India s Online Insurance Market Ready to Open Up

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1 India s Online Insurance Market Ready to Open Up Harnessing the Internet and Consumer Choice By Anushri Bansal, Rajesh Sabhlok and Vivek Jalan India is experiencing the growth of the Internet at a time when consumers are more comfortable buying life insurance online, two changes that create opportunity for insurers with a successful online strategy. Only recently have life insurance companies started to put the Internet to commercial use by selling insurance policies to their customers. There are two powerful forces now at work in India that offer tremendous opportunity for life insurers that are able to harness them. The growing use of the Internet by an increasingly affluent urban middle class is happening at a time when consumers are becoming more comfortable buying simple insurance products through online distribution. These two forces may combine to propel the nascent online insurance market into a policy-generating powerhouse. But only those insurers that understand how to cater to the unique needs and preferences of online customers will benefit from the promise of these two events. Before we can fully understand why the Indian insurance market is on the cusp of a marketchanging future, it is helpful to understand how past events have brought it to this point. Then and Now The founders of the ARPANET, the original Internet developed by the U.S. Department of Defense way back in 1969, probably could not have imagined the revolutionary impact their invention would have on all forms of social communication, business and commerce. The Internet, which was originally restricted to research, education and government services, has now become a part of our daily lives. Globally, the Internet had approximately 2.3 billion users as of December 2011, and according to the Interactive Media in Retail Group, global e-retail sales reached US$772.4 billion in India and the Internet Despite being the second-most-populated country in the world, India accounted for a mere 121 million Internet users with a penetration of 10.2% as of December 2011, making it the least penetrated country for Internet usage among the BRIC nations. So it is no surprise that India s contribution to e-commerce transactions from business to consumer in 2010 stood at a meager US$4.01 billion, compared with Australia, the U.K. and the U.S., with e-commerce transactions amounting to US$26.1 billion, US$92.1 billion and US$261.4 billion, respectively. Poised for Growth Still, the growth story of Internet usage in India over the last decade has been incredible: The number of users in India has increased at a rate of 32.8% each year from 2000 through 2011, and it is expected that the number of Internet users in India will surpass 300 million by Monthly Internet charges that are among the lowest compared with other markets around the world are helping to increase Internet usage in India. Fierce competition in the Indian media and telecommunications industry is making this possible. A 2011 report from Knowledge@Wharton states that India has seen rates as low as US$0.07 per minute. The availability of the Internet on mobile communication devices at affordable rates has also contributed to the rapid growth of Internet users in the country. Approximately 29.5% of urban users accessed the Internet through their mobile phones, according to an Internet and Mobile Association of India report in towerswatson.com

2 Figure 1. Profile of Internet users and usage Proportion of Internet usage across user profiles 8% 21% 8% 14% 11% 13% % 2 2 Internet usage pattern by customer profiles 100% 80% 60% 40% 20% 0% 5% 13% 35% 11% Heavy users (over 16.5 hours per week) 6% 10% 26% 22% Medium users (between 6.5 and 16.5 hours per week) 12% 21% 21% 2 Light users (less than 6.5 hours per week) School children (age 8 17 years) Young men (age years) Nonworking women (age years) College students (age years) Older men (age years) Working women (age years) Source: Towers Watson calculations based on IAMAI and IMRB International Report 2011 The report states that college students and young men constituted more than half of the Internet users in the country in 2011, and also constituted a large proportion of the heavy users (Figure 1). A 2011 report by Juxt, an interactive media company, reports that two out of every three Indian Internet users belong to socioeconomic classification (SEC) A, B or C categories, representing the middleto upper-income markets. These Internet users generally own a bank account, credit cards and insurance, and have an average family income of approximately US$350 per month. Interestingly, the report finds that Internet users in the lower-income segments, SEC D and E, have grown steadily to 11% in 2011, up from 3% in And most importantly, the rapid growth in the volume and value of retail electronic transactions over the last decade reflects the growing adoption of the Internet as a way to conduct financial transactions, suggesting that users are more comfortable conducting business online (Figure 2). This augurs well for the insurance industry because insurers can leverage some of the success of online banking and e-commerce to build their own online propositions. Figure 2. Growth in retail electronic transactions in India Retail electronic transactions Volume (millions) Amount (US$ billions) Source: Reserve Bank of India Bulletin Insurers Create an Online Presence Only recently have life insurance companies started to put the Internet to commercial use by selling insurance policies to their customers. Experience in industrialized markets shows that the Internet has had a positive impact for insurance companies on multiple fronts, including lower customer acquisition costs, enhanced convenience, improved access to information and services for customers and other stakeholders, and better product innovation that reflects the specific needs of customers at affordable prices. The cost savings are largely passed on to consumers, benefiting both this group and insurers. Annualized growth rate (%) Because of the faceless nature of online distribution, insurers have a limited window of opportunity to influence the customer s buying decision. Emphasis 2012/2 17

