Indian insurance market

The Indian insurance sector (both life and non-life) was recently opened for private, as well as foreign players. This article assesses the insurance market in India, and provides detailed information on the regulatory framework and the structure that has been enacted. It delineates the competitive environment that exists at the moment, and is likely to emerge in the near future. Finally, the profile of the consumers, who are the end-users, is also discussed.

The process of opening up the insurance sector in India started in 1993 when the Indian government set up a committee to make industry recommendations. The committee submitted its report in January 1994. Among its recommendations were the constitution of a regulatory authority, the ending of the state's monopoly in the sector, and the opening up of the sector in a phased and gradual manner for private, including foreign, entities.

The Insurance Regulatory Authority Bill was passed in December 1996. The Insurance Regulatory and Development Authority (IRDA) Act was passed in December 1999. The sector was opened for private participation, an independent regulatory authority was constituted, and foreign insurance companies were permitted to enter the Indian market through equity participation up to a level of 26%. At time of writing, 16 licenses had been been issued in both the life and non-life industries by the IRDA to private players.

According to the statistics compiled by the Principal Director, Office of the Comptroller and Auditor General of India, India was 23rd in the world in terms of insurance premium over 1999-2000. Non-life premium for the same year was over $2bn, putting it in 32nd place, while life came in at 20th with $5bn in premium income. In terms of penetration, India ranks 51st in the world with a penetration rate of 1.95%. As a percentage of the gross domestic product (GDP), insurance premium accounted for 1.38%, and 6.21% of the total savings.

Most new entrants are depending upon the National Council for Applied Economic Research (NCAER) study (the Indian Market Demographics) to assess the total size of the insurance market. According to the 1998 report, the deregulated Indian insurance market is estimated to have a customer base of at least 300 million. These are the people in the middle income group ($500 and above annually).

According to a report of the Confederation of Indian Industry (CII) on the potential of the Indian insurance market, life insurance premium is expected to touch a high of $13bn by 2004-2005, and $31bn by 2009-2010. In the non-life segment, the premium from the corporate sector will touch $4bn by 2004-2005, and $8bn by 2009-2010. In the non-life segment, the growth will be rapid for personal lines premiums. From the current statistics of $88m, it is expected to reach $1.1bn in 2009-2010. These projections are based on an annual GDP growth of 7% to 9% during the next decade, though they are likely to prove overly optimistic given the present trend of 6% to 6.5% GDP growth. For this reason, firms considering entry into the Indian market need to maintain a healthy scepticism about the published data and carefully assess the true size of the market for their insurance products.

In the post-liberalisation set-up, intermediaries will have a major role to perform, especially with the emergence of new distribution channels for the development of new products. While the main prospects in the sector are, of course, life and non-life, promising sub-sectors in insurance are insurance brokerage, reinsurance, pension funds, health and service industry insurance.

The competitive scenario likely to emerge during the next few years will see the state-owned corporations losing their market share, but still maintaining leadership positions. Enough competitive space will be created for new entrants to be profitable. A near saturation stage in developed nations and other markets makes India an attractive destination offering high growth potential to international insurers.

Nationalisation of the insurance industry occurred in two phases. The life insurance business was nationalised in 1956, and the non-life part was nationalised in 1972. Before nationalisation of insurance, a large number of private players (over 250 in life and more than a 100 in non-life) operated in the Indian market.

After nationalisation there were only six companies. One life insurer remained, the LIC, and one non-life insurer, the GIC which had four subsidiaries, National Insurance Company Ltd, New India Assurance Company Ltd, Oriental Insurance Company Ltd and United India Insurance Company Ltd.

Subsequent liberalisation has come about because of the low growth, untapped potential and high premiums of the market.

Low growth
India's insurance industry has been growing at 20% annually in terms of premium collection, but lags far behind when it comes to insurance penetration. According to analysts, the main reasons for low penetration of insurance are:

  • dearth of innovative and buyer-friendly insurance products;

  • low awareness on part of consumers;

  • term insurance plans are not promoted;

  • unit-linked assurances are not available;

  • insurance covers are expensive;

  • returns on insurance products are low;

  • marketing network is weak; and

  • turnover of agents is high and the training of agents is woefully inadequate.

    Untapped potential
    This is the area where the new insurance companies are going to benefit. According to the NCAER report mentioned earlier, the coveted middle income group ($500 and above annually) contains at least 300 million people. By 1999-2000, the LIC had serviced less than 100 million policies and only 65 million Indians have been introduced to these policies.

