The challenges insurers face range from economic hurdles such as the potential for sustained inflation; to sustainability concerns including climate risk, diversity, and financial inclusion; to rapidly evolving consumer product and purchase preferences. Insurers are increasingly dependent on emerging technologies and data sources to drive efficiency, enhance cyber security, and expand capabilities across the organization. However, most insurers focus on improving the customer experience by both streamlining processes with automation as well as providing customized service where needed and preferred. On a more fundamental level, many insurance companies consider taking steps to bolster trust among stakeholders to boost retention and profitability. This might be achieved in part through greater transparency in how insurers collect and utilize personal data. They are more proactive in seeking comprehensive solutions to big picture societal problems—such as mitigating the financial impact of future pandemics and closing coverage gaps for natural catastrophes. In FY21, the industry witnessed a 4 per cent year-on-year growth to Rs 1.85 lakh crore. Public sector undertaking (PSU) entities were slower to adjust to an online mode of growth and the reliance on physical meetings was higher. This resulted in a 2 per cent y-o-y decline in business at Rs 71,800 crore while the private sector reported 8 per cent y-o-y increase in gross direct premium income to Rs 1.13 lakh crore. The life insurance industry is expected to increase at a CAGR of 5.3% between 2019 and 2023. India’s insurance penetration was pegged at 4.2% in FY21, with life insurance penetration at 3.2% and non-life insurance penetration at 1.0%. In terms of insurance density, India’s overall density stood at US$ 78 in FY21.
It is becoming increasingly challenging for insurance companies to survive in their current form. While the insurance industry was already fighting to adjust and transform itself to overcome multiple threats plaguing its growth, the pandemic has further worsened the problems for the insurers across the globe. It is become necessary to understand the role of process automation, cloud-computing, and other digital technologies, and how they can revolutionize the industry. Today, this under capitalized industry is already charging many businesses far too much in premiums while threatening even greater increases, all while attempting to create the perception that it is too financially troubled to pay claims. Yet this is an industry that has stored away so much excess profit that it now sits on more surplus than at any time in history. Insurance companies have never been forthcoming about why ups and downs in insurance premiums happen. In these cyclical hard markets, they have internally admitted that the cause is the industry’s own self-made boom and bust economic cycle. But publicly they have attempted to cover up their mismanaged underwriting and accounting practices by blaming insurance regulator and the regulatory system. Globally in the insurance sector, many things are changing focussed on safeguarding the policyholder’s interest; growing the industry and making the players remain solvent. The government has already notified the General Insurance Business (Nationalisation) Amendment Act which will allow the government to cut its stake in state-owned general insurers to below 51%. The industry witnessed a radical shift in customer’s needs, behaviour, and expectations, which disrupted insurance operations prompting an overnight shift to virtualization.
Life insurance industry
Since the privatization of the insurance industry two decades ago, the fallout of COVID-19 pandemic has possibly been the most epochal for the industry. Adversity has brought out the best in the life insurance business and created a slew of innovations. The need for life insurance has gained significant visibility since the pandemic struck, as the uncertainties of life have become starkly visible. Health and well being of self and loved ones have become a priority, which has made financial protection a crucial task. Quite naturally, protection solutions including life and health insurance have become an essential requirement in every financial portfolio. The preferred methods of insurance buying are also undergoing changed. Customers are not only comfortable buying digitally, but also interacting digitally with advisors on various platforms. As millennials continue to become a larger part of our economy, this trend is likely to become even stronger, prompting insurers to relook at the customer experience through various distribution channels. Life insurers are continuing building multi-channel capabilities to assist and provide information to the customers, wherever, and however they want. Simply put, easing access to insurance has become an important business objective. Companies are looking for newer strategic partnerships to significantly smoothen the life insurance purchase journey for customers. In the years to come, insurers will work consistently to improve the service experience by investing in omni-channel capabilities over time. Overall, life insurers are leading the way in setting out a path of significant investments and innovation across the insurance industry that will play over the next three to five years. Fear of uncertain global events and the flight to safety will further push the need to stay protected with life insurance solutions. People are focussed on prudent financial planning. Turbulent markets and the uncertain job market has encouraged individuals to secure their savings with long-term guaranteed return plans.
