"The profitability of an insurance product depends on the combination of returns, operational cost efficiency and the quality of risk underwritten" Gautam Sharma, Vice President & Head of Marketing, ING Vysys Life

Yes. It is always the role of the pioneer to innovate. Homi Bharucha understands that Liberty Life's role in India is not just to build a healthy and profitable insurance business, but to also help develop and foster a deeper understanding of the fundamental concepts of risk protection and financial planning among the Indian populace.

However, it is a fallacy to say that life insurance is a commodity-type product. In reality, the level of differentiation possible is enormous. One just has to look at the hundreds of different products and combinations typically available in a mature market. Cars all run on an internal combustion engine and take you from point a to point b, but cannot be called a commodity-type product. The insurance product's core may be identically based on mortality risk and investment return, but customisation is possible to the most minutely fine-tuned specific needs of customers.

India is a market where the concept of risk protection-building a financial security net for your family-is not widely accepted yet. So health and critical illness riders allow the rationale of protection to be easily understood. It is much easier to imagine yourself a victim of a common modern lifestyle or stress-related disorder, than to face the prospect of your own mortality. So such policies will form an important part of the product portfolio of a successful insurer.

The risk of a loss incurred due to incorrect product pricing and inadequate information is largely controllable for the following reasons. The profitability of a life insurance product is determined by a combination of investment return, operational cost efficiency and the quality of risk underwritten. So the mortality or illness risk is only one part of the equation. While the actuary will price for the risk he/she understands, there are a couple of hidden upsides or trends which are working in favor of profit rather than loss. Since these trends are not exactly measurable, they are not priced. However, over a period of time, these will have a positive impact on profitability. One is the increase in longevity with better nutrition, lifestyle, medical care and affluence. This has the effect of postponing life insurance payouts. The second is that the quality of underwriting and risk information will only improve. So, over time, the risk premium part of the price should reduce. Since most insurers sell level priced policies, this also has a positive impact.

In sum, Homi should go ahead and innovate. He should not be too concerned about the risk of a pricing loss. In all likelihood, his successor 20 years in the future will thank him for his vision and foresight in laying a strong foundation for the life insurance sector in India.

"Liberty Life will initially need attractive pricing to get a large percentage of the general population onto its books. After that, periodic risk reassessment will play a vital role" Pankaj Seith, Head (Marketing), HDFC Standard Life Insurance

At the onset, let's evaluate four key facets of the situation that Liberty Life finds itself in. First, Liberty is succeeding in positioning insurance as a 'risk protection tool' in the customer's mind. This provides 'proof of concept' for the protection-led business model, from a marketing perspective.

Another facet is its focus on quality of business and quest for 'underwriting profit' as well. So it has eliminated its investment risk to some extent, and needs to manage underwriting risk very prudently in order to succeed. However, this strategy does reduce its ability to compete in the savings end of the market.

A third facet is the picture of health insurance. Two interesting and true views are presented. First, as Raizada says, "The typical executive worries more about an artery clog-up than getting hit by a truck". The second, as echoed by Raina, "We're dealing with intelligent guestimates rather than true measures". This indicates a growth opportunity for someone who can find innovative answers to the data problem. The last facet is the long term impact of decisions taken now. All risks have to be understood and managed well.

Decision Points

To secure a successful long term future, Liberty Life must decide whether to offer health riders at all and, secondly, how to mitigate the risk. On the first, I would recommend them to go ahead. On the second, it needs to consider:

• Reinsurance: A classic tool for mitigating high risks and a pragmatic option. Reinsurers also bring knowledge of the Indian and world markets, which can serve as useful inputs in product development.
• Re-pricing clause: By this feature, Liberty can review the risk profile of customers after a fixed period, say 5 years, and then reassess the price. While this will limit risk, it may be seen as customer-unfriendly.
• "Conservative" pricing at the start and re-pricing based on experience: A mid-way option, but may make Liberty uncompetitive at the start.
• Early experience building: Can be an innovative option by which Liberty can build early experience for different segments and geographies of the market. It can use a mixture of periodic risk reassessment without re-pricing for their different customer segments. This can help it evolve a sophisticated risk pricing model for the long term.

Recommendation

In all, I would recommend going in for building a risk protection (life risk and health risk) led business using the 'Early experience building' model.

To be successful in this, it will need attractive pricing at the start to get a large percentage of the general population onto its books. After that, periodic risk reassessment will play a role, and good human resource management can make this a success.

Liberty should also keep a Plan B ready. If the above strategy does not yield good results over 5 years, a more conservative approach, relying on reinsurance, may be taken.

"Health policies require a certain amount of capital and hence would need investor commitment. This can again be addressed by reinsuring a large part of the risk" Anuroop 'Tony' Singh, CEO & Managing Director, Max New York Life Insurance Company

Homi Bharucha is absolutely right. If there's half a chance of seeing an idea through that would be of greater value than the loss in case of failure, Liberty is most definitely better off going for developing health policies.

By following the quality approach to business, Liberty has adopted the right strategy in a market that is cluttered with players creating the perception of selling life insurance while actually selling mere tax-saving instruments (akin to provident/mutual funds).

Among the reasons that favour considering health-covering policies are the following:

• Insurance is always sold and never bought. Distribution will therefore play a key role in business success. It has been established that Liberty has a very well trained network of professional agents. They have been successful at selling life insurance, which is tougher than selling health policies. Liberty has, therefore, built a strong distribution channel that can be leveraged to sell health policies.
• If one were to assume that the market for health policies is grossly underdeveloped, it presents a phenomenal opportunity for providers of high-quality service. That Liberty's credentials as a quality player are established provides it with a competitive advantage.
• Subhash's concern on data availability is well noted. Liberty can hedge against these by 'ring fencing'. For example, Liberty could cover only defined illnesses, establish a network of qualified health intermediaries for delivering health related services, and having assigned a fixed claim for defined illnesses, launch them as limited edition products among others. As the market evolves and Liberty gathers data based on experience, the 'fences' can be lowered to increase the target audience spread and also lower its risk exposure.
• At the same time, it is important to understand that health policies require a certain amount of capital and hence would need investor commitment. However, this can again be addressed by reinsuring a large part of the risk carried by Liberty on account of health policies. The reinsurance costs will continue to come down with time, if Liberty's experience with these policies is healthy.
• Life insurance companies are valued on the basis of their Embedded Value, which is driven by factors such as nature of customer relationships, quality of underwriting, investment policy and claims experience. Health policies, much like whole life policies by their very nature have the potential for building long-term relationships. It is a fact that the longer the relationship with the customer, the higher will be the profitability of the product and the insurer's Embedded Value.

Bertrand Russell, the English logician and philosopher, said, "All exact science is dominated by the idea of approximation." So is business. Liberty should not wait for the exact data to develop a product whose opportunity is evident even to the blind. The only rider: hedge your risks.