Personal Finance Outlook 2013: Insurance – Long-term story intact

TR Ramachandran : The year 2012 was a mixed year for the life insurance industry. While the challenges and uncertainties of last year still cast a shadow, the long-term prospects remain bright, given the strong fundamentals of the life insurance industry. The sector saw some significant long-term developments that will enable it to move to a sustainable long-term growth trajectory.

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Although the year started on a slow note due to inaction on the investment norms and annuity side, there was an increased willingness on the part of regulator to engage in frequent dialogue with insurers on all guidelines. This resulted in the removal of a 4.5% minimum guarantee on pension and annuity products. Clearing of the insurance Bill by the Cabinet was a long-awaited announcement. Though deferred to the Budget session, the action provided the industry the much-needed impetus and motivation.

One of the most significant developments for life insurance industry has been the strong emergence of the online channel. In 2012, players opened up the platform further and expanded the online product suite from just term plans to health and retirement as well. The platform will further reinforce the central theme of customer centricity and have multiple advantages for insurers, including controlling costs.

But the sector continues to grapple with challenges, such as choppy equity markets, high interest rate-high inflation scenario and regulatory pressures. Owing to the dismal macro economic conditions and sluggish domestic economy, in 2012, we saw a shift in consumer behaviour.

There was a tilt towards low-risk products that impacted the product pies of the players with an increase in pure protection and guaranteed returns plans. Further, the year saw no new pension products in the market until the last month. This was mainly due to the guidelines issued by the regulator that mandated insurers to provide a guaranteed minimum investment return and annuitisation with the same company providing the accumulation benefit. The industry, as a result, witnessed a de-growth of 3%, with private players’ business shrinking by 5%.

The coming year will continue to focus on key themes of customer centricity, financial penetration, technological innovations, and creating guidelines and frameworks to revive the life insurance industry. At the same time, the life insurers will also need to focus on increasing productivity, controlling costs and spreading the risk by not concentrating on a single product category. One of the key facilitators for this will also be the guidelines for standardised products. This will not only curb the high charges a customer pays because of miss-selling, as surrender penalties, but will also make the process of launching products much faster. Since the benefits in a standardised product will be fixed, quality of customer processes and services will become key differentiator for the players.

One of the major concerns that we would need to address in 2013 will be reviving pensions as a category. Almost 70-80% of India’s workforce works in the unorganised sector, who are not a part of any pension scheme. Developing and strengthening the pension sector will facilitate social security for these people. Additionally, a strong pension system, given its long term nature, will also help address the need for investment in critical infrastructure projects.

As per the 12th Draft Approach paper of the Planning Commission, the total investment in infrastructure would have to be over R45 lakh crore during the 12th Plan period. Such high level of investments cannot be financed by traditional sources of public finance alone. Currently, private sector investment in infrastructure is mere 3.3% and pension fund investments into infrastructure seem to be a befitting alternative. Allowing pension pools to be accumulated and invested will not only maximise returns to support future pensioners, but also maximise the future growth of the economy’s production capacity.

The year 2013 will also see the life insurance industry going beyond the tier-1 cities, increasing financial inclusion and penetration through micro insurance and targeting tier-2 and tier-3 cities. A big enabler in this will be Open Architecture. The life insurance penetration currently lies at a 4.4% and with over 600 crore bank accounts in the country, Open Architecture can prove to be a game changer. Allowing life insurers to tie up with multiple banks will not only increase the reach, but also provide customers with more choices. This will also put a check on the practice of selling insurance as a bundled product. The regulator has already taken a step towards this by issuing draft guidelines on Open Architecture.

Technology will continue to be a definite game changer. The phenomenal growth of online channel has already underscored the potential of this platform. The online insurance industry is expected to touch R1,500 crore in the next one year. If leveraged strategically, online insurance channel can also be instrumental in helping government’s agenda of financial inclusion and insurance penetration. The next big platform to watch out in 2013 will also be the mobile platform. To conclude, it would be accurate to say that 2013 looks like a year of opportunities for life insurance industry, especially in the key areas of products, distribution and the next wave of technology for the sector as a whole.

By: TR Ramachandran, CEO & MD, Aviva Life Insurance

http://www.financialexpress.com/news/personal-finance-outlook-2013-insurance-longterm-story-intact/1052591