Indian Insurance Sector

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Indian Insurance Sectorz



Indian insurance sector
Stepping into the next decade of growth September 2010

Confederation of Indian Industry

The insurance industry in India has progressed significantly over the last decade, which is amply evident in the strong growth witnessed in the insurance premiums, strengthened outreach, increased number of players, product innovation and its enhanced regulatory framework. A combination of these factors, along with strong economic growth in the last few years, has positioned India as a regional insurance hub and a rapidly developing financial center. The insurance industry is amid an exciting journey — there needs to be a persistent endeavor to sustain what has already been achieved as well as expand beyond the current level. Furthermore, several reforms and policy measures, especially during the last couple of years, have enabled a favorable environment for insurance companies to flourish in the country. The coming years are critical as the regulator stance and approach of market participants will govern the strength, stability and the sustained growth of the insurance sector. The insurance sector has become a major contributor to economic development, especially to infrastructure development. This growth has been fueled by India’s multiplying consumer class, rising insurance awareness, increasing domestic savings and investments. Moreover, it has been the joint effort of all stakeholders, including the government, regulator and insurance companies to enable the positive momentum of this industry. However, there is still a long way to cover on the road to achieve financial inclusion and bring more and more people under the insurance blanket. To this end, the Confederation of Indian Industry (CII) and Ernst & Young have co-authored this report to evaluate the current state of the insurance industry, implication of new regulations and the steps that can be taken to strengthen the penetration of insurance products.

Ashvin Parekh Partner & National Industry Leader, Financial Services Ernst & Young Private Limited

Chandrajit Banerjee Director General, Confederation of Indian Industry

Indian insurance sector: stepping into the next decade of growth


Executive summary ....................................................................................................................... 1 Introduction .................................................................................................................................. 3 Section I: Industry overview ........................................................................................................... 5 Evolution of the industry .......................................................................................................... 5 Current scenario ...................................................................................................................... 7 Growth drivers ....................................................................................................................... 10 Emerging trends .................................................................................................................... 11 Contribution of the insurance sector to the economy ................................................................ 12 Section II: Industry at cross-roads of development ....................................................................... 17 Insurance industry: significantly untapped latent potential ........................................................ 17 Recent regulatory developments that govern the current market state ....................................... 20 Section III: Critical factors for market development ....................................................................... 25 Distribution channels ............................................................................................................. 25 Focus on financial inclusion..................................................................................................... 34 Consumer needs and preferences ............................................................................................ 36 Way forward ................................................................................................................................ 39 Bibliography ................................................................................................................................ 42


Indian insurance sector: stepping into the next decade of growth

Indian insurance sector: stepping into the next decade of growth


Executive summary

India’s rapid rate of economic growth over the past decade has been one of the most significant developments in the global economy. This growth traces its origin in the introduction of economic liberalization in the early 1990s, which has equipped India to exploit its economic potential and substantially raise the standard of living of its people. Together with other financial services, insurance services contributed 7% of the country’s GDP in 2009. A welldeveloped and evolved insurance sector is a boon for economic development as it provides long-term funds for infrastructure development and concurrently strengthens the risk-taking ability of the country. Further, insurance has been a notable employment generator, not only for the insurance industry, but has also created significant demand for a range of associated professionals such as brokers, insurance advisors, agents, underwriters, claims managers and actuaries. By the nature of its business, insurance is closely linked to saving and investing. Life insurance, funded pension systems and non-life insurance have accumulated a significant amount of capital over time, which can be invested productively in the economy. The mutual dependence of insurance and capital markets plays an instrumental role in channeling funds and investment capabilities to augment the development potential of the Indian economy. India’s growing consumer class, rising insurance awareness, increasing domestic savings and investments are among the most critical factors that have positively driven the market penetration of the insurance products among its consumer

segments. However, there are large untapped areas, which have yet not benefited from the upside of insurance. Imparting financial literacy, incentivizing Indian households to transfer savings from physical assets to financial assets and taking the distribution network to rural areas are expected to help bring more and more individuals within the insurance ambit. While insurance penetration in India is higher than that in countries such as China and Brazil, it still has a considerably long way to go. The insurance industry in India has visibly progressed since the time when businesses were tightly regulated and concentrated in the hands of a few public sector insurers. Following the passage of the Insurance Regulatory and Development Authority Act in 1999, India abandoned public sector exclusivity in the insurance industry in favor of market-driven competition. This shift has brought about major changes to the industry. The new era of insurance development has seen the entry of international insurers, the proliferation of innovative products and distribution channels, and the raising of supervision standards. The period post-sector liberalization, which we call Phase I, has witnessed an unprecedented surge in the sales of insurance products, with the industry recording a CAGR of 24.2% in annualized premium equivalent during FY00–05. The insurance industry, in its first phase of development, has been relying on regular capital infusions from the promoters as its lifeline. High new business strain and expanding distribution networks have resulted in accounting losses across the industry. In order to meet their commitment toward claim settlement and reserve creation, promoters


Indian insurance sector: stepping into the next decade of growth

have been investing additional capital, resulting in ”cashburn.” The tradeoff between ”growth” and ”profitability” was heavily inclined toward the former. The next four to five years can be termed as Phase II, which saw players focus on an expanding product range, developing innovative products and building a robust distribution channel. During this period, i.e., FY05–09, the industry grew at a CAGR of 25.9%. Insurers were shifting weight from the Phase I philosophy of ”growth versus profitability” to the Phase II mantra of ”profitable growth.” As a result, the focus shifted from ”growth” to ”profitability,” with product pricing becoming more rational based on more conservative assumptions. Product innovation continued and traditional policies gained some foothold in an otherwise unit-linked incentive product (ULIP) driven market. The Indian life insurance industry stands at the threshold of launching its Phase III growth. The phase is marked by bringing the industry to a stable position, ensuring “stable profitable growth.” Most large players will now look to decelerate the pace of distribution growth and increase their focus on the retention of channel partners as well as improve channel productivity. Further, insurance companies are working toward improving persistency. At this cross section, the role of the regulator becomes critical. The Insurance Regulatory and Development Authority (IRDA) is in the finalization stage vis-à-vis most of its regulations, which would be instrumental in navigating the future course of the insurance industry. IRDA has introduced certain regulations to help improve disclosures,

profitability and capital as well as ensure consumer protection. Further, the regulator is amid finalizing the norms for the initial public offering (IPO) of insurance companies. In a sector where none of the players are listed, the IPO of insurance companies could be a milestone in the future growth of the sector. Risk management plays a very critical role in the insurance business. In the next three to four years, India plans to shift from the current solvency I norms to risk-based solvency norms, called the solvency II model. This change will result in the better apportionment of risk in the backdrop of the actual risk associated with the asset. With the rising competition, the industry may also witness consolidation among smaller players and the emergence of some large players. The regulator is in the process of finalizing guidelines for mergers and acquisitions in the insurance space in India. The government, regulator and the insurance companies are now focused on maintaining a favorable environment for sustainable growth, higher contribution of the industry to economic development and the increasing reach of insurance to the underdeveloped areas of the country. To summarize, the Indian insurance industry is poised for a quantum leap in performance with unprecedented growth opportunities, notwithstanding a temporary sliding growth curve. The stage is now well poised for the real show to commence.

Indian insurance sector: stepping into the next decade of growth



The economic reforms initiated in the early 90s paved the way for the growth and opening up of the financial sector, which led to a sustained period of economic growth. The insurance industry was opened up for private players in 2000, and has seen tremendous growth over the past decade with the entry of global insurance majors. India is fast emerging as one of the world’s most dynamic insurance markets with significant untapped potential. The insurance sector plays a critical role in a country’s economic development. It acts as a mobilizer of savings, a financial intermediary, a promoter of investment activities, a stabilizer of financial markets and a risk manager. The

life insurance sector plays an important role in providing risk cover, investment and tax planning for individuals; the non-life insurance industry provides a risk cover for assets. Health insurance and pension systems are fundamental to protecting individuals against the hazards of life, and India, as the second-most populous nation in the world, offers significant potential for that type of cover. Furthermore, fire and liability insurance are essential for corporations to safeguard infrastructure projects and investment risks. Private insurance systems complement social security systems and add value by matching risk with price.


Indian insurance sector: stepping into the next decade of growth

Appropriate risk pricing is one of the most powerful tools for setting the right incentives for the allocation of resources, a feature which is the key to a fast-developing country such as India. By the nature of its business, insurance is closely related to savings and investing. Life insurance, funded pension systems, and to a lesser extent, non-life insurance, will accumulate a significant amount of capital over time, which can be invested productively in the economy. There are good reasons to expect that the growth momentum can be sustained. In particular, there is

significant untapped potential in various segments of the market. While the nation is heavily exposed to natural catastrophes, the insurance cover to mitigate the negative financial consequences of these adverse events is still underdeveloped. The same is true for both pension and health insurance, where insurers can play a critical role in bridging demand and supply gaps. The major changes in both national economic policies and insurance regulations will highlight the prospects of these segments going forward.

Indian insurance sector: stepping into the next decade of growth


Section I: Industry overview

The insurance industry in India has come a long way since the time when businesses were tightly regulated and concentrated in the hands of a few public sector insurers. Following the passage of the Insurance Regulatory and Development Authority Act in 1999, India abandoned public sector exclusivity in the insurance industry in favor of market-driven competition. This shift has brought about major changes to the industry. The beginning of a new era of insurance development has seen the entry of international insurers, the proliferation of innovative products and distribution channels, as well as the raising of supervisory standards.

Evolution of the industry
The growing demand for insurance around the world continues to have a positive effect on the insurance industry across all economies. India, being one of the fastest-growing economies (even in the current global economic slowdown), has exhibited a significant increase in its GDP, and an even larger increase in its GDP per capita and disposable income. Increasing disposable income, coupled with the high potential demand for insurance offerings, has opened many doors for both domestic and foreign insurers. The following table briefly depicts the evolution of the insurance sector in India.


Indian insurance sector: stepping into the next decade of growth

Exhibit 1.1. Tracing the chronological evolution of the insurance industry
Year 1818 1870 1907 1912 Event Oriental Life Insurance Co. was established in Calcutta. The first insurance company, Bombay Mutual Life Insurance Society, was formed. The Indian Mercantile Insurance Limited was formed.
• •

Life Insurance Companies Act and the Pension Fund Act of 1912 ► Beginning of formal insurance regulations

1928 1938 1956 ► 1957 1972 1991 1993 1994 1999 2000

The Indian Insurance Companies Act was passed to collect statistical data on both life and non-life. The Insurance Act of 1938 was passed; there was strict state supervision to control frauds.

The Central Government took over 245 Indian and foreign life insurers as well as provident societies and nationalized ► these entities. The LIC Act of 1956 was passed.

