Industry attractiveness

The Indian insurance industry grew at a CAGR of 16.9% between 2008 and 2012. The increase was primarily due to the rapid levels of growth registered in the stock market and related products such as unit-linked, which posted a CAGR of 25.9%. Such growth was supported by the India’s positive economic growth, increasing employment rates, a rise in life expectancy, a greater awareness of the benefits of insurance coverage and the introduction of flexible, unit-linked policies.
The life and general insurance segments in India were liberalized in 2000, allowing private participation in the form of foreign direct investment (FDI) of up to 26% of the equity capital of an insurance company. Following this liberalization, the number of firms increased from four in the life insurance segment and eight in the non-life insurance segment in 2000 to 23 and 19 respectively in 2011.
The nation’s insurance industry is anticipated to increase at a significant pace owing to India’s positive economic growth and proposed industry reforms, such as the increase in the limit of foreign direct investment. The IRDA has proposed to increase the permitted level of foreign direct investment in private insurance companies to 49 percent of equity capital from the current level of 26 percent, which is expected to raise the penetration level of insurance companies, especially in rural areas. Insurance penetration in rural and social areas is marked by a high degree of risk and, as such, requires more dynamic and efficient risk management systems. Raising the FDI cap will enable the transfer of expertise and know-how from foreign companies to their Indian counterparts.
Rising employment and affluence levels are expected to increase the insurable population significantly by 2016. Consequently, the life insurance segment is expected to grow at a CAGR of 14.6% over the next four years. The life insurance segment’s growth will be driven by the increasing demand for unit-linked policies and greater awareness about the need for, and benefits of, life insurance coverage.
Despite its attractiveness, the Indian insurance industry has challenges. For example, the capital requirement for geographic expansion is especially problematic when a company attempts to expand to rural areas. To maintain a solvency ratio depending upon the risk assumed, the number of policies sold must grow substantially. As such, the industry would benefit significantly from investment in newer products, while utilizing the experience of multinational insurance companies to increase the number of policies sold.
Increasing the FDI cap from 26% to 49% and allowing insurance companies to raise capital through newer instruments such as preference shares, bonds and perpetual debt could help overcome these challenges. As such, the IRDA is in the process of evaluating the advantages of making the relevant regulatory changes. On the whole, the Indian reinsurance segment is anticipated to post a projected CAGR 14.5% over the forecast between 2013 and 2017.


Segment outlook

In terms of gross written premiums, the Indian life insurance segment recorded significant growth from 2008 to 2012, with a CAGR of 16.9%. The growth was primarily generated by the rapid expansion of unit-linked products, which grew in terms of volume at a healthy CAGR of 25.9%. The increase was supported by the number of enterprises which increased from 17 in 2007 to 23 in 2011. This growth has further expanded by the robust economic growth alongside increasing levels of employment, increasing life expectancy, the introduction of flexible life insurance plans and a rising awareness of the benefits of life insurance. These factors are expected to support the segment over the coming years. As a result, the life insurance segment is projected to increase from INR2.9 trillion (US$61.8 billion) in 2011 to INR5.8 trillion (US$122.2 billion) in 2016, at a CAGR of 14.6%.
In 2011, the Insurance Regulatory Authority of India (IRDA), in collaboration with the Securities and Exchange Board of India (SEBI), allowed insurance companies to raise funds through public offerings. As a result, a life insurance company can raise equity capital from the public through an initial public offer (IPO), after it has completed 10 years of business operations. As such, the companies which entered the Indian market during the first half of the previous decade, such as Reliance Life Insurance and HDFC Life Insurance, can now raise capital from the public. This will help to fund their expansion plans into major cities, as well as enter the largely untapped rural markets which will bring growth to the overall industry.
The overall Indian insurance segment is expected to continue growing, primarily due to growth in the Indian economy and the effect of favorable reforms such as those proposed to allow the increase in foreign direct investment (FDI) from 26% to 49%. The additional foreign direct inward investment is likely to help insurance companies to expand their distribution and establish international systems in order to improve their product development and customer service processes. Other factors, such as the ability to set IPOs by insurance companies and mergers and acquisitions, are also expected to play a role in increasing the market growth.
An important concern for India’s growing number of nuclear families is to arrange finances for their children’s higher education. As such, it is expected that life insurance schemes linked to child education plans are expected to become increasingly in demand. The allocation of household savings for financial protection is also expected to increase over the coming years.
Among the distribution channels, it is expected that insurance policy sales through the online retail channel is likely to increase significantly over the next four years. The number of policies sold through e-commerce is expected to increase from 272,640 in 2011 to 656,780 in 2016. Insurance plans which are easy to understand by customers are increasingly being sold through the online platform. When selling plans online, insurers save on their overhead costs and can pass on these savings to their customers. The sale of insurance through the online retail channel is, however, expected to increase gradually as semi-urban and rural customers in India are not currently accustomed to online retail.
In terms of gross written premiums, the individual life product segments are expected to grow at a CAGR of 10.8% while individual general annuity is expected to achieve a CAGR of 2.9% and individual pension is anticipated to register at a CAGR of 2.0%. In addition, group life plans are expected to achieve a CAGR of 20.7% and group superannuation plans are expected to grow at a CAGR of 6.5% over the next four years. The unit linked insurance plans (ULIPs) are likely to continue to be the main contributors for the growth of individual and group life insurance policies.


