How insurance has evolved over the years

Disruption is a way of life in business. For India's life insurance industry, the time taken to react to such big changes has over the years defined this industry. This approach has made the life insurance industry, dominated by Life Insurance Corporation, second only to banks for mobilised savings. In the past decade, the industry has dealt with big changes in a practical manner, as its watch-dog Irda ensured that the industry with nearly Rs 30 lakh crore of managed assets comes out stronger and better.

Ulip pain

The first disruption was the reforms in united-linked insurance plans (Ulips). In a Ulip, the investments made are subject to risks associated with the capital markets. So, the risk in investment portfolio is borne by the policy holder. With markets on a roll in 2004-2008, just as they are now, the industry back then found it easy to lure customers with Ulips. So much so, that for every Rs 100 of total premium collected in 2007-08, unit-linked premium contributed Rs 46.

Most customers were unaware of the high charges levied in the initial years. They did not realise what the agent was up to when he/she said that they have to pay the premium 'only for a few years'. So, Insurance Regulatory and Development Authority of India (Irda) capped charges, extended lock-in period to five years and raised minimum life cover. Huge commissions were also restricted. These regulations around the Ulip business, aimed at establishing its long-term nature, transformed the industry and made Ulips more customer-friendly.

"It was a tough period, but ultimately Ulips emerged a stronger product. Ulips are not for everybody, because not everybody has the same risk appetite. When markets do well, Ulip performance is good," said Sunil Sharma, appointed actuary and chief risk officer, Kotak Life Insurance.

The big changes brought in by Irda did not kill Ulips. From a peak Ulip premium of over Rs 1 lakh crore between 2009-10, it did fall to Rs 37,500 crore in 2013-14 but has picked up pace and crossed Rs 46,000 crore in FY16. With the string of Ulip reforms taking place, the once most-hated product is silently making a successful comeback. In FY15 and FY16, growth in Ulip premium was faster than traditional premium.

"Today, investors understand that via Ulips they can get multiple advantages of investing in equity markets for wealth creation as well as secure life protection. It’s a product for the long-term," says Anil Rego, founder & CEO, Right Horizons.

Ultra-low cost PMJJBY

The second disruption, although the industry would not like to label it that way, was Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY). An ultra-low cost Rs 2 lakh renewable life insurance cover for Rs 330 per annum was unheard of before the government launched it in May 2015. At that time, similar-value life cover from others was available from Rs 1,500 to Rs 3,000 annual premium.

“This was a game-changer. PMJJBY clocked about 3 crore policies in a year, straightaway doubling the insurance customer base. There were initially concerns about viability because the ticket-size was small, but volumes have been big. The product is designed in a way that life insurers can make money in the long-term if numbers sustain,” said Rushabh Gandhi, director - marketing & sales, IndiaFirst Life Insurance.

The PMJJBY wad a disruption in thinking because selling a life insurance at such a price never happened. In some circles, many CEOs and MDs were also worried whether a government-backed life insurance scheme would take customers away. But that has not proved to be the case. In reality, PMJJBY helped the sector.

Firstly, insurance awareness has increased courtesy PMJJBY. Cost of customer acquisition is high in life insurance business, and so many players don’t tread in areas where money to be made is less. PMJJBY opened up a new market for all insurers.

“Secondly, all life insurers can now upsell and cross-sell products. The Rs 2 lakh sum assured (which gives around Rs 13,000 annual interest if invested in FD) isn't enough for middle class Indians. So, insurers can tell the same customers to take a bigger term cover. They can also sell them other products like money-back, endowment and Ulips, and they are already doing it,” said Arijit Dutta, a life insurance trainer.

Growth is happening at a nice pace. Edelweiss Securities analysts Nilesh Parikh and Kunal Shah said, "The life insurance industry (individual annual premium equivalent) grew >22% year on year in June 2017 spearheaded by private players, who jumped >27% compared to LIC that grew 17% YoY. Strong momentum in higher ticket size lent impetus to growth."

GAINS FROM DISRUPTIVE POLICIES

• Most customers were unaware of high charges levied on united-linked insurance plans (Ulips) in the initial years. So, Irda capped charges, extended lock-in period to five years and raised minimum life cover
   
• These regulations around the Ulip business, aimed at establishing its long-term nature, transformed the industry and made Ulips more customer-friendly
   
• Pradhan Mantri Jeevan Jyoti Bima Yojana, an ultra-low cost Rs 2 lakh renewable life insurance cover for Rs 330 per annum, has increased insurance awareness and opened up a new market for all insurers
   
• At the time Pradhan Mantri Jeevan Jyoti Bima Yojana was launched, similar-value life cover from others was available from Rs 1,500 to Rs 3,000 annual premium