Indian Insurance Sector

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December 2011
Time Leveraging Time fasfdor

Indian Insurance Sector
Innovate Now Or Stagnate


Indian Insurance sector poised for its next stage of growth 1
The puzzle of untapped potential 2
Redefining Customer Value Proposition 3
Improving Operational Performance 6
Key challenges in leveraging Innovation 7
Improving the Innovation Quotient 8
Conclusion 12
Contacts 13

Indian Insurance Sector Innovate Now Or Stagnate 1
Indian Insurance sector poised
for its next stage of growth

The insurance sector in India has grown at a fast rate post-liberalization in 1999. In the last decade, total
premium grew at a CAGR of 25% and reached a total of $67 billion in 2010. Indian Life insurance
industry (which contributes 88% of total Life and General insurance premium in India) has emerged as
the 9th largest life insurance market in the world. Yet, Insurance penetration (measured as ratio of
premium underwritten to GDP) was only at 5.2 % in 2010 – significantly lower than Asian peers like South
Korea, Taiwan, Japan and Hong Kong which boast an insurance density greater than 10%.

With low insurance penetration levels, growth potential remains promising. More importantly, the pace
and nature of growth will likely see a change where new behaviours and dynamics of demand and supply
will apply. On the demand side, growth is being fuelled by the growing population base, rising purchasing
power, increased insurance awareness, increased domestic savings and rising financial literacy. The
suppliers are correspondingly playing a market making role as competition heightens and differentiation
become necessary for profitable growth.
In the new order, innovating across the business lifecycle has become a necessity.

Source: IRDA Annual report 2010

Indian Insurance Sector Innovate Now Or Stagnate 2
The puzzle of untapped
While the growth in Insurance industry has been at 25% in the past decade, a closer look suggests that
this growth has come at a cost. Private insurance companies have incurred high expenses in the last
decade in increasing awareness about the need of insurance, developing brand strength, establishing
distribution channels and setting-up branch network and other infrastructure. Most insurers‟ initial plans of
breaking-even within first 7 to 9 years of operations has been fraught with challenges. Some of the
challenges can be characterized as growing pains, while others are more fundamental and intrinsic to
how players have approached market making.
To begin with, awareness levels of insurance offerings are low (e.g. compared to banking products)
except for products like motor insurance where insurance is mandatory. Even when awareness of
insurance products exists, the perceived value of buying insurance remains low for reasons like high
expectations on returns (which other financial products may offer) and the belief that risk coverage is not
needed. Hence, insurance remains a „push‟ rather than a „pull‟ product in India. Even among those who
do buy insurance, the lapse ratios are high (average ~25% lapse ratio for top 13 players as per IRDA
2010 annual report) and many buyers lose interest due to mismatch between expected returns and actual
In order to attract customers, the insurers have (especially in non-life insurance, post de-tariffing)
resorted to premium discounting which may have impacted the profitability and quality of risks
underwritten. Reaching out to the potential willing buyers and servicing them is also a challenge
considering the sparsely spread population, especially outside the metros and Tier-I cities. The industry
has faced challenges in acquiring and retaining (internal and external) channel teams considering the
huge gap between the demand and the supply of dependable and skilled personnel, resulting in high cost
of customer acquisition and operations.
In our view, despite the latent potential, in the short term, Insurers will continue to be confronted by a
multitude of challenges in their quest to achieve top-line as well as bottom-line performances. Besides
struggling to maintain growth, insurers are called upon to meet the increasing dynamic needs of price-
and service- conscious customers, meet regulatory demands, enhance risk management capabilities,
reevaluate business partnerships and distribution models and at the same time build capabilities in a
more enabling technology environment.
Due to above challenges, in our view, accessing the next wave of growth would require different
strategies from those applied during the first wave. Players will need to innovatively improve primarily two
aspects of business – value proposition to customers (to improve customer acquisition) and operational
performance (to improve profitability).

Indian Insurance Sector Innovate Now Or Stagnate 3
Redefining Customer Value
To improve customer acquisition, a closer examination of the strategic components – Core Product
features, Positioning, Communication and Distribution channels – is warranted (refer figure 1). Innovation
and developments of these components and their interplay will be critical to developing distinguishing and
sustaining propositions.

