RBSA-RR-Demystifying Life Insurance Industry in India (1).pdf
Penetration Of Life Insurance and General Insurance In India
1. PENETRATION OF LIFE
INSURANCE AND GENERAL
INSURANCE IN INDIA
[Submitted for completion of summer internship at IISWBM]
Submitted by: Sudipta Das
MBA(DAY), 2014-2016
Roll: 107/MBA/141091
Registration No: 107-1122-0057-14
2. ABSTRACT
The major change of the life insurance industry in India is the opening up to private
and global players. Life Insurance Corporation of India (L.I.C.I) dominated the Indian
Life Insurance market. With the development of the Insurance Regulatory and
Development Authority the (IRDA) Act in 1999 was a clear signal of the end of the
monopoly of LIC in the insurance sector. It has become imperative for LIC to face the
competition posed by the entry of new private players. The insurance industry has
undergone a drastic change since liberalization, privatization and globalization of the
Indian economy in general and the insurance sector in particular. With the entry of
private players, the competition is becoming intense. After the entry of these private
players, the market share of LIC has been considerably reduced. As on 16 July 2015
there are total 52 insurance company among them 24 are life insurer and 28 are
non-life insurer. After liberalization the private companies has been making waves.
They have been penetrating their business more and more form year to year and
has been increasing their market share and presence. The paper focuses the role
and performance of private insurance players for the period from 2001 to 2012. Hike
in foreign investment limit to 49 per cent in the insurance sector has potential to
attract up to USD 7-8 billion (about Rs 50,000 crore) from overseas investors, giving
a major boost to the segment. The study will reflect the role of private insurance
players in the areas like number of policies floated, amount of premium collected
and commission expenses, operating expenses from 2001 to 2015.
INTRODUCTION
In India life insurance has an increasingly substantial role to play. India is now one of
the top insurance market in world. Not only by selling risk management products
but can help developing economic and social credibility of India. India ranked 11th
among 88 countries in the life insurance business, with a share of 2.0 per cent during
FY14.The country ranked 21st in global non-life insurance market, with a share of
0.66 per cent in FY13. The insurance sector in India is rapidly growing. The increasing
ability of new middle class in Indian market creates a great scope for insurance
industry. The life insurance premium market expanded at a CAGR of 15.3 per cent,
from USD14.5 billion in FY04 to USD60.3 billion in FY14. Increasing online users and
rapid digital marketing gave a big boost to recent progress. The expanding digital
universe, and access to the same, are feeding this growing and urbanizing cohort.
India’s well-deserved reputation for digital savviness is reflected in its Internet user
population, now at more than 205 million—and one of the fastest-growing in the
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3. world—as well as in its mobile Internet user base, which numbers more than 130
million. The country’s Internet users are well-versed at doing online comparison
shopping for a range of consumer products, including insurance. Many private
insurers are already actively leveraging the Internet and social media platforms to
connect and interact with existing and prospective customers. Several insurers are
well on their way to building true e-commerce platforms, with a view to providing
simplified and low-cost savings and protection products. A number of industry
players are also looking to automate their processes in order to speed up, and
simplify, marketing and sales. The non-life insurance premium market rose at a
CAGR of 16.3 per cent, from USD3.4 billion in FY04 to USD11.7 billion in FY14. The
share of private sector in the life insurance premiums increased from 4.7 per cent in
FY04 to 24.6 per cent in FY14.The market share of private sector companies in the
non-life insurance premium market rose from 9.6 per cent in FY03 to 45.3 per cent
in FY14. This evolution of India’s economic and social fabric is part of a larger global
megatrend: the accelerating urbanization of our planet. In 2009, the world’s urban
residents had surpassed their rural brethren in terms of headcount, and are
expected to account for 66 percent of the global population by 2050, according to
the United Nations’ World Urbanization Prospects—2014 Revision report.
India’s own urbanization was helped in no small measure by the country’s economic
liberalization in 1991, which set the stage for substantial growth and development,
and fueled the emergence of our middle class. Today, between 30 and 40 percent
of India’s total population of more than 1.2 billion resides in and around cities,
according to estimates—a substantial shift even from 20 years ago. According to a
recent research conducted, the country’s urban population is set to nearly double
by 2030, implying that the country will have nearly 70 cities with populations of over
one million each. Six of these cities will be megacities with more than ten million
citizens, and will account for at least 70 percent of the country’s Gross Domestic
Product (GDP). In addition, by 2025, at least 75 percent of all of India’s urban
dwellers will be middle-class. India’s comparatively young population—with an
average age of 27—as well as the projected rapid growth of the workforce, due to
both organic causes and migration, will also drive continued GDP growth, and in
turn, further development of the middle class.
Urbanization has heralded enormous changes in India, both demographically and
culturally, the decline of the joint family system being one of the biggest ones. As
recently as 40 years ago, the majority of family units in the country were joint
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4. families—that is, multiple generations of parents, siblings, spouses and children
living together, either in one home or in a family compound as a single economic
family unit. In recent years, India’s young adults, rather than staying in these joint
family units, have been moving to cities to further their educations or careers. Once
there, many marry and form their own nuclear families, and start to achieve financial
self-reliance, purchasing savings and protection products from life insurance
companies that are enabling them to build and protect their assets, and mitigate
financial risk.
India’s rapid GDP growth of the early 2000s, which averaged approximately 9
percent per year, leveled off somewhat after the 2008 global financial crisis.
Nevertheless, our economy continues to expand at a respectable rate, and the
Organization for Economic Co-operation and Development (OECD) is predicting
short-term (2014-2018) annual GDP growth of 5.9 percent.
Several challenges loom, however. With the continued, rapid expansion of our urban
population essentially assured, the main challenge for India over the foreseeable
future will be to develop a modern and reliable national infrastructure. Although
such development has been a clear need over the last few decades, progress in that
direction has been far from substantial. This is nothing short of a national
embarrassment: India’s infrastructure development needs to keep pace with the
rate of urbanization, as well as the pace of growth in population and workforce.
Indeed, India ranked 85th out of 148 countries, with regard to infrastructure, in the
Global Competitiveness Report 2013-2014 published by the World Economic Forum.
One is hard pressed to find an urban area within India where actual infrastructure
development has kept pace with current, let alone, future requirements
Crop insurance market in India is the largest in the world and covers around 30
million farmers; it accounted for nearly 4.7 per cent of the total non-life insurance
premium in FY13.Strong growth in the automotive industry over the next decade to
be a key driver of motor insurance. Health insurance continues to be one of the most
rapidly growing sectors in the Indian insurance industry, and reported 18.66* per
cent growth in gross premiums in FY13.
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5. An Analysis of Evolution of Insurance in India
The Indian economy has been growing rapidly and the growth impulses continued
during 2014–2015. There has been sustained manufacturing activity and impressive
performance of the services sector along with a reasonable recovery in the
agricultural sector. The agricultural and allied activities registered a growth of 1.4%
due to improvement in the agricultural production. The industrial sector improved
by 8.4% and the services sector maintained a higher growth of 14.1%. Thus, the
growth in real GDP was 7.9% during 2005–2006 as opposed to lower percentage in
2013–2014. Within the services sector, there has been an improved performance in
finance, insurance, real estate and business services. There has been a substantial
increase in the GDP emanating from insurance. The deregulation of the sector in
2000 has contributed to insurance growth. GDP from insurance sector which
constituted 12% of the GDP in 2000–2001, has increased to 19.3% in 2004–2005.
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6. The gross domestic savings, a component of which is the financial savings of the
household sector, as a percentage of GDP increased to 29.1% in 2004–2005.
