The COVID-19 pandemic has resulted in a massive number of health claims.
By Siddharth Acharya
The recent times, particularly after February – March 2020, have changed the world in so many ways we could not have imagined. COVID-19 brought about human suffering, pain and agony in ways that most humankind could not have ever visualized. It can be counted as a black swan event, if there ever was one. One of the most affected sectors has been the insurance sector. The COVID-19 pandemic has resulted in a massive number of health claims. Already, the Indian insurance industry was passing through challenging times. A market that was restricted in structure for many decades was opened up for international players by the turn of the last century. The last two decades, however, have not been able to produce the kind of high growth and penetration as was expected. The enthusiasm of international players to enter also has been tepid.
There would be many reasons for this ‘slower than expected’ growth. But a key one is how the leading insurance players from overseas saw the future of the Indian market. The idea was that time tested products, distribution methods and operational techniques would deliver results. This was perhaps not the case. Missing the pulse of the Indian market and the omission to adapt products and processes to gel well with the Indian context contributed to the market not doing as good as it could have. It also affected the enthusiasm of new players to come in.
Recently, the Government has increased the FDI cap in general insurance companies to 76% with a view to provide a fillip to the Indian Insurance Sector. Many foreign insurance players now have adequate opportunities to enter into the Indian Insurance Sector and acquire controlling stakes in Indian Insurance Companies. India – an interesting challenge every market is different and needs different treatment. However, the scenario in the Indian market is a bit more complex. Here we have a relatively under penetrated market with a very large potential, operating in a complex and sub-optimal environment. We have striking contrasts like low per capita income, but very high mobile penetration. Such parameters are not observed in other markets. So transplanting external solutions may not yield good results. With a penetration of less than 4% India offers a tremendous opportunity to grow.
However, the access to the consumers is an area which poses a major challenge. Traditional channels may not really work well and technology innovation would play a key role in solving the puzzle here.
Another dimension of the Indian market which makes it interesting is the range of risks that are offered for insurance – bicycle to satellite! The array of products required to offer meaningful and effective coverage requires thought and innovation. This aspect stretches the abilities of the insurers to the maximum. Overall, the status of the industry and the avenues of growth in the Indian market make the demands of the Indian market specific to products and distribution. It calls for deep domain expertise at the leadership levels.
The challenges before the board of the companies are also very different compared to that of other markets and industries. For any organization it is absolutely critical to get the right leadership at the top to guide it ahead. Board of directors, as the top leadership of a company, assumes tremendous importance in this context. Constituting a board with the right combination of skills is half the job done well. The Board of any company would collectively determine the fortunes of the organization, driven strongly by the background and perspectives of individual members. So, deciding the mix of profiles that would need to go into the board is a defining decision. Traditional wisdom and many research findings point to the need to have good diversity in the profile of members of the board.
This is to harvest wide skill-sets and provide overall guidance and direction to the company. As the board needs to operate on a wide range of activities from strategic direction to high level operating leadership, having members with complementing backgrounds is essential.
We can find several reports and studies advocating the need for diversity. It is important that we understand and evaluate the generic reports on board constitution with specific industry context while looking at specifics. From that perspective, the insurance industry in India may need a slightly different treatment compared to the generic principles of board constitution. A quick look at insurance players in the Indian market gives us a picture of boards constituted with experts from various financial services and other fields. There is a clearly visible tendency to staff the board with nominee members of the owners, investors and so on.
We often find that the presence of insurance industry experts is quite limited. This limits the growth potential or trajectory of the Insurers. Perhaps, some parallels can be drawn from guidelines / regulations drawn up by regulators in other financial sectors. The RBI, for e.g., has drawn up guidelines providing for banks to have a large number of independent directors. Such guidelines further provide for the Chair of the Board to be an independent director. Similarly, such guidelines also provide that various important committees of the Board are also constituted by and are chaired by independent directors. This ensures adequate corporate governance at the board level at all times. It is not that the Insurance regulator in India has not taken steps in this regard – they have issued guidelines for corporate governance for insurers in India. These however need some reforms. With the changing environment, it is time that the insurance regulator also needs to change with the times. The insurance companies would certainly benefit with the compulsory inclusion of domain experts in insurance and independent directors on their boards to steer them through challenging times.
At this critical juncture, insurers would need to carefully evaluate the constitution of their boards from the perspective of skills and expertise to counter the challenges discussed above. Attracting leading brains in the insurance domain for board level positions could be a productive move from the side of insurers. It is also the right time for companies to re-balance the board skills, by bringing in more insurance domain expertise. This will ensure the benefit, not only of the insurance companies, but also the customers and the industry at large.
(The author is a practicing advocate in Banking and Insurance Law and practices in the Supreme Court of India and National Company Law Tribunal and looks into various regulatory decisions of the government. He can be reached out at email@example.com. Views expressed are personal and do not reflect the official position or policy of Financial Express Online.)