Sunday, March 24, 2013

Web Aggregation in Insurance sector in India - concept, status and issues

Introduction to Web Aggregation:

In India, Insurance has usually been “sold” (depending upon the commission, the agent/broker gets) and not “bought”(depending upon the felt need of the customer). Insurance companies historically have relied on standard channels of distribution mainly agents who normally push the highest commission products. This often leads to post purchase dissonance and hence lapsed policies. The insurance policy contracts somehow are verbose, often have fine prints, and no proactive communication on negatives. No entity besides the regulator has an incentive in making the customer understand the contract he is actually entering into, as the focus is clearly on making the transaction happen. As a result, not only,there often is a mismatch between what a person needs and gets but also she/he doesn't get to exercise an informed choice option of price and insurance product by comparing neutrally various insurance policies of different companies. In a sense, she/he gets exploited for this lack of comparative information data.


Insurance aggregation is a process of finding multiple quotes of various Insurance Companies at one time so that the buyer can make an accurate comparison of insurance products based on his needs and budget. Insurance web aggregation in turn is finding this information on the web. It is an easy and consumer friendly display of prices, costs, features, service levels, consumer reviews, and sometimes the opinions of expertson different insurance options to a consumer, who voluntarily comes (he is actually buying)looking for such information. The information required by an aggregator from a customer is usually a superset of the information required by
all the insurers who provide a quote. Aggregators get traffic because customers
find value in the research they can do on their own on Insurance products, saving time, and in simple to understand language. This traffic is the key differentiator for a successful aggregator, and its advertising revenue potential. This implies there is a direct relationship between the accuracy and helpfulness of an aggregators comparison charts, and their success.

Aggregators are different from other channels, as they are designed to be a self-help tool for the customer. The focus is on education and information quality and richness. These results in deepening penetration of protection focused products which specifically cater to his needs some of which might be low cost products, products not typically sold through traditional intermediaries. For example pure term insurance products have been largely displayed and promoted by aggregators.

International Experience:

Web aggregators are standard tools for buying Insurance in most developed markets. The UK and US have 4 web aggregators who are publically listed. Other countries including Netherlands, Germany, France, Spain, Italy, Australia, Hong Kong, Ireland, South Korea, and Canada, among others have Web aggregators.

The UK has the most developed insurance aggregation business, supported by the FSA. For example, in UK, 63% of all motor insurance buyers compare before they buy.

Insurance Aggregation in India

Insurance Aggregation started in India in 2005 with two companies (i) and (ii) From 2005 to 2011 twenty other players joined this industry. Their importance can be gauged from the number of Unique Visitors to various leading insurance sites for instance the number of hits which was 344,000 in April 2010 became 1,900,000 in April 2011 for Within a short span of time, these websites already account for over 50% of the 1st year premium collected via the Internet in India. For some companies, Aggregators can account for as much as 15% of their new business.

Regulations in India regarding Web Aggregation

IRDA vide circular No.IRDA/Admin/GDL/Misc./253/11/2011 have issued guidelines under section 14(1) of IRDA Act, 1999 which defines web aggregator, process of approval and eligibility criteria to be web aggregator, agreement between an insurer/ broker with web aggregator and conditions, contents to be displayed on website and remuneration caps on transmission leads and actual issuance of policies. The guideline prescribes a flat fee not exceeding Rs. 1 lac per year towards each product displayed by the web aggregator and an amount not exceeding Rs.10/- towards each lead transmitted by the web aggregator. An insurer shall pay a fee or remuneration to web aggregator not exceeding 25% of the commission payable or actually paid, if such leads get converted into actual sales, within the overall limits on commissions and expenses as provided u/s 40 (B) and 40(C) of the Insurance Act. The guidelines came in operations w.e.f.1st February, 2012.

