Saturday, September 8, 2012

Increasing Insurance coverage - catch them young!

Why should one insure? Well, as the name suggests, its an insurance against a particular peril covered under the insurance policy and provides, to the insured or his family a benefit coverage in case of any eventuality. We all do insurance in some form or the other. While the informal
insurance is our savings, social networks and kinship where we lean on others for assistance, the formal insurance means taking an insurance policy. The various segments where insurance cover is provided include life, health, personal accidents, fire and motor among others.
In the life sector, the extent of insurance cover is measured by sum insured which in turn depends on the nature and extent of cover and the sum assured determines the premium chargeable. Higher the sum assured, higher would be the premium. There are 3 broad and totally inter-related measures:
1.Insurance penetration – this means insurance premium as a percent of GDP. It is 4.1% in India last year and come has a long way from being around 2% in the year 2000 when the insurance sector got opened up in India. The world average in this regard is 3.1%. Given the saving habits of Indians and the younger age group bulge, it is however felt that India can reach a penetration level of 5.5-6% in next 5 years.
2. Sum assured as multiples of premium – this shows the intensity of insurance and shows, how much a person is willing to get a sum assured which is primarily determined by his capacity to pay the premium. The higher the sum assured, the higher will be the premium.
3. Level of protection in the country is also determined by the sum assured as a percent of GDP. Higher the sum insured, higher is the level of protections in the country. This is discussed in detail below.
The sum assured as a percent of premium collected shows, in a way, how people treat insurance products. On the one side of the spectrum is base policies providing life coverage at its minimum. The premium is low and the sum assured is low. An example is that of social security policies such as Aam Aadmi Bima Yojana and Janashree Bima Yojana. The premium is only Rs 200 pa and the maximum coverage is Rs 75000 in case of accidental death. On the other hand, we have life coverage which are in the multiples of millions and the premium also increases.
Lets look at sum assured as number of times of premium collected over the years..
LIC is obviously lower because it has social security policies. The sum assured as percent of premium collected is increasing, albeit slowly and it’s a sign of a maturing life market.
However, the sum assured as a percent of GDP in India is only 55% ( sum assured can cover only 55% of the GDP) whereas the world’s average is about 150% and some of the mature countries have more than 200%.In that sense, we have a long way to go to improve per policy sum assured. While penetration (insurance premium as percent of GDP) at 4.1% looks healthy, it can be increased. The saving habits in India, despite being decelerated a bit in recent past is still at a healthy 32% of GDP. What is worrisome however, is the fact that most of it is being invested in gold and real estate and the extent of household savings in insurance is only 17%. This needs to be improved and a conscious effort needs to be made to channelize people's savings into Insurace.
One way to improve sum assured (and insurance penetration) is to concentrate on younger generation. They will have a longer contributory span (a life policy of 25 years old versus 45 years old). Let’s look at what’s happening in LIC.
The average age of LIC’s policyholders is: This average age of 37 years is not very high considering that life insurance is a long term contract and the average in respect of in-force policies for a grown up and matured company like LIC, is bound to increase.However, the average age of LIC’s policyholders (risk weighted Sum Assured) in respect of New Business for the last five years is also worked out as and shown in the right side table. It is clear from the data that the average age of new business policyholder is not high and showing stagnation from last 3 years. Increase in New business average risk weighted age during last 5 years from 30 to 32 may be attributed to the higher saving capacity among older people. Following data which shows the NB policies sold for the last 3 years (not risk weighted) gives us some more insights: The table conveys that selling of new policies to the people below aged 35 years is constantly increasing from 47.28% of the total policies sold by LIC in 2009-10 to 53.66% in FY 2011-12. At present LIC is selling more than half of the policies to the people aged 35 years and below, which is a good indicator of the efforts taken by the corporation to be relevant for the young generation in changing business environment.
India has a demographic advantage with >50% of people in less than 30 age group. With increasing awareness about the insurance, the need to have an insurance cover is increasing. The average age of starting a job in India is between 23-25 years and it is here that we need to concentrate and have them insurance cover at the earliest. Its a win win situation as they get an insurance cover with a lower premium (because of their age, health profile being better) and the levels of protection improves in the country.

