Life insurance companies must continue to work in tandem with theregulator and using technology and innovative processes, designproducts and services that will delight customers by offering themhigh returns, says P Nandagopal MD and CEO, IndiaFirst LifeInsurance Company. Speaking to Jayadipta Chatterji, he saysIndiaFirst has begun the process of ushering in this change. Theday will come when the customer will return and the industry willregain its credibility

IndiaFirst Assuring Change

24 CFOCONNECT September 2013

If all goes well, financial year 2014 will be the last year of the current slowdown in the insurance industry. Various reports and market estimates suggest that it will start growing at 18-20 per cent from April 2014. Insiders say the industry

has reached an inflexion point. IndiaFirst Life Insur-ance Company, one of the youngest in the industry, envisions itself leading the curve going up, and is insuring itself for the future. The disclaimer here is that the turn and its sustainability are contingent on all three prominent players - the regulator, the macro economy, and insurance companies - playing their respective roles and holding up well.

A difficult birthThe young company began operations in a chal-

lenging environment in 2009. At the time, industry was introspecting having evoked the wrath of its customers for following wrong practices, demanding high premiums and hefty distributor commissions in its mindless pursuit of the topline. From 2004-2008, its Golden Era, it danced all the way to the bank gy-rating in tune with the bull run on the stock markets which scaled 20,000 from the measly 2000-6000 band in the four-year period (2000-2004) just preceding it. ULIPs had caught the fancy of customers and insurers, and many thought it an easy way of mak-ing money on the stock markets. During this period private new business premium (NBP) grew from Rs 2011 crore to Rs 33,716 crore at a scorching 93 per cent compounded annual growth rate (CAGR) and public NBP grew from Rs 17,348 crore to Rs 59,997 crore at 36 per cent CAGR. Until the crash post-Lehman hit customers and insurers hard. It exposed ULIPs pa-rading as insurance products, when they were pure play investment instruments.

The slowdown ensuesBy the time industry decided to re-look at its

business plans, the market had slowed down, and the reform process ushered in by the Insurance Regulatory and Development Authority (IRDA) had started. All three happening almost simultaneously contributed to the industry slowdown which ensued. The period from 2008-12 saw the return of traditional life insurance products, given their perceived stable returns with capital protection. The NBP for private companies grew from Rs 33,716 crore to Rs 39,369 crore at merely 5 per cent CAGR and for public companies from Rs 59,997 crore to Rs 97,012 crore at 13 per cent CAGR. Much like FY’12, there was de-growth in FY’13 of -4.64 per cent and -5.97 per cent for public and private companies respectively. The overall de-growth in FY’13 over FY’12 was -6.27 per cent. Going by the performance of the last two years, FY14 is not expected to be much better. But following the rounds of regulations from IRDA on both ULIPs and traditional products, it is hoped that

the customer will return from the start of FY 2015. This will happen only when the domestic industry designs ‘customer first’ products and services. “I can promise you that we will be a completely different company,” says P Nandagopal, MD and CEO of IndiaFirst Life Insurance Company.

The immediate cause for the slowdown was the poor economic environment which kept customers away. The two other factors that contributed to it were first, an inherent problem in the industry as some companies chose wrong business strategies and resultantly wrong products that offered little or no insurance component and therefore created no value for the shareholder, the distributor, and the consumer. Second, the customers were also disenchanted by the high prices in the form of high premiums that insurance companies demanded, due to hefty commissions paid to agents as customers were not buying voluntarily and agents were mak-ing frequent house visits to convince them to do so. Finally the insurance regulator had to step in.

The regulator’s roleThe insurance regulator has played a laudatory

role in the growth and development of the industry. It increased the insurance component of ULIPs, placing caps on insurance charges (including policy administration, fund management, premium al-location, mortality expenses and riders), as well as commissions, and lowered the guaranteed surrender value at the time of discontinuance of the policy to 30 per cent of the premium paid in the second and third year, and 50 per cent between the fourth and seventh year. The surrender value varies with products and the term of the premiums paid. It increased the lock-in period from three to five years and mandated that the charges be evenly distributed over the five-year period instead of frontloading them in the first two years as companies had been doing. The regulator also introduced a guaranteed return of 4.5 per cent on pension products. This was later replaced by an ‘assured benefit’ that pension plans have to disclose at the time of issuance, which is an absolute amount that will be payable on the vesting date.

In an earlier notification in 2009, it had capped

“I can promise you that we will be a completely different company”

- P Nandagopal, MD and CEO, IndiaFirst Life

Insurance Company

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September 2013 CFOCONNECT 25

COver STOrythe previous year are renewed has to be at least 50 per cent. The inverse of this is the lapse ratio, which refers to the number of policies that customers fail to renew.

