26. Payments in — Insurance Sector
Two Scottish men, Robert Wallace and Alexander Webster, came up with idea of Insurance in 18th Century. Idea is simple, build a fund by collecting small periodic amount (‘premiums’) from policy holders and give one-time settlement to policy holder or her family (in-case of death). Invest collected funds for good returns so that claim settlement is done from returns keeping fund corpus intact. Over the centuries the assessment of risk, investment methods, things that can be insured have evolved but concept remains same.
I pay Rs.20K per year for a health insurance with Rs.5L coverage. I may pay premiums for decades but never claim any amount and it is also possible that I may claim cover amount within 4 years of premium payment. To be in business, insurance company has to make sure outflow is lower than inflow. To reduce risk of outflow, insurance companies decide on whom to give insurance (e.g. mandatory medical check-up to issue Term Policy) or add pre-conditions (e.g. pre-existing diseases are not covered or no claim within 1 year of policy purchase) or increase the premium amount to compensate for risk (E.g. a smoker pays more premium than a non-smoker for same health policy)
Common trait between ‘Insurance’ and ‘Payments’ is risk adjusted pricing. Why a utility company has lower MDR (PG Rate) than eCommerce company or why POS merchant enjoys lower MDR than online ticketing merchant is exactly same reason why non-smoker pays less premium than smoker. Everything is about risk adjustment
In India, Insurance sector is Governed by IRDA (Insurance Regulatory and Development Authority). Two main types of insurances: Life and Non-Life (General). General Insurance can be for health, vehicle, property, travel or even for your mobile phone.
There are two types of entities: Insurers, the companies that underwrite the risk or in common language the companies that give you insurance (E.g. LIC, HDFC Life) and Web-Aggregators, companies that sell insurance policies of Insurers (E.g. Policy Bazaar, Coverfox). Some web-aggregators collect payment on their page using their own MID (E.g. Policy Bazaar) and some web-aggregators redirect user to Insurer’s page for payment.
Below are the requirements related to Payments:
Requirement 1: Multiple use cases of payment
- Use cases in insurance (1) Policy purchase (2) Policy renewal
- Biggest challenge is policy renewals on time. Although there are various recurring payment solutions (SI on Cards, NACH e-Mandate) but customer may not opt for such solution if periodicity of payment is not frequent (E.g. will you set up SI on Card if premium payment is once a year?)
- As alternative, the insurance company deploys solutions such as sending payment links to remind policy holder about renewal and link will redirect user to checkout page
Requirement 2: Channels of payment
- Insurance company deploys multiple channels for policy purchase and renewal: website, app, web-aggregators and its own collection agents. Payment solutions should cover these channels
- Both online and offline payment solutions are deployed for these channels to cover first time and recurring payment use cases
- Agents either collect cash, cheque or carry tablet. The tablet can have PG integration
Requirement 3: All Payment Modes
- Credit Cards, EMI on Cards, Debit Cards, Net-banking, UPI, wallets, Containers are allowed
- Decision to enable a payment mode is dictated by practicality. Example: If ticket size is small then EMI on Cards is not useful but wallets are useful but ticket size is big then wallets are uselss
Requirement 4: Charges
- PG charges are typically lower than that of eCommerce sector; Credit Cards: ~1%, DC: Standard RBI rate or Flat Fee, NB & UPI: Flat Fee per transaction
- PG charges are either passed on to customer as surcharge (E.g. LIC) or absorbed by merchant (E.g. HDFC life)
Requirements 5: Settlements
- Standard settlement time of T+2 days is followed but quite possible to get T+1 day settlement
- Settlement amount is either gross (in case of surcharge configuration) or Nett (in case of upfront deduction model)
- Insurance company may want product wise settlement. Example: Vehicle policy should go to a/c ABC, Health policy should go to a/c XYZ. This can be achieved either with scheme code integration or use different MID for each use case
Requirement 6: Refunds
- A new policy holder may ask for cancellation of policy (within specified time period) and considering ticket size is big, refunds needs to be efficient
- IMPS/NEFT modes are also used for faster refunds
Requirement 7: Success Rate
- To buy a policy, user has to fill lot of details and after completing all formalities if transaction fails then you have angry customer who may defer buying
- Large number of policy holders do not renew policies so if any user intends to renew policy then payment shouldn’t fail
- But policies are purchased or renewed based on other criteria (insurance company, coverage, claim settlement ratio etc.) so even if transaction fails customer will not switch immediately to Insurer as intent of purchase is higher. Overall, success rate is important but not critical
Use Cases and Payment Solutions:
There are two main use cases for payments: Policy purchase and Renewal (periodic premiums)
A. Save Card: Insurance has repeat use cases as policy holder will keep making periodic payments. But those payments are so stretched (once or twice a year) so saving card doesn’t have much value.
B. Recurring Solutions: There are many recurring payment solutions but adoption is very low because a user who will make payment once a year will not sign-up for the mandate. If periodicity is monthly or quarterly then user may sign-up for mandate.
C. Mobile App: Mobile Apps are not important for insurance companies. Considering one has to fill lot of details during policy purchase so a desktop/laptop is better than mobile. Also, you pay premium either once or twice a year so why will you install an App that has very less utility
D. Claim Settlement: Policy holder will receive interim bonuses, coverage amount and maturity amount. These disbursements are done either by cheque or by transferring funds to policy holder’s account.
E. BBPS: Insurance premiums can be paid through Third party Apps such as PhonePe, PayTM etc. Insurers are on-boarded on BBPS platform by BBPOU and customers of agent/BBCOU can make premium payment. Transaction charges (PG charges) will be borne by agent and Insurance company will give a flat fee per transaction to BBPOU. Considering, agents are keen on driving transaction counts irrespective of cost so a promising payment channel for Insurers.
India is one of the under-insured countries in the world, that means there is huge scope for growth. The sector suffers issues such as high costs related to customer acquisition and lower policy renewals. As the sector is moving towards ‘digital’ with paper less on-boarding till claim settlement, online payments will play crucial role in this sector.