2020 witnessed 'one-size-fits-all' insurance. Is this the way forward?

"IRDAI has come out with a slew of standardised insurance plans in the year 2020 - Corona Kavach and Rakshak for Covid-19, Arogya Sanjeevani for health insurance, Saral Jeevan for term insurance and now proposal to have a standardised personal accident cover – to help customers make informed decision and reduce mis-selling. In my view, this trend also manifests lack of customer awareness/education and need for further protection of customers' interest."

Life and health insurance needs of an individual depend on various parameters, including risk exposure, risk perception, risk appetite and personal financial situation. Insurance companies are expected to understand the existing and emerging insurance needs and design well-aligned products at competitive price within the regulatory framework. They need to innovate products continuously, build a robust sales process and create a long-term trust with the customers to ensure enduring growth of the industry.

Standard product life cycle journey of the insurance industry begins with simple commoditised insurance products and moves towards catering to the customised insurance needs of various target segments of the market. The product life cycle had a paradigm shift and 2020 witnessed standardised insurance plans, including Corona Kavach & Corona Rakshak for Covid-19, Arogya Sanjeevani, a health plan, Saral Jeevan, a term insurance policy and now a personal accident policy. This shift has some reasons and implications in short- and long-terms.

Why this trend!

♦ The first and foremost reason for this could be that the regulator wanted to increase the insurance penetration through simple and standard products. This pandemic has made people acknowledge and appreciate the need for insurance like never before. This approach would help to make available a product by all insurers that will broadly meet the needs of an average customer.

♦ The other reason could be that the customers who are not financially savvy find it difficult to select the right product. This has made it necessary to introduce a standard insurance product, with simple features and standard terms and conditions.

♦ There seems to be a lack of awareness of risk requirements between the insurer & the insured and the regulator is helping bridge that requirement by issuing the standardised product features.

♦ This approach has also been taken to reduce mis-selling as well as potential disputes at the time of claim settlement. Mis-selling has been a concern for the insurance industry and the regulator, and the companies have taken a number of initiatives to reduce it, but it is still prevalent. Any sustainable improvement will happen through efficient investor awareness framework and robust protection mechanism.

Implications:

♦ There is no gain saying that standardisation of insurance products ensures the availability of specific-purpose plans but it leaves behind a limited scope to innovate on product design to differentiate and provide more options to policyholders. The scope of differentiation becomes limited on design and pricing as well.

♦ With standardisation of products, the competition among insurers will increase and this may lead to price war. This situation would have beneficial impact on the premium rates in short run while the price war has its own advantages and disadvantages for the sector. The companies with competitive costs and scalable business would be the winners. This would also depend on the stage of business cycle they are.

♦ Standardisation of products may lead to some sort of standard pricing. This may not encourage many insurers to actively participate in that line of business or product segment as the standard pricing may not be financially viable for them.

♦ This may also lead to consolidation in the industry as products would become a non-differentiating factor and to optimise cost and achieve scalability, companies would merge to compete effectively in the market.

Why such standardised products with a commodity approach of insurance needs are required even after 20 years of opening of the sector? Has the industry missed something?

We need to understand the genesis of such approach and a true prognosis will pave the way for creating a balance between innovation & penetration, between regulation &development.

In my view, we need to create awareness so that customers can make an optimum choice and establishing a right regulatory framework to safeguard the interests of all stakeholders concerned. Whether this 'one size fits all' approaches, is good for the industry, only time will say.

An educated customer is a protected customer is the template we need to reinforce.

(The author is Fellow of Institute of Actuaries of India, Member of Investor Education and Protection Fund (IEPF) Authority, Government of India. The views are personal)