General Insurance CEOs laud the switch to 'principle-based' regulation

We are the 15th largest general insurance market in the world, said Dasgupta

The General Insurance CEOs panel discussed ‘A paradigm shift from rule-based to principle-based regime’ at the Business Standard BFSI Insight Summit held on October 31, 2023. The panel included BHARGAV DASGUPTA, the then managing director (MD) and chief executive officer (CEO) of ICICI Lombard General Insurance; KISHORE KUMAR POLUDASU, MD and CEO of SBI General Insurance; RITESH KUMAR, MD and CEO of HDFC Ergo General Insurance; and YASHISH DAHIYA, CEO and co-founder at PolicyBazaar. Edited excerpts:
 

How will the simplification of regulation help the general insurance industry?
 

Bhargav Dasgupta: We are the 15th largest general insurance market in the world. I think one of the reasons that this happened is the opening up of the sector to private players, liberalisation to attract foreign capital, and setting the ground rules in a manner that didn’t lead to too many market failures. So, there was a lot more control, a lot more rule-based regulations. We have seen some changes over the years. There was de-tarification in 2008, which was a significant reform in the sector. But those original sets of rules that were laid down back in 2000 were not fundamentally re-looked when the sector was liberalised. Maybe there was a reason and a role for it in the past. However, as the industry matures, if you want it to grow well and serve the true needs of the economy, it needs a lot of freedom and flexibility, which comes in terms of the reform objective set by the regulator. So, the agenda is ‘insurance for all by 2047’. And a belief that the industry has matured, where you can move to principle-based regulations rather than very restrictive, prescriptive regulations, like rule-based regulations.
 

Kishore Kumar Poludasu: There’s a wide disparity between the gross written premium (GWP) of the nations across the world when you compare the Indian ranking in the GWP and gross domestic product (GDP). And, when you look at the penetration percentages globally, our general insurance penetration is at 1 per cent, while global penetration is at 4 per cent. There is a 4x multiple of potential opportunity, which is still untapped in India. When India aspires to become a developed nation by 2047 and to be in the top three global economies in the medium term, there is an ample push towards improving infrastructure development and our core sectors so that the entire economy will get uplifted to meet the goal of reaching the top three global economies. Towards that, when we compare ourselves with the US, there is a wide disparity in terms of the penetration of life insurance versus general insurance. In the US, what we observe is that  general insurance penetration is higher than the life insurance penetration. But in India, the situation is entirely opposite. Life insurance is around 3.9 per cent and general insurance at 1 per cent. So, we are looking at the rural areas where most of the assets are not insured, and there is no risk of transmission happening. This is the main pocket which can be used to bridge the gap between these two and rise to global standards. So, towards meeting that objective of insurance for all by 2047, the regulator is coming up with these relaxations in terms of converting from rule-based to principle-based so that appropriate flexibility, innovation, and risk assessment techniques will be developed by the insurers. Insurance companies will benefit by being able to come out with new processes and new products so that the ultimate aim of customer centricity will improve in providing insurance coverage for the entire population, which, in turn, will help the nation develop.

Why do you think the penetration is low, and what do we need to do, going ahead?
 

Yashish Dahiya: It has been fairly well stated that we spent the first 20 years of the industry in a rule-based mechanism. For the last 10-15 years, I think the demand from the leaders of the industry was crystal clear but did not materialise. Things have started to change in the last 18 months. Speaking about penetration, insurance is not an industry that changes overnight. I think the ground has been laid. Maybe in the next five to 10 years, we will reap benefits as people gather around and figure out new strategies that are conducive and introduce flexible ways of operating. So, I think with a lag, you will see the penetration increasing. There is also a developmental aspect that we are at 1 per cent of GDP. This is because India is still quite low when compared to the number of people who have per capita income above $6,000. The number of assets in India is also low. However, the groundwork has been laid. The insurance industry can’t change the entire country just by itself. The asset base of the country has to change.

Has the groundwork been laid for the insurance sector to grow?

Ritesh Kumar: The fact remains that for any sector once it opens up, there are a set of things that need to be done. On the global level, depending on how one looks at it, there is a gap. But, I think a sound foundation has been laid, and what would be important for the industry is to attract capital. At the end of the day, the Rs 2.5 trillion has to become Rs 10 trillion. Therefore, it is also important that we look at some of these important aspects in terms of making the industry attractive to the market.
 

