Customer Awareness, Tight Insurer Processes, Incentive Structure Keys To Avoid Mis-Selling, Policy Lapses

I think there are multiple reasons. First, awareness needs to go up much more. Another big reason is financial discipline. People need to understand why financial discipline is important for the long term. Then come things like affordability or how we are distributing or selling products.

An aware customer understands the need a product fulfils, and there are two needs in insurance. One is pure protection, which everybody should have. Two, there is a long-term savings element, which is protection against volatility and interest rate changes. This understanding is required, and customers need the discipline to stay with it; this is not a product which will give you immediate gratification in six months or a year.

Also, for sellers, it’s important to have the discipline of explaining to customers why they need the product. That process ensures that the customer buys it for the right reason.

In the last 50-60 years, we’ve always been talking about insurance as savings. It’s only in the last 15 years or so that pure protection products have started catching up, and they are doing well now. Even after the GST waiver, the boost towards term insurance was much bigger, and we saw rapid growth for two reasons. One was that they became more affordable, but the bigger reason was that it was recognised at the government level as an important category to be made GST-exempt, which boosted awareness.

Campaigns around awareness and the need for protection are there, but more needs to be done and maybe at a higher decibel. We do have a mindset that nothing comes back to me. On that, some product innovation has helped, especially when we go deeper in the country, into Bharat. So, return-of-premium kind of plans have started to get some traction in the smaller markets.

Clearly, one is reach. Insurance is a product which has some complexity which is intangible. For such products, you need to have a face to understand, and a human front builds trust. So, one must reach that last mile. As a company, we have expanded and opened nearly 240 branches in the last two years. We have branches in nearly 650 to 700 towns. Even digitally, we service more than 2,000 towns and cities at this point.

Getting that reach and depth is important, apart from understanding the nuances of the region and territory. For example, when you go to smaller towns, the risk underwriting is very different from a Tier 1 city. Also, availability of income documentation is sparse deeper in the geography. So, companies do have inhibitions to move deeper because it takes time to understand that risk. We have also gone through our own learning curves.

It’s a step in the right direction, though there may be some nuances which could have been handled better or could be amiss. What they are trying to do at a larger level is reduce the cost and, hence, make the product more attractive for the customer.

Distribution models may change or may need to be tweaked because the revenue will change dramatically, and that might need some time. So, a little bit of transition time will help smooth it.

One point that the regulator could do better is in appreciating the role played by the credit life product, where a customer really takes a loan and attaches it to an insurance plan (the loan is taken care of in case of an eventuality). That helps us reach underserved segments.

When you are underwriting, you need to start at a certain ticket size where the individual needs to have documentation like income documents. Credit life serves the segment which does not have these documents, and it’s a large segment. Nearly 80 per cent of the lives covered today in the country would be through credit life for small ticket sizes like loans of Rs 50,000 or Rs 75,000. This segment will likely not be able to buy a life insurance plan because of the lack of documentation.

Let’s hope that when it (consultation paper) comes in the final form, there is some more relaxation so that this business also remains viable.

So we are largely asking for two or three things. One is clearly in the credit life: take it to a level where it’s viable so that you know there is a reasonable return for the effort that the intermediaries are putting in for KYC, claim processing and so on. Then there is some feedback on the process from the industry side.

From the intermediary side, I am seeing a lot of feedback around the quantum of reduction; they want a slightly higher payout as well as a longer transition time.

There will be some short-term impact for all intermediaries, even the insurance companies, because if the distribution is going to be shaken up or disrupted, it will have a scale impact on insurance companies also.

But it’s like a transition period, and as it gets over, we believe this will help take the insurance industry to a higher level by making the products better for the customer.

Every stakeholder needs to play a certain role. Customers need to be more aware of what they are buying and why. As an insurance company, we have a reasonably tight process, but we can tighten it further. So, what we do is whenever a sale happens, we reach back to the customer through an independent call centre or a virtual relationship manager or somebody to explain 5-7 key points about the insurance product that’s been bought. This is customised and includes how many years you need to pay, what you need to do, the benefit you’ll get, what the cash flow will be and so on. Once the customer agrees, we move ahead. At times, customers, after maybe a year, say that they did not understand it fully. This is where we would need the awareness angle to come in because you can clarify at the stage when the call is made and make an informed decision.

On the intermediary side, clearly incentives have been upfronted. So, there is a reason to close the sale maybe much faster than you might need to. But as the regulations and the new guidelines are envisaged, they are more spread out. So, the renewal commission is also becoming more lucrative and will be a motivation to ensure that the customer stays focused for a longer run.

It should increase persistency because now it’s a much more well-distributed piece.

If we assume that the guidelines come in by April 1, one could see the impact on persistency happening a year later. So, 13 months from then is what you could see.

It can have an impact. Over five years, there are two things that one needs to understand. There are certain product constructs which are meant for five-year payment, after which you have the option of taking a premium holiday. For instance, in a unit-linked insurance plan (ULIP), you can stop paying after five years, without penalty or surrender costs. That’s not truly a persistency problem; it’s the customer using a product feature.

Even so, there is a challenge. We as an organisation have worked hard towards this. Our five-year persistency is now at nearly 66 per cent, which is among the highest in the industry. We do understand that selling and persistency are very important parts of a large organisation like ours.

Also, if you understand that you’re getting into a long-term play at the beginning, that will help increase persistency.

Not just awareness, but it will help. If I am an aware customer, I will ask questions and understand why I am buying it. But it is difficult to understand an intangible like insurance.

Let’s say I am buying a tangible product like a television. I know a few things that I’m looking for, like screen size or maybe a smart TV. So, I will ask the right questions, but when the TV comes home, I may realise that I did not check a few things that were not important to me. So, I live with that TV and don’t say I want to surrender it. But a financial product is different, and awareness has a role to play. If I am aware that this product will behave in a certain manner, then I will continue with it because I know that it is going to happen. If I am not fully aware and, let’s say, want some nuance or flexibility after two years, which the product does not allow, the challenge of lapsation comes in.

So, I think awareness is a big factor, and it’s very easy to find out in today’s AI world. It’s just about making an effort.

The next step is how the intermediaries are incentivised. As I said, spreading it out over the long term will help. Third is how tight the insurance companies are; like we explain upfront. So I think a combination of these three.

They usually are. But how they are understood is a different question. I’ve heard customers, and these are verbatim, say that at the time of buying, they were not thinking of surrender and, therefore, did not pay attention to that part. So, at the time of buying, they thought they could pay, and then perhaps there was a distress or change of decision. It is like the feature you didn’t ask for in a TV because it was not important for you.

More awareness about the surrender penalty will help, but for a long-term product like insurance, it is also important to have exit barriers in the beginning to build the culture of long-term savings and investment. If you don’t have that, the churn will be higher. For example, in the mutual fund industry, the churn is much higher. Insurance customers stay for longer.

Such behaviour sometimes does make selling a savings plan easier, as it’s an easier sales conversation. But change is happening. We are seeing a lot of people getting more aware of just pure protection plans.

The media has played a good role in also talking about pure protection plans, and I think that's where insurance needs to start. So, someone who has just started earning or has just started a family should start with a protection plan. And then, as you grow and start thinking about long-term wealth goals, the savings element can come in.