Insurance Article, The Insurance Times 2022, The Insurance Times December 2022

Indian insurance sector – Major transformation ahead

Insurance is important for sustained economic growth-

The importance of insurance in economic activities has been recognized for many years.  Insurance is a way to protect from financial losses.  Life insurance protects potential future earnings and livelihoods of individuals and non-life insurance safeguards by protecting assets and businesses.  Insurance not only facilitates economic transactions through risk transfer and indemnification but also promotes financial intermediation.  More specifically, insurance can have effects such as enabling efficient risk management, facilitating trade and commerce, encouraging loss mitigation, promoting financial stability, mobilizing savings and fostering efficient capital allocation.In the times of growing natural and man-made/ induced catastrophes, insurance offers a substitute for State funding.

There is nothing as permanent as change-

Heraclitus, a Greek philosopher said “change is the only constant in life” and, Benjamin Franklin, a well-known US personality said “the ability to adapt to the changes will determine your success in life”.  A global pandemic, energy shortage, rising inflation, growing geopolitical tensions are reshaping the world.  A new era, drastically different from historical perspective is set to unfold.

Though change disrupts, it is important to embrace change so as to remain relevant.  Businesses globally experience volatility, uncertainty, complexity and ambiguity, often referred to as ‘VUCA’.  Resilience is necessary in managing change, dealing with the disruption and to continue to perform.  Resiliency is characterized by the ability to put forth positive effort and being open to new learning.  Organisations or people, thosewho are proactive in adapting with the times,ready to embrace change and effectively innovate do succeed in long run.

Incremental, i.e. small or modular change takes place slowly.  Businesses have seen many such changes over years. It is easier to adjust tothe incremental change.But Disruptive change is radical, powerful, does not allow time to make adjustments and almost forces all players to follow suit and accept it.  Disruptive change brings in the possibility of upsetting traditional strong players which have been operating on the strength of experience and legacy systems at the core of their processes.

What is disrupting the insurance industry?

A straight answer would be-the technology. Insurance industry in the past was seen lagging behind in the adoption of new technologies and slow to adapt to changes. Traditionally, insurance business has been heavily reliant on experienced human resources, majorly using manual processes and relying on time tested legacy systems and procedures.  Emphasis had been mainly on dependability, often linked with size, even at the cost of lack of flexibility and responsiveness.  But things are changing now.  Digital advancements, wearables, sensors,telematic devices and other technological interventions have been the major drivers transforming insurance. Newer digital technologies, improved network connections, Internet of Things, cognitive computing and blockchain are poised to transform the entire insurance value chain.   The insurance landscape is seen to be changing fast and is evident from never-before-seen things such as availability of instant quotes, dynamic pricing, specific tailor-made products with unique coverages.  Dependability and cost have no longer been the main differentiators in insurance industry though they continue to be an area of focus for some, while transparency, convenience and ease are seen as factors making the difference for customers.

Insurance ecosystem is an interconnected system of actions and services with participation by providers and intermediaries ably offeringcohesive user experience that fulfilscustomer needs and expectations. A new era in insurance is being witnessed with accelerated adoption of technologies, optimum utilisation of digital advancements, personalised product offerings and shifting business around customer experience. The legacy operators in insurance industry are getting increasingly concerned about weaknesses in their business models and the possibility of losing business to digital operatorswho are already present in the market.Covid 19 pandemic has further accelerated the pace of change. May be, that should help bridge the gap and bring insurance at par with banking and other financial services and remove the laggard tag it carries among financial sector players.

Disruptors other than ever evolving technology-

There are some other drivers of change for insurance industry apart from technology and digital interventions.  Rise of the gig economy is one of them. Also called as the peer economy, the collaborative economy, the collaborative consumption or the sharing economy, it makes it easier to exchange resources on demand and thus, increase the level of efficiency. It allows participants to transact without owning valuable items and by extracting maximum value from idle assets, possessions or talent, and thus, achieving cost and resource efficiency.  Collaborative efforts among peers and even competitors become necessary in moving towards achieving reduction in cost and resource efficiency.  Open technology architecture to share information in real-time with other product providers, channel partners and customers is yet another change that is seen happening.  Aggregators, on-line platforms, app-based business operators work efficiently and at reduced costs than the legacy operators.  The boundaries between different financial services are getting blurred.

Indian insurance sector update-

Over the years, Indian insurance industry has witnessed many changes.   Today, around60 insurers including 5 health insurers, 1 agricultural insurer, 1 insurer specialising in export credit guarantee, Indian reinsurer and branches of foreign reinsurers are active in the Indian insurance market space. Agents, brokers, aggregators, repositories, Insurance Marketing Firms, Third Party Administrators and surveyors are playing their respective roles in the insurance business and IRDAI plays the role of development and regulation.

In the Indian insurance sector, there is a mixture of old and new players.  Some are more than 100 year old, while some new kids on the block are also active.  The Indian consumers are also a combination old and new constituting old retired population, young working/ earning population and the millennials.  To remain relevant, players in insurance sector have to get past dated assumptions about what it takes to succeed, dump the idea of one-size-fits-all and design and develop products that address customer needs.  Talent in the insurance business has always been a critical issue.  While core domain knowledge and industry specific capabilities matter, insurance entities would need to onboard human resources with newer skills such as digitization and data analytics.  Recruitments will not be limited to actuaries, underwriters and claims managers.  Onboarding of hiring data analysts, application developers will also be essential. Reskilling existing resources to close the growing skill gaps assumes importance. Product innovation would be the key.  Players need to make use of data and analytics and design offerings basing on understanding of the user experience and requirements.  Ideas such as usage-based insurance and payasyougo will have to be tried with so as to offer tailored insurance policies meeting growing customer expectations. New thinking and technical competencies in underwriting and pricingof risks will be required. There will be need for collaborations and integrating with business partners. It is crucial to understand that sharing goods, services and even skills adds to efficiency and reduce costs.  The sharing economy offers access to things that might not be practical to own or obtain.  While human touch remains important and agents/ brokers still play their role effectively, tech enabled services will also have to be made available. As against full and permanent employment and working from office, alternatives that have emerged especially during Covid 19 pandemic such as outsourcing and co-working, remote working could be explored.