The average charges till the lead stage which the WA has to pay to search engine sites such as Google is about Rs 100 or more (as voiced by some of the WAs and needs to be verified) and putting a cap of Rs 10 per lead has made it totally un-remunerative. As a result, out of 15 WAs, only 5 companies decided to apply for aggregator license, that too under protest on commercials and only 2 of these have received licenses.

It may be pointed out that in no other country, is there a remuneration cap between the WA and an Insurer.

Likely implication

The implication of Rs 10 per lead as stipulated by IRDA, given the fact that since its initial phase and not more than 25% of leads are actually getting converted into sales, implies that WA end up paying more to the service providers than what they receive from prospective customers and that is making the entire process a non-starter. A question arises therefore whether should it not be left for them (WA & Insurers) to decide mutually depending upon their volumes and economies, within the overall expense limit as defined under the Act?

The likely reach of internet in Indian scenario in the coming years is going to be phenomenal. Almost 50% of the total population will have access to internet in the next five years and we will thus be missing out in a major way if we ignore the power of internet and continue to stifle it with some short sighted guidelines. We need to look into the future and create an enabling environment which provides prospective customers a neutral unbiased web based platform to compare insurance policies and make a judicious choice.

IRDA has rightly put conditions to monitor the content of what’s displayed by a WA to ensure against misinformation and to maintain neutrality. Regarding the remuneration between an Insurer and the WA, IRDA‘s stipulation of it being within the overall limit u/s 40(B) & (C) of the Insurance Act for those leads actually getting converted into sales (ie lead charges +sales commission) is also within the justifiable as there is no separate definition of a WA under the Act and the expenses are to be covered within the meaning of Section 40 (B) & (C) of the Insurance Act.

There’s another related issue which is hampering the growth of insurance e-policies. IRDA has mandated that Insurance co. has to reapply for product approval if it proposes to put a product, already approved, as a e-policy based product too. There are large no. of products already approved and in order to increase the efficacy of web-based comparison of insurance products, it is desirable that all such products should be available as e-products. Otherwise, the basket of Insurance products available online gets severely restricted, depriving customers to make a meaningful comparison and choice. The logic of IRDA is that the regulator wants to examine the cost implication of a product being introduced as e-product and that no additional cost should be passed on to the customer. This, however, can be achieved by adding a certification from the insurance co that such an introduction doesn’t increase the premium nor changes any aspect of the policy in any manner. E-policies, by cutting down the other expenses, may actually lead to some cost savings for the insurance cos and that will act as an incentive for them to concentrate on issuance of e-policies in a major way duly harnessing the web based potential and reach.

In view of the growing importance of internet, the web based insurance business, whether issuance of e-policies or comparison sites on the web, need to be encouraged. Putting a cap of Rs 10 per lead, without any basis, is proving to be stifling and is restraining the propagation of Insurance policies through comparative sites in a major way and needs to be done away with. Similarly, asking the co to reapply for approval for a product already approved leads to delays and puts extra burden on the regulator which can be obviated by having a certification by the insurance co. regarding the price impact and status quo of product features.

Suggestions for making Web Aggregation more effective in India

(i)  the actual charges levied by the WA and payable by the insurers on a per click or per lead basis should be left to be decided by them which will vary depending upon the volume of business, the web-design of the WA and other such factors, subject to it being within the overall limits under Section 40(B) & (C) of the Insurance Act;
(ii) An insurance product, once approved by IRDA need not require re-approval if it is proposed to be introduced as an e-policy provided it doesn’t lead to increase in premium and there remains status-quo so far as product design is concerned. A certificate needs to be filed by the co. in this respect with the Authority who can take appropriate action in case of any violations.
(iii) There shouldn't be an entry fee prescribed (at present Rs 1 lakh) payable by an Insurance company to the WA for display of an insurance product on the web aggregator portal. It puts a cost for the insurance co. and may deter them from displaying low premium insurance products and thereby depriving customers from availing such products. In fact, I would suggest that enlisting of any insurance product should be free so that one can have as many products on such portals as possible which will give the intended customers a real time choice option.