Milestones of the Evolution of Insurance before nationalization in 1956
The Insurance Act, 1938 was the first comprehensive piece of legislation for
Insurance in India. It covered both life and general insurance companies and clearly
defined what would come under the life insurance business, the fire insurance
business and so on. It covered aspects ranging from deposits, supervision of
insurance companies, investments, commissions of agents, directors appointed by
the policyholders, among others. This act lost its significance after nationalization in
1956 (of Life Insurance) and in 1972 (of General Insurance). With the privatization
in the late 20th
century, it has returned as the backbone of the current legislation of
insurance companies.
Rationale for Nationalization of the Life Insurance Business in 1956
The genesis of nationalization of life insurance in India came from a document
produced by Mr. H.D. Malaviya (on behalf of the Indian National Congress) called
“Insurance Business in India”. In his document, Mr. Malaviya made four important
claims to justify nationalization. First, he argued that insurance is a “cooperative
enterprise”, under a socialist form of government; therefore it is more suited for the
government to be in the insurance business on behalf of the people. Second, he
claimed that Indian insurance companies were excessively expensive. Third, he
argued that private competition had not improved services to the “public” or to the
policyholders. Preventive activities like better public health, medical check-up,
hazard prevention had not improved, according to him. Fourth, he commented that
the lapse ratios of life policies were very high and leading to “national waste” Several
of his arguments that were analyzed proved to stand on rather weak grounds. For
example, his claim that Indian insurance companies were very expensive was
justified by comparing the overall expenses of life insurers in India with those of the
UK and the USA. However, the base or denominator he used for India resulted in
amplification of the figures beyond credible.
Anyway, the nationalization of the Life Insurance business in 1956 was justified by
the government on three distinct grounds. First, the government wanted to use the
resources for its own purpose. This clearly meant that the government was unwilling
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7. to pay the market return on assets (otherwise they could have raised the capital
whether insurance companies were public or private). Second it sought to increase
the market penetration through nationalization. There can be two reasons why
nationalization would make more sense than privatization for market penetration.
The government, by virtue of being a monopoly, could generate huge economies of
scale and thereby reduce costs of operation and thus reap higher volumes, by
transferring the lower costs into lower prices for the public. [b] Through
nationalization, the government may be able to take life insurance to rural areas
where it may not be possible for private insurers to be profitable. This goal was
definitely achieved by the newly formed monopoly to a considerable extent. Please
see the illustration below “Rural share of Life Insurance Business”. The last reason
cited for nationalization was that the government found the number of failures of
life insurance companies to be unacceptable.
Thus, with the Life Insurance Corporation Act of 1956, the 245 insurance companies
of both Indian and foreign origin in 1956 were nationalized by the government
acquisition of the management of the companies; and the Life Insurance
Corporation of India was created on 1st September, 1956, as a result; LIC has grown
to be the largest insurance company in India as of 2007.
Rationale for the non-nationalization of the General Insurance Business in 1956
However, general insurance was not nationalized in 1956. The then Finance Minister
addressed it in his speech as follows, “I would like to explain briefly why we have
decided not to bring in general insurance into the public sector. The consideration
which influenced us the most is the basic fact that general insurance is a part and
parcel of the private sector of trade and industry and functions on a year to year
basis. Errors of omission and commission in the conduct of the business do not
directly affect the individual citizen. Life Insurance Business, by contrast, directly
concerns the individual citizen whose savings, so vitally needed for economic
development, maybe affected by any acts of folly or misfeasance on the part of
those in control or be retarded by their lack of imaginative policy.”
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8. Milestones of the Evolution of Insurance after Nationalization in 1956
The diagram below illustrates the key milestones in the evolution of insurance in
India from the nationalization of life insurance in 1956, to the IRDA (Insurance
Regulatory and Development Authority) act in 1999 that led to the deregulation of
the insurance industry in India.
Nationalization of General Insurance in 1972
General Insurance was nationalized in 1972 (with effect from January 1st,
1973).There were 107 general insurers operating at that time. These were mainly
large city oriented companies catering to the organized sector (trade and industry).
They were of different sizes, operating at different levels of sophistication and were
assigned to four different subsidiaries (roughly of equal size) of the General
Insurance Corporation (GIC). The four subsidiaries were [1] the National Insurance
Company, [2] the New India Assurance Company, [3] the Oriental Insurance
Company, [4] the United India Insurance Company with head offices in Calcutta
(now Kolkata), Bombay (now Mumbai), New Delhi, and Madras (now Chennai)
respectively, collectively known as NOUN for their initials. There were several goals
for setting up such a structure [a] the subsidiaries were expected to “set up
standards of conduct and sound practices in the general insurance business and
render efficient customer service”, [b] the GIC would assist controlling their
expense, [c] the GIC would help in the channeling of funds, [d] this structure would
help bring general insurance in rural areas, [e] GIC was also designated as the
national reinsurer, [f] finally, all four subsidiaries were expected to compete with
one another. Most of these goals remained rather elusive and were not achieved to
a massive degree
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9. Development of the Life Insurance Industry during the Nationalized Era
LIC today services its customers through 8 Zonal Offices, 113 Divisional Offices, 2048
Branches, 1346 Satellite Offices, 1242 Mini Offices, more than 1.20 lakh employees
and approx. 11.95 lakh agents. All Offices are fully networked, with a huge IT
Infrastructure to support them.. The largest product category of the life insurance
market in India has been individual life insurance. The types of the policies sold were
mainly whole life, endowment and “money back” policies. Money back policies
return a fraction of the nominal value of the premium paid by the policyholder at
the termination of the contract. Until recently, term life policies were not available
in the Indian market. Note that even in 2001, individual life business accounted for
92% of all life insurance market. The number of new policies sold each year went
from about 0.95 million a year in 1957 to around 22.49 million in 2001. The total
number of policies in force increased from 5.42 million in 1957 to 125.79 million in
2001. Thus, on both counts there has been a 25-fold increase in the number of
policies sold. Of course, during the same period, the population has grown from 413
million in 1957 to over 1,033 million in 2001. On a per capita basis, there were
0.0023 new policies in 1957 compared with 0.0218 new policies in 2001. Total
policies per capita went from 0.0131 in 1957 to 0.1218 in 2001. Thus, whether we
examine the new policies sold or the total number of policies in force, there has
been a tenfold increase during that period. Therefore, if we examine the headcount
of policies as an indication of penetration, there has been a substantial rise. Apart
of this rise is directly attributable to a deliberate policy of rural expansion of the Life
Insurance Corporation. Between 1985 and 2001, total life business had grown from
below 18 billion rupees to over 500 billion rupees. During that period, the price index
increased fourfold. Thus, if there were no change in life insurance bought in real
terms, it would have accounted for 78 billion rupees worth of business.
In recent years, life insurance saving has played a bigger role in national savings.at
relatively lower levels of saving rate (that correspond to a lower level of income),a
rise in saving rate does not lead to a rise in life insurance premium expressed as a
fraction of GDP. However, beyond a threshold; with the threshold value of saving
rate being 20% for India, the life premium as a percent of GDP starts to grow rapidly.
India seems to have reached that deflection point.
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10. Moreover, we have already seen earlier in this chapter that insurance savings as
apercentage of financial savings has increased over the years (till 2006).