Indian Health Insurance Market
Geographically, the Indian health insurance market is segmented into North India, South India, West India, and East India. Among these regions, the Western part of India dominates the country’s health insurance market. However, South India is also emerging with a great growth potential in the health insurance market. States like Andhra Pradesh, Tamil Nadu, Telangana, etc., are leading the market with increasing health insurance penetration. Additionally, the growing preference for private hospitals and structured public healthcare systems in these regions plays a crucial role in propelling the overall market growth. Furthermore, the presence of significant health insurance providers, such as Max Bupa, Care Health, Manipal Cigna, etc., is also driving the market growth in South India. India health insurance witnessed tremendous growth after the unprecedented pandemic outbreak. During the initial phase of the pandemic, there was a lot of confusion over whether or not an individual’s current insurance plan covered corona virus infection. Therefore, to provide relief to their citizens from the pandemic, The India government developed various health insurance policies and laws. Furthermore, the pandemic altered people’s perceptions of medical and health insurance programs, and they began to understand the value of health insurance and its advantages. Health insurance sector needs to be streamlined and simplified its tech experience to become more agile and offered innovative digital propositions to enhance customer journeys. Growth to continue, backed by increased awareness and demand. Pandemic firmed up the growing customer confidence towards insurance as a safe financial instrument especially in times of uncertainty. This mind-shift of people perceiving life insurance as one of the best safeguards against risk
Buckled up to accelerate growth
Customer engagement have taken centre stage. Omni-channel sales and novel ways of interacting with the customers through hyper-personalization and more intimate digital sales interaction is encouraging companies to explore newer ways to enhance customer engagement and experience. Despite lingering concerns about covid variants, most insurers expect an accelerating economic recovery and additional digital technology investments in the current year. About one-third of the survey respondents expect revenues to be “significantly better.” The demand for insurance is expected to keep rising worldwide. 2021 saw widespread vaccine deployment and easing of pandemic-related restrictions—important catalysts that helped rebuild confidence among people and businesses alike, while fueling economic recovery. But the battle with covid is far from over, and a level of uncertainty still persists— perhaps indefinitely. Might this undermine the insurance industry’s outlook heading into next year. Despite ongoing pandemic concerns, insurers in general expect more rapid growth—although non pandemic challenges around regulation, talent, sustainability, and evolving consumer preferences may present speed bumps. A lot will depend on how effectively insurers manage their investments in people and emerging technologies. Flexible work models, balancing automation with the need to maintain a human touch with customers and being more proactive in bolstering stakeholders’ trust should be among the industry’s strategic priorities.
Crisis & Challenges before the Insurance Industry
Understanding the following challenges ahead prepares insurers for success in the same way that clients are preparing for hazards when purchasing a policy. The new financial year will be filled with opportunities to grow the business, but there will be challenges to look out for when navigating the way through the insurance industry in 2022-23. Luckily, companies are prepared with a list of the most common challenges to get ahead of their competitors to prepare for many of the potential threats to their business:
- The insurance industry claims it is suffering losses, but it is actually massively prospering. Indeed, the foundation for its argument for raising rates on businesses – that it is in some kind of financial peril – is easily proven to be untrue. In fact, insurers’ surplus – the money held above that reserved for expected losses.
- Nothing much is happening to promote the penetration of insurance. Curiously it is the government schemes like health and life insurance that have increased the penetration while the insurers have not done much. Despite the high growth, general insurance penetration (measured as a % of GDP) is very low in India and stands at less than 1%, much lower compared to developed markets such as the US, which had penetration of 7.8% in 2017. Even emerging markets like China and Brazil have higher penetration of 1.8% and 3.3%, respectively.
- The insurance companies inflates losses by manipulating its own claim reserves at key moments to justify rate hikes particularly as it is trying to trigger a hard market as is likely happening today. Raising reserves is used not only to raise rates but also to lower tax liabilities at times of significant profits.
- For two decades, businesses and consumers have been victims of periodic eruptions in insurance premiums caused by the property/casualty insurance industry’s economic cycle, the industry’s unique accounting methods, and laws that allow anti-competitive pricing by this industry. The only way to stop volcanic eruptions in insurance premiums is through better oversight and regulation of the industry’s mismanaged accounting, and the cyclical nature of the insurance business.
- The non-life insurance industry is one of the most important but least understood industries in the nation. Every person and business in India needs insurance. Yet for the past 21 years of liberalization, policyholders have been victims of this industry’s little recognized economic cycle, created by anti-competitive underwriting practices, unique and opaque accounting policies, and virtually unchecked power because of the generally weak regulation of insurance rates.