Core Product Features
Risk coverage, benefits, price/premium and associated services form the key components of core
features of an insurance product. The product design teams need to configure innovative combinations of
these components to address specific segments‟ needs and remove deterrents to buying insurance
Globally, insurers have designed innovative products targeted at specific ages, types of groups,
professionals or people with disease at different stages. Instances of products with innovative coverage
and benefits include wellness programs, access to preferred providers, reward and loyalty programs,
provision of emergency services and guaranteed NAV ULIPs. Products with innovative pricing include
„pay as you drive‟ for motor insurance and „co-payment claim products‟ for health insurance. Globally,
some players are experimenting with use of telematics to offer „driving behavior-based pricing‟ for motor
insurance products. However, the insurers will have to take caution against innovation that leads to more
complicated products and design products which are simple and focused on offering the value desired
from insurance by the customers.
Figure 1: Components of Customer Value Proposition

Indian Insurance Sector Innovate Now Or Stagnate 4
Positioning the product is equally important to improve the perceived core proposition of the product.
Positioning involves communicating key highlights or proposition of the product through messages which
the target segment easily appreciates and connects with. Insurers have positioned their products as ones
which provide „prevention of disease‟, „education for child‟, „complete car solutions‟, „with you for life‟ to
position their products‟ utility or establish an emotional connect. Innovative positioning will require
understanding the potential and existing customers‟ stated and unstated needs and responding to
changing socio-economic scenarios across the target geographies. With changing lifestyles and
increasingly demanding customer segments, the players will have to position their products around
concepts like „lifestyle products‟, „quick & easy‟ or „chose your coverage‟.

Customer Segmentation
Understanding customers and inherent customer behavior is a vital element in developing a value
proposition which resonates with the customer‟s unmet needs. However, there is a need to look beyond
the traditional segmentation strategies around income, wealth, geographies and life stage. Segmenting
the customers according to their insurance needs and behavior characteristics provides better customer
insights which are more likely to create a satisfied customer. Developing that level of a refined
understanding of the customer will enable insurers to adapt their product offerings, marketing campaigns
and sales force alignment to suit their niche segments.

Communication and Distribution Channels
The identified product positioning requires appropriate communication channels which can reach
geographically dispersed and socio-economically diverse target customer segments. The distribution
channels contribute by delivering on the promise made through the communications during the customer
acquisition and servicing cycle. Insurers will need to deploy innovative distribution channels to
significantly improve the ability to reach target customers and communicate the value proposition at
optimal cost. Insurers are increasingly using communication and distribution channels like social media,
self-help web-portals, bundling services with mobile service providers and alliance with malls. Work-site
marketing, groups like co-operative housing societies and unrelated products‟ distribution channels are
increasingly being leveraged by insurers to improve distribution reach. For example, an experiment by a
leading insurer in South Africa of distributing insurance products through a retail clothing store has been
successful. Insurers have also leveraged Self-Help Groups (SHGs) and Business Correspondent outlets
of banks in rural areas to distribute micro-insurance products.

Aligning the Value Proposition with Customer segments
To ensure effectiveness of innovatively re-defined customer value proposition, insurers will need to
address specific segments of customers. Insurers will need to segment the potential customers on
dimensions of how „Aware‟ and „Convinced‟ are the customers (refer figure 2) about insurance products
and services to better choose which components of value proposition to leverage.
The segment under quadrant „Addressable opportunity‟ is a sweet-spot which could be serviced with
minimal efforts, but most of the insurers would be chasing this segment, making it a competitive space to
operate in. It is important to retain acquired customers by understanding their needs and serving them
well. Addressing such customers requires (a) innovative differentiation of product / services from other
players; (b) innovative service delivery model and (c) the ability to cross-sell other products.
The segment under the quadrant titled „Hidden opportunity‟ may have only blurred to little understanding
of insurance products but may be willing (or are easier to convince) to buy insurance once they are made
aware about the features and benefits in greater detail. Addressing this segment requires innovative
promotions, campaigns, communications and bundling with other/associated products. For example, low
ticket or bundled health policies were launched to introduce the products to identify those who respond
positively (as they are willing buyers) and then increase the ticket-size and cross-sell more products.
Innovative channels could also play an important role in increasing potential buyers‟ affinity with products
to explore and serve the convinced buyers.

Indian Insurance Sector Innovate Now Or Stagnate 5

Figure 2: Customer Segments

The “unconvinced segment” is the informed segment which does not perceive the need to buy insurance
or had bad experiences in past. Addressing this segment requires innovative product design, aligned
pricing and customized servicing. Players will need to assess the possible reasons for this segment being
unconvinced to refine the pricing, alter the product ticket-size upward or downward and change the rigor
of service levels and available channels.
The “future opportunity” segment should be monitored for future potential and revisited periodically
depending on the untapped potential available in the other quadrants. The population under „future
opportunity‟ could also move towards the other quadrants by itself as product awareness and perceived
need for insurance improves due to external parameters like larger media exposure, improvement in
quality of life, word-of-mouth and large natural / human-made disasters.
The challenge in undertaking the above however is the ability to map the population along the four
quadrants. This could be achieved by primary research, focused group interactions and stakeholder (e.g.
healthcare providers in case of health insurance) feedback. On-going industry-wide research on
consumer behavior and perception towards insurance products sponsored by the insurance players,
councils or the regulator could also provide significant insights.
Insurers who invest in incremental innovation across the insurance value chain and not just in disruptive
innovation are more likely to benefit as the market stabilizes. Incremental innovation is not likely to cost a
lot (compared to existing cost structures of players), as it involves rejigging existing business and
operating model to deliver better and is easier to implement. Insurers investing in redesigning products
and processes, smarter marketing, finer customer segmentation are more likely to gain a
disproportionately high share of market growth and market share.