Deregulation of Insurance in India with the IRDAAct, 1999
With effect from 1st, January, 2000, with the passage of the IRDA Act, the Indian
Insurance Industry was privatized or deregulated. The deregulation was brought
about with the following objectives: to increase coverage of population, propel a
choice of better products with informed decisions, promote competition, encourage
the entrance and joint partnership of foreign players with the Indian insurers, boost
innovation, advance economy of operations, enhance customer centricity and
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11. service excellence and improve the efficiency of the public sector companies. The
Insurance Regulatory and Development Authority (IRDA) was formulated as an
independent body that would monitor and shape the insurance business in India.
The IRDA has separated out life, non-life and reinsurance insurance businesses and
therefore a company has to have separate licenses for each line of business. Each
license has its own capital requirements (around USD 24 million for life and non-life
and USD 48 million for reinsurance business). The role and the statutory functions
of the IRDA will be discussed in chapter 1.3 that deals with Authorities and
Regulatory environment.
Dynamic Market Environment for Insurance in India
An Era of Change
The insurance industry has experienced significant change over the past few
decades. But never before have the changes been so pronounced, the pace so rapid
and the scope so broad. Insurers are in the midst of a true paradigm shift. Their
governing rules are changing. Their functional bodies are blurring. Buyers are
becoming more sophisticated about services and value, and are ever more
demanding. This heightened form of consumerism is spurring a new demand
pressure on insurance products. At the same time, the industry is experiencing
traditional financial pressures, as well as new competition, new market entrants,
new substitutes for traditional insurance offerings. The industry is responding in
many ways. For example, there is an enhanced focus on market selection, new and
varied distribution channels, bundling and unbundling of products and services, all
in an effort to customize and achieve greater value while re-engineering and
consolidating for efficiency.
The Dynamic Environment and the Insurer’s point of View
In view of the ever-changing landscape of the Insurance Industry in India, insurers
need to revisit the core competencies and the cardinal features of their underlying
strategy.
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12. PEST Analysis
Of the facets illustrated above, it would make logical sense to take an outside-in view
and begin by analyzing the environment, a backdrop amidst which a new firm would
like to enter or an existing insurer would like to relook its strategy. Thus, I have
illustrated all factors contributory to the environment via the PEST (P-Political/Legal
Factors, E- Economical Factors, S – Social/Cultural Factors, T –
Technological/Physical Factors) framework.
Political Factors
– De-tariffing of general insurance with effect
from 1st Jan, 2007
– Safety valve imposed by the IRDA, of not
changing the terms and conditions of the
policies till 31st Mar, 2008
– Investment regulations
– Social and rural sector obligations
Economic Factors
– Increase in contribution of insurance to the GDP
– Increase in gross domestic savings as
percentage of GDP
– Decline in savings in the form of insurance funds
– Buoyancy in the Indian stock market
– Insurance business (first year premium) grew
Technological Factors
– Building up data warehouses
– Increase in CRM solutions
– Increased use of online portals for policy
purchase, renewal, claims processing etc.
– Impending importance of technology to
lower
costs in a de-tariffed scenario
– Grievance redressal cells
– Online Complaints reporting mechanisms
Social Factors
– Insurance penetration stood at 2.53%
for life
insurance, 0.62% for non-life insurance,
thus huge scope
– Huge middle class
– Increase in lifestyle diseases
– Higher demand for old age provisions
– Increasing awareness among the
PEST
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13. Political Factors:
The regulatory aspects of the political factors will be discussed in chapter 1.3. De-
tariffing, the opening up of the market to free pricing and flexible policy terms and
conditions (which came into effect on the 1st January, 2007), is the most essential
aspect that is set to revolutionize the face of the insurance industry by directly
affecting the insurers, concerned intermediaries, customers and stakeholders; thus,
a separate subsection detailing its prime characteristics will be dedicated to de-
tariffing.
Economic Factors:
– Increase in contribution of insurance to the GDP: GDP from insurance sector
constituted 12% of GDP in 2000–01, increased to 19.3% in 2004–2005.
– Gross domestic savings as a per cent of GDP increased to 29.1% in 2004–2005.
Savings in the form of life insurance funds accounted for 15.1% of the gross financial
savings.
– A decline in the savings in the form of insurance funds was witnessed, even though
life insurers increased their business during the year.
Buoyancy in the Indian stock market due to strong macroeconomic fundamentals,
robust corporate results, positive investment climate and sound business outlook.
– Insurance business (first year premium) grew at 47.93% in 2005–2006, surpassing
the growth of 32.49% in 2004–2005
Technological and Social Factors:
These are self-explanatory in the illustration.
De-tariffing and its consequences
A tariff market is one where the premium rates, policy terms and deductibles are
controlled and to be applied uniformly by all the underwriters. The market portfolio
mix for general insurers on tariff/non-tariff covers during the tariff regime were as
follows: 73.09% of the overall premiums were tariffed, and 29.91% was non-tariffed.
Health formed a part of the non-tariffed portfolio which implied that insurers could
set their own prices and adopt flexible policy terms and conditions.
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14. The primary effects of the tariffed regime were
– Cross subsidization: Profitable businesses like fire and motor which were tariffed
paid for un-profitable businesses of a company like health and marine cargo
insurance (which were non-tariffed), thus making these (health and marine cargo
insurance) available to customers at throw away prices. The profitable businesses,
thus cross-subsidized the unprofitable businesses. This is also the core reason for
the absence of any standalone health insurance company until 2006, because such
an insurer would not be able to compete with the general insurers, for whom health
insurance was one of the businesses that could be easily subsidized despite
exorbitant claim-to-premium ratios at 130%.
– “Good” customers paid for “bad” customers: In a tariffed regime, where prices
were uniform, all the “good” customers, who had a better risk management history
with lower risks and thus consequently fewer claims, ended up paying for “bad”
customers with higher risks. In fact the tariffed regime, induced complacency in the
customer, who had no incentive to improve their risk profile or management as he
would get reimbursed anyway.
– Underwriting skills smothered: The biggest defect of the tariffed regime was the
complete dearth of underwriting skills. For businesses that were tariffed,
underwriting was rule based rather than risk based (as it should be for insurance);
and for businesses that weren’t tariffed, underwriting did not matter on account of
dependency on the profitable tariffed businesses. Thus although underwriting is the
core activity defining the profitability of an insurance company, the tariffed regime
nullified its significance.
– Complete lack of quality data: Risk profiling, customer history, data warehouse,
data mining, management information systems were deemed insignificant and just
investments with a rather negative net present value because of their irrelevance to
the pricing of an insurance product; thus subsequently leading to complete lack of
quality data available to insurers and intermediaries, and reliance on outdated
information that was provided by the Tariff Advisory Committee.
The movement from a tariffed to a de-tariffed regime will occur in a phased manner
In order to prevent cut-throat competition with the lifting of tariffs, the IRDA has
decided to move from the tariffed to a de-tariffed regime in a phased manner. This
phased process would act as a safety valve for insurers and help preserve the
sanctity of the industry.
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15. – Phase 1:
• What is it? Opening up of the free market pricing policy with effect from 1st of
January, 2007. However, insurers cannot change their policy terms and conditions
during this phase (of the businesses that belonged to the tariffed part of the
portfolio mix)
• Process of Preparation in this phase includes:
• – Data compilation and stratification
• – Data warehousing, analysis of data and sending data to the appointed actuary
– Phase 2:
• What is it? With effect from 1st April, 2008, insurers can change their policy terms,
conditions, wordings, tariff rules and regulations. This phase would include
launching new or redefined products.
• Process of Preparation in this phase includes:
• In order to launch new products with options to choose perils and add-on covers
and considerations on “what are the most urgent requirements of the customer?”,
define product concepts like [a] policies purely on first loss covers, [b] policies on
selective perils basis, [c] policies considering agreed value covers etc.