In the more recent regulations on traditional products it has capped the maximum distributor commission that can be paid to agents at 15 per cent in the first year, 7.5 per cent in the second year, and 5 per cent from the third year onwards.

The regulations have restored the balance of power between the customer and insurance compa-nies. The fortunes of insurance companies are linked to those of the customer, and they will benefit if the customer benefits from them. For the efficacy of the regulations in building faith among consumers, this process may need to continue much further so that the products become more transparent. Industry is working in tandem with the regulator in this journey.

A maturing marketLife insurance in the modern form has been in

India since the time of the British, going back to 1818 when the first foreign insurance company was set up on Indian soil. Almost half a century later an Indian company was formed in 1870 to insure Indian lives, and the domestic industry was established. Much later insurance was nationalised in 1956, and more recently it was liberalised towards the end of 1999, al-

“A decade from now I will meet customers’ needs and beliefs with my customer service orientation and thinking. When that day arrives we will lead through innovation and service re-engineering”

- P Nandagopal, MD and CEO, IndiaFirst Life

Insurance Company

Bombay Mutual Life Assurance Society set up in 1870, gave Indians in India their first taste of a modern life insur-ance service. Until then, insurance companies brought into the country by the British since 1818, had been serving only British residents. Oriental Life Insurance Company started by Europeans in Calcutta was the first to be set up. Later, due to the efforts of eminent people like Babu Muttylal Seal, the foreign companies began to insure Indian lives, but at hefty additional premiums.

Imbued with the nationalist spirit, many more Indian com-panies came into being. Among them was Bharat Insurance Company set up in 1896. Between 1905-1907, the period of the swadeshi movement, several others such as, United India in Madras, National Indian and National Insurance in Calcutta, and the Co-operative Assurance at Lahore were established. In 1907, the Hindustan Co-operative Insurance Company was born in a room at Jorasanko, the house of nobel laureate rabindranath Tagore, in Calcutta. The Indian Mercantile Insurance Ltd, General Assurance, and Swadeshi Life (later called Bombay Life) were some others established in the same period. Legislation was introduced only in 1912, when the Life Insurance Companies Act, and the Provident Fund Act were passed. The former made it mandatory for

premium rate tables and periodical valuations of companies to be certified by actuaries. But it put Indian companies at a disadvantage as it discriminated against them.

The industry grew in the first two decades of the 20th century from 44 companies with total business-in-force of rs 22.44 crore, to 176 companies with total business-in-force of rs 298 crore in 1938.

The Insurance Act 1938 became the first legislation to govern not just life insurance but also non-life insurance to enforce strict state control over the insurance business. By 1944 the demand to nationalise the industry had gathered momentum, but it was not to be until January, 1956. At the time there were 154 Indian insurance companies, 16 foreign ones, and 75 provident funds operating in India.

Nationalisation happened in two stages. In the first stage, the management of the companies was taken over through an Ordi-nance, and in the second, ownership was established by means of a comprehensive bill. In 1956, Parliament passed the Life Insur-ance Corporation Act in June, and the Life Insurance Corporation of India was created on September 1, 1956, with the objective of spreading life insurance much more widely, particularly in the rural areas to provide Indian residents adequate financial cover at a reasonable cost. Towards the end of 1999, the industry was liberalised, allowing private companies to come in.

distribution commission charges at 3 per cent of the total returns earned by the policyholder for insur-ance contracts up to 10 years, and 2.25 per cent for those above 10 years. In 2011 it ruled that contracts of agents will be revoked if they fail to renew more than half the policies that they have sold in the sub-sequent year. This means that their persistency ratio which refers to the extent to which policies sold in

A Brief History

26 CFOCONNECT September 2013

lowing private companies into the sector once again. Though industry today has world class products on offer, the market is still maturing, says Chandan Khasnobis, Director and Appointed Actuary of Indi-aFirst Life Insurance Company. The customer does not see value in the products on offer for the high price that he or she has to pay. Insurance is an instru-ment for the financial protection of the customer, yet consumers have always looked at it as a tax saving device, and remember it for the pass back com-missions (called rebating in market parlance) that agents offered to customers to sell them the policies. Aided by the regulator, industry is now reviewing its products to offer a higher return to the customer. To do this it is looking at re-engineering its operating processes through technology and innovation and to cut its administrative and distribution costs. “We have to give the customer a good deal at the end of the policy period comparable to other existing op-tions in the market such as, bank deposits, pension funds, and MFs,” says Dr Nandagopal.

