Edward Reiche discusses key issues for the development of India's life insurance sector

The classic approach to classify the level of development of insurers is to compare the penetration of insurance premiums relative to gross national income (GNI). In such a comparison, India is firmly positioned in the emerging market sector, alongside a number of other Asian countries, notably China.

Instinctively, this is as it should be. There is a positive relationship between wealth (measured as gross national income per capita in purchasing power parities) and a country's insurance penetration; higher wealth tends to result in a rising penetration in life as well as in non-life (i.e. the insurance market is growing faster than the overall economy). In general, the increase is stronger in emerging markets than in industrialised countries.

Existing deviations of individual countries from the 'global trend line' are due to differences in life insurance market environments across countries (e.g. degree of old-age pension systems being based on social security).

This means that wealth alone does not explain the state of a country's life insurance market.

Based on the overall global trend, growth potential in life business in general exists in emerging markets (catching up) as well as in industrialised countries (reform of social security systems, ageing society).

In non-life business, growth potential is particularly strong in emerging markets, whereas growth in the industrialised countries is only in line with the economic development (i.e. with GDP growth).

Nevertheless, it says little about the dynamics of the developments in the respective markets.

Another measure of developments is to look at the nature of the products being offered in the market. Life insurance markets tend to start more slowly than non-life markets due to lower consumer awareness and individual income constraints. One can also observe a trend over time towards unbundling of protection and saving, and for less investment guarantees to be offered by life insurers, i.e. products become more complex.

However, even this measure is too restrictive as it does not properly describe the financial, legal and regulatory environment, which can promote or inhibit development. So while these factors are important indicators, one needs to consider a far broader range of issues to get a proper understanding of the state of developments and, thus, what is to be expected in future.

The list is not exhaustive, but the following would be important considerations:

- distribution;

- consumer protection;

- solvency and capital adequacy;

- investment restrictions;

- co-operation between different players in the financial services sector;

- restrictions on the shareholders and foreign investment; and

- fiscal treatment of insurance and insurers.

It is interesting to consider and compare the respective positions of China and India, both countries which are in the process of opening their insurance markets and the two key regions attracting most attention in Asia at the moment. China can be described as having the following features:

- very low insurance penetration;

- low awareness of insurance by the general public;

- strong economic growth;

- a few large national companies;

- gradual entry of foreign players with severe operational and investment restrictions;

- regulations and legal framework still under construction and little experience within the authorities;

- relatively simple products marketed;

- strong drive for market shares;

- agency distribution systems dominate; and

- a nascent actuarial profession.

Other Asian markets will show similar features.

India is unique and does not, on this broader basis, typically fit in. Instead, it has a fascinating mix of developing and sophistication.

In India there exists a body of legislation with which the industry is regulated, though some of it relates to the industry as it was some decades ago inherited from colonial days. Life insurance is not unknown given the very wide awareness of the state-owned Life Insurance Corp of India, even in remote villages in India. So far, most products and distribution along agency lines is standard. As in China, entry into the market is severely restricted, but there are several new players, primarily foreign.

Unlike China, there is a long actuarial tradition allowing the developing industry to draw on an albeit small pool of professionals.


Insurance executives in India will thus face different problems from their counterparts in other countries, despite being categorised at similar development levels when using a simplistic approach. They will certainly soon be confronted with addressing key issues which we recognise in so-called developed markets:

- moving from volume-driven to profit-orientated business. This means developing efficient distribution models. Though bancassurance will feature in many business plans, agency-driven distribution is likely to still be the main source of business. Agents will have to create quality rather than merely quantity;

- consumer and regulatory interest in ethical sales behaviour and marketing literature. Indian and other regulators will have been following the mis-selling scandals in the UK with some interest. They will be concerned that these problems do not arise in their own jurisdiction;

- improving the financial effectiveness and productivity of the organisation as a whole to meet shareholders' demand for adequate returns on capital invested. The dramatic downturn in stock markets worldwide demands that the use of the now rare commodity, capital, is productively and profitably invested;

- greater focus by regulators on solvency, financial soundness and risk adequate reserving. Regulators, too, are going global in that they regularly meet and share views. Systems and approaches used in North America, Europe and even Australasia are quickly migrating to Asia. India will not be an exception;

- impact of new international accounting standards. Given the exposure of global insurers to the Indian market, there will be a need to describe the Indian business in compliance with the accounting standards of the parent organisations, additionally to and independently of India's own requirements; and

- greater professionalism. This is looked at in the context of the actuarial profession in India. The Actuarial Society of India has experienced dramatic growth in membership (475% more students registered since 1999). It will be a special challenge to the Actuarial Society of India to manage this.

The signing of the Mutual Recognition agreements with the Institute of Actuaries, London, the Faculty of Actuaries, Edinburgh, and Institute of Actuaries, Australia, bear testimony to the determination of Indian actuaries to maintain high international standards.

The high priority the insurance companies and the industry will need to place on creating value, even at the cost of volume, is of paramount importance - a theme not limited to India.