PORTER’S 5 FORCE ANALYSIS OF INDIAN INSURANCE MARKET
All aspects related to de-tariffing are marked with a “D” followed by a “+” sign
indicating it has a positive effect on insurers, “–” sign indicating it has a negative
effect on insurers, and “+/–” sign if it has both positive and negative effect on
insurers. The points in the illustration that are not preceded with a “D” are unrelated
to the de-tariffing aspect and would have progressively occurred irrespective of the
de-tariffed scenario. TPA= Third Part Administrator
Marketing Facets
– Pricing:
• Industry experts predict that fire and motor premiums would go down by 30–35%
(these were part of the tariffed, thus profitable businesses). This is attributed to the
tendency of players to undercut one another, due to free market pricing policy, thus
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16. resulting in some type of cut-throat-ism and a price war. [Initial ill effects of a de-
tariffed scenario – Industry Rivalry, Porter’s 5 forces.]
• Health and marine premiums will have to rise due to end of cross-subsidization by
their profitable counterparts (motor and fire).
• There will be a rise of sophisticated price segmentation methods: for example,
having location based pricing in place, people in cities would pay higher premiums
than those in suburbs
– Products:
• De-tariffing will propel competition because of a need to differentiate, thus
promote heightened innovation in product design; for example, there may be health
insurance products developed for people with specific hereditary diseases which
were not in existence earlier.
– Distribution channels:
• Need of an innovative combination of distribution channels to increase the
number of touch points with the customers and maximize customer reach via
channel effectiveness.
• Achieving operational efficiencies in channels would be inevitable; as prices would
go down initially and costs will have to be kept at an all-time low, if the stipulated
solvency margins have to be maintained.
Customers
– “Good” customers will cease to subsidize “bad” customers, as each customer
would pay premiums based on his/her risk profile [Good customers will no longer
subsidize bad customers – Buying Power, Porter’s 5 Forces]
– Due to de-tariffing, competition would heighten and consequently result in new
and innovative products, thus resulting in increased consumer choice and
heightened customer centricity and service. [Increased competition in a de-tariffed
scenario
– Buying Power, Porter’s 5 forces]
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17. – Price sensitivity of customers will increase in areas where competition results in
an initial price fight. [Increasing price sensitivity of customers – Buying Power,
Porter’s 5 forces]
– The obvious consequence of the de-tariffed regime is increasing customer
awareness and aggravated premium tension.
– The moral hazard will end with high risk customers coming in the spot light as they
can no longer find “cover” under the low risk customers.
– The information asymmetry would reduce as customers would be willing to
disclose more information to get a better risk rating in case they are good customers;
thus complete and furnished information from customers would be rewarded with
discounts.
– Policyholders would be incentivized to improve their risk portfolio, as doing so
would be compensated for.
– Large corporate clients’ bargaining power would be enhanced in the fire and motor
portfolio where prices will be slashed; however, corporate clients would be lost in
the health insurance area where prices will have to be increased to ensure the
profitability of these businesses. [Large Corporate Clients – Buying Power, Porter’s
5 forces.]
Reserving
– The IRDA (regulatory authority) has stipulated regulations with respect to the
solvency margin that companies must adhere to; solvency margin is the extent to
which assets need to be over the liabilities for the insurer. In lieu of the same,
insurers cannot indulge in price wars to the extent that their solvency margins will
be hurt, thus serving as a necessary evil. Moreover, insurers are answerable to the
Shareholders for their bottom line, which is why they cannot afford to let it get
affected too drastically.
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18. Industry Rivalry
✔ D– Initial effects of Detarifed
scenario
✔ Industry concentration in both
life and non-life
✔ Foreign players entering
✔ Restricted competition due to
regulations
✔ Solvent Margin requirements
✔ Low penetration of insurance
Barriers to Entry
✔ FDI Ceiling
✔ Capital requirements
✔ Experience with respect to
understanding of the market
✔ Elaborate distribution requirements
✔ “Lock-in” of buyers
Threat of Substitutes
✔ D– Increased competition, thus
substitutes due to de tariffing
✔ Government pension schemes
✔ Tax savings instruments
✔ Emerging substitutes
✔ Switching costs of customers
✔ Dependence on Children in rural India
Suppliers’ Power
✔ D– Reduced commission
offered by reinsurance
companies with de-tariffing
✔ D- Increased efficiency of
Brokers necessitated
✔ Limited actuaries in the
marked
✔ Reinsurance concentration
✔ Lock in & high switching
costs for firms
✔ Cession to the National
Insurer
✔ Dependence on IT providers
✔ Dependence on TPAs
✔ Orphaned customers due to
high attribution of agents
Buyer/Customer Power
✔ D+ Widening product range
✔ D– Increasing price
sensitivity of customers
✔ D± Increased competition in
a de-tariffed scenario
✔ D– Large corporate clients
✔ D– Switching costs
✔ D+ Good risk customer will
no longer subsidize bad risk
customer
✔ Low penetration, thus less
number of buyers
✔ Yearly renewal for non-life
products
✔ Multiple distribution
✔ Sale of Banc assurance
Industry Rivalry
✔ D– Initial effects of Detarifed scenario
✔ Industry concentration in both
life and non-life
✔ Foreign players entering
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19. Regulations
– The IRDA (regulatory authority) has disallowed cross subsidization of
businesses in light of the solvency margin argument; however, if insurers do need to
cross subsidize, they can do so by presenting a proposal to the IRDA with a
justification for the same.
– Actuaries have been appointed to insurers to help them in their
underwriting activities and rate making process.
– The phased process sequenced by the IRDA acts as a safety valve (as
discussed earlier).
Reinsurance
– If competition based on price increases, it would imply reduced prices,
however same liabilities or better put, increased liability for the same price suggests
that the insurers would pass on more liabilities to the reinsurer (who in turn gives
commission to the insurer for the percentage of premium received and obviously
even carries partial risk of the insurer in return). More liabilities to the reinsurer
without corresponding increase in premium would reduce the commissions that
insurers can get out of reinsurers. [Reduced commission offered by reinsurers in
case of detariffing.
– Supplier’s Power, Porter’s 5 forces.]
Investments
– Price reduction by insurers would call for more efficient management of
their investment portfolio and thus cautious and conscientious pooling of resources
to reap maximum returns, in order to be able to augment their bottom line and
sustain their solvency margins.
Risk Management and Underwriters
– The switch from a tariffed to a de-tariffed regime calls for a transition from
rule based underwriting to risk profile based underwriting.
19
20. – This would imply classification of risks into class rated risks and individual
rated risks.
• Class rates: where risks of a class have similar risk factors and individual
variations are not financially significant; for example motor risks in India
• Individual rates: where each risk has significant variation in risk factors and
the financial magnitude justifies individual rating – for example engineering risks
– More time and money will need to be invested in risk profiling through and
data collection.
– Low pricing will not be the basis for creating the best company; it will be
based upon risk acceptance, service delivery standards and commensurate
remunerative pricing.
– Efforts will have to be made to overcome the steep learning curve with
respect to sophistication in risk management practices.
– Underwriters will have to team up with the marketing department and rate
policies based on claims data collected at a micro level which would include
[a]product level knowledge per se, [b]enhanced customer domain knowledge and
corresponding merit rating of the same
– Use of IT and innovative techniques to improve decision making via data
warehousing, data mining and other business intelligence systems augmenting
micro level data analysis will have to be used to improve efficiency and quality of
decision making.