The three things a market-linked insurance product that serves as a long term financial savings instrument must therefore have are, first, sensitivity to inflation providing attractive real return, sec-ond, the company has to pay the promised claims promptly and the industry has a good record of doing so, and third, it has to offer a good overall return, which is right now low because companies have been portioning out enormous sums from the customer’s fund towards their own distribution and administration costs.

Midnight’s childAdopting technology and structuring the overall

organisational model to the new regulatory require-ment for insurance were its imperatives when Indi-aFirst Life Insurance started out. The company calls itself midnight’s child born after new regulations her-alded freedom from the industry’s oppressive pricing structure, and anti-customer practices. It belongs to the future, it says, and its mission along with industry is to bring back the customer and re-earn his or her trust. Starting with its own name IndiaFirst, it puts the customer first, having ruled out an amalgam of its promoters’ names - Bank of Baroda, Andhra Bank, and UK based Legal & General - as its own name. Bank of Baroda is 106 years old and holds the largest share of 44 per cent stake in the company. Andhra Bank is 90 years old, owning 30 per cent stake, with the balance 26 per cent held by Legal & General. Its logo suitably has the vibrant colours of India.

Its premium status will neither be in terms of its size nor the number of policies sold; but expertise in value creation and customer delight. The company is targeting to be among the top quartile in the in-dustry in the next five years in terms of productivity, efficiency, and innovation. Currently, there are 24

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companies in the industry and if you divide this by 4, then it hopes to be among the top six, though it is the second youngest. It has financial might with a high solvency rate of above 400 per cent as against a required rate of 150. The company expects to break even in 2015-16, two years ahead of the original deadline.

Leading the wayLaying its foundations on the new guidelines

of reduced business margins, it chose its business model well. A big focus is on managing its costs efficiently by relying more on technology and in-novative business processes, and keeping its man-power costs in check. As a result, its operating costs are among the lowest in the industry. In its second

year of operations it won the Celent Model Insurer Award 2011 (Asia Region) for IT Architecture and Infrastructure. Last year it won the Life Insurance Company of the Year Award for leadership, robust growth with a strong customer focus, and efficient claims settlement.

Investing in R&D“We tried to be different and developed new

thinking and operational processes in our organisa-tion. Our prices are fair, product servicing is efficient, and the organisation structure is lean with just five layers, clear job roles, and no overlapping,” says Dr Nandagopal. “A decade from now I will meet cus-tomers’ needs and beliefs with my customer service orientation and thinking. When that day arrives we will lead through innovation and service re-engineering,” he proudly claims. The company is in-vesting enormously in R&D to improve its customer delivery points and reduce distress over its products. The benefit of this is expected to accrue in the next two years. Promising to be different from its peers it insists that it does not believe in making cosmetic changes but is penetrating deep into the customer’s minds before undertaking process engineering. This is how a whole set of game changing opportunities have presented themselves, he asserts.

Customer’s delightIt is also one of the few companies in the industry

to have been awarded the ISO 9001:2008 certifica-tion in the first seven months of operations for its process. It got this certification for over 60 key pro-cesses across all its functions including operations, distribution, HR, and marketing, among others. These are now being collapsed into smaller sets of standardised processes to ensure strict discipline in implementing them. The aim of this exercise is to ensure standardised service for standardised customer experience, which is a given requirement of any service oriented company. The process disci-pline will be enabled through the MagicBoard which will act as the control mechanism. MagicBoard is its frontend, customer facing technology and is an integrated portable device, comprising a Samsung Galaxy tablet and a battery-powered printer. It is the first mobile office in the industry for sales persons to issue standardised policies efficiently and transpar-ently, within an hour,

Its health claim card which functions like a debit and credit card is another first in the industry. While the industry issues a letter of authorisation in the cashless payment system, IndiaFirst loads the en-tire benefit onto the health card when the customer swipes it in a machine. The customer gets his benefit in a few minutes and the hospital is reimbursed instantly. A second example is the happy family image acquired only by possessing a life insurance,

“We have to give the customer a good deal at the end of the policy period comparable to other existing options in the market such as, bank deposits, pension funds, and MFs”

- P Nandagopal, MD and CEO, IndiaFirst Life

Insurance Company

28 CFOCONNECT September 2013

COver STOrywhich the life insurer captures in a photograph of the customer’s happy family and places it on the cover of his or her insurance pack, called the IndiaFirst picture policy pack. This ensures a better emotional connect for the customer with his or her insurance policy.

