Team Name: The Illuminati 2011 Critical Review of the Insurance Sector & Role of IRDA Team Members: Anam Shaikh Chaitanya Warang Ishita Sharma Kush Tandon Sumedh Shevde
Current Scenario: Indian insurance industry has seen a significant growth over the past few years on account of growing national economy, increasing per capita income, growing consumer awareness about insurance products, and the entry of foreign players in the Indian market bringing in more innovative products. The Indian insurance industry operates through life and non-life segment, with life insurance, motor and health insurance being the major industry drivers. With the development of the Insurance sector, the premium received can be deployed in long term projects like infrastructure as the tenure matching becomes easy. The Indian Insurance Sector is a colossal one and is growing at a speedy rate of 15-20%. Together with banking services, insurance services add about 7% to the country s GDP. Overall insurance penetration (premium as percentage of GDP) in India has increased from 2.3% in 2001 to 5.2% in 2011. A well-developed and evolved insurance sector is a boon for economic development as it provides long- term funds for infrastructure development at the same time strengthening the risk taking ability of the country. IRDA (Insurance Regulatory & Development Authority): In 1999, IRDA was constituted as an autonomous body to regulate and develop the insurance industry. The key objectives of the IRDA include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market. The IRDA opened up the market in August 2000. Foreign companies were allowed ownership of up to 26%. The Authority has the power to frame regulations and has from 2000 onwards framed various regulations ranging from registration of companies for carrying on insurance business to protection of policyholders interests. Rationale for selection of topic: What happens when a poor family s breadwinner dies, when a child in a disadvantaged household is hospitalized, or the home of a vulnerable family is destroyed by fire or natural disaster? Every serious illness, every accident and every natural disaster threatens the very existence of poor people and usually leads to deeper poverty. It is important that maximum Indians are provided a social security blanket to safeguard their future. The need for microinsurance thus becomes critical. Page 2
Problem definition: (i) Increasing transparency in insurance operations and selling in urban areas (ii) Penetration of insurance in rural areas through micro-insurance Major concerns in rural areas: (i) (ii) (iii) (iv) (v) (vi) There are specific reasons for low demand for insurance in spite of intense need. Suppliers have their own concerns and this explains why there have been so little efforts at market development. Consequently, the rural market is characterized by limited and inappropriate services, inadequate information and capacity gaps. There are challenges in product design, which has resulted in a mismatch between needs and standard products on offer. Efforts at product development / diversification have been limited. Pricing, including willingness to pay and the availability of subsidies, influence the market. In the absence of a historical database on claims, premium calculations are based on remote macro aggregates and overcautious margins. Building and sharing claims histories can help in aligning pricing decisions with actuarial calculations, thereby reducing prices. Difficulty in distribution is one of the most cited reasons for absence of rural insurance. The high costs of penetrating rural markets, combined with underutilization of available distribution channels, hinder the growth of rural insurance services. This adds to costs, both, managerial and financial. Like inclusive credit, inclusive insurance is expected to be a low ticket business, requiring volumes for viability. Cumbersome and inappropriate procedures inhibit the development of this sector. Contrasting perspectives of the insured and the insurers, lead to low customization of products and low demand for what is available. Page 3
Fig 1: Three pillars of Insurance Sector Fig 2: Trade-off faced by Insurance Cos. Penetration Profits Major concerns in urban areas: (i) Gross mis-selling of insurance products to gullible masses: Growth has been driven by short-term investment-oriented products where customer has not been fully aware of underlying risks. Hence, lack of financial literacy amongst the educationally literate is also a major concern. As a result, the industry has not been able to meet core objectives of providing long term savings and protection. This is especially true in case of ULIPS where a majority of the investment goes into the stock markets. Selling based incentives and compensation structure of insurance agents which leads to Lack of transparency and accountability about the actual product (ii) Conflicting objectives of stakeholders: For the industry to meet core objectives of long-term savings and protection while evolving to balanced and vibrant structure, the interplay among and action taken by three sets of stakeholders is critical: (a) Manufacturers: Innovating business models and products (b) Regulators: Ensuring appropriate oversight to balance objectives (c) Distributors: Creating access and consumer education (iii) Need for a more robust anti-fraud program: Fraud risk exposure from claims or surrender is a major concern area for industry players. They have emphasized the need for increased anti-fraud regulations in the area of claims management. Frauds are driving up overall costs for insurers and premiums for policyholders. There is a need for a more robust analytics tools to effectively detect red flags. It s imperative to screen all the key stakeholders. Page 4
Investigation Methodology: Problem Analysis: (i) Primary research: (a) Interaction with Insurance Industry Experts, (b) Survey of Insurance holders and consumers (ii) Secondary research: Past data from multiple sources including reports of IRDA and LIC (iii) Critical evaluation of IRDA as a regulator to improve transparency and increase competition amongst the players. Also, the objective of insurance being a social need should preclude the profit motive (iv) Study of successful foreign models The solution/model envisaged to deal with the issue: Rural Areas: Our focus is to increase penetration of insurance in rural areas. Insurance represents a socially sensitive topic. It not only represents a great business opportunity due to the sheer volume of the uninsured in rural areas but it will also help the poor get protection and mitigate personal and professional risk. However, due to the different nature of the Indian rural market, the following areas are recommended for study: (i) Product Innovation: This is imperative as the needs and capacity of the rural masses is different from the urban areas (ii) Awareness: There is little knowledge about insurance as social security (iii) Distribution: This is the key area as the products have to reach the masses in a costeffective manner. Using the UID scheme can be one approach to help this cause (iv) Role of IRDA: This is another important area as micro-insurance is relatively new, and will need proper regulations to ensure its success Page 5
We are proposing to study the feasibility of following distribution models: (i) Gram Panchayat LIC (ii) Gram Panchayat Banking Correspondent Bank Insurance Co. (iii) E-choupal Self Help Group FMCG Co. Insurance Co. Urban Areas: (i) Tighter regulations formulated by IRDA: IRDA will have to play a major role in the cleanup of the insurance sector. It has to come up with regulations that will convert the capitalist motive into a socialist motive without affecting margins. IRDA will have to ensure proper implementation of reforms to curb malpractices in insurance sector. (ii) Financial Planning: Insurance executives should be trained adequately such that they can advise customers appropriate Insurance cover based on their financial goals. Conclusion: This paper aims at using two-pronged approach to develop socially relevant business models for the Indian insurance sector Page 6