Sunday, September 2, 2012

My experiments with horse riding & making sense of horses!

I learnt horse-riding, for the first time, as a part of mandatory training during the foundation course of IAS in Mussoorie Academy from 1991-93. It used to be extremely hilarious when we all struggled during those days and how some of the officers invented all sorts of excuses to avoid attending those training classes. When one of the officers, out of sheer fearful frustration asked the trainer in the Academy as to why should one be learning horse-riding, the reply was that one can control (administer) the District very effectively if one knows how to control a horse! And prompt came the retort that in that case, the riding instructor should be running the country!! There’s a saying, “A horse is the projection of peoples’ dreams about themselves-strong, powerful, beautiful-and it has the capability of giving us escape from our mundane existence”. The riding in the Academy was very user-friendly as most of the horses were well trained and all one needed to do was to balance oneself on the horse properly and the horse used to take care of the rest as they were trained to follow the horse in front and voice commands from the trainer. In that sense, the horse-rider had little control. It was enjoyable experience and gave all of us a sense of confidence. Even till day, not a single get-together of our batch mates passes off without discussing some interesting incidents of those horse-riding days.
Thanks to a friend, I took up horse riding after a gap of almost 20 years. We were having lunch one day when he informed that he has been horse-riding now for about six months and why shouldn’t I join him. It was an interesting offer. Of course, I have put on weight, rather sumptuously since the last time I rode and my instant thought was whether the horse can carry my weight! Well, i was not willing to take into consideration the age factor and whether my nerves can still be agile enough to take up horse riding. However, the comforting factor was sitting right in front of me, my dear friend with all his weight (his girth certainly is bigger than mine) and his age (well, he might not be colouring his hair)! And I went to Army Polo and Riding Club, Naraina along with him.
The riding here is very different from what I had supposedly learnt in my Academy days. The horses are bigger & independent and don’t go by the common voice command of the trainer. One has to take charge. I started slowly and was doing walking and a bit of trotting in first few days. Basic gaits of the horse include (1) Walk – a slow, flat footed gait with four beats, about 3-4 miles per hour. Walking is good to warm up the horse’s muscle before hard work; (2) the trot – the trot is a two beat gait in which the diagonal (opposite corners) front and hind legs move and hit the ground together as a pair. It has suspension meaning that there’s part of the time when the horse is off the ground. This is what gives the trot its bounce. The trot is about 6 miles per hour. Trotting is a good exercise for both horse and rider. The rider can ride posting, sitting or balancing in a two-point position. A good rider can do all three. The trot is the least tiring for the horse and they can cover long distances while trotting;(3) The canter – the canter is a three beat gait with suspension. The canter is a medium gait, about 8-10 miles per hour. The rider usually sits up tall in the saddle when cantering and should keep his seat deep and relaxed to follow the rolling movements of the horse’s back; (4) the Gallop – the gallop is a horse’s natural speed gait. It’s very much like a canter speeded up. The gallop has four beats instead of three and the suspension is longer. The horse pushes off harder, reaches farther with his legs and stays up in the air longer between strides than he does in the canter. I gradually moved to canter in my third week and have been doing cantering regularly since then mixing it with trot.
Horse riding, especially the way, we manage horses tells so much about the personality of the rider. One can easily make out when one is frightened by the manner one sits on the horse or rides. Its interesting how the same horse behaves differently with different riders depending upon the comfort level of the rider. Horses, I feel, are extremely intelligent and can make out in an instant about the experience, knowledge and comfort level of the rider within first few minutes and behaves accordingly. There are two categories in horses – ones which are like children and are naughty. When they find that the rider is new or not comfortable, they literally take him for a ride and try and unnerve him in every possible manner. They will skip, buck, canter on their own or will refuse to move. Basically they decide what they want to do. The second category is those horses which are matured and act like one. Once they observe the uncomforting newness of the rider, they treat him with care and try and give him confidence. They just give the impression of being an indulgent parent. I would like to mention a particular horse in this category of APRC – Alibaba. He is the first preference of any new comer and is a must for anybody entry in the world of riding in APRC. Likewise, there are few horses who are very disciplined and will take care of their riders especially if one is new. One such horse is “Romeo” and it’s almost hilarious how most of the kids keep requesting for Romeo every morning!
