Why online is the right way forward in life insurance

November 20, 2012

(The views expressed in this column are the author’s own and do not represent those of Reuters)

Insurance in India is divided into two broad categories — life insurance and non-life insurance (also called general insurance). For the record, most retail non-life products such as health insurance, car insurance and travel insurance are already sold completely online by most insurers.

A couple of years ago, AEGON Religare did the hitherto unthinkable in the life insurance space by launching an online term insurance plan, and things have never looked the same.

In the beginning, there were a large number of sceptics, each with their own sound reasons. But in a very short period, nearly half of all life insurers have launched online term insurance plans. The sceptics have more or less vanished or have become reluctant adopters. And it is just a matter of time before remaining insurers adopt this method.

Even for customers, it did seem perplexing that a plan with identical benefits can be almost 60-70 percent cheaper if purchased online. And given that term plans are usually for 20 to 30 years, overall savings are in lakhs of rupees for the same benefits.

The easiest logic provided is the absence of agent commission throughout the 20 to 30 years of a term plan, leading to a steep drop in rates. While this is true, there is a lot more that makes these plans cheaper on the operational front. For the sake of simplicity, let’s divide the process into four parts:

The solicitation process – There is little or no savings achieved here. Acquiring a customer online or making a offline customer apply online still requires time, money and other resources.

Application processing – This is where the big savings in cost come from.  Imagine a scenario where a physical application form needs to be filled, sent to the local branch and then to a processing hub. A person then goes through the individual form and goes through each of the details mentioned by the applicant and then applies the underwriting norms to them. Then, based on the norms, the application is approved or rejected. This entire activity is actually quite expensive and time consuming, given the numerous movements and human interventions involved.

In the online term insurance plan process, this entire activity is automated – no physical forms and no physical viewing of the application form as the underwriting rules are automated and applied while the application process is on.

Some companies have even done away with the medical tests and process the application based on the inputs provided by the applicant in the health section. This should not be mistaken as lax underwriting as the rule-based underwriting factors in the risks involved.

The renewal payment process – Small savings are achieved here as a customer would be expected to pay online without the help of an agent who would come to collect cheques.

The claims process, if any – No major savings here.

By embracing technology, life has become convenient and cheaper. So you see, the life insurance industry is among the few which have actually transferred the cost savings directly back to the customer in terms of much lower annual premiums.

I cannot recollect any industry which has passed on such large benefits to the customer while embracing the online channel (Compare this with the banking channel, where instead of cheques which were free, customers are now gradually being charged for online transfers being initiated by them).

It can get even better. As more and more customers fill their online insurance applications themselves rather than signing the blank application form and giving it to an agent, the quality of disclosures in the application forms are improving substantially. This will lead to better service levels and customers will know exactly what they are buying.

The chances of unpleasant surprises with unknown clauses will drop dramatically as the customer is much more involved in this process. With time the insurers will be able to work with this data and this may result in a further drop in premiums.

As time goes by, more and more traditional plans and ULIPs will also move aggressively online. Some already have, but the industry is still waiting for something to happen before going all out with this.

Any sceptics around? Please share your reasons in the ‘comment’ section.

For more articles by Deepak Yohannan, please visit www.myinsuranceclub.com/

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