Life insurance: key challenges
Introduction:
After a decade of strong growth, the Indian insurance
industry is currently facing severe headwinds, grappling with slowing growth,
rising costs, deteriorating distribution structure since the industry was
liberalized and opened to private and foreign insurers, the life insurance
segment witnessed a year-on-year decline. For the first time in 12 years life
insurance industry witnessed a decline in the first year premium collected in
FY12, which declined from INR1,258 billion in FY11 to INR 1,142 billion, a drop
of approximately 10%.
Discussion :
Reasons:
Products Strategy and
design
According to IRDA officials in most of the ULIP products,
customers are being lured with the promise of decent maturity benefit but in
case of claims (in the event of death) the benefits are sometimes lower than
the premiums.
The regulator is keen to oversee the product design more
closely to better protect policyholders falling prey to low life risk covers.
The challenge for insurers, therefore, is to develop innovative products
without crossing the boundaries of insurability.
Cost
The Insurance Act, 1938, prescribes ceiling on management expenses, which include
administration expenses such as commissions, fund management fees,, and
expenses on marketing and advertising.The challenge for most life insurers is
to control these expenses and increase efficiencies with a view to achieve long
term profitable growth .
Taxation
The insurance industry is facing challenges with respect to
taxation on both the demand and supply side. On one hand, the service tax
charged to insurance companies has been increased to 12% from the existing 10%
— rate on life insurance policies. On the other hand, the 2012 Budget mandated
that the sum assured be at least 10 times the premium compulsory service tax
has been levied on all insurance.
Distribution
The main distribution channels in life insurance are the
traditional individual agency channel, corporate agency (banks), broking
channel and direct selling (which includes online selling). From an industry
perspective, it is an agency-dominated business with maximum premium being
sourced from the agency channel.
Prospects and
challenges of various channels
While most companies have adopted a multi-distribution
approach, share of direct channel, brokers and other alternate channels remains
low. Most companies are seen to be focusing on cost efficient channels The use
of internet to distribute life insurance products has not made a significant
impact so far . Low penetration continues to be a critical hurdle for insurers.
Conclusion
The business model for insurers has been changing
continuously for the past couple of years on account of regulatory changes.
While the regulatory changes aimed at customer protection and increasing
transparency in pricing and operations, it gave the industry very little time
to adjust, leading to a lot of uncertainty in the market environment. In
addition to challenges in growth, pricing and profitability, life insurers are
faced with significant challenges on the distribution front with uncertainties
in alternate channels such as Bancassurance. The cap on commission and expense
ratios further imposes restriction on competiveness of insurers and limits
expansion of distribution channels.
Fair Attempt but words > 500?????
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