is one of the key mechanisms by which we can provide social security in the country. Besides a large number of poor people, we also find that Indians are hugely under-protected. A lot of improvement has taken place in the last few years towards highlighting the impact of insurance.
From an investment point of view, we have very good potential, and insurers play a big role. At a macro-level, look at the funds we have at our disposal; when western markets are growing at one to two per cent, we are looking at 30 per cent. India is now the tenth largest life insurance market in the world, and fifteenth largest non-life insurance market in the world. This is around $80-90 billion of insurance premiums in the country as of now. Investment of insurance funds in infrastructure building of the nation will play a big role.
The focus of the Budget on the rural economy and infrastructure is highly positive. If income levels of 60 per cent of the population go up, then to that extent, insurance companies will get more business. Additionally if aviation and transport projects take off, there is going to be huge potential for the sector. The government’s focus on insurance as a social security tool and also a measure for risk management is good. Besides, the government plans using Jan Dhan accounts for micro-insurance and expanding three schemes: Pradhan Mantri Fasal Bima Yojana (PMFBY), Pradhan Mantri Suraksha Bima Yojana and Rashtriya Swasthya Bima Yojana (RSBY). With all this, general insurance will be a Rs 10 trillion business by 2030, which is eight times growth over the next 12 years.
As a country we spend close to four per cent of GDP on health care, which is over Rs 5 trillion a year and of this, over 60 per cent continues to be out-of-pocket. Health insurance in itself was about Rs 330-340 billion. The government realises that along with health care delivery through government hospitals, primary health centres and so on, there need to be financing solutions. On the demand side we are seeing an uptick, and on the supply side we have a favourable and stable regulatory regime and more new players. This has brought in more supply and more sophistication to the products. Health insurance will become a more vibrant space with more products and better supply.
There has been tremendous progress both in terms of growth and the underlying quality of the value delivered to the end-policy holder. Cashless programmes in both medical and motor vehicle segments have helped deliver a superior experience and have reduced the trust deficit between consumer and insurer. Disclosures on how the claim behaviour happens across the industry is virtually absent in a meaningful way, which I think should progress this year. There are lots of positives, but a lot of homework needs to be done.
The new National Health Protection Scheme (NHPS) will provide insurance of Rs 500,000 a year to 100 million families. Where will the money come from?
This is a great scheme and the government has clarified time and again that money is no constraint. We should believe that the government will find ways and means of raising resources, and there is also a 60:40 split between the Centre and states.
The real challenge is how to run it and make sure that value is delivered to the ultimate consumer. This scheme will eventually bring in the infrastructure, with the money which goes out as insurance claims, resulting in new hospitals in small towns. With 10 years of experience with other mass insurance schemes, we are fully geared to implement it effectively and bring value.
Can the state deliver it?
When the crop insurance scheme was launched, the finance
minister had said that the intent of the government was to move towards a fully insured and pensioned society, given that we don’t have state care. This is a move in that direction, and the PMFBY scheme has worked quite well. While there are concerns on the pricing, only actuarial pricing will make it a sustainable scheme. We are confident that the government will roll out a very good scheme, and tie up all the loose ends before the launch.
Aren’t there concerns that the scheme will cover a large number of people for relatively low premium?
Gulati: There is no ambiguity in anyone’s mind that this scheme is needed.
When we look at the incidence rates, the average claims sizes and so on, what was earlier estimated to be a Rs 750-800 per family annual premium is now Rs 300-350 premium. That’s the beauty of the law of large numbers working in your favour.
When RSBY was set up in the poorest districts of the country we were concerned that there would be no health care delivery due to non-availability of hospitals. However, we underestimate the entrepreneurship ability of doctors and health care professionals. The moment there is financing available and a steady supply of patients, the medical fraternity would be willing to move out of urban centres and go back to their home districts and even set up 15-bed hospitals.
Listing has been a big thing that has happened this year, how has life changed ?
