Learning from others' experiences for New Entrants in Life Insurance
Of late, there is renewed interest among the companies aspiring to enter insurance industry. Its probably the best time to enter the market. There is lot of awareness and inclination to buy insurance among customers, thanks to Covid 19. Regulator is giving indications to speed up the process of licensing. What can be a better time than this to get into the market?
As per reports, few companies have already applied to regulator for licence and few more are in the process of applying. They are at various stages of finalizing their strategy and business plan, be it distribution or products or geographic locations. This probably is the right time to reflect on the learnings from the experiences of existing insurance companies and incorporate them in the strategy of new entrants.
More than two decades back when the industry was opened for private players, many of them had planned to break-even in 4 to 8 years. But in practice, for many insurers, it took longer than what they had originally planned for. This resulted into investment of more capital, lower profit margins and lower valuations of company than what they had planned for. Clearly, the new entrants now have an opportunity to learn from this and plan their business in a much better way.
I am listing out, what I think are the factors that the new entrants should focus on to avoid a similar situation, with a disclaimer that they are not exhaustive and not necessarily interpreted the same way by others.
The first factor is the productivity of distribution channels. Many channels in general and agency channel in particular, have not reached the productivity levels mandated originally for them, despite many efforts from insurers. This led to a debate on what is optimum level of productivity and resulted into legitimizing the mediocre productivity as optimum. The only defence for this was, its not possible to improve further. While that may be true, the productivity levels should justify the cost incurred, to make the channel viable. The new entrants should be mindful of this and allow for realistic yet viable productivity levels in their business plan.
One reason for low productivity was, high acquisition cost. A lot of expenditure was made expecting certain productivity levels. When those levels were not achieved, the cost should have been cut down to match the productivity levels. But when the cost was reduced, the productivity reduced further. In other words, the distribution got locked into an unviable cost-productivity matrix. For some insurers who managed to get this matrix right, it was at the cost of policyholder value. The policies sold by them were not necessarily best in terms of customer value. In other words, they passed on the inefficiency of their distribution to customers. Customers sooner or later realized this which led to customer dissatisfaction. So the challenge now for the new entrants is, how to solve this equation and ensure productivity levels are consistent with acquisition cost without compromising on policyholder value. It’s a very difficult equation to solve, but not an impossible one. It requires operational efficiency and robust risk management framework. And you need skilled and experienced resources to manage all this.
A lot of leakage while acquiring business is happening due to inefficient process. Adequate thrust is not given in hiring, training and retaining the right sales people. Many people enter the system, sell one or two policies and leave. Apart from wastage of money in re-hiring and re-training, this is also causing a lot of mis-selling. The issues of productivity and acquisition costs can only be addressed by hiring suitable sales people, training them and retaining them for long. Only then the cost of their hiring and training will be recouped from the business brought in by them.
Another important factor is, lack of skilled human resources. Sudden expansion of industry resulted into big demand for experienced resources. Lack of availability of them resulted into many resources from other industries flocking into insurance without necessarily having the knowledge and understanding of business. This resulted into compromising on many quality parameters, unknowingly or knowingly. The risk management framework came under tremendous pressure. Underwriting, Claims, Policy servicing and other critical areas need to be very efficiently managed. You need to have experienced and skilled resources in all key positions. Else, a lot of money will be wasted through anti selection, frauds in claims and operational frauds. Obviously, those experienced resources need to be open for experimentation and innovation also. Experience doesn’t mean using the same outdated processes and methods forever. A lot of efficiency and risk management can be achieved through digitization with the help of insure-techs. Insurance is one area where data analytics is not used at its full potential and it’s a great opportunity for new entrants.
One important factor for new entrants would be to decide on the size of operations. Do you want to operate across all geographies of the country selling all lines of business and all type of products through all distribution channels? Or focus on a particular geography or a niche market through a particular channel? There is no need to get carried away by what the existing insurers are doing. You can decide to operate in a limited space (in terms of geography, products or distribution) which, arguably, can maximize your profit margins.
There are many learnings from the experience of existing insurers. Those new entrants who learn from them are going to make a difference in the market and create history.
Contact me for a brainstorming discussion on this at my mail id: sai@lifegurusolutions.com