India’s Insurance Industry Since Liberalisation’

A SUMMARISED VERSION OF MY WINNING SUBMISSION AND PRESENTATION ON 20TH JANUARY 2017.

EVENT WAS PART OF 10TH INDIA RENDEZVOUS FROM 18-20 JANUARY 2017, TAJ LANDS END, MUMBAI, INDIA ON THE THEME “FINDING THE IDEAL REINSURANCE PARTNER”. 

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We live in very interesting times and in the midst of the fourth industrial revolution. Two recent major events that occurred in insurance industry may not have received adequate attention.

• A Japanese life insurer, Fukoku Mutual Life Insurance has replaced more than 30 employees with IBM's Watson Explorer Artificial Intelligence (AI). The AI is able to read the medical records of policy holders and calculate payouts to them much faster than the human employees could. High productivity gains have been reported.
• Lemonade, P2P insurer, claimed a world record of having settled a claim in 3 seconds through its AI claims bot. The process involved submission of claim, camera taking claim submission, running 18 anti fraud algos, settlement decision and credit to bank. Lemonade offers home insurance to customers in New York who can buy coverage with any mobile device. London has Guevara, a P2P car insurance company, and Friendsurance started in Berlin in 2011, selling personal and casualty insurance.

So do these foretell the revolution about to sweep Insurance industry?

BACKGROUND OF INDUSTRY

Insurance industry in India is not 16 yrs old or 50 yrs old- it is more than 150 yrs old. That is the more rigorous standard against which it must be judged against rather than merely the last 16 years.

From a historical perspective, industry has swung from liberalised to nationalised to again liberalised environment. However regretfully industry was not able to consolidate any particular capability; whether product, or distribution or customer service. This has left lasting impact till today.

CURRENT SCENARIO

Some troubling quantitative performance indices:

• India is worlds 7th largest economy with GDP of around USD 2 trln with world GDP share of 7% . Total India Insurance premium is around USD 71 Bln. World GDP share is 1.6%. Global rank is 12. (Swiss Re). Why this gap?
• When we look at the global rankings, Indian insurance penetration ranking is at No 41 ….3.44% ( Life 2.72 plus Non Life 0.72) and insurance density, No 76 USD 54.7 ( Life USD 43.2 plus Non Life USD 11.5). Though there is improvement since 2000, both parameters are still way behind Asian standards leave alone other developed markets.
• As per Capgemini EFMA World insurance report 2015 which carried out survey in major 30 countries insurance markets, India figures in the bottom 10 countries with positive customer experience. In 2014 it was 24.6% a drop from 32% in 2013. Rank has dropped from 13 to 21. It is shocking to see that only a quarter of customers have positive customer experience.

Even the country with highest positive experience Austria No 1 is at mere 43% in 2014. What does it say about the industry not only in India but worldwide? Can an industry thrive with such low customer experience scores?

• Non life insurance industry in India has shown largely stagnant penetration and density levels. There is marginal increase in premium growth in post liberalisation period as compared to decade before liberalisation. Globally still have among the highest overall combined /loss ratios.
• Life insurance industry has shown increase in penetration and density rates but way below Asian rates. There is also decrease in premium growth in post liberalisation period as compared to decade before liberalisation. Also have among poorest policy persistence rates which reinforces the customer experience scores mentioned previously.

How to explain this dichotomy in terms of actual performance and expectations?

It can be inferred that we have not really made that much of progress as was expected form liberalisation.

If we look at the qualitative aspects of performance of insurance industry, we observe following trends:

• An INSEAD study (2006) claimed, ‘that the image of insurance industry in the public opinion is not good- in reality, it appears to be blurred, if not squarely bad’. Every alternate day, we read horror stories of customer contact with insurers. How does it impact industry reputation?
• Insurance industry is one of least preferred careers.
• Inward focus: complete product/line focussed business coupled with a ‘push oriented’ distribution approach with the customer not even as an afterthought.
• No distinct and integrated customer value proposition
• Low Receptivity to Management Innovations - Agile, Design Thinking, Lean etc . One doesn’t hear many successful examples of implementation of these innovations in insurance industry unlike in other industries.
• Heavy dose of Regulation which acts as barrier to innovation.
• Behind other Financial Services in usage of Information Technology (IT). Does the industry see IT primarily as a cost center prone to overruns and a megaproject mentality; Does the strategy drive technology or the technology drives strategy? How effectively data is being used to drive decisions?