- Insurers make their money primarily from investment income, investing the premium they receive from policyholders. They invest the “float” that occurs during the time between when premiums are paid to the insurer and losses are paid out by the insurer – e.g., there is about a 15-month lag in auto insurance, while there is a 5- to 10- year lag in “long tail” lines like medical malpractice. As a corollary to this, rarely do insurers achieve an underwriting profit (i.e., when premiums taken in are more than “losses” and underwriting expenses. In many lines of insurance, an underwriting profit would produce a wildly excessive overall profit because the investment yield on the float is so great.
- The most common story presented historically by industry leaders to argue that the industry is financially beleaguered and cannot pay claims is that lawyers, lawsuits, and judges have suddenly become more “aggressive.” It is a narrative used not only to push for a cycle turn, but also to maintain rate hikes for the entirety of a three- to four-year hard market.
- Globally, insurance firms are navigating volatile markets of economic uncertainty. As the pandemic-induced financial crisis persists, the future will require industry participants to juggle with dynamic investment, business, and regulatory conditions. What’s being observed is that insurers and brokers who swiftly pivoted to digital channels enabling seamless operations experience improved growth across insurance markets.
- There is an increased convergence in administrative tasks such as underwriting, processing of claims and managing customer queries. Insurance industry should focus on the elements of acronym ‘Ideas’— Investment, Distribution, Economics and Efficiency; Administration and Solvency.
- Despite prodding, no life insurers are coming with short- term group insurance products. It is good to be risk averse. But industry should come forward to provide risk cover. Insurers have very little to show on micro insurance and more needs to be done on this front.
- With COVID-19 spread into the hinterland, there is huge growth potential for insurers in tier-2,3 and 4 cities. Prosperity will grow in rural India, especially with good agriculture performance. Insurers have to come up with simple, intelligible and, at the same time, innovative products to meet the protection needs of people.
- It is time to relook the solvency norms. Like standalone health insurers there will be standalone vehicle insurance companies and the like. So, the solvency norms should be fixed in line with the kind of business that is being done.
- The system of management expense ceiling should also be reviewed and see the possibility of having an overall ceiling on expenses. IRDAI is dealing with regulations which were largely framed two decades back and they have to be revised. Experts are frowning at IRDAI’s practice of issuing new regulations in the guise of Guidelines which needs to be halted.
- While using data to improve offerings and, ultimately, customer experience is not a new phenomenon in the insurance industry, doing it well and consistently is still a challenge for many. There are outside factors at play here as well, as insurers grapple with market instability and increasing competition.
- Need for adequate life insurance and being covered with appropriate products, has taken leapfrog in 2022. Life insurers have to focus on simple, innovative, and differentiated products to offer better customer experience. The focus should be on creating hyper-personalized customer-centric offerings to cater to policyholders’ emerging needs.
- It has been two decades since the opening up of the insurance industry. While during earlier phases the emphasis was on growth, the industry will move towards consolidation as it matures as companies also start looking at profitability and not only growth numbers. The general insurance industry being price sensitive, the economies of scale of the players will be another advantage that may bolster the mergers and acquisitions.
- India is emerging as the most prominent and attractive market for the growth of Insurtech. The adoption of Insurtech is anticipated to provide lucrative growth opportunities to the health insurance market as well. Through the application of advanced technologies, such as cloud computing, AI, IoT, etc., insurance providers can focus on improving user experience and overall customer engagements. To achieve this, insurance providers have to establish partnerships with Insurtech companies as well.
- Insurance professionals should be prepared to deal with unforeseeable serious catastrophic environmental events. These events are becoming more severe, and they are happening more frequently. The possibility of harmonization between regulators around the world. Creating a standard for insurance practices will impact prices and policies. Companies have to stay up to date on world events to prepare for this challenge.
- Despite underwriting losses, the sector is expected to report marginal return on equity (3 to 4.5 per cent) largely supported by investment income which is highly regulated by the Insurance Regulatory and Development Authority of India (IRDAI).
- The domestic life insurance industry has seen pressure on its profitability in the short-term as the corona virus pandemic has cast doubt on the certainty related to morbidity and mortality in the country. In the short-term, the profitability of the insurance industry is expected to be an area of concern given the increase in mortality and morbidity rates induced by the pandemic.
- The pandemic has posed multiple challenges for the Indian life insurers. The onset of the pandemic saw a sharp fall in equity prices, while interest rates also declined. Insurers have exposure to equities in unit-linked and participating businesses. Thus interest rate movements impact their liabilities and guarantees based schemes. While, a credit risk can impact their investments made incorporates.