Indian Insurance Sector Innovate Now Or Stagnate 6
Improving Operational
Apart from addressing the challenge of customer acquisition, the other big challenge for Indian insurers
has been improving operational performance to achieve profitable growth. Many Insurers in past have
resorted to tactics like high commission payment to distributors, focusing more on new premium rather
than renewals, high premium discounting and focusing only on growth rather than also focusing on
improving operational maturity. The result has been high customer acquisition costs, low channel
productivity, low customer-centric service excellence, reduced ability to detect frauds, difficulty in
implementing risk-based pricing, challenges in acquiring and retaining talent and poor quality of data.
The insurers will need to innovatively alter the operating models, business processes, channel
management and human resource strategy to control the operating expenses and the combined ratios.
Insurers have implemented innovations like over-the-counter products, auto-underwritten and straight-
through processed products to improve the speed of service and reduce processing costs. However, with
increasing customer sophistication, growing scale of operations, larger diverse workforces and greater
need to increase reach, the players will need to bring in rapid innovations across business functions.

Indian Insurance Sector Innovate Now Or Stagnate 7
Key challenges in leveraging

While there have been instances of innovative products and business models deployed by insurers in
India, there are challenges – internal and external to the insurers‟ organizations – which inhibit greater
Firstly, in the first decade of privatization, the focus was more on expanding and stabilizing the business
applying the prevailing business models rather than on innovation. With a decade of learning about the
consumer behavior and channel economics, the players may now be better equipped to implement
successful innovations relevant in India. The imperatives for innovation too are now higher than in the
early years of privatization. Secondly, the management teams have so far been more oriented to design,
deploy and maintain systems and processes rather than bring in innovation. The ability to innovate –
which involves taking risks – may also have been hindered by the fact that the players are constrained by
low margins of error on account of lower profitability and high capital requirements.
Lastly, some of the product and distribution innovations prevailing in other markets (e.g. Insurers offering
insurance along with other services like health programs) are not permitted in the Indian regulatory
environment. While the regulator has supported insurers to implement innovative practices through steps
like product de-tariffing in general insurance and permitting „Health plus life combo‟ products, regulator
has been cognizant of prevailing challenges. With realization of mis-selling instances and low consumer
awareness, the regulator has avoided propagating drastic variations in core product parameters or the
distribution channels.

Indian Insurance Sector Innovate Now Or Stagnate 8
Improving the Innovation
Fuelling the innovation engine
Innovation management is all about people management. To begin with, the organizations should commit
themselves to deploying innovation and creating a culture in which implementation of new ideas is a part
of the core strategy. Secondly, the management should communicate to the stakeholders, the extent of
role that innovation is expected to play – the Innovation Quotient – in the growth journey of the
organization. Accordingly, the management should propagate the culture of risk taking within the set
The participants of innovation process could either be the entire organization or a focused team which
could include various functions (sales, marketing, distribution, operation, strategy). The human resources
strategy and policies should be aligned to Innovation Quotient in terms of appropriateness of job roles,
reporting structure, Key Result Areas (KRAs) and incentives to encourage innovative behaviors.
Integration of stakeholders outside the organization – customers, channel partners, regulators – is also
critical to source and implement innovations in the organization. Lastly, the organizations should develop
capabilities to assess the extent of success and Return of Investment (RoI) achieved through innovation.
Ability to Innovate also requires parameters external to the players to be conducive. For example, the
regulatory regime should allow and encourage innovation in areas like products and distribution. The
related sectors like healthcare, housing, motor dealers and government should be receptive and agile to
participate with insurers to offer innovative products and deploy processes and technology to improve
sales process and customer servicing.

