Contents
Indian Insurance sector poised for its next stage of growth The puzzle of untapped potential Redefining Customer Value Proposition Improving Operational Performance Key challenges in leveraging Innovation Improving the Innovation Quotient Conclusion Contacts 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%. 1 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.

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Source: IRDA Annual report 2010

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The puzzle of untapped potential
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 benefits. 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 priceand 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).

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Redefining Customer Value Proposition
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 products. 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

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Positioning
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.

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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.

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Improving Operational Performance
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 straightthrough 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.

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Key challenges in leveraging Innovation

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 innovation. 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.

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Improving the Innovation Quotient
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 boundaries. 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 (illustrative) How could these work? 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. 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 Key questions Is there a need to create a position of a Chief Analytics Officer? Is the organization ready to adapt DDD (Data Driven Decision making)? Have you created an organization strategy around evolving technology? Are all elements of your technological infrastructure working in

Analytics

Technology

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powerful analytical software tool is modelling software to support underwriters in making competitive pricing decisions, while improving efficiency by facilitation straight through processing. 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. 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. 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.

tandem? What is the incremental technology ROI?

Customer Segmentation

Is there is need to introduce a Customer Insight function to hear the Voice of the Customer?

Product Innovation

Is the Product development aligned to customer need? Does it give a sustainable competitive advantage?

Channel Management

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‟.

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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.

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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.

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Conclusion
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.

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Contacts
Sachin Sondhi
Tel: +91 22 6619 8710 Email: sacsondhi@deloitte.com

Monish Shah
Tel: +91 22 6619 8692 Email: monishshah@deloitte.com

Alpesh Patel
Tel: +91 22 6619 8803 Email: alpeshpatel@deloitte.com

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