Dasgupta: Capital seeks returns; it also seeks consistency of law. While we are doing this, which is a great first step, I think it’s very important that we stay the course. And to stay the course, there have to be a couple of things. One is a level of confidence and trust in the industry that the regulator sees in terms of how we are behaving as an industry. And, the second is a sense of responsibility among the players to behave in a mature manner. And, I still want to put this point out because at times we get very carried away with reforms, without understanding the responsibility that we have in the industry. We need to behave in a certain manner, ensure market conduct, and ensure customer service. Because we’ve seen many times that there are regulatory flip-flops. And, the general tendency is to blame the regulator without doing some soul-searching. And, I think that’s why I wanted to make this point that the regulator must trust the industry. The industry should also be mature in its conduct, going ahead. Equally, there have to be mechanisms to monitor what’s happening in the industry rather than wait for outcomes to see that things are not going off course. And, that’s a capability that the regulatory system has to build.

So, where do you see the penetration, at least exponentially, say by 2030?
 

Dasgupta: I think if you look at this industry, we've grown through these last 23-24 years at a compound rate of over 16 per cent at a time when prices are corrected. If you look at the prices, the rate of per risk charged, per sum insured price that we charge as an industry has come down in a lot of sectors like motor, and fire, among others, from 2008 to 2023. So despite that, the industry has grown at this rate. So, given some of the reforms that we’re witnessing, the fact that the industry has matured a lot more and that India is doing so much better than the rest at this point, I think all of us should have good reasons to be optimistic about the future of the country. I sense that this industry should comfortably be able to grow at about 20-25 per cent compound rate for the next five to 15 years. I am assuming that India grows at maybe close to 8 per cent. When we started, we had 0.5 per cent penetration, so, reaching 1.5 per cent penetration in a matter of seven to eight years should be feasible from the current 1 per cent penetration.

Poludasu: More and more new products and innovative ways of dealing with the customers be it in the sourcing of the business or servicing the claim settlements with appropriate support from the digital architecture have been evolving in the industry due to the leverage provided by the regulator.

Also, new players are entering the industry and all these things will help in improving the penetration and awareness across the nation. To this account, even the Government of India is also contributing equally by pushing more and more health schemes and crop insurance.

More state governments have joined the Ayushman Bharat and the crop insurance schemes in the recent past. This will help us to appropriately keep in place the transfer mechanism for all the infrastructure projects which have been implemented by the push of the Government of India. With the kind of projects which are coming up and opportunities available, we will see growth coming in the engineering segment and decent growth in the motor and health segments.

Do you think the Bima Trinity will change the business?

Poludasu: Absolutely. I think when you talk about the initiatives by the regulator in terms of putting in place, we call it a Bima Trinity: Bima Vistar, Bima Vahak and Bima Sugam.  If you talk about Bima Vistar, it is a comprehensive product where the insurance industry is coming together and deriving a common product wherein people can choose as per their requirements and the pricing is also affordable. Bima Vahak is one of the channels which the regulator is pushing, mainly with woman-centric rural penetration in view.
 

Bima Sugam is an online platform to which insurers will have access. They can display their products and the pricing as well so that the customer will get to make an informed decision to appropriately pick up the right product which gives value for their money. This will be a game changer for the insurance industry as it will help to penetrate untapped and unpenetrated markets.

Dahiya: This is an effort by the government to expand and develop a road for the insurance sector and these three being there to support is a fantastic thing. It is very supportive of the growth of the industry. I think, we must also as an industry work towards having greater confidence in both servicing and claim aspects.

Globally, among consumers, I would say there is a trust deficit or a bit of confidence deficit and that comes from servicing difficulties. If this part is solved, it will truly expand the industry. But, at the same time, any effort by anyone is only going to help the industry grow further.

What are the broad changes that are expected from this risk-based capital and risk-based solvency and how is that going to impact the industry?

Kumar: Currently, we have what is typically called a solvency quantity. Now, what this means is that it's a standard sort of bar for everyone. To my mind, the risk-based capital or the risk-based solvency moves into what we call principle-based solvency. Today, any company that has 100 per cent of a particular portfolio largely needs to keep the same amount of capital. What will change tomorrow is that people who have a more diversified portfolio will have to keep less capital. So, it starts giving some benefits for diversification.

Today, if 40 per cent of my portfolio is insured in a particular line of business, I may reinsure it with the world’s best and this company may reinsure it with something else. We still have the same capital relief. Tomorrow, the quality

of the insurance will start making a difference.
 

Today, in a rule-based regime, there are gaps in how much benefit you can get from insurance. Tomorrow, that opens up. So, risk-based solvency will look at the portfolio quality, quality of insurance, and the market risk. It will look at how well you are and what is being done on the enterprise risk management. It is a far more holistic issue than what the present sort of rule-based solvency is.

