While a range of economic and financial reforms have helped the insurance sector grow, there remains a host of challenges which need to be addressed for harnessing the full potential of the sector:

1. Key Issues and Challenges
Part 2
Indian Insurance Industry: Reaching out to
Exponential Growth

2. Key Issues and Challenges
While a range of economic and financial reforms have helped the insurance
sector grow, there remains a host of challenges which need to be addressed
for harnessing the full potential of the sector:
Key Challenges
a. Lack of Consumer Awareness: In spite of opening of the insurance sector for
private participation, the levels of insurance penetration and density are very
low. The main reason for low penetration is lack of awareness about the
insurance products and its benefits. It is important (and IRDA has been
working on it) to educate general public about the benefits of insurance, how
to select an insurance product and to educate them about the grievance
redress mechanism in case they are not satisfied with the services provided
and have a complaint against financial service providers.

3. Key Issues and Challenges
b. Negative Consumer Experience and Perception: One of the critical levers is
to manage consumer expectations and service. The industry has been
plagued by perceptions of slow, unreliable and at times harassing consumer
delivery. A lot of new entrants have worked at addressing the barriers
through their consumer interactions and working models, the same needs to
be strengthened across, especially with the onset of social media. Insurers
should identify areas, which are most vulnerable to frequent critical
comments, analyze the reasons for such underperformance, and take steps to
enhance the service delivery.

4. Key Issues and Challenges
c. Poor offtake of micro-insurance- Micro insurance (life, disability and health)
coverage of the economically disadvantaged sections of Indian society is dismally
low. Several factors have impeded the growth of micro insurance in the country.
Most customers in the target segment have low financial literacy and are unable
to view insurance as a risk mitigation tool. Further, lack of adequate products,
poorly designed policies, lack of education, mis-selling through inadequately
trained agents and rejections during claims settlement has led to lack of trust
with this customer segment. The feasibility of various products is often lacking or
low in quality. On the distribution front, limited incentive on a low premium
products makes it difficult to cover operational costs of reaching out to the
customers. For micro insurance to succeed, demand has to be created through
building awareness among the target segment, creating simple and need based
products and most importantly, simplifying the processes of underwriting and
claims management.

5. Key Issues and Challenges
d. Agency led Distribution Model: With reduced commission structures, high
attrition rates and dwindling perception attractiveness of agency as a career
options, the agency channel is under stress. This has led to reduced
dependence on the model and subsequently significant reduction in number
of offices in the private space.

6. Key Issues and Challenges
e. Distribution Costs: Life insurance companies spend a significant portion of
their budget to set-up and streamline the operating model and the
distribution process towards business acquisition. Distribution is not only the
forefront of the operations but also forms a large proportion of the operating
expenses. Accordingly, inefficient agent recruitment and high employee
attrition increase the operational costs. For insurers to realize the highest
value from distribution, they must define an operating model which supports
a multiproduct, multi-channel distribution model that compliments an
insurer’s revenue objectives and profit margins.

7. Key Issues and Challenges
f. Lack of Alternate Distribution Channels: While banc-assurance is expected
to drive near term growth and online holds a promise for the future, agency
channel continues to dominate the channel mix today. There is an urgent
need to take initiatives to revamp the agency channel to become cost
effective and in tandem, identify alternative networks that complement the
existing channels.

8. Key Issues and Challenges
g. Lack of Product Innovations and Customizations: There have always been a
few life insurers who have sought to identify niche markets like women-
oriented products, worksite marketing, children future protection markets
and pension markets. But these have not been happening on a consistent
basis. The industry’s business model needs to constantly innovate and evolve.
However, off late this is witnessing a change with increasing number of
insurers looking to introduce new and innovative products aimed at meeting
evolving customer needs.

9. Key Issues and Challenges
h. To highlight the point further, Pension and retirement products is a big gap
in the current product portfolios. While the demographics (percentage share
of 60+ is expected to go up to 12 per cent by 2030) support the need for a
product, it has remained largely under-leveraged by consumers and
marketers alike on account of a. low consumer awareness and thus perceived
relevance b. Difficulty in providing long term insurance guarantees c. long
gestation period of returns etc.

10. Key Issues and Challenges
i. Intense Market Competition: The Indian insurance industry is gradually
evolving and thus remains highly competitive. The insurance public and
private players compete on the basis of reliability, financial strength and
stability, ratings, underwriting consistency, service, business ethics, price,
performance, capacity, policy terms and coverage conditions. In addition, the
company also faces competition from other financial institutions such as
banks, securities firms etc. which have started cross selling products that
directly or indirectly competes with various insurance products. Given the
inability of general insurers to differentiate on the basis of product offerings
along with the lack of customer awareness towards product features, the
competition will mainly be price led, which will further impact margins for the
sector.

11. Key Issues and Challenges
j. Human Resource Challenge: Keeping attrition in check and ensuring
availability of continuous talent is a key task. Further, the insurance market is
now filled with players, who are mature, globally prominent and big players,
each of them has ability to influence the market which is likely to further up
the challenge in this area.

12. Key Issues and Challenges
k. Regulatory Challenges: As the competition gets acute, the customer
becomes more vulnerable to the vagaries on market environment. The
regulators with a view of driving transparency, consumer protection,
simplifying portfolio and creating a long term sustainable eco-system and
business model have driven a few frequent changes in the regulations. Some
of the key changes which played a dominant role in charting the course for
the industry were the introduction of cap in charges on linked products,
restrictions on pension and index-linked products, and persistency norms for
agents; while the general insurance sector was affected by price de-
tarrification and motor third party risk pooling arrangements.

13. Key Issues and Challenges
E.g. IRDA had announced rules pertaining to capping of expenses -- no insurer
should spend more than an aggregate 10% of all first year premiums and 4% of
all renewal premiums on policies granting deferred annuities for more than one
premium; 5% of premiums received during the year on single- premium annuity
products and 1/20th of 1% of the average of the total sums assured by policies
excluding single-premium policies. While it aims to protect long term interests,
in the short run, it will put pressure on insurance companies to cut costs by
innovation, digitization, reducing customer acquisition costs and reducing
turnaround time. [Source: Economic Times, June ’15 Report]

14. Key Issues and Challenges
k. Volatility in Global Financial Markets: Though, coordinated actions by several
governments did restore some confidence in the volatile global markets, market
participants remained jittery. As a result, whenever there is a withdrawal of
foreign portfolio investments from Indian equity and debt markets, investment
returns booked by insurers are likely to suffer.

15. Key Issues and Challenges
l. Costs and Profitability: Insurers’ fascination for top line growth at any cost has
resulted in inefficient operating models and hence inferior operating ratios as
compared to global benchmarks, in both life and non–life. Clubbed with high
claims costs and regulatory constraints (as discussed above) have led to
tightening of insurer margins, impacting category profitability.
m. Adverse Claims Ratio for Non-Life Insurance: The sector has been making
significant underwriting losses from its core operations since 2007. In 2014- 15,
the net incurred claims for the industry rose 12.3 per cent to INR 55,232 crores
against INR 49,179 crores in 2013-14, stressing thereby the underwriting profits.
Within Non-life sector, the health and motor insurance lines, which are also the
biggest and the fastest growing segments, had the highest claims ratios of 97
percent and 77 percent respectively

16. THANK YOU
Email: jyoti.gadia@resurgentindia.com Call Us: +91 124 4754550
www.resurgentindia.com
Read full report on: http://blog.resurgentindia.com/indian-insurance-industry-reaching-
out-to-exponential-growth/