Customer is king as insurance biz undergoes sea change

The insurance industry will remember 2010 as an eventful year in which insurance regulator Irda came out on top in a turf war with market watchdog Sebi over the regulation of Unit-Linked Insurance Products, with the end result of such schemes becoming investor-friendly.

Sweeping regulatory changes with regard to ULIPs have already set the tone for the New Year. "2011 will be a year of transition and adaptation for the life insurance industry. After having witnessed the changes in the financial market, consumer sentiments and regulatory changes, going ahead life insurance will need to focus on and be sold as a long-term contractual savings and protection tool," Max New York Life Insurance Managing Director Rajesh Sud said.

In April, 2010, a spat between the Securities and Exchange Board of India (SEBI) and Insurance Regulatory and Development Authority (IRDA) over regulation of ULIPs -- which are hybrid insurance products in which a portion of the investor's premium is invested in equity -- led to the metamorphosis of such products.

To end the acrimony between the two regulators, the government issued an ULIP Ordinance on June 18 as capital markets regulator SEBI and insurance watchdog IRDA could not resolve their dispute over which of them was empowered to regulate such products.

Thereafter, the Securities and Insurance Laws (Amendment) and Validation Bill, 2010, was passed by Parliament to address the issues of jurisdiction between the financial sector watchdogs.

The Bill enabled the establishment of a joint body under the chairmanship of the Finance Minister and with representation from the four financial sector regulators and the Finance Ministry.

As per the Bill, the Reserve Bank Governor would be vice-chairman of the joint committee. After the promulgation of the Ordinance, IRDA tightened the norms for these schemes by increasing the lock-in period and raising the risk cover to make a significant distinction between ULIPs and mutual fund products.

At the same time, dealer commission rates were reduced and disclosure norms tightened to ensure greater transparency of ULIP schemes. As a result, the product became more investor-friendly.

The lock-in period for all ULIPs was increased from three years to five years, including top-up premiums, thereby making them long-term financial instruments which primarily provide risk protection.

In contrast, ULIPs were earlier more like an investment product. IRDA also directed insurers to evenly distribute charges on ULIPs during the lock-in period to ensure that high front-ending of expenses was eliminated.

These new guidelines offered a superior value proposition for customers and ensured that life insurance was promoted as a long-term protection and savings tool, Sud said. Echoing a similar view, Bharti AXA Life Chief Marketing and Operations Officer (CMOO) Mark Meehan said, "It's short-term pain, but long-term gain for the insurers."

The industry has been quick to adjust to the changed landscape and improve operational processes and the quality of their distribution chain, said Aviva India Managing Director T R Ramachandran.

However, in the short run, there is a period of adjustment as companies reconfigure their business model to the new environment, he said, while adding these are defining changes that will go a long way in making life insurance a preferred financial tool for long-term savings and risk protection.

Going forward, 2011 is likely to be a good year for the insurance industry, as products will become highly customer-centric and offer better returns, as well as long-term protection, said DLF Pramerica Life Insurance CEO Kapil Mehta.

Insurers will become much more efficient and this will help build stronger businesses, Mehta said. Experts also believe that distribution trends may also undergo changes. With the regulatory changes, the focus will increase on multi-channel distribution, particularly bancassurance.

Much of the growth in life insurance sector is expected to be driven by productivity of agents. Two focus areas for the business will be reducing expenses and persistence, Sud said.

As far as general insurance is concerned, mediclaim policy premiums witnessed an increase as insurers tried to cut down their losses due to excessive claims.

What is more, four public sector general insurance firms --Oriental Insurance, New India Assurance, National Insurance and United Insurance-- stopped their mediclaim cashless facility at about 150 top hospitals in select cities, including Delhi and Mumbai, alleging over-charging by these hospitals.

However, after prolonged negotiations with the healthcare industry, the cashless mediclaim facility was restored in some of the leading hospitals that were removed from the list earlier.

The claim ratio -- which is still very high in the medical insurance business -- is likely to exert pressure on insurers to hike premiums further in the coming year.