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  1. Analysis
January 9, 2012updated 13 Apr 2017 8:46am

Life industry growth goes into reverse

In many ways this setback marks a watershed in the industrys growth story as it adjusts to new regulatory norms and shifts its focus increasingly from the tied agent to the bank distribution channel.


After a decade of rapid growth, India’s life industry was hit by a slump in new premium income growth in 2011. In many ways this setback marks a watershed in the industry’s growth story as it adjusts to new regulatory norms and shifts its focus increasingly from the tied agent to the bank distribution channel.


Table showing first-year premium income, April to November, of INDIAN LIFE INSURANCE INDUSTRY, 2011 compared to 2010India’s life insurance industry’s premium income growth hit a brick wall in 2011. From the high double-digit growth rates that had become the norm for a decade, the Insurance Regulatory and Development Authority’s (IRDA) reports that new premium income in the first eight months of India’s fiscal year which starts in April slumped to INR614.49bn ($11.5bn), 20.2% down on the same period in 2010/2011.

This slump brought an abrupt halt to what had appeared to be the Indian life industry’s unstoppable growth trend that followed deregulation in December 1999. Following deregulation foreign insurers entered the country in their droves as joint venture (JV) partners with Indian companies and helped drive total premium income growth at a CAGR of almost 35% between 2001 and 2007.

In terms of first year premium income India’s life industry recorded its highest increase in 2006-2007: a staggering 94.96%.

Even during the global financial crisis premium income growth continued, although at a more subdued CAGR of 11.3% between 2007 and 2010.

However, a high inflation rate in India during this three-year period reduced the CAGR of premium income in real terms to only 0.9%. In 2010, premium income of INR2.916trn was up 16.3% in nominal terms and 4.2% in real terms.

The sharp reversal in premium income growth in 2011 had little to do with India’s economic growth rate. GDP growth in 2011, although down on the 8.4% achieved in 2010, is expected to still have been a robust 7.2% in 2011, according to Swiss Re’s economic research and consulting unit.

Indeed, India’s general insurance sector enjoyed strong premium income growth in 2011. According to the IRDA, in the eight months to November the 18 private general insurers recorded premium income of INR155.6bn, up 26.8% compared with same period in 2010. The six state-owned general insurers’ premium income lifted 22.7% to INR210bn.


Regulatory pressure

Bar chart showing premium income of INDIAN LIFE INSURANCE INDUSTRY, 2001-2010Certainly a factor in the reversal of the life industry’s fortunes has been increased competition from bank deposits. Since March 2010 the country’s central bank has increased interest rates 13 times in a bid to curb inflation.

However, causing the biggest damage to life premium income growth in 2011 was the imposition by the IRDA in September 2010 of far more stringent regulatory requirements on unit linked insurance policies (ULIP).

Steps taken by the IRDA included extending the minimum lock-in period before which ULIPs can be surrendered from three to five years and mandating that all ULIPs must include a minimum life or health insurance element.

In the case of death cover, the sum assured must be about 10-times the annual premium.

In addition, the IRDA has capped charges on ULIPs and tightened up significantly on commissions, including banning their payment upfront. Prior to this, upfront commissions on ULIPs were as high as 30%.

The negative impact on ULIP sales was already seen in the fiscal year to March 2011.The IRDA reported that the share of ULIP premium income fell from 43.5% of total premium income in 2009-2010 to 37.4% in 2010/2011.

Added to the negative impact of the additional regulatory requirements, the performance of the equity market in 2011 was also far from conducive to attracting consumers into equity-orientated ULIP products. India’s benchmark Bombay Sensex equity index fell by almost 25% in 2011.


Private insurers hit hard

Bar chart showing individual new business of INDIAN LIFE INSURANCE INDUSTRY, 2010-2011The decline in the sales of ULIPs has been more serious for India’s private life insurers than for the only state-owned life insurer, Life Insurance Corporation (LIC).