Indian insurance market which used to be predominantly agent (including brokers and corporate agents) driven is changing with newer mode of distribution channels such as Bancassurance and web based individual insurance cos portals coming to play increasing role. The importance of web aggregation for insurance cannot be ignored. World over, especially in mature markets, majority of insurance policies in Motor, health and property insurance as well as life insurance are bought online through web aggregation. This is yet another effective and neutral platform providing comparative information on various insurance products of different companies to the intended customers and enabling them making an informed choice based on their specific need and budget. Web aggregation thus needs to be encouraged and shouldn't be curbed down with some short sighted ill-informed regulations. People have suffered tremendously since 2006-07 on account of large scale mis-selling and a time has come when they should "buy" insurance products rather than being "sold".

Friday, March 22, 2013

Budget 2013-14 -- Insurance sector benefits

Finance Minister presented the Budget for 2013-14 on March 1. Paragraph 90-93 of the speech refer to certain announcements pertaining to Insurance sector. I am reproducing these paragraphs here:

90.       A multi-pronged approach will be followed to increase the penetration of insurance, both life and general, in the country.  I have a number of proposals that have been finalised in consultation with the regulator, IRDA. 
·       Insurance companies will be empowered to open branches in Tier II cities and below without prior approval of IRDA.
·       All towns of India with a population of 10,000 or more will have an office of LIC and an office of at least one public sector general insurance company.  I propose to achieve this goal by 31.3.2014.
·       KYC of banks will be sufficient to acquire insurance policies.
·       Banks will be permitted to act as insurance brokers so that the entire network of bank branches will be utilised to increase penetration.
·       Banking correspondents will be allowed to sell micro-insurance products.
·       Group insurance products will now be offered to homogenous groups such as SHGs, domestic workers associations, anganwadi workers, teachers in schools, nurses in hospitals etc.
·       There are about 10,00,000 motor third party claims that are pending before Tribunals/Courts. Public sector general insurance companies will organise adalats to settle the claims and give relief to the affected persons/families. 
91.       The Insurance Laws (Amendment) Bill and the PFRDA Bill are before this House. I sincerely hope that Government and the Opposition can arrive at a consensus and pass the two Bills in this session.
92.       The Rashtriya Swasthiya Bima Yojana covers 34 million families below the poverty line.  It will now be extended to other categories such as rickshaw, auto-rickshaw and taxi drivers, sanitation workers, rag pickers and mine workers.
93.       A comprehensive and integrated social security package for the unorganised sector is a measure that will benefit the poorest and most vulnerable sections of society.  The package should include life-cum-disability cover, health cover, maternity assistance and pension benefits.  The present schemes such as AABY, JSBY, RSBY, JSY and IGMSY are run by different ministries and departments.  I propose to facilitate convergence among the various stakeholder ministries/departments so that we can evolve a comprehensive social security package.

I did write a brief article which appeared in Economic Times dated March 21, 2013, on what each of these announcements entails for the sector.

A slightly detailed analysis is presented here.

India is among the top ten economies in terms of nominal GDP and fourth in terms of purchasing power parity. However, for its size and potential, India has an abysmal level of insurance penetration (insurance premium as percent of GDP) and density (per capita insurance premium). The penetration in the life sector actually came down to 3.4 % during 2011-12 while it continues to be at a low of 0.7% in the general insurance sector (including health). Much of the life insurance premium comes from the salaried and the organized sector including the self-employed and is largely driven by tax incentives. A worrying feature also has been the thin spread of per capita insurance cover (insurance density) even among those availing insurance, which @US$64.4 is much lower than the world’s average of US$627.3 and is lower than any of the other BRIC nations. While life sector density is US$55.7, the general insurance density is only US$ 8.7 which is among the lowest coverage in the world. Not surprisingly thus, the levels of protection (insurance sum assured as a percent of GDP) for India is only about 55% where it ranges from 150-250% in some of the other emerging and mature economies.