The code of conduct by the General Insurance Council to ensure fair conduct and ethical business practices was framed. The General Insurance Business (Nationalization) Act was passed. Beginning of economic liberalization The Malhotra Committee was set up to complement the reforms initiated in the financial sector. Detariffication of aviation, liability, personal accidents and health and marine cargo products The Insurance Regulatory and Development Authority (IRDA) Bill was passed in the Parliament.
• •

IRDA was incorporated as the statutory body to regulate and register private sector insurance companies. General Insurance Corporation (GIC), along with its four subsidiaries, i.e., National Insurance Company Ltd., Oriental Insurance Company Ltd., New India Assurance Company Ltd. and United India Assurance Company Ltd., was made India’s national reinsurer.

2005 2006 2007

Detariffication of marine hull Relaxation of foreign equity norms, thus facilitating the entry of new players Detariffication of all non-life insurance products except the auto third-party liability segment

Indian insurance sector: stepping into the next decade of growth


In India, the Ministry of Finance is responsible for enacting and implementing legislations for the insurance sector with the Insurance Regulatory and Development Authority (IRDA) entitled with the regulatory and developmental role. The government also owns the majority share in some major companies in both life and non-life insurance segments. Exhibit 1.2 depicts the structure of the insurance industry in India. Exhibit 1.2. Indian insurance industry structure
Ministry of Finance (Government of India) IRDA Life insurance Public Private
Source: IRDA

Current scenario
A growing middle-class segment, rising income, increasing insurance awareness, rising investments and infrastructure spending, have laid a strong foundation to extend insurance services in India. The total premium of the insurance industry has increased at a CAGR of 24.6% between FY03 and FY09 to reach INR2,523.9 billion in FY09. Exhibit 1.3. Total premiums of the insurance industry (life and non-life)
3,000 INR billion 2,500 2,000 1,500 1,000 500 0 14 22 23 26 43 27 10 50 y-0-y growth (in %) 40 30 20 10 0

Non-life insurance Public Private

FY03 FY04 FY05 FY06 FY07 FY08 FY09 Life insurance premium

Non-life insurance premium Growth rate (in %)
Source: IRDA

Both the life and non-life insurance sectors in India, which were nationalized in the 1950s and 1960s, respectively, were liberalized in the 1990s. Since the formation of IRDA and the opening up of the insurance sector to private players in 2000, the Indian insurance sector has witnessed rapid growth.

The opening up of the insurance sector for private participation/global players during the 1990s has resulted in stiff competition among the players, with each offering better quality products. This has certainly offered consumers the choice to buy a product that best fits his or her requirements.


Indian insurance sector: stepping into the next decade of growth

The number of players during the decade has increased from four and eight in life and non-life insurance, respectively, in 2000 to 23 in life and 24 in non-life insurance (including 1 in reinsurance) industry as in August 2010. Exhibit 1.4. Growth in the number of insurance players 2000 Life insurers Public Private Non-life insurers Public Private Reinsurer 4 3 1 4 6 1 5 8 1 6 8 1 6 8 1 6 8 1 6 9 1 6 10 1 6 15 1 6 15 1 6 17 1 1 3 1 10 1 12 1 12 1 13 1 13 1 15 1 15 1 21 1 21 1 22 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Most of the private players in the Indian insurance industry are a joint venture between a dominant Indian company and a foreign insurer. Life insurance industry overview The life insurance sector grew at an impressive CAGR of 25.8% between FY03 and FY09, and the number of policies issued increased at a CAGR of 12.3% during the same period. As of August 2010, there were 23 players in the sector (1 public and 22 private). The Life Insurance Corporation of India (LIC) is the only public sector player, and held almost 65% of the market share in FY10 (based on first-year premiums). To address the need for highly customized products and ensure prompt service, a large number of private sector players have entered the market. Innovative products, aggressive marketing and effective distribution have enabled fledgling private insurance companies to sign up Indian customers more rapidly than expected. Private sector players are expected to play an increasingly important role in the growth of the insurance sector in the near future.

In a fragmented industry, new players are gnawing away the market share of larger players. The existing smaller players have aggressive plans for network expansion as their foreign partners are keen to capitalize on the enormous potential that is latent in the Indian life insurance market. Exhibit 1.5. Market share amongst private players – FY10 (based on first year premiums) (in %)
ICICI Pru,16.5

Others, 8.6 New entrants, 4.0 Met Life, 2.8 Tata AIG, 3.4 Kotak Mahindra, 3.5 MNYL, 4.8 HDFC Standard, 8.5

SBI Life, 18.3

Bajaj Allianz, 11.6

Reliance Life, 10.2 Birla Sunlife, 7.7

Source: “IRDA annual report FY09, “IRDA Journal,” Insurance Regulatory and Development Authority website,, accessed 26 May 2010

Indian insurance sector: stepping into the next decade of growth


ICICI Prudential, Bajaj Allianz and SBI Life collectively account for approximately 50% of the market share in the private life insurance segment. To tap this opportunity, banks have also started entering alliances with insurance companies to develop/underwrite insurance products rather than merely distribute them.

and health insurance. Out of the total non-life insurance premiums during FY10, auto insurance accounted for 43.5% of the market share. The health insurance segment has posted the highest growth, with its share in the total non-life insurance portfolio increasing from 12.8% in FY07 to 20.8% in FY10. These two sectors are highly promising, and are expected to increase their share manifold in the coming years. With the sector poised for immense growth, more players, including monoline players, are expected to emerge in the near future. The last two years has seen the emergence of companies specializing in health insurance such as Star Health & Allied Insurance and Apollo DKV. In the last decade, it was observed that most players have Exhibit 1.7. Market share among players in FY10 (in %)
Royal Sundaram, 2.4 HDFC ERGO General, 2.4 Star Health and Allied Insurance, 2.6 AIC, 4.0 IFFCO- Tokio, 4.3 Reliance General, 5.2 Oriental, 12.4 National, 12.1 ICICI-lombard, 8.6 Tata-AIG, 2.3 New India, 15.7

Non-life insurance industry overview Between FY03 and FY10, the non-life insurance sector grew at a CAGR of 17.05%. Intense competition that followed the de-tariffication and pricing deregulation (which was started during FY07) decelerated the growth momentum. As of August 2010, the sector had a total of 24 players (6 public insurers, 17 private insurers and 1 re-insurer). The non-life insurance sector offers products such as auto insurance, health insurance, fire insurance and marine insurance. In FY10, the non-life insurance industry had the following product mix. Private sector players have now pivoted their focus on auto Exhibit 1.6. Product mix (FY 10) (in %)

United India, 13.6

Engineering, 4.8 Marine , 6.3

Auto, 43.5

Bajaj Allianz, 6.6% Others, 7.9

Fire, 11.3 All others, 7.2 Personal accidents, 2.5 Health, 20.8 Aviation, 1.2 Liability, 2.5%

Source: "IRDA annual report FY09 - IRDA Journal," Insurance Regulatory and Development Authority website,, accessed 26 May 2010

Source: “IRDA Monthly Journal,” Insurance Regulatory and Development Authority website,, accessed 10 June 2010

experienced growth by formulating aggressive growth strategies and capitalizing on their distribution network to target the retail segment. Although the players in the private and public sector largely offer similar products in the non-life insurance segment, private sector players outscore their public sector counterparts in their quality of service.


Indian insurance sector: stepping into the next decade of growth

Growth drivers

India’s favorable demographics help strengthen market penetration The life insurance coverage in India is very low, and many of those insured are underinsured. There is immense potential as the working population (25–60 years) is expected to increase from 675.8 million to 795.5 million in the next 20 years (2006–2026). The projected per capita GDP is expected to increase from INR18,280 in FY01 to INR100,680 in FY26, which is indicative of rising disposable incomes. The demand for insurance products is expected to increase in light of the increase in purchasing power.

Private sector insurers are more aggressive in this segment. Favorable demographics, fast progression of medical technology as well as the increasing demand for better healthcare has facilitated growth in the health insurance sector. Life insurance companies are expected to target primarily the young population so that they can amortize the risk over the policy term.

Rising focus on the rural market Since more than two-thirds of India’s population lives in rural areas, micro insurance is seen as the most suitable aid to reach the poor and socially disadvantaged sections of society.

Exhibit 1.8. Working population assessment and GDP per capita till 2026
800 700 600 500 400 300 200 100 0 120 100 80 60 40 20 2001 2006 2011 2016 2021 2026 0 INR

In million

Poor insurance literacy and awareness, high transaction costs and inadequate understanding of client needs and expectations has restricted the demand for micro-insurance products. However, the market remains significantly underserved, creating a vast opportunity to reach a large number of customers with good value insurance, whether from the base of existing insurers or through retail distribution networks. In FY09, individuals generated new business premium worth INR365.7 million under 2.15 million policies, and the group insurance business amounted to INR2,059.5 million under 126 million lives. LIC contributed most of the business procured in this portfolio by garnering INR311.9 million of individual premium from 1.54 million lives and INR1,726.9 million of group premium under 11.1 million lives. LIC was the first player to offer specialized products with lower premium costs for the rural population. Other private players have also started focussing on the rural market to strengthen their reach.

Age group 25–60 (in million)
Source: CMIE, Census of India 2001

Projected GDP per capita in '000s

Health insurance attracts insurance companies ► The Indian health insurance industry was valued at INR51.2 billion as of FY10. During the period FY03–10, the growth of the industry was recorded at a CAGR of 32.59%. The share of health insurance was 20.8% of the total non-life insurance premiums in FY10. Health insurance premiums are expected to increase to INR300 billion by 2015.

Government tax incentives Currently, insurance products enjoy EEE benefits, giving insurance products an advantage over mutual funds. Investors are motivated to purchase insurance products

Indian insurance sector: stepping into the next decade of growth


to avail the nearly 30% effective tax benefit on select investments (including life insurance premiums) made every financial year. Life insurance is already the most popular financial product among Indians because of the tax benefits and income protection it offers in a country where there is very little social security. This drives more and more people to come within the insurance ambit.

Consolidation in future The past few years have witnessed the entry of many companies in the domestic insurance industry, attracted by the significant potential of insurance sector. However, increasing competition in easily accessible urban areas, the FDI limit of 26% and the recent downturn in equity markets have impacted the growth prospects of some small private insurance companies. Such players may have to rethink about their future growth plans. Hence, consolidation with large and established players may prove to be a better solution for such small insurers. Larger companies would also prefer to take over or merge with other companies with established networks and avoid spending money in marketing and promotion. Therefore, consolidation will result in fewer but stronger players in the country as well as generate healthy competition.

Emerging trends

Exploring multiple distribution channels for insurance products To increase market penetration, insurance companies need to expand their distribution network. In the recent past, the industry has witnessed the emergence of alternate distribution channels, which include bancassurance, direct selling agents, brokers, online distribution, corporate agents such as non-banking financial companies (NBFCs) and tie-ups of parabanking companies with local corporate agencies (e.g. NGOs) in remote areas. Agencies have been the most important and effective channel of distribution hitherto. The industry is viewing the movement of intermediaries from mere agents to advisors.

