Insurers have much in common and should think more about how to differentiate themselves.
Currently, there are several products that are standardised across insurers. Motor insurance is one such legacy product. The core product has two sections – own damage and third-party liability. The basic coverage is the same across insurers for both sections. However, insurers can issue add-ons to differentiate their offerings for the own-damage section. Most add-ons are now similar. Pricing for own damage is defined based on a discount to the motor tariff. This discount varies substantially across insurers. The premium for third-party liability section is identical across insurers. Another legacy product is Fire insurance.
The product coverage goes beyond its name. In addition to fire, it covers flood, earthquake and riots. Insurers are allowed to issue add-ons, but few promote it aggressively. Until 2007, insurers were also required to charge the same price. When that fixed price regime was lifted, it was considered a watershed moment for the industry. Since the product was the same, insurers soon out-priced each other to the bottom. Pricing became unviable. To salvage the economics, insurers now have gone back to a fixed-price regime. They all charge the same rates, which are recommended by the Insurance Information Bureau of India (IIB).
Standardisation in personal insurance
A similar wave of standardisation is now underway in personal insurance polices. In September 2019, regulator IRDAI introduced the standardisation of exclusions in health insurance covers. The guidelines prohibit insurers from excluding specific illnesses and make them compulsorily cover a few modern treatment methods. The guidelines also set a framework through which insurers could exclude some illnesses permanently based on pre-set underwriting criteria. Such a framework would certainly help reduce policyholder disputes and bring more predictability in health insurance claim settlements. IRDAI followed this with several other standardised coverage guidelines such as compulsory coverage for tele-medicine and the methodology to apply for room rent deduction.
This framework standardisation is accompanied by product standardisation. In January 2020, IRDAI made it mandatory for all general and health insurers to introduce a standard health insurance product, Arogya Sanjeevani. The entire product design, claims process, and the product name format are identical across insurers.
Now, insurers are free to set underwriting guidelines and charge premiums based on their risk perception. They are also free to offer other health insurance products with unique features. Later in 2020, the regulator asked all health and general insurers to issue Corona Kavach insurance. Again, the structure, wordings, and claims process were pre-defined. Companies were free to differentiate based on price and perceived after-sales service proposition.
Corona Kavach was a timely move by the regulator, as insurers were reluctantly issuing coverage specifically for COVID-19.
Dependence on standardisation
However, heavy reliance on standardization may not be the best for insurers. Recently, the regulator asked all life insurers to issue a standardised term insurance, Saral Jeevan Bima. Term insurance is highly commoditised, and insurers have been struggling to differentiate. Term insurance products cover all kinds of death and have no exclusions, except suicide for the first year. In insurance, after-sales service is tested by the policyholders or the nominees, several years after making the payment. So, in a standardised product regime, price becomes the principal differentiator. Standard health products already witness more than 50 percent price difference among insurers. It is likely that insurers would under-cut each other in a bid to gain market share. Already, there is a concern amongst re-insurers that life insurance pricing in India is too low. Perhaps, would we see the fire insurance trend repeat itself in health and life covers as well?
In the standardised regime, the price for flood insurance is the same for Rajasthan and Meghalaya. This naturally deters buyers, especially the first-timers. To drive insurance adoption, we need to tailor customised products for specific occupations, lifestyles, geographies, sizes and risk conditions. Much of these have to be driven by insurers and intermediaries. Some aspects of standardization are good because they set the minimum bar for all insurances. However, insurers should innovate much more; otherwise they risk becoming undifferentiated and creating an industry that is completely price driven.