India is clearly under insured and the sector represents a clear case of a “missing market”.

As early as in 1911, Joseph Schumpeter had argued that services provided by financial intermediaries, aimed at mobilizing savings (including insurance), are essential for technological innovation and economic development. Using data on 80 countries over the 1960-89 period, Economists Robert G King and Ross Levine have presented a cross country evidence consistent with Schumpeter’s view that the role of financial systems in promoting economic growth is not “over-stressed”. A well developed insurance sector with increase access in far-flung areas, a wider bouquet of simple and easy to understand standard products and easier availability is thus a pre-condition for mobilization of savings and it is in this regard that insurance related measures (paragraph 90-93) announced by Finance Minister Shri P. Chidambaram in his budget speech for the year 2013-14 assumes great significance.

Let me try and elaborate what each of these announcements entails.

“Insurance companies will be empowered to open branches in Tier II cities and below without the prior approval of IRDA” and further “All towns with a population of 10,000 and more, will have an office of LIC and at least one of the four public sector general insurance companies by 31.03.14”.

One of the major reasons for the low penetration, especially in the general insurance has been the non –availability of insurance offices in smaller towns ie towns having a population of 10000 and above. The existing office infrastructure of LIC and the four public sector general insurance co. is:

Even though LIC has a system of premium collection centers through its agents network in most of the towns upto Tier V, the fact remains that presently, only 16% of its own offices are in tier IV level towns and below. Private life insurance companies especially SBI Life have started opening offices in tier II and III and a total of 1756 offices of private companies are in tier II level and below. The low penetration in general insurance is understandable as only 6% of offices of the four Public sector general insurance companies are located in Tier IV towns and below. The situation is almost alarming when it comes to the presence of private companies in the general insurance sector.  There isn’t a single office of any private general insurance companies in any town of tier II level and below (classified as “other” category by IRDA). The number of towns (tier wise as per census classification) thus not having any insurance offices are:
It is thus clear that insurance facility is yet to reach the critical mass and this would require both expansion in capacity and the geographical spread of the insurance facility. The number of towns in each of these tiers is going up continuously with the increase in population. There also has been a burgeoning middle class in each of these towns who save and are in need of insurance. So far, the insurance needs of these towns is met by the agents most of whom however cater to life insurance which also gets reflected in low penetration in general insurance sector.
The presence of offices of LIC and at least one general insurance company is each of these towns will enable availability of insurance services at the doorsteps of people in these towns and will specifically be useful in health and motor insurance segment. The opening of offices to such uncovered and under-covered areas will be based on the commercial considerations of these insurance companies and empowering these companies to open their offices without having to come to the regulator for case wise approval will also provide these companies a business opportunity who will also get an advantage of early foot-fall in these cities. Private insurance companies are likely to follow suit immediately. It is often missed out that insurance creates and sustains employment. As it penetrates in tier II level towns and lower, it will boost and nurture both direct and indirect employment. All these towns will have these offices functional by 31st March 2014.

“the KYC for banks will be applicable for insurance policies”

Presently, a separate KYC (know your customer) is done every time an individual wants to buy an insurance policy. In order to bring down “on Boarding Cost” of insurance products, it has been decided that the KYC check done by banks will be made applicable for insurance policies. This will also facilitate customers for availing insurance policies without going through a multiplicity of KYC requirements by different agencies. For this purpose, a copy of the bank passbook containing KYC details and attested by the concerned bank official shall be an accepted document for the purpose of KYC for buying an insurance policy. Only additional information which is insurance policy requirement (such as health status of the individual etc) will be asked for separately. This will enable buying of an insurance policy easy and customer friendly and will bring down the cost for the insurance company. This announcement has been welcomed by the industry.

