The year 20
00 was game-changing for the insurance sector in India. Suddenly from just the state-owned insurers, there were big, multi-national players that launched innovative products for the customers. Interestingly instead of eating into the market share of state-owned insurers, the private sector helped expand the market and increase the penetration of life insurance – from 1.7 percent of gross domestic product (GDP) in 2000 to 4 percent in 2010. This, in turn, led to a rapid pace of expansion for the Indian insurance industry during the decade ended 2010, as reflected in the strong growth in insurance premiums, number of policies sold, increased outreach of the sector, entry of more private-sector players, and the launch of a slew of innovative product lines. The life insurance industry grew at a compound annual growth rate (CAGR) of 25.8 percent between FY2002-03 and FY2008-09, with the number of policies sold growing at 12.3 percent during the same period.
However, companies across the sector struggled to sustain this hectic pace of growth in the last few years, amid the lack of a stable regulatory regime. The industry faced its own set of challenges along the way, and is now maturing and stabilizing. If presented with a favorable policy framework and an enabling environment in terms of regulations linked to distribution, products, etc, the industry could grow rapidly once again. In fact, India is poised to have the fastest growing life insurance market in the world as per multiple industry reports, with premiums expected to grow at a CAGR of 12 to 15 over the next few years.
The insurance sector has always been a key contributor to national economic development as it has fueled vital growth engines like infrastructure, which needs $1 trillion in investments over the next few years (till 2017). Insurance is also an important financial instrument that addresses a social agenda around financial stability of individual families if something were to happen to the breadwinners. In addition, the industry is supporting the Pradhan Mantri Jan Dhan Yojana (PMJDY) where 5.52 crore bank accounts have been opened till recently, and deposits worth Rs. 4,268 crore have been mobilized. Close to 1.78 crore Rupay cards have been issued, which includes an inbuilt accident cover from insurance partners. Additionally, the account holders will also get a life cover of Rs 30,000 through LIC.
Insurance industry’s contribution to economic and social agenda
A well developed, and evolved, insurance sector can be a boon for the economic development of a country, as it provides long-term funds for infrastructure development, and concurrently strengthens the risk-taking ability of citizens of a country by providing an insurance cover. This has been seen in the more economically developed markets. The Indian insurance market is the 19th largest globally, in terms of premiums, and ranks fifth in Asia, next only to Japan, South Korea, China and Taiwan. With 36 crore policies already in force, and the industry poised for rapid growth, the Indian life insurance sector cannot be ignored by the Government.
Social security
Life insurance is the only the financial instrument that ensures the savings one planned for their family are available whether they are around or not. In a country lacking social security measures, life insurance plays an even more critical role in protecting the financial future of a family in case something happens to the breadwinner.
According to a recent study undertaken, the total protection level of Indian citizens is only about 60 percent of the GDP – as compared to 99 percent and 178 percent in China and Malaysia, respectively, and as high as more than 250 percent in developed countries like the U.S., U.K. and Japan. This significant gap can perhaps be explained by the fact that India has traditionally been a savings oriented market. In a country like ours with lack of social security, protection levels remain far too low. Only insurance companies can help improve this, and as a sign of their commitment to this issue, many industry players are focusing on launching customer friendly, simple protection plans.
Infrastructure investment
According to the current Five-Year Plan outlined by the Planning Commission, India needs to invest $1 trillion in infrastructure, including roads, ports, airports and power plants, in the current Five-Year Plan (2012-2017. In fact, the government has identified the revival of the infrastructure sector as one of its top priorities. The combined assets under management (AUM) at all insurance companies grew more than nine times from nearly Rs. 2 lakh crore in FY2000-01, to Rs. 18.68 lakh crore in FY2012-13. The bulk of these assets have been parked in bonds, held till maturity. Thus, insurers, given the long-term nature of their business and extant regulations, have emerged as one of the biggest investor groups in infrastructure. Being able to hold the bonds till maturity allows insurers to remain invested in infrastructure, even during difficult periods. This dynamic, prevalent worldwide, makes insurance one of the key pillars of support to develop national infrastructure.
Generating employment
The insurance industry currently employs about 2.4 lakh individuals directly, and another 21 lakh as agents. The number of direct employees did not come down over the last few years, even when the sector struggled to grow. In addition, the industry helps companies operating in tertiary sectors, such as IT support providers, call centers, media and advertising professionals create job opportunities too. With the government poised to increase the upper limit for foreign direct investment in the sector, insurers would be more willing to expand their services, which in turn, will create further avenues of employment.
Opportunities for other sectors
With India being a popular destination for offshoring backend processes, leading insurers from the U.S. and Europe have shifted their processes to either captive units or third party outsourcing firms in the country. Also, Indian insurance companies are expected to spend Rs. 117 billion ($ 1.93 billion) on IT products and services in 2014, an increase of 5 percent from 2013, according to Gartner. The forecast takes into account expenditures by insurers on internal IT (including personnel), software, hardware, external IT services, and telecommunications. Moreover, insurance companies operating in India are likely to spend Rs. 4.1 billion ($ 67.84 million) on mobile devices in 2014, an increase of 35 percent from 2013.