3 But because of the faceless nature of online distribution, insurers have a limited window of opportunity to influence the customer s buying decision. So insurers need to design their websites so that they are easy to use and transactions are seamless. But they also need to develop online products that meet customer needs, and offer features and benefits that can help them differentiate their products in the market. Companies tend to supplement their online sales model with chat facilities on their websites to provide instant clarification and guidance to customers. Some companies also use a call center to follow up with online visitors who showed interest in their online products by leaving contact information, a follow-up technique that helps enhance conversion rates. Online Distribution: New Game, New Rules The key drivers of online insurance sales differ greatly from face-to-face channels such as agency and bancassurance, where products are typically sold and not bought. The role of the seller is crucial for face-to-face channels, and the attractiveness of the products to the distributor often takes precedence over their suitability for customers, increasing the chances of mis-selling. But with online sales, the customer s needs and preferences lead the purchase decision, and as long as sufficient information is provided for the consumer to make a properly informed choice, it can be argued that their needs are more directly served. Companies need to think about how the Internet can be transformed from an independent distribution channel to a platform that can be used by all distribution channels to write and support new business. While the online sales channel is attractive and lucrative, it has its own set of challenges. Insurers need to have checks in place to avoid the risk of anti-selection by customers. They also need to be conscious of the potential for channel conflict for instance, traditional distribution channels may raise concerns that lower pricing of online products could hurt their business. Companies need to think about how the Internet can be transformed from an independent distribution channel to a platform that can be used by all distribution channels to write and support new business. For instance, some leading brokers are leveraging the Internet to provide end-to-end services to online users, from providing product comparisons across a range of providers, to helping them purchase a policy online. Likewise, banks are also using their websites to promote their insurance providers products by linking to their websites so that customers can purchase insurance products online as well at the bank. 18 towerswatson.com

4 Online Distribution in India Today An online term-insurance plan is bought every 18 minutes in urban India, the Asia Insurance Review reports. Cost and convenience are aiding online sales: Premiums are 40% 60% cheaper, and an average purchase takes minutes. Online distribution is increasingly attractive to a large and growing list of private life insurers. Recently, the Life Insurance Corporation of India joined the list by launching a pure term product to be sold through the Internet. Reports indicate that in the first six months of fiscal year , the total insurance cover provided through online term insurance policies by the seven life insurers currently active in this area stood at US$1.77 billion, nearly equal to the total cover across all the life insurance policies sold by the five newest private life insurers in the Indian market. Leading life insurers in online distribution estimate that the average annualized premium collected per policy for online term insurance was between US$176 and US$195, and the average death benefit was approximately US$0.18 million, roughly eight times more than the average death benefit for term policies sold through other channels. Initially, term insurance policies were the only products being distributed online, but now a range of protection products, including health insurance, are offered to Indian consumers. Some companies have also launched unit-linked products to cater to the dual investment and protection needs of their online customers. Although the online insurance channel is still in its infancy, it has been observed that it tends to attract more educated and informed consumers who understand and appreciate the need for accurately disclosing information such as health status when applying for insurance. Interestingly, the proportion of claims rejected is lower for this group than for offline applicants. But the current size of the online customer segment is marginal when compared to the total customer base of insurance companies. It remains to be seen whether the lower claim rejection rates can be sustained as the online customer segment continues to grow and acquires a statistically significant size. Online Insurance Regulation The Insurance Regulatory and Development Authority (IRDA) in India issued guidelines on the distance marketing of insurance products in April 2011, which governed all forms of non-face-to-face distribution of insurance products, including telemarketing and Internet. The guidelines now permit insurance companies to issue policies sold through distance marketing without having a physical application in their possession. For these policies, insurers are required to append with the policy document a transcript of verbal communication or the electronic record of the customer questions and the answers provided. However, most life insurers still ask their online customers to print out the completed online application, sign it and send it to them for processing. IRDA has released guidelines for insurers for issuing electronic policies and for setting up e-repositories for holding such policies in electronic form, steps that will facilitate the further growth of the online distribution of insurance policies. IRDA has recognized the important role that web aggregators can play in the proliferation of Internetbased insurance sales and has recently released guidelines governing web aggregation. To ensure that online customers get unbiased and factual information about comparable insurance policies, IRDA has clarified that no existing insurance intermediary and/or those parties that are in any way related to any of the insurers or the intermediaries may act as a web aggregator. Moreover, web aggregators are not permitted to carry advertisements, endorsements, rankings, ratings or sponsored content on their websites, or comment on any insurers or their products. IRDA has also capped the remuneration for services provided to web aggregators by insurers, removing the opportunity for bias in information contained on their websites. This has significantly affected web aggregators remuneration, and it remains to be seen how this business adjusts to these regulations. Anushri Bansal Specializes in global research in risk and financial services. Mumbai Rajesh Sabhlok Specializes in life insurance risk consulting and software. Mumbai Vivek Jalan Specializes in life insurance risk consulting and software. Delhi Emphasis 2012/2 19

5 business driver, and getting closer to and engaging more directly with the customer are playing a more critical role in determining companies corporate strategy. Social media positioning, platforms and development are infl uencing marketing and distribution in India. The Promise of More The growing number of Internet users and consumers growing comfort with online fi nancial transactions are raising the potential for signifi cant growth in online insurance distribution in India. The advantages of cost and convenience, and the emergence of a do-it-yourself generation that is happy making purchasing decisions online, seem to be leading the growth of this new distribution channel. For online insurance distribution, it simply refl ects the enormous potential for future growth. Insurers that better understand the buying behavior of online customers; develop innovative, attractive and simple products catering to specifi c customer needs; and most importantly, have a robust communication and customer engagement model backing their online marketing strategy will emerge as future market leaders in online insurance distribution. For comments or questions, call or Anushri Bansal at , [email protected]; Rajesh Sabhlok at , [email protected]; or Vivek Jalan at , [email protected]. Increasingly, companies realize the Internet s potential in India and are aligning their marketing strategies accordingly. Social media is also having a greater impact on the way Indian businesses are run across all industry sectors, including insurance. Empowering the consumer is becoming a key The advantages of cost and convenience, and the emergence of a do-it-yourself generation that is happy making purchasing decisions online, seem to be leading the growth of this new distribution channel. 20 towerswatson.com