ACKO will be in a ‘happy place’ after distribution reforms: CEO

Why do you feel the SC ruling on long-term Motor Third Party insurance may not improve penetration?

The big gap is that in younger cars or two-wheelers or private vehicles, the compliance rate was already high. Almost 85% of the population is taking insurance anyway for the first four years. Commercial vehicles account for more than 50% of all third-party claims, yet they sit entirely outside this mandate. A similar long-tenure bundled product was introduced in 2018, and Irdai had to withdraw it in 2020. Of the people who purchased five-year insurance, nearly 80% did not renew in the sixth year. There are a couple of reasons. One, consumers end up paying out so much at the start. The second issue is that by the sixth year, their recall of even buying an insurance product is negligible.

What is the solution to increase motor insurance penetration?

There are some fundamental issues. Most insurance companies spend money on customer acquisition costs (distribution or commissions) and claims payouts. If the commission component keeps increasing because some company goes aggressive and shells out more commission, and if I have to put an extra 2–3% or 3–4% every year into commissions, my claims pool keeps getting tighter. I will then have to find ways to control this pool by not doing a fair job in settling claims, or by not delivering a great customer experience. I think this is fundamentally broken in the industry today. The bigger gap is in the current distribution model. The economics of how companies are growing means you are not making the product affordable. I think the commission reform will help the industry to solve these things to a good extent.

How will the proposed distribution reforms impact direct-to-consumer players like ACKO?

The proposed distribution reforms are really aimed at commission-led channels and companies that are over-dependent on them for growth. ACKO’s model is structurally different, so we find ourselves in a comfortable place. Our D2C model is built to optimise expenses over time. Unlike an agent- or intermediary-led model, we do carry customer acquisition costs in the first year — largely advertising and marketing — but from the second year onward, renewals come in at near-zero acquisition cost. That’s a compounding benefit. Our expense of management (EOM) ratio has improved by roughly 10% every year on the back of this effect.

Today, more than half our portfolio is renewal business, which carries virtually no distribution cost. This is fundamentally different from the commission-led part of the industry, where the cost of distribution is largely fixed as a percentage of premium and tends to rise year after year, with no natural lever to bring it down.

Our cost structure, by contrast, has a built-in glide path toward efficiency. I hope we have also done a decent job in delivering a good customer experience. If the market pushes consumers to organically find channels like this, we will be in a happy place.

ACKO was traditionally known as a motor insurance provider, but health now accounts for nearly 50% of the portfolio. 

We don’t think about our business in terms of an ideal split between lines of business. Insurance isn’t something people plan around in neat categories. They think about protecting their vehicle, health, travel, gadgets, as they come up in life. Our job is to be present and relevant across all of those moments. The fact that health has scaled in our portfolio isn’t the result of a strategic pivot away from motor,  it’s a reflection of trust. Once a family experiences how we handle an auto claim, they’re far more willing to bring their health, travel, or device protection needs to us as well. The mix moves because customer behavior moves, not because we’re rebalancing a portfolio.

Is there any tentative timeline for ACKO’s IPO?

No comment.