30 October 2024
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After taking over the reins of ICICI Prudential Life Insurance as CEO and MD in June 2023, Anup Bagchi has been heard talking about making life insurance simpler, which is a big positive for policyholders. In an interview with Nidhi Sinha, Editor, Outlook Money, he talks about how simplifying insurance will help people buy the right product, curb mis-selling and reduce the possibilities of early surrender. Edited excerpts:
You recently talked about making life insurance simpler. Why is that so?
Our interaction with customers shows that they are anxious about buying insurance, mainly because of the complexity.
The anxiety stems from the fact that they are not confident about what they are buying. I have seen it across the banking, financial services and insurance (BFSI) industry that customers shy away from complex products, even if they are good, and flock towards simpler products.
Since these are long-term products, they are not liquid and there are costs attached to exiting them midway, the decision becomes that much deliberate.
But certain jargons are intrinsic to insurance. For example, you cannot think of insurance without understanding the concept of pre-existing diseases. What is the solution then?
The solution is explaining patiently and asking the right questions. As an example, for the medical part in life insurance, usually customers are asked to just make disclosures on their own, but these may not be validated all the time. This can lead to issues at the time of making a claim.
We have started simplifying the questions. For example, one can just ask, “Are you taking any medicines?” rather than asking “Are you under any medication?” It’s the same question but worded more simply.
The complexity comes because the simplified words also need to be legally enforceable. So, to make it watertight, one ends up mystifying it too much.
The Insurance Regulatory and Development Authority of India (Irdai) has set up a committee to simplify documentations and wordings which are legally enforceable.
It is important to explain that disclosing a disease does not automatically mean it will not get covered. At a slightly higher charge, the same can get covered. One must balance deliberate misrepresentation against a genuine situation.
Irdai recently came with the customer information sheet, which may make it easier for customers to understand a policy. But what role can agents and sellers play in making customers understand as it is that one-on-one discussion that finally makes a difference?
Bringing in the customer information sheet is a positive. The banking industry has a “most important terms and conditions” sheet, and the mutual fund industry has it (scheme information document).
I am glad Irdai has also brought in something similar because people must know what they are buying. Anything which increases trust is positive.
A policyholder must be clear about the contract, how much they are going to pay, how long they are going to pay, when they will get money, what are the costs, etc. I think there are 7-8 things customers are interested in, and they should be told about them upfront. If the product is good, people will come back because life insurance products are unique to the sector, and those risks are not covered by other products from the financial services sector.
What we have tried to do is create an explanatory video of 30 seconds. The idea is that in 30 seconds, you should be able to explain to the customers the most important things about a product so that they know what they are getting.
We are sending these videos to our partners as well, so that they do not miss out on any important aspect. We must be careful that important things should not get inadvertently missed.
The market now has standard policies but there’s emphasis on customisation as well. Can the two co-exist?
Our feedback from customers is that they want options. However, when you give them unlimited options, which may be complex, they will get confused.
Customisation works better when customers understand a category. But when they don’t fully understand the category, customisation can confuse them. From a behavioural finance perspective, both should be provided, but standardisation can fulfill the needs of 80 per cent of the customers.
Though Irdai has recently come up with a proposal that may increase the surrender value of policies, surrender charges remain an issue. People sometimes find themselves stuck with the wrong policies and want to exit. Shouldn’t the surrender aspect be simplified too so that people understand the cost of exit?
Customers need to have clarity about the kind of protection they are looking for. In fact, there are hardly any complaints when people are buying for protection. Even in the case of annuities, there are no complaints because the buyers know that they pay a lump sum, and they will get back some money every month or the spouse or nominee will get the money if they were to pass away. Similarly, for guaranteed products, people know that they are paying for, say, five years and I will get x amount of return at the end of the term.
There is little confusion when it comes to unit-linked insurance plans (Ulips) as they work like mutual funds, where net asset values (NAVs) are published etc.
Then there are products which build corpus as well as give protection. It is in these products that customers sometimes do not get clarity on what they would get if they had to surrender.
It is an issue of need of liquidity, either temporary or permanent.
Temporary liquidity issues can be resolved through loan against policies. It is when the policy needs to be surrendered that the real issue comes up. Clarity around how much one gets back would be useful as well as the process of surrender can be made easy. One has to bear in mind that all long-term corpus building products like the National Pension System (NPS), Provident Fund (PF) etc. do not provide for liquidity except in special circumstances.
Irdai has come up with a discussion paper on surrender value. It envisages a higher surrender value for non-linked products to the policyholder, which would encourage demand for products. The product and the distribution structure will have to be adjusted for those changes. Transparency on surrender will again increase trust, which in turn will increase demand.
Many products in life insurance might be simple on the outside but complex inside, for example, guaranteed products. However, most products are long-term and have to be risk-managed (hedged) at the backend. Then there are products which have part guarantee returns and part floating returns basis investment returns on the premium paid. Those investment are for long term in line with the policy terms. When the policy is surrendered, the backend investments and hedging need to be unwound which would have associate costs. To prevent discipline and manage asset liability, simple products like FDs also have a breakage value. Similarly, mutual funds also have exit load if one exits (surrenders) after a particular duration.
In insurance, in market-linked investments like Ulips, there is no breakage or surrender costs post a lock-in.
Additionally, there are costs of creating and distributing the products. Thus, the calculation of surrender value takes many of these things into consideration. A simpler and transparent way of surrender value would be a step in the right direction. One can argue that currently the calculations are complex and can be made more intuitive for the policyholders.
You have been talking about trust, but there are reports of mis-selling even by the bancassurance channels used by some of the “trusted brands”. Irdai, too, recently called for a review of bancassurance, perhaps with the intention of curbing mis-selling. Your comments.
I will go back to my first answer. If you make anything complex and the process tough, the chances of such cases happening are high. I have been with the banking industry for long and it is very difficult to mis-sell a bank savings account or an FD because customers know what they are getting into.
The solution to this problem is to simplify products and the on-boarding process for customers.
Distribution across all sectors essentially plays three roles. One, to make the product available and accessible to customers.
Two, they play the role of a translator if the product is complex. Sometimes things get lost in translation, but not necessarily intentionally.
Three, they help navigate the process if it is tough and complex. We want to focus on numbers two and three and want to demystify products for the customers and make the process simpler.
Even in mutual funds systematic investment plans (SIPs) of simple MFs, ETFs and index funds are popular because of simplicity, good process and low complexity. We have to work very hard as an industry to make that happen because the need for life protection, critical illness protection, protection for loan repayment and retirement penetration is very large.
Talking about retirement, what is it that the life insurance industry can provide to seniors or people who are planning for retirement?
Globally, there used to be defined benefit which shifted to defined contribution. However, people’s demand for defined benefit is high. If you see many of our investment products, they are all defined benefit because there are guarantees. They, in turn, are risk managed by buying government securities to mirror the cash flows.
A large part of the retirement corpus needs to be in guaranteed products because interest rates are very volatile. The FDs that are giving 7.5 per cent now were giving 5 per cent two years ago, and the present rates may go back to 5 per cent as the economy stabilises and liquidity comes back.
Personally, I've invested in government securities giving 14 per cent in 1996 and within 8 years in 2004 it went to those giving 5 per cent—such is the amount of volatility in rates in India.
Saving for retirement needs the defined benefit approach partly and defined contribution as well, because if the market grows, you must take part in the upside as well. It is important to diversify to manage the risk.