The riding hours are from 6-6.40 am in the first batch and 6.50-7.30 am in the second batch. It means getting up at 5 am and setting out by 5.30am. I have an advantage as my house falls in the way of my friend’s route who graciously picks me up in the mornings. The fact that i have to get up early , this implied that i started sleeping in time and which meant cutting down on social gatherings and social drinking. It has in a way brought so much of discipline in life and a time has come when friends have stopped inviting me for late evening gatherings knowing well where my priorities would be! I started as being a guest of my friend as i wasn’t sure initially whether I would continue with this adventure beyond first few sessions. But once i started cantering, I realised the feeling of freedom.
The feeling, when the horse is rhythmically cantering with his full glory, is that of being in control of almost the entire world (now I realise why riding is compulsory in IAS Academy). As they say “horses lend us the wings we lack”. I am reminded of an Arabian proverb, “The air of heaven is that which blows between a horse’s ears”. There’s nothing in the world which i feel can describe this feeling of sheer sense of completeness, with droplets of sweat making their way from the sides of one’s helmet, that wheezing sound of the wind as one is riding through the sky. It almost makes riding synonymous with freedom. As they say, a canter is the cure of every evil. One forgets all worries, tensions and all the routine pre-occupations and its one of the best forms of meditation in that sense. The saying “A horse in the wind, a perfect symphony” that way perfectly describes the exact feeling of a rider in control. I am now almost hooked to riding and have got a membership of APRC. Beryl Markham very rightly had said that “A lovely horse is always an experience... It is an emotional experience of the kind that is spoiled by words”.It’s not as if everybody has a safe riding. There are occasions when there have been falls and one of them was a bit fatal one. Horse sense is the basis of horsemanship. This is the ability of a person to understand horse and even to think like a horse. The better one understands horses, the more one can enjoy them and a better rider he will be. Horses are large and powerful animals but they are also timid and easily frightened. Isn’t this quality like a child? As Josephine Dermot Robinson said once “Horses and children have a lot of the good sense there is in the world”. Most horses are gentle and obedient if they are handled properly. Horses are among the most forgiving animals. There are certain rules such as that we should praise them often and punish them very seldom. Gentle treatment will gain horse’s respect. Harsh and cruel treatment makes him fear us. We should also never stand directly being or in front of a horse. A frightened horse may kick or run over us and i have seen somebody actually getting kicked once. Another interesting fact i was told was that horse should never be hand fed. Fingers may be mistaken for treats and be eaten. I smile every time I think of this warning.
I have since been observing and discussing “Horse sense” with other fellow riders. The following describe what’s meant by horse sense:
Fearful – horses are big and powerful but fearful creatures. If they are frightened, they will run away from whatever scares them. They are normally scared by loud noises, and things that move suddenly move towards them. If one acts frightened, his horse becomes more frightened as he feels that something must be wrong if his rider is frightened.
Habit and training- horses don’t know they are powerful, bigger and stronger. Otherwise, they would realise that they needn’t obey us! We should always handle horses using the same rewards and punishment they are used to.
Reward and Punishment – horses learn how to obey commands and to do or not to do certain things by connecting them with pleasant (reward) or unpleasant (punishment) feelings. A horse can pay attention to a reward or punishment for a maximum of about 3 seconds. It means that the pleasant or unpleasant feelings must come immediately after the horse has done something deserving it. Rewards are not always feed, carrots or apples. They can also be kind words & petting. Punishment, likewise, can also be a harsh, sharp voice or not allowing him to do what he wishes to do otherwise. Reward & punishment should fit the situation and must be fair. If he doesn’t know why he is being punished, he will look for ways to get away from a rider who hurts. I am reminded of a saying “ If your horse says no, you either asked the wrong question or asked the question wrong”.Horsemanship includes how to adjust one’s stirrups, mounting a horse and dismounting, sitting positions, holding reins, aids (natural – hands, voice, legs and weight and artificial – crops, spurs and whips) and how to use them. I have tried the ‘voice’ aids with my horse and it really works. They seem to listen to you and respond. My friend who is a Keraliate speaks to his horses in ‘malyali english’ and it’s at time a really hilarious sight. But it seems to work and all horses seem to getting used to that type of communication!
I have just begun this journey and realise that i have a long way to go. It brings in discipline, all the ingredients of management training and ultimately, makes one a better human being. I am loving it and intending to make it a long term affair! I have made some wonderful friends, both human beings and horses and am learning horse sense finally! As someone once said “ ask me to show you poetry in motion and i will show you a horse”.

