A look at the general insurance sector in India — Part 2
We continue to look at the key issues driving the general insurance industry
Last time we looked at the insurance industry, players, market size and segment wise share of the general insurance business. In this part, we’ll discuss the sole of insurance industry — SALES. We look at various distribution channels, incentives and reward structures and take a deeper dive into health and motor businesses. In the final part we will look at cost structure of insurance companies, overall claim settlement track record and capitalization metrics that demonstrate the stability of these companies. I want to specially thank IRDAI for providing detailed data tables that have helped me write this article.
Uniqueness of general insurance
Before we go into distribution channels, let us step back and analyze what makes general insurance stand out. If you speak with any sales or business head in insurance for 10 minutes, I bet 100 bucks that you’ll understand what’s unique in this business — and that’s its tagline “Insurance is never bought but always sold”
Being a lateral in the insurance industry, I was quite amazed at how deeply this wisdom is entrenched into people — it’s almost like an ‘axiomatic truth’. The reason why I compare this with Lannister’s favorite line (for GoT fans)— when everyone believes something so strongly, it doesn’t matter what the truth is.
Just like ‘pop corn’ is not a primary need for a family going for a movie, insurance is not a primary need for most customers. Staying healthy, obtaining financial security, owning a car or buying a home are some primary needs of people. ‘Insurance’ is a secondary need that protects from downside scenarios to the primary need.
Fact that most people don’t spend as much time thinking about secondary needs makes insurance a tough sale
When we look at distribution channels, it becomes abundantly clear how this phenomenon comes into play. Let’s see how…
Insurance distribution channels
Broadly speaking, there are 5 channels in the general insurance sector:
Individual agents: Registered individuals who sell insurance directly to customers. Direct channel are sales booked by insurance companies themselves. Brokers are registered Intermediaries who can sell policies of multiple insurers. Corporate — Bank channel includes sales made through distribution networks of banks. Corporate- others channel includes non-banking companies that include securities firms, housing finance, wealth management, credit card companies etc.
In terms of sales per channel (on a gross premium basis), individual, direct and broking channels account for 85% of the market.
The thing that is unique about general insurance industry is 75 paisa of every rupee of premium is NOT SOLD by insurers themselves
In today’s world where every business aspires to tightly control its sales channels (think APPLE or TESLA or AMAZON) to manage the customer buying experience and influence customer loyalty, here is one industry that is happy to outsource the sales/ customer engagement to external partners.
It gets even more interesting when we look at segment-wise breakup of distribution across different channels:
It is surprising to note that the biggest and fastest growing non-general insurance segment, motor, has only 16% of sales coming from Direct channel. Overseas Medical Insurance (International Travel) fares much better with half the sales coming from direct sales.
Domination of partner driven sales is a manifestation of a strong push-driven sales process.
‘Proximity’ to customer is the biggest advantage in insurance sales and this becomes even more critical in segments like ‘motor’, 2-wheeler and overseas travel. The incentive to not go shopping separately for insurance is very high from a customer standpoint. Let’s look at the distribution channels of motor insurance to understand this better.
Motor insurance
Of all segments, motor insurance is unique because this segment sees a very strong influence of OEMs (read ‘car show-room network’). Since OEM distribution network has a first connect with a customer, almost all customers purchase motor insurance through this network.
Since insurance costs less than 3% of car purchase, customers psychologically don’t mind bundling insurance with car.
All said and done, a motor insurance is a simple product and customers don’t do a lot of research to find a best motor insurance policy. Honestly speaking, product features are almost the same — if something works with one insurance company, it is quickly copied by the others. When product differentiation is low, whoever is the closest to the customer obviously has a huge advantage.
Here is a look at how motor insurance distribution works:
Are OEM’s hurting innovation in motor?
In my opinion, an unequivocal YES. OEM’s are stifling product and marketing innovation because any change in status quo hurts them badly. It is very easy for insurers to offer discounted products or differentiated products online or via direct sale. The fact that they cannot do it shows the extent of control OEM’s have on insurers.
When 60% or more of business comes from one distribution channel, it is natural that this channel dictates how business is run
If any insurer does not co-operate, an OEM can just make life difficult for customers that hold policies issued by that insurer at the time of claims. Customers will get spooked and simply avoid buying that insurance from next year. This kind of control obviously leaves little room for innovation from either the insurer or any other intermediaries.
Rise of online channel
There is a massive opportunity for online channel in the ‘renewals’ business. Insurers price the second year renewals very aggressively to get customers to switch their insurance providers.
For second year renewals, there is almost a 35–40% drop in insurance premium from first year.
This price discount is enough incentive for customers to do price shopping and pick the insurer with least price. Intense competition on price, easy online buying, and foray of tech startups has meant that online motor insurance is the fastest growing online segment in insurance.