“in order to utilize all bank branches, Banks will be permitted to act as insurance brokers”

Insurance is a permissible form of business that could be undertaken by banks under section 6(1)(o) of the Banking Regulation Act, 1949. As per RBI circular dated July 12, 2012, Banks need not obtain prior approval of the RBI for engaging in insurance agency or referral arrangement without any risk participation subject to certain conditions. Bancassurance mechanism means selling insurance products through bank branches and presently all such Bank-insurance tie ups are where Banks act as corporate agent of an insurance company (one life and one non-life or health insurance company). IRDA during 2009-12 has issued a total of 362 corporate agency licenses including 203 licenses in the life sector and 159 licenses in the general insurance sector. However, the insurance business through Bancassurance is only about 7.5% of the total insurance premiums and only about 15000 of the existing 100,000 bank branches are engaged in selling insurance policies.  
In order to utilize the entire network of available bank branches, which will also help increase the insurance penetration, banks will be permitted to act as insurance brokers. This will not only enable availability of insurance products of several different insurance cos through banks branches but will also mean that banks will represent the customers as insurance brokers.  IRDA will notify banks as “broker” under regulation 2(j)(v) of the IRDA(Insurance Brokers) Regulations 2002.  There will not be any need to open a separate subsidiary by banks for this purpose and the existing branch network can be utilized.  Banks wishing to become an insurance broker will however require prior approval of RBI. The conduct of insurance business as a broker does not involve any risk participation by banks. It is expected that this move will help not only the utilization of all bank branches but also will provide customers a wider range of insurance products.

“All categories of banking correspondents shall be allowed to sell micro insurance products”

The high cost of distribution in rural areas coupled with availability of simple, standard and a product with low/flexible premium is one of the major reasons for a very low insurance presence and penetration in rural areas.  This announcement will go a long way in addressing this difficulty of higher distribution cost.  Micro insurance policies have an insurance cover ranging from Rs 5000 to Rs 50000 and cover health, dwelling, personal accidents in general insurance and term, endowment, health and accident under life insurance.  Micro-insurance policies, because of flexibility of premium payment terms, amount and coverage, cater to families in the informal sector who are in need of insurance and can’t afford higher premium in one go. 

These banking correspondents will be permitted to take up selling of ‘micro-insurance’ policies. The tie-up of banking correspondent as seller of micro-insurance policies will enable people in such unbanked and under-banked areas to avail insurance products at their doorstep and will help improve insurance penetration in a major way. IRDA presently permits only four categories ie. Non Governmental Organizations, Self Help Groups, Micro Finance Institutions and a company formed under Sec 25 of the Company Act to be a micro insurance agent. IRDA is in the process of expanding this definition to include banking correspondents as permitted by RBI. The banking correspondents will have to undergo an insurance training of 25 hours. However, they will be exempt from undertaking and clearing the Agent’s exam as mandated by IRDA for a regular agent.

“Group insurance products will be made available to homogeneous groups such as self help groups, domestic workers associations, aanganwadi workers, teachers and nurses etc”

Group Insurance products are offered to a group as a whole with a single master policy holder and individuals as members. A typical group saving product is an endowment policy and will have a component of both insurance and savings. The Group Products are expected to offer a more cost-effective product to the members of the Group by cutting down processing costs and risk sharing. Another advantage of group product is that it can be customized for each group depending upon the requirement, premium paying capacity and coverage required of its members. Such group products are presently permitted only for employer-employee groups where the employer is a master policy holder. 
There are a large number of groups which are non-employer- employee, are homogeneous in nature and have a commonality of interest. These groups include represent a particular profession/trade such as domestic workers, auto drivers and taxi drivers association, Anganwadi workers, Aasha workers, teachers of schools, Self help groups (SHGs) and cooperative societies. Such groups are in fact more deserving for a group based insurance product and are presently not able to have a product for them. It was felt necessary that group insurance products should also be available for these non-employer Non-employer-employee groups.

