The Associated Chambers of Commerce and Industry of India (ASSOCHAM) and McKinsey&Company have projected that the size of Property and Casualty insurance (P&C) industry would exceed Rs. 500 bn (US$ 11.2 bn) in total premiums by 2012-13 from current level of close to Rs. 370 billion (US$ 8 bn) in 2009-10.
However, the study has projected that profitability will remain low with RoEs (Rate of Return) at 7 per cent due to stiffer competition.
“Given the macro economic situation, the underlined demand for P&C insurance will continue to grow as players will compete aggressively for market share, resulting in low pricing levels across both personal and commercial segments”, said Dr. Swati Piramal, President, ASSOCHAM while releasing the study.
Since deregulation of insurance industry in 2000, the P&C insurance sector has been growing steadily and has reached a size of Rs 370 billion (US$ 8 billion) in 2009-10.
This growth has been primarily driven by private sector players, whose premiums grew at 40 per cent between 2003-2004 and 2000-2010, as compared to 8 per cent for public sector players over the same period. However, both on an absolute and relative basis, compared to other markets and other financial asset classes, penetration levels are extremely low.
The paper further points out that as a result the sector has not yet been able to achieve its objective of deepening’. For example, P&C penetration in India (defined as premiums to GDP) has remained flat at 0.6 per cent between 2004-05 and 2008-09. In comparison, China’s penetration has increased from 0.83 per cent to 1.14 per cent over the same period, with the corresponding figures for Brazil being 1.49 and 1.59 per cent and for Russia being 2.14 and 2.3 per cent respectively.
This low penetration in the Indian market is the result of a combination of low asset ownership levels, low usage levels of insurance and extremely low level of pricing of premiums. The rate of increase in penetration of P&C insurance is also extremely low as compared to other financial asset classes in India. Between 1994-1995 and 2008-09, the relative increase in penetration has been only 1.6 times for P&C, as compared to 1.8 for mutual funds, 4.2 for life insurance and 5.3 for mortgages.
The ASSOCHAM chief further said that the Indian general insurance consumer is fairly reactive when purchasing insurance and rarely drives the process of choosing insurance products. This is particularly true for retail buyers. In nearly 50 per cent of cases, buyers initiated the process of insurance policy renewal only after the policy expired.
Further, in over 80 per cent cases, renewal process is initiated by sales representative, rather than being self-initiated. This `inertia’ and low involvement translates into high drop-off rates post the first time purchase of the products: correspondingly, penetration is low.
The paper, however, adds that there is a scope for improvement in business models adopted by Indian P&C players. The industry has driven several innovations in products, distribution channels and operations in the past few years. For example, new products were introduced in the motor, health and SME lines. However, the pace of innovation has not matched that in foreign markets: the product range in India remains limited; the share of alternate channels is low, with the balance of power resting with traditional channels. Underwriting practices have weaknesses that need to be addressed.
Further, operational efficiencies are also low with claims ratios in the industry being one of the highest in the world and expense ratios remaining high due to low productivities and lack of scale. The average combined ratios between 2006-07 and 2008-09 for Indian public sector players was over 120 per cent , while for the private sector it was over 100 during the same period. This compares to combined ratios of 84 per cent for Brazil and South Africa, in the low 90s for UK, Germany and Brazil, 97 per cent for the US and 106 per cent for China.