The Insurance Regulatory and Development Authority of India (Irdai) came out with draft regulations for insurance e-commerce in June. Irdai hopes to lower the cost of transacting insurance business, and improve efficiencies and reach through these norms. E-commerce is also seen as an effective medium to improve financial inclusion in a cost-efficient manner, the draft said.
The regulator has proposed these norms in the wake of many startups trying to bring in digital innovation in the insurance sector. These measures gain importance as insurance penetration in the country is less than the global average, said the Irdai’s annual report for 2014-15.
Fintech in insurance
According to a PricewaterhouseCoopers (PwC) global survey in June, How InsurTech is reshaping insurance, for the insurers, cost reduction is the most significant gain from fintech. “A move towards cloud-based platforms means not only lower up-front costs, but also smaller ongoing infrastructure spending. Only this innovation, when compared to mainframe-based technologies, could reduce costs up to 10-fold,” the survey said. It also added that disintermediation, self-servicing and automation of core insurance functions will lead to further savings for insurers.
Experts also believe that digital innovations have to be first about operational improvement, which will then translate into better experiences for consumers. “Whether we like it or not, the general understanding of the word digital is online selling. What we need to understand is that this element is only a subset of the digital ecosystem,” said Anuraag Sunder, director, PwC.
The use of technology aims at employing existing as well as new data, analysing it, using artificial intelligence and machine learning to understand customer problems and reach a solution.
“Data has really not been a strong point of the Indian industry, and that holds true across sectors, not just insurance. From that perspective, insurance sector has recognised this issue and there has been movement,” Sunder said.
Online platforms enable capture and storage of rich, reliable and insightful consumer data that can be leveraged in the future to customise underwriting for individual customers, based on past history, said Balachander Sekhar, founder and chief executive officer, RenewBuy, a fintech startup focussed on motor insurance. Digital is all about business improvement, it is not about making things look pretty, Sunder said. “Customer ease, or solving the customers’ problem is the most important element in this entire journey. Digital would not have happened otherwise.”
Consumers often complain about lack of understanding and transparency while buying insurance. Fintech can help here. “Insurance contracts are defined using legal language. They contain exclusions and limitations to protect insurers, but are difficult to understand by the consumer. The traditional agent’s job was to explain this to the consumer but this does not always happen… we are trying to fill the gap by using a mix of technology and in-house experts,” said Anand Prabhudesai, co-founder, Turtlemint.com, an online insurance aggregator.
Lack of compliance
Non-compliance is a major concern in segments like motor insurance, where insurance is mandatory. Sekhar said the category sees large drop-outs. About 80% two-wheelers and 25% of cars are uninsured despite it being mandatory. This happens mainly due to lack of reach and distributor interest in pursuing small-ticket premiums, he said.
“Consumer surveys show that while most consumers want to insure their bikes, they are currently clueless about where to find an insurance agent or insurance branch office to get this done,” Sekhar added.
Pricing of insurance and the commission an agent earns are also factors in the widespread non-compliance in motor insurance. “Unlike more lucrative segments like life insurance, where commissions are high, a typical bike insurance policy premium is as low at Rs.1,000 and the agent may earn only Rs.50 to Rs.75 a policy. On top of that, the paperwork and process are cumbersome,” Sekhar said.
Fintech helps customers
While fintech may look like it benefits only the insurers—with benefits like operational improvement—industry insiders also expect these changes to benefit the customers. Fintech is making insurance buying a lot quicker and simpler than the traditional platforms.
“Today, technology allows one to make a quick comparison within seconds and understand the nuances that affect the premium or quality of services. Smart algorithms and clean user interface… allow a user to buy the best-fit insurance for her needs confidently in the least time,” said Jaimit Doshi, chief marketing officer, Coverfox.com, an Irdai-licensed broker. “It also makes managing the policy a lot easier. One can literally buy a policy within 3 minutes without any tedious paperwork,” he said.
According to the Irdai annual report, the penetration of life insurance in the country is slightly more than 2% of the total population and it has been less than 1% for non-life insurance for many years. The report also states that just 2% of total policies sold and 1% of the premium paid were from online channels.
“With mobile and Web technology, consumers across tier 2, 3 and 4 cities and rural India will have access to multiple insurers and transparent prices,” Sekhar said. Apart from reducing the cost of delivering the policy, and cutting down the branch network, online insurance selling also delivers transparent information to consumers.
“Using technology and the internet will allow for custom-pricing mechanisms and ability to sell long-tail products (when gap between filing a claim and its settlement is long), something both insurers and regulator should consider while creating product frameworks. Currently, most products are designed for leading channels like agency and bancassurance, which get adapted for internet sales,” he said.
Doshi said low internet penetration in India, and even access to online banking are an impediment. “India is a promising and growing internet market. But currently the penetration level is abysmally low,” he said. However, things are improving. “According to a Boston Consulting Group (BCG)-Google report, by 2020 every three in four policy purchases will be influenced by the digital channel,” he said.
As internet penetration in rural areas improves, the market for these startups will expand. By 2020, about 315 million Indians in rural areas will be connected to the internet, compared to around 120 million at present, according to a study by BCG: The Rising Connected Consumer in Rural India.
Technology has given a boost to several sectors like e-commerce. However, Doshi said unlike in e-commerce, the current regulations do not allow discounts when selling insurance.
According to the draft regulations, insurers will be allowed to have differential pricing for products sold through insurance self-network platforms.
The new regulations could also do away with tedious processes such as physical signatures, by bringing in digital signatures and other authentication methods like one-time passwords.
The insurance regulator has laid down the infrastructure for digital sale of insurance, which is definitely a step in the right direction. This combined with a host of fintech startups in the industry could increase insurance penetration, while also easing the processes for consumers.