Is it any wonder that prominent insurance practitioners have made shocking comments about the industry.

‘Insurance industry risked being “mentally domiciled in the suburbs of the 1950s…” Chartered Insurance Institute (CII), 2008

Insurers will disappear unless they embrace sweeping technological change. He went on to say that the insurance sector is “on the verge of a revolution and has been lagging behind every other industry — it has been paralyzed.” Generali’s CEO, Mario Greco, The Financial Times, 2015

Overall whether one looks at qualitative or quantitative aspects of the insurance industry, picture is not pretty. One is reminded of Ronald Reagan’s famous quote…“Status quo, you know, is Latin for 'the mess we're in”.

DISRUPTIONS

To complicate the situation even more, there are several disruptions already in operation. These are:

• The industrial economy was based on supply-side economies of scale. This is also reflected in the phrase ‘insurance is sold not bought’. The new focus is in demand-side network effects in many industries. Most of insurance industry have internalised supply side assumptions which inhibits innovation. Has the industry absorbed this?
• Regulatory- More focus on market conduct, transparency. One particularly likes a comment made by Mr Ravi Menon, Managing Director, Monetary Authority of Singapore (MAS) , in the context of Fintech . He observed that Regulation must not front-run innovation. Introducing regulation prematurely may stifle innovation and potentially derail the adoption of useful technology. That is a useful rule for regulators.
• Technological- IoT, SMAC, AI, Big Data, though still in piece meal mode.
• Digital revolution

a.     Sixteenth Meeting of the Financial Stability and Development Council (FSDC) discusses Fintech

b.     ‘Traditional banking to be soon disrupted by Fintech; urges Regulator to promote innovation’, Former RBI Governor D Subbarao

c.      China Insurance Regulatory Commission (CIRC ) promoting Digital Insurers.

d.     Digital Insurers in India? Coverfox promoted by NRN Murthy applies for insurance licence. Given his orientation can we expect surprise?

• Demographics- Changing preferences of millennial generation.
• Economic- Low interest environment. For every percentage reduction in interest rate the combined ratio needs to improve by 3.5%.
• Climate change and impact on rising urbanisation

WAY AHEAD

Rethink the strategic and leadership model adopted by the industry.

Industry has to generate non linear growth rather than follow a linear growth model. Only then can it vault to Asian standards of penetration and density. This means focus on two challenges

1. Value challenge:
2. Distribution challenge

Value Challenge: What is the solution we are providing to customers?

–    ‘Quarter inch drill or quarter inch hole’ ?

This was the question asked by Theodore Levitt in his seminal 1960 HBR article ‘Marketing Myopia’. I suggest that most of the insurance industry has not asked this question. The industry is still stuck at the transaction level of polices and claims level. Replying to this question can take insurers in very interesting directions and help build a clear differentiated strategy and radically different business models.

–    Insurance as a commodity is taken as gospel truth.

A commodity is a product or a service that no one cared enough about to market. Marketing creates value, by combining stories, design and care… Commodities are in the eye of the producer….Seth Godin

The perception is not so much in the customer’s eyes but in the seller’s eyes. Clearly insurers have failed in this area and have accepted ‘insurance as commodity’ as the ruling norm which hobbles them from doing any effective marketing/selling.

These two factors condemn the industry to price based death spiral and hardly any differentiation is seen. Insurance companies are near clones with similar strategies.

Distribution Challenge: How do we provide the solution?

In the post demonetised world, this has to be met by the digital route for maximum reach. Its not merely making some technological improvements like a website etc but a complete overhaul of the way the industry operates. The rethink is in the way insurance world should work rather than the way it does now. A good example is Uber and the reason the word ‘Uberisation’ has been coined to denote disruption of any industry.

Digital revolution will require insurers to make stark choices and rethink structure of companies and the structure of industries

?     Industrial form of ‘silod’ organisation vs collaborative/information sharing structures

?     Silos vs customer centricity

?     Transactions vs Knowledge driven

?     Gut driven vs data driven decisions

?     Product driven vs customer driven

Currently the industry operates on the former pattern.

The latter pattern is the one industry has to aim for. Even without the digital disruption the change is due.

“To win in the marketplace, you have to win in the workplace first” -Doug Conant, Campbell Soup

Can the Indian insurance industry rise to the twin challenge?