Mounting focus on EV over profitability Many companies are achieving profitability by controlling expenses; releasing funds for future appropriations as well as through a strong renewal premium build up. As a few larger insurers continue to expand, most are focused on cost rationalization and the alignment of business models to ground level realities. This will better equip insurers to realize reported embedded value (EV) and generate value from future new business. In the short term, companies are likely to face challenges to achieve the desired levels of profitability. As companies are also planning to get listed and raise funds, the higher profitability will help companies to get a better valuation of shares. However, in the long term, companies would need to focus on increasing EV, as almost 70% of a company’s EV is influenced by renewal business and profitability is not as much of an indicator for valuation. Hence, players are now focusing on increasing their EV than profitability figures.

Product innovation With customers asking for higher levels of customization, product innovation is one of the best strategies for companies to increase their market share. This also creates greater efficiency as companies can maintain lower unit costs, offer improved services and distributors can increase flexibility to pay higher commissions and generate higher sales. The pension sector, due to its inadequate penetration (only 10% of the working population is covered) offers tremendous potential for insurance companies to be more innovative.


Indian insurance sector: stepping into the next decade of growth

Rising capital requirements Since insurance is a capital-intensive industry, capital requirements are likely to increase in the coming period. The capital requirement in the life insurance business is a function of the three factors: (1) sum at risk; (2) policyholders’ assets; (3) new business strain and expense overruns. With new guidelines in place, capital requirements across the sector are likely to go up due to:
• • •

increase the capital strain, especially in the case of capital/return guarantee product. Besides, companies are likely to witness a slowdown in new business growth. Companies may also opt for product restructuring to lower their costs and optimally utilize capital.

Higher sum assured driving higher sum at risk Greater allocation to policyholders’ assets due to lower charges Back loading of charges is resulting in high new business strain, and expense overruns due to low productivity of the newly set distribution network (and inability to recover corresponding costs upfront)

According to IRDA Regulations 2000, all insurance companies are required to maintain a solvency ratio of 1.5 at all times. But this solvency margin is not sustainable. With the growing market risks, the level of required capital will be linked to the risks inherent in the underlying business. India is likely to start implementing Solvency II norms in the next three to four years. The transition from Solvency I norms to Solvency II norms by 2012 is expected to increase the demand for actuaries and risk management professionals. The regulator has also asked insurance companies to get their risk management systems and processes audited every three years by an external auditor. Many insurance companies have started aligning themselves with the new norms and hiring professionals to meet the deadline.

For non-life insurance companies, the growing demand for health insurance products as well as motor insurance products is likely to boost the capital requirement. With the capital market picking up and valuations on the rise, insurance companies are exploring various ways of increasing their capital base to invest in product innovation, introducing new distribution channels, educating customers, developing the brand, etc. This is due to the following reasons:

Contribution of the insurance sector to the economy
Insurance has had a very positive impact on India’s economic development. The sector is gradually increasing its contribution to the country’s GDP. In addition, insurance is driving the infrastructure sector by increasing investments each year. Further, insurance has boosted the employment scenario in India by providing direct as well as indirect employment opportunities. Due to the healthy performance of the Indian economy, the share of life insurance premiums in the gross domestic savings (GDS) of the households sector has increased.

A major portion of the costs in insurance companies is fixed (though it should be variable or semi-variable in nature). Hence, the reduction in sales will not result in the lowering of operational expenses, thus adversely impacting margins. As such, reduced margins would impact profitability, and insurers would need to invest additional funds. The sustained bearishness in capital markets could further pressurize the investment margins and

Indian insurance sector: stepping into the next decade of growth


Exhibit 1.9. Share of life insurance premiums in GDS (household sector) (in %)
20 15 10 5 0 FY05 FY06 FY07 FY08 FY09 11.0 12.3 15.9 17.9 17.6

Contribution of insurance to infrastructure Generally, countries with strong insurance industries have a robust infrastructure and strong capital formation. Insurance generates long-term capital, which is required to build infrastructure projects that have a long gestation period. Concurrently, insurance protects individuals and businesses from sudden unfavorable events. A welldeveloped and evolved insurance sector is needed for economic development as it provides long-term funds for infrastructure development and simultaneously strengthens the risk taking ability. Although the insurance sector is relatively young in India, its contribution to infrastructural development has been on a visible rise as depicted in the following exhibit.

Source: IRDA, “National Income Statistics,” July 2010, CMIE

The increased contribution of the insurance industry from the household GDS has been ploughed back into the economy, generating higher growth. The following factors showcase how the contribution of the insurance industry has strengthened economic growth:

Exhibit 2.0. Contribution of various insurance products to infrastructure (in INR billion)
FY06 Investments from traditional products Approved securities including Central Government Securities Infrastructure and social sector Investment subject to exposure norms, including other than approved investments Housing and fire-fighting equipment Unit-linked insurance product funds (ULIPs) Approved investments Other than approved investments 234 25 576 95 1,115 219 1,515 213 3,131 546 1,327 31 3,541 759 1,538 37 4,013 763 2,035 39 4,439 756 2,787 42 FY07 FY08 FY09

Source: “IRDA annual report FY09,” Insurance Regulatory and Development Authority website,, accessed 20 August 2010


Indian insurance sector: stepping into the next decade of growth

In FY09, the total investments by the insurance industry increased to INR9,742 billion, as against INR8,183 billion in the previous year. Further, investments by both life and non-life insurers increased by 20.2% and 4.6% to INR9,163 billion and INR589 billion, respectively, in FY09. However, as outlined in the Eleventh Five Year Plan (2008– 2012), there is a significant fund requirement of INR20,562 billion in the infrastructure sector. Given an expected robust increase in the insurance business and the increasing participation of foreign insurers in India, insurance companies are well positioned to contribute to infrastructure development in the country. These investments could further increase with the development of sound debt markets, especially the market for long-term government paper and income tax incentives to attract savings for infrastructural schemes. The direct investment of policyholder funds of life insurers in government bonds is another way in which the industry has helped the development of infrastructure. In addition, IRDA’s mandate for insurance companies to invest 15% of their annual sales in infrastructure is expected to boost capital formation. Contribution of insurance to FDI The importance of FDI in the development of a capitaldeficient country such as India cannot be undermined. This is where the high-growth sectors of an economy play an important role by attracting substantial foreign investments. Currently, the total FDI in the insurance sector, which was INR50.3 billion at the end of FY09, is estimated

to increase to approximately INR51 billion in FY10. It is difficult to estimate, but an equal amount of additional foreign investment, can roughly flow into the sector if the government increases the FDI limit from 26% to 49%. The insurance sector, by virtue of attracting long-term funds, is best placed to channelize long-term funds toward the productive sectors of the economy. Therefore, the growth in their premium collections is expected to translate into higher investments in other key sectors of the economy. Therefore, the liberalization of FDI norms for insurance would not only benefit the sector, but several other critical sectors of the economy. Contribution of insurance to the offshoring business India has become one of the most popular destinations for offshoring insurance processes, and leading insurance companies in the US and Europe has moved their processes either to their captive units or third-party outsourcing firms. Currently, around 63% of India’s insurance outsourcing revenues come from the US and around 22% from EMEA. India offers varied insurance solutions dealing with health, property, life, annuities, reinsurance and casualty, among others. The following is a list of insurance services that are outsourced to India. The total revenues from the Indian offshore insurance business process outsourcing services increased from US$367 million in FY03 to US$790 million in FY07, and are expected to reach US$2 billion by FY10. This increased business will also result in increased employment opportunities in the insurance offshoring business.

Indian insurance sector: stepping into the next decade of growth


Exhibit 2.1. Insurance services suite
Property and casualty insurance Life insurance, pension and annuities Reinsurance


Application process Policy administration and maintenance

Underwriting support Claims processing and adjudication

New business

Policy administration Annuities servicing

Treaty administration Technical accounting

Underwriting support Claims management

Claims and issuance

Technology enabled

Customer relationship and information management

Customer relationship and information management

Reinsurance treaty administration

Insurance workflow

Active desk solution

Active desk solution

Insurance workflow

Open block life administration Hire-to-retire End-to-end platform Procure-to-pay Producer administration service

Closed block life administration Hire-to-retire Retirement services Procure-to-pay Hire-to-retire



Product analytics

Customer analytics

Profitability analytics

Claims analytics

Risk analytics

Technology and consulting

Application development and maintenance

Life, retirement services, producer administration platform

Business process and operations consulting

Source: Infosys


Indian insurance sector: stepping into the next decade of growth

Contribution of insurance to employment Insurance helps create both direct and indirect employment in the economy. Alongside regular jobs in insurance, there is always demand for a range of associated professionals such as brokers, insurance advisors, agents, underwriters, claims managers and actuaries. The increasing insurance business has increased the demand for highly skilled professionals as well as semiskilled and unskilled people. For example, life insurance provided direct employment to an additional set of 30,912 people, besides adding more than 407,768 individual agents during FY09.

IRDA has mandated the appointment of actuaries in all insurance companies, ensuring the certification of all products before launch. The insurance regulator has also made it mandatory for appointed actuaries to attend all board meetings to help the insurer ensure solvency at all points in time. To ensure continued growth, the need of the hour is trained manpower with specialized knowledge about this industry. Insurances companies need to invest in the professional training of their employees, especially for subjects such as underwriting, claims and risk management.

Exhibit 2.2. Growing employment in the life insurance industry
Parameter Direct employees Individual agents
Source: Life Insurance Council of India

FY00 1,23,000 7,14,000

FY06 1,52,449 14,22,609

FY07 1,87,403 19,85,457

FY08 2,54,332 24,98,513

FY09 2,85,244 29,06,281

Indian insurance sector: stepping into the next decade of growth


Section II: Industry at cross-roads of development

Insurance industry: significantly untapped latent potential
India’s insurance industry has witnessed rapid growth during the last decade. Consequently, many foreign companies have expressed their interest in investing in domestic insurance companies, despite the Government of India’s regulation, which mandates that the foreign shareholding limit is fixed at 26% for the life as well as non-life insurance sectors. The country’s strong economic growth in recent years has helped increase penetration levels substantially. Premium income, as a percentage of GDP, increased from 3.3% in FY03 to 7.6% in FY09. However, the penetration of insurance in India still continues to be low, as compared to other developed and developing economies. Exhibit 2.3. Insurance premiums as a % of GDP
In percentage 8 6 4 2 0 3.3 2.7 0.6 3.7 3.0 0.7 FY04 4.2 3.5 0.7 FY05 4.8 4.1 0.8 FY06 0.9 FY07 0.9 FY08 0.9 FY09 6.3 5.5 7.3 6.4 7.6 6.7

The Indian life insurance sector has witnessed exponential growth, driven by innovation in product offerings and distribution owing to market entrants since the opening up of the sector in 2000. Currently, it is the fifth-largest life insurance market in Asia. The rapid expansion in the life sector coincided with a period of rising household savings and a growing middle class, backed with strong economic growth. Innovative product design (e.g. launch of ULIPs) and aggressive distribution strategies (e.g. development of bancassurance) by private sector players have significantly contributed to strong premium growth. The following diagram shows the increasing premium per capita during the same period.

