Posted on Apr 19, 2011 by Sergio Ulloa
The Indian insurance industry will continue to outpace the country's economic growth and is projected to reach US$ 350 to 400 billion in premium income by 2020. These figures will put India amongst the top three life insurance and top fifteen non-life markets in the world within the next nine years, according to a new report.
At present, the insurance sector in India comprises of 23 different life and 24 non-life companies, and is cumulatively valued at over US$ 66 billion. The development opportunity for life and non-life insurance coverage is being driven by the continued growth of India's population and economy. This increase in prosperity has been combined with stringent regulation and unique product development in the domestic insurance industry, which has helped develop the business to meet the changing coverage needs of India's fast-moving society.
Released on April 11th 2011, a study by the Federation of Indian Chamber of Commerce and Industry (FICCI) and the US-based Boston Consulting Group (BCG) titled 'India Insurance, Turning 10, Going on 20', reveals that awareness and total penetration of insurance services (premiums as a percentage of GDP) in India have increased from 2.3 percent of the population in 2001 to 5.2 percent in 2011.
In addition, there has been a substantial increase in coverage. The report detailed that the number of life insurance policies now in force had increased almost 12 times over the past decade
and the number of people receiving health insurance had also risen nearly 25 fold.
"This massive growth will have a significant impact on India's ranking in the global insurance industry and is based on strong fundamentals," remarked FICCI Director General Rajiv Kumar.
The FICCI report primarily attributes better terms and the surge in availability of a wide variety of modern insurance products, including unit-linked products, whole life coverage, automobile assistance, auto pay per km motor insurance, maximum net asset value (NAV) guarantee, disease management and wellness services, to having boosted the development and growth of the industry in India. Progress has also been made through improvements in operations and systems management in the industry, with the establishment of five distinct service channels, including bancassurance, corporate, auto and direct dealers, to accompany the existing third party agency and domestic salaried sales staff. Alongside the emergence of these multiple channels, the distribution reach had increased nearly six fold for life and one-a-half times for non life, marking a shift in the gradual evolution of the Indian insurance market from a state monopoly into a truly competitive system.
Even though Indian life and general insurance companies have been performing well over the past decade and are projected to grow through to 2020, the industry has yet to find a solution to its mounting profitability problems.
The non-life insurance industry incurred cumulative underwriting losses of Rs 300 billion (US$ 6.7 billion) and the private life insurers reported losses of Rs 160 billion (US$ 3.6 billion) through Mach 2010
Underwriting loss is measured as the difference between premium income and claims paid out. Non-life insurers report a net profit or loss after taking into account their investment income. Many Indian non-life insurers remain profitable on net basis. The report cites several reasons for non-life insurer's continued operating losses, including high claims cost of third party liability polices, health loss ratios, fraud in the auto and health insurance sectors and lack of sufficient management. For life insurers, the report claims last year's customer-friendly regulations regarding unit linked policies as the reason they have tightened their operating margins.
The report is critical of Indian insurance companies, whose pursuit of top line growth at any cost has led to inefficient business models and inferior operating margins in comparison to international benchmarks in both the life and non-life insurance sector. Overall, there has been a limited focus on the end customer, with intermediaries given a more prominent role among Indian insurers. Companies have been criticized for not maximizing value from existing customers.
To achieve sustainable profitability FICCI suggests that domestic life insurers need to fix their agency operating model, build long-term strategic non-agency partnerships, invest and develop alternative channels and products, and most importantly to better incorporate an innovative customer-centric operating model. For non-life insurers, the report outlined similar objectives: develop an optimal product portfolio, move towards risk based pricing, develop innovative claims management systems and establish alternate distribution channels and retail products.
The national government and insurance regulators will also have an important role in enabling Indian insurers to sustain profitability. FICCI outlines several items that should be on the authorities' agenda, including regulation to relax Indian ownership and investment norms, defining IPO standards in the country,
permitting banks to sell policies from multiple insurers, standardize electronic insurance statements and to enable Indian insurers to more easily expand internationally.
A bill to raise the foreign direct investment (FDI) cap in the private insurance market from the current 26 percent up to 49 percent is currently pending in Parliament. This legislation will be important in attracting the necessary capital and international expertise towards the Indian insurance sector. India has tremendous economic potential due to its large labor force and rapidly expanding middle class. The projected increase in per-capita GDP will correlate with an increasing demand for a wide range of insurance and investment products. International insurance companies and domestic Indian insurers have been gaining increased market penetration through providing insurance protection products and financial services to meet the emerging demands of this more prosperous population but, with a population exceeding a billion people, the potential for further business appears infinite.
The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm and one of the world's leading advisors on business strategy. BCG partners with clients in all sectors and regions to identify opportunities, address critical challenges, and transform their businesses. Founded in 1963, BCG is a private company that operates through 71 offices in 41 different countries.
Federation of Indian Chambers of Commerce and Industry (FICCI) is India's head chamber representing over 500 industry associations and business units employing over 20 million people. FICCI works closely with the Indian Central and State governments and regulatory bodies to research and implement policy change.