    Another indication of low penetration is the low collection of insurance premium as compared to the percent of domestic savings. At present, LIC and GIC collect 6.21% of the domestic savings.

    Most new entrants are depending upon the NCAER study conducted in 1993 and then updated in 1996 and 1998 to assess the changes in consumption patterns in India for the total size of the insurance market.

    The Indian Market Demographics is based on the Market Information Survey of Households (MISH) conducted by the NCAER. This survey is one of the most comprehensive primary data surveys covering a sample size of 300,000 households drawn from each district of India.

    Estimates based on the report suggest that the deregulated Indian insurance market has target customer base between 250 million and 300 million comprising individuals who earn an average of $500 or more annually. This offers a healthy opportunity for private players in this sector.

    The LIC and GIC charge a high premium as compared to insurance companies in other parts of the world. Moreover, revisions to premium rates also take time; LIC and GIC last revised their premiums 12 years ago. There is improper research on claims and thus the premium is not scientifically determined. Despite high premiums, the companies continue to struggle for profits.

    In the latter half of the last decade, on average 76% of the premium collected by the GIC was given as claims, 28% as management expenses and 5% was set aside as reserve for unexpired insurance. This totals to 109%, implying an underwriting loss. Similarly, for the same period, the LIC did not perform efficiently, though it has turned the corner last year despite a downward revision of premium in May 1998. In 1999-2000, the LIC's total assets were $34.6bn, a growth rate of 21% over the previous year.

    The CII report into the Indian market estimates that insurance premiums will account for 18% to 20% of the gross domestic savings of the country by 2010 for the life insurance segment. The non-life segment would concomitantly rise to 4% of the gross domestic capital formation by 2010.

    A near saturation stage in developed nations and other markets makes India an attractive destination offering high growth potential to international insurers.

    The first phase of opening up the insurance sector to private players had been completed with the grant of licenses. The IRDA has issued 16 licenses so far, eight for life operations, four for non-life operations and four in both life and non-life business.

    Insurance brokerage
    This sector seems shrouded in controversy, as the Government of India (GOI) and the IRDA take careful steps to ensure that the legislation about foreign participation is acceptable politically. It is expected that, as with insurance business, foreign equity participation in insurance brokerage would be permitted up to 26%. However, no announcement has been made yet.

    According to the IRDA norms for brokers in the insurance sector, prospective insurance brokerage companies can apply for permission to commence business in any one of the four categories stipulated by the IRDA. These categories are:

    Category I
    Direct general (non-life) insurance broker: A person registered for the non-life insurance business, but not any reinsurance business. Direct life insurance broker: A person registered in respect of life business but not any reinsurance business. The capital adequacy norms for Category 1 is $53,800.

    Category II
    Reinsurance broker: A person registered in respect of reinsurance business. The capital adequacy for category II is $215,200.

    Category III
    Composite broker: the function will consist of both that of a direct insurance broker (general or life) and a reinsurance broker. The capital adequacy for category III is $269,000.

    Category IV
    Others: Insurance consultant, risk management consultant, or any other nomenclature/description as may be approved by the IRDA. The capital adequacy for category 4 is $21,520.

    The IRDA is also considering a liberalised version of the corporate agency norms for directors of companies and banks willing to offer agency services to insurance companies. The revised norm will waive compulsory training for all directors. The new norms should be ratified by the Indian Parliament by the end of 2001.

    There are about 200 reinsurance companies in the international market, but of these, only about a dozen are truly international in their operations. All of them are eagerly waiting the green signal to start operations in India. At least one US company has had interactions with the IRDA, and has been informed that the announcement on reinsurance regulation is expected before the end of this year.

    Today, LIC has the financial strength to absorb risks fully. The LIC has used reinsurance outside India in a limited way, both in policy numbers and risks covered, primarily to keep in touch with the world market. The number of policies reinsured as well as the total sum at risk reinsured is quite insignificant.

    On nationalisation, GIC became India's domestic reinsurer, though it also accepts overseas reinsurance business. Under Indian regulations, all insurance companies in the country must reinsure at least 20% of their business with GIC, though the balance can go into the international markets. In recent times, the GIC has slowed down its inward reinsurance business because of the prevailing soft market conditions.