Exhibit 2.4. Per capita insurance premium
2,500 2,000 1,500 1,000 500 0 1,716.1 2,013.8 2,187.1

1,197.2 952.0 1,003.6 785.4 628.3 265.2 528.4 166.6 193.7 237.0 244.5 109.5 147.8 637.9 776.1 FY03 FY04 FY05 FY06 FY07 FY08 FY09

1,921.9 1,769.3 1,479.1


Non-life insurance premium contribution as a % of GDP Life insurance premium contribution as a % of GDP Total insurance premium contribution as a % of GDP
Source: “IRDA annual report FY03–09,” Insurance Regulatory and Development Authority website,, accessed August 2010; CMIE

Non-life insurance premium per capita Life insurance premium per capita Total insurance premium per capita
Source: “IRDA annual report FY03-09,” Insurance Regulatory and Development Authority website,, accessed August 2010; CMIE


Indian insurance sector: stepping into the next decade of growth

The global economy has slowly started recovering from the economic recession. Lagging employment, coupled with declining aggregate wages, a weakened residential and commercial real estate market, tight credit and a behavioral shift on the part of consumers from consumption to savings are factors contributing to a delayed recovery. Although the global insurance industry has not been impacted by the financial crisis as much as the banks, it still has its set of issues. The leading five issues on the global insurance watch list are:

Promoting compliance: The cost of regulatory compliance and the attendant reputational risk of non-compliance are on the rise. Growing globally: The expansion into new markets is expected to help drive profits, as developed economies witness slower growth in the demand for insurance. Lack of innovation around products and delivery: The use of technology and emphasis on innovation will help provide better service and delivery. Institutions can also strengthen their ties with customers and differentiate themselves from competition. Adapting to demographic shifts: The demographic changes in North America, Europe, Japan and other areas is starting to shift assets from equities to annuities as well as other fixed-income products.

Managing risk: The most significant concern for insurance companies is risk in all its forms. Increasingly, insurance companies are adopting an enterprise-wide view of managing risks—employing a framework to address them across the organization.

Exhibit 2.5. Global comparison of insurance premiums, penetration and density for both life and non-life segments
Non-life premiums in 2009 Country Developed Australia France Germany Singapore South Korea United Kingdom United Arab Emirates United States 27,849 88993 126,591 5,188 34,527 91,560 4,381 647,401 3 3.1 3.7 1.7 3.9 3 2.1 4.5 1,308.0 1,289.4 1,518.7 645.6 709.7 1,051.2 952.7 2,107.3 32,468 194077 111,776 9,057 57,436 217,681 732 492,345 3.4 7.2 3.3 5.1 6.5 10 0.4 3.5 1,524.8 2,979.8 1,359.7 1,912.0 1,180.6 3,527.6 159.2 1,602.6 Premiums, US$ million Penetration, % of GDP Density, US$ per capita Premiums, US$ million Life premiums in 2009 Penetration, % of GDP Density, US$ per capita

Indian insurance sector: stepping into the next decade of growth


Non-life premiums in 2009 Country Developing Bangladesh Brazil China India Indonesia Malaysia Mexico Pakistan Philippines Romania Russia South Africa Sri Lanka Taiwan Thailand Vietnam 205 23,979 53,872 6,375 2,219 3,158 9,664 650 835 2,365 38,940 8,215 358 11,443 4,248 769 0.2 1.5 1.1 0.9 0.4 1.6 1.1 0.4 0.5 1.4 2.4 2.9 0.9 3 1.6 0.8 1.3 123.8 40 6.7 9.6 115 88.2 3.6 9.1 111.2 276.4 163.9 17.7 494.8 62.7 8.7 Premiums, US$ million Penetration, % of GDP Density, US$ per capita Premiums, US$ million

Life premiums in 2009 Penetration, % of GDP 0.7 1.6 2.3 6.6 0.9 2.9 0.9 0.3 1 0.3 0 10 0.6 13.8 2.4 0.7 Density, US$ per capita 3.9 127.9 81.1 48.1 22 206.9 70.1 3 17 25.1 4.5 574.2 11.8 2,257.3 91.7 7.6

636 24,781 109,175 46,206 5,066 5,682 7,688 543 1,563 533 636 28,773 238 52,204 6,212 671

Source: “World Insurance in 2009,” Swiss Re, June 2010, Insurance Regulatory and Development Authority website,, accessed 06 January 2010

According to Swiss Re, among the key Asian markets, India is likely to have the fastest-growing life insurance market, with life premium poised to grow at a CAGR of 15% for the next decade, slightly faster than the 14% expected for China. The growing consumer class, rising insurance awareness and greater infrastructure spending have made India and China the two most promising markets in Asia. Europe and the Americas represent relatively mature insurance markets. Though India’s penetration appears higher, it is not excessive, given the high level of investments in insurance policies underwritten. Nonetheless, besides India, Taiwan is the other Asian market that shares similar characteristics.

Taiwan has the highest insurance penetration in Asia, largely driven by the immense popularity of ULIPs. The progress of the Indian insurance industry over the last decade has been the most crucial period in the establishment of this industry; post the formation of IRDA in 2000. The initial four to five years witnessed the entry of many private players, each trying to acquire market share. The latter part of this phase witnessed a heightened focus on the expanding product range, developing innovative products and building a robust distribution channel. The last one to two years have been very critical as the industry is


Indian insurance sector: stepping into the next decade of growth

trying to sustain its growth in light of the new regulations being formulated. The Indian insurance industry is at a threshold from where it can witness the next growth wave, if presented with a favorable policy framework and an enabling distribution environment. The industry is poised to witness the emergence of new leaders who would carve a niche for themselves by using instruments such as alternative channels of distribution, cost management and product innovation, among others. At this cross section, the role of the regulator is very significant. IRDA is in the finalization stage of most of the regulations pertaining to the industry. The regulator has introduced certain regulations to help improve disclosures, profitability, capital, consumer protection, etc.

losses and meeting solvency requirements. In this context, given the existing regulatory constraints of foreign direct investment by the overseas partner, a substantial part of the funding would have to be done by the Indian partner, whose financial strength is likely to influence the credit strength of the joint venture. Given the evolutionary stage of the Indian insurance industry, one of the focal points for the regulator has been to drive stability and solvency in the industry. The act also mentions broad guidelines for the construction of the investment portfolios of life insurance companies. These norms have been designed to make sure that an insurer does not take on unsustainable risks in deploying funds collected by way of premiums. Overall, the regulatory environment is favorable and takes care that players maintain prudent underwriting standards, and reserve valuation and investment practices. The primary objective for the current regulations is to promote stability and fair play in the market place. Some of the recent regulatory changes and their impact include: New disclosure norms IRDA has come up with the following disclosure norms:

Recent regulatory developments that govern the current market state
The development of the insurance industry in India, as in other international markets, is likely to be critically dependent on the nature and quality of regulation. The role of the regulator in most markets is to ensure efficiency, transparency and fair play, while at the same time, protect the interests of the consumer. The IRDA Act 2000 has delineated the broad regulatory framework within which insurance companies are expected to operate in India. The provisions of this act address issues related to ownership, solvency, investment portfolio construction, commission structures, reporting formats and accounting standards. The minimum paid-up equity capital requirement has been set at INR1 billion. The insurance business is capital intensive, and international experience suggests that, on an average, non-life insurance companies require four to five years to break even. In the interim, these companies would require regular capital infusion for funding expected

IRDA has issued disclosure norms for insurance companies, mandating them to publish accounts on a halfyearly basis. The disclosure norms are seen as a precursor to allowing insurance companies to hit the primary market. According to the new norms, insurers will have to publish their balance sheet on a half-yearly basis, starting from the period ending 31 March 2010. All financial disclosures for the past five years prior to the IPO have to be available on the company website. In addition, insurance companies have to disclose the data on various parameters such as the calculation of economic capital, surrender and lapse experience of business and expense patterns for the five-year period.

Disclosures to be made for a company launching an IPO

Indian insurance sector: stepping into the next decade of growth


Insurance companies that intend to go public would also need to disclose required and available solvency margins for five years, capital structure and details of investment performance. A wide range of risk factors related to credit, market, insurance, liquidity, operational and asset and liability management need to be disclosed clearly by the insurers, accompanied by a report from an independent external actuary on the reasonableness of the methodology adopted and assumptions made to determine valuations. IRDA has also instructed all life insurers to explicitly disclose, in their benefit Illustration document, the exact amount of commission/brokerage paid by insurers to insurance agents. This circular came into effect from 1 July 2010.

year in a tapered scale, ending with 2.25% after the fifteenth year. The new guidelines apply from 1 September 2010. Earlier, the regulator had allowed commissions charged by agents to not exceed 40%.

For single-premium products, the maximum commission rate is 2% of the premium paid, and for regular premium products, the rate is in the range of 15%–30% of premium in the first year, followed by 5%–7% in the subsequent years. According to the draft guidelines, all life insurance agents will have to gather a minimum of INR150,000 as the first-year premium or sell a minimum of 20 life insurance contracts. When an agent falls short of achieving either of the above, they would have to proportionately achieve more in either one to make up for the shortfall. Where the average annual persistency ratio is less than 50%, the license of the agent will not be renewed.

Implications The regulator has directed all firms to come up with a public disclosure framework to ensure a fair and stable insurance market. These norms would help investors to be fully aware of the financial performance, company profile, financial position, risk exposure, elements of corporate governance in place and the management of the insurance companies. The standard on public disclosures for the insurance companies, which has been prepared out of the leading international practices followed by the International Association of International Supervisors (IAIS), will strengthen corporate governance and market discipline. According to IRDA, the circular on the disclosure of agent commission will enhance transparency by providing prospective policyholders with details of the exact amount of commission/brokerage paid by insurers to insurance agents, thus making it pro-investor. However, on the negative side, this move may encourage many insurance agents to rebate commissions to their clients, which is an illegal practice. Altered commission structure of agents

Implications This move by the IRDA reflects its efforts to ensure transparency and implement more stringent disclosure norms to avoid mis-selling. This is likely to allow insurers to recover their cost in a “more transparent and informed way,” thereby reducing “unfair practices” and the “information gap” in domestic insurance to enhance market discipline. Any variation in the payment structure of agents will also help companies to reduce their costs. Further, tenurebased commissions will definitely benefit the industry. High commission is also expected to come down and there will be better reward for longer-term policies than the shorterterm ones. Customers are the largest gainers from this change, as products will now be more transparent, customer-friendly and aimed at protecting their long-term interests. With the implementation of the IRDA’s new norm, insurance companies may initially face a setback in policy sale numbers and total premiums. Although the IRDA stance is in favor of bringing transparency in the commission structure of agents, this norm could negatively impact agents as well, at least in the short term. To address the impact of reduced

