Embedded value: Insurers need to invest in technology to sell, analytics to predict risk

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Updated: Dec 23, 2015 12:14 AM

Two major insurance schemes launched by the government, PMJJBY and PMSBY, changed the marketing of insurance products at the bottom of the pyramid

The beginning of the year augured well for the insurance industry. Just a week before the new year ushered in, the Centre took the bold decision to get presidential assent for an Ordinance permitting foreign investment up to 49% in Indian insurance companies. Later during the year, Parliament also enacted a Bill on the subject putting to rest long standing suspense about the matter of foreign investment in this highly capital–intensive business.

The Act not only relaxed the ceiling on foreign investment but also brought several changes in the Insurance Act, 1938 for the benefit of the policyholders and the claimants. Most significant among them is the clarification regarding the role and the right of the nominee under an insurance policy and the matter of not questioning the bonafides of a death claim under a life insurance policy on the ground of misstatement or suppression of facts leading to acceptance of proposal and issue of policy if a policy has remained in force for at least three years before the incidence of the claim.

The amendments to the Act provided for powers to the insurance regulator to frame rules concerning products, distribution, intermediaries, investment, solvency, reinsurance, outsourcing of services and corporate governance concerning both life and non-life companies. The clarities introduced by the Act gave fillip to the decisions by promoters to bring changes in the holding pattern. This resulted in infusion of foreign fund to the tune of $341.43 million between March and Sept 2015 in the insurance sector. This also led to important decisions by the foreign partners regarding their commitment to bring capital.

State Bank of India has announced that BNP Paribas Cardif has expressed interest to raise its stake to 36% from the present 26%. Aegon Religare’s partner Aegon is set to raise its investment up to 49%. ICICI Prudential is also keen to divest a significant part of its holding to FIIs or PE investors. Almost all foreign JVs are set to get foreign capital infusion. They are all waiting for the right valuation to offload shares held by Indian partners.

Introduction of two major insurance schemes by the government for the common man, the PMJJBY and PMSBY, revolutionised the marketing of insurance products at the bottom of the pyramid. Both the schemes are being managed by public and private sector life and non-life insurance companies. The industry is reporting a pick-up in growth. As per provisional figures available, the private sector life insurers achieved a growth rate of 24% up to November 2015. The average growth rate of the industry, however, got pulled down due to only a 14% growth rate achieved by LIC, the country’s largest insurer.

Similarly, in the non-life sector, both public and private sector insurers achieved 16% growth. The health insurance segment has achieved an excellent growth rate of 43%. All these point to recovery of the industry in FY16 after very poor performances during the last few years. The non-life sector, however, has been more consistent in growth.
The year 2016 is expected to be a good year for insurers as they have come out of the struggle. The ghost of mis-selling seems to have subdued and the aggressive regulatory interventions have mellowed down. Now the regulator is busy framing rules, at least 40 of them, as a sequel to the passing of the insurance amendment Act. Product approvals are slowly but certainly happening.

The revival in the economy has provided a better environment to the insurers to sell more. Millions of youngsters are joining the workforce every year and all of them need insurance for themselves and for their movable or immovable property. The fast rising average longevity also provides a huge market to insurers to sell annuity products. The exempt-exempt-exempt tax regime is likely to continue as it provides an important motivation to people to not only buy insurance for risk cover but also for long-term savings. The year ahead is surely going to be a better year for the insurers.

However, 2016 will also pose several challenges. The Tamil Nadu floods are likely to result into property and casualty claims of around R2,500 crore. This is sufficient indication of the effect of global warming and climate change on the insurers. Insurers will have to think of insurance-linked securities or alternate sources to fund such eventualities.

The reinsurers, too, will have to tread cautiously. They may have to develop skill for analytics to predict risk more precisely.

The challenge will not remain limited to actuaries. Another challenge will be to upgrade technology with due consideration of cost. When everything is today sold and serviced with the click of the mouse, how can insurance remain oblivious of this fast changing lifestyle. IT professionals of the industry will have to learn driving business through technology, instead of just supporting business process.

Last, but not the least, the year 2016 may witness scramble for grabbing talent by insurers. The slowdown in the industry in the past three to four years caused huge laying off of manpower and also some voluntary migration. But to handle growth of business during 2015-16 and the bigger market waiting to be cultivated will certainly require huge talent pool. The industry will have to gear up to manage this challenge. Productivity of employees and agents needs to be improved to take advantage of the positive scenario likely to be unfolding during the coming year.

The writer is executive director, Intuit Consulting

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