So, are you Feeling down? Saddle up buddy!

Saturday, September 1, 2012

Bancassurance - concept and issues

“Bancassurance” is not a term defined in Insurance laws in India. It broadly refers to sale of Insurance products by Banks (Bank + Insurance= Bancassurance). This was initially introduced in nineties in Europe and later spread to other countries. As Insurance business deals with monies received from policyholders against future promise of claims maturity or settlement, it is highly regulated and Bancassurance is no exception.

There are 3 models of Bancassurance in Europe:
(i) Straight contractual relation between a Bank & an Insurance co.for the distribution of their products.
(ii) Banks & Insurance cos form a specified Joint Venture (JV) which markets insurance products;
(iii) An Insurance co. is promoted by a Bank which has an exclusive distribution right to distribute its products.

Banks were prohibited to have any relation with Insurance cos. In USA & Canada. Laws were changed in USA in 1999 and Banks are slowly getting into Insurance space though not significantly.

The Indian life insurance market has been witnessing a slowdown post certain regulatory changes by IRDA since September 2010. However,the fundamentals for growth remain strong. Over the next decade, India will be one of the fastest growing life insurance markets in the world, with a compound annual growth rate of around 15 to 18 per cent and will account for around 10 per cent of global growth in gross written premiums. It is expected to grow from the fifth to the third largest life insurance market in Asia by 2020.

Bancassurance, is defined earlier is the insurance distribution model where insurance products are sold through bank branch network. The presence of several banking groups as promoters of insurance companies is of great significance to this model. With a network of over 80,000 branches spread across the length and breadth of the country, banks have the necessary potential to make bancassurance the most efficient way to achieve financial inclusion in insurance sector also. The bank customers with higher average premium per capita provide quicker means to grow for insurers. The complementary nature of insurance products towards the bank advances (e.g. credit life)provide synergies in operations to the entire financial sector. The ease of access to bank customers reduces servicing costs, contributes to lower lapsation of insurance policies and hence lower costs to the economy.

IRDA vide its notification dated 16.10.2002 on licensing of Corporate Agent authorized the following entities to become corporate agent which includes:
a) a Banking Company as defined in Clause (4A) of Section 2 of the Companies Act, 1956.
b) a corresponding new bank as defined under clause(d)(a) of sub-section(1) of section 5 of the Banking Companies Act, 1949 (10 of 1949)
c) a regional rural bank established under section 3 of the Regional Rural Banks Act, 1976 (21 of 1976)
d) a co-operative society including a co-operative bank,registered under the Co-operative Societies Act, 1912 or under any law for the registration of co-operative societies.

So far, the Regulator (IRDA) has granted 3261 corporate agency license out of which 266 have been granted to Banks to act as Corporate agents. While Banks have nearly 100,000 branches in the country, only about 15-20% of these branches have been utilized for distribution of Insurance Products.

The distribution channels in various countries is as under:-
As against an overall 8% in India, Bancassurance accounts for 26% in Japan, 27% in Singapore & 68% in here. Bancassurance accounts for 13% of gross premium in life and 2% in non-life as on 31.03.12 in India (IRDA).

While the overall market has stagnated over the last two years (and declined in several product in several pockets), bancassurance has continued to grow (from 19 per cent of new business premium [NBP] in FY 2008 to around 40 per cent in 2012 for private sector players). The share of bancassurance in India for private sector players is now almost as large as some of the other Asian and Western countries (many of which have share of bancassurance close to 50 per cent) and also almost as large as agency channel for private sector players in India (around 45 per cent share of new business premium in FY 12 for private sector players). The role of banks as primary investment counselors is rising. McKinsey proprietary personal financial survey indicates that now 16 per cent of customers choose a bank investment counselor as their primary advisor compared to only 7 per cent in 2007. The importance of Bancassurance thus becomes crucial.