Insurers would be allowed to charge up to 4% on annual premium paid on ULIPs for the first five years, and thereafter, charges will be reduced during the tenure of the policy. This figure narrows down to 3% by the tenth


Indian insurance sector: stepping into the next decade of growth

commission, insurance companies may resort to innovative ways of compensating their top-performing agents. Noncommission-based remuneration may increase. Companies may expand their different reward and recognition programs to make the sale of ULIPs attractive for agents in light of these recent changes. In the long term, the role of agents is expected to evolve with this policy change. In future, increased transparency is likely to make agents more accountable not only in selling the right products, but also in providing better customer service. This is also likely to guarantee that agents justify the commissions they earn. From being mere agents, they will be expected to serve as financial planners selling a bouquet of financial products. IPO norms for insurance company

promoters will get the opportunity to put their equity into the market as well as FIIs will also be able to participate and acquire stakes. Promoting health insurance

IRDA has allowed insurance companies to offer “Health plus Life Combi Product,” a policy that would provide life cover along with health insurance to subscribers. Under the guidelines issued by the IRDA, life and non-life insurance firms can also partner in offering the healthplus-life cover. The combi products may be promoted by all life insurance and non-life insurance companies, however, a tie up is permitted between one life insurer and one nonlife insurer only. Thus, a life insurer is permitted to enter an alliance with only one non-life insurer and vice-versa. The sale of combi products can be made through direct marketing channels, brokers and composite individual and corporate agents, common to both insurers. However, these products are not allowed to be marketed through “bank referral” arrangements. The regulator further specified that the guidelines do not apply to microinsurance products, which are governed by IRDA (Micro Insurance) Regulations, 2005. Under the ”Combi Product,” the underwriting of the respective portion of the risks will be underwritten by respective insurance companies, i.e., life insurance risk will be underwritten by the life insurance company and the health insurance portion of risk will be underwritten by the non-life insurance company.

The insurance regulator has reduced the waiting period for an insurance company to make an IPO from 10 years to 5 years after commencing operations. IRDA has finalized its IPO guidelines and has sent them to the Securities and Exchange Board of India (SEBI). SEBI will club IRDA’s recommendations with its general guidelines on IPOs for any company that wants to raise money from the public through equity shares. The norms for correct valuation, disclosure of operating results and profit and loss account and filing of the draft red herring prospectus are the three essentials that a company has to fulfill when opting for a public float. Besides, companies would have to make financial disclosures, risk disclosures, investment performance, etc. (details stated in the above section — “New disclosure norms”).

Implications Life insurance has a much deeper penetration in India, as compared to the non-life insurance segment. This step is in sync with the government’s, regulator’s and the insurance company’s strategy to cover more people under the insurance umbrella. As insurers leverage on the marketing and operational network of their partner insurers, the proposed product innovation is expected to facilitate policy holders to select an integrated product of their choice under a single roof without shopping around the market for two different

Implications Insurance companies need capital to expand, innovate and sustain in the market. Insurance companies typically prefer to raise capital by floating an IPO. There can be a mix of a fresh issue of shares as well as the sale of shares by the parent company. Most companies prefer this route when they do not have enough capital to plough back into their business. With the IPO route of raising capital, Indian

Indian insurance sector: stepping into the next decade of growth


insurance coverage options from two different insurers. Therefore, insurers are expected to offer appropriate covers as an attractive proposition for the policyholders. Alteration in ULIPs IRDA has attempted to make ULIP a long-term protection contract covering risks related to mortality, longevity and health by simultaneously offering a fair deal to the policyholder and doing away with the excesses in the system. The key changes introduced through the new guidelines are as follows:

Minimum guaranteed return for pension products: Regarding pension products, all ULIP pension/annuity products will offer a minimum guaranteed return of 4.5% per annum, or as specified by the IRDA from time to time. This will provide protection to the life time savings of pensioners from any adverse fluctuations at the time of maturity.

Implications The impact of these new guidelines on customers will be favorable due to lower charges and guaranteed returns, among other reasons. However, these changes will also impact the margins of life insurers, as the charges, particularly surrender charges, are capped. This could have an adverse impact on their profitability. The possibility of a decline in the profitability and increase in the capital requirements of life insurers has resulted in discounting the previously high multiples assigned to the new business achieved profits (NBAP), and as such, there could be a decline in the valuation assigned to the life insurance business. The changes in ULIPs guidelines could also result in a delay in the IPO plans of a number of players as they will have to rework their product offerings. Though it may make selling difficult as it would make products inflexible, it would certainly reduce persistency risk, make AUMs stable, and boost the overall certainty on assumptions and the profitability of the business underwritten. Other regulations Besides the above regulations, IRDA and the government are in the process of drafting more regulatory reforms for the industry such as:

Lock-in period: IRDA has increased the lock-in period for all ULIPs from three years to five years, including topup premiums, thereby making them long-term financial instruments that provide risk protection. All limited premium ULIPs, other than single premium products, will have a premium paying term of at least five years. Level paying premiums: All regular premium/limited premium ULIPs will have uniform/level paying premiums. Any additional payments will be treated as a single premium for the purpose of an insurance cover. Even distribution of charges: The charges on ULIPs are mandated to be evenly distributed during the lock-in period in order to eliminate high front ending of expenses. Increase in risk component: Further, all ULIPs, other than pension and annuity products, will provide a mortality cover or a health cover, thereby increasing the risk cover component in such products. Cap on surrender charges: IRDA has recommended a cap on the surrender charges at up to 15% of the fund value in the first year for policies with a tenor more than 10 years and 12.5% for policies with a tenor of less than 10 years. This charge comes down to 5% and 2.5%, respectively, in the fifth year of the policy, and becomes nil for policies of less than 10 years after the fifth year. For tenors above 10 years, the charge in the sixth year is 2.5%, which becomes nil in the seventh year.

With the private players completing nearly 10 years of existence, the industry is seeking alternative ways to meet its capital needs. The government is considering


Indian insurance sector: stepping into the next decade of growth

increasing the upper limit in FDI from the current 26% to 49%. Foreign partners are largely unwilling to dilute their stakes below 26%, since most of them enter the business in anticipation of the limit being increased. This may result in the local partner being compelled to reduce its stake to 49% to meet the new norms. This could create its own complications, since according to the Indian company law; a 51% stake ensures ownership.

IRDA is finalizing directives and detailed guidelines for mergers and acquisitions in the insurance sector. The policy document for the smooth transition from Solvency I to Solvency II is in the draft stage. A data warehouse is being set up to monitor the settlement of insurance claims, better customer relationship management and facilitate better decision making. IRDA is considering allowing banks to tie up with multiple insurance companies to vend their products. This will give bank customers a wider menu of options to select from, so that they can buy insurance products based on their needs. IRDA will soon come up with norms to define terms such as critical illness and hospitalization cost, among others, a move that will reduce the scope for disputes between insurers and hospitals.

Regulation affects the economics of both the supply side (the policyholders — supplier of funds) as well as the demand side (the insurers — borrowers of funds). The Indian consumer, being extremely price sensitive, adjusts rapidly to the altered economics, which could affect the persistency trend in the industry. IRDA’s role will be critical for further industry growth and the rise in penetration levels.

Indian insurance sector: stepping into the next decade of growth


Section III: Critical factors for market development

Distribution channels
The effectiveness and cost of diverse distribution strategies of different players is crucial in ensuring the success of players in the insurance business, particularly in the retail lines of business. The low differentiation among retail insurance products suggests the criticality of distribution reach and efficiency for success in this business. The factors that determine the choice of the distribution channel of an insurance company are:
• • •

Role of intermediaries/distributors/financial advisors Insurance has to be sold the world over, and the Indian market is no exception. The touch point with the ultimate customer is the distributor or the producer, and the role played by them in insurance markets is critical. Insurance distribution is not simply about pushing products. An outsized share of the value across the entire insurance industry value chain is added in distribution. For customers, it is in distribution that needs are understood and assessed, options (from full risk transfer to self insurance and more exotic methods of managing risk) are identified, and counsel on the choice of carriers and other providers is given. It is because of distribution that relationships and trust are built with agents, brokers and customers, opportunities are identified and created, and products and services are sold. It is the distributor who makes the difference in terms of the quality of advice for the choice of product, servicing of policy post sale and the settlement of claims. In the Indian market, with their distinct cultural and social ethos, these conditions play a major role in shaping the distribution channels and their effectiveness. The figure below provides an estimate of the current market share of the various distribution channels used by life insurers, and gives a view of how these channels could develop in the future.

Where are the customers? What is target customer profile? Which product (linked, traditional, term, etc.) can be sold through distribution channel? Which channel provides best buying experience and value to target customer segment? What is the operational cost involved in each type of channel?

The customer preferences vary by market segment vis-à-vis geography, age, income, life style, etc., and market characteristics change over time.


Indian insurance sector: stepping into the next decade of growth

Exhibit 2.6.: Current market share and potential market growth
High Potential channel growth (Medium term) Tied agents

Corporate agents

In today’s scenario, insurance companies must move from selling insurance to marketing an essential financial product. The distributors have to become trusted financial advisors for the clients and trusted business associates for the insurance companies. The most prominent models of insurance distribution are:

Brokers Direct Worksite Internet Low Current market share
Direct: Sales through call centres and/or direct mailing Internet: E-commerce sales through internet portals Tied agents: Insurance companies aligned agency force Worksite: Marketing arrangements with entities to sell insurance to their employees




Insurance agents have to know which product will appeal to customers, and also know their competitors’ products in the same space to be effective sales individuals who can sell their company and its products to the customers. To the average customer, every new company is the same. Life insurance in India has been mostly distributed through an elaborate network of agents. The agency force has a high gestation period and is more suitable to sell complex risk-based products. The product market focus on relatively simpler ULIPs makes predominantly agency-based models relatively expensive. Agents are divided into various categories, depending on the skills, experience and productivity. Companies are focusing on identifying training needs and increasing the productivity of agents. Exhibit 2.7 provides features of agents at different levels:

Bancassurance: Insurance products offered through banks Brokers: Representatives for buyers who deal with either agents or companies in arranging for coverage Corporate agents: Non-bank institutions involved in the sale of insurance products

Source: Watson Wyatt

Indian insurance sector: stepping into the next decade of growth


Exhibit 2.7. Tied agency model
► ►

Nascent agency force "Trained" and "independent" agency force "Mature" and "highly" productive agency force

Low productivity Heavy investment required in product and process training

► ►

Insurers’ focus on controlling attrition Insurers' brand strength, product innovation and commission rates are critical in preventing attrition High productivity Loyalty (propelled by trailing commission build up) Equips the organization with the ability to sell complex risk and asset protection products

► ► ►

Source: “Life Insurance,” Edelweiss, 6 August 2010, via Thomson Research

Agents are responsible for the reputation of the company they are working for and have their obligations toward their clients. Here are some of the basic functions that agents perform:
• • • •

only sell insurance products, but offer other financial products as well to enhance customer benefits. The limiting factor for prospective insurers will be the extensive and costly distribution structure equipped for reaching this segment. While public sector companies are able to attract agents, they continue to suffer from high attrition rates due to the indiscriminate agent appointment. The most successful of these companies’ tied agents are hardly of the elite variety of salespeople. They are still the neighborhood do-gooders — the postman, the schoolteacher and the shopkeeper — who know the people and are themselves known in the community. The challenge here is the lack of knowledge of the competitive market and the inability to do intelligent comparisons with the competitors’ products. New companies are looking for educated and aware individuals with a marketing flair, an elite group that can be attracted only with high remuneration and the lure of a fashionable job, all of which may not be possible in this business with its price pressures and the complexity of selling insurance. With this kind of segmentation of intermediaries, the test for the insurance company lies in training and educating these people to become effective sales individuals.