Insurance reach in India is still low compared to world average. Insurance penetration (premiums as % of GDP) stood at 4.2% in year 2021.  In non-life insurance business, India ranks 15th in the world with less than 1%  share in global non-life insurance market.  The plan and process of ‘insuring the nation’ is a long one.  In life insurance business, India ranks 10th in the world with just about 3% share in global life insurance.  The insurance regulator in India carries the word ‘development’ in its name, and, regulatory authority has not only been aggressively pushing the agenda of ‘insurance for all’but also facilitating the journey by active participation.  Regulator has offered sandbox for creative ideas and actions, eased the process of file and use, considering relaxation in capital requirements. Insurance Information Bureau is activated to be the single point for entire insurance industry data.  The general perception and attitude towards insurance is fast changing due to the unprecedented pandemic that made Indian population think of increasing need for effective risk protection through insurance.

Challenges in the transformation process-

Globally, insurance business is transforming, and, things cannot be different for India.  Indian consumers have a wider choice in selecting their provider, either the century old public insurer or decade old private sector companies or the newly setup tech-enabled private insurance firms. With Government action of PSU disinvestment, in terms of organisational set up, they will be coming closer to large private sector insurers in terms of their constitution and operations in the next few years. And, consolidation among private sector insurers through mergers and acquisitions is a continuous activity.International Financial Centre (GIFT) has been set up and yet another insurance ecosystem is getting developed there (IFSCA).  A unified regulator for all financial services has been established to regulate entities.  Indian insurance sector is on the cusp of a new era with a new narrative of progress.As operations face extraordinary disruptions, working out how to respond and chart the path ahead would be a challenge that would test the leadership of organisations.Without question, Indian insurance industry today is different, the growth is linked with disruptive changes, existing leaders are making adjustments to their business models and new players with substantially different business models are asserting their place in the marketplace.

Challenges and actions for making organisations future ready-

What could the new Indian insurance sector look like? Who will win and who will stumble in the new operational environment? The die is yet to be cast.

  • Legacy establishments have the advantage of being seen as trusted and time tested organisations. LIC still holds more than 60% of the market share and non-life PSUs together hold just about 50%. Private insurersand the new tech enabled insurance operators are gaining prominence in India’s insurance landscape basing on the strength of product offerings, convenience and service efficiencies.
  • People in India have been putting faith in public sector organizations, be it banking or insurance. However, the PSU and private insurers are governed by same legislation and regulation.  This offers a degree of comfort to the customers and private sector insures have been putting up an impressive performance and fast establishing themselves in Indian insurance market.  Moreover, many of them are promoted by reputed industrial and banking groups.
  • Agents and brokers have been the main business sources for PSU and big private sector insurers for customer engagement through face to facepersonal relationships. Pandemic has boosted direct, internet and app-based sales due to the compulsion of social distancing. This would make PSUsand legacy insurersto gear up and create alternate channels.
  • Regulator is considering shifting the industry to risk-based capital regime from the current prescriptive requirements. PSU insurers that engage in all types of businesses irrespective of profitability indicators will have to be choosy and reconsider selling products on the basis of capital efficiency.
  • Technology is reshaping all the industries including insurance. PSUs and other legacy operators will have to onboard the fresh talent or reskill the existing resources fast. Talent management and paying attention to critical cultural factors would be crucial in repositioning the organisations.  PSU insurers will have to take up this technology challenge not only from the view point of adoption but also from the angles of human resources, mindset and acceptability.  They will have to change the hiring process and compensation levels.
  • Technology will continue to evolve and will be at the forefront of competitive working and sustainability. What impact will the next wave of technologies have on traditional as also the new players will have to be seen. In the wake of rapid technological advancements, keeping up to date would be a challenge for all.
  • New lean and thin insurers are achieving savings through collaborations and taking advantage of the sharing economy. PSUs and other legacy operators can also make use of sharing economy through effectively employing the idle assets and resources at their disposal.
  • As the customers adopt and feel comfort in using internet, new digital technologies, wearable devices and sensor-based operations, insurers will have no choice but to match customer expectations and offer the services that way. Only when designed and implemented quickly and effectively, improved business processes could deliver substantial benefits to organisations.
  • Moving to IFRS, Risk Based Capital and supervision will be a task for all the players in the ecosystem, be it public sector, private sector, small or big players.
  • Ultimately, in the long term,the capital-deep insurers leveraging on new technology and lower operating costs wouldemerge successful. That would also prepare themto ably manage the wave of mergers and acquisitions on the basis of their stress freebalance sheets.

Exiting times ahead for the Indian insurance industry-

When designed and implemented efficiently and effectively, operational transformation becomes feasible.  Difficult times bring out the best out of individuals and organisations. During the difficult times of pandemic, Indian insurance industry demonstrated remarkable flexibility overcoming numerous obstacles.

Adaptability is the critical success factor during transformation. Those insurers that succeed in gathering customer experiences, understanding customer expectations, designing service offerings by integrating new technologies, building partnerships and ably attract and retain talent would come out as winners. As said by Charles Darwin, it is not the strongest that survives, nor the most intelligent, but the one most responsive to change.

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