Brokers
– The de-tariffed regime would enhance the broker’s role and transform him
into a financial advisor; as Mr. Sunderasan, the Chair Professor of National
Insurance.Academy put it “The Broker will be the eyes of the insurer and the voice
of the customer.” This means he will use his proximity to the customer and market
20
21. intelligence to help design new products, develop new markets and improve pricing
strategies. The broker’s role as the voice of the customer would imply: a
requirement analysis of the prospective insured, matching the price within the
desired budget, using customer (insured) response to provide feedback to the
insurers, and enhancing his value addition by providing a bundle of services.
[Increased efficiency of the brokers necessitated – Supplier’s Power, Porter’s 5
Forces]
– Brokers may face reduced margins from insurers (on account of price
cutting mechanisms the effects of which will have to be borne by all the
intermediaries involved) and may even be compelled to switch from a commission
based model to a fee based one.
Transition to a de-tariffed regime will have deep, certain and temporary
financial impact on the insurers before the industry cycles settle. In order to find a
way to create a lasting value in the customer’s mind, there is a need to ensure fair
pricing, balance between the interests of insurer, insured and other stakeholders.
Since a price war is in the offing, unmindful viability of the insurers will need to be
kept in check and it would be essential to moor pricing on sound technical base to
prevent the market from going out of control. Finally priorities with respect to
growth versus profit need to be defined as both may elude for some time.
Authorities and Regulatory Environment
The Insurance Regulatory and Development Authority (IRDA) is a national agency of
the Government of India, based in Hyderabad. It was formed by an act of
Indian Parliament known as IRDAAct 1999, which was amended in 2002 to
incorporate some emerging requirements. Mission of IRDA as stated in the act is “to
protect the interests of the policyholders, to regulate, promote and ensure orderly
growth of the insurance industry and for matters connected therewith or incidental
thereto.”
The role of the IRDA as a developer
The role of the IRDA as a developer includes
• Shouldering the responsibility of developing a nascent insurance market
21
22. • Striking a right balance between developing and regulating the industry
• Protection of Policy holders’ Interests – Mission of IRDA
• Interests of policy holders as the prime objective while framing regulations.
The Statutory functions of the IRDA
The statutory functions of the IRDA include
1. Issue to the applicant a certificate of registration, renew, modify, withdraw,
suspend or cancel such registration. The applicants may be the insurer, broker or
the TPA.
2 Protection of the interests of the policyholders in matters concerning assignment
of policy, nomination by policyholders, insurable interest, settlement of insurance
claim, surrender value of policy and other terms and conditions of contracts of
insurance. The mission statement of the authority attaches immense importance to
the protection of the policyholders’ interest. In order to achieve this, the IRDA has
set upa cell that handles grievances against insurers. Grievances received by the
authority are taken up with insurers for examination/re-examination and speedy
resolution. A greater awareness amongst the policyholders was seen about the
existence of a Grievance Cell at the Authority. The Regulations for Protection of
Policyholders’ interests, 2002 requires every insurer to have an effective grievance
redressal system. Policyholders who have complaints against insurers are required
to first approach the grievance/customer cell of the concerned insurer. If they do
not receive a response from the insurer within a reasonable period of time or are
dissatisfied with the response of the company, they may approach the Grievance
Cell of the IRDA.
3. Specifying requisite qualifications, code of conduct and practical training for
intermediaries or insurance intermediaries and agents. The IRDA has specified
mandatory training and pre-recruitment exams for individual and corporate agents
that they need to clear before licensing.
22
23. 4. Specifying the code of conduct for surveyors and loss assessors. The code of
conduct for surveyors and loss assessors is specified in the IRDA Regulations for
Surveyors and Loss Assessors, 2000.
5. Promoting efficiency in the conduct of insurance business. For example, the
Authority raised the limit of losses required to be surveyed by a licensed surveyor
and loss assessor for settlement of claims for the flash floods in Surat, Gujrat as a
special case for a period of two months from the date of issue of the order.
6. Promoting and regulating professional organizations connected with insurance
and reinsurance business. IIRM (the Institute of Insurance and Risk Management),
in order to achieve its mission of spreading insurance education, continues to
receive cooperation from international bodies, relevant institutions and insurance
regulatory authorities.
7. Levying fees and other charges for carrying out the purposes of the Act. The
Authority levies both registration and renewal fees from the insurers and various
intermediaries associated with the insurance business. The registration fee for an
insurer for example, is Rs. 50,000 and the renewal fees are 1/10th of 1 percent of
gross direct premium written in India, subject to a minimum of Rs. 50,000 and a
maximum of Rs. 50 million.
8. Calling for information from, undertaking inspection of, conducting enquiries and
investigations including audit of the insurers, intermediaries, insurance
intermediaries and other organizations connected with the insurance business.
9. The de-tariffing of the general insurance business and file and use guidelines
prescribed by the IRDA to best deal with de-tariffing; setting up an agenda for
insurers to permit a desired switch, in order to smoothly transit from a tariffed
regime which called for no underwriting skills to a regime where prices need to be
set based on prudent risk assessment and underwriting.
10. Specifying the form and manner in which books of accounts shall be maintained
and statements of accounts shall be rendered by insurers and other insurance
intermediaries.
11. Regulating investment of funds by the insurance companies. Please see the
illustrations below; they depict the investment regulations for life and non-life
insurance businesses.
23
24. 12. Regulating maintenance of margin of solvency. Every insurer is required to
maintain a certain solvency margin. Solvency margin is defined as the excess of
assets over liabilities; the main purpose of which is to ensure that insurers have
sufficient financial muscle especially in a service like insurance, where costs cannot
be pre-accounted for, implying costs are realized after the price/premium has
already been paid for, making the business highly susceptible to uncertainty.
13. Adjudication of disputes between insurers and intermediaries or amongst
various insurance intermediaries (IRDA).
14. Specifying the percentage of life insurance business and general insurance
business to be undertaken by the insurers in the rural and social sector. As part of
the initiatives to increase the spread of insurance to rural and socially backward
sectors, the Authority notified the Regulations on obligations of insurance to the
rural and social sectors in the year 2000 consequent upon the amendment of the
Insurance Act, 1938. The obligations require
– Life Insurers to fulfill – 7, 9, 12, 14, 16 and 18% of total policies in first six years of
operation as rural obligations.
– General Insurers to fulfill – 2, 3 and 5% of total gross premium in I, II and
subsequent years as rural obligations.
