When ULIPs had a high cost structure, they were quite popular with investors. But collections have dropped after the cost structure was rectified.
We need to understand that a ULIP is not a ‘pull’ product. The same thing happened with mutual funds, which were considered by many as ‘pull’ products − the business evaporated after the entry load was taken out. But given our demographic profile, we need to increase insurance penetration.
There is a cost to this. I wouldn’t say that ULIPs had a high cost structure. They had a high upfront cost structure. Instead, had we offered products which had upfront cost of only 5 per cent and spread their costs over the 15-year or 20-year term, investors would have held on for the long term. Before the insurance industry got liberalised, the average tenure of the policy was 17 years; today, it is seven years. More and more people are cancelling their policies early. With such short holding periods, it doesn’t deliver that benefit.
I think the word ‘commission’ also killed ULIPs, apart from mistakes made by insurance companies. The moment you call something a ‘commission’, there is a negative association with it. We pay large distribution costs when we buy a car, a phone, or even a bottle of mineral water. But when it comes to insurance products, we don’t like to pay it.
Have you completed the process of relaunching all your products in line with the new rules?
Not yet. So far, we have launched 17 products, 11 on the individual side. We still have around 12 riders and eight products filed with IRDA. We have used this opportunity to have more focussed products that deliver better returns to customers.
How have Bajaj Allianz’s first-year premium collections been in the last one year?
Till December, we were higher than the previous year. From January, after new product guidelines have come through, we are 10-11 per cent lower. But this was expected because agents need to understand the features of the new products.
Are insurance collections falling because of distributors leaving or consumers being wary?
I think it is the distributors who feel that the new products are challenging to understand. Also, after the costs were brought down, margins − including that for distributors − needed to be rationalised. Today, you see customers wanting to buy a product on their own, but expecting servicing from the agent later. This means the distributor has to reconcile to lower commissions. But this is yet to happen.
The world over, a wholly online model has not worked well for financial products. You have what is called ‘ROPO’ – research online, purchase offline.
Right now, you have limited means to do this in India. You either have to buy wholly online and understand products on your own, or go to the agent, who will probably explain only one insurance product. We are trying to build a model where if a customer browses our website, but doesn't complete the transaction, we can approach him for an offline sale.
How can existing policyholders move to the investor-friendly, new products?
IRDA has a provision to convert old products into new ones. But so far, no companies seem to have done this. So the only thing for a customer to do is to surrender the old product at a loss.
The other issue is that if we offer a new product, the customer will be subject to another five-year lock-in period. We need a system by which we can retain the old product code, but change the product features. This should be an interesting opportunity for insurers.
I think one area where the industry has to really evolve is in simplifying our policies and having easy-to-understand product literature.
Today, if you approach even the most educated customer with an insurance application form, he will say, “Come back on a Sunday.” He simply does not want to read it because it is a painful task. Insurance companies should strive to bring products closer to what the customer wants.
(This article was published on May 4, 2014)
vinay mohanty
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