Provide all the necessary application forms Submit application forms to the company Arrange for all the medical tests and related formalities Provide reminders premiums payments and return receipts Should help customers make necessary changes in address, nomination, etc. Help in the process of assignment Assist customers for any loan applications and related formalities Should help customers revive lapsed policies Assist in claiming death benefits, if required

• •

• •

Besides the above, agents are now moving from the sole contact point between a customer and an insurance company to become financial advisors. Agents would now be responsible for explaining the nature of a policy to customers as that will help customers to take informed decisions. Their role is likely to enhance, as they will not


Indian insurance sector: stepping into the next decade of growth

Further, IRDA holds a mandatory test and other training programs for agents in India. IRDA norms are becoming increasingly stiff for agents (commission reduced and spread over a longer period of time) is likely to be even more strict, which would impact agents in the short term.


Bank-backed insurers and those promoted by large banks that are better positioned due to their relatively lower development costs, predominantly variable cost structure (typically opening own sales branches imply higher fixed and semi-variable costs) and the integration of systems that may reduce the cost of operations. Though bank-backed insurers are better placed because of their strong brand, variable cost business models, access to the bank’s database and walk-in customers, which help reduce overall acquisition costs, LIC clearly stands as an exception to this tenet because of its scale of operations and productivity achieved over years of operations. The bancassurance model functions at various levels, each party having a different level of agreement. Exhibit 2.8 explains the various bancassurance models with their features.

Market entrants cannot expect to replicate the extensive distribution network of the nationalized insurance companies. Building a distribution network is expensive and time consuming. As a result, private insurers have largely followed a strategy similar to that of the foreign banks, i.e., starting from the affluent segment and gradually strengthening the distribution network to reach out to the middle-income segment.

Exhibit 2.8. Bancassurance model
► ►

Insurer able to leverage the bank's infrastructure; source of fee-based income for the bank Bank and insurer may have a fragmented view of their customers Low level of integration Reluctance of bank staff to sell insurance; insurer has little control over distribution Insurer able to leverage the bank's infrastructure; source of fee-based income for the bank Integration in product development and channel management Sharing of customer database Reluctance of bank staff to sell insurance to sell insurance; insurer has little control over distribution Joint decision making; bank participation in product and distribution design High system integration, infrastrucural utilization; low-cost model Insurer loses control on distribution Bank may be able to realize higher profitability as an insurance distributor rather than as a producer Full integration of system; low–cost model Potential for fully integrated products and developing a one–stop shop for financial services Insurer is ill equipped to exercise control over distribution Bank may be able to realize higher profitability as an insurance distributor rather than as a producer

Distribution agreement

► ►

► ►

Strategic allowance

► ►

► ►

Joint venture

► ►

Financial services group

► ► ►

Source: “Life Insurance,” Edelweiss, 6 August 2010, via Thomson Research

Indian insurance sector: stepping into the next decade of growth


Technological advances are expected to enable new distribution channels, while recent regulatory changes (bank’s entry into insurance) are expected to allow crossselling between financial services companies. However, banc-assurance is expected to gain considerable popularity. The increased alliances between banks and insurance companies position the selling of insurance products by banks as an opportunity to leverage their extensive branch network and broaden their income base to include more fee-based business. Insurers equally see bancassurance as a low-cost option to expand their distribution network and foray into previously inaccessible segments of the market.

Brokers and corporate agents constitute a small part of the distribution system in India. As on 31 March 2010, there were 259 direct brokers, 33 composite brokers and 6 re-insurance brokers. While not many large brokers are present in the Indian market at the moment, the overall contribution from corporate brokers is likely to increase as many corporate agents are now becoming brokers. Global insurance brokers such as Aon, Marsh, Willis and Howden have also entered the Indian market. Some products, once they receive a high level of penetration and awareness, can become commodities and be sold through more impersonal channels. The use of the internet to distribute life insurance products has only recently emerged, and has not made a significant impact so far, partly because of the substantial advisory component of most life insurance products. The penetration in rural and semi-urban areas has become the core of distribution strategy of insurers. As in metros and urban areas, insurers have targeted the mass-affluent segment in rural areas as well. The cost of setting up operations in rural/semi-urban areas is far lower compared with those in metros and urban areas. There is a promising potential of rural and semi-urban offices with unrelenting expansion in these areas and the presence of multiple insurers may result in sub-optimal operations. These distribution networks have reached an unprecedented scale from mobile phone companies to microfinance institutions to supermarket chains and churches. Customers, in vast numbers, who were previously off the grid are now within reach. Challenges with the existing distribution model India is arguably one of the most challenging and promising emerging insurance markets. Its rapidly growing economy, coupled with a young and diverse population, open ample opportunities for the development of insurance. However, there is much to be done to realize this potential. In today’s

Other distribution methods

Alternate distribution channels are needed for the following reasons:
• •

To increase insurance penetration in the country To differentiate on the basis of customer service; to retain and attract new customers to expand business To increase insurance awareness and knowledge among people To satisfy the needs of more demanding customers To improve cost efficiency in insurance distribution

• •

Private players are exploring several alternatives to reduce the cost of replicating the distribution network of public sector insurance companies. While third-party distribution in fast-moving consumer goods is a possibility, the complexity of insurance products, especially given the low awareness levels, would necessitate direct selling. One potential channel is marketing through corporate employers, i.e., employers purchase products on behalf of the employees or at least support the marketing effort. The concept of “worksite marketing,” i.e., the sale of voluntary insurance products to employees at the worksite through payroll deduction has become common. Worksite marketing, which was once the realm of a few small companies, selling just a few products, has now stretched to large companies, offering a variety of worksite products.


Indian insurance sector: stepping into the next decade of growth

Indian insurance market, the main challenge to insurers and intermediaries are:
• •

trusted the agent and the company. This arrangement worked satisfactorily in the absence of competition. In today’s scenario, agents continue as the prime channel for insurance distribution in India, as is the case in most markets, supported by call centers to a small extent. Nearly all the new players follow this model primarily because the regulations for other channels are yet to be put in place. However, there is great excitement in the industry over the impending broker regulations and companies are planning all possible channels in their enthusiasm to strengthen volumes. The belief that all these channels will grow and seamlessly integrate to bring in business seems a fallacy. Since controlling expenses has become a challenge and most of these expenses are incurred on distribution, the issue of efficient cost management is strongly linked to effective distribution. With the new IRDA regulation on the commission structure, distributors will earn lower commissions, going forward, and will have to accordingly adjust their business models. The challenge will be no less for insurance companies. The fixed and semi-variable costs in the business are high. With restriction on the ability to push the product, gaining scales will not be easy for all.

Building faith about the company in the minds of clients Intermediaries being able to build personal credibility with clients Controlling operating expenses by reducing distribution costs Coping with IRDA norms on their commission

It is the traditionally tied agents that have been the primary channels of insurance distribution in the Indian market. Public sector insurance companies have their branches in almost all parts of the country and have attracted local people to become their agents. These agents are from various segments in society and collectively cover the entire spectrum of the society. A person who has lived in the locality for many years sells the products of the insurance company with a local branch nearby. This ensures the last mile touch point being closer to the customer. Of course, the profile of the people who acted as agents suggests that they may not have been sufficiently knowledgeable about the different products offered, and may not have sold the appropriate product to the client. Nonetheless, the customer

Indian insurance sector: stepping into the next decade of growth


A two-pronged approach to cost management can be envisaged:
• •

Cut commission pay-outs Shift toward variable cost distribution models

For a standalone insurer, achieving this will be a herculean task, requiring the potential to execute low-cost customer capture independent of the distributor. In the absence of product differentiation, the options available to insurers are limited to:

develops, there are various other distribution channels that come to the fore to supplement the agency model. However, the types and reach of different channels is affected by a variety of factors such as the size and potential of the insurance market, geographical scenario, culture, literacy level, complexity levels of the insurance products, development of the information technology infrastructure, and the availability of associated distribution channels. Other distribution channels such as independent financial advisors (IFAs), brokers, bancassurance and electronic channels emerge as the market moves to developing and mature phases. Insurers deploy various channels, keeping in mind the complexity of the products involved and target the customer base, besides optimizing their distribution costs. Local rules and regulations also play an important role in deciding the penetration of any distribution channel. Although the composition of various insurance distribution channels could vary across different insurance markets, it broadly moves from being predominantly an agency model to a multi-distribution model with a significant role played by IFAs and brokers. The following figure explains the evolution of insurance distribution network across countries. Exhibit 2.9. Evolution of the distribution network
Emerging Others Developing Others IFAs/brokers Bancassurance, including JVs Tied agents Tied agents Tied agents Mature type A Others IFAs/brokers IFAs/brokers Bancassurance, including JVs Mature type B Others

Build a low-cost reach, which is the most desired and most difficult Generate higher investment yields that may strengthen the sales pitch Build a strong retail brand, which will be expensive

The insurance industry in India has seen the emergence of large bank-backed insurers. So far, the regulator has allowed banks to enter only into corporate agency tie-ups with insurers. Hence, banks promoting insurance companies remained tied to their ventures, putting to question the existence of the arm’s length relationship between the bank and insurance subsidiary. The emergence of a much more difficult and evolving market scene, with existing players, more new players coming in and global marketing practices and ideas being tested, is distinctly visible. But none of this has changed the fundamental character of the market. Experiences from developed insurance markets worldwide Globally, various insurance markets are at varying stages of development, which is also reflected in their insurance distribution networks. On one hand, the distribution network primarily comprises agents, given the higher face-to-face interaction required to educate people about insurance products. Primarily, insurers follow a push strategy to market their offerings. As the insurance penetration

