The Insurance Regulatory Development Authority of India (IRDAI) report of 2013-14 revealed that the insurance penetration in 2001-02 stood at 2.15 per cent but in a decade since, it had barely increased to 3.10 per cent in 2013-14. Incidentally, it had also seen a significant decline in 2011-12 (3.40 per cent from 4.40 in 2010-11) and 2012-13 (3.17 per cent). The insurance density in 2001-02 was $9.1, which increased to $41 in 2013-14, again not a very high density.
The issue of penetration and density is the worst in the rural areas. The rural population has relatively lower access to information and lacks even basic awareness of insurance products, excluding them from a critical financial service. To make them aware of the insurance products, and more importantly the need for insurance, it is necessary to educate the rural populace in person thus following, what KPMG terms, a 'high touch service model'.
This can only happen with the help of a dedicated and large sales force in rural areas. A multi-channel distribution model, which includes insurance agents, sales force of insurance companies, brokers and corporate agents can become the army which brings this underserved population under insurance coverage.
Prime Minister Narendra Modi's ambitious program of Pradhan Mantri Jan Dhan Yojna (PMJDY) has sought to cover a large section of the uninsured population with one stroke. PMJDY provides life cover and accidental coverage at an unprecedented scale on a very nominal premium amount.
As we await the results of the success of PMJDY, it is important to remember that IRDAI too has mandated for insurers to underwrite 25 per cent of their policies in the rural sector. In 2012-13 out of the total 44.1-million new policies, the life insurers underwrote 11.3 million policies in the rural sector. While LIC underwrote 25.44 per cent of new policies in the rural sector, private insurers made up 26.99 per cent. The challenges of penetration, especially in the rural areas are therefore huge for the insurance sector.
The difficulty of overcoming large-scale penetration is further compounded by the fact that we have a distribution channel, which is highly regulated with continuous issues of attrition and productivity. In 2013-14 the number of individual agents stood at 21,88,500 while the number of corporate agents stood at a mere 689. This is a very minuscule sales force required to sell insurance products across a varied socio-economic population.
It is extremely important for a regulator to create avenues for promoting a larger distribution network of sales force in the country. The recent notifications by IRDAI to restrict the working of intermediaries, especially corporate agents, will stifle and eventually decrease their strength, especially in the rural areas. For example, the regulator has underlined that corporate agents have to make their 'Specified Persons' full-time employees. This will convert the sales force into non-commission and salaried employees with no intention or ambition to sell their products. It will further make the corporate agent model unviable by creating huge fixed overhead expenses for them.
There is an additional clause of making it mandatory for the 'Specified Person' of the corporate Agent to have finished school, with 50 hours of training (in case of a composite corporate agent the stipulation is for 75 hours of training) and passed the required IRDAI examination. While the other insurance agents (company) only need to be high school (class Xth) graduates, this stipulation on the corporate agents will force many to look at alternate avenues of employment. Such stringent regulations will be more difficult to adhere in the semi-urban and rural areas where the school dropout rate is still high. In rural areas where relationships still drive the purchase of financial services, a large and strong distribution channel is vital for its growth.
IRDAI's recent move to increase the number of insurers whose products can be sold by intermediaries from one to three is a welcome step. This will give the required push to the channels. It would however be a booster if IRDAI increases the number of insurers whose products can be sold by the intermediaries to five or more. This will create a more competitive market in the industry. To ensure that the sector does not attract operators who do not have a long-term view of the industry, the regulator should ensure a minimum equity share capital of Rs 50 lakh and maintain a net worth of Rs 50 lakh at all times.
The recent penetration of mobile phone, internet and even online sale of insurance products has provided alternate methods of building the distribution network for insurance in the country. IRDAI is working in strengthening this network by creating awareness campaigns, online games and the use of social media. IRDAI is also encouraging the use of big data analytics to study both consumer and seller behaviour and which will lead to more scientific and sustained insurance selling in the future.
However, this is still limited to the metropolitan cities and mainly urban areas. Tier-III cities and rural areas still require a personalised relationship to drive the purchase of insurance products. In these areas, the agent is a repository of huge goodwill and information and his or her co-option is central to this process.
The insurance industry is at a crossroad today. In a span of a decade, it has witnessed two phases of liberalisation, yet it has not been able to substantially increase the required rate of penetration and coverage. Clearly, policy and practice are not yet in sync. Correcting this mismatch will require an integrated thrust for the sector, one that works in conjunction with agents and accommodates their inputs to maximise coverage targets and achieve them too.
Liberalisation without adequate deregulation and implicit incentives for agents is not likely to deliver the desired growth for the industry. At a time when the Government of India has launched ambitious targets for reach and penetration of social sector initiatives, and where insurance is the lynchpin of the thrust, yet another decade of non-existent growth for this sector will be a sin that won't be forgiven.
The author is former member, IRDAI (Life) and former Executive Director, LIC.