Round table: Changes to Insurance Act a redefining moment, say experts

Covid has been a defining moment for the industry; the industry has paid out Rs 25,000 crore in claims, it has led to an important change by converting insurance from a push product to a pull product

Against the backdrop of a slew of changes to the Insurance Act that have been proposed  by the Ministry of Finance, and the steps taken by the insurance regulator to promote ease of doing business to achieve the goal of insurance for all by 2047, top honchos of non-life insurance companies, including ICICI Lombard General Insurance Managing Director (MD) and Chief Executive Officer (CEO) Bhargav Dasgupta; HDFC Ergo General Insurance MD & CEO Ritesh Kumar; Reliance General Insurance Executive Director & CEO Rakesh Jain; and Future Generali India Insurance MD & CEO Anup Rau spoke to Tamal Bandopadhyay, Consulting Editor, Business Standard, in a panel discussion on the pros and the cons of the proposed changes. Edited excerpts:

How do you view the new regulations that the government has proposed?

Bhargav Dasgupta: In terms of awareness and popularity of insurance, behavioural science talks about people being more focused on making money, rather than paying a little premium for an event that may or may not happen. This is one reason why insurance penetration takes time to increase. As society evolves, as income increases, and as families become more nuclear, people realise they need to protect their assets, or pay for the large accidents that might happen to them.

Globally, as per capita income crosses $2,000, insurance penetration goes up. In India, of the aggregate general insurance market, penetration is about 1 per cent, which is much lower than that of other Brics countries. Insurance density, which is the per capita insurance premium that we pay, is almost one-tenth of China’s, which is also not near the world average. This is the gap that we have, and the opportunity for the industry. 

For any major catastrophe in India, 10-15 per cent of the losses are covered by insurance. The rest is paid out of pocket, or the state steps in. That’s the unfortunate reality that we have to address. For the first time in 20 years, we are seeing a lot of initiatives from the Centre and from the regulator in addressing the need gap. And that is a huge positive from the longer-term perspective.

Ritesh Kumar: What we are presently experiencing is insurance 4.0. You had the public-sector insurers to start with, then there was insurance 2.0 when, at the turn of the millennium, the private sector came in. Then we had an event, when de-tariffing happened in 2008, which was insurance 3.0. And, what we now see is insurance 4.0, where we are trying to align ourselves with how the world sees insurance. We have a fair distance to cover to reach our neighbours (mutual funds).

Non-life insurance penetration was 0.5 per cent when the private sector was allowed. At that point, we were the 28th-largest country in terms of insurance penetration. Fast forward 20 years, and we have grown at a compound annual growth rate of 16 per cent through these two decades. Now penetration is at 1 per cent. And, from 28th position, we have climbed to 14th in the world ranking.

Let’s look at India’s gross domestic product (GDP) growth rate in the last 20 years. Nominal GDP has grown at about 12 per cent. Hence, the non-life insurance industry’s growth has been 400 basis points over and above the nominal GDP growth rate. So, if nominal GDP continues to grow at a robust rate, even without any intervention, we should be growing at 15-16 per cent.

Covid has been a defining moment for the industry. Apart from the fact that the industry has paid out Rs 25,000 crore in claims, it has led to an important change by converting insurance from a push product to a pull product. For the first time, we are seeing that people actually want to buy insurance. This is something we need to build upon. The regulatory reforms are essentially in the direction of taking India to the next level, where by 2047 there will be insurance for all.  

Rakesh Jain: General insurance is an indemnity business, and India has a mindset of savings and returns. In the first decade (2000-2010), life insurance companies were establishing themselves and we were in the tariff backdrop. We are a risk-oriented business, and to an extent, in the first decade, we tried to discover ourselves. The first 10 years got stopped with de-tariffing. After de-tariffing, companies realised that they have to price risk. The moment the risk aspect came in, people started to build the business model. And, when business models started to evolve, you started to realise distribution and technology.

Obviously, when pricing is freed up, it invariably falls. So, the first reaction is always about how to save yourself in that environment. Thankfully, a few years before Covid (2017-18 onward), pricing had bottomed out. Most industry participants realised that they could not afford to see it go down further. Some companies decided to list themselves. With a broad-based shareholding, new investors step in who look at the company’s financial performance more deeply than traditional promoters. So, the ball game became 360 degrees.

Covid has been an inflexion point in the way everybody has to think about risk, starting with consumers. In the past 18 years before Covid, we have grown by looking at products. Covid made us realise that customers are now thinking about risk. So, why don’t we become customer-centric? This is a huge revolution. We are today on the cusp of creating the next 20 years in a very different way from the past. So, it is a very opportune time for us. 

Anup Rau: Covid in some sense has been an inflexion point for everyone, and not just our industry. If you look at the brand consideration scores, there is a significant difference between the brands. Some players have a very strong consideration and awareness. But that does not reflect in the purchase decision of the customer. So, in case somebody’s saliency is significantly high, that seems to have no bearing on the customer choosing that brand.

So, it tells you that we are by and large selling a commodity. And the opportunity for us is to see if we can move away from selling salt to insurance, which is differentiated. I think some of these enabling regulations will give us the appetite for those things and, in that sense, take the industry forward in making truly consumer-led products.

What do you find exciting among the changes that have been proposed? 

Rau: For the industry, it provides access to distribution to people who have been left out in the past. Earlier, it was one insurer, one bank. Then it was changed to three per bank, and now that one can have nine insurers means that it will give access to players who did not have that privilege in the past. So, it levels the playing field.

