Number 91

November 2012

Delivery not Distribution in Life and Non-Life Insurance: Emerging Markets Beware!
Praveen Gupta MA, DipDM, FCII, FIII, Chartered Insurer
Managing 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 the financial 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, which arguably contributed to the global financial crisis. Emerging markets in the relatively early stages of evolving 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. Treating Customers 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 the developed economies will recognise the mis-selling hallmarks. Aside from the reputational risks, it also creates separate and contesting silos in our businesses: a client is no longer a companys property, 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 down to the bottom line. Unfortunately, and increasingly, the insurance business is configured as a sales organisation 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 and debate 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 or its members. Mr Gupta has asserted his right under the Copyright, Designs and Patents Act 1988 to be identified as the author and copyright owner 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 we intend some of our articles to be open to rebuttals for publication.

The Chartered Insurance Institute

CII Introduction: a recurring theme in some of our previous Thinkpieces has been the growth potential for retail financial services in emerging markets such as India. In May, Vanessa Rossi talked about the consensus forecast of the Indian life market more than doubling by 2020. 1 In September, Vankayalapati Number xx Padmavathi focused on growth of Indias non-life market and its implications. 2 The question then arises: what steps must be taken to make sure that growth is sustainable from a regulatory and reputational perspective? How can the emerging markets avoid the hard lessons of the mis-selling scandals experienced in the developed economies? In this paper, Praveen Gupta takes a view on one of the most visible aspects of the insurance industry: distribution. He asks whatever happened to the long-established delivery proposition, and suggests 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 overemphasis 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.

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 Month 2012 transaction.
It was this quiet agent or salesperson who could get almost anything done a seamless intermediation and the epitome of delivery rather than distribution: far more diverse in its offerings than a mere transactional one-off relationship.

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.

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.

Distribution is not equal to delivery

The rapid growth of the retail segment in India, which coincided with the disintegration of the family, the erosion of 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

Vanessa Rossi, The Southern Surge Revisited: Robust Trends in South Asian Insurance, Thinkpiece, no.78 (May 2012). www.cii.co.uk/thinkpiece
1

Vankayalapati Padmavathi, Non-Life Insurance in India: Managing Disaster Risk Exposures An Opportunity for Better Risk Management and Growth, Thinkpiece, no.88 (September 2012).
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CII Thinkpiece no.91 (November 2012) Delivery, Not Distribution in Life and Non-Life Insurance

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protection. Treating Customers 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. Unfortunately, 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. There is also very little sensitivity to the varying needs of various segments at different levels of economic evolution.
Having sold you a policy, or any financial product for that matter, the focus of a financial services entity is to move on to the next sale. The back office is faceless, notoriously prone to staffing churn, and diverse in unacceptable ways. The customer is a king or queen of no consequence.

aggressively sold is the Unit-Linked Insurance Plan (ULIP). You are urged to invest in this product, despite all of its proven flaws. It turns out to be one of the most mis-sold products in the market. If you challenged the caller, he or she would talk about their sales targets and the associated financial incentive. So the goal was to sell more and more ULIPs, regardless of whether it had any utility for the buyer. Distribution is about sales and, consequently, short-term. This makes it harder to retain a customer. We all know it is more expensive to acquire a new customer than retain one, so the entire arithmetic is unsustainable. Now look at what the language of distribution does to our business. We end up creating separate silos that contest with each other. For example, take multi-channels of distribution: agents; brokers; bancassurance; direct and ecommerce. A client is not a companys property but a prisoner of the channel that first acquired him or her. Each of these channels has a separate protocol and there is no unified approach. Sometimes one channel cannibalises another channels business. Another time, by going direct, the company gobbles its own channels property. And there are even opportunities for a client to beat the system and maximise the benefits while each channel strives to figure out the life time value of its customer! Imagine what happens to the brand value of such a company, let alone the overall erosion to the credibility of our industry and the profession.
Unfortunately, and increasingly, the insurance business is configured as a sales organisation where behaviour and personality mutate into something inherently contradictory.

Distribution is but a small part of delivery and more fixated with the point of sale. We trade in the business of trouble. However, point of sale is the first major milestone, and the woes of our trade only start afterwards. Several test cases may follow sometimes unique to each individual and going beyond the realms of sales into the world of individual experience. This is what makes our business uniquely diverse. Even so, it has its downsides because we impose processes that do not generally allow the individual customer to be treated as special. Our call centreswhether onshore, offshore or outsourcedfurther complicate the issue.

The great divide

Having sold you a policyor any financial product for that matterthe focus of a financial services entity is to move on to the next sale. The back office is faceless, notoriously prone to staffing churn, and diverse in unacceptable ways. The customer is a king or queen of no consequence. The customer is confused and anxious, because distribution only drives sales. It wants to sell what it wants to sell, not necessarily what the end user desires or deserves, nor the solution that is needed. This can never lead to a true fulfilment across the spectrum. Be it retail, commercial, or corporate in nature, the disillusionment has been most pronounced in the areas of health insurance and unit-linked insurance plans. Almost all of us in this market have received calls from bank call centres pitching the products and services of their bancassurance partners. In India these days, the most

It is not just the sales arms fighting to the finish. The rest of the organisation tends to be anarchic too. It is underwriting versus claims versus marketing versus operations versus geographic entities. If you are not being treated as a companys customer, the brand is already diluted or contaminated in your eyes. The resulting dissonance will only make the work of businesses fraught with negative and even toxic energy. Delivery on the other hand is service-driven. It is about sustaining relationships and it comes down to the bottom line. Unfortunately, and increasingly, the insurance business is configured as a sales organisation where behaviour and personality mutate into something inherently contradictory. Whats more, some of them also tend to pose as role models for the bottom of the pyramid entities that owe their existence to pure service. As economic activity
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CII Thinkpiece no.91 (November 2012) Delivery, Not Distribution in Life and Non-Life Insurance

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.

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-set needs 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 they existed before, rather to keep them simple in a unified and holistic way. Not only will it benefit the physics of our networks, it will alsoget the chemistry right.

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 developing longer term strategies;

2. Make servicing client needs an essential part of your KPIs and base incentives on customer satisfaction rather than customer acquisition; 3. Segment each socio-economic class separately, instead of taking 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. contract certainty, price, fair treatment); and 5. Ensure that your entire organization works as a single entity with 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.

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 not embed 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.

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Praveen Gupta is Managing Director and CEO of Raheja QBE General Insurance Company Ltd, a joint venture between QBE 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 Bombay Chamber of Commerce & Industry, where he served as Chairman of the General Insurance Committee. For the CII, he has been writing various pieces since 2000 on the opening up and evolution of the Indian insurance market; and is currently Deputy Chair of the CII Diversity Action Group. He is also on the Board of Education of the Insurance Institute of India, and is a Member of the Australian Institute of Company Directors. Praveen is a recipient of D. Subramaniam and SK Desai Memorial Awards by Insurance Institute of India.
The CII is the worlds leading professional organisation for insurance and financial services, with over 100,000 members in 150 countries. We are committed 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.

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

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