The Era of change presents a unique growth opportunity for life insurers

The life insurance sector is in the midst of what can best be described as an era of change. At every level, change is coming at a hurtling pace. The Insurance Regulatory and Development Authority of India (IRDAI) has stepped up the pace of regulatory reforms, in line with its stated intent to achieve ‘Insurance for All by 2047’ while protecting policyholder interests and enhancing the sector’s attractiveness as a global investment avenue.

Life insurance companies will need to cash in on this one-of-a-kind opportunity by taking a holistic view of these developments and leveraging them to boost awareness and improve distribution models. For, this will influence the growth trajectory of the sector going forward.

Let us take a close look at some of the key changes and the impact they can have on the sector:

Regulatory push to boost penetration and customer choice
Driven by its objective to foster a competitive environment that is conducive to growth, the IRDAI has proposed various regulatory reforms in recent times. These cover the entire spectrum from expense and capital management norms to financial reporting and governance standards, and product structures and management.

The Indian insurance sector has always been tightly regulated. But the attempt now is to move to a principle-based regulation regime that will allow companies greater flexibility in several areas of operation, as below:

• Commission structures freed up under new Expenses of Management norms: The new consolidated regulation on Expenses of Management (EoM) covering life and general insurers and payment of commissions came into force from April 1, 2023. Life insurance companies have greater flexibility to manage their expenses and determine commission levels while complying with overall EoM limits. Previously, distributor commission levels were capped. Freeing up of commission structures will enable companies to innovate product and remuneration structures to promote distributor engagement and optimise customer outcome.
• New product regulations: To provide more flexibility and liquidity to policyholders, the regulator has reviewed product regulations to significantly enhance surrender values payable to the policyholder in case of a premature exit. This necessitates innovation on the currently front-loaded expense structures by life insurance companies so that the traditional product offerings remain financially viable for the shareholders as well as attractive enough to continually increase insurance penetration.
• New risk-based capital framework for better risk management: The life insurance business is exposed to various economic or market risks, non-economic or core insurance risks, and operational risks. The IRDAI has proposed the launch of the Indian Risk-Based Capital (Ind-RBC) Framework in line with the risk-based capital allocation approach adopted globally. This aims to measure capital requirements from each source of risk to arrive at a company’s aggregated capital requirement and will link solvency requirements to individual risks. This will enable better capital allocation, thereby deepening the focus on risk management.
• IndAS accounting standards adopted to improve disclosures: In terms of governance, the implementation of the IND-AS accounting framework as well as the adoption of the international financial reporting standard, IFRS17, will improve disclosures, leading to a more investor-focused view of insurance company accounts. Presently, large listed life insurance companies make additional actuarial disclosures such as on embedded values, which has boosted the understanding of the financial engine of the life insurance business.
• Paving the way for composite insurers: The proposed introduction of composite insurers under the Insurance Laws Amendment Bill 2023 is a big step forward. If passed, insurance companies will be able to offer life and non-life solutions under one license. This could significantly improve insurance penetration in an age of digital convenience, besides enhancing consumer choice.
• Other proposals under the impending Insurance Laws Amendment: Some of the other proposals include differential capital, reduction in solvency norms, issuing captive license, change in investment regulations, one-time registration for intermediaries and allowing insurers to distribute other financial products. The proposed amendments primarily focus on enhancing policyholders’ interests, improving returns to policyholders, facilitating the entry of more players leading to economic growth and employment generation, enhancing efficiencies of the insurance industry – operational as well as financial and enabling ease of doing business.

Technology as a growth enabler
Apart from the regulatory push for growth and inclusion, the insurance sector has also been leveraging technological advancements including digitalisation and Artificial Intelligence (AI)/Machine Learning (ML) based tools and data analytics to transform itself.

Digitalisation has made it easier to onboard clients, issue policies instantly and process claims speedily. Data analytics and AI/ML are helping with product pricing and customisation of products based on an individual’s insurance needs and risk profile. Digital platforms are providing more relevant and more flexible insurance products.

Technology will also help to reduce costs over the long term, improve reach in remote locations, and enhance distribution and service models. On the actuarial side, too, predictive models are being used for persistency management and better financial disclosures. All this has improved customer experience while increasing productivity and operational efficiencies.

Also Read | Life Insurance Industry Prepares for Next-Gen Innovations

Seize the day

Life insurance is in a unique position as it is the only protection and savings instrument that provides long-term guarantees for meeting specific needs. As institutional investors, too, life insurance companies play an important role in strengthening the capital markets.

The Indian life insurance industry is growing at a fast pace, yet the country is severely under-penetrated. Hence, the present era of change presents a clear opportunity for life insurance companies to popularise the unique benefits of insurance products to various consumer segments and strike a balance between the needs of various stakeholders.

Continuous adoption and integration of emerging technologies can be a key enabler for setting up new-age distribution channels to boost insurance penetration. And reforms such as the freeing up of commission structures and lower capital allocation norms will enable companies to rationalise the present front-ended remuneration structure and experiment with product offerings to improve customisation.

It’s time for life insurance companies to seize the day.

Views expressed by Bhavna Verma, Appointed Actuary, IndiaFirst Life Insurance