IRDA chief J Hari Narayan
A: The growth has been uneven in the general insurance sector, but lately it has picked up. In India, general insurance has traditionally been motor insurance because people see a value in it. In any case, it was also pushed by the law. The law makes it compulsory. Therefore, about 50 per cent of the entire general insurance market is only motor insurance. The rest was highly specialized and in very small forms. There was not much going on in the general insurance space. There are two critical things in general insurance business. One, the person must perceive a risk. Second, he must get value for whatever cover he seeks. The big change that has been happening over the past five to six years is in health insurance. While the general insurance industry is growing at 25 to 26 per cent, health insurance is growing at 37 per cent. People see a value in it. There is a real risk and they see a value in having an insurance cover for meeting health contingencies. The issue in other products like household theft insurance, fire insurance, etc is not as much of reaching out as it should have been. It is really from the customer end. Customers see a value in motor insurance and they are now seeing a value in health. I think the fast growing health insurance will probably overtake motor insurance in terms of the total premium paid.
Q: Is the lack of large general insurance product basket also a reason for the sector's uneven growth?A: I would say people in India don't feel the need to protect themselves against fire, theft and other risks of this type. The companies will respond to the consumer insurance needs if there is a demand. They have actually hit upon health. That is something which the consumer wants, there is a need and the insurance industry is also well equipped to meet that need.
Q: While the penetration of life insurance jumped from 1.75 per cent in 2001 to 5.25 per cent in 2010, figures for general insurance are quite dismal at 0.55 per cent in 2001 and 0.65 per cent in 2010. Is it because general insurance has linkages with the general health of the economy and with luxury products like cars?A: Cars, especially four wheelers, may fall under the luxury category, but there are all kinds of segments within motor insurance. I don't think it's a function of luxury at all. As for the state of the economy, life insurance is actually more closely interlinked with the state of the economy than general insurance. Indians save a lot of money. The bulk of the savings is in the form of gold and land followed by bank deposits, insurance and shares, mutual funds and debentures. These investments are crucially dependent upon the disposable income of a family, which in turn is closely linked to the state of the economy. General insurance is totally different. It is really driven by concerns and anxiety about an event and actually buying a protection against it. That is a value proposition. Look at how people value their cars and so they buy insurance. Now health insurance is picking up after the advent of modern corporate hospitals and advancement of modern technology in healthcare like technologies available for changing a knee or a hip.
Q: Do you see more niche players like focusing on only health emerging in the general insurance space?A: It is bound to happen. There are already three companies focused solely on health. They fall under general insurance and, in principal, (should) offer everything, but they are today offering only health. The industry is evolving. Today, the big issues on the health side are proper pricing, more efficient system of distributing health products and having a more robust claim settlement process.
Q: In the private sector, general insurance companies have managed to garner almost 40 per cent market share whereas their counterparts in life have just 25 per cent to 30 per cent. While the general insurers have been able to snatch a big market share from public sector companies, the penetration levels are abysmally low. How will you explain this?A: Life insurance by its very nature is a very long-term business. It requires financial strength and companies like Life Insurance Corporation of India, which have got enormous financial strength and deeper pockets, have an advantage. There were other countries that nationalized insurance around the same time we did, but LIC actually grew from strength to strength whereas it is not the case in other countries. That is why LIC continues to dominate the life insurance market. Whereas in the general insurance, there were four nationalized companies with no common branding. Unlike life insurance, the general insurance business is short term (one year) and also not very retail oriented.
