The Indian life insurance industry, which was liberalized in 1999, allowing private sector players in the business, has grown at a phenomenal pace since its liberalization. The sector experienced a CAGR of 25% in the last decade with total premium reaching US$ 67 billion in 2010 and the Indian market ranking as the 10th largest market in the world.
The life insurance penetration (ratio of premium to GDP) grew from 2.15% in 2001 to 4.40% in 2010 while life insurance density (ratio of premium to total population) grew from USD 9.10 to USD 55.70 during the same period.
To a large extent, this wave of growth was caused by a spurt in innovation and creativity, promoted by the sector post-liberalization. Consequent to the opening up of the sector, it has received considerable exposure to the modern concepts and best practices from developed markets across the globe as almost all the major life insurance players are operating in India through their respective joint ventures.
This, coupled with the high growth potential of the sector, prompted the industry to embark on a series of innovations and creativity in critical functional areas resulting in the growth of business as well as the development of the sector.
Evolution of the Sector Post-liberalization
In the period following post liberalization, the Indian life insurance sector witnessed an unprecedented growth of business while there was massive transformation in other functional areas as well. During the pre-liberalization period, LIC of India was the only life insurer. However, the post-liberalization decade saw the emergence of 22 life insurers apart from LIC.
There was a phenomenal growth in the volume of annual new business and the product portfolio was enriched with the addition of new and innovative products. While there was aggressive sales and distribution of products with the addition of new channels of distribution, customer service acquired new dimensions with the setting up of multi channel contact centres by private life insurance companies. Thus, there was an enrichment of the total customer value proposition offered by the sector.
Growth of New Business
The impact of liberalization was seen most prominently in the growth of new business. Even though the decade of 1990s had witnessed remarkable growth in new business, the period following the opening up of the sector was characterized by unprecedented growth in business.
The two tables below display the individual new business figures during the comparable periods and the year-on-year growth rates:
| Table 1 | ||
| Growth of Life Insurance Business Pre-liberalization | ||
| Year | Premium (Rs in Crores) | Growth (%) (YoY) |
| 1990-91 | 1,526.65 | 21.54 |
| 1991-92 | 1,790.09 | 17.26 |
| 1992-93 | 2,037.87 | 13.84 |
| 1993-94 | 2,507.73 | 23.06 |
| 1994-95 | 2,533.90 | 1.04 |
| 1995-96 | 2,813.63 | 11.04 |
| 1996-97 | 3,345.39 | 18.90 |
| 1997-98 | 3,841.12 | 14.82 |
| 1998-99 | 4,863.41 | 26.61 |
| 1999-2000 | 6,008.00 | 23.53 |
| Source : Thresholds in Indian Insurance (pp. 173) by Dharmendra Kumar | ||
| Table 2 | ||
| Growth of Life Insurance Business Post-liberalization | ||
| Year | Premium (Rs Crore) | Growth % (YoY) |
| 2000-01 | 9,707.43 | 61.57 |
| 2001-02 | 19,857.28 | 104.56 |
| 2002-03 | 16,942.45 | -14.68 |
| 2003-04 | 19,788.32 | 16.80 |
| 2004-05 | 26,217.64 | 32.49 |
| 2005-06 | 38,785.54 | 47.94 |
| 2006-07 | 75,649.21 | 95.04 |
| 2007-08 | 93,712.52 | 23.88 |
| 2008-09 | 87,331.08 | -6.81 |
| 2009-10 | 109,893.91 | 25.84 |
| Source : IRDA Annual Report 2013-14 | ||
Impact of Innovation & Creativity on Business Growth
It is quite obvious from the above table that post-liberalization the sector has witnessed an unprecedented growth in new business. While a part of the growth could be attributed to the increase in the number of companies operating in the market, their distribution network and increased manpower; a significant degree of credit needs to be given to the innovation and creativity brought in by the private insurers in certain key components of business.
Some of the important areas of innovation and its impact on business are discussed below:
Product Innovation
Before the opening up of the sector, life insurance products were primarily used to offer a combination of savings and protection in various proportions. The post-liberalization period saw the emergence of a new array of products called the Unit Linked Insurance Plans (ULIPs), which were designed to offer as an instrument of protection and investment to the customers. Under ULIPs, the investible portion of the total premium paid by a customer is invested in the stock market as per his/her choice. Unlike earlier products, the new set of products offered clarity about the part of the total premium being utilized for offering protection and the part being invested in the stock market.
As these plans had been very well accepted in the developed markets of the West, they were introduced in the Indian market with varying features. In the face of the fact that the Indian stock markets were also on the rise during the period 2004 to 2008, the new products were very well received in India as well and they accounted for a good part of the business growth during the post-liberalization period.
The Figure 2 below, illustrating the increasing share of ULIPs against traditional products, demonstrates the impact of this innovation.
The impact of this innovation was felt more on the private sector business, as LIC with its penchant for traditional business and its dominant market presence, neutralized the distribution between traditional plans and ULIPs to a great extent. In fact, for many of the private players, the share of ULIPs was above 80% of their total new business.
Innovation in Distribution Channels
Distribution is the key to the success in the life insurance business. Before the opening up of the sector, LIC had a mono-channel distribution network with Agency being the only channel. While LIC continues to be largely mono-channel, the private insurers have experimented with alternative channels to a great degree of success. The following new distribution channels were introduced in the Indian market:
- Bancassurance
- Corporate Agency
- Brokers
- Direct Channel
As per IRDA Annual Report 2009-10, during the year 2009-10, the Corporate Agents (other than banks), Brokers and Direct channel accounted for 10.28%, 3.44% and 10.28% of the private sector business respectively, which is quite a significant achievement.