Creating magic with MagicBoardSince it is a new company, it is small and has no

legacy issues, so it is quick to adapt to market changes such as, the new handheld technology MagicBoard which it uses for 100 per cent sales. This allows it to have complete control over customer interactions thereby maintaining high compliance and customer delight standards. The device holds all the informa-tion that a customer may require on the benefits of the product on offer, at the time of the policy pur-chase and thereafter. He or she can view product videos and even interact with senior personnel in the office via video or a phone call. Dr Nandagopal says MagicBoard has several modules and only the frontend module has been launched. Here, all four stages of buying an insurance product are seamlessly linked and include first, ‘prospect’ which is when a sales person approaches a potential new customer to sell a product, second, deals with the customer’s premium calculation and any queries or objections pertaining to it, third, documentation where he or she captures the customer’s details and does the under-writing, and finally, generates the policy and issues both the policy and the receipt. IndiaFirst bagged the Company of the Year Award for Technology Innova-tion in 2013 for MagicBoard at the Indian Insurance Awards. The key for business is how quickly the insurer can respond to the customer and add value in real-time, he says. In fact the banking, telecom, and FMCG industries are miles ahead in the use of frontend customer facing technology, and can show the way to the insurance industry.

Leveraging parental supportIts biggest late entrant advantage is the enor-

mous success of its bancassurance distribution model, which has been a big contributor to its great three-and-a-half-year run that it has enjoyed so far. Instead of setting up a large branch network it sells its insurance products at the 6000 branches of its pro-moter banks Bank of Baroda and Andhra Bank - both stalwarts in this space. It gets 80 per cent of its retail business from the promoter banks and 20 per cent from agents and other distributors. The company has a tie-up with 23 Regional Rural and Cooperative Banks, adding 2000 branches to the network. It also has tieups with like minded corporates that are either brokers or corporate agents.

An important component of the business that it receives from its promoter banks is group credit life and group protection. The former is a life insurance product bundled with loans that the banks give to

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customers. Chief Financial Officer Karni Singh Arha says this business typically has good margins. In ad-dition, its investment performance has been good on the back of its group fund business which includes group pension, provident fund, and gratuity fund, among others, which it manages for corporates. This has resulted in its Assets under Management (AUM) growing at a good pace to roughly about Rs 4500 crore (as on June 30, 2013). Mr Arha says it is significant that this chunk of business was earlier LIC’s and to some extent SBI Life Insurance Com-pany’s monopoly, before shifting to IndiaFirst Life Insurance Company.

The two bank partners also provide support in policy making, strategy preparation, and governance structures at the board level. The third promoter Legal & General is its technical partner, and lends it support in actuarial risk modeling work, and peer review.

It is also working on a micro insurance product for rural areas along with industry bodies and is

hopeful that it will take off and become another game changer.

Catching upIn terms of catching up with the rest of industry

it hopes to re-introduce the individual pension product, now that IRDA has replaced the earlier 4.5 per cent minimum guaranteed return on the product with an assured benefit. “We will be filing for the product soon,” says Kamalakar Sai Palavalasa, Direc-tor Sales and Distribution, IndiaFirst Life Insurance Company. On the distribution front the challenge now is to expand beyond its promoters’ network. It is building up its agency distribution network which it feels will have to be a similar model to the bancassurance one. Only in this case, it may have to be virtual, rather than physical. However, this will be contingent on whether the agents are mature enough to use the technology. Also, there are connectivity and technology reach issues. The other challenges are the regulations which resulted in about 10 lakh agents leaving the industry. Getting good agents has therefore become difficult.

The company currently has 3000 advisors and targets to take this number up to 5000 this year. The advisors are being trained in-house and will have to work out a revenue model with a low commission. Their role will be to identify potential customers whom they believe can be converted into customers, and pass on their leads to the sales persons who will then take it forward on the MagicBoard.

Dr Nandagopal feels this investment will be fruitful. He sees a strong growth story in the agency model because India is a very ‘relationship oriented’ country. Here, one-to-one relations are better done by a personal financial planner than banking staff which tend to intimidate customers with its organisational and institutional view. In contrast, the agent will take a personal view and be better able to respond to customer needs than a large bank.

ConclusionDr Nandagopal says he is an optimist, and the real

challenge for the industry is to present the customer with an opportunity, so there will be a pot of gold at the end of the rainbow. Post the 2013 regulations, the traditional products will have to be re-filed and the September deadline met. Industry may view this as a challenge, and indeed it will require great effort to respond to the fast-paced changes. In the final analysis, if the industry does it well, it will indicate that it is getting more efficient, and more customer-oriented. Industry must see this as an opportunity for a greater benefit. Slowly, its combined efforts will remove the distrust in the minds of customers. When this happens, the insurance industry will regain its credibility and will be poised for the next round of growth, which will be more sustainable.

“Slowly, our combined efforts will remove the distrust in the minds of customers. When this happens, the insurance industry will regain its credibility”

- P Nandagopal, MD and CEO, IndiaFirst Life

Insurance Company

30 CFOCONNECT September 2013