The inclusion of these groups under the group insurance products will help hitherto uncovered members of these groups to have an insurance as well as saving cover, will help mobilize their savings and will help increase insurance penetration immensely. These members could not afford an individual insurance product due to the higher premium and will now be able to avail a better customized product at a much lower premium.
 “There are about 10,00,000 motor third party claims that are pending before Tribunals/Courts. Public sector general insurance companies will organise adalats to settle the claims and give relief to the affected persons/families”

Motor insurance is the largest portfolio of General Insurance Industry both in premium accounting for about half of the total premium as also the claims outgo for the industry. The Motor Vehicle Insurance Policy is a contract between the Insurer and the vehicle owner (Insured) by which the insurer undertakes to pay the liability awarded against the owner of the Motor vehicle by the Tribunal or the Court in respect of any injury/ fatal accident or property damage claim filed by a Third Party or their Legal heirs. On receipt of a claim filed by a Third Party/ legal heir/s who has been injured in a road accident, the Motor Accident Claims Tribunals (“MACT”) and Courts, based on various factors like cause of accident, Insurer’s liability as per Policy Conditions, contributory negligence, if any, on the part of claimant, age and income of the claimant or deceased, dependents etc. pass an award of compensation.

However, due to various reasons, there are delays in claim settlements. The number of outstanding motor third party claims as on date is approximately 10 lakhs, involving an amount of Rs.22,000 crore. What’s worrying is that almost one-third of these claims are pending for more than 5 year and another 21% and 27% are pending for a period ranging from 3-5 years and 1-3 years and only about 20% are less than an year old. The long pendency has been causing misery and hardship to the affected persons and their families. Recourse to “lok-adalats” to expedite settlement of pending claims in a campaign mode throughout the country will enable quick disposal of all pending cases. All the four public sector general insurance companies as well as private companies will, under the guidance of National Legal Service Authority (NALSA) will participate in these “Lok-adalats” at various levels. .  It will provide a major relief to all the affected families and reduce pressure on the legal system.

“There is a need to have a comprehensive social security insurance for the informal sector which would include life and disability cover, health cover, maternity benefits, incentive for girl child education and pension benefits. The existing schemes such as AABY, JBY, RSBY, IGMSY and pension schemes are implemented by different agencies.

It is estimated that by 2020, India will have over 900 million people in the working age group of 15060 years and over 130 million dependents in the age group of 60 years and above.  Further, on the demography scale, India will begin to grey between 2020-35 and coupled with rising life expectancy which will be around 80 years, it is imperative that a sound pension system is in place and that the basic levels of health and life insurance cover is available during the working age.
The existing schemes aimed at providing social security such as life and disability cover (Aam Aadmi Bima Yojana and Janashree Bima Yojana administered by LIC), health cover (Rashtriya Swastha Bima Yojana by Ministry of Labour and Employment), maternity benefits (Indira Gandhi Matritva Suraksha Yoajana by Ministry of Women and Child Development and Janani Suraksha Yojana by Ministry of Health & Family Welfare) and pension schemes (a co-contributory ‘Swavlamban’ scheme administered by PFRDA) are administered by different departments and implemented by their respective agencies. As a result, there is little inter-linkage/integration of these schemes and as such intended beneficiaries or those getting presently covered are not able to get the overall comprehensive coverage. There is thus a strong need for providing a comprehensive social security insurance cover to all in the informal sector.

In order to provide certain basic level of a comprehensive minimum social security, which would include old-age income security, life & disability and health insurance, maternity benefits and incentive for girl students at the higher secondary level  of the families covered,  all such existing schemes will be dovetailed and converged into a single comprehensive scheme. The components of the scheme, coverage of beneficiaries, premium required and its sharing pattern and the overall funding requirements will be decided through a process of consultations with the state governments and various stakeholders. 

To sum up, The critical importance of insurance in an economy is well recognized and the series of measures as announced by Finance Minister in the budget speech will provide the necessary impetus in the insurance sector and will help arrest the deceleration in insurance sector at the earliest.