ULIPs had been the key driver of premium income growth in the private insurance sector since their introduction in 2001 by Birla Sun Life, a JV between Canadian insurer Sun Life Financial and Indian industrial conglomerate Aditya Birla Group.

Indicative of the huge success enjoyed by ULIP’s, the IRDA reported that in 2007-2008 ULIP’s accounted for 88.3% of total private insurer sector premium income, a level which fell to 86.7% in 2008-2009 and to 79.2% in 2010-2011.

Highlighting the impact of the IRDA’s regulatory clampdown, a report in The Times of India in December 2011 noted that ULIP’s currently account for only 30% to 35% of private life insurers’ new business. Although there has been an increase in conventional, non-linked business this has not been sufficient to offset the fall in ULIP sales.

This is reflected in declines, some extreme, in the first year premium income of most private life insurers. Overall the private insurer sector recorded a decline of almost 30% in first year premium income in the eight months to November 2011 compared with the same period in 2010.

There are now 23 private life insurance companies in India. With the exception of Sahara Life, all have foreign JV participation.


LIC less impacted

Bar chart showing penetration, % of GDP, of INDIAN LIFE INSURANCE INDUSTRY, 20001-2010For LIC ULIPS have always played a smaller role in its product sales. Although LIC launched its first ULIP in 2001, the insurer maintained a more diversified premium income spread with traditional life insurance and endowment policies dominating its new business.

According to the IRDA, LIC’s premium income from ULIP’s peaked at 31.6% of its total premium income in 2007-2008. By 2010-2011 ULIP premium income had fallen to 19.3% of LIC’s premium income of INR2.035trn.

Less dependence on ULIPs has served LIC well in recent years of volatile equity market performance and enabled it to regain market share lost to private insurers.

The first market share gain since reform of India’s insurance market made by LIC followed the over 50% slump in the Sensex between May 2008 and March 2009. In the wake of the slump, private insurers’ saw ULIP sales stall while increased demand for conventional insurance products enabled LIC to improve its market share in terms of first year premiums from a low-point of 56% in 2007-2008 to 66% in 2008–2009.

The improving trend continued for LIC in 2011. Although LIC did not escape the overall decline in new business in the first eight months of 2011/2012, it increased its first year premium income market share to 74.5% from 72% in the same period in 2010-2011.


Growth story not over

The IRDA has been criticised for its crackdown on ULIPs and the impact it has had on premium income growth. But it is hard to fault the regulator in its objective of discouraging what had in many instances become tantamount to the use of ULIPs for equity speculation.

The IRDA can also not be faulted for encouraging development of traditional forms of protection and long-term life insurance savings products.

There is no doubt that India’s life industry will adjust to the new regulatory norms and meet the Pull quote by Rajagopalan Krishnamurthy, demands of a market that still has huge growth potential. Part of this potential is summed up by Rajiv Memani, professional services firm Ernst & Young’s India country managing partner.

“With GDP projected to surpass 8% annually and the number of people in the Indian middle class set to treble over the next 15 years, with a corresponding impact on disposable income, domestic demand is expected to grow exponentially,” says Memani.

Also in India’s favour is an entrenched savings culture amongst individuals. Memani stresses that Indian households save more than those in other emerging markets such as China and Brazil. Specifically, he notes that household savings were 25% of India’s gross domestic savings in 2008, compared with 5% in Brazil and 15% in China. The figures for the UK and the US were 2% and 1%, respectively.

India also has a youthful population with half of its population of 1.12bn under the age of 25. Some two thirds of the population is below the age of 35.

“India’s favourable demographic profile is of special interest to insurers,” says Rajagopalan Krishnamurthy, a specialist in business strategies, market entry, products and distribution at consultancy Towers Watson’s Mumbai office.

Krishnamurthy also points to research by US investment bank Morgan Stanley which shows that India’s working-age population will increase by 136m by 2020. This is significantly more than in China where Morgan Stanley estimates that the working-age population will increase by 23m by 2020.

