In 2000, when the Indian insurance sector was deregulated and FDI with a cap of 26% was allowed in the sector, the private sector was quick to respond. By 2011, the numbers of players in the life insurance segment had increased to 24, and they accounted for more than a quarter of the market, based on total premium. Accompanying this was the impressive increase in life insurance penetration levels (defined as amount of total premium as a percentage of GDP), as well as life insurance density (premium per capita). While the former had increased from a dismal figure of 2.15% in FY02 to 4.6% in FY10, the latter reached a peak of $55.7 in FY12, having been a mere $9.1 in FY02.
However, following this honeymoon phase of sorts, which lasted for close to a decade after the deregulation of the insurance sector, there was an almost secular drop in penetration level as it fell to 2.76% by FY16, and while the insurance density has been much more resilient, the overall downward trend in the life insurance sector is as discernible and ominous as the black sails of Theseus’ Ship to King Aegeus. Only this time around, the black sails are the constantly declining company branches, agents, etc. The number of branches of life insurance firms has virtually stagnated at around 11,000 since FY10, and the number of individual agents has fallen from around 28 lakh in FY10 to around 20 lakh in FY16. The fate of corporate agents is no better.
One major reason for this downward trend appears to be the inability of the industry to keep pace with the growing population and sell adequate new policies, possibly but not entirely due to the aforementioned reduction in both human resources and physical infrastructure. A mere 267 lakh new life insurance policies were issued in FY16, as compared to 532 lakh new policies issued in FY10 (chart 1). The dilapidation of infrastructure can both be a cause as well as effect of the decline in penetration and density, but it is unlikely that it will be an effect of the decrease in demand for life insurance products, since, from data, a decrease in penetration or density has never preceded a decrease in infrastructure.
After initial few years post-deregulation, first-year premiums have consistently accounted for a major chunk of total premiums of the life insurance industry. At their peak in FY07, they accounted for almost 48% of the total premiums, and even as recently as FY16, they made up approximately 38% of the total premiums. Further, upon juxtaposition, we see that growth in first-year premiums is a major driver of the growth in total premiums, unlike growth in renewal premium (chart 2). Even the correlation between the former two variables is 0.92, while it is 0.57 for the latter two variables.
The recently released RBI report on household finances indicates that people often regard debt from informal institutes and insurance products as substitutes. A major reason for this behaviour is their perception of the onerous bureaucratic requirements, the paperwork, coupled with their lack of understanding of terms and conditions involved in getting a policy.
Given these findings, a digitalisation approach should focus on reducing the bureaucratic bottlenecks and the cost involved in getting an insurance policy. The aim of the said policy should be to establish a scalable and sustainable policy environment.
Insurance has always been sold rather than bought. With the access to internet in India having increased from 5.1% in 2009 to 26% in 2015 (World Bank data), the vastly untapped transmission channel of internet has greatly widened. Internet allows policymakers and industry players to increase the spread of the insurance in a more rapid and cost-effective manner vis-à-vis the normal route.
In a preferred digital set-up, the government should play the role of an enabler. However, as of now, the multitude of regulators (SEBI, IRDAI, PFRDA, RBI, TRAI) stifles innovation in the digital space. The legacy firms and start-ups alike are conflicted in what rules and guidelines to follow, given the overlapping jurisdiction of different regulators. For example, regulators often indulge in elaborate and, at times, cumbersome consultation processes before finalising the regulations. Now, with a plethora of regulators being involved, the entire process gets unnecessarily stretched. This calls for a clear demarcation of regulators’ roles.
Lessons in digitalisation from other relevant markets should be drawn upon and fine-tuned in order to better emulate them in the insurance space. The provisioning of e-KYC for mutual fund investment is a case in point.
The government, with its initiatives like Pradhan Mantri Jan-Dhan Yojana (PMJDY), National Insurance Repository (NIR), e-KYC and DigiLocker, appears to have realised the importance of the digital medium. However, what is required for truly digitalising insurance services is that all these platforms must work in tandem.
The provisioning of a pre-approved set of low-cost insurance products, which can either be opted at the time of PMJDY account seeding or at the point of e-KYC, can be an initial step in the integration of the disparate government digitalisation initiatives. Documents required for availing the insurance policy can be extracted from applicants’ DigiLocker, while the policy, once issued, can be sent to the policyholder’s NIR account. This will greatly reduce the need for the applicant to be physically present at the branch during the entire process of getting a policy issued.
With the advent of fingerprint sensors on smartphones, the process of e-KYC can also be achieved from one’s place of comfort or choice. These are but a few illustrative suggestions on utilising the digital route in insurance space. Their implementation, with proper checks and balances, can nevertheless expedite the process of increasing insurance coverage. Digital India cannot just be about less cash and internet connectivity—Digital India can be heralded as a success only if its application is integrated into mainstay economic and financial services.
By Prithu Sharma, Research Associate, Pahle India Foundation