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.
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India’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.
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By GlobalDataHowever, 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
Certainly 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
The
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
For
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
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.
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.
