The life insurance industry in India has come a long way since its liberalization in the year 2000. The industry has had its own ups and downs, driven by a multitude of factors including: the scale and frequency of regulatory changes; the global financial meltdown; evolving consumer awareness; emergence of dominant channels like bancassurance; and changed market dynamics. Despite the progress made by the industry since the year 2000, India remains grossly under-insured as compared to other developed economies both in terms of penetration and density.
The penetration of life insurance has increased from 1.5 percent in the year 2000 to 2.6 percent in 2015; it hit a high of 4.5 percent during 2010. The opportunity for the industry is immense and hence the model of distribution of life insurance continues to evolve daily. The geographical and demographical diversity of India presents a great opportunity. A large uninsured and under-insured population spread across the wide geography of the country, combined with low financial literacy, throws up big challenges for life insurance companies as they struggle to reduce distribution costs and offer higher value to their customers, agents and partners.
Population Demography
The Indian demographic profile will continue to provide the right opportunity for the continued growth of the life insurance Industry. Currently 40 percent of the Indian population is below the age of 18. Over the next 15 years, India will continue to be a young country, with a very large part of the population below the age of 30 (refer Exhibit 1), which means that the need for life insurance, i.e. the need for life cover and for long-term savings will continue to dominate.
This demographic profile has two implications, stressing the importance of finding solutions to the need for family security. On the one hand, the young working population needs adequate life insurance cover and also appropriate savings to take care of their pension requirements. The dependent population is also very large, which implies that the income earner has to ensure the right life cover. It means that life insurance companies cannot afford to ignore product innovation and the delivery mechanism in respect of meeting up with the needs of these young customers.
This young generation is tech-savvy and uses technology, both the Internet and mobile for communication and transactions. Online business has tremendous potential for the sale of life insurance policies and also helps in keeping overall costs low. Insurers are expected to focus adoption of online channels increasingly, not only to book new business but also to provide related services to their customers. Online channels can also be leveraged to provide claims management and policy-related services to customers.
Life insurers need to provide ‘do it yourself’ products and processes and also devise a mechanism for an ‘assisted Internet sales’ facility for ‘from my home’ buying. While developing an online strategy which includes the design of portals and online products, life insurers need to keep in mind that the online portal is an integral part of the multi-channel distribution network.
Large Non-urban Market
With more than 700 million people living in rural areas in some 5,80,000 villages, about two-thirds of India’s workforce is engaged in agriculture and allied activities. With a contribution of 29 percent to its gross domestic product (GDP), India’s economy is predominantly rural in character. We also keep observing that the sales of FMCG and automobile companies are increasingly becoming rural-dominated and a favorable monsoon drives sales up for these organizations. Of late we can also observe that the tempo of development is accelerating in rural India, coupled with increase in purchasing power because of scientific agriculture. The changing lifestyle and consumption pattern of villagers with increase in education; social mobility; improved means of transportation and communication; and other penetrations of mass media such as television and its various satellite channels have exposed rural India to the outside world. Hence their outlook to life has also changed. With such a large section of our population continuing to live in semi-urban and rural areas, life insurance companies need to figure out an appropriate model which will include both the product and process of delivery to offer to these customer segments. These semi-urban and rural customer segments have an income stream which is more cyclic compared to their salaried counterparts in the urban centers. It is very important to understand the peculiarities of this customer segment while designing the product.
Even in terms of affordability to pay premiums, the rural segment has a lower average premium per policy as compared to the national average. In order to service this customer segment, while insurers are required to reduce the cost of delivery, they need to ensure reasonable commission earnings for their agents to reach out to these customers.
Simple and easy-to-understand product benefits are required to cater this non-urban customer segment. The product structure and benefits are to be designed keeping in mind the low financial literacy of the customer segment and the need to reduce substantially the opportunity for mis-selling of life insurance products.
Secondly, in the absence of a predictable income stream, we are already witnessing higher mortality among the agency force. Moreover, it is becoming increasingly difficult to recruit a new agent; the cost of recruitment and training being higher, it becomes an imperative for life insurers to retain their existing agents and improve their earnings through higher productivity. We see the emergence of fully automated tablet-based sales in the coming years in the life insurance business. This hand-held device will double up as a sales-enhancing and a sales-completion tool. The rapid changes happening in mobile technology will be a great facilitator in this digital dispensation of life insurance products. This digital drive in mobile technology can help life insurers not only in reducing their cost of acquisition, but also in increasing their reach to much larger customer segments. Easy-to-sell products, simple processes and technology-supported customer service initiatives are expected to drive growth in the life insurance business in the coming years.
The challenge of reaching out to customers at the lowest possible cost while ensuring appropriate remuneration to distributors in order to retain them will continue to pose a challenge to the profitability of life insurers.
In terms of product design, it has to be simple and easy to understand from the point of view of the customer, whether urban or rural. We can expect more urban customers to move to the online medium for product research and buying. For this customer segment, life insurers need to have simple and easy-to-buy online products at competitive prices. With the information in their palms, the urban customer segment is price sensitive and it is important for life insurers to offer differentiated products which offer more value to these customers. This will also involve designing of the portal with user-friendly features which will guide and glide the customer with ease in the purchase of the life insurance product by providing product information; and also in completion of the online purchase.
In the emerging scenario, life insurers will continue to focus both on the online and ‘brick and mortar’ models for distribution of life insurance products. The products will be customized for target customer groups and will have a customized delivery model. The opportunity is enormous and customization and quicker adoption will be the key to profitable growth in the life insurance industry.
Manoj Kumar Jain, Managing Director, Shriram Life Insurance Company Limited writes this piece for FICCI-BCG publication ‘The Changing Face of Indian Insurace’