– 5000, 7000, 10000, 15000, 20000 and 25000 of lives as social sector obligations
by all insurers in first six years of operation
15. Moreover, by virtue of the IRDA’s regulatory role in the area of consumer
protection, the Authority has been instrumental in implementing the following:
– Introduction of cashless transactions by third party administrators in health
insurance
– Maintenance of minimum solvency margins as mentioned earlier
– Protection of policyholder’s interests regulations, 2002
– Widening of distribution channels in order to increase insurance accessibility
– Entry of banks in the “bancassurance” model
– Monitoring of the underwriting policy through file and use
– Formulation of the Grievance Redressal Cell as discussed
24
25. – Formulation of a committee to study existing grievances’ mechanisms to formulate
uniform guidelines and prescribe improvement steps for the insurers
– Promotion of micro-insurance to reach rural areas
– Prescribing guidelines for insurers with respect to simplicity of contracts et al to
reduce the principal agent problem between the insurer and the insured and
thereby diminish the occurrence of grievances on account of errors of omission, or
frauds on account of errors of commission
Industry Outlook and Major Players
Introduction
When it was part of the British Empire, India with its splendor and natural
riches, was known as the “jewel in the crown.” Today, foreign insurance
companies, especially those in the life sector, tend to view India in a similar,
if less lyrical light. With its rapidly expanding economy, burgeoning middle
class and overall population of more than a billion, India is seen as a land of
promise (O’Connor). Joint venture is recognized as the preferred route into
the Indian insurance market, for reasons beyond the foreign direct
investment cap. Joint ventures help in combining local knowledge,
distribution network and infrastructure with global experience. The year on
year growth for private insurers in the life insurance industry has exceeded
100%, with private insurers now gaining 20% of the market share. Peter
Alexander Smyth, the regional general manager of ING Asia Pacific said to this
outstanding growth “Outside managers are likely to be unused to high growth
rates like these; however, Indian managers are unfazed by this”; which is why
although foreign players bring in a lot of experience, managers feel this may
not be everything. It is essential to think locally in a dynamic environment and
understand the rhythm and cycles of the local market before exacting a
business model from the foreign location onto a new market. This discussion
helps us to further the base established in the previous chapter with respect
to the kind of internationalization strategy that a foreign player must pursue,
wherein we concluded it should be “business transfer” with a “joint venture”.
The Life Insurance Industry in India recorded a premium income of 2368billion
25
26. during 2013–2014 as against Rs. 2086 billion in the FY2014 recorded a growth
of 13.48%. Overall, the size of the life insurance market increased on the
strength of growth in the economy and concomitant increase in per capita
income (IRDA).
COMPARITIVE ANALYSIS OF LAST TWO YEARS DATA*
Life Insurance Business Performance:
2013-14 2012-13
Public Sector
Private
Sector
Public Sector Private Sector
Premium Underwritten (Rs in Crores) 236942.30 77340.90 208803.58 78398.91
New Policies Issued (in Lakhs) 345.12 63.60 367.82 74.05
Number of Offices 4839 6193 3526 6759
Benefits Paid (Rs in Crores) 158081 58994 134922 56923
Individual Death Claims (Number of Policies) 760334 125027 750576 127906
Individual Death Claims Amount Paid (Rs in
Crores)
8475.26 2385.33 7222.90 2147.32
Group Death Claims (Number of lives) 267296 158682 245467 119970
Group Death Claims Amount Paid (Rs in Crores) 1882.83 1222.25 1697.37 949.08
Individual Death Claims (Figures in per cent of
policies)
98.14 88.31 97.73 88.65
Group Death Claims (Figures in per cent of lives
covered)
99.65 90.45 99.54 87.79
No. of Grievances reported during the year 85284 289336 73034 267978
Grievances resolved during the year 85828 288836 72655 268415
Grievance Resolved (in percent) 100.64 99.83 99.48 100.16
*data provided by IRDA.
26
27. MARKET SHARE
With these premiums underwritten, the private sector and the LIC experienced a
95.19% and 20.85% growth respectively, over the year (2004–2005). The higher
growth for the private insurers needs to be viewed in context of the lower base.
However, the private insurers have improved their market share from 9.33% in
2004–2005 to 14.25% in 2005–2006.
73%
5%
4%
4%
2%
2%
2%
8%
MARKET SHARE OF MAJOR INSURER IN INDIA IN 2014
LIC
ICICI PRUDENTIAL
HDFC STANDARD
SBI LIFE
BAJAJ ALLIANZ
MAX LIFE
BIRLA SUN LIFE
OTHERS
27
28. List of Public Sector General Insurance Companies in India
Agriculture Insurance Company of India Ltd.
National Insurance Company
New India Assurance comp. Ltd.
The Oriental Insurance Company
United India Insurance Comp. Ltd.123
Bharati AXA Insurance Company
Bajaj Allianz General Insurance Company
Cholamandalam MS General Insurance Company
Future Generali Insurance Company
HDFC ERGO Insurance Company
ICICI Lombard
IFFCO Tokio
Liberty Videocon General Insurance Co Ltd
L&T Insurance Company
Magma HDI Insurance Company
Raheja QBE Insurance Company
Reliance General Insurance
Royal Sundaram Alliance General Insurance
Shriram Insurance Company
SBI General Insurance Company
Tata AIG General
Universal Sampo Insurance Company
PUBLIC SECTOR LIFE INSURANCE COMPANY
Life Insurance Corporation of India
Source:http://en.wikipedia.org/wiki/List_of_insurance_companies_in_India,
retrieved on May 24 2015.
28
29. Private Sector Life Insurance Companies
AEGON Religare Life Insurance
Aviva India
Shriram life insurance
Star Union Dai-ichi Life Insurance
TATA AIA Life Insurance
Bajaj Allianz Life Insurance
BHARTI Axa life insurance company
Birla Sun Life Insurance
Canara HSBC Oriental Bank of Commerce Life Insurance Company Ltd
DHFL Primerica life insurance
Edelweiss Tokio Life Insurance Co. Ltd.
Exide Life Insurance company Ltd
Future Generali India Life Insurance Company Limited
HDFC Standard Life Insurance Company Limited
ICICI Prudential Life Insurance Company
IDBI Federal Life Insurance
IndiaFirst Life Insurance Company
Max Life Insurance
Kotak Mahindra Old Mutual Life Insurance
PNB Metlife India Insurance Co. Ltd.
Reliance Life Insurance
Sahara India Life Insurance Co, Ltd.
SBI Life Insurance Company
Source: http://en.wikipedia.org/wiki/List_of_insurance_companies_in_India,
retrieved on May 24
29
30. Indian General Insurance Industry
INTRODUCTION
The General Insurance (GI) industry in India has evolved significantly over the last
decade and is now at a watershed in its development. From a ` 12,000 crore top-line
industry in 2001–02, today it is worth ` 70,000 crore, clocking an annual growth rate
of 17%. The industry today provides a cover of ` 1,000 lakh crore, which by itself is a
huge testament to its importance to the economy. While the last few years have
been challenging for the industry’s profitability, the industry holds significant
potential, both from the perspective of growth and value creation. However, to
meet its full potential, India’s GI industry will require aco ncerted effort by all the
stakeholders. This report paints a picture of the aspirations of the GI industry and
what it will take to realize the vision. GI is a major contributor to the country’s
economy. It effectively pools and transfers risk from individual and corporate
consumers, thus encouraging investments and driving GDP growth. It supports the
government and society by reinvesting funds and sharing the cost of catastrophes.
The industry is also a major contributor to employment. Detailed analyses show that
GI is a strong driver of GDP growth. A one standard deviation increase in GI
penetration induces a per capita GDP growth of 0.39%. This is superior to the growth
induced by private credit (0.34%) or life insurance (0.37%).
GI industry in India employs around 7 lakh people both directly and indirectly. The
industry supports the government and society by reducing the financial burden of
social welfare and sharing the cost of catastrophes. The insurance sector
contributed 11–12% of total loses over the string of natural catastrophes in India
(e.g., it contributed ` 10–12,000 crore across floods in Mumbai in 2005, Surat in 2006
and Uttarakhand in 2013). Further, the sector as a whole has invested 35% of its
total assets in government securities.
The GI industry has also played an unparalleled role in creating access to financial
services and to protection. Supported by the largest health insurance programed
globally, the industry prides itself on having added over 300 million beneficiaries in
a short span of 4 years. Further, a majority of the beneficiaries are from the below
30
31. poverty-line segment, which goes a long way in contributing to the policy objectives
of universal financial inclusion.