The Bancassurance Innovation
However, in the distribution space, the most noteworthy innovation has been Bancassurance. In this distribution model, a bank ties up with an insurance company and acts as its corporate agent to sell insurance products to its own customer base. It has been a very successful distribution model in the West, particularly in Western Europe and the Indian market has also received it very well.
It has turned out to be a very cost-effective channel for insurance companies as they get ready access to the vast branch-network of their partner banks as well as to their sales personnel. Creating such an infrastructure on their own would not only involve astronomical costs, it would take ages as well.
Looking into the potential of Bancassurance, a good number of large Indian banks, like SBI, ICICI Bank, HDFC Bank, Bank of India, Bank of Baroda, etc., have floated their own insurance companies, thus creating a huge synergy between banking and insurance within the country’s financial ecosystem.
The performance of bancassurance channel in Figure 3 appears to be relatively subdued since LIC of India with over 70% share in the sector’s total business, continues to be largely an agency-driven organization and thus, it distorts the overall picture. In fact, the real impact of this innovation can be realized from a look at Figure 4 below, which illustrates the growth of this channel in the private sector space as it contributed 43% of its business at the close of the decade under reference.
Innovation in Customer Value Proposition
Apart from propelling a quantitative growth in business, the liberalization of the life insurance sector has also had a qualitative impact on the total customer value proposition offered by the sector.
These innovations in the products and processes, distribution, customer service, etc. have brought in a greater degree of transparency, flexibility, liquidity and security for the customers. A few significant ones are briefly discussed below:
1. Introduction of Benefit Illustration : This provides to customers both an optimistic and pessimistic scenario of returns on their investment in an insurance plan so that they could take a conscious call on buying the product. The insurance proposal is processed only after obtaining the customer’s written consent.
2. Free-look Period : This gives customers a 15 day period from the date of receipt of the policy document, during which they can cancel the contract if any misrepresentation was made to them at the time of sale.
3. Unlike traditional products, in case of repudiation of ULIP contracts, customers are assured of the payment of their investment portion as the risk and investment premiums are clearly segregated.
4. There is a greater transparency in ULIP products as customers are told upfront about the various charges being levied under the policy.
5. With ULIPs offering partial withdrawal from the investment fund, customers have greater liquidity at their disposal.
6. With the introduction of Contact Centres, while customers have got a better accessibility to their insurers, insurance companies are also able to do a better customer profiling and they are able to manage customer life cycles more efficiently.
The Adverse Side of Liberalization
While liberalization of the sector and the resultant innovations have brought in a lot of positive factors within the sector, there have been certain negative impacts as well, some of which are discussed below:
1. In the post-liberalization period, the sector has witnessed mis-selling of products on a large scale, particularly in the ULIP segment, resulting out of
wrong advice, wrong products or some process irregularities.
2. Bancassurance has brought to the fore the issue of the ownership of customers. As they happen to be primarily banks’ customers, banks don’t like insurers to have a direct access to them. This quite often results in low business persistency.
3. With the focus on premium oriented benchmarks, newly cultivated by the industry in line with global standards, the emphasis on protection and risk coverage has reduced. Thus, the life insurance sector is in the danger of straying away from its USP.
Future Innovations in the Sector
Even though the sector has realized the benefits of innovation, the spate of innovations has considerably slowed down as, for the last few years, the industry has been facing serious challenges, emanating from adverse market conditions and regulatory interventions, resulting in the negative growth in business for a few years.
However, in order to carry on its march on the growth trajectory, the sector has to continue innovating further and finding solutions to the emerging challenges before it. Therefore, it has to encourage further innovations considering the new-normal environment in order to create sustainable business models and improve business growth and persistency. Some of the potential areas of innovation are discussed below:
1. As there is a huge chunk of population waiting to be insured, the industry needs to innovate simple & standardized products which could be sold to customers over the counter.
2. The distribution space needs further innovation in order to improve reach and accessibility. Distribution models around potent channels like ATM, internet, etc. need to be created so as to connect with the younger generation. Like wise, alternative channels like Independent Financial Advisors need to be developed. Bancassurance needs a further round of innovation in order to implement the open architecture whereby banks could sell the products of more than one insurance company and increase their reach and customer base.
3. Having been a laggard in the application of technology in the past, the industry is in urgent need to implement new technologies and usher in process innovations to be able to operate on digital platforms. This will help not only in connecting with new-gen customers but also in ensuring the speed and ease of business operations and in driving the cost advantage.
Conclusion
Since its liberalization, the Indian life insurance industry has successfully encouraged innovation and creativity to realize its growth potential. As a result of this, not only has there been quantitative growth in the volume of business, innovation in various aspects of the insurance business has also brought about qualitative transformations in the total customer value propositions offered by the sector.
However, the sector has to continue innovating further in respect of its products, processes and technologies in order to get over the challenges it is facing as well as to keep ahead of the competing sectors within the economy.
The article is based on a Paper presented during the International Conference on Business Excellence (ICBE 2015) held at International Centre, Goa on 9th & 10th April 2015. The writer is a Management Consultant and former COO of Star Union Dai-ichi Life Insurance. He is currently pursuing a Ph.D. program in Indian Life Insurance Regulations and is available at pawan@pawankverma.com).