    The Indian pension and pay out annuity sector is undeserved and has opportunities for growth. In most countries the systems of providing social security benefits are in crisis, and the governments are increasingly trying to unburden themselves by encouraging private funding of these benefits.

    India was among the few nations that recognised quite early on the need for social security during old age, thus Provident Funds (PF) have a long history. The Employees Provident Fund Scheme came into force in 1952, and today covers 177 industries. For the employees, the returns on PF are comparable to 'safe' fixed income products.

    The Employees Pension Scheme (EPS) came only in 1995, and the government acts as the main fund manager. Private pension funds have also come on the scene in recent years. In addition, the Public Provident Fund (PPF) scheme covers the self-employed, and those not covered by the other two state schemes on offer. However, this scheme covers less than 1% of the working population.

    There is need for well-managed pension funds in India because the population is gradually aging. The share of the aged (over 60) in the total population is expected to rise from 6.4% in 1991 to 8.9% in 2016. This is expected to rise even more rapidly to 13.3% of the total Indian population by 2026.

    The lack of a comprehensive social security system combined with a willingness to save means that Indian demand for pension products will be large. However, current penetration is poor. By March 1998, LIC's pension premium was only $21.5m.

    The Indian Ministry of Finance has proposed the Old Age Social Income and Security Scheme (Oasis) in which professional fund managers would be consulted for finalising its details. The IRDA has been appointed as the regulator for pension funds that are at present under the government of India's Ministry of Labour. The joint venture between the US-based Principals Group and the Indian financial institution, the IDBI, was the first company to start operations in this sector. Subsequently, several private players have already started operations in this sector.

    Current market positions
    Many overseas insurers, bullish about their entry into India, pre-empted the opening up of the insurance sector and entered into commercial agreements and anticipatory alliances with Indian companies. Several companies identified the asset management company route to gain foothold in the Indian market, prior to their entry into the insurance sector. The table below gives details of the 16 private sector players which have entered the in the insurance market.

    With the entry of these foreign and domestic private players, the stage is set for intense competition in the insurance market. Industry experts have identified certain key factors that will determine the success of these companies including:

  • strong distribution network;

  • integrated training and development;

  • reputation and credibility;

  • financial stability;

  • sophisticated technology and systems;

  • actuarial and risk management skills;

  • fund management skills; and

  • strategic selection of segments.

    The competitive scenario likely to emerge during the next few years will see a decline in the market share of the state-owned companies. The LIC's market share is set to be down to 70% by 2010. GIC is likely to show a steeper decline, to 50% by the same date. This means that the existing players will maintain their leadership position with strong market shares, while enough competitive space is created for new entrants to be profitable.

    To the new entrant in the insurance market, India offers healthy opportunities, though it poses serious challenges too. India is not a mature market, and although all product categories coexist, the spread of the products is skewed in favour of certain types of policies. For the consumers, the life insurance policy, underwritten by the government, is seen as a safe option. To most consumers, the type of policy as well as the rate of return are secondary; insurance is primarily used as a tax-saving device. For the non-life sector, the market situation is not quite as diverse as it is for the life sector. This is because, except for some really basic forms of non-life insurance (for instance, fire and vehicle), the clientele for non-life is mainly the corporate sector, and this sector, though small compared to the corporate sector in any major economy, is still significant in number and value.

    One of the most challenging provisions put in by the IRDA is for private players to compulsorily reach out to the rural market. The rural market has a healthy potential, but the cost of tapping this market has been high, and even the state corporations, particularly the LIC, have concentrated more on the urban market.

    Provisions of the IRDA Act

  • Private insurance companies will be regulated by the IRDA. A single company cannot be in the business of life and non-life insurance business; separate applications and separate companies in case the same set of bidder desire licenses in both.

  • Foreign equity is capped at 26%, in life, non-life and reinsurance ventures. A domestic Indian investor's holding should not exceed 40% and should not be less than 26%. It is mandatory for a domestic Indian investor to divest a shareholding in excess of 26% after a period of ten years from commencement of business. Shareholders other than promoters cannot hold more than 1%.

  • Minimum capital fixed at Rs1bn ($21.5m) for life and non-life business and Rs2bn ($43mn) for reinsurance business.

  • Private insurers are to maintain a minimum solvency margin of Rs500m ($10.7m); highest of Rs500m ($10.7m) or 20% of net premium income or 30% of net incurred claims for general insurance; and Rs1bn ($21.5m) for reinsurance.

