Growth Inevitable for Indian Insurance Market, Profits Maybe Not

Posted on Jan 17, 2012 by Sergio Ulloa (G+)

A special report released today by international insurance information and credit ratings agency AM Best has provided new analysis on both the opportunities and challenges facing insurers, consumers and regulators in India's emerging insurance market as we head into 2012. At present, India's insurance market is composed of 23 different life and 24 non-life companies, with a total value estimated at over US$ 66 billion per annum. The development opportunity for life and non-life insurance coverage has been driven by the continued growth and expansion of India's overall population and economy. In their new report, titled 'Growth Anticipated for Indian Insurers but Frustrations Remain', AM Best acknowledges that while India's insurance sector has posted strong growth indicators in the decade since the market was first liberalized in 2000, with consistent double-digit premium growth achieved primarily through the country's life market, achieving profitability remains a challenge for many of the country's individual insurance companies. While the insurance sector's overall prospects for growth still appear bright in the long term, the market's unique idiosyncrasies will need to be addressed in order to attract and sustain the necessary investment and innovation required to take India's insurance industry to the next level. According to AM Best, intense competition, poor underwriting practices, and high expense ratios have been three of the chief concerns brought forward by insurance companies operating in India. The impact of de-tariffing on the Indian general insurance industry in 2007 has made it particularly difficult for companies to sustain profitable operations at present. Over the past few years, intense competition has forced insurers to drive down rates without due regard to the risks and overall profitability of the business being generated. Ten years on since the state's insurance monopolies were officially ended, the public sector undertakings (PSU) New India Assurance, United India, Oriental Insurance and National Insurance Co, in the non-life sector, and Life Insurance Corporation of India, in the life market, remain the dominant players across their respective lines. Private sectors insurers in India have continued to find it challenging to achieve profitability and generate the necessary scale to compete with state-backed firms, citing the costs of establishing distribution channels and sustaining a consistent customer base by offering ever-more competitive prices, as prohibitive obstacles. AM Best adds that the Indian Motor Third Party Insurance Pool (IMTPIP) has also played a significant role in driving up company underwriting losses, as claims inflation continues to rise across the country's non-life market. Under the IMTPIP, established in April 2007, all insured losses are distributed amongst the country's auto insurers according to their overall market share of all lines of business. This mechanism has severely tested the solvency of those involved in the general insurance sector due to the huge inefficiencies in claims, fraud, and pricing amongst the market's participants. According to AM Best's report, India's third-party motor pool posted a record loss ratio of 194.2 percent for the year 2009-2010, while it maintained reserves for a loss ratio of only 126 percent. Insurers are hopeful that the upcoming reforms to the IMTPIP in March 2012 will lead to an eventual improvement in rates and enable the country's potentially lucrative motor insurance market to properly reset and prosper. The country's life insurance sector has meanwhile had to deal with new regulations governing popular unit-linked insurance policies, which took effect in 2010. AM Best notes that the impact has so far proven significant, resulting in a sharp industry-wide drop in first-year premium. The ratings agency notes however that companies are now beginning to adjust their product portfolio toward more conventional policies, which should in turn improve underwriting performances. Despite these varied challenges, AM Best notes that there are still bountiful opportunities for insurers in India, and top-line growth remains strong, with non-life gross written premiums increasing by 23.8 percent from April to October 2011. Continued economic growth and infrastructure development, together with an expanding middle class and a surging demand for health insurance are resulting in international insurers and reinsurers seeking to develop a greater presence in the world's second most populated country. International insurers have so far found success in the country through direct investment and operating as joint venture partners alongside major local insurance and finance conglomerates, which can provide more immediate access to local expertise and distribution networks. However, while these companies would like to increase their commitment to India, in pursuit of risk diversification and mutual growth, they are facing repeated frustrations in attempting to increase their involvement in the populous South Asian country, with a lifting of the country's onerous foreign direct investment limit from 26 percent to 49 percent unlikely to change in the near term. Recent foreign entrants into India's insurance market include Japan's Tokio Marine Holdings and Berkshire Hathaway, who became a licensed corporate agent of Bajaj Allianz last year. The country's bancassurance sector has also grown in international importance, as was evident by MetLife India's decision to acquire a 30 percent stake in Punjab National Bank in July 2011.This was followed by Nippon Life's move to acquire a 26 percent stake in local power Reliance Life in August 2011. The year wrapped up with moves made by US health insurance giants to take advantage of India's emerging medical coverage demands. First Aetna purchased local health provider network Indian Health Organization Pvt Ltd (IHO) and then Cigna signed a joint-venture agreement with Indian consumer goods company TTK Group to sell a range of health, wellness and insurance products in November 2011. Overall, India looks set to be one of the world's fastest growing insurance markets over the next decade, with total premium income projected to reach US$350-400 billion by 2020. Rising income levels and greater awareness of risk management practices are expected to drive a considerable demand for coverage solutions nationwide. Furthermore, India's insurance companies could make a significant mark and compete on the international insurance stage if they are able to update their business models and capitalize on the tremendous potential client base available in their home market. Companies Mentioned A.M Best A.M Best Company was founded in 1899 and is a full-service credit rating organization dedicated to servicing the financial services industries, including the banking and insurance sectors.