The coming year will assume a significant position in the history of Indian insurance industry. It denotes completion of a decade of open-market; ending of oligopoly and entry of private sector insurance companies; and the regime of a new development oriented regulatory authority—the IRDA (Insurance Regulatory and Development Authority).
The market continues to attract new capital; barring a handful of mega-risks, there is more than adequate capacity to cover all the risks within the market. Post de-tariffing, competition for the existing pie intensified and premium-rates in all classes took a dip. However, insurers are chasing premium and booking losses and working up unviable combined ratios. It is felt that the bottom has been reached and an upswing in the rates is inevitable.
At present, the general insurance market has 20+ players already and some more large international ones are expected to enter shortly. Companies today are coming up with new ideas to stand out and they are offering the existing and prospective customers, new technology platforms that would streamline the business and would also be beneficial to them.
The industry is going through a challenging phase now because of the general economic slowdown and this phase is expected to continue for some time. According to industry experts, the market will grow by 18% a year and is expected to reach Rs. 900 billion by 2015.
Despite there being over 30 players (in both general and life), the market is still under penetrated. In the general insurance sector, the penetration level is just about 0.65%. In India, the urban market is the major contributor for general insurance. Though the rural market does not have any significant contribution to this sector, it is growing rapidly over the past few years and is slowly becoming a huge potential market for general insurance in India. To capture the rural market, companies are adopting strategies to increase awareness levels among the people. This, they are achieving through increasing the distribution levels and access points. Business generation through multiple distribution channels is the main agenda for these companies. Some of them are even adopting the cutting-edge technologies like e-marketing and institutional marketing for deeper penetration in the rural market.
On the property and liability insurance segments—niche marketing and competition for small and medium size companies would be the challenge for the next two years. Project-insurance sector will continue to be the major work-horse; with continued economic development spurring investment in power sector, manufacturing and other industries, roads and buildings. Insurers with right technical support and adequate capacity would be able to benefit from this segment.
Brokers and agents—who upgrade their technical competence—are expected to play an increased role. Hence, it would be wise for insurance companies to support competent brokers and agents. These much needed intermediaries with help from insurers and re-insurers would have to take up a major challenge of educating the under informed customers in risk-management and risk improvement; accept more reasonable policy deductibles and seek better policy coverage.
Newer pricing methods need to be developed for commercial lines. Underwriters should give up the old tariff-based (T-x%) approach and develop experience-based and actuarial-supported models for pricing. Most of the large risks have already well developed risk-management departments and deploy ERM (enterprise risk management) techniques; with the right pricing, and capacity, this segment still offers good pickings. The SME (small and medium enterprise) sector (property) needs careful cherry-picking and the right marketing approach would yield dividends.
Catastrophe risk management system has to become robust as the insurance spreads in the semi-urban and rural areas. With increased penetration, rapid economic development in rural areas, insurance companies will face losses from events like floods and catastrophes in the interiors which hitherto have not produced significant insurance losses. It is vital for insurers to monitor their aggregate exposures closely and buy adequate catastrophe protection. Choices of India-specific cat-modelling software tools are now available and most of the insurers are using these tools. With increased awareness in this area, insurers are buying more and more catastrophic cover; notably the cover being purchased has increased from 100 years to 250 years return period cover.
Health insurance is a lucrative segment; it is poised to record a massive growth in India in the coming years. Half of the country’s population is expected to come under the health insurance umbrella in the next seven years, according to an Ernst & Young study. A mere 12% of the population is currently covered by healthcare. According to an Economic Times report, the government’s proposal to scale up the foreign direct investment (FDI) in the insurance sector from 26% to 49% will boost the healthcare business. In the coming years India might witness more standalone healthcare companies too as they will have an edge in the future market scenario, says an industry expert.
The recent development in the general insurance sector is the activities by the insurance regulator. The IRDA has been very stringent and has been keeping a close-watch on the functioning of all the insurance companies. The latest regulation from IRDA is on health insurance portability. In the future, general insurance industry will be very much in the limelight than any other industry facing recession now.
Online selling of insurance policies to discerning customers, who access the Internet will gain momentum. Typically motor, travel and health policies will be sold more online. Many insurers have already realised this and are creating separate verticals to exploit this segment. The interplay of technology & telecom solutions will be a major factor determining the growth of the industry in the future.
Till recently, micro-insurance on the lines of micro-finance, is thought to be a magic word and insurers planned to bring retail products to suit this segment. Another area of opportunity is the government initiatives in health and PA covers for the populace. Rashtriya Swasthya Bima Yojana (RSBY) schemes and group PA covers sponsored by state and central governments are providing huge opportunities to insurers. While these schemes provide volumes, pricing and claims management is critical for success.
The Indian customers are demanding and expect best in class service levels so the entire insurance industry will have to work towards becoming more customer-centric in the areas of product development, policy issuance as well as claims settlement. They would need to constantly do market research to update their products, services & processes to keep up with the changing needs of their customers.
Completion of 10 years under new regime opens up new opportunities to those private sector insurance companies which started in 2001. According to law, they will become eligible to raise capital from public and make IPOs (initial public offerings). Obviously, the promoters would want to skim the cream; but timing of an IPO is crucial and more importantly, to present the right financials and a strong-balance sheet is imperative.
The public sector companies will definitely face an extremely competitive situation from the private sectors and the private sectors will in turn have to prove their competency to gain an edge over the public sectors and to grab a major piece of the market pie. Another major development in the future would be the number of private insurers in the space. This is expected to grow as various foreign companies have announced intentions to establish joint ventures. Given the low level of penetration in some segments, this trend towards foreign participation is likely to continue for some time. So, India will witness a major competition in the general insurance market and this definitely indicates a tough but exciting road ahead for the existing and upcoming players.
One major problem affecting the industry, like in all developing economies is the shortage of trained insurance professionals and technicians at all levels. So companies that are able to recruit and grow talent that continue to provide innovative insurance solutions for the underserved Indian market will be the ones that will rise and shine in the general insurance industry. The market is large and set for rapid growth but the ones that take the required calculated risks, have the right technical expertise, do not blindly go after market share and are customer-centric in their approach to the market will be the ones to benefit from this growth and become one of the biggest and best run insurance companies in the world.
The author is the CEO & MD of Bharti AXA General Insurance.