Insurance companies open a new chapter

While listing on the bourses has improved visibility, low penetration and a shift to financial savings will drive growth

Year 2017 was a noteworthy milestone in the journey of India’s insurance industry as five prominent companies hit the capital market to raise ~440 billion within a span of six months. Prior to that, only ICICI Prudential Life Insurance (IPru Life) had come out with its initial public offer (IPO) in September 2016.

While insurance companies get more visibility and credibility after being listed, for the investing community it is the opening up of a new sector, which boasts of strong long-term prospects.

The market had been eagerly awaiting the listing of insurance companies as Warren Buffett, the world's best-known investor and a role model for many, has made a good chunk of his fortunes by investing in insurance companies, which have gone on to generate tremendous wealth for Buffett’s firm Berkshire Hathaway. India, too, is in the early growth phase, giving investors an opportunity to generate wealth.

It’s been a short time frame since listing of domestic insurers, but barring the two public sector players, stocks of private companies have delivered good returns on an aggregated basis.

No dearth of growth

Barring intermittent hiccups, the growth of the insurance industry has been impressive in the past 15 years at around 18 per cent with life insurance premiums of ~4.18 trillion and general insurance premiums at ~1.3 trillion. Yet, penetration levels remain low.

At the Business Standard Insurance Round Table 2018, Amitabh Chaudhry, MD & CEO, HDFC Standard Life, said, “The runway for growth is huge from here on. It is a question of how well we are able to tap the opportunity.” This is the future of the industry, which expects to triple in the next few years.

Life insurance

The life insurance industry, which opened to private sector in 2000, saw a consolidation phase during 2000-2007. However, growth came back as the sector grew 17 per cent annually during 2007-10. Again, growth stuttered thereafter till 2014 due to alleged mis-selling by certain players, impacting the industry’s credibility and with revenues shrinking by five per cent annually during 2010-14. Penetration, which had improved from 2.1 per cent in 2001-02 to 4.1 per cent in 200910, fell to 2.6 per cent in 2014-15.

The sector, however has bounced back again, growing over 19 per cent annually in the last three years with penetration rising to 2.7 per cent, thanks to lower inflation, upbeat capital market, soft interest rates, and increase in financialisation of savings as other assets turned unattractive. Private insurance players continue to gain and now have half of the life insurance market as compared to 35 per cent in FY10.

Private insurers having tieups with banks to sell products (bancassurance channel) grew faster (25 per cent annually during FY15-17) than ones approaching customers through the agency route (industry growth 16 per cent). Given the distribution and cost advantage, they will continue to grow faster.

Rising life expectancy will improve their profitability and propel the need for pension products aiding growth rates. Analysts at B&K Research expect life and pension value to increase to 35 per cent of financial savings by FY20 from 26 per cent in FY10.

General insurance

The general insurance industry, too, is looking at better days ahead after posting a strong show in the past 15 years. Like in life insurance, lower penetration, government initiatives, widening distribution and increasing awareness coupled with new products and innovation will help expand the base and boost growth rates. Penetration levels currently are at 0.77 per cent as against world average of 2.8 per cent.

While aggressive pricing by companies to gain market share saw the sector bleeding during 2008-12 period, they have turned more rational over the last three years. Raising equity cap for foreign investors to 49 per cent from 26 per cent and new schemes by the government helped insurers.

As a result, gross premiums grew at 32 per cent in FY17, the best in 15 years. Efforts taken by companies to improve customer experience have also helped. Sanjay Kedia, Country Head & CEO, Marsh India Insurance Brokers said, “Cashless programmes in medical (insurance) and motor vehicles have helped deliver a superior experience.”

Going ahead, analysts at Ambit Capital believe that the sector has the potential to grow at 20 per cent annually over the next decade. Private players are expected to increase their market share from the current 47 per cent.

Valuing insurance companies is a challenge for investors as it is a new sector and the metrics are industryspecific. However, as listed companies, they now declare results on a quarterly basis and make presentations, which will help market players make better investment decisions.