Current position of General Insurance in India
The GI industry’s performance is influenced significantly by the interplay between
various related elements—customers, the individual insurer’s capabilities, the
industry acting in collaboration and external stakeholders such as policy
makers/regulators and other related stakeholders (e.g., reinsurers, third-party
administrators, healthcare and motor insurance providers). This interplay shapes
industry performance and determines how it fares on its three core objectives–
providing universal access and coverage; returning value to shareholders; and
ensuring a superior experience for customers. An assessment of the current position
of the industry indicated that it has some way to go in terms of performance against
these three core objectives.
1. Providing universal access and coverage A detailed micro-analysis of underlying
needs and risks indicates substantial scope for improvement in penetration and
access across segments. For example, home insurance penetration is less than 1%;
there is significant underinsurance in segments such as two-wheelers and personal
health; corporate (property and indemnity), SME and rural risk coverage is
substantially lower than global benchmarks. Further, the total economic losses due
to underinsurance are estimated to be close to ` 150–200,000 crore.
2. Delivering returns to shareholders India has the highest combined ratio compared
across developed and developing economies and time periods. This has been largely
driven by substantially higher claims ratios. As a result, the industry has delivered
poor returns to shareholders. Barring a few exceptions, the returns have been lower
than 15% (i.e., below cost of capital) even in the tariff era. Returns post
detariffication (2007) have largely remained in a single digit even after adjusting for
TP (motor third-party) pool losses. While the average economics have been poor,
there is huge spread in industry performance, with a few players earning
substantially higher returns than the rest of the industry, driven almost entirely by
superior underwriting performance.
31
32. 3. Ensuring superior customer experience and building loyalty GI industry in India
has shown considerable improvement on customer service and experience (while
only 60% of claims were settled in 1 month, customer grievances have dropped
significantly from 2,800 per million policies in FY10 to 1,100 per million policies in
FY12). Even on a relative basis, the industry has performed better than other
financial services. Complaints are lower compared to banking (~3,500 complaints
per million SA), asset management (~1,800 per million folios) and life insurance
(~1,200 per million policies). Even on this dimension, there is substantial dispersion
in performance across players, with the best players performing up to 5 times better
than the industry average, and about 30 times better than the bottom quartile
performers. The ‘report card’ of various inter-related elements which influence
industry performance reveals mixed results: Customers: Customer awareness and
involvement is increasing. However, there remains a trust deficit between the
customers and the industry participants, leading to relatively low loyalty and highly
transactional price-driven relationships. This behavior is also leading to
underinsurance, particularly among SME customers, who may buy a risk cover of as
low as 20% of asset value to bring down their upfront insurance spend. Individual
insurer capabilities: Players have significantly improved the operating model and
made progress in upgrading their product and distribution capabilities; however,
there is a large gap vis-à-vis the desired best practice eon core “technical”
capabilities (claims and under writing), with significant spread across players.
Industry conduct: Over time, the market has opened up and seen the entry of new
players, which has increased competition and choice for customers. However,
competition has largely remained price driven, with limited focus on creating new
capabilities. As an industry, there has been a high degree of collaboration in areas
like dismantling pools, articulating the need for more consistent product and
distribution reforms and creating entities such as the Insurance Information Bureau
(IIB). However, there is opportunity to do more in terms of raising the industry
profile, defining common standards and self-regulation mechanisms, and building
more industry-wide utilities. Regulatory interventions: Over the last decade,
regulatory interventions have helped open up the industry, foster more competition
and largely benefited the industry. However, there remain several areas to be
32
33. addressed—particularly on issues of distribution, product, pricing and solvency
reform. Other industry participants:—— Reinsurers: India continues to attract
tcapacity from global reinsurers, particularly on casualty and specialty lines of
business(while witnessing a reduction in higher rated capacity on property lines);
however, the lack of local presence of global reinsurers has inhibited the market
from getting access to the best talent and expertise.—— Providers: Relationship of
insurers with motor and health stakeholders (i.e., OEMs/repair shops and providers)
is relatively poor, with limited progress made in some pockets.—— TPAs and
surveyors: Capabilities of the Third Party Administrators (TPA) and surveyor industry
are low and remain a big area of concern.
The overall general insurance industry growth has kept pace with the GDP growth in
the country and general insurance penetration has varied in a narrow band .After
liberalization of the Indian insurance industry in the year 1999-2000, the Indian
general insurance industry has witnessed rapid growth. The industry, in terms of
gross direct premium, has grown from INR 11,446 crore in FY02 to INR 57,964 crore
in FY12, which corresponds to a compounded annual growth rate (CAGR) of 17.6
percent. Insurance density, which is defined as the ratio of premium underwritten
in a given year to the total population, has increased from USD 2.4 in 2001 to USD
10 in 2011. The growth in the general insurance industry has kept pace with the
nominal GDP growth rate resulting in general insurance penetration remaining
stable in the range of 0.55% to 0.75% over the last 10 years.
33
34. Changes in the regulatory environment substantially impacted the industry dynamics
Apart from macro-economic, social, and demographic growth drivers, the evolving
regulatory landscape had a significant impact on the growth and profitability trends
in the industry. The most notable of them was the price de tariffication in 2007
which significantly impacted the premium rates and growth for commercial lines and
health insurance.
Though the overall insurance penetration has remained in a narrow range, coverage
of underlying risks has increased considerably. The insurance penetration statistics
may not represent the true perspective on coverage of the underlying risk due to
changes in the premium rates across segments which were significantly influenced
by the regulations. In our estimates, the risk coverage has grown at an annual
growth rate of approximately 25 percent. For example, in the health insurance
segment, the number of persons covered has increased from approximately 80 lakhs
in FY04 to approximately 7.3 crore without taking into consideration the Rashtriya
0.2
0.3
0.35
0.4
0.45
0.5
0.56
0.6
0.65
0.7
0.75
0.8
0.84
F2 F3 F4 F5 F5 F6 F7 F8 F9 F10 F11 F12 F13
Growth in the Indian general insurance industry
Gross direct premium
34
35. Swasthya Bima Yojna (‘RSBY’) which has additionally covered more than 16 crore
people by FY12. Even in commercial lines business, the premium growth over the
years indicates considerable increase in the underlying risk coverage, especially
considering the impact of price de-tariffication
Overall, while the industry achieved significant growth over the past 5 years, the
profitability of industry deteriorated sharply
A multitude of factors adversely impacted the industry profitability over the last five
years
• Price detariffication provided freedom to general insurance companies to decide
the premium rates in most of the product segments
• Between FY06 and FY12, 10 new companies have entered the general insurance
business. Intensifying competition and focus on growth by the new entrants led to
competitive pricing pressure
• Focus on growth by the insurers across the industry led to higher bargaining power
of the intermediaries and limited control on the claims cost
• Limited or no increase in the TP premium rates for a number of years coupled with
issues pertaining to third party liability caps as under The Motor Vehicles Act, led to
extraordinarily high claims ratio in the segment which impacted the overall
profitability and solvency requirements for the general insurance companies.
