By R.Devaprakash
Risk transfer mechanisms are subject to close scrutiny in the aftermath of big disasters. Although companies end up paying hefty sums as insurance payouts, the adequacy and timeliness of claims are far from desired in the context of the demand market. This questions the relevance of organised insurance. Between 1990 and 2016, the total loss from natural disasters in India has been assessed at over USD 48 billion, out of which the insurance sector compensated just 11-12%. According to Federation of Indian Chambers of Commerce and Industry (FICCI), this reveals an enormous gap in coverage and an opportunity for microinsurance.
It is an open secret that most profit-making insurers derive a major share of their profits through investments. The non-life insurance industry receives partial support through higher growth in premium and heavily subsidised agricultural insurance. The underwriting loss of general insurance industry in India has increased by 42% in 2016 from the previous year. Penetration of general insurance in India was also very low at 0.72 per cent in 2016.
Life insurance vs. the industry
Life insurance is structurally challenged with various savings-based products being linked to interest rates. Thus, insurance growth becomes coincident with economic progress. Bancassurance refers to the selling of life assurance and other insurance products and services by banking institutions. It contributed to contributing to 52% of private life insurers business in 2016. Although insurance is a two-century old sector in India, life insurance penetration has been risen modestly to 3.4% in 2016 from 3.3% in 2015. Insurance density in India stands low at USD 59.70, compared to the global average of USD 638.30. The persistence of life insurance in India is in for a big question as in 2016. The Swiss Reinsurance Company observed that overall Indian insurance penetration was at a 10-year low in 2015.
Insurance works when made compulsory
Whether it is Jan Suraksha Insurance schemes with casualty insurance reaching 110 million for accidental death and 35 million for natural death, the bancassurance model, Indian railways’ online ticketing or crop insurance linked to crop loans, insurance has made considerable inroads in different domains. However, in the past, the market has needed a doctored push. Evidence suggests that agricultural insurance adoption rate is high when it is linked to credit, input, technology and market.
Data sharing protocol
The insurance industry goes to great lengths to keep protect data from other players. Blockchains may unravel the web of secrecy through decentralised data sharing arrangements, including the customers. This is likely to change the terrain of the insurance industry and encourage providers to come together on this important protocol. Companies desirous of honouring profit sharing protocols with client-aggregators and brokers are expected to see a spike in business.
The industry as a sellers’ market
Complaints regarding claim rejections have been on the rise. Insurance providers still suffer from the allegation of overcharging clients. The cost of pure premium is estimated to be 60%, leaving significant administrative costs due to internal inefficiencies. With the industry still suffering from information asymmetry, if the average premium costs keep rising, insurance will continue to be a sellers market. Intensive research in understanding demand market of this hard-to-drive financial service may be insufficient to absolve the industry.
Disruption through innovation
With uncovered protection gaps reported at 92%, 76%, 70% for life, health, and crop insurances respectively, the industry is grappling to realise the full potential of disruptive innovations in distribution channels. These solutions have the flexibility for bypassing the agents and enable distribution through retail stores, leveraging fintech, and tie-ups with companies having a vast rural network. This will create a level playing field for private insurers, consequently inducing competition and lowering prices. The industry may need to be more inclusive by changing tactics, revamping business models and reinventing their distribution channels. Faced with tough entry barriers and regulatory uncertainties, it is difficult for firms to set the price in a languishing market. An open architecture propelled by a distributed technology like Blockchain that eliminates information asymmetry is necessary to usher in an era of providers who collaborate to compete and compete to collaborate.
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