Challenges – In spite of being on a growth trajectory
The Indian life insurance industry is projected to expand at a CAGR of 12 to 15 percent in the next five years, in terms of premiums. The industry plans to boost its penetration to five percent of GDP by 2020, and has the potential to top the $ 1 trillion mark in terms of premiums over the next seven years, as per industry reports. The immense growth potential for the sector is underpinned by several factors, including the country’s favorable demographics, increased consumer awareness, and a supportive government likely to enact business-friendly policies and promote customer-centric products and practices. While insurance companies have strengthened their presence in tier I and II cities, penetration into tier III and IV cities will require significant investments in a robust distribution network, and training. And, FDI will be critical in this regard. However, in spite of the good intentions of the government, the legislation concerning increased FDI into the sector is yet to be passed – an issue that, if not addressed at the earliest, may adversely impact the industry’s growth prospects.
FDI – the ongoing discussion
Most insurance companies are well capitalized at the moment, and are profitable. However, to reach the next level of growth, they need significant investments – something that only FDI can facilitate. FDI not only brings in immediate capital – and foreign exchange – into the domestic economy, but also helps Indian insurance companies improve their operational and technical skills, administrative organization, and spurs innovations in products and processes.
With 14 years having gone by since the opening up of the industry, it is high time that Indian policy makers deliver on their promise to hike the cap on FDI from the current level of 26 percent. Such a step, apart from helping boost the confidence of overseas investors, will have a very positive impact on the Indian economy. While the industry has seen capital infusion of about Rs. 35,000 crore, 26 percent of which has been committed by foreign investors, since 2000, the flow has significantly ebbed over the last four years – amid a sector-wide slowdown and tightening of liquidity. If FDI norms are relaxed, the industry is expected to attract capital inflows of about Rs. 10,000 crore in the near term, and as much as Rs. 40,000 crore over the next 10 years.
If these projected levels of capital inflows materialize, the industry is likely to expand at a CAGR of about 15 percent over the next ten years. This would help the market for new premiums grow four times, to Rs. 4,80,000 crore, with the private sector expanding five times to Rs 1,50,000 crore. Assuming such a pace of growth can be achieved, private-sector insurers alone can garner combined AUMs of about Rs. 5,50,000 lakh crore – half of which could be used to invest in long-term sovereign and infrastructure bonds.
Stable regulatory regime – need of the hour
Most of the regulatory changes, introduced over the last few years by IRDA, have been extremely positive for consumers, and would hold the insurance sector in good stead over the long term. However, the speed at which these changes were enforced meant insurance companies did not get enough time to recalibrate their operations – the result being a negative impact on their performance. Companies have had to quickly reconfigure their operations in the short term to meet the new norms. Given that insurance is a capital intensive business – one that requires a long-term view on returns – there needs to be predictability in policy and regulations, to allow companies to plan, and execute, their strategies accordingly.
While some of the regulations introduced in recent years are aimed at standardizing products and distribution, policy makers need to ensure simultaneously that there is no compromise on innovation, which will be the key factor to driving growth of the sector, as well as to attracting and retaining talent. As the industry matures, the regulatory environment has to move toward embracing a more principle based approach with regard to oversight. For the industry to contribute meaningfully to the economy, and to secure the financial future of people, life insurance companies and the regulator need to continue collaborating effectively.
Potential to help India leap ahead
A growing middle class, rising levels of income and spending, increasing insurance awareness, and higher infrastructure investments have laid a strong foundation for the growth of the insurance industry in India. The country’s insurable population is expected to touch 75 crore by 2020, with life expectancy of the average citizen reaching 74 years. The life insurance industry is projected to account for 35 percent of total domestic savings by the end of this decade, compared to 26 percent in FY2009-10.
The growth opportunity for the insurance sector is immense, considering that the industry’s current ratio of total sum assured to GDP, at 55 percent, is amongst the lowest across comparable economies. In comparison, the equivalent figure for Malaysia and China stands at 179 percent and 99 percent, respectively. With 70 percent of its population below 30 years of age, India needs to create job opportunities for its youth. Apart from aiding economic development through provision of long-term funds for infrastructure projects, while strengthening people’s ability to take risk, the insurance sector can contribute significantly to employment generation. The role of insurance companies as an engine of job creation is manifested not only in direct employment, but also in the range of associated professionals such as brokers, agents, underwriters, claims managers and actuarial professionals, they employ.
The insurance industry is uniquely positioned to help the Indian economy meet a host of challenges over the medium and long term. However, a lot would depend on the ability of the sector to attract new capital, as well as on the ability of policy makers to facilitate a conducive environment for the industry to operate in.
-Tarun Chugh, MD & CEO, PNB MetLife, Member FICCI Insurance and Pensions Committee