- If social inflation is not checked, insurers’ reserves could be proven inadequate. Under-reserved liability insurance business has historically been the largest cause of insurance company impairment, so insurers are justifiably wary of any external trend with the potential to challenge reserve adequacy.
- The sharp movements in markets, coupled with any asset liability mismatches that insurers may have, can impact the solvency position.
There’s no challenge too big to handle, so work out a viable solution to overcome any obstacle that comes your way. Be sure to look out for these challenges by preparing solutions to keep your business moving throughout the next year.
Digitalization to transform the insurance value chain
The insurance industry is often seen as having a bad reputation for being behind the advancements in technology. One of the key trends, which can be witnessed, is the gradual deployment of technology across the industry value chain. For instance, HDFC Ergo tied-up with IBM for deploying artificial intelligence (AI)-based solutions in its customer relations as well as product development processes. Similarly, ICICI Lombard is deploying AI-based models in motor and health insurance for claims processing and fraud detection. The same insurer also deployed drones for crop insurance assessment in the Indian state of Gujarat. Others have to follow suit. Today, we live in a digital world, where technology is embedded in our daily lives and work. The insurance industry is also rapidly adapting to these seamless virtual operations. With the adoption of AI, RPA, cloud computing, Internet of Things, and blockchain, digitalization is set to transform the insurance value chain. Currently, about 68% insurance companies are either in the process of testing or adopting AI. By 2025, the insurance industry has the potential to automate 25% of its processes (especially manual processes like claim processing, underwriting, customer service, and policy administration) using AI and machine learning. Certain use cases for RPA (Robotic Process Automation) include claim settlement, fraud detection, real-time data analytics, customer experience, and product personalization. On combining RPA with AI tools, bots can help collect data from internal and external sites, extract information, analyze customer history and further identify and verify fraudulent claims.
India is the second-largest insurance technology market in Asia-Pacific, accounting for 35% of the US$ 3.66 billion insurtech-focused venture investments made in the country. There will be a growing use of technology and digital mediums to create new opportunities, not just to acquire customers, but also in helping customer lifecycle management. Not every new technology needs to be used to make the industry grow. However, insurer may find ways to use knowledge of drones, the Internet of Things (IoT), and other recent advancements in technology. Being knowledgeable of these developments will help companies talk to clients, and their clients will feel more at ease working with someone who understands their concerns. To meet this challenge and maximize data in pursuit of better customer experiences, companies must leverage the digital insurance solutions at their disposal. With agile cloud systems, data analytics capabilities, and more, insurers can meet the demands of today’s consumers with important features such as:
- Chatbots
- Mobile applications
- Omnichannel claims capabilities
- AI-generated quotes
Widening the reach of insurance products
Increasing consumer awareness, the launch of innovative products and the emergence of online distribution channels such as aggregators (Policybazaar.com) will widen the reach of insurance products and help increase penetration in India. There are emerging risks related to environmental, social and governance (ESG) issues on the insurance industry of which climate change is a bigger challenge. Apart from climate change, there are emerging risks associated with public health trends such as increase in obesity related disorders and demographic changes such as population urbanization and ageing. The pandemic amplified the need for life insurance among people, leading to the category slowly moving from being a “push product” to a “nudge product. On the back of the risk-averse behaviour of our customers, there was considerable interest for traditional long-term savings products which grew by 61.2 per cent for the year. Similarly, annuity products registered a robust 120 per cent growth year-on-year. It has become imperative for every working individual to add life insurance as a key ingredient of financial planning. In non-life insurance also the lessons learnt from the pandemic will lead to a paradigm shift in the way businesses operate. Along with the growth in technology, there’s one special sector of the insurance industry that provides a new valuable service. Understanding and navigating the world of cyber risks will help insurers prepare for challenges that could arise with individuals and businesses. Individuals may want insurance to cover their personal losses when they become impacted by data breaches. However, companies want to be insured against other costly factors. If their data is exposed, they’ll want to cover several of the costs associated with a data breach.Providing this coverage can be a cost-effective, low-risk investment that shows insurers are forward-thinking and looking out for the best interests of their customers.