Understanding the Innovation Levers
There are several Innovation Levers which may be applied by insurers in the context of environment
developments which are likely to considerably change their business prospects over the next few years.
Insurers which are better organized around harnessing and adapting these Innovation Levers will be
better positioned to realize their potential by deploying their capital – financial, managerial, technological
as well as physical. A select list of illustrative Innovation Levers have been detailed below.
Innovation Levers
How could these work? Key questions
Data management needs to evolve from inherent
data collation to advanced data analytics to provide
insights as well as operational foresights which can
increase the insurer‟s ability to compete. Finding
the small changes that make a difference could be
the result of appropriate use of data analytics.
Is there a need to create
a position of a Chief
Analytics Officer? Is the
organization ready to
adapt DDD (Data Driven
Decision making)?
There are several technological advances, which if
deployed appropriately, can provide a head-start to
the insurer‟s business. Besides soft technology like
predictive modeling, claims fraud software, there
are options including cloud computing and other
technology tools that can make a business
difference between players. For example, one
Have you created an
organization strategy
around evolving
technology? Are all
elements of your
infrastructure working in

Indian Insurance Sector Innovate Now Or Stagnate 9
powerful analytical software tool is modelling
software to support underwriters in making
competitive pricing decisions, while improving
efficiency by facilitation straight through processing.
tandem? What is the
incremental technology
Companies developing more granular customer
segmentation approach based on non-traditional
factors will be better positioned to promote some
products to select customer segments, e.g. by
developing transparent / advisory based selling to
an „Active‟ customer, price-based selling to a
„informed‟ customer, etc.
Is there is need to
introduce a Customer
Insight function to hear
the Voice of the
Product Innovation
Redesigning products that meet specific customer
requirements may assist in repositioning the
customer value proposition. Several insurers are
investing in developing affordable products geared
to specific customer segments or reverse
engineering the existing products for a specific
price point.
Is the Product
development aligned to
customer need? Does it
give a sustainable
competitive advantage?
Developing alternate channels may provide a
distinct advantage in the light of changing market
behavior. There are customers with various
coverage requirements that are buying online.
Insurers developing multiple channels and
managing inherent channel conflicts are likely to be
better placed to face competition in the future.
Is there a need to align
channel management
as per customer and
product matrix rather
than traditional silos?

Innovation process
Innovation process begins with generation of ideas by the identified stakeholders. Organizations need to
put in place, process which enables collation of ideas through modes like formal meetings and
workshops, suggestions boxes or technology enabled „idea banks‟.

Indian Insurance Sector Innovate Now Or Stagnate 10
Figure 3: Innovation Process

The desired stakeholders and the modes of seeking ideas depend on the scope of innovation (e.g.
product innovation or operational improvement) and frequency of innovation (one time vs ongoing). The
goals for seeking ideas and scope of idea generation should be defined when inviting the ideas (refer
figure 3).
The generated ideas need to be selected for implementation using a matrix which accommodates
imaginative exploration but also evaluates expected returns and risks involved through critical judgment.
The ideas need to be further elaborated and converted into products and services definitions in the
context of the organization‟s business and socio-economic environment. In the final stage, the selected
products and services need to be defined and delivered as projects by engaging the stakeholders and
closely monitoring the benefit realization.
The process of innovation can take two forms – Incremental or Breakthrough (refer figure 4).
Breakthrough innovation is generally less frequent, disruptive, more strategic with high revenue potential
and initiated at organization level with close involvement of the top management.

Indian Insurance Sector Innovate Now Or Stagnate 11
Figure 4: Forms of Innovation

Breakthrough strategy enables creation of growth strategies, new product categories, services or
business models that change the game and generate significant new value customers and the
corporation. Breakthrough innovations are often managed as one-off large projects in the organizations.
Incremental Innovation involves successfully utilizing a new technology, undertaking small process
improvements or launching product variants, which bring incremental improvement. In the short term,
Incremental innovation has relatively low to medium impact on the revenues or the expenses incurred by
the organization. They may not bring large, dramatic or game changing improvements in short span, but
often lead to long term growth of the organization. Incremental innovation is often managed through
imbibing idea generation, selection, conversion and diffusion steps in the regular responsibilities of the
functional leaders of the organization.

Indian Insurance Sector Innovate Now Or Stagnate 12
Insurance industry in India has now been through a cycle involving high growth and more recent
moderation. The next wave of growth will be of different nature and complexity, led by players who
change the market dynamics through innovation. With a decade of experience and learning about
customer behavior and business economics, Indian insurers are well-placed to select and diffuse
innovative ideas. However, this would require that insurers bring about fundamental difference in mindset
on how they perceive the role of innovation in achieving profitable growth. The insurers will need to align
the people strategies to create a culture of generating new ideas and implementing those using optimal
resources. Insurers have the choice of adopting innovation and leap ahead or lag behind.

Indian Insurance Sector Innovate Now Or Stagnate 13
Sachin Sondhi
Tel: +91 22 6619 8710
Email: [email protected]

Monish Shah
Tel: +91 22 6619 8692
Email: [email protected]

Alpesh Patel
Tel: +91 22 6619 8803
Email: [email protected]

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