Indian Insurance Industry Report - Insurance Sector Research & Analysis in India - Equitymaster

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Insurance Sector Analysis Report 

[Key Points | Financial Year '17 | Prospects | Glossary]

  • The insurance industry can be broadly divided into two: life insurance and general insurance. While life insurance relates to risk cover for life or disability/accidents of an individual or a group of individuals, general insurance or non-life insurance covers risk to other insurable assets such as property, vehicles, health etc.
  • Penetration (premium as a percentage of GDP) of life insurance stood at 2.7% as compared to the global average of 3.5%. On the other hand, the general insurance penetration stood at a mere 0.8% as compared to the global average of 2.8%. This shows the huge untapped potential in the Indian insurance market.
  • The insurance sector is regulated by the Insurance Regulatory and Development Authority of India (IRDAI). The IRDAI opened up the insurance sector for private participation in 2000. Until 2000, there were only one life insurer and four general insurers in the country, all from the public sector. Presently there are 24 life insurance companies and 30 general insurance companies operating in the country.
  • General insurance can be broadly divided across fire, marine, motor, health, and crop product segments. Motor, health, and crop were the three biggest segments with shares of 39.5%, 27% and 16% of the general insurance pie in FY17. Life insurance products can be classified as non-linked and linked. Non-linked products are traditional products with a protection and savings element built in or only pure-protection products. Non-linked savings products can be further divided into participating products and non-participating products. Participating products have variable returns, as it is linked to the performance of the insurance company. Linked products' returns, on the other hand, are tied to the performance of debt and equity markets. Linked products started gaining traction from FY07. As of fiscal 2017, non-linked products was the biggest segment accounting for 87% of the total premium collected. However, the share was much lower for private players, constituting 56% of the total premium.
  • Reinsurance refers to the arrangement whereby insurers transfer part of the risks and liabilities to one or more insurers or reinsurers by entering reinsurance contracts and paying premiums. Reinsurance allows direct insurers to manage capacity, ease surplus strain, minimise fluctuations in claim payments and lapse exposure and also manage their portfolios.
  • The fortunes of the reinsurance industry are tied to the growth of underlying life and non-life insurance businesses. The size of the Indian reinsurance market was estimated to be around Rs 388 billion in FY17. Reinsurance of non-life insurance business accounted for a lion's share of 95% of the total premium during the year. The dominance of non-life in the reinsurance pie can be attributed to the better geographical spread of life policies compared to non-life and because the insured amounts are typically smaller in comparison, reinsurance need is correspondingly lower. In addition, life insurance is viewed as a protection-cum-savings product in India. Therefore, the uptake of pure life protection policies (term insurance) that can be reinsured is on the lower side.

How to Research the Insurance Sector (Key Points)

  • Supply
  • Post the sector being privatised in 2000, there has been a steady rise in the number of players. Presently there are 24 life insurance companies and 30 general insurance companies operating in the country.
  • Demand
  • Since the penetration of life and non-life insurance in the country is still lower than the global average penetration, there is a lot of latent demand waiting to be tapped.
  • Barriers to entry
  • Licensing requirement, investment in branch network, and regulatory requirements.
  • Bargaining power of suppliers
  • Rising share of the bancassurance and digitisation has enabled players to reduce costs and offer innovative and customised products while maintaining cost efficiency.
  • Bargaining power of customers
  • Since the reinsurance component in non-life insurance schemes is higher as compared to life insurance schemes, the customer's bargaining power in group general insurance scheme is better.
  • Competition
  • With entry of more players, the competition in the industry has been on a steady rise.

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Financial Year '17

  • Premiums income of life insurance companies grew by 14% in FY17 to reach 4.2 trillion driven by a 26% jump in new business premium. Factors such as falling inflation, an increase in financial savings, and healthy returns provided by equity and debt markets aided the growth. Life Insurance Corporation of India continued to be the market leader with a 72% share of the premium pie followed by ICICI Prudential, HDFC Standard, and SBI Life having 5% share each.
  • The commission expense to premium ratio for the life insurance industry has been on a steady decline after IRDAI capped the commission on linked products in 2010. The commission ratio for the industry stood at 5.3% in FY17. But as LIC sources a significant share of individual business through agents, its commission ratio at 5.5% is higher than 4.7% for private players. The operating expense ratio for the industry stood at 11.4%.
  • Premium income of general insurance companies surged by 32% in FY17 to reach 1.27 trillion, driven by a four-fold increase in crop insurance premiums as a result of the Pradhan Mantri Fasal Bima Yojana scheme. Even after excluding crop insurance, premium growth remained healthy at 18%. New India is the market leader with 15% market share followed by United India, National Insurance and Oriental Insurance having shares of 12.4%, 11%, and 8.5%, respectively.
  • For 2016-17, the claims to premium ratio stood at 86% whereas the expense to premium ratio was 30% for the non-life insurance industry. So, the combined ratio at 116% continued to exceed the premium earned by the industry resulting in an underwriting loss. The profitability of general insurance companies is dependent on underwriting performance and investment returns. The industry posted underwriting losses of Rs 110 billion in the first nine months of