The insurance industry is witnessing a phase of transition, which brings to the fore some obvious questions. Following the capping of charges, will insurers be forced to look at the existing structure? How will this help customers? Will unit-linked insurance plans become even more popular with increased customer loyalty? T R Ramachandran, CEO & MD of Aviva Life Insurance Company India, talks about some of these key issues in an interview with Sunil Dhawan and Teena Jain.
It's been exactly a year since you moved to Aviva from Citibank. Did you notice any similarities or differences in the way the two industries work?
There are several similarities and dissimilarities. One of the similarities is that the product structure needs to be figured out and you could substitute almost every treasury or credit function in a bank with an actuary function in an insurance company. Both are retail in nature to a large extent. The institutional aspect of banking is not here, but the retail aspect is very much present. There are a lot of similarities in the distribution mechanism, too.
The dissimilarities are very stark as well. The nature of the profit pool and the way profits are derived is dramatically different in an insurance company.
These industries are at different stages of maturity and that is the challenge. Compared to the UK and US markets, the banking business is much more evolved in India than its insurance business. The average age of players in the insurance industry in India is four-and-a-half years.
Do you see market-linked policies getting more popular than the traditional ones in the future?
Yes and no. Each of them has its niche. Unit-linked products are obviously going to become attractive from the customer perspective. Given there is a minimum internal rate of return mandated by the insurance regulator, persistency will increase. It will be logical to assume that the higher the attractiveness of the product, the greater will be the propensity to stay in the scheme.
Following the capping of charges, insurers will be forced to take a look at the expense and commission structure. So, if you ask me if unit-linked insurance plans will become more popular than today, I would say yes. Will they be more popular than traditional products? I do not know because each of them has its niche.
Aviva has been focussing on children's plans. What is the idea behind targeting that segment?
There are two reasons for this: rational and emotional. India is going to have the youngest demography in the world. Also, we have done a significant amount of research on the financial habits of Indians. After marriage, a husband and a wife are really focussed on the kid because the child's future is very important. Child plans are very relevant as India is our largest target market.
What impact do you foresee on the way products would be designed and the manner of distribution following the capping of charges?
The customer will get a better deal as far as the IRR is concerned. It will improve by anywhere from 50 basis points to 300 basis points, depending on the product and the company. Distributors will get lower commission, which is inevitable. And like I said, the customer's ability to stick with a product will probably be higher. Consequently, we will see the lapse ratio coming down.
Will the removal of surrender charges after the first five years lead to churning of money in the industry?
If you churn money out from Ulips after five years, it will go into real estate, mutual funds or stocks. What the customer gets after the completion of the policy is significantly more attractive. Why should he churn it out?
I suspect that we are going to witness lots of slices and dices happening in the portfolio as well, and sharper segmentation happening going forward.
A government-appointed committee has suggested phasing out commissions over a period of time. What's your take on it? Will a fee-based structure work?
I believe this is an absolutely premature step. In fact, recently, the Irda (Insurance Regulatory and Development Authority) chairman came out with his take on this and, coincidentally, our views are similar as far as this matter is concerned. A large group believes that commissions induce mis-selling. I disagree. We have to address two or three discrepancies in the cause-and-effect relationship.
If you saw in 2008, the sale of accumulative bonds or Lehman Brothers' notes to millions of customers resulted in their losing millions of dollars, literally. All of those were advisory products with the consumer paying a per cent or two to the advisor. I cannot see a cause-and-effect relationship in that. That is the issue number one.
In terms of volume, close to 40 per cent of the policies are sold in semi-urban and rural areas. How do we make the average farmer reach the maturity level to understand the fee-based structure? What's the incentive for millions of agents to go to rural areas?
What are your plans for the second half of this fiscal? Any new product launches and any new innovative features?
We are looking at a couple of products. We are zeroing in on two on the microinsurance side, including a universal life type product. One of them has received the approval by the regulator and the other one is pending approval. In traditional products, we may launch a child plan.
What do you think is going to drive the consumer's behaviour next year?
We believe stockmarkets will be range-bound in the next 6-12 months. It is reasonable to expect 6-8 per cent inflation, and the consumer price index is clearly going to be in the double digits. Consequently, I believe that consumers will largely stick to fixed instruments, which could be fixed deposits. Gold is at an all-time high and real estate has not found equilibrium so far. So, I think the next year is going to be choppy as far as investors are concerned. I believe it is going to be relatively more volatile than 2009 was.