For most of us life has not changed as we have always had boards to answer and deliver numbers. Obviously, listing brings a completely different level of scrutiny and requirements of corporate governance, which you don’t have to necessarily follow when you are not listed. As listed companies, we have a huge job to do in terms of educating the retail investors, because insurance is a subject which all of us are still trying to understand, so how can a retail investor understand us.
Even though we did not think of when to list, we have followed a corporate governance regime that didn’t need any updating on being listed. If you look at our annual reports, we have been much more forthright than what even Insurance Regulatory and Development Authority of India (Irdai) requires.
Because insurance is a long term business, whatever is good for the policy holder is good for the shareholder. As long as we do things in the policy holder’s interest, we will deliver value to shareholders. Margins actually improve if you are selling the right product to the right person.
Are investors understanding the business?
While the understanding of life insurance is catching up with investors, but not of non-life and especially reinsurance as it is a B2B business. At analyst conferences, it is a challenge explaining the nature of our business and that we don’t work like a PSU, but like an Indian MNC. We tell them we work in line with international best practices, and benchmark ourselves with global peers.
So I’m sure that it is only a matter of time, a few quarters that they will understand the business, because we saw a lot of interest now as they will understand both non-life and reinsurance segments.
Are you comfortable to disclose claims settlement data every quarter?
The regulator required us to disclose claims data anyway in its annual report. Now instead of every year when it takes some time to come, they will be disclosing it every quarter. As per the Insurance Act, we anyway have to honour every claim after three years, and it doesn’t matter whether it is a fraud or not, so you are talking about claims data only for the first three years.
As a broking firm representing policyholders, we find that there is an absence of regulatory requirement to publish the claims settlement behaviour of each insurance company with regards to the size of claims lodged. We have claims data by numbers, so a Rs 10 billion claim not-settled and a ~1 billion claim not settled, will both be counted as one, which is complete misinformation.
Why are insurance products so complicated?
Gulati: An appropriate way to look at a product is what is covered, what is excluded and how it is delivered and experienced by the customer. In a market where we have a high rate of under-penetration, the first few customers who come in and buy may be the riskiest, which is why in retail health insurance we come out with wait-periods, pre-existing wait periods, named exclusions etc.As the penetration rate goes up, logically some of these barriers will come down.
How do you check mis-selling?
The data is very clear that insurance companies have done a great job against mis-selling. Insurance industry realises that mis-selling is bad. Work is still required, we come across instances where if there isn’t mis-selling, there is misrepresentation or misunderstanding or some parts are not disclosed. The best way to avoid it is by keeping the product simple, which most companies have worked towards but it is an ongoing process.
How do insurers deal with high concentration risk like in crop insurance?
The way insurers deal with it is to spread the risk to reinsurers. For example, 80 per cent of our risk is reinsured and reinsurers further reinsure it with other reinsurers. The risk is thus spread across various insurers. So there is absolutely no risk of concentration. We as experienced insurers know how to de-risk ourselves. We have repeatedly faced natural calamities and billions of rupees of losses. But we are able to handle it all through an appropriate reinsurance programme and that’s the beauty of insurance- spreading of risk.
Is there a problem with the order of preference issue for reinsurers where Indian reinsurers get top preference followed by the branch of a foreign reinsurer?
It has certainly created a lot of controversy within the insurance market. The order of preference effectively delivers a right of first refusal to a prescribed set of reinsurers. And we all know when you take away meaningful competition, the industry will suffer in all aspects — pricing, service, claims, and innovation. And that is a concern for us who represent the buy side, that is the bar of any insurers or reinsurers and many of them have spoken. What this order of preference prescribes is that before a business is given to a freely competitive market, you need to offer to a particular reinsurer, and if that reinsurer says no, then you go to the second and then third. This would be anti-competitive and will create a lot of challenges.
Vaidyan: Irdai has said that we need to maximise Indian market capacity and retention; this is just an extension of that. Order of preference is not right of first refusal but right of offering, it will show to the Indian reinsurer first.