The Indian insurance industry seems to be in a state of flux. While there has been a perceptible change in the market dynamics since liberalisation and economic reforms, a considerable amount needs to be done for future growth and development of the market in an orderly and sustained manner, according to Confederation of Indian Industry (CII) and Ernst & Young Report titled, ‘Insurance industry: Challenges, Reforms and Realignment’.
The report was released by J Hari Narayan, Chairman, Insurance Regulatory and Development Authority (IRDA) at the CII flagship event—15th Insurance Summit on ‘Hard Realities and Opportunities in Insurance Sector’. The event was organised in Mumbai on 6th August. The report outlines the current issues and challenges faced by the insurance industry and the steps that could be taken to ensure that the industry achieves its potential.
Notwithstanding the strong improvement in penetration and density in the last 10 years, India largely remains an under-penetrated market. The market today is primarily dependent on push, tax incentives and mandatory buying for sales. There is very little customer pull, which will come from increasing financial awareness along with increasing savings and disposable income. Till then the stakeholders will have to strive for product simplification, increasing transparency of cost and pricing, effective distribution and improving customer servicing to drive sales. In the long run the insurance industry is still poised for a strong growth as the domestic economy is expected to grow steadily, leading to rise in per capita and disposable income, while savings are expected to be stable.
For the first time in 12 years, the life insurance industry witnessed a decline in the first year premium collected in FY12, which declined from Rs. 1,258 billion in FY11 to Rs. 1,142 billion, a drop of approximately 10%. There is a perceptible shift in the life insurance market as the sales of unit linked insurance plans (ULIPs) witnessed a drop in sales and customer move toward traditional products. The business model for insurers has been changing continuously for the past couple of years on account of regulatory changes. While the regulatory changes were aimed at customer protection and increasing transparency in pricing and operations, it gave the industry very little time to adjust, leading to a lot of uncertainty in the market environment.
In addition to challenges in growth, pricing and profitability, life insurers are also faced with significant challenges on the distribution front with a reducing agency force and uncertainties in alternate channels such as bancassurance. The cap on commission and expense ratios further imposes restriction on the competiveness of insurers and limits the expansion of distribution channels.
The non-life premium underwritten grew by 23% in FY12, reaching Rs. 530 billion from Rs. 430 billion in FY11, but the segment is saddled with considerable underwriting losses and pricing issues in addition to high claims ratio exerting increasing pressure on profitability. Insurers need to strengthen their risk assessment and underwriting mechanisms. There is a requirement today for long-term assets, benefit and health policies to serve people till the time insurance in India is considered as a household requirement than just a temporary risk-mitigating tool.
Furthermore the pace of reforms needs to be increased especially in the areas of pricing and reinsurance. The three standalone health insurers also performed well with a premium underwritten growth of 13% for FY12, reaching Rs. 17.3 billion from Rs. 15.4 billion in FY11. Health insurers need to balance their portfolio, which leans heavily towards group insurance and introduce more products covering individuals. The claims and fraud monitoring process also needs to be simplified, strengthened by stricter guidelines for third party administrators. Despite strong growth, the non-life segment also faces stiff challenges in distribution, pricing and claims management and these issues need to be addressed on a priority to sustain the growth.
The industry is at an inflexion point and despite the signs of stress there is a silver lining. The insurance industry stands at the threshold of moving toward a stable position, delivering “stable profitable growth.” Most players will now look to reassess the entire business model from product, pricing, risk management, acquiring rural customers, distribution, claims and fraud management and a realistic pace of growth. The industry is also likely to witness consolidation as and when the regulator finalises guidelines for mergers and acquisitions.
The stakeholders should work toward maintaining a favorable environment for stable growth, increasing the penetration of insurance to rural and underpenetrated areas and increasing the contribution to the economy.