Bancassurance, including JVs Tied agents Netherlands Australia US UK

Poland India China Turkey

France Spain Italy

Source: “Life Insurance,” Edelweiss, 6 August 2010, via Thomson Research


Indian insurance sector: stepping into the next decade of growth

Multiple distribution networks create a range of opportunities for insurers to attract and serve customers in a differentiated way, keeping in mind the customer’s preferred combination of product, pricing, service and channel. It is a way to reach customers who could not be reached before, and to extract more value from existing customers. It is, therefore, a powerful lever to increase market and customer access, especially in mature insurance markets. Exhibit 3.0. Current state of distribution across geographies
Agency Australia China Hong Kong India Indonesia Japan Malaysia New Zealand Philippines Singapore South Korea Taiwan Thailand Vietnam Mature Mature Mature Mature Mature Mature Mature Mature Mature Mature Mature Mature Mature Mature Bancassurance Mature Growing Mature Growing Growing Mature Growing Mature Emerging Mature Mature Mature Growing Growing Telemarketing Mature Emerging Mature Growing Emerging Mature Emerging Mature Emerging Growing Mature Growing Emerging Emerging Virtual* Mature Emerging Growing Emerging Emerging Mature Emerging Growing Emerging Growing Mature Mature Emerging Emerging Worksite marketing Growing Emerging Emerging Emerging Emerging Mature Emerging Growing Emerging Emerging Emerging Emerging Emerging Emerging Micro Wealth mgmt Mature Emerging Mature Emerging Emerging Mature Emerging Growing Emerging Growing Mature Growing Emerging Emerging Takaful


— — — —

Growing Emerging




— —

— —
Emerging Emerging Emerging

— —

* Includes electronic kiosks, mobile phones, and Internet Source: More than one approach: Alternative insurance distribution models in Asia Pacific, Deloitte, 19 March 2010

Indian insurance sector: stepping into the next decade of growth


The mix of distribution channels is matched by the diversity of the cultural, infrastructural and regulatory environments. It is evident that a ”one size fits all” model is not the best approach. Rather, a multi-pronged approach that factors in country-specific details, penetration rates and cultural characteristics appears to be the most successful model. Conversely, market segmentation and the unique needs of customer groups appear to be dictating the distribution channel used in a specific country. United Kingdom Insurance distribution channels have evolved through various phases in the UK. Before 1990s, the majority of insurance distribution was undertaken by the direct sales force of insurance companies. However, after the implementation of “polarization” rules, which mandated individuals and companies selling insurance to tie to one company or remain independent to manage all products across the market, IFAs became a prominent player in insurance distribution. Currently, around 45% of life insurance and 85% of pension business is done by IFAs in the UK. Besides IFAs, there are also tied advisors, which can be grouped under two categories — tied advisors (working for one financial institution) and multi-tied advisors (offering products from a selection of the market and usually paid on a commission basis). Typically, tied and multi-tied advisors cater to mass markets and offer simple products, whereas independent IFAs target high net worth customers and offer customized products.

Further, bancassurance has also emerged as a prominent distribution channel for insurance products. Post depolarization, a variety of bancassurance models emerged in the UK. It has emerged as an important channel for the distribution of simple products such as ULIPs and bond products. The bancassurance market share stood at 20.3% in 2006 in the UK. Organized retailers such as Tesco, Sainbury and ASDA constitute another interesting channel that has emerged in the UK. They can act as a corporate agent or as a referral, and are among the largest distributors of insurance products in the UK. Various functions during the policy cycle are managed between retailers and insurers. This channel can be integrated to the agency channel for better servicing and for establishing one-to-one relationships with customers. To conclude, in the UK, banks have emerged as a preferred channel for the distribution of savings/simple ULIPs; IFAs and banks for pension/retirement products and insurance companies/tied agency for risk protection products. Insurance is a ”push” product. Hence, the role of intermediary is crucial in influencing the buyer and creating a committed customer base. In the insurers’ value chain, significant value is generated at the distribution stage. Distribution strength is a key to the scalability and sustainability of the insurance business. Given the nature of the product and the emerging regulatory environment, the existing distribution strategy has been challenged. Going forward, in India, commission rates are likely to drop, impacting the front-line sales force, corporate agents


Indian insurance sector: stepping into the next decade of growth

and brokers. Alternative channels such as bancassurance, e-channels will gain more prominence. The rural/semi-urban distribution strategy will undergo a change; insurers will focus on the leading 20 towns over the medium term, rather than experimenting with the low per-capita income underpenetrated areas.

down to the poorest of the poor. The Eleventh Five Year Plan puts special emphasis to promote more inclusive growth in the financial services sector. The need for the delivery of financial services at an affordable cost to vast sections of disadvantaged and low-income groups is on the rise. Financial inclusion is likely to increase in the light of limited social security by the government. In India, the government provides very limited social security to its citizens as reflected in the fact that less than 4% of the population is covered under any of the social security schemes. Further, the self-employed or those working for small enterprises are exempt from contributing to the employees’ provident fund and need to make their own arrangements for savings and a protection cover. The growth of nuclear families in urban locations resulting in the breakdown of traditional old age support structures also supports this trend. Exhibit 3.1 clearly depicts that the government expenditure on public social protection and health expenditure is very low as compared to other countries. In the light of the need of protection instruments, there may be an expected increase in the demand for financial products in the years to come. Exhibit 3.1. Public protection and health expenditure as a % of government expenditure (2004)
70 60 50 40 30 20 10 0 -10 59.6 51.6 39.9 26.1 24.0 20.8 12.0 9.0 South Korea Singapore

Focus on financial inclusion
The approach to insurance must be in sync with the evolving times. The mission of the insurance sector in India should be to extend the insurance coverage over a larger section of the population and a wider segment of activities. Around 40% of the population does not have access to the organized financial services sector in India. There is a significant demand for these services in excluded regions where it is difficult to provide these financial services. Therefore, a large section of the excluded population has to rely on the informal sector (moneylenders etc) for availing finance that is usually available at exorbitant rates. Apart from the obvious and apparent benefits of improving living standards, financial inclusion has a multiplier effect. By increasing the number of people in the umbrella, the value of the entire national financial system increases. The consequent fuller participation by all in the financial system makes monetary policy more effective, and thus provides an enabling environment for non-inflationary sustainable economic growth. Despite a robust growth of 30%–40% in premiums during 2003–2008, the per capita insurance premium is also low due to a large population base and the financial exclusion of a large section of this population. The government has realized the need to increase financial inclusion in the financial services sector, especially in insurance. Need to increase financial inclusion in India Since economic liberalization started in 1990s in India, financial inclusion has been at the forefront of policy makers to ensure that the benefit of economic growth percolates

7.0 Indonesia

1.5 India






Source: “India Life Insurance Sector,” Credit Suisse, 29 July 2009, via Thomson Research

Indian insurance sector: stepping into the next decade of growth


Measures to increase financial inclusion in India There are various measures that have been taken to increase insurance penetration in India, although, with varied success. Some of these are listed below:

a wide population, a consistent and harmonized approach by all the stakeholders may prove to be more effective and bring in the desired results. The primary objective of all stakeholders (regulator and insurance companies) should not only be limited to encourage people to buy insurance policies, but also to ensure that all the individuals or families should be reasonably familiar with the concepts of insurance, products, means of delivery, grievance handling process, customers’ rights, etc. They should feel comfortable in transacting with the insurance companies and their representatives.

Increase financial literacy

Given the low literacy level of around 65%, it is imperative to have even lower financial literacy among the populace. The situation is worse in semi-urban and rural areas, where many people are not even aware of the concept of insurance. Therefore, various stakeholders in the industry need to promote financial literacy and educate populace about insurance. Unlike other disciplines of finance, insurance is introduced to a person at a much later stage of life, which results in limited knowledge. Hence, the level of awareness about insurance products and services is very low. The low level of financial literacy has been an issue in not only developing countries, but also in many of the developed countries. Countries such as the US, Australia, New Zealand and the UK, among others, have taken considerable steps in ensuring higher levels of financial literacy. Some of these are:

Motivating Indian households transfer savings from physical assets to financial assets

Household savings comprises both financial and physical savings. The majority of the Indians prefer their savings in the form of physical assets instead of financial instruments, and this trend is likely to continue despite the India growth story. Although financial inclusion is a mantra for the RBI and the government, it is estimated that the financial savings of the household sector have been declining over the years. In the coming years, banks, insurance companies and other financial institutions should focus on channelizing savings from physical assets to financial assets. Exhibit 3.2. Distribution of physical and financial savings in India (as a % of household savings)
100 80 60 40 20 0 51 49 2005–06 51 49 2007–08

Establishment of ”The Adult Financial Literacy Advisory Group” by the UK Government in 2000 to recommend ways to improve financial literacy of the adult population with a specific emphasis on those who are disadvantaged Joint effort of the US Federal Government, state governments and other stakeholders in the insurance sector to teach family economics and finance Measures taken by the Insurance Council of New Zealand as a part of ”The Enterprise New Zealand Trust’s Financial Literacy Programme” to educate on risk and insurance in more than 100 schools

69 31 1970–71

54 46 1980–81

53 47 1990–91

53 47 2000–01

58 42 2004–05

52 48 2006–07

54 46 2008–09

Closer home, IRDA had undertaken a publicity campaign to improve awareness and knowledge about insurance products to enable customers to take informed decisions. As India has

Financial assets

Physical assets

Source: “National Income Statistics,” July 2010, CMIE


Indian insurance sector: stepping into the next decade of growth

Traditionally, a sizable percentage of the Indian population has been more risk-averse, investing most of their savings in physical assets rather than financial instruments. Therefore, the government should incentivize investments in financial instruments. Combined with an increasing savings rate, this trend is expected to be extremely beneficial to the life insurance industry. This change has started to happen over the years; however, increasing financial literacy and awareness are likely to boost this further.

Consumer needs and preferences
The growth in insurance industry has been spurred by product innovation, vibrant distribution channels, coupled with targeted publicity and promotional campaigns by the insurers. Innovation has come not only in the form of benefits attached to the products, but also in the delivery mechanism through various marketing tie-ups both within the realm of financial services and outside. All these efforts have brought insurance closer to the customer as well as made it more relevant. One of the crucial areas in the insurance sector is the adoption of new technology in the industry. It is an accepted fact that the insurance business is technology-driven. It has the potential to save costs, and hence, the scope for reducing the price of product. The coming years will witness a total revolution in the ways of doing business. E-commerce will be increasingly used in all the sectors, including banks and insurance and products will be sold on the internet. Insurance plans for children are fast becoming popular, as they not only offer payouts that can be timed to coincide with certain milestones in a child’s life, but also financial security if the parent dies. All the life insurance companies are now expressing a keen inclination toward children’s insurance plans and are willing to come out with new innovative product lines in the future. According to industry estimates, 20%–30% of the business of many companies currently comes from children-specific insurance policies alone. Emerging lifestyle trends amid a changing fabric of the Indian society have also modified social and financial behavior. For instance, an increase in the number of working women has led to a demand for life insurance policies, which in turn has helped women through a micro-entrepreneurship initiative. Project insurance is another area, which is increasingly gaining significant traction. This type of insurance has been prevalent for decades for those who undertake diverse and risky projects, whether government, public sector or private sector. With the new developments, particularly

Improve access and reach vast sections of the underprivileged and low-income groups

In a diverse and large country such as India, various factors such as a vast geographical spread, lack of technology and affordability of insurance products have been a hindrance to financial inclusion. Hence, the use of different distribution channels, developing products for the poor, cheaper access to financial products, etc., would help increase financial inclusion.

