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Insurance Sector in India

May, 2014

Brief Introduction

The future of the Indian insurance sector looks bright. The sector which stood at a strong US$ 72 billion in 2012 has the potential to grow to US$ 280 billion by 2020. This growth is driven by India’s favourable regulatory environment which guarantees stability and fair play. This environment has given rise to an insurance market which encourages foreign investors to tap into the sector’s massive potential.

Ever since the Indian government liberalised the insurance sector in 2000 and opened the doors for private participation, the sector has gone from strength to strength. The resultant competition has provided the consumer with a never-before-seen range of products and providers, and also enhanced service levels markedly.

The health of the insurance sector reflects a country’s economy. This sector not only generates long-term funds for infrastructure development, but also increases a country’s risk-taking capacity. India’s economic growth since the turn of the century is viewed as a significant development in the global economy. This view is helped in no small part by a booming insurance industry.

Industry Dynamics

Consistent growth in the insurance sector depends on a few factors. Some of these are:

  • Effective distribution channels – The efficiency and cost of the various distribution strategies used by companies are significant to their success in the insurance business. This particularly holds true for the retail business.
  • Focus on overall financial inclusion – As time evolves, so must the approach of the insurance sector in India. The objective of the insurance sector should ideally be to offer a broader range of activities to a wider populace.
  • Consumer needs and preferences – The growth of India’s insurance industry can be attributed to product innovation, dynamic distribution channels, and vibrant publicity and promotional campaigns run by insurance companies. Benefits attached to the products and the manner in which they are delivered (through various marketing tie-ups) have helped bring customers and insurance companies closer to each other and made the latter more relevant.

Health insurance is an up-and-coming segment in this sector. Currently, it caters for 10 per cent of the overall US$ 30 billion healthcare expenditure in India. Consequently, there is plenty of scope for players in this area.

The life insurance segment contributes about 4 per cent to India’s gross domestic product (GDP) in terms of total premiums underwritten annually. There are 23 private companies in the segment. The state-owned Life Insurance Corporation (LIC) dominates the field, with about 71 per cent of the market share, according to Insurance Regulatory and Development Authority (IRDA).

Key Statistics

  • India’s life insurance segment collected new business premiums worth Rs 11,742.7 crore (US$ 1.84 billion) for April–May 2013. Indian insurance companies collected a combined Rs 107,010.7 crore (US$ 16.85 billion) worth of new premiums for FY 2012–13, according to data released by IRDA.
  • Meanwhile, the general insurance industry grew by 19.6 per cent in April–May period of FY 2013–14. Non-life insurers collected premiums worth Rs 13,552.46 crore (US$ 2.13 billion) in the first two months of the current year, as compared to Rs 11,333.54 crore (US$ 1.78 billion) during the corresponding period of the previous year.

New Developments/ Product Launches

  • Insurance companies will now have more freedom to invest in sectors such as IT and pharmaceuticals. IRDA has increased the sector specific exposure limit for investments to 20 per cent of the insurer’s total investment, from the previous 15 per cent.
  • The electronic know-your-customer (e-KYC) services used by the Unique Identification Authority of India (UIDAI) will be accepted as a valid verification process for insurance, according to IRDA. Through e-KYC, insurance companies can conduct electronic identity verification. The agencies can obtain an electronic identity document of the customer which is digitally signed by the UIDAI. This service enables a quicker and more efficient process for the customer as well as the insurance company.
  • Private player Cognizant Technology Solutions has successfully acquired ValueSource, which is a subsidiary of KBC Group, a Belgium-based multi-channel bank insurance organisation. Under the initial five-year agreement, the Indian company will provide a number of services to KBC, including application development and maintenance, and software testing.
  • • United India Insurance Co Ltd (UIICL), the second largest general insurance company in India, intends to open 530 new offices domestically in 2013. As of now, UIICL has 1,340 offices in the country, as per their website. In FY 2012–13, the company collected total premiums worth Rs 9,266 crore (US 1.45 billion) and has set a target of Rs 11,000 crore (US$ 1.73 billion) for FY 2013–14.

Government Initiatives

  • The Government of India has passed the Pension Fund Regulatory and Development Authority (PFRDA) bill that allows foreign investors to hold 26 per cent stake in the insurance sector. The primary objective of the bill is to provide pension cover to a greater percentage of the country’s population. The PFRDA bill would also provide subscribers a wider range of investment choices. The bill will provide better regulation of the sector and provide more confidence to investors, according to Mr Yogesh Agarwal, Chairman, PFRDA.
  • Aviation insurance is likely to emerge as an important segment in the near future with new players in the market operations and existing players seeking to increase fleet size, according to industry officials. At present, the current market size of aviation insurance hovers around Rs 500 crore (US$ 78.76 million), a figure that is almost certain to grow as the industry develops further.
  • In order to enhance financial inclusion in the country and develop bancassurance as a business, IRDA has facilitated banks to sell insurance policies. Application for the licence required to act an insurance broker can only be obtained after prior approval from the Reserve Bank of India (RBI). Banks would be required to apply under the direct broker category. The licence will be valid for three years.

Road Ahead

The insurance business in India is projected to reach Rs 4 trillion (US$ 63.01 billion) in FY 2013–14, according to Mr TS Vijayan, Chairman, IRDA. Total premiums collected by the general and the life insurance industry in FY 2012–2013 amounted to Rs 3.75 trillon (US$ 59.07 billion). The chairman believes that insurance penetration in India has the potential to rise to 5–6 per cent from the current 3.86 per cent.

Life Insurance Council, the industry body of life insurers in the country, has projected a compounded annual growth rate (CAGR) of 12–15 per cent over the next five years for the segment. India’s insurable population is expected to grow to 750 million by 2020, with life expectancy projected to reach 74 years around the same period. The council believes that this favourable Indian demography would result in more people seeking out life insurance. Also, the council predicts life insurance penetration – percentage of insurance premium to GDP – to reach 5 per cent by 2020 from its current 3.2 per cent.

Confederation of Indian Industry (CII) projects the growth rate for India’s insurance industry in FY 2013–14 to be around 5 per cent. It also anticipates 60 per cent of non-life insurance companies to record an average growth of more than 10 per cent. The raising of the foreign direct investment (FDI) limit from 26 per cent to 49 per cent in the sector is viewed as a key element to promote the insurance industry in India.

Exchange Rate Used: INR 1 = US$ 0.0158 as on November 12, 2013

References: Media Reports, Press Releases, IRDA Journal, E&Y report