35
36. Changes in the regulatory environment substantially impacted the industry dynamics
KeyRegulatory
Changes
ImpactofChanges
IRDA Bill
Cleared
Foreign players
allowed to enter
with FDI limit of
26%
IRDA
insurance
brokers
and
corporate
agent
regulatio
n
Entry of
Stand-
alone
Health
Insurance
Players
allowed
Price
Detariffication
Merger
Acquisition
Guidelines
Introduction
of Declined
Risk pool, TP
premium
increase
IRDA issues Third
Party Administrator
regulations (TPAs)
Creation of Indian
Motor Third Party
Insurance Pool
Liberalization
of the sector
and
formation of
an
independent
regulator
Entry of TAPs
specifically
focused on
servicing health
insurance
business
Thrust on
Insurance
distribution
through
corporate
intermediari
es
Entry of
stand-
alone
health
insurance
players
Mechanism to
equitably share
CVTP losses
Enabled
consolidatio
n, inorganic
transactions
in the
industry
Improvement
in overall
profitability
of the CV
segment
Entry of a
number of
foreign players
bringing capital,
strong technical
expertise
Significant
change in the
premium rates
for the
commercial
lines
1999
2001
2002
2006 2007
2011
2012
36
37. Future growth and profitability trends in the General Insurance Industry
While the Indian general insurance industry has evolved significantly over the past
decade or so, the insurance penetration and insurance density levels are
significantly lower than the developed as well as comparable developing countries.
The under-penetration is driven by lack of overall financial awareness, lack of
understanding of general insurance products, low perceived benefits, and
propensity to purchase insurance based on reactive drivers such as insistence by
financers, statutory requirements, etc.
Key trends shaping General Insurance over the next decade
The GI industry in India will be shaped by trends and discontinuities across four
themes over the next decade. These themes are—global forces; consumer
behaviour and expectations; demand–supply dynamics in related sectors; and
macroeconomic factors.
1. Global forces impacting India’s insurance industry Emerging Asia—mainly China,
India and Southeast Asia—is expected to become the most important playing field
for global insurers. These countries will account for around 35% of total growth. This
will result in heightened competitive interest from a range of foreign insurers, who
look to India as a major source of growth. Continued high bar on “technical
excellence” with “winners” pulling away further and capturing disproportionate
share of industry value. Technology discontinuities (Big Data, Mobility, Social Media,
Cloud) which will allow for more sophisticated business models to emerge.
Increasing complexity of risks driven by an ageing population, lifestyle changes,
climate changes, new types of coverage.
2. Changing customer behavior and expectations Increasing consumer awareness and
involvement.
Blurring boundaries between the online and offline world, with demonstrated multi-
channel behaviour, e.g., 60–70% of online users conduct digital research before
purchasing any financial services product; two-thirds change their mind about the
product and brand after online research. Emergence of various segments of
customers with different needs and expectations, requiring the development of a
37
38. finer customer centric approach. Customers increasingly expect a solution oriented
approach rather than a claim linked transactional approach, e.g., cover for entire
healthcare needs and not just IPD claims.
3. Shifting demand–supply dynamics in related sectors Healthcare:
Rapid increase in healthcare spend and formalization and corporatization of
provider space will lead to new opportunities. Auto: Pressure on core sales margin
and ageing of car PARC will result in heightened focus of OEMs/dealers for insurance
pools. Corporate sector: Globalization, organized retail and infra spending translate
into significant GI opportunities; continued importance of SME.
4. Macroeconomic factors
Uncertain and volatile macroeconomic outlook will temper near-term growth and
investment return; it will necessitate building resilient business models. Wage cost
squeeze and talent crunch (especially for technical skills), compounded by increasing
attrition.
Scenarios for the future
The future direction of the industry will be shaped by the interplay of various
stakeholders—the individual insurers’ efforts to upgrade their capabilities, industry
conduct and level of collaboration, and external influence, in particular the policy
actions. In this context, there are three potential evolution paths/scenarios for the
industry: Status quo: In the “status quo” scenario, a few insurers will focus on
initiatives to build holistic capabilities across the value chain. However, capabilities
for a large part of the industry would continue to be low and industry conduct will
remain poor. Further, the policy environment would be largely conservative, with
few enabling actions. As a result, in this scenario, the outcome would be one of
“unfulfilled” potential. The industry would grow at a CAGR of 13% and reach a size
of ~` 3,00,000 crore by 2025. However, the industry CoRs would remain high
(~110%), resulting in single digit RoEs and value creation will continue to be
negative. As a result of underperformance, the industry as whole will require fresh
capital to the tune of ` 40–45,000 crore, with a bulk of this required to recapitalize
a few weak players. In the scenario above, if economic recovery is accelerated over
38
39. the next 2–3 years, the industry would benefit from both higher growth and higher
contribution from investment income. However, due to limited effort to build skills
and capabilities and improve industry conduct, the impact would still be moderate
– 14–15% growth to reach a GWP of ` 3,50,000 crore by 2025; RoE in low double
digits, continued negative value creation and high capital requirements of ` 25–
30,000 crore. Gathering momentum: To break out from this cycle and control its
own destiny (as against being dependent on external economic conditions), the
industry will require a combination of individual insurer efforts to upgrade
capabilities and significant improvement in industry conduct and collaboration.
Accordingly, the “gathering momentum” scenario will help the industry realize
significant improvement in outcomes—growth CAGR of 15–16% translating into a
total industry GWP of ` 3, 90,000 crore by 2025; improvement in CoRs to 103–104%
resulting in a total industry RoE of 13–15%.
In this scenario, the industry would require fresh capital infusion of ` 20–25,000
crore to fund the higher growth requirements.
Inclusive, progressive and high performing: For the industry to realize its true
potential and achieve its vision of becoming an “inclusive, progressive and high
performing” sector, there will need to be significant enabling policy actions to
complement the industry and individual insurer actions. The upside of these actions
will be substantial—GWP of ` 4,80,000 crore by 2025; substantially higher
penetration levels (over 85% of motor vehicles covered; about 1 billion health lives
covered; overall GWP to GDP penetration of 1.4%); industry CoR of 99–101%
translating into RoE upwards of 20% and incremental value creation of `
35–40,000 crore. In this scenario, the additional capital infusion will be ` 10–15,000
crore primarily driven by significantly higher volume and growth. Further, the
industry will witness significant demand for technical talent—over 1 lakh
underwriters, claims assessors and surveyors will be required. Agenda for action to
build “inclusive, progressive and high performing” industry stakeholders will need to
take a coordinated set of actions to help the industry unlock its full potential and
realise its ambitious vision
39
40. 1. Individual players need to drive initiatives
Across three axes of innovation: Build distinctive granular customer insights to
Capture high potential growth opportunities and enhance engagement across the
customer lifecycle. Upgrade to next generation technical capabilities (claims,
underwriting, analytics, and actuarial capabilities). Build world class operating
models to achieve gains in efficiency while strengthening the human capital.
2. Industry-level initiatives required to further performance:
Raise the profile of general insurance in the Indian ecosystem. Contribute in defining
industry standards and protocols. Co-sponsor the building of common infrastructure
(in concert with policy makers/regulators) for fraud detection, claims management,
skill building, etc.
3. Policy and regulatory initiatives that will help complement individual and industry
level actions: Foster innovation and deepen penetration through product and
distribution reform, and create an environment to attract capital. Strengthen the
industry structure through focused regulatory intervention and supervision. Enable
and guide efforts towards a common industry infrastructure. Strengthen targeted
initiatives to ensure consumer protection.
40
![PENETRATION OF LIFE
INSURANCE AND GENERAL
INSURANCE IN INDIA
[Submitted for completion of summer internship at IISWBM]
Submitted by: Sudipta Das
MBA(DAY), 2014-2016
Roll: 107/MBA/141091
Registration No: 107-1122-0057-14](https://image.slidesharecdn.com/ac7eb0e5-3897-4c2e-98e5-9355a3b8c0b7-160312183334/85/penetration-of-life-insurance-and-general-insurance-in-india-1-320.jpg)