The IRDA also lays stress on the level of life insurance penetration in India. While this has grown fast, reaching 4.6% of GDP in 2009 before slipping to 4.4% in 2010, the IRDA believes that there is still significant scope for penetration to increase.

Given the high household savings ratio this certainly appears to be true. In addition, while Indian’s are good savers they are not necessarily the best of investors.

This was highlighted by a survey of 63,000 urban and rural households by the National Council of Applied Economic Research (NCAER) and Indian insurer Max New York Life. The survey revealed that, on average, Indians prefer keeping 65% of their savings in liquid assets such as bank or post office deposits and cash at home. Of the remaining savings, 23% is invested in physical assets such as property and gold and only 12% in financial assets.

India also presents significant potential to insurers in the private and occupational pensions arena. According to Allianz Global Investors’ 2011 Pension Sustainability Index study, only 12% of India’s population is covered by any type of formal pension arrangement. In terms of the sustainability of its current pension system, only Greece fared worse than India out of the 44 countries covered by the study.

India also has massive strides still to make in the health insurance arena. Although the adoption of health insurance has grown strongly over the past decade, only 302m people (27% of the population) were covered by some form of health insurance at the end of 2010, according to the Public Health Foundation of India. Private insurers accounted for 55m of those insured.

Private health insurance has already emerged as one of the fastest-growing insurance segments with IRDA data showing premium income having risen from a negligible amount in 2000-2001 to INR425.8bn in 2010-2011. This represented 23% of total non-life premium income ranking health insurance second-only to motor insurance (43%).

Growth continued apace into 2011/2012 with IRDA data showing health insurance premium income generated by specialist health insurers in the first quarter up 36.3% compared with the first quarter of 2010/2011.

There are currently three specialist health insurers in India: Apollo Munich Health Insurance, Max Bupa Health Insurance and Star Health and Apollo Munich Health Insurance.

RNCOS, an Indian research firm, forecasts that private insurers’ health insurance premium income will record a CAGR of 28% between 2011-2012 and 2013-2014.

Table showing premium income, real growth rates (%), of ASIAN LIFE INSURANCE MARKETS


Agent race over

Undoubtedly there is still a huge untapped or only partially tapped market for life and health insurers in India. As with insurers worldwide the challenge is effective product distribution.

When deregulation came to India’s insurance market virtually the only distribution channel was through tied agents. It was a model that continued to be built on by private insurers and LIC to a point where the total number of agents in India hit almost 3m in 2009.

“Mass recruitment led to quality and sales skill issues, and widespread complaints of misrepresentation of insurance plans,” notes Krishnamurthy.

“Most agents consider insurance sales a secondary pursuit for additional income, and they often rely on their immediate contacts to make sales,” he continues. “This has led to high agent turnover and a high percentage of policy lapses, which has affected insurers’ long-term profitability.”

The IRDA took note of what had become a free-for-all in the life agent arena and in February 2011 introduced new rules aimed at enhancing the professional standards of agents. Among these, if an agent’s annual persistency ratio based on policy numbers is under 50% his or her licence will not be renewed. The IRDA intends increasing the persistency ratio hurdle to 75% in 2015-2016.

As a further measure to improve standards, an agent must sell at least 20 policies every year with a total premium value of at least INR150,000. With the assistance of the UK-based Chartered Insurance Institute, the IRDA has also developed more stringent entry exams for agents. These came into effect in October 2011.

Private life insurers, faced by caps on fees, significantly lower surrender charges and falling ULIP sales also came under pressure to cut costs and in 2009 began trimming agent numbers.

This saw the number of private insurer agents fall from just under 1.6m at the end of March 2009 to 1.3m at the end of March 2011. The number of LIC agents has remained virtually constant at 1.34m over the two year period.

Notably, a 2011 study by professional services firm Deloitte found that in India 88% of Individual agent sales are produced by the top 25% of agents.

