India's insurance companies feel the digital pinch amid Covid-19 pandemic

The second half of 2020 is proving to be a tough period for India’s insurance companies. For years these companies wrote insurance policies and serviced claims in a limited universe of mostly salaried people but recent trends have disturbed the pace. The first of these is the Covid-19-induced furious pace of adoption of digital means to sell insurance. This digitalisation has hurt non-life companies the most with digital insurance aggregators cornering clients. The other is the dip in the interest rates that has reduced earnings from long-term investments for life and reinsurance companies.

In August, HDFC Ergo and ICICI Lombard withdrew sales of their insurance products from third-party brokers. They join LIC, which has so far resisted the temptation of digital third-party sales. The withdrawal was clearly a fight for survival. While industry reports assert that technological competence will determine which insurance companies will be in business in 2030, the withdrawal shows the insurance companies are uncomfortable with just providing the back-end office support and meeting claims while tech-based aggregators sell the products. The model offers an advantage to sellers vis-a-vis the customers, a variation of the competition between retail shops and wholesalers. An Accenture report notes, “Probably for the first time, the market change has left the insurance industry well behind in a very short period.”

Yet a BCG report on the scope of digital insurance notes, “Partnerships between digital companies and insurers can lead to a win-win-win situation.” From just 1.5 per cent, the share of online insurance policies sold had jumped to nearly 10 per cent by end of March 2020. The traditional insurance companies feel there is an asymmetry developing in the insurance market. For instance, Policybazaar, the biggest among the aggregators, has filed for an IPO. Next in line, Digit Insurance, has become a unicorn last year. Acko is on the way to be the next unicorn. Of the 110-plus insurtech companies in India, many of them members of India InsurTech Association (club of insurance brokers), dozens are hopeful of hitting the one billion-dollar mark soon. On the other end are the traditional life and non-life insurance companies, of whom only six are listed on the stock exchan­ges as of August 2021. There are no others among the 58 companies planning to get listed soon, except the government-owned ones and those under duress.

These companies operate in a thin Indian insurance market. A SBI report notes that the number of people offered life cover by the insurance companies in four years up to July 2021 is just 170 million, “while the government sponsored Pradhan Mantri Jeevan Jyoti Yojana has enrolled 10 crore [100 million] people during the same period”. The latter is like term insurance but marketed by government agencies. Minus the government numbers, the insurance penetration in India (that is, percentage of premium to GDP) is just 3.78 per cent, stagnating for more than a decade.

It is the insurtech companies, therefore, that are attempting to expand this market. As more customers flock to their portals, they can demand higher marketing commissions for the products they sell, just as car dealers have forced the same arrangement for motor insurance policies sold at their premises. These companies are already tying up with e-commerce, ride sharing, travel and fintech companies to offer value-added service to the same customers. The gross merchandise value of South Asia’s digital economy is expected to grow at 16 per cent CAGR over the next 10 years.

The “time out” taken by the two leaders in the pack in the non-life business is, therefore, significant. They are not closing down their digital presence, but want to reach customers only via their own platforms. Both companies declined to share more details.

It is also no surprise that other companies have not followed the lead. Despite calendar years 2020 and 2021 having been roller coasters for the industry in terms of growth rates, with wild dips and highs (see chart) these companies are scared they will lose market share if they walk out of the digital platforms run by the aggregators.

Globally, the insurance industry is moving to a model where insurance policies and premiums are tailored to customer profiles aided by vast technological leaps. Chinese life and health insurer Ping An describes one of its products as a “disease management” service for people with Type 2 diabetes. Artificial intelligence practically decides how the customer will run her life, intervening with periodic check-ups to develop a medical care plan that is being berated as too invasive. Root, a motor insurance company in the USA, offers customers test drives in cars padded with machines to decide if he will be offered an insurance plan.

Compared to these trends, Indian insurance companies are just tapping the digital options. Companies such as HDFC Ergo recognise the challenges. “Integrating IoT devices with health insurance will benefit the retail customers, encouraging healthy living activities for them and making it a win-win proposition,” a knowledge centre blog run by the company notes. Yet Covid-19 has forced the domestic industry to take a technological leap far earlier than planned. In the space of months, life and non-life insurers had to re-engineer their sales, claims and back-office platforms often from scratch, and abandon in some cases their traditional model of relying on agents, brokers, and bancassurance channels for distribution. That model was itself of recent vintage, having replaced the public sector-led model where insurance officials waited for customers to walk into branches.

The changes have, therefore, come too fast for the industry, which is undercapitalised with too many players. In the past few years, the total shareholders’ return (TSR) from the business has fallen. In developed markets, the average annual TSR, weighted by market capitalisation, was 5.1 per cent from 2016 through 2020, 3 percentage points lower than in the previous five-year period and significantly below the average insurer’s cost of equity, a BCG report notes. Indian insurers are mostly joint ventures with these companies so the dip in returns has impacted the ability of the companies to expand. To complicate matters, returns on debt paper have dipped as interest rates stay low. Insurance and pension companies hold papers for the long term so the current rates are bad news for them. In this environment, the additional cost of going digital at warp speed demands a major overhaul.