delivery not distribution in life and non-life insurance: emerging markets beware!

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The Chartered Insurance Institute

Number 91 November 2012

Delivery not Distribution in Life and Non-Life

Insurance: Emerging Markets Beware!Praveen Gupta MA, DipDM, FCII, FIII, Chartered InsurerManaging Director and CEO

Raheja QBE General Insurance Company, Mumbai

Summary

Distribution and delivery tend to be used as synonyms, not only in our industry but across thefinancial services sector. Owing to growth opportunities, sales become a dominant mode leading to

the spurt in distribution. Delivery tends to suffer. While best practice is hard to find, poor practice is

not.

Many of the woes in financial services emanate from an over-emphasis on distribution, whicharguably contributed to the global financial crisis. Emerging markets in the relatively early stages ofevolving their financial services, but in a hurry to embrace financial inclusion, need to tread

cautiously.

Those markets evolving without many checks and balances should listen to these warnings. TreatingCustomers Fairly is still off the radar and there is a tendency to ignore the experiences of developed

economies. At best, we imitate the channels but disregard the readiness and suitability of local

conditions.

This is already happening in India with Unit-Linked Insurance Plans (ULIPs), and many in thedeveloped economies will recognise the mis-selling hallmarks. Aside from the reputational risks, italso creates separate and contesting silos in our businesses: a client is no longer a companysproperty, but a prisoner of the channel that acquired him or her.

Delivery, on the other hand, is service-driven. It is about sustaining relationships and it comes downto the bottom line. Unfortunately, and increasingly, the insurance business is configured as a salesorganisation where behaviour and personality mutate into something inherently contradictory.

The Chartered Insurance Institute is the worlds largest professional body for insurance and financial services and the leader in awarding

qualifications to industry practitioners. Our thinkpieces are a key part of our ongoing commitment to promoting innovative thinking anddebate within the insurance and financial sectors. In 2012, we are celebrating our Centenary as a Chartered body.

The views expressed within the article are those of the author and should not be interpreted as those of the Chartered Insurance Institute orits members. Mr Gupta has asserted his right under the Copyright, Designs and Patents Act 1988 to be identified as the author and copyrightowner of the text of this work, and has granted the CII worldwide perpetual licence to reproduce and distribute it in whole and in part. We welcome

suggestions from potential contributors, but we are also seeking feedback from our readers. We urge you to get involved especially as weintend some of our articles to be open to rebuttals for publication.


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CII Thinkpiece no.91 (November 2012) Delivery, Not Distribution in Life and Non-Life Insurance Page 1

Number xx Month 2012

CII Introduction: a recurring theme in some of our previousThinkpieces has been the growth potential for retail financialservices in emerging markets such as India. In May, VanessaRossi talked about the consensus forecast of the Indian lifemarket more than doubling by 2020.1 In September,Vankayalapati Padmavathi focused on growth of Indias non-life

market and its implications.2

The question then arises: whatsteps must be taken to make sure that growth is sustainablefrom a regulatory and reputational perspective? How can theemerging markets avoid the hard lessons of the mis-selling

scandals experienced in the developed economies? In thispaper, Praveen Gupta takes a view on one of the most visibleaspects of the insurance industry: distribution. He asks whateverhappened to the long-established delivery proposition, andsuggests why and how it could be revived.

Distribution and delivery tend to be used as synonyms, not

only in our industry but across the financial services sector.

As a matter of fact, distribution dominates in terms of usage

and application. However innocuous it may seem, there are

some serious implications that we ought not to ignore.

Many of the woes in financial services, which also arguably

triggered the global financial crisis, emanate from an over-

emphasis on distribution. Emerging markets in the earlier

stages of evolving their financial markets, but in a hurry to

embrace financial inclusion, need to tread cautiously.

Delivery equals indispensability

Consider the following customer-insurance agent exchange:

Customer: I am away from town, could you please arrange the timely

renewal of my car insurance?

Agent: Not to worry, I have taken care of this already. Your premium

has been paid to the insurance company.

In a cash-before-cover market in the pre-internet era, this

was potentially a stressful situation. Another exchange:

Customer: My dad has been hospitalised and Im attending to him. I

need to make a claim and dont know how and dont know anyone at

the insurance company. Could you please help?

Agent: Your company policy covers your parents. Leave the claim

process to me.

The agent arrives in the hospital with a floral bouquet to wish the

ailing father an early recovery. The agent then expedites a letter of

claim intimation (signed by the customer) delivers to the insurer,

and coordinates the entire process through to settlement.

1 Vanessa Rossi, The Southern Surge Revisited: Robust Trends in South Asian

Insurance,Thinkpiece, no.78 (May 2012). www.cii.co.uk/thinkpiece

2 Vankayalapati Padmavathi,Non-Life Insurance in India: Managing Disaster Risk

Exposures An Opportunity for Better Risk Management and Growth, Thinkpiece,

no.88 (September 2012).

When health insurance was in a nascent stage, there was no

cashless settlement and no Third Party Administrator. This

was indeed a service with a golden touch: the common

thread in whatever was done was service rather than pure

transaction.

It was th is qu iet agent or sa le sperson who could get al mostanything done a seamless in termed ia tion and theepitome of delivery rather than distribution: far morediverse in its offerings than a mere transactional one-offrela tionship .

The broker could also be called upon to assist with other

financial requirements, outside of the insurance realm. Be it

subscription to the Public Provident Fund, Initial Public

Offerings or a Post Office deposit, some commission could

be earned. But the key was delivering a service and not just

facilitating a transaction.

