“If you allow an outsider to come and play in the Indian market, naturally you must allow them to have full capital say. It is not unfair to allow foreign companies to have 100% equity in insurance sector if they want.”
M. Ramadoss,
Chairman and Managing Director of Oriental Insurance Company Ltd.

Insurance sector: Liberalization and after

Since its opening in 2001, insurance industry has come a long way in India. It has undergone perceptible structural changes. More than 40 private players are vying for space in the insurance market of India, once dominated by LIC and GIC. This has not only generated options for the common people, but has also provided them a viable tool of investment. M. Ramadoss, Chairman and Managing Director of Oriental Insurance Company Ltd. reveals the dynamics of insurance sector in a talk with Himanshu Kumar Singh and Sandhya Sharma of Amity EduMedia. Present below are excerpts of the interview:

 What are the strengths of Oriental Insurance Company Ltd.?

This is one of the oldest companies started by LIC and perhaps it is the only nationalized company right from the beginning. Other companies were started in the private sector and nationalized later. So all along it has been a government owned company. This automatically makes you to associate it with security and you can be quite sure of the paying capacity of the company.

Secondly, it has a very good spread. It has about 900 branch offices and 16,000 employees. Another important feature is our financial strength. We have a net worth of about a Rs. 1,500 crores which enables us to do more premium. The gross premium is related to the net worth capacity. Moreover, it is a brand name and has been in existence for such a long time. We are quite strong in some of the regions and we have trained manpower. We are the leaders in some segments of the market. For instance we lead in energy and aviation market. We have a good technical staff and a number of engineers working with us.

So, these are the traits, I would consider, the strengths of our organization.

What are the emerging trends in the insurance industry in terms of product innovations?

 Several private players have ventured into the insurance industry since last four years and the growth of the industry has been averaging around 15%. In the first year it was 100% but now it has gradually tapered down to 15%. On an average it is around 10% to 15% per annum. The life insurance industry has led the growth in the insurance sector. There the growth is mainly due to unit linked products which are very akin to mutual funds product. They are looked upon as investment returns. So, they involve a very small element of risk coverage. Perhaps that is the reason they have picked up fast.

In General insurance growth has come in the form of personalized business like health insurance and the motor insurance. More innovations have come in segments like overseas travel insurance policies. The procedures have been simplified. Similarly in health several products have come up and many modifications have been introduced. Some companies have packaged some of the policies and they are giving extended coverage.

The main bottleneck to innovation is that even today 70% of the market is tariffed. So you cannot issue a policy other than what is specified in the tariff. More innovations will come once the entire market is detariffed. Only then different products can be introduced. For example, more innovative health insurance products can be introduced to suit the common people and different age groups.

What is the concept of bancassurance?

Bancassurance means issuance of insurance policies by banks. This is a system in which a bank has a corporate agency with one insurance company to sell its products. By selling insurance policies bank earns a revenue stream apart from interest. We call it as fee-based income. More and more banks are going into more and more non-interest based income. This is because interest is market driven and fluctuating and quite narrowing these days. Banks do not get great margins because of the competition. Most of the banks today are selling other products such as mutual insurance, money transfers through Western Union and so on. They are also selling insurance products - life as well as general.

Bancassurance was quite successful in France where it started and then spread over all other places. Today, it is said that only 1% of the total business is transacted through the banks. The greatest advantage of bancassurance is that an insurance company can piggy ride on the strength and reach of the banks. In India around 67,000 branches are there for PSU banks alone. If all 67,000 branches sell the insurance products you can see the reach. So, that is one method of penetrating the market.

There is also another method called ‘Bank Referral’. Here the banks do not issue the policies, they only give the database to the insurance companies. The companies issue the policies and pay the commission to them. That is called referral basis.

Whichever way it is, the ultimate thing is that the insurance company has access to the data and details of the bank.

The insurance penetration in India is very low. So can bancassurance improve the situation?

 Bancassurance is one mode which can definitely improve the insurance reach especially in the rural areas. For a new insurance company, setting up a large reach is quite expensive. Bancassurance is an automatic way of getting the reach at least cost. This is a very strong model suggested for penetration.

But till today in Asia, as per statistics, 91% of the insurance is done through agents. This is because people here still believe in face to face interaction rather than on paperless interaction. As an alternative to the face to face interaction, banks would be able to sell insurance products better. Bancassurance has a good potential to grow in India. They have been quite successful with life insurance products the world over as compared to the general insurance products. This is because life is more akin to investment. The customer is likely to pick it up faster than non returnable non-life insurance.

Reach can come through the brokers also. The broker institution has come to India only three years back. I feel the brokers can have more work when the markets get de-tariffed. They can appoint more sub-brokers, which is another way to increase penetration.

What are the reasons for non-penetration of insurance in India?