Private life insurers have also begun trimming back on the number of branch offices they operate. After increasing by over 5,700 to 8,785 in the two years to March 2009 the number of offices fell to 8,175 at the end of March 2011.


Bancassurance holds the key

Bancassurance was virtually non-existent of at the time of the deregulation of India insurance market but is steadily coming to the fore as a viable alternative to employing an army of agents. Indeed, notes Krishnamurthy, some recent new JV life insurance companies, are exclusively bancassurance models and employ no individual agents.

In June 2008 Canara HSBC became the first bank-focused distribution life insurer to begin operations. Canara HSBC is a JV between Indian state-controlled banks Canara Bank and Oriental Bank of Commerce which hold stakes of 51% 23%, respectively, and UK banking group HSBC’s Hong Kong based HSBC Insurance (Asia-Pacific) Holdings which has a 26%. The two banks provide access to 3,600 branches.

The next bank-focused insurer Star Union Dai-ichi Life followed in September 20008. The insurer is a JV between Bank of India which has a 51% stake and Japanese insurer Dai-ichi Life and Union Bank which have stakes of 26% and 21%, respectively. The banks, both state-controlled, provide access to over 4,600 branches.

The third insurer to adopt a bank-focused strategy is India First Life, launched in November 2009. The insurer is a JV between Bank of Baroda (44% stake), Andhra Bank (30%) and UK insurer Legal & General (26%) and has access to 4,800 branches.

Bancassurance has proved its worth for the three new insurers. In the first eight months of 2011-2012, Star Union Dai-ichi Life and India First were two of the only three out of 23 private life insurers to register new premium income growth – 49.5% and 17.4%, respectively. Canara HSBC recorded a comparatively low 4.5% fall in new premium income.

The positive impact of a major bank partner was also reflected in a 6% rise in MetLife India’s new business in the first eight months of 2010/2011. In July 2011, India’s largest state-owned bank, Punjab National Bank acquired a 30% stake in MetLife India (now PNB MetLife) for an undisclosed sum.

At the time of the deal, PNB chairman and MD K R Kamath noted: “This partnership has the potential to drive the company into the top tier of Indian life insurers and more than double its market share.”

The bank has some 60m customers.

Other Indian life insurers have also made strides into bancassurance with a study by Towers Watson in 2010 revealing that 93% were using the bank channel to one degree or another. IRDA data show that in 2010-2011 private life insurers generated a third of new premium income through the bank channel and 47% through tied agents. This was a significant change from four years earlier when 85% of sales were through tied agents and 13% through banks.

A latecomer to the bank channel, LIC produced only 1.8% of its sales through banks in 2010/2011. However, LIC aims to increase sales through banks to 5% in the near-term.

A widely held view in India is that the country’s life industry will only reach its full potential by working closely with banks. Given the bank sector’s reach this is hard to dispute. Banks have over 70,000 branches serving about 400m retail customers.

Also significant is that a 2011 study by Deloitte found that an Indian bank branch actively selling life insurance is three-times more productive than the average individual agent. Indicating the potential for growth in the bank channel, Deloitte also noted that only some 20% of Indian bank branches are actively selling life insurance products.

With greater reach Indian life insurers also appeared assured of a receptive audience. According to the NCAER/Max New York Life household study, 78% of Indian households are aware of life insurance, yet only 38% in urban areas and 19% in rural areas have a life policy.

The study also found that in case of loss of income due to death or disability of the chief earner, 96% of households cannot survive financially beyond a year on their current savings.


Two good years ahead

Looking at the immediate prospects for India’s life industry, on a positive note Swiss Re’s chief economist in Asia, Clarence Wong, believes growth will rebound in 2012. He predicts real growth in life premium income of 7.5% in 2012 which, based on India’s 9% inflation rate in November 2011, indicates nominal growth of about 16.5%.

In 2012, Wong predicts that real premium income growth in India will accelerate to reach 11%.

This, based on Wong’s predictions for other major Asian markets, would make India’s life industry the top performer in the region in terms of growth in 2012.

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