From its fundamental role of providing basic protection against losses, the insurance industry in India has come a long way over the last decade and a half. It has become an indispensable pillar to support India’s ascent to economic prosperity and growth by accounting for risks, providing funds for nation building projects, steadying equity markets and driving social security. In the process, it continues to create significant value for all its stakeholders i.e. customers, distributors, shareholders and the insurance companies. But there are challenges ahead; can these be met?
The insurance sector in India is overlooking an exciting period in its evolution. With the passage of the Insurance Laws (Amendment) Act 20151, the longtime demand of having greater access to foreign capital has been fulfilled. This one amendment can be a game changer as it will bring in significant fresh capital to re-energize the sector.
However, says a Confederation of Indian Industry (CII) and EY report on the Insurance Industry titled ‘Building Growth, Building Value’, “Insurance companies must tread with caution and carefully adopt changes to make the best possible use of the opportunities presented. The sector will have to partner with the regulator and other industry bodies to ensure that the current phase leads to a holistic long-term growth and successfully builds value for all the stakeholders involved”.
The report recommends chasing efficiency in distribution by finding greater synergy among the different channels. This will help in well-rounded industry growth and enable maximum value creation for all the stakeholders. The report also states that insurers must be careful in identifying the right ways to employ additional capital inflows that they may receive over the next few years with capital infusion from the foreign partners.
CII and E&Y believe that “the major gaps which the industry must plug in are around realizing a cost-effective distribution mix (primarily life), checking the ongoing slowdown in the non-life sector, getting a handle on claims (particularly in motor and health lines) and absence of a sizable presence in the pension space. To prepare for the next level of progression, the industry must have a strong focus on augmenting the value insurance brings to nation’s economy, the society, its customers, the distributors, the shareholders and the insurance companies themselves.
Says Rohan Sachdev, Global Insurance Emerging Markets Leader and Partner, EY India, “The Indian insurance sector has evolved and is looking at the future with renewed optimism. In order to realize the full potential, the industry must focus on aspects that will build value for all stakeholders – customers, distributors, shareholders and the insurers. A step-by-step approach must be adopted to build value for customers, the primary stakeholders. Technology and analytics helps to understand exactly what customers want thereby creating long-term value for customers and earning their loyalty.”
Echoing optimism in the sector’s future, Sanjiv Bajaj, Chairman, CII National Committee on Insurance & Pensions said, “The market has expanded and given each one of us more than enough room to prosper. Solvency is far in excess of minimum regulatory requirements. We made some mistakes and the slowdown of the economy hit us hard, but the regulator stepped in and the life insurance sector responded by realigning well. The onus is clearly on the industry to realise its full potential in the coming years.”
Offering foresight, the report advises on how “Value for customers, the prime stakeholder, can be enhanced by providing more options at the time of purchase by developing segments such as pensions and long-term care, which are essential yet currently being offered in a very limited way. Besides developing options, it will also be critical to accurately assess the customers’ needs and ensure transparency in communications to embed a feeling of trust among customers.
Customer experience can be enhanced significantly by raising service delivery standards through a greater use of mobile technologies, analytics, and through implementation of global best practices adopted from the foreign partners, who can now be expected to play a greater role in the overall operations. All of these aspects, when coupled with providing sound payouts at the time of exit, will create enormous value for customers and earn their long-term allegiance.
For distributors, the real evidence of value creation will be when a distributor is able to stay engaged, can work like a partner and is confident of a long-term growth in its earnings. The insurance industry can create such value only by developing unified service capabilities between the insurers and the distributors through greater use of technology and sharing of resources.
Additionally, creating a common skill development framework at an industry level will allow distributors to access the required manpower which is often a key challenge, particularly for the smaller distributors. The insurance industry will create substantial shareholder value if it successfully caps costs across the value chain, primarily in the area of claims, by adopting robust claims administration systems, greater use of analytics for preventing frauds and adopting new methods of accurately pricing new business (like usage-based insurance).
Shareholder value can also be amplified by writing higher margin products by identifying niche segments and greater engagement with global reinsurers, who are now (post the passage of the Insurance Laws (Amendment) Act 2015) expected to set up local offices. However, the industry must strive to maintain high governance standards and eliminate risks, particularly the relatively new ones such as cyber risk.
Finally the stakeholder who puts it all together, the insurer, will create value for itself by focusing on a balanced rather than rapid growth. It must be careful in identifying the right ways to employ the additional capital inflows which it may receive over the next few years. Also, it should harp upon the adequate skilling of its employees and setting practices aimed to make it future ready
For ensuring a future which is characterized by a well rounded industry growth and which maximizes value creation for all the stakeholders, the sector must work towards capitalizing on every opportunity. Some of the areas which it must pursue in this regard include…
- Chasing efficiency in distribution by finding synergy among channels, driving skill development at an industry level, optimizing the distribution network and achieving greater service integration between the insurer and the distributor
- Making the most of the Insurance Laws (Amendment) Act 2015 by effectively utilizing the incremental capital infusion to drive awareness, reaching out to underpenetrated segments and adopting global best practices in operational efficiency and service delivery
- Exploring possibilities in the pension space by developing relevant products and incentivizing stakeholders
- Furthermore penetrating the health insurance segment by engaging customers early, creating cost effective offerings (products with savings component, old-age health insurance) and by keeping a tab on frauds
- Solving the cost conundrum by a greater use of technology to streamline operations, to curb losses from claims and to prevent frauds
- Embracing digital whole heartedly to disrupt the traditional business structures while keeping risks in check by leveraging a resilient cyber security framework