‘Insurance industry will move to protection’
New Delhi/Mumbai: Ng Keng Hooi, group chief executive and president, AIA Group Ltd and Naveen Tahilyani, chief executive officer and managing director, Tata AIA Life Insurance Co. Ltd, speak about the need for the life insurance market to sell more protection products and how a dedicated agency channel is best suited for the purpose. AIA is the foreign partner of Tata AIA Life in India and now holds 49% stake in the insurance company while Tata Sons Ltd holds 51%. Edited excerpts from an interview:
How did AIA shape up after breaking away from the AIG group? Was there any difference in the way you perceived insurance or how it should be sold?
Ng: It’s important to recognize that AIA is now an independent company listed in Asia. Because AIA is independent and based in Asia we have been more quick-footed. We can now go to the markets much faster; earlier we were controlled by AIG from New York so the big decision was far away from the market, but now we are all close to the market.
In Asia, we believe there is a huge need for protection. If you were to make a guess in terms of what is needed for protection in Asia and what is being met I would say only about 10% of the needs are being met and the needs are growing faster. This is why we have quickly moved into the protection space. So every time a customer wants to buy a policy, the first thing we look after is protection, the first dollar we like customers to spend is on protection (by buying a pure term plan). We don’t want the money to go into savings first and the reason is very simple; suppose a person has $5,000 to spend and he invests in a savings product with very low protection. The savings product will return $7,000 or at best $10,000 which would be insufficient for the family if the main breadwinner died, but with the same $5,000 this person can easily buy half a million to 1 million insurance cover to make sure the family is protected in case he dies.
But in India, savings plans with low protection still dominate the market, with the percentage of pure protection products sold in low single digits.
Ng: But I think even in India, Tata AIA is now moving in the direction of protection. It’s good for the customer and also for the company. To give you an example, some of the passengers who flew MH370 that disappeared bought insurance from us. The average amount of claim that we paid was $10,000-$300,000. And that is really sad because they would have needed at least 10 to 20 times this amount for their dependants. So this is the theme that we want to communicate to our existing and potential customers.
So what, according to you, are the reasons that the market in India is still not focussing on protection?
Ng: I will tell you why we are successful in our markets. It’s because we focus on developing premier agency that are dedicated and full time. These agents are not only productive but will make sure they spend considerable amount of time to analyse customer needs and recommend the right kind of products.
Tahliyani: The protection gap is 93% which is not very different from other Asian markets and that’s because distributors are looking to maximize the commissions and if you look at the average ticket size on protection it’s about Rs10,000-Rs20,000 whereas in a savings product it’s about Rs50,000-Rs70,000. So the agent actually feels that he is better off selling savings products to maximize his own income instead of looking at customer needs. So we have looked at the premier agency strategy where agents look at life insurance as a full time source of income. They will then get focussed on serving the need of the customers and that’s when you will see protection kick-off.
You say that agents are best suited to address customer needs. But now we are seeing an over-dependence on banks for distributing insurance. Even Tata AIA has increased its focus on bancassurance. For instance, you have a strategic partnership with Citibank and under the open architecture with HDFC Bank.
Ng: I am not saying bank channel is not the right channel, I am talking more about face-to-face. So even if a product is sold through banks it needs to be face-to-face. And we do a lot of bank sales and we sell a lot of protection products through them. So what we do is we make sure they are trained well and that the first thing that gets met for the customer is protection. We are a life insurance company so that’s what we are good at.
Tahliyani : Yes the gravitation has been towards bancassurance particularly since the Ulips (unit linked insurance plans) guidelines came in 2010, but now I think there is a realization in the market that they need to have a viable agency channel. Even when insurers go to list, analysts are looking if the insurer has over-dependence on one channel alone. So I think the development in the agency channel will be very different from what we have seen in the past. We will see growth not so much in the number of agents, but productivity of agents.
We are in early stages on implementing the premier agency (strategy) in India but we have got to a level where protection sales (pure term plans) in our agency is 14% of total sales by premium and 21% of total sales by number of policies. At a company level, we are about 10% because our level of protection is lower in our bancassurance channel. But I think protection is where most of the industry will move towards.