  • Policyholders' funds to be invested within India.

  • Compulsory rural and social sector exposure. All the private sector players will have to compulsorily reach out to the rural market, both in life and non-life operations.

    Over the last two years, the IRDA has become an extremely proactive regulator, and has been consistently involving the industry players, international regulators, the Indian government and the public in the process of reforming the sector, and ushering in reform policies. A considerable amount of work on the regulatory framework has already been accomplished, with the IRDA now emphasising on the operational guidelines.

    In 1996, Cigna International signed a memorandum of understanding with the promoters of Ranbaxy Laboratories, the largest Indian pharmaceutical company, to establish a joint venture company in health insurance. After a long seven-year wait, Cigna decided to quit India, mainly because of the non-preferential capital structure extended to health insurers in India, and no separate regulations for stand-alone health insurance companies. At present, none of the foreign companies have shown interest in entering the health insurance market on a stand-alone basis, which requires a basic equity capital investment of Rs1bn ($21.5m), particularly when it is generally accepted that the break-even period will be long, and, in fact, longer than that for life or other types of non-life insurance businesses. Cigna had been lobbying to have the equity capital for stand-alone health insurers reduced. Cigna's decision to exit the Indian insurance market is a set-back, not only for the Indian insurance sector, but for the Indian healthcare industry as well.

    International agreements
    As a signatory to the World Trade Organisation's (WTO) General Agreement on Trade in Services, which includes banking and insurance, foreign companies are expected to play a role in insurance in India. Several governments, which tried to initiate the process of reforms in this sector, have run into political roadblocks, slowing down the process of private entry. Reforms in insurance are to be seen as an integral part of the ongoing reforms in the overall financial sector which cover banking, capital markets, currency markets, and so on. A well-developed insurance sector promotes economic growth by encouraging risk-taking activity, and also has great potential as a mobiliser of long-term contractual savings. The latter are crucially needed for infrastructural development. Commercialisation of infrastructure provision has become an economic reality. Several factors have contributed towards the shift in thinking away from the traditional approach that regarded government as the main provider of infrastructure.
    These factors include massive investment requirements against a background of fiscal stringency, greater awareness of the importance of efficiency in infrastructure investment and delivery, changing technology making it easier to have user charges, and increased possibility of raising large funds for infrastructure investment on a commercial basis.

    The demand for long-term investment funds is ever growing. Most of this will have to be financed through domestic long-term contractual savings, and not foreign sources.

    While banking institutions mobilise short and medium-term savings, contractual savings institutions (such as insurance companies and pension and provident funds), because of their long-term liabilities, are natural investors for infrastructure projects. Contractual savings institutions can also play a major role in vitalising the secondary long-term debt market and also, if the investment norms permit, the securities market.

    Insurance is a multi-billion dollar business in India, and yet its spread in the country is relatively thin and shallow. There is tremendous potential for growth, and tapping this growth potential calls for reforms. The insurance reforms committee called for allowing private entry into insurance, setting up a strong regulatory authority and ensuring financial soundness of all the players. Successive governments in the past few years have been unable to implement the recommendations of the reforms committee, despite insurance general consensus on their desirability.

    The Insurance Regulatory and Development Authority (IRDA) has been entrusted with the task of framing the guidelines for pension reforms in India. The need for reforms in pension funds is imperative considering that the reforms process in the financial sector has over the last decade led to the middle income group losing money steadily both on the debt and equity instruments.

    The need for safe investments can be met by pension funds, analysts feel, and the opening up of the sector will see fresh opportunities for foreign investors into the sector.

    On August 29 and 30, as a step towards getting more clarity on this subject, the IRDA asked the LIC, State Bank of India and the Industrial Development Bank of India to work on the entire costing for the proposed pension reforms prior to the submission of its report to the government. This request came in the wake of the administration proposed by the Association of Mutual Funds of India and the Indian Banks' Association, which are not in keeping with that identified by the Oasis report.

    The Oasis report had identified that the cost of acquisition, management and disbursements of pension contributions had to be managed within 0.25% of assets under management and the real returns on an annual compounded basis to the investor should be 6%.

    The advisory committee for pension reforms headed by IRDA chief Rangachary, highlighted that integrated institutions on the likes of universal banks would be best capable to come out with a composite solution for an end-to-end management and servicing of pension funds across the country.