Margins on Ulips has come down substantially ever since the new norms came into force, says Gaurav Rajput of Aviva India
The insurance industry has seen a lot of changes over the past few years in terms of products, processes and even the way the industry interfaces with customers. In an interview with MoneyGuruIndia, Gaurav Rajput, Marketing Director of Aviva India Life Insurance, gives an insight into the way things are shaping up in the industry. Excerpt:-
India’s insurance industry said to be in a phase of transition – in terms of products (Ulips to traditional plans), processes (online plans, bancassurance from agency-based model) and even market orientation (from urban areas to semi-urban areas). Will you give us a perspective of the situation?
The year 2011 had been a challenging year for the industry. There were a slew of regulatory changes that impacted the industry both in terms of product structures and viability as well as distribution models.
While the margins on Ulips, which were 75 per cent or so of industry volumes, did come down substantially, pensions which contributed to around 30 per cent were made unviable to launch. However, we are hopeful that the regulator would review the pension’s guidelines and the new products will again build the traction in this space.
All these did have an adverse impact both on the top-line growth as well as the profitability of the industry in the short-medium term. After the guidelines were introduced, the private players de-grew by (-) 40 per cent while Aviva showed a slower decline of (-) 33 per cent in 2010.
The industry did recover in 2011-12 which led to the -18 per cent de-growth for private players in FY 2012 while Aviva recorded a growth of 15 per cent. Ulips have been continuing to contribute 40-50 per cent to the overall business.
Another trend that has emerged is the increase in sale of pure protection and traditional insurance products. This can be attributed to financial literacy initiatives by media and companies, due to which people have now consciously started investing in them to protect their families against eventualities.
India had been a unique market in this respect where people started with Ulips and went on to protection products contrary to the phenomenon in the developed markets. Insurers are also adapting to this demand and are launching more protection products leading to a rise in the overall protection business. At Aviva, we have seen the enforced sum assured of the company increasing from Rs 45,229 crore in FY2010-11 to Rs 74,673 crore in FY 2011-12.
In terms of processes and distribution, companies are exploring the potential of the online channel as a key distribution model. Companies initially offered term plans on the online platform as they were simple and easy to understand. However, now realizing the immense potential that the channel holds, companies are gradually expanding their product suite online. We have covered over 22,000 lives through Aviva i-life, our online term plan in less than a year.
Keeping in mind that close to 70 per cent of India’s population resides in semi-urban and rural areas and with low penetration levels of just 4 per cent, these areas offer huge potential to the insurance sector as they continue to remain untapped by insurers. In this respect, the recommended Open Architecture model by the regulator where banks can tie-up with multiple insurers in different zones will offer a huge opportunity for financial inclusion through insurance.
In the long term, the new norms will help the industry to grow at a healthy rate and the slew of customer centric initiatives and products will ensure that the long term sustainability of the business remains intact. Product diversification, cost management, innovation in distribution and managing persistency will be key to success.
So, are the Ulips going to disappear at some stage? Has customer interest in Ulips gone down drastically?
Though there has been a dip in the sales of Ulips but it is not alarming. If you see Ulips still constitute about 50 per cent of the portfolio for most insurers. Ulip is a need-based investment instrument and one must buy them keeping in mind their investment goals in life. It is critical that investors understand that Ulips are designed to meet long term investment goals such as child’s education, retirement, and therefore should not get influenced with short term market fluctuations.
Post the September 2010 regulations, Ulips have become lot more attractive from the customer perspective. As the life cover has now gone up to minimum 10 times of first year premium, there is a twin benefit of increased life protection as well as investment for the customer.
Within the traditional product category, what kind of innovation is happening? Which are the promising products one can look at?
For insurers, the single biggest innovation has happened in terms of distribution. Online channel has emerged as a very strong and promising distribution channel for life insurers. Through this channel, not only the benefit of low distribution cost is being passed on to the customers in terms of extremely affordable policies, but mis-selling is also being checked.
Insurers started with offering only pure term products on online channel as they were easy to understand, but have now moved on to offering Ulips as well, which have also got a good response from the customers. Recently, we also saw a senior citizen product being launched online. We believe that a lot of product innovation will eventually happen in this space, owing to its great potential and success.
Pension product from insurance companies has been a talking point? Would you please update us what is happening on this front? Are insurers shying away from bringing out new products conforming to the new regulations?
Pension products were extremely popular and used to contribute to around 30% of industry sales. However, with the new guidelines, they have become an unviable proposition for insurers. We say this because it is very difficult for the insurers to provide any form of guarantee on equity linked products over the policy term, as stipulated.
Also because of the guarantee, the insurers are forced to invest in money markets or debt instruments because of which the returns are not inflation linked. Also, according to the guidelines customers now have to buy annuities from the same insurer that they bought the pension product from. This stifles investor’s freedom of going shopping for annuities from their choice of insurer.
We have already voiced our concerns regarding this to the regulator and the pension product guidelines are under further consideration and scrutiny as of now.
Term plans and single-premium plans have also created lot of buzz in the market. How can a customer make the most of these products? When should you buy a term plan and when should one go for a regular insurance product?
There is no defined age for buying insurance. One should buy insurance depending on the life stage and investment goals. To illustrate this, let’s explore the life stage of a 25 year old - a young individual, who has no financial dependents, could consider investing in a Ulip or traditional retirement product to ensure that there is enough corpus on his retirement and he is not financially dependent on anyone. The day the individual gets married, he needs to think about protecting his family income as he now has financial dependents.
At this stage, he should invest in a term plan. A simple term plan is a must in any financial portfolio and one should buy it when they are young and healthy to enjoy low premium. The third stage in life is children. With the cost of education going up significantly, today more than 80 per cent of parents in India are concerned about the future expenses of their children’s education. It is advisable to buy a child education plan from an insurance company as soon as the child is born so as to build a significant corpus till the child turns 18.
Hence buying insurance depends more on the life stage you are at and your investment objectives in life. Having said that, it is always recommended that one buys a term plan at a younger age to enjoy a higher life cover at a lower premium.
Five years hence, what all changes would you expect to see in the life insurance industry and the way consumers are going to use insurance?
As far as the life insurance industry is concerned, below are some of the changes that I believe will take place:-
Growth of the online channel:
Online will emerge as one of the key distribution channels for insurers in the future. With internet penetration growing in the country, this channel is likely to grow exponentially with insurers offering a slew of products on the platform. I expect more companies to launch products and improve the overall experience of purchasing online in terms of competitive pricing, right advice, jargon free documentation and simple purchase experience.
Introduction of open architecture:
Open Architecture could enable insurers to offer their products at any branch of any bank across the country, through multiple tie-ups. This will dramatically expand the range of options available to potential buyers of insurance products into geographies left untapped so far and thus encourage insurance penetration. The potential of Bancassurance is estimated at 80,000 bank branches but barely 10% of bank account holders buy life insurance from this channel. Open architecture will make this a huge scalable opportunity for the insurance business.
Sale of protection products to increase:
As awareness about insurance products increases, more people will buy insurance for protecting their loved ones.
Insurance to become a pull product:
With simplified products and greater transparency, insurance will become more of a pull product rather than a push one. Consumers will realise the importance of insurance and proactively invest in policies.