What is your view on open architecture (where distributors sell products of multiple insurers)? Because in India, initially there was huge demand for open architecture, but now some companies have come to the realization that bancassurance is not cost-effective if the bank doesn’t happen to be a part of the promoter group.
Ng: Open architecture can be challenging and insurers who are putting a lot of money for tie-ups need to make sure that banks are productive. So unless there is real partnership between the bank and the insurance company, it’s always challenging to make it work well. So we focus on strategic partnership. For instance, we have a strategic partnership with Citibank all over Asia and we make sure we distribute the right products to their customers.
Tahliyani: I think, the regulator has done the right thing by making open architecture voluntary. It allows banks to figure out how they want to tie-up. We have a strategic partnership with Citibank which means the bank sells only our products in the life insurance space whereas with HDFC Bank and DBS Bank we have a tie-up under the open architecture model.
HDFC Bank is a giant and we need to work with it to make sure that the partnership is more than what it was with a single tie-up. Our focus is to reach out to customers that are uninsured and there are always opportunities in terms of reaching out to the under-penetrated markets.
There is a lot of discussion around insurance incentives in India among policymakers. The suggestion now is moving towards to a trail or level commission model. What are your views?
Ng: The trail structure is a concept of mutual funds because there is an asset that’s growing and the incentives are a percentage of that AUM (asset under management). So as the assets grow, the incentives go up too. But, for term plan, trail model won’t work. Yes you can debate about making commission level through the course of the policy instead of front loading it, but then as I understand the commissions paid in India are not very high. So if you were to spread it then there is a real challenge at hand in terms of getting good people in this business. You have to make careers of agents attractive enough to make sure they are full time and that will boost persistency of the customers as well.
Tahliyani: In India we are not getting full-time agents largely because of the approach of the industry. We are still very young as an industry but insurers are beginning to realize that agency is important and AIA is the gold standard in building up agency.
In India, there is a huge gap between the incentives of a life insurance policy and other financial products. Is that your experience of other markets too?
Ng: You must understand the job of the agent is not so straightforward, when you look at a deposit in a bank you don’t really need an agent, even for investment products like mutual funds you don’t need a lot of commission because people want to invest on their own anyway. But people don’t want protection on their own and you need intermediaries to sell these products. So I think it’s not right to compare incentives built in insurance products and pure investment products.
There is a view in the industry that the insurance in India is overregulated so much so that some of the regulations have contributed to the negative growth in the industry. Do you think India is overregulated?
Ng: All regulations evolve with time and India is a young market whereas AIA is close to 100 years. We have seen how regulations evolve over time and eventually you move towards self-regulation when regulators feel all insurers are capable enough.
We have to make sure that the customer buys protection and if that doesn’t happen then we fail as an insurer. And you need good distribution because you can design a zero commission product but if nobody buys it then what’s the point. So we need to make sure that our agents are provided adequately relative to the market in which they operate.
The year 2010 was a watershed moment for the life insurance industry when the Ulips regulations came into effect. Subsequently, the industry saw a negative growth. The industry did recover from the shock but Tata AIA took longer. How concerned were you?
Ng: We understand the short-term volatility in different markets and when you hold a long-term view, short-term volatility doesn’t concern you much. Sometimes people also change and now if you look at the current management of Tata AIA, it’s a very impressive team. The company has grown new business premium four fold in the last two years. Last year Tata AIA was ranked sixth on individual APE (annual premium equivalent).
How does India compare to global standards as far as disclosures are concerned from a customer standpoint?
Ng: I think India is headed in the right direction. India is still a young market, but I think the right disclosures are important to help customers understand the policy. And if they can understand the policy well persistency will automatically improve.
Tahliyani: I think our disclosures in terms of the benefit illustration are world-class because they do not leave anything to the imagination of the agent. The issue is not what we are disclosing but how the agent is explaining which is why having premier agents is important.