ICICI Prudential, the largest private life insurer, is the only company to have retained its position since liberalisation. In an interview with ET correspondent, ICICI Pru Life MD Shikha Sharma, the longest serving chief executive of any insurance company, speaks of what is required of the industry to deal with the present economic situation.
What has been the impact of the crash in the market on customer behaviour?
We have not seen any big shift in consumer behaviour, so the business continues to remain at similar level of persistency so far. We have also not seen any change in the product mix, so it still remains primarily unit linked. But growth is definitely lower than what was anticipated.
That is a big statement because we had, in any case, anticipated that growth would be slow because of various extraneous reasons. Even a flat market would have meant lower growth. But the volatility in the market has definitely slowed down growth even more. I think, that it is a reality and the industry will have to rethink some of its own strategies.
In recent years, insurance has been sold as an entry point to stocks. Do you think this needs to change?
My view is that it will not change. I see two good things happening as a fallout of this crisis. Now, people will have to look at cash flows and balance sheets and ask ‘does it make sense to continue doing this or do we need to do things differently?’ I have been talking of consolidation for a long time, and in the next two to three years there will be consolidation.
In the US, there has been massive consolidation in the banking sector and I think the next round of consolidation will be in the insurance sector. The criticism that has been put on the industry is that even though we are supposed to be a long-term industry, we often end up selling a product as one where you can come in for only three years and then decide. I think people will have to change that.
There has been some talk about having a minimum level of traditional business prescribed for the life industry...
It is correct for the regulator to think about the intervention it should come out with. But if there are not enough customers wanting endowment, it will amount to licensing the number of policy. That is not correct as you can not dictate to the customer what to buy. To say that instead of a minimum lock-in of three years, we need a product to be longer term, that is good.
But long-term does not mean unit linked vs endowment; we have to let the customer choose what long-term product they like. Also to say that we do not want to offer so much choices in a rural product... is stretching it too far because even in rural markets you have some savvy customers. I think the moment you go beyond term issue, any restriction will have to be thought carefully as it treads upon the freedom of the customer.
Don’t you think there is a need for industry to simplify?
I agree. I am one of the major advocates for further simplifying products.
With ULIPs becoming the mainstay, is there a case for standardisation and simplification?
There are only two issues that life industry face — one, that we are not as long-term as we should be, and two, we are not transparent as we should be. I actually think the system is quite transparent. The problem is that there is too much complexity in the product and because of complexity, the customer is not able to understand the product.
I think we should simplify the product so that even if there is no standard product we should standardise the charges nomenclature so that the customer can understand it effectively. I think, you should not have a standard product that is not good. But saying that you should not have three-four sets of charges, that is perfectly legitimate. Today, when we try to collate the number of charges used by the industry, it is hugely complex and unwarranted. The industry needs to simplify.
The New Pension Scheme proposes to introduce a simple retirement plan with very low charges. How do you see that impacting life insurance?
Pension has still not addressed the distribution challenge. I think it will work very well for compulsory schemes. Charges followed by life companies for superannuation and group annuity, are low. There is no distribution costs, you only add the fund management charge. But is that going to be adequate to take the message of pensions across the country? That is what we have to wait and watch. But having said that, there is a case for the life industry to simplify its products but we have to build a consensus.
With stock markets in the doldrums, do you see the focus shifting to costs?
We are focused on productivity and efficiency right from the beginning. If we see a potential in the rural markets and open offices there that is an investment for the future. We will continue to do that. But when you are a large growing company, there is an inefficiency that gets created in a high growth environment as there are duplications that take place at the branch and centre. For instance, we always had a centralised MIS but despite that lots of people did MIS locally.
So we are doing little things like that. Unless you reduce your manufacturing costs you cannot pass on less cost to the customers. The focus has to be to make process that is efficient and then pass on the savings. Otherwise, the decrease may be unsustainable or you will be charging the cost in some other manner. So I think the focus has to be more efficient in production.
There have been several instances of agents selling regular premium policies as single premium investments. How serious is the problem?
There are two scenarios: One where it is actual misselling where an agent sells regular premium policy as a single premium comes. Of the total misselling complaints, maybe a quarter comes on account of this. Our total misselling complaints ratio is quite good in the context of international numbers — they are are much less than 1%.
The second issue is where you have products that are designed in such a way that premium needs to be paid only for the first year and from the second year it is either zero premium or much less. There is an element of such quasi single premium products in the market. We also have that product. But we have designed that product with a high minimum premium. So most of the customers who buy that product know what it is.
But some other players in the industry have different structures. For us, it is a smaller proportion of total business. If you have factored the impact of such products into your persistency projection it is fine. It means that you do not get so much of renewals.
The problem is if either the customer does not understand what he has bought or the company does not factor the lower persistency in its New Business Achieved Profits (NBAP) calculation. Right now nobody discloses NBAP. My view will be, don’t restrict the product.
7 months ago