As for the composite licence, I don’t know how that will work, because the way we think about a life company and a general insurance company is very different. This is going to take some time. But eventually, the use of technology, levelling the playing field, will hopefully lead to a situation where companies would have to outshine others not just in terms of pricing but also in terms of the offering the customer might get. Insurance in some sense has worked on access, or capture of distribution. And frankly, distribution share leads to market share. So, hopefully, these regulations will provide choices and value propositions to customers.

Where else in the world does the composite licensing system work? 

Kumar: Our joint venture partner is based out of Germany. In Germany, there is the concept of a composite licence. They have a large operation in Poland, and Poland has a composite license. Their third-largest operation is in Austria, and Austria has a composite licence. All these markets have one entity doing life, and a separate entity doing property and casualty insurance. So, it’s really about how one wants to organise themselves.

As a non-life company, we actually run four companies — a motor company, a health company, a commercial lines company, and a crop company. Hence, life to that extent becomes the fifth one. This is really about how you wish to organise yourself. In some ways, distribution also needs to be segregated, because the kind of channels that you require for motor insurance may be very different from the channels you require for health insurance. These regulations will act as an enabler.

There will be organisations which would want to move the composite licence way. Others would want to stay as individual entities. The regulations also talk about allowing other smaller players to come in, such as captive insurers and micro insurers. They also want to do away with the requirement of Rs 100 crore of capital to set up an insurance company. I think the regulator has 18-19 licence seekers that it needs to take a call on. So, there will be more choices available to customers. It will also ensure that whoever is already in the industry behaves more responsibly.

Has the industry given their comments on the proposed amendments? 

Jain: Comments have been given. This is a very significant way in which the Insurance Act was framed. When it was created, there was a lot of remnants of the earlier era. You still had control over business and how pay-outs and distribution would happen. Much of this lost out for two reasons: We became a market-oriented economy, and the way we drive things now is digital. Most brick-and-mortar-style laws had to change.

The good part is that the Insurance Regulatory and Development Authority of India (Irdai), appropriate to its developmental goal, has taken this up. The way the new chairman is pushing change will give us a lot of ability to really construct a business model. The composite licence helps me to give a customer a complete solution, as against selling him a few products. Of course, giving complete solutions is an optional thing for an insurance company. But if it wants to, it can do so.

Many of us in the past have struggled. For example, in Covid times people wanted to know if we would cover death and many of us were conflicted. If it’s a natural death, what do we do? Any consumer will understand these kinds of boundaries. A digital environment gives you the opportunity to customise. You really do not want an off-the-shelf proposition for 1.3 billion people. The changes that are being brought in are more market-oriented, and gives opportunity to people to create the business model they want to pursue.

You want to be a boutique guy, you want to be a large guy, or for that matter a surety guy — you name it, and perhaps now you can do it. This is what the changes to the Insurance Act intend. All the regulations surrounding it will hopefully give an impetus to insurance companies as well as distributors to reach the real Bharat.

Dasgupta: The erstwhile Act was a remnant of the British Raj. It’s a 1938 Act and for 70 years we have not rectified it. We are now finally looking at modernising insurance and aligning ourselves with how the world sees insurance. The key aspect in this Act is that it is redefining insurance and the value that insurance provides customers. Traditionally, the way we understand insurance and as the Act defines insurance is that it’s a cover that pays a claim if you pay a premium.

Once the reforms that the regulator is looking to bring in come into effect, it will increase awareness about insurance. If 100 people pay premiums, only seven to eight get claims. That is the model. For individual customers, the probability of getting service from the insurance company is very low. Switch it to insurance being a risk management and risk service business, which is what globally it is moving to, and you can engage with the customer.

Of India’s total health care spending, roughly 30 per cent is made at hospitals and that is all we are taking care of. About 60-65 per cent, which is outside the hospital — pure health care cost plus wellness and fitness — is currently out of the scope of the industry. Similarly, for corporations, companies can provide a lot more value-added services and mitigate risk, rather than pay for a claim if the risk happens. This is tremendously more valuable for customers and society at large. And that is the role insurance should play, and will play, going ahead.

The second theme I see is that the approach to regulation was very rule-based. For the first time, we are moving to principle-based regulation. We in the industry are very happy to see not only the draft Act but also the initiative that Irdai is taking in moving to principle-based regulation. It will streamline the entire operations. There is a tremendous amount of micro-regulation in our current regime, which will go away, and this is all for the good, as it has unnecessarily constrained the industry over the years.

The customer does not see his/her life in the narrow lens of motor or health. In the past, we could not bundle a product, which looks at the customer’s risk landscape and provides a composite product across all types of risk. Potentially, going ahead, we will be allowed to do that. Also, there is a realisation that you need people on the ground at the remotest locations, to provide access to insurance. The approach today is to open up distribution. What we have seen happen at the bancassurance level is encouraging. It should also be allowed at the individual agent level.

An individual insurance agent is significantly more competent, aware, and knowledgeable about insurance products than a bank relationship manager. If a bank relationship manager can sell 27 insurance products (nine life, nine non-life, and nine health), there is no reason why an individual insurance agent cannot sell as many. That’s what will create the real scale-up in terms of distribution, because if you limit an agent to one company, he will not be able to provide customers with choice. The draft regulations are still not clear on opening up the retail distribution model, which has been done for corporate distribution. It should be done, if we want to achieve scale and insurance for all.