India continues to be a developing country and large sections of the population do not have enough money to make their ends meet; hence insurance would be their last priority. There is still a sizeable section of the population which is capable of insuring, but is not being insured. The most important reason is the credibility gap which has to be filled up. They have to be convinced that if they pay the insurance premium they will be paid their claims at the time of need. Their confidence levels have to improve. This will happen if the grievances are addressed properly and customer service increases with the guarantee that all the claims will be settled maximum in a week’s time; at least the smaller claims. This will give the customer’s confidence a boost. If the customer service improves and the credibility gap narrows it would be good selling point and with more and more players coming, this will expand the market.

Once again insurance companies are piggy riding on other institutions like banks to sell their insurance. The world over insurance is sold rather than bought. Nobody feels the need to go and buy, whereas in any other commodity you go and buy it. That sort of development has not taken place in insurance.

Don’t you feel that insurance companies are targeting metropolitan cities rather than rural India and this is one of the reasons of low penetration?

 No, this is not very true because each PSU has got 900 offices. We have got an office in almost every district. But selling insurance in rural areas is not an easy job. First you have to market a low priced product to suit the rural people. When it is low priced the agency would not get a high commission. The agents because of low commission may not be inclined to sell such policies. So there is a mismatch between the price and the policy as far as individual sales is concerned. Therefore, the only method suited for rural, semi-urban sales is group sales. For instance, group mediclaim, group personal accidental insurance, group farmer insurance and so on. We have to reach them through institutions like NGO’s and self help groups to market these products. It is the only way to spread it to the rural areas until all of them become semi urban and the paying capacity improves. Its tough and perhaps it may take a little longer time.

There has been a lot of discussion in the recent past to raise the cap on FDI which is 26% at present. What are your views regarding this?

 If you allow an outsider to come and play in the Indian market, naturally you must allow them to have full capital say in that. It is not unfair to allow them to have 100% equity if they want. Today, even though the local partner has got 74% share, the entire management is in control of the foreign insurance market. So when he wants to put in the money, I think he should be allowed to do so.

It has been estimated that close to 6 lakh new jobs have been created in the insurance sector in the post-liberalization era. What are the qualifications and qualities required by the aspirants who want to make it big in the insurance sector?

Selling insurance policy is all about general knowledge. So a person who is just a graduate with a good aptitude towards sales and marketing can join the insurance industry. I feel that the person should have the right aptitude and then interest in the insurance field. Though you can qualify through some of the insurance examinations, even a simple graduate has scope for promotion in the insurance field.

PSU insurance companies have already been overloaded with more people. We have not been recruiting trained people off late. Perhaps we will recruit specialized people in actuarial sciences. Sometimes IT professionals are also recruited.

Other than insurance companies as such, there are several auxiliary services that will crop up as the insurance world expands, for exmple, risk management institutes, risk management companies and brokers. Moreover, there are various allied services such as third party administrators to service the clients and there could be some client’s management officers too.

Many new players have come into the insurance sector and each of them has opened up a number of offices. So they need to employ many people to man the offices. Apart from that, companies are also focusing on the recruitment of large number of agents. When you work as agent the remuneration is in your hands. The more policies you sell the more commission you can earn. Once you are a successful agent there are chances that the same company would appoint you as its permanent employee. Even we advertise every month for agents.

Apart from that several insurance jobs, like policy issuance, are being outsourced to India from the countries like the U.K. and the U.S. If I have to issue a policy it costs about 5 to 7 pounds in U.K. While it costs much less, about 1/10 th of the entire amount, in India. So all the policies to be issued can be transferred to India and be issued from here. It can also be generated online. In short, most of the routine jobs are being outsourced here including some of the legal works.

I have an appeal for the people who want to join the insurance sector, including those having simple graduation. You must get into the insurance subject and learn more about it through several insurance books available in the market. There are several institutes offering insurance courses, for example the U.K. Chartered Insurance Group. If you have an interest for insurance, educate yourself more to have an edge.

The past 5-6 years have seen a boom in the number of insurance companies in the private sector. How has the competition affected the insurance industry? Has the increase in the number of companies affected the insurance penetration in India?

It has certainly affected the existing PSU insurance companies and our market share has come down. The private companies have taken about 26% of the market share. All the PSU’s put together have already lost around 74% of the market share. This means that the cake has not expanded as expected. But the existing cake is being shared and the companies are eating into existing fellows’ market share which is not a welcome step. Except for health insurance, the market has hardly expanded about 5%.

But the companies are very young; only about four years old. Hopefully, the market will expand with increasing experience. Though I am convinced that owing to absolute freedom to price and devise own product, detariffed market is set to expand.

LIC is the oldest and the most experienced player in the market. How have the new players affected LIC or how has LIC affected the new players?

As per data the growth of LIC has been quite substantial in the past year -- around 48% despite the presence of new players. But one worrying factor was that the number of policies sold and the number of lives covered has come down compared to the previous years. LIC has a very big advantage of being the leader of the insurance sector. It has huge investment and financial strength. Owing to its bigger size it has the best advantage of pricing as well as getting the better investment returns which can subsidise its original insurance product. Therefore, like SBI continues to be the market leader despite of so many private banks coming, LIC will continue to play a very big role and it is not easy to destabilize it. It has lakhs of agents and has an enormous size and is less likely to be affected. But of course it is being challenged and has been put on its toes.