Moreover,unlike other Asian markets, bancassurance economics in India is better compared to the overall industry (operating cost and commission is 15-25 per cent lower for bancassurance channel than overall industry). Further, bancassurance is significant contributor to third party fee income for banks (greater than 75 per cent of third party fee income for banks is through life insurance sales). The bancassurance channel therefore has the potential to be a win-win proposition for both banks and insurers. However, there are several gaps in the bancassurance business model in India driven by leakages in end to end value chain that constrain value capture.

Internationally, it has been observed that insurers with stronger Bancassurance have a faster growth trajectory:In view of the fact that the percentage of insurance business through Bancassurance hasn’t picked up in a manner expected and the fact that only about 15-20% of the Bank branches are being used for Bancassurance purpose, IRDA has come out, recently, with draft guidelines on Bancassurance and the key features are as follows:
i. Zonal Division: The States/UTs and major cities in the country have been divided into three zones based on which the guidelines for tie-ups between banks and insurers have been specified.
a.Zone A (13 States) - Kerala, Gujarat, Andhra Pradesh excluding Hyderabad, Tamil Nadu excluding Chennai, West Bengal excluding Kolkata, Karnataka excluding Bangalore, Maharashtra excluding Mumbai, Chandigarh, Hyderabad, Bangalore, Chennai, Delhi, Mumbai.
b. Zone B (9 States) – Rajasthan, Assam, Jharkhand, Haryana excluding Chandigarh, Orissa, Bihar, Punjab excluding Chandigarh, Madhya Padesh, Uttar Pradesh
c. Zone C(Rest of the country) – Lakshadweep, Dadra & Nagra-haveli, Daman & Diu, Andaman &Nicobar, Mizoram, Arunachal Pradesh, Sikkim, Nagaland, Meghalaya, Manipur, Pondicherry, Tripura, Goa, Jammu & Kashmir, Himachal Pradesh, Uttrakhand, Chattisgargh.

ii. Ceiling on number of tie-ups with banks:
No insurers other than the specialized insurer shall tie up with any bancassurance agent in more than nine states/ Union Territories in Zone A (out of 13) and six states/ Union Territories in Zone B (out of 9). There is no such ceiling in Zone C.

iii. Ceiling on number of tie-ups with Insurers:
No bancassurance agent shall tie up with more than one life, one non-life and standalone health insurance company in any of the states in addition to one each specialized Insurance companies.

These are draft guidelines and not yet formal. However, given the fact that the tie-up between an Insurance Company and a Bank, invariably has been on pan-India basis in almost all cases, the proposal of IRDA in restricting operations of such a tie-up on geographical basis (9 out of 13 in Zone A and 6 out of 9 in Zone B ) is causing apprehensions in their mind. The problems in slow take off in bancassurance, apart from being a teething one, are structural in nature and solution lies in sorting out those issues. Some of these issues are in (i) product offering where many partnerships lack basic /priority end to end practices in product development and marketing including availability of simple products, adequate bundles (>3) of core banking and insurance products and joint product development; (ii) Lead generation and sales conversion which has multiple hurdles. For most banks esp Public Sector Banks, the lead generation mechanism depends either on customer walk-ins or the frontline’s relation with the customer who often face capacity constraint. Private sector & foreign Banks generate leads effectively through their outbound sales force, analytics and alternate channels. The sales coversion process also suffers from several pitfalls as only 50-60% of the leads generated are actually converted. (iii) then there are several leakages in the Bancassurance channel post the log-in as much as 30% between log-in and policy issuance, the main cause being frontline’s inability to collect all relevant documents. (iv) there also are leakages, post sales service and persistency management.

To conclude,creating a focused program with close involvement of both Banks and Insurers can help make the model a win-win for both and capture full value from the partnership.

ps.I have taken inputs from the later report of Mckinsey & co, Financial Institutions Group on "Capturing the full value of bancassurance through end to end integration"

These are my personal views and no part of this blog can be quoted without my specific approval