For the customers, By the customers

29 December, 2011

With the Insurance Regulatory and Development Authority (Irda) cracking its whip on insurance firms by bringing in sweeping reforms in a bid to make the industry more customer-friendly, the insurance industry saw a shift in 2010. The year 2011 was when these reforms, largely in the life insurance industry, were tested. While traditional plans stole the show from unit-linked insurance plans (Ulips), the surge in term plan sales indicates healthy insurance penetration may become a reality in the future.

The year also marked a big change in the non-life sector by bringing in the much-debated and awaited health insurance portability and restructuring of the third-party motor insurance pool.

Says Arun Balakrishnan, CEO, BerkshireInsurance.com: "Irda has been releasing customer-centric guidelines. Now firms are paying attention to meet the requirements of the customers, rather than just meeting sales targets."

Life insurance products

Hard sell on traditional plans: You've been sold more traditional plans in 2011, sales were up to 88% in the April-June period. Not because they are good for you, but because the commission and cost-heavy Ulips came under the regulatory hammer. Forced to be fairer, the industry pressed the brake pedal on Ulips, bringing down the sales of Ulips from 56% in FY09 to 12% in the quarter ended June 2011. Says G.V. Nageswara Rao, managing director and CEO, IDBI Federal Life Insurance Co. Ltd: "Traditional plans account for 75% of the business now. There are two reasons why traditional plans have become popular. First, Ulip cost caps have reduced margins for the insurers and second, the market conditions. In such market volatility, customers seek the comfort of guaranteed plans."

But unlike a Ulip which is a transparent and relatively low-cost, traditional policies are opaque. The only visible advantage of a traditional plan to you is that the benefits are defined. Apart from the guaranteed sum, most traditional plans offer non-guaranteed bonuses.

But these guaranteed benefits are not really attractive for the security-seeking investor, who has a better option in banking or small savings products. Says Kapil Mehta, managing director, SecureNow Insurance Broker Pvt. Ltd: "Usually, the return on the guaranteed benefit in a traditional plan is 1-3%. On this, you can add 4-5% to factor in the non-guaranteed benefits or the bonuses. However, traditional plans return lower than FD rates."

Since the push in 2012 on traditional plans will continue, you must remember that the illustrations that agents or banks show you are not telling the true story. Calculated at an assumed rate of growth of funds at 6% and 10%, these overstate your potential return since traditional plans are predominantly bond investors, they do not get equity-linked returns, making the 10% return illustration misleading. The regulator is aware of this loophole and Irda chairman J. Hari Narayan said in November: "The rates used for illustrative purposes are pitched too high and the fear is that these projected returns when seen on a piece of paper may cause some sort of an optical illusion in the minds of the customers. Projections on paper have a greater authority and a customer starts expecting the same returns he sees on paper. That is digressing from the purpose of an illustration. By having a conservative rate, the customers' expectations will not be unrealistic."

Term plans sell themselves: You showed how smart you are by going online and buying term insurance yourself. Term insurance sales hiked from 3% in FY07 to 9% in quarter ended June 2011 of the total life insurance pie. Your increased awareness levels, a decrease on costs and availability of term plans online were the key reasons for this rise. Says Yashish Dahiya, co-founder and CEO, Policybazaar.com: "The cost of term insurance cover has gone down by over 60% in the past three years. This is predominantly because of the evolution of online term insurance plans."

"On a month-on-month basis we record 600,000 visitors on our site. Out of which approximately 24% of the traffic is for term insurance. The sale for term insurance today accounts for over 60% of our total insurance sales."

The good news is that you are buying cheap cover but you are buying enough of it. Says Dahiya: "Since the premium size for term insurance is not too big to hurt the policyholder's pocket, the average sum assured bought through us is Rs. 72.50 lakh."

Pension plans get a lifeline: In 2010, after the regulator imposed a minimum guaranteed return of 4.5% on pension policies, unit-linked pension plans (ULPPs) almost disappeared. In 2011, the regulator has done away with this guarantee, but has mandated that insurers offer either a minimum return, which is non-zero and positive, on all the premiums paid or an absolute amount on maturity. These guidelines are applicable for traditional pension plans as well as the unit-linked ones. However, with the guarantee remaining, though in a different form, the insurers may still find it difficult to offer ULPPs with high equity exposure.

General insurance products

Health insurance is finally portable: October saw portability of health insurance policies finally happen. While health cover is an annual contract, the freedom to switch insurers is important when one looks at the cost of switching in terms of losing the "waiting period" benefit.

So while moving from insurer A to insurer B, you can port the waiting period you have already served with insurer A. You can also port your group insurance policy to an individual policy. However, initially for a year you can't change the insurer. Says Balakrishnan: "Portability ensures that customers get the best service and features as they have the freedom to choose the insurer that suits their need. Also, insurers would work hard to improve their product offering. Customer service would play a bigger role in customer retention."

