The write-up digs at the history of product needs of customers in the Indian Life Insurance sector from pre-liberalization era till today. It also tries to identify what could be the reasons for the industry to face issues like pitching the right products to the customers today.
The key points bothering current life insurance companies in the Indian life insurance market are:
- Selection of right products for the right customer
- Challenging distribution
- Challenges in meeting the top line
- High lapse rate
- Hitting the bottom line
- Longer Payback period
All the above six issues are interrelated and stemming from the fact of what products will sell and what are the needs of the customers. The product landscape changed over the last 18 years from pre-dominantly Unit linked business till the point regulator intervened a few years back to traditional business. This was a big shift from a customer’s point of view.
In the pre-liberalization era, products predominantly sold in this country were the traditional participating product by LIC of India. The Indian customers had no inkling about the unit-linked product and how it works.
During those days, insurance was even less popular than now, so the prime reason for purchasing of life insurance was tax saving and long-term savings. People never compared the returns on the products partly because there were lesser saving options as businesses mostly relied upon the relationship between the buyer and agent. Most common short-term saving tools were fixed deposits in the bank.
Post liberalization era brought a sudden surge in the unit-linked business. It was sold across all sections of the society with providing investment comparison from other investment products. This transition was not smooth and there was a paradigm shift in the product shelf for customers. The customers were presented with unit-linked products which were serving very different needs as against the traditional participating products sold before the year 2000 by LIC. The pitch of the product changed from insurance as long-term savings products to comparing investment return on the different unit-linked products. During the same time, customer’s need was never assessed as all the customers were treated with same unit-linked product irrespective of the target market of A or B or C class cities.
As there were gaps between the customers need and products matching, it led to increasing lapse rate in the post-2000 era hurting capital, non-recovery of expense, lower profits and higher payback period. Also, the customers were made to compare the returns of different unit-linked products with other investment option as against meeting long-term savings need.
Insurance is not an investment in the exact sense, it is more of a protection; it is a protection against the unfortunate event and protection of meeting long-term savings. Investment return on an insurance product may not be a point of interest for customers as a competitive market would automatically fix the customer return somewhere as all the players are operating in a same economic environment, so the focus of life insurance business should be on meeting the customer’s need.
The country has a large cross-section of the society in India, there is a large cultural variation, there is a history of social support through family, and these things make a challenging ground for insurance companies to manufacture a right product which requires a clear classification of customer’s need and customer segmentation. A tea stall vendor’s insurance need is very different from a High Net Worth customer in terms of product, tenure, the frequency of premium payment, premium amount, the timing of benefits etc. If we look at the market in general, every product that is sold is based on the customer’s need, be it a cosmetic or just buttermilk.
The India customer segmentation is very wide; the variation from life insurance point of view could vary from
- Products class
- Ticket size
- Timing need
- Flexibility to customer
The customer need could vary from
- Protection against unfortunate event
- Protection for saving for self
- Protection of savings for children
- Protection for savings for other purposes
The key difference between an insurance product and any other financial instrument is long-term nature of insurance product. There is a no other financial instrument in India which covers for as long as life for both savings and life cover; the longest savings product available in the Indian market is PPF for the term 15 years without life insurance.
In the Indian landscape, the insurance product may be pitched as long-term savings with different savings features meeting customers need at different stages of life instead of pitching for return on investment. The customer landscape in India has gone a lot of changes over last two decade. Government jobs have been replaced by corporate, there is a no long-term health cover, there is a no social security in term of pensions and others, spending habits have gone sea change with little focus on savings, there is an unlikely to support from the family in future and also from children. Ours could be the first generation who will be struggling with various health issues led by diabetes.
Not all the sections of the society are investment savvy. They understand the different savings products available in the market such as mutual funds, direct equity investment etc.
The beauty of insurance is that it provides discipline of paying a regular premium for both savings and protection against life for the long term in one package, which should be the attractive point as against managing the different portfolio for mutual fund and term product where the majority of the population have a problem in handling. Insurance is a simple one-stop shop with the discipline of regular premium payment providing long-term protection.
The meeting of right product and right customer’s need would make the life insurance a pull product as against today being a push product. A pull product will have higher persistency which will help insurance companies in meeting its margin better. It will also help them recover expenses allocated to the product which will have a positive impact on the managing payback period on the anticipated line.