Life insurance needs new framework

In the year 2006-07, Life Insurance Corporation of India (LIC) alone sold over 320 million new life insurance policies. During the year 2017-18, LIC and all the 25 private life insurance companies put together underwrote only 282 million new contracts. Apparently, the liberalisation of the industry hasn’t taken a leap forward in spreading the canopy of life insurance protection widely.

The industry may take solace in the CAGR of 17 per cent in the new premium income since the opening of the sector in 2000. However, the growth percentages in isolation sometimes create an illusion of well being of an industry and/or enterprise. But that the penetration of life insurance as a percentage of GDP in 2017 had fallen to 2.76 per cent, from a peak of 4.6 per cent in 2009, when average normal GDP growth was 15.3 per cent between 2010-14, dissipates that comfort too.

India is a sub-continental geography with a huge population of over 1.25 billion; slotted to become the most populated country in the world in just a couple of years.

The security against the hazards of ‘dying too soon’ and more so against the rapidly rising hazards of ‘living too long’ is woefully inadequate for the larger mass of Indians.

The organised sector, which offers significant economic security, is narrow. The majority of the population work in the informal economy.

The available state (both State and Central government) funded schemes notwithstanding the ardent efforts to scale up, do not fulfil the needs of individuals and families. Despite the hype over ‘competitive populism’, it is well-neigh impossible for India to don the status of a welfare state like matured European economies and US. Even those economies are now groaning under the impact of social security on the national balance sheets and the benefits are being scaled down; albeit gradually. The growing longevity with attendant increasing health care-cost is becoming a bane of economic misery. The sustainable option is the individual endeavours of the people.

Great potential

The GDP per capita of India has been rising rapidly, increasing the potential for savings. The size of the insurable population and increasing ability of insurable to purchase life insurance products is a reflection of the potential that exists in the country. The industry seems to be missing woods for the trees. Revisiting the policy formulation is overdue.

Globally, two kinds of life insurance company organisation designs are in operation. The first, more prominent globally and being used in India as well, combine manufacturing and distribution in one entity.

In the second, the manufacturing is divorced from the distribution. Both these organisational designs are complemented by stand alone third party distribution networks, which do not undertake manufacturing of life insurance products. One of the solutions for India could be granting more licences for life insurance companies. The UK has over 300 companies for a population of just over 50 million. India too at the time of nationalisation of life insurance industry in 1956 had 245 companies.

However, life insurance is a capital intensive business and the gestation period is long. It takes a minimum of seven years to crack, which makes deep pockets and capacity to wait for profitability and returns, an essential requirement. Some of the life insurance companies are in the red even after 10 years of operations, even though value may be shaping in increasing ‘embedded’ and ‘appraisal values’. Hence, the opening of more life insurance companies may not be the ideal option. India needs a much larger size of distribution networks.

With the opening up of the sector, a large number of new independent distribution networks had sprung up. Somewhere along the line, the collusion of manufacturers and distributors led to a series of misconducts adversely impacting customers’ interest.

The regulator stepped in to correct the situation.

Unfortunately, the knee-jerk reaction killed a large number of standalone third party distribution networks and stunted the tied agency ranks. Ever since regulations have been periodically amended and enforcement strengthened to stamp out unethical and undesirable practices and ensure that outlined compensation frames are strictly adhered to. The gaming of regulations by the economic agents can be prevented only by out-of-the box thinking. Unfortunately, the crackdown has not been followed by an efficacious regulatory design where standalone third party distribution networks and tied agency system can thrive.

As a consequence, the reach of insurance to the uninsured and under-penetrated segments has slowed down. Companies are focusing on the ‘ready market’ of the insurable. The greater success of bank-sponsored life insurance companies is proof of this. A push on this layer eventually leads to practices that do not necessarily fall within the ambit of regulatory directions, erode the economics of life insurance business and consign the profitability to a distant future.

Need for new design

The current organisation design of life insurance companies seems to have run out of steam. The organisation design is an edifice of an enterprise that integrates people, information and purpose.

It also delineates roles, responsibilities and accountability and ensures the commitment of people to vision, strategies and shaping of efficiencies.

The dynamics of environment often render the organisation design and business models inefficient, uneconomical and even irrelevant. More than 50 per cent of the managers, reveals a study, are not able to visualise the onset of obsolescence in time and even when they do, they take comfort in the status quo.

A mere tweaking of the regulatory framework even when based on the learnings from enforcement under such circumstances is inadequate to promote a transformation. Radical thinking is the path for the desired outcome.

Life insurance continues to be a ‘push business’ and the role of leg work will remain relevant even with greater digitisation for reasons of last mile human interface. The solution lies in revisiting the organisational design and promoting a large number of remodelled independent third party distribution networks as also tied agency frameworks, which can reach out to the larger population of under-insured and uninsured.

The managers of the industry and the regulator have their work cut out for designing a new ethos and re-engineer the ecosystem for spreading the umbrella of life insurance protection faster and also the orderly growth of the life insurance industry commensurate with the potential.

The writer is former Chairman SEBI and LIC

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