Motor insurance gets a new lease of life: While the motor third-party premium remain under the control of the regulator, the third-party motor pool has been restructured. Currently third-party motor cover which is mandatory for all vehicles operates out of a pool. This pool comprises all motor third-party premiums collected by all the non-life insurers for commercial transport. It is from this pool that claims are paid at present. But the claims are paid in the ratio of an insurer's market share.

So regardless of how many policies the insurers underwrite they had to pay the claims in proportion to their overall market share. The idea behind the pool was to see all the insurers participating in offering third-party cover and claims being shared. But with time inefficiencies seeped in. Since the claims were shared by all the insurers, there was no incentive for insurers to better their claims management. Says Hari Narayan: "The claims had been growing astronomically. So it was felt that the risk of claims settlement be transferred to individuals in order to make them more efficient. However we need a safety net and hence the entire pool can't be dismantled so we restructured it."

From April 2012, third-party motor pool will work as a declined pool. In other words this pool will be restricted to those stand-alone third-party cover for commercial vehicles that do not meet the underwriting guidelines. Explains Bhargav Dasgupta, managing director and CEO, ICICI Lombard General Insurance Co. Ltd: "The rationale behind allowing only stand-alone third-party cover to the pool is because in the case of comprehensive policies, an insurer can stop cross subsidizing by reducing discounts in other components of the comprehensive package."

This means each insurer will have to individually underwrite third-party claims that are part of comprehensive motor insurance policy. Only a part of stand-alone third-party cover that the insurer thinks unviable can be apportioned to the pool. The claims from this declined pool will be shared on the basis of the insurer's overall market share and its overall motor insurance business. Says Dasgupta: "Each insurer will now have to do a minimum stand-alone third-party business as per their quota and any shortfall will have to be met by settling more claims from the declined pool."

While the reforms will improve claims management, third-party premiums are likely to go up. In April this year, the regulator raised premiums for motor third-party liability insurance by up to 68%. Not only did it raise premiums, but also decided to review the premiums annually on the basis of three parameters: average claims for each class of vehicle, frequency of claims for each class of vehicle and cost of inflation index for the year of review. Considering the insurers are still facing an adverse claims ratio of almost 190% for commercial vehicles and 120% for private vehicles, premiums are likely to go up.

Distribution

Regulatory reforms have brought about a big change in the distribution landscape. Lower commissions and higher accountability pushed unproductive agents to flee, while the ones who stayed back were forced to focus on renewals for a steady stream of income. Says Rao: "Agents who have been able to adapt to the changes have remained. The number of active agents has reduced by 30-40% over the last year."

The industry is focusing on productivity too. Explains Puneet Nanda, executive director, ICICI Prudential Life Insurance Co. Ltd: "Now it is about getting more business with a limited number of agents. Earlier, the agent would sell policies to relatives and friends and exit. The industry was okay because there was no pressure on cost and efficiency. Now even the reward structure has changed from the number of sales to other parameters such as renewals, customer complaints and post-sale service."

On its part, the regulator announced persistency norms for agents. According to guidelines, from 21 July 2014, agents will be allowed to renew their licence or move to another firm only if they have a persistency ratio of 50%, which means half the policies sold by them are in force. Says V. Philip, managing director and CEO, Bajaj Allianz Life Insurance Co. Ltd: "Persistency guidelines will ensure that agents provide continued services to customers. It will also help in lowering lapsation rate."

Bancassurance: Irda emphasized the importance of bancassurance channel, sale of policies through banks, as a low-cost option of distribution. It suggested that banks be allowed to have tie-ups with multiple insurers in different states. The draft recommends that banks should continue to tie up with one insurance company in the life, non-life and health insurance spaces but only in a specified number of states. The commissions through bancassurance are proposed to be capped at 85% of the commission payable under the Insurance Act, 1938. Insurers promoted by banks have a ready bancassurance partner in their promoter banks and, therefore, they see the draft guidelines as restrictive. But for other insurers, it's a good opportunity.

Customer service

Irda also focused on grievance settlement this year in both life and non-life sectors. If you lost your battle with the insurer, you can take it to the regulator by calling up the toll-free number 155255 or emailing at complaints@irda.gov.in. The regulator has also launched a dedicated website (www.igms.irda.gov.in) for grievance management.

The insurers have also been directed not to refuse a delayed claim. The insurers must not reject a claim unless and until the reasons are specifically ascertained, recorded and the insurers have satisfied themselves that the claims would have been rejected even if reported on time, according to Irda. Insurers have been asked to insert a clause in the policy document, stating that a delayed claim will be honoured if the delay is because of reasons beyond the control of the insured person. The other significant move was paving the way for demat policies which not only clears the clutter from your life but also reduces the cost for the insurance companies.

As we look over our shoulders, 2011 looks like a year where significant change happened in the insurance industry. Though there is a long road ahead, we are at least on the right path.