Online channel has seen a 60–80% CAGR in last 3 years. Bulk of this growth is because of motor insurance.
Health insurance
Health insurance is broadly classified into 3 segments — Group Health Plans, Government Plans and Individual Plans that include family health cover. Government plans include schemes like Rashtriya Swastha Bhima Yojna for poor and the under-privileged. Group health plans are taken by companies for their employees and insurance firms offer structured plans that are very different from individual plans. Individual plans are available to retail customers and are standardized.
Group health plans cover is largely managed by corporate brokers who have the resources to provide exclusive claim support to corporate clients. Policies themselves are very comprehensive and have lesser restrictions compared to retail policies. Group business is ultra competitive and the incurred claim ratios in group health are very high. Most insurers are bleeding in the group health business.(more on this in part 3)
Since AskArvi is looking closely at the retail market, let’s quickly look at how the individual health plan distribution is working in India.
An overwhelming percent (~70%) of distribution is controlled by unorganized agents whose main advantage is a relationship with customer. Agents are also favored by older customers or customers with a health history because of the ‘perception’ that they will help at times of claim.
Unlike motor, health insurance distribution is dominated by unorganized ‘agents’ with lesser negotiating power
Another important metric is the unit premium across channels — all things being the same, unit premium of plans sold by banks and insurers are the lowest, then comes online players and finally come the brokers. Brokers do a better job of discovering customer needs and hence are able to offer a better product to customers.
We at AskArvi are most bullish on the health segment because nobody has disproportionate control in segment that stifles innovation. It is a horizontal play where your biggest competitor is a ubiquitous agent selling health plans. Using technology to give a better, consistent and transparent buying experience is definitely a solvable challenge.
Commission structure
As in any business that depends largely on external sales teams, insurance business has a heavy commission expense. On average, industry is paying one-third of premium as commissions or management expenses.
IRDAI officially puts a segment-wise cap on commissions that can be paid to intermediaries. Insurers also offer target based incentives to intermediaries leading to a higher net commission. Unlike term-life insurance, where incentives taper down quickly from second year, non-life insurers pay a fixed commission every year on renewals.
A relatively flat commission structure ensures intense competition on every renewal in segments like two-wheeler, four wheeler and overseas travel.
Challenges for online distribution
Points discussed previously give a broad sense to the reader in building an online distribution business. This is even more critical for intermediaries who don’t have control on the under-writing or claim support process. Broadly speaking, here are a list of challenges for distributing products online:
1. Lack of differentiated pricing
Online distribution channel would have grown leaps and bounds had it not been cannibalized by insurance companies to favor certain interests. As mentioned above, OEM’s and other corporate agents exert enormous influence on product pricing when it comes to online distribution. Not passing discounts to customers who shop for insurance online is probably the biggest reason why online buying hasn’t taken off in a massive scale.
2. Control ‘At-source’
Dan Ariely in his book “predictably irrational’ runs a social experiment — when a customer likes a pen worth 25$ at a store and comes to know that the same pen is being sold for 18$ at a store 3 miles away, more often than not, he will make the trip. But when a customer is buying a suit worth 400$ at a store and comes to know that the same suit is being sold for 393$, most customers would just go ahead and buy.
A similar thing is happening in the world of insurance — customers prefer to bundle insurance with primary need (travel or car or home) instead of shopping for insurance separately. Only when customers perceive a large enough benefit of un-bundling will they go out to shop for insurance.
Every online distributor has to consistently invest in customer education on the benefits of shopping for insurance.
3. The narrative
When we met Aditya Birla Health team, the one thing that impressed us most was that they are changing the ‘narrative’ from ‘insurance’ to ‘wellness’. The way they engaged with customers was ‘How can we help you stay healthy’ rather than ‘we can help you when you get hospitalized’. Current positioning is a negative narrative and the only company that is really benefiting from this narrative is, hold your breath, GOOGLE. We’ve analyzed the spending patterns and cost per lead for insurance companies over Google and its mind boggling.
I will stick my neck out and make the following prediction based on my understanding.
No company, be it insurer or intermediary, can build a long term business on the back of GOOGLE. Period.
There has to be an alternative narrative of making people interested in buying insurance — as to what that alternative is… it is yet to be discovered I guess.
To conclude, insurance business has several distribution related challenges. People are getting paid just because of relationship value and the commissions paid are disproportionate to the services offered. Market is not growing as fast as it could because of intrinsic challenges in existing distribution network.
In the concluding part, we look at the health of insurance companies and how they are faring viz-a-viz international insurers. Knowing an insurer’s business helps us at AskArvi to appreciate their concerns and align our interests with theirs so that we can offer real value to our customers.