Will the risk-based capital change the product or portfolio mix of companies?

Dasgupta: The risk-based approach could drive strategy. At the end of the day, it depends on how capital-constrained you are and whether you are forced to choose your lines of business based on your capital constraints. However, I think it will help in allocating the right amount of capital for the right set of risks. If one has a lot more granular business, where the volatility is less, there should be some benefits. If one runs a book that has a high equity exposure, one should put more capital. These are the correct measures. When one says risk-based capital, it need not mean the same for everyone. Within risk-based capital, there is a standard model, an internal risk-based model.

An important point is the extent of diversification benefit. During the pandemic, multiline general insurance companies had a reasonably robust year as compared to monoline companies. The multiline companies did not dip in capital, which shows the power of diversification. And,  at the end of the day, solvency is to protect the company from going bankrupt or insolvent. So, it was a true test of a Six Sigma event and the industry rising to the challenge. So, these are things that a proper risk-based capital mechanism should factor in and account for.
 

Poludasu: In the risk-based capital framework, what we foresee is that the focus will shift from the top-line approach to the profitability approach, wherein the return on capital will play a major role in deciding the business mix of any industry, going forward. The kind of business mix, what kind of growth will be chosen and what kind of reinsurance structures will be entered into based on the rating of the reinsurance. Also, when it comes to the investment portfolio, where you get the majority of the investment income. Again, what kind of instruments you are deploying with your money? If it is an equity-based option, the higher capital requirement will be there. And, if it is a motor-third party business, what they are doing, based on the quality of the book, then again the capital will get changed. The shift from factor-based capital maintenance to risk-based maintenance is a perfect measure for the insurance industry to identify efficiencies across the price. That will help in keeping our industry in the international arena, towards a greater insurance framework. I think all roads lead to health, is my view of the general insurance industry.

Do you see health being dominant in the general insurance industry?

Dahiya: I think all roads lead to health, is my view of the general insurance industry. It is a difficult, complex area. Recently, there was a misdeclaration; it was a port policy. The company settled the claim for a hospitalisation bill of Rs 11 lakh for four days. There was not a single voice which said that the bill was too high. Somewhere, we have to understand that health insurance pays for health care. Health care bills have been funded. How does the health insurance industry keep up with sympathy towards declarations and misdeclarations? So, I think it’s a complicated area. Even if I speak to most of the insurance companies, they have no clear answers on how to get this resolved. Countries have solved this as a combination of efforts from government and private or a combination of health care and the insurance industry. It's not a simple problem. It’s not a trivial problem to solve.  The industry, yes, it will grow. It has been growing at 18 per cent. It will keep growing. However, if you look at the fresh health insurance business, the health insurance industry has seen perhaps a growth of zero per cent in the past few quarters. So, porting is now almost 30 per cent of the industry where one company’s policy is moving to another company. This is despite having a good price range as an industry.

What is the reason for not having growth in the fresh health insurance business?

Dahiya: I think it’s a difficult claims environment. I think there are two reasons for that. The customers believe they are covered for a lot more than what their policy says. I also feel doctors are struggling with claims at the back end as the quality of the charge and the nature of the cost comes up. And I think the hospitals do have a similar problem. In many places, hospitals charge more than the customer’s insurance. The costs are not the same.

Kumar: At the core is the fact that health insurance needs to be affordable. It’s very easy for an insurance company to go out and pay all the claims. Meanwhile, with a lead or a lag, the premiums will go up. So I think it is a very complex problem. How do we handle fraud? We are a regulated industry. On the other side, the provider is not regulated. So these are complex problems. The other thing is, the more transparent we get as an industry, the faster the turnaround times are. I also want to put it across that there is a very, very important initiative that we as an industry are trying to move which is to move health insurance to 100 per cent cashless. The bulk of the problems that we face as an industry today are because there is a significant amount of claims that come in as real cases. In India, if one settles something in cash, you will pay lower than what the insurers pay. Now if you look at insurers as cash cows who are going to just be paying claims because as corporates they have a larger pocket, that's not going to solve the problem. Because at the end of the day, I think affordability is what we are missing. We can settle a claim instantly.

But, we want to pay claims fast to the rightful claimant, not to someone who has misdeclared. This is what we are doing. It is an industry’s endeavour along with the regulator, along with the government to try and see to what extent we can push up cashless settlement than what is presently 60 per cent in terms of cashless.