Economy, internal issues water down fortunes of Indian Insurance Industry
Throwing no surprises, just like other industries within the Indian Economy, the Indian Insurance Industry too is looking to greener pastures while battling internal issues that keep it from realizing tremendous market opportunities. In its quest, it seeks supportive partnerships with the the industry regulator and the government to provide a conducive environment that helps realise its true potential.
At the 16th Insurance Summit held by the Confederation of Indian Industry (CII), the industry body together with E&Y released a report on the new hopes and directions sought by the Indian Insurance Industry. The story so far:
The sector was opened up at the turn of the century and soon witnessed the participation of numerous foreign players, which was marked by an increase in the number of insurers to 24 in life and 25 in the non-life segment. Consequently, insurance penetration went up in India from 2.8% in FY2001 to 5.1% in FY2010. However, the prevailing economic scenario of the last three financial years saw penetration decline to 4.1% in FY2011 and further to 3.9% in FY2012, marked by a corresponding decline in premium collection by insurers. This sub-par performance has lead to a fair amount of introspection within the industry to develop better business and operating models, and stem pricing and underwriting losses within the non-life segment. Nonlife penetration barely moved from 0.6% in FY2001 to 0.7% in FY2010. LifeInsurance
Life insurance saw an increase in the number of private insurers over the past decade, with IRDA regulations keeping pace to protect customer interest and provide direction. Notching an impressive 29% CAGR between FY2001 – FY 2011, of late the industry has been clocking negative growth in FY2012 and FY2013 on account of a slew of regulations that necessitated insurers revamp their business models and move towards more cost efficient operations. The main factors the impact profitability and sustainability in the life sector are economics of the distribution channels (agency model, Bancassurance, and third party), with high operating and commission costs working for top-line growth but not for profitability and sustainability. Non-lifeInsurance
Since 1999-2000, the non-life sector of the industry has witnessed exponential growth in the number of private players. The dominant segment within the sector remains motor insurance (mainly the mandatory third-party liability insurance) with 43% of non-life premium collected in FY2013, followed by health at 22% and fire at 10%. Even though the non-life sector has witnessed strong growth of around 19% in recent years (discounting stagnation during the economic crisis of 20072010), penetration levels are still a cause of concern, as are high underwriting losses and a high claims ratio in the health insurance business.
Current opportunities
Large middle class
The middle class, the sweet spot for the industry, is estimated to rise from 5% in 2005 to around 20% in 2015, increasing the size of their target market from 13 million households to 51 million households. With 21% population with an annual income of over INR 2 lakh, insurers will need to develop products and services to keep the upper and upper middle classes happy enough to prevent their life insurance premiums walking away into other asset classes with the eventual upturn in economic conditions. Financial inclusion and micro-insurance
On the flip side, with around 78% of the population making less than INR 2 lakh annually, the bottom of the pyramid for the sector is a huge juggernaut of opportunity for micro-insurance, with present penetration levels estimated at only 2% of the adult population. Volumes in this business, with controlled expenses for distribution and premium collection can result in a sustainable model for the sector. Pensions and social security
An estimated 12.5% of the world’s population above 60 years of age lives in India. In 20 years, this number is set to double to 160 million, and by 2050, 21% of India’s population (315 million people) will be above 60, and 13% (213 million) will be above 80 years of age. Against this backdrop, ensuring old age income security is a gap that the insurance industry can readily step into, specially given that there is a dearth of for mal social security protection based either on a contribution based social insurance scheme or on a tax/cess based benefits scheme. Healthcare
One of the fastest growing segments in the Indian insurance sector, this segment lives each day with the realization that the bast majority of India’s population does not come under their umbrella, with only 3% penetration in terms of selling health insurance products.
Current challenges
Looking within, the industry also realises that it needs to overcome low distribution efficiency, improve product design and introduce riskbased pricing of non-life products.
In terms of distribution, the agency channel has been witnessing a falling share of business. Challenges exist in terms of finding new agents, low front line sales force productivity, building agent productivity and continual investment in the agency model. On the other hand, Bancassurance represents an opportunity that helps leverage a large, captive customer base, accessible at a minimal and fixed expense. Smaller, rural banking partners represent untapped potential to reach customers through enhanced branch penetration, activating branches part of the bank’s network that don’t presently sell insurance, and minimizing misselling.
In the non-life sector, the absence of risk based pricing has lead to significant underwriting losses for insurers. Issues that need to be addressed in the interest of profitability and sustainability include the dearth of professional actuaries, increased access to better quality customer information, a central database that provides for accurate and correct data, and marketing strategies that take into account underwriting considerations while not engaging in price wars with competition.
The future
For the Indian Insurance industry to live long and prosper, the key lies in product innovation, finding new low cost avenues of distribution, new ways of selling and servicing based on market segmentation and customer centricity, and working towards a sustainable growth model that is built around responsible industry practices.
For better distribution and customer access, models the industry is considering include own channels (both agency and direct), a digitized sales force that leverages technology to manage the entire customer experience, and online channels that capitalize on the inherent low fixed costs and high persistency. The Bancassurance channel, with the inclusion of smaller bank players, will need to develop a more product-customization approach in tandem with joint investments in the bank’s system development and upgradation programs for better data quality, which will be a win-win for both partners.
A sustainable, profitable growth model for the industry will have its roots in improved customer service, improved persistency, optimized costs, realigned distribution that supports long-term goals, and an effective claims management process. Responsible industry practices
Key focus areas for the future of the industry include prevention of misselling to regain customer confidence and the development of a professional code of conduct for intermediaries, improving customer satisfaction, and a transparent way of doing business. Insurers will also need to work on the development of a central data repository, focus on risk, compliance and governance, and self regulatory mechanisms to keep things clean and smooth.
From IRDA, the regulator, the industry seeks a transparent and systematic road-map co-developed through consultations. Additionally, regulatory support for risk based solvency management and risk based pricing is also key to improved profitability in the industry, while product approval and transparency are key areas of engagement.
From the government, the industry anticipated conducive policies for the long term development of the sector, including FDI limits, and measures that help ease hurdles through inter-ministerial coordination such as one with the health and road transport ministries, and amendments to the Motor vehicle act to discourage under insurance of vehicles plying on the road through appropriate law enforcement.
To conclude, a collaborative effort between the three stakeholders is needed to get the industry back on track towards sustainability and brighter future.