Insurance as a tax saving instrument

In India, insurance has so far been viewed primarily as a tax-saving instrument. This is evident in the fact that the majority of the insurance policies are purchased in the last two months of the financial year (February and March). As a result, many Indians buy insurance policies without regard to their actual insurance needs. Further, many policyholders do not reassess their insurance cover, as their income level increases and the standard of living improves. Thus, a large number of policyholders are underinsured. India has an approximately 3.5% tax-paying population, which is very small. But with the increase in disposable income and the inclusion of more people in the tax bracket, the sale of tax-saving products, especially investment in insurance products is likely to increase. Financial inclusion will be achieved by creating a supportive socio-economic environment to build and sustain it. The process of financial inclusion should be a virtuous circle of sustainable income generation programs for the poor, followed by customized products by the financial system delivered with the help of intermediaries on a mass scale by leveraging technology and related infrastructure.

Indian insurance sector: stepping into the next decade of growth


in the economic and industrial areas, apart from projects such manufacturing units, sales units and medium-sized factories, a large number of infrastructure projects such as constructing roads, canals, flyovers and bridges, and industrial units are coming up in significant numbers. There is, therefore, immense potential for this class of insurance. ULIP is one of the most successful innovative products in India. As a product, ULIP gained popularity post 2003, with an evolving market opportunity on the back of a booming equity market, low household equity penetration and heavy channel incentivization. Product innovation is likely to continue and traditional policies are set to gain some foothold in an otherwise ULIP-driven market. Insurance companies are now coming up with usage-based insurance, also known as pay-as-you-drive, which is a type of automobile insurance, whereby the costs of auto insurance depend upon the type of vehicle used, measured against “time, distance and place.” This differs from traditional insurance, which attempts to differentiate and reward “safe” drivers, giving them lower premiums and/or a no-claims bonus. The evolving customer preferences and the need for developing customized products is the new mantra of growth, which most companies are following. In line with the product philosophy to introduce an innovative range of products that are most suitable to different customer needs, companies are introducing more customer-friendly products. The role of customized products is also seen in providing a competitive advantage.


Indian insurance sector: stepping into the next decade of growth

Indian insurance sector: stepping into the next decade of growth


Way forward

Vast potential; poised to sustain robust growth

India is poised to experience major changes in its insurance markets as insurers operate in an increasingly deregulated and liberalized environment. However, despite the liberalization in the insurance sector, public sector insurance companies are expected to maintain their dominant positions, at least in the foreseeable future. Nevertheless, given the enormous potential of the Indian market, it is expected that there will be enough business for the industry entrants. For consumers, the opening up of the insurance sector is indicative of new products, increased product variants and improved customer service. Product innovation and channel diversification would gain momentum, in line with the global trend of the convergence of financial services. For the government, insurance, especially life insurance, can complement state-security programs. It can relieve pressure on social welfare systems and allow individuals to customize their security programs in accordance with their own preferences. This substitution role is especially valuable, given the rising demand for social security and increased financial challenges faced by the Indian social insurance system. In the coming years, the government expects insurance to be a key contributor to the large capital requirement for funding planned infrastructure projects in the country.

The life insurance segment is a major attraction for private and foreign players. Life insurance players are realigning their business strategies in response to new IRDA norms on capping charges. In the long term, this can create entry barriers and strengthen the competitive strength of the incumbents. IRDA is also expecting more applications for licenses over the next one or two years due to the rising inclination of banks to venture into the insurance segment.

Tightening the belt by leveraging technology and exploring alternate low-cost channels

The sector is likely to witness an increase in the usage of technology in distribution channels. Moreover, a shift from the agency model of distribution to models, such as bancassurance, brokers, etc., will help increase reach and reduce costs. In addition, there is significant potential in the micro-insurance segment with the majority of the Indian population residing in rural areas. After the de-tarrification, the non-life insurance sector has witnessed a slowdown in premium growth. However, in the next three or four years, the industry is likely to grow at a stable rate. Both health insurance and auto insurance are highly promising, and are expected to increase their share manifold in the coming years. The reinsurance industry is likely to increase pricing rates in the light of increasing claims and decline in the value of investment income following the financial crisis. The market


Indian insurance sector: stepping into the next decade of growth

has to ensure that domestic companies increase their own capacities and introduce stricter guidelines as firsthand risk carriers. Insurance companies have to establish business relations with their reinsurer to prevent them from the worldwide reinsurance cycle that affects capacity and stability. In future, insurance companies are likely to compete on a number of parameters, including price, products, underwriting and innovative sales methods. Poorly managed companies with a weak capital base are expected to either drop out of the market or become uncompetitive on premium rates and profits. For insurance companies, profit from innovation will be integral to driving success, and technology will help private insurers to develop and customize products to befit individual needs. India is likely to continue its strong premium growth momentum, provided private sector players continue to be innovative with optimal product design and distribution channel usage. Robust ULIP sales during the equity market downturn and the recent resumption of ULIP sales are testaments to the strong demand for insurance products in India. The Asia-Pacific region has dynamic and varied insurance markets. Most countries are experiencing a significant shift in population demographics, standard of living, income levels as well as the education scenario. Consequently, insurance industries do not follow a standardized model for effective distribution channels.

The ability of any private sector insurer to outperform its peers hinges on its ability to improve its channel usage and productivity. Insurers would do well to tap into new customers through new channels, while bolstering existing channel productivity to generate more business or improve upon the quality of business already being generated. Among all channels, the agency force presents the largest improvement opportunity. Although the agency model has been and will remain a major distribution channel, insurers should combine multiple channels in order to meet the needs of a socio-economically and religiously diverse region. Insurers need to first establish their physical presence in new cities and towns, and then recruit and train agents. Drawing experience from the UK market, insurers may also want to effectively use retail chains for better servicing customers and building one-to-one relationships. Seeing that commissions, i.e., the variable costs paid across all channels should be the same, building the agency business incurs most fixed costs. The expansion in agency force would be the most expensive way forward, although it would potentially provide the best returns since this distribution means is more stable than bancassurance and there is plenty of room for improvement as agent productivity is very low in India currently. Agent poaching and high attrition rates are some of the problems faced by insurers, but these are no different from the problems faced in other developing markets such as China.

Indian insurance sector: stepping into the next decade of growth


Sustaining growth through increased transparency

Given the rapid increase in costs associated with building a robust agency force, insurers are also building lowcost channels such as direct marketing, internet and telemarketing channels to sell simple insurance policies and service existing policyholders. Direct distribution incurs much lower commission and is suited for simple products for which face-to-face interaction is not required for their initiation or concluding sales. Recently, a leading insurance player has launched the first fully online term insurance product, which is substantially low priced, as compared to the company’s conventional term products. Internet as a channel to launch new and innovative products will be widely used in the future as e-commerce continues to witness a surge in the country. The insurance industry is at a very critical stage, from where either it can flourish or can witness muted growth. The last decade has been a phase of growth and development.

But now is the time for growth, along with stabilization. IRDA, on its part, is facilitating the expansion of the sector by formulating enabling regulations. However, along with keeping the interests of the customers at the forefront, there is a need to facilitate a favorable environment for distribution intermediaries, which can result in the exponential growth of the sector. The regulator has devised a framework for insurers to make the disclosure of financial statements, investment portfolio as well as operating ratios. These disclosures are expected to make the industry stronger as well as earn the faith of its stakeholders. The shift from solvency I to solvency II is also taken as a big step toward risk management. IRDA is also considering the formulation of rules and regulations for a smooth transition to this new regulatory standard. The growth potential and opportunities for the Indian insurance industry is vast. In the wake of the improving global financial situation, the industry is expected to be a major contributor to the country’s economic growth.


Indian insurance sector: stepping into the next decade of growth

• • • • • • • • • • • • • •

Insurance Regulatory and Development Authority (IRDA) Reserve Bank of India Life Insurance Council General Insurance Council Centre for Monitoring Indian Economy Insurance industry: the evolving dynamics, Ernst & Young, 2009 “World Insurance in 2009,” Swiss Re “Life Insurance,” Edelweiss, 6 August 2010, via Thomson Research “India Life Insurance Sector,” Credit Suisse, 29 July 2009, via Thomson Research “IRDA’s new guidelines on ULIPs to impact profitability of Life Insurers,” First Global, 9 July 2010, via Thomson Research “All is well,” RBS, 8 February 2010, via Thomson Research “India Life Insurance,” ICICI Securities, 23 September 2010, via Thomson Research Neha Singhvi and Prachi Bhatt, “Distribution Channels in Life Insurance,” Bimaquest - Vol. VIII Issue I, January 2008 Sreedevi Lakshmikutty and Sridharan Baskar, “Insurance Distribution in India - A Perspective,” Domain Competency Group (Insurance), Infosys Technologies Limited “Alternative insurance distribution models in Asia Pacific,” Deloitte “The Emergence of Alternative Distribution in India,” Towers Watson S. Varadharajan, “Future Generali to introduce use-based insurance product,” The Hindu, 10 August 2010, via Dow Jones Factiva, © 2010 Kasturi & Sons Ltd.

• • •

About CII Way forward
The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the growth of industry in India, partnering industry and government alike through advisory and consultative processes. CII is a non-government, not-for-profit, industry led and industry managed organisation, playing a proactive role in India’s development process. Founded over 115 years ago, it is India’s premier business association, with a direct membership of over 8100 organisations from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 companies from around 400 national and regional sectoral associations. CII catalyses change by working closely with government on policy issues, enhancing efficiency, competitiveness and expanding business opportunities for industry through a range of specialised services and global linkages. It also provides a platform for sectoral consensus building and networking. Major emphasis is laid on projecting a positive image of business, assisting industry to identify and execute corporate citizenship programmes. Partnerships with over 120 NGOs across the country carry forward our initiatives in integrated and inclusive development, which include health, education, livelihood, diversity management, skill development and water, to name a few. CII has taken up the agenda of “Business for Livelihood” for the year 2010-11. Businesses are part of civil society and creating livelihoods is the best act of corporate social responsibility. Looking ahead, the focus for 2010-11 would be on the four key Enablers for Sustainable Enterprises: Education, Employability, Innovation and Entrepreneurship. While Education and Employability help create a qualified and skilled workforce, Innovation and Entrepreneurship would drive growth and employment generation. With 65 offices in India including 7 Centres of Excellence, 10 overseas in Africa, Australia, Austria, China, France, Germany, Japan, Singapore, UK, and USA, and institutional partnerships with 223 counterpart organisations in 90 countries, CII serves as a reference point for Indian industry and the international business community.

Confederation of Indian Industry The Mantosh Sondhi Centre 23, Institutional Area, Lodi Road, New Delhi – 110 003 (India) Tel: 91 011 2462 9994–7 Fax: 91 011 2462 6149 Email: [email protected] Website:


Indian insurance sector: stepping into the next decade of growth


Indian insurance sector: stepping into the next decade of growth


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