While the insurance sector was opened up for the private sector a decade ago, the industry is yet to witness a mutually supportive relationship between product manufacturers, distributors and consumers. Manufacturers focused more on market share by adopting short-term growth and cashed in on the bull market run of 2006-07 by focusing on Ulips, while distributors got rewarded with good incentives.
But the market crash of 2008 and a series of regulatory changes brought in a paradigm shift in the way the products are sold now. The natural fall out of the mis-selling became clearer by the day and renewal premiums dropped.
Regulator’s response. The Irda?s far-reaching guideline capping the commission on Ulips became the game changer. A minimum guaranteed return of 4.5% was stipulated for pension products, which has been relaxed now. Recently, guidelines on stringent mandatory persistency have been issued.
The developments have affected distributors and more than 20% of independent advisors have left the industry over a year. The low persistency affects the valuation of manufacturers wishing to opt for initial public offerings. Some manufacturers have focused on increasing the single-premium share, which is immune to poor persistency. The attrition rate in the industry is high and the reputation risk of manufacturers is a matter of concern.
Products. Now, the top priority is to address consumer confidence. New products are introduced, tweaking a feature here and there. Since financial literacy in the country is poor, we need simpler products to understand them well. The instances of mis-selling in bancassurance can be addressed to a great extent by designing simpler products that can be sold easily across the counter. This can help reduce distribution cost a sinsurance is still being sold and not bought. It will contribute towards creating a pull pressure that will be healthy for the sector in the long run. The market segmentation on consumer profiles, rather than on distribution lines, will be appropriate for designing suitable products.
Transparency. There is a need for standardisation of charges in Ulips. Consumers find it difficult to link between products and funds. The funds can be categorised depending on the composition of equity and debt. This can help compare the performance of funds across manufacturers. Disclosures on risk and return parameters ? historical returns, expenses ratio, standard deviation, beta sharp ratio, alpha and tracking error ? can go a long way in helping the consumers selecting the right products.The recent guidelines on web aggregators and mobile information will help in transparency. The basic focus on selling insurance should be on providing adequate insurance solutions to consumers.
General insurance. De-tariffing in general insurance was introduced in 2008. It envisaged encouraging healthy competition among manufacturers so that consumers benefit. The fire insurance segment faced unhealthy competition by discounts up to even 70-80%. The claims ratio in two other growing segments ? motor and health ? continues at more than 100% despite the fact that the pull element plays a role in these two sectors. We need sensible risk management in general insurance to increase our penetration, which is hovering at around 0.6% of GDP.
The moral hazards in the motor and health segments are a serious issue. The TPAs in the health sector and the motor pool have attracted the attention of Irda and it will do away with the motor pool to enable manufacturers contain losses.
* The writer is chief financial planner, Max Secure Financial Planners