Long before the broker arrived and other forms of

professional intermediation evolved, it was this quiet agent

or the insurance salesperson who could get almost anything

done. This agent would be out there, working on your behalf

and in anticipation of your direct requests. A seamless

intermediation and the epitome of delivery rather than

distribution: far more diverse in its offerings than a mere

transactional one-off relationship. Maturing with time like a

good quality wine. In other words, an almost indispensable

part of your financial risk management value chain because

of the power of the value proposition: always there for you.

Whether the insurance company sent you a renewal notice

or not, you would get a postcard from the agent to remind

you of the due date. And accessibility was rarely a problem,

despite the challenges of a limited telephone service.

Distribution is not equal to delivery

The rapid growth of the retail segment in India, which

coincided with the disintegration of the family, the erosionof primary health care and arrival of the middle class,

boosted demand for both health and motor insurance.

Opening up the Indian insurance market to private insurers

only fuelled competition and quick growth, bringing price

competition. However, service remained a low priority and

was not a differentiator.

Here is a lesson for emerging markets, particularly those on

a growth trajectory with their financial services evolving

without many checks and balances. Their regulatory

environment is raw, with scant attention to policyholder
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CII Thinkpiece no.91 (November 2012) Delivery, Not Distribution in Life and Non-Life Insurance Page 3

begins to take-off at the grass-roots level, replicating the

business model of the richer segments could become a very

expensive proposition. To remain viable in terms of costs,

sales and service should go hand in hand. In emerging

economies, this embeds a bad DNA into the evolutionary

cycle of the financial services architecture.

Any solutions in sight?

It may sound simplistic, but we quickly need to find ways to

merge distribution into a variety of delivery models. Servicing

the client needs and delivering on the promise will keep the

point of sale obsession away from mis-matched expectations.

One approach may be to evolve a better delivery proposition

embracing this Five-Point Strategy:

Five-Point Strategy for Reviving Delivery

1. Move away from the point of sale obsession by developinglonger term strategies;

2. Make servicing client needs an essential part of your KPIs andbase incentives on customer satisfaction rather than customer

acquisition;

3. Segment each socio-economic class separately, instead oftaking a one size fits all approach. The product needs and

solutions for varying classes are bound to be different;

4. Ensure that what has been promised is delivered. (e.g. contractcertainty, price, fair treatment); and

5. Ensure that your entire organization works as a single entitywith a common purpose, rather than as the sum total of its

parts. This will eliminate issues such as channel conflict and

inter-departmental disconnect.

Following this strategy will perhaps bring in self-regulation

and minimise the amount of formal regulatory intervention

and micro-management. In addition, at the very

evolutionary level where financial inclusion is all, the seller

will also be delivering, and be more responsible.

Conclusion

The insurance business needs to think hard about where it

is heading. It cannot afford to be nave in interchanging

distribution for delivery. It must not allow itself to be

conditioned as a sales industry. The point of sale mind-setneeds to be reconfigured since, in choosing the current way,

we have already invited upon ourselves the risk of

unintended consequences. Before this risk becomes

perilous enough to threaten our raison dtre, let us bring

back the indispensability of service that we all seem to be

missing in the world of financial super-markets or one-stop

shops. The idea is not to simplify things and go back to how

they existed before, but rather to keep them simple in a

unified and holistic way. Not only will it have positive

implications for the physics of our networks, but it will also

deliver the chemistry right.

The idea is not to simplify things and go back to how theyexisted before, rather to keep them simple in a unified andho li st ic way. Not on ly wi ll it benefi t the phys ics of ou rnetworks , it wi ll al soge t the chemis try ri ght.

The consequences for emerging markets are far more

serious, as they are still in development. Moreover, each

segment of society depending on the maturity level of the

financial evolution ought to follow a deserving treatment. If

the course correction is made early enough, they need notembed the blunders in their products and processes. In

turn, this will insulate their financial services from the

systemic vulnerabilities that are triggered by the

incentivisation of the distribution system. This will not only

prevent mis-selling, but ensure delivery of value.

Distribution is a necessary evil, but it must be kept reigned

in to allow the larger cause of delivery to take the lead.

If you have any questions or comments about this Thinkpiece,and/or would like to be added to a mailing list to receive new

articles by email, please contact us: [email protected]

orby telephone: +44 (0)20 7417 4783.

Praveen Gupta is Managing Director and CEO of Raheja QBE General Insurance Company Ltd, a joint venture betweenQBE and Rajan Raheja Group. He has over three decades of industry experience in diverse markets like India, Thailand,Hong Kong and the UK. Praveen regularly writes on diverse subjects and speaks at national and international forums.He championed the cause of Indian insurance industry liberalisation. He was closely associated with the BombayChamber of Commerce & Industry, where he served as Chairman of the General Insurance Committee. For the CII, hehas been writing various pieces since 2000 on the opening up and evolution of the Indian insurance market; and iscurrently Deputy Chair of the CII Diversity Action Group. He is also on the Board of Education of the Insurance Instituteof India, and is a Member of the Australian Institute of Company Directors. Praveen is a recipient of D. Subramaniamand SK Desai Memorial Awards by Insurance Institute of India.

The CIIis the worlds leading professional organisation for insurance and financial services, with over 100,000 members in 150 countries. We arecommitted to maintaining the highest standards of technical expertise and ethical conduct in the profession through research, education and

accreditation. In 2012 we are celebrating our Centenary as a Chartered body. For more information on the CII and its policy and public affairs

function, including examples of the range of issues in financial services and insurance that we cover, please see:www.cii.co.uk/policy .

Qualified CII members: please note that reading and reflecting on this Thinkpiece could count towards membership CPD requirements.
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delivery not distribution in life and non-life insurance: emerging markets beware!

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