Edelweiss Tokio Life Insurance Co. Ltd, launched in 2011, is the youngest life insurance company in India. Its foreign joint venture, Tokio Marine Holdings Inc.’s Tsuyoshi Nagano, president and CEO, spoke to Mint on why they waited to enter the life business. He also spoke about how the company views the Indian insurance market and regulatory reforms. He welcomed the hike in foreign direct investment from 26% to 49% through the Insurance Laws (Amendment) Ordinance, but also mentioned that the company is yet to decide its plan of action. Edited excerpts:
You entered the non-life space through Iffco-Tokio General Insurance Co. Ltd as soon as the industry got privatized, but took a decade to enter the life insurance business in India. Why?
We saw huge potential for both life and non-life businesses in India. Of course, regulations require a foreign firm to have an Indian partner but to understand the way the business is done, we need to understand the people and culture of that country and to do that we need good partners. We chose to wait instead of rushing into the life space.
Also, life insurance is capital intensive with a long gestation period and we needed to make sure that we had a partner with a long-term vision. The life insurance market in India has not been very favourable in the past few years as there have been too many regulatory changes, especially around investment-linked products. Even the economic situation was not favourable. So, we chose to wait for some stability. Even under the current circumstances, our joint venture with Edelweiss has produced an average growth of 167% in the past three years. Iffco-Tokio in the non-life space has been able to manage a combined ratio of less than 100.
In Japan you package various insurance products together to address the various needs of customers. You call it super insurance. What’s the scope of that in India?
We invented the super insurance policy in Japan in 2001. It looks at insuring a household holistically and, therefore, looks at packaging all the relevant insurance covers for the household. The idea is to understand from families the type of risks their household has and insure those risks through a bouquet of products. Coming to regulations, even in Japan we are not allowed to be a composite insurance so we operate as individual companies in both life and non-life, but we own the companies completely, so it’s much easier to make things happen. In India, we have different partners and that gives us more challenge. But we can work towards packaging it in the way we sell and market the products here. The important thing is we need to talk with partners and explain the merits of super insurance. I know this won’t happen overnight, so we need to be patient.
Traditional life plans are making a comeback in India, but are out of fashion in other markets. Why?
The level of interest rates and customer needs are two market determinants for a financial product. Where interest rates are very low, it’s difficult to structure traditional products that add value to the customers as the guaranteed rates will be so low that you would end up moving to a pure-risk product.
The second factor is equally important and a lot of mis-selling in the past has been because customer needs were not addressed. A unit-linked product tied to market performance to cover a short-term need is not appropriate. In developed markets, traditional endowment policies have become less popular as people are realizing that a pure term product with an investment product that may or may not be insurance wrapped is a better proposition.
One of the debates going on in the insurance industry is on open architecture in distribution. What do you think about this?
Even where banks act as independent brokers, tied-agents and semi-agents, the real key determinant is who is responsible and what the relationship of the bank with the insurer is. Certainly, in European markets, especially in the UK, banks have been held responsible regardless of their distribution arrangement.Some of the worst examples of misselling got reported in the UK when banks were independent brokers. This was primarily due to lack of transparency and differential commission structure.
The most important message here is transparency. If a customer can understand the relationship of the bank with the insurer and the incentives being paid, she will be able to trust more in terms of products offered. In the UK, extraordinarily high commissions—well over 100% of the first-year premium—were paid to banks for selling life insurance and so the competition was purely on commission level rather than on product suitability. Open architecture works best through a broking route where there is no differential commission arrangement. The range of products needs to be of high quality with proper advice without commission bias or simple products with guidance available in terms of facts to enable the client to make sensible choices.
Do you think Indian markets are over-regulated?
If the objective of the regulation is to give better protection to customers, it is healthy. But the regulators need to be careful of unintended consequences. In India, regulations have been put in place with a clear intention of protecting customers and the general outcome is as intended. But in the UK, the regulations have had some unintended consequences. The retail distribution review intended to stop commissions that favoured certain financial products, so they stopped commissions altogether on all financial products. Now a customer needs to pay explicit fees to a financial adviser to buy products. This stopped the commission practice but it also stopped 90% of the public from getting any financial advice as the fee-based structure doesn’t work. The client was always happy to pay some embedded commission but unwilling to pay money for financial advice because they thought they were getting it for free previously.