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Distribution Channels


The Indian life insurance segment posted significant growth in gross written premiums value with a healthy CAGR of 16.9% between 2008 and 2012. This was achieved due to the rapid expansion of distribution channels. A number of insurance companies employed numerous distribution channels through which they generated business and revenues. Apart from selling life insurance products directly to customers, there were numerous alternative distribution channels such as financial brokers, bancassurance, agencies, post offices and tie-ups of parabanking companies with local corporate agencies such as non-government organizations in remote areas. All of these channels supported the life insurance companies in generating larger business and are expected to play a significant role in the development of the segment as the country has a large rural population base and is comprised of a vast geographical area.
Like other Asian countries, authorized agencies play an important role in the expansion of the Indian life insurance segment. In 2011, agencies generated 56.1% of the total new business written premiums in the segment. The primary reason for this strong preference for agencies is because India is comprised of a vast geographical area, making a wide-ranging network of agents the most efficient way to sell, promote and manage insurance products for the entire Indian population. Moreover, the channel offers insurance companies a large client base, strong brand reputation and an existing sales force at a relatively low cost. The Life Insurance Corporation of India (LIC), the largest life insurer in India in terms of gross written premiums, had a large agency network of 15 million, as of March 2012. Overall, the number of policies sold through agencies increased from 43.6 million in 2007 to 44.6 million in 2011, at a CAGR of 0.6% during this period. Furthermore, direct marketing, which accounted for 31.6% of the total new business written premiums in the life insurance segment in 2011, has been used as a cost-driven channel. The number of policies sold through direct marketing increased from 1.4 million in 2007 to 1.8 million in 2011, at a CAGR of 8.0%.
Bancassurance was the most popular distribution channel in terms of growth and, in terms of gross written premiums value, increased at a healthy CAGR of 35.4%. A number of life insurance companies partnered up with local banks in order to cross-sale products to banks’ retail networks. In 2010, ICICI Prudential, the second largest life insurance company in terms of gross written premium, partnered up with Allahabad Bank to cross-sell its life insurance products through the bank’s large retail network. LIC has co-operative agreements with UCO Bank, Corporation Bank, Central Bank of India and Dena Bank. Overall, the number of policies sold through the bancassurance channel increased from 1.4 million in 2007 to 1.9 million in 2011.
The number of policies sold through professional insurance brokers increased from 259,400 in 2007 to 512,700 in 2011. Moreover, the online distribution channel is also becoming popular. The number of policies sold through e-commerce increased from 61,620 in 2007 to 272,640 in 2011, after registering at a robust CAGR of 45%. Meanwhile, the number of policies sold through other distribution channels, including shopping malls, post offices, government agencies and parabanking companies, decreased from 715,900 in 2007 to 548,800 in 2011, at a CAGR of -6.4% as a result of the growing popularity of e-commerce, insurance brokers and bancassurance channels.
Competition between LIC and private sector insurers intensified between 2008 and 2012. While private insurers traditionally relied on developing and offering innovative products to increase their premium income, the threat of losing market shares encouraged them to adopt forceful marketing strategies and to increase the penetration of distribution channels into rural areas. Furthermore, the IRDA introduced legislation that allows new forms of intermediaries, such as co-operative societies and brokers, to act as viable distribution channels. Life insurance companies are making efforts to improve the penetration of existing distribution channels across the country. While most channels are expected to experience an increase in written premiums, the growth of distribution channels, such as bancassurance and agencies, is expected to decelerate.
Life insurance companies are expected to continue to concentrate on increasing the penetration of their products. The semi-urban and rural markets in India offer a vast, untapped potential for life insurance products. Additionally, life insurance companies are expected to initiate cost-control measures in managing their distribution channels and online insurance sales are expected to increase gradually, since not all semi-urban and rural customers in India have internet access.


Market developments

August 2012: Reliance Life Insurance Company Limited, an Indian life insurance company, is planning to sell 5% of its stake to banks. Reliance Life Insurance Company Limited (Reliance Life Insurance) is an associate company of Reliance Capital Ltd, a part of Reliance Group. It provides life insurance products to individuals and corporates in India. It serves individuals by offering a range of plans such as endowment, wealth creation with health coverage, protection, term, credit guardian, cash flow, savings and investment, automatic investment, market return, unit linked investment and insurance, retirement, and child plans. The company primarily offers these products through agents. Reliance Life Insurance was the largest private insurer in terms of policy count as of March 2011. It is also the fourth largest private player in terms of individual premium and amongst the fastest growing companies for four consecutive years. It has 1,248 branches, 189,000 advisors and over 16,000 employees. Reliance Life Insurance is headquartered in Mumbai, India. The transaction will enable Reliance Life to expand its base in the bancassurance channel.


21 February 2013: Future Generali Insurance receives ISO certification. This certification validates Future Generali’s compliance with internationally established standards for quality systems for its customer service & claim services. In addition to this all the functions of Health Insurance of the company like Underwriting, Enrolment and Claims are also now ISO compliant.
ISO 9001:2008 is the internationally recognized standard for Quality Management Systems (QMS). It prescribes systematic control of business activities to ensure that the needs and expectations of customers are met. This certification also ensures that a company’s products and services are among the best in the world.
Commenting on the occasion, Mr. K G Krishnamoorthy Rao, MD & CEO, Future Generali India Insurance Co. Ltd. said, ‘At Future Generali India Insurance, customer service has been and always will be a key driver and parameter of our current performance and future growth. This certification reiterates our consistent efforts to meet customer expectations & to offer them our best services’.