Q: What are the issues engaging your attention as a regulator?A: General insurance premiums are very low today. It is actually the premium that helps in meeting all the costs of an insurer like administration and operating costs and paying off insurance claims as and when they come. What we find is that after the de-tariffing, the companies were competing on the grounds of price. They drove the price down. While the consumers are getting a good deal, the companies are under-pricing their products. There are actually two sources for a general insurance company to meet its financial commitments. One is underwriting profit; the money left after charging all the costs and claims, if any. The other part is the investment income. It is a question of how well you manage your investment portfolio to earn an investment income. After the de-tariffing, the underwriting income has gone as people are competing on prices. In fact, the prices have become totally unsustainable. As a result, you have to depend only on investment income to make money. So the question is: how long can you keep living off investment income? One day, the investment will go away. That is fundamentally unstable in the longer run for private companies. The state-owned companies have a breather in the sense that they have an investment pool built over the years. If the general insurance companies continue to make underwriting losses, the companies will fold up because how long a shareholder go on pumping in money? I feel the pricing right now is wrong.
Q: So pricing is a big issue….A: I don't want to go back to the system where we fix the price. I think market discipline is good for companies. They will manage their businesses better and give services to customer. There was a good reason for de-tariffing. But as a regulator we keep thinking what other steps we can take to help the companies regain a healthy and financial viable position. There are already provisions which we as a regulator oversee. Unlike other businesses, you are taking the money today in an insurance business for meeting a liability which may come tomorrow. Sometimes that tomorrow is a very long way off. Take for example, a claim coming on the last day of the one-year old policy. This claim will actually be cleared after a month or two of the policy's last day. So insurance companies have to keep enough money to take care any liability that arises in future.
Q: There is also a very radical idea of setting up a depository. Can you elaborate on it?A: We must encourage and enable the insurance industry to become more and more efficient. I mean reducing the cost on certain types of transactions while increasing reliability. Take for instance, motor policies. Every motor policy is much the same, except for a change in the name of the car and the chassis number. If it is from the same company, it is indeed the same as the previous year. These are large documents as they are contracts enforceable in a court of law. In India, every year, we sell about 80 million policies. Nowhere else in the world does any country sell such a large number of policies. It is not as if every policy is different. There are actually three to four different types of policies issued to all. The policy document which is given to every policy holder involves postage and other costs. We thought if we set up a depository just the way it operates in the capital market, the policy can be kept in a depository. The customer will be given a slip which confirms the company, policy details etc. This will make the whole process simpler. First of all, it could reduce the cost of transmitting the document like paper costs, postage, delivery etc. Look at it from the policy holder's side, it is safe kept in a depository against keeping it in a drawer or a file or in places where the storage facility is not up to the market. There are also chances of losing a policy by way of a theft or fire.
Q: You also plan to regulate outsourcing in insurance. Can you elaborate on that?A: Insurance is a matter of trust and responsibility. So there are certain core functions of the insurance activity we don't want companies to outsource. Basically, the idea is to inculcate ownership and responsibility. If I outsource something which is very critical, I will be less responsible. So the certain core functions of insurance we don't want to outsource. Many companies are already outsourcing some of the activities, but what we have done is to bring more order in the whole process by regulating it.
Q: We have seen innovations like cashless facility, online payment of premiums etc. Are you satisfied with the innovations in the general insurance sector?A: The sector could be more innovative. But having said that, there are arguments on both sides. Insurance policy is a contract and contracts have words and words have legal meanings. Over time, various matters have gone to courts where it has been accepted that certain words have certain legal meanings. We have only decontrolled the pricing, but the meaning of the words remains the same in a policy. Some in the insurance industry people say why we don't allow them to redefine the words. We would be moving in this direction, but before that insurance companies have lot to do especially in terms of bringing in responsible pricing etc. They are today making underwriting losses. I want to see that to correct and protect the policyholders interest and also health of the industry. In fact, we are quite flexible in health side. We are actually defining it as we are going along.
Q: We already have two dozen general insurance players. Is there a room for more players? A: If I go by comparison, we have about 23 general insurance in India. There are 70 to 80 in Hong Kong alone. There are more general insurers in the countries of South East Asia. So looking at it that way, there is enough space in India.
Q: So do you expect consolidation going forward?A: That should happen, but there is not much evidence of it happening. It may happen.
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