GENERAL INSURANCE GROSS WRITTEN PREMIUM (INR Bn 2013-22 FEB
Growth momentum
India has undergone a sea-change over the last two years. One major change has been the perception of the category amongst customers, and the need to have a health insurance policy. The pandemic has made everyone realize the uncertainties of life and their unpreparedness in case of any health-related emergency. The growth engine/trajectory will continue as the health insurance category has gained the attention of the consumers. With a major shift in consumer perception of the industry, the focus has gradually moved from sickness insurance to health insurance. The underlying cause of this change has been the rising cost of hospitalization that has made people understand the need of buying health insurance. Consumers have also realized that buying a comprehensive cover is a better choice since it extends a holistic healthcare approach with wider coverage against diseases, pre-existing conditions or even future lifestyle conditions. Thus, many consumers have started viewing health insurance as an essential investment that brings in a wholesome health cover.
The balance of power
The balance of power is shifting to the consumer. New and ongoing social trends will shake up traditional business patterns in the insurance industry. The change in power is shifting towards the consumers due to a rise in consumer expectations. Consumers (people and businesses) are demanding quicker transactions, and more consumers want to work directly with insurance providers. This shift to the rise in technology is because the smart phone has equipped consumers with a mobile device that carries out their demands. The pandemic has forced insurers to leave the status quo behind. More change has occurred in the industry in the past year than in the previous several years combined and its pace is only accelerating. Many insurers are taking bold steps to capitalize on structural changes in the marketplace, technology trends and evolving customer behaviors. To effectively transform the business, insurers will need to make more than just fragmented business line or functional investments. Insurers promise “we’ll be there when you need us.” In exchange for premiums paid today, buyers trust that they can rely on certain financial help if they face peril in an uncertain future. To reinforce that promise, insurers have to diversify risk, and scale helps them deliver on that promise. And, to some extent, they’ve been trying to fine tune the balance between centralized, standardized and controlled capabilities and decentralized models.
There is a growing opportunity for the industry to come up with new and innovative product offerings that fulfill the unmet needs of the customer. There is a big gap in the market currently that is waiting to be filled with innovative and customized products. For e.g., offerings for people with certain conditions from Day 1, offerings to cover outpatient expense coverage, look at certain segments of customers whose needs have not been fully met yet, etc. We will see the emergence of large consumer tech platforms as distribution channels for insurance. With the rising need and value of insurance, such newer channels will definitely aid in a much refined customer experience along with enabling to create a curated offering with personalization. This will also help in creating a model that is both transparent and personalized. It will be data driven and digital that will thereby make the process of buying and reviewing insurance easy. The pandemic has also brought a big shift in the consumption behaviour of customers. Such newer channels will help broaden the reach of the industry, especially the millennials and the younger population. Based on demographics, the India health insurance market is segmented into minors, adults, and senior citizens. Among these, the senior citizens held the largest market share. Increasingly, geriatric populations between the ages of 65 and 80 are most vulnerable to medical emergencies, which is why health insurance is of paramount importance for providing the financial support necessary. However, the adult segment is expected to grow at a faster pace during the forecast period because of increased awareness of healthcare among this demographic.
The insurance industry is not suffering from poor management of issues about which it does have control, like use of capital, reserving, or pricing. A niche but profitable market within the insurance industry is small business insurance, otherwise known as small commercial. Larger, more aggressive insurers understand the value of small commercial and are making a push to move into this market and update it. This is forcing carriers who already offer small commercial to significantly invest in new digital technologies to keep up with their competitors. Data is constantly being generated and leveraged in the insurance industry. But as we know, quantity doesn’t always equate to quality. To get the most out of user, operational and marketing data, insurers need to have robust data management plans in place. With these plans, they can improve the overall quality of analytical data and gain more meaningful insights to improve customer experiences. Digital insurance platforms are helping insurers of all types and sizes modernize their back-end operations and their offerings, which ultimately help increase customer satisfaction and revenue. Most companies reported securing hefty rate increases in their liability books, in line with insurance rate surveys that reported double-digit rate increases in some liability lines. The future looks promising for the life insurance industry with several changes in regulatory framework which will lead to further change in the way the industry conducts its business and engages with its customers. The value-based personalized purchasing and increased awareness will further shape customer behaviours and will redefine the next year. Such trends will be a game-changer for the life insurance industry and will provide an opportunity for the industry to think beyond the usual, innovate and offer granular, value-based, and integrated products to meet customer needs. The focus will be on insurance offerings which will combine risk transfer with proactive and value-added services and emerge as a differentiator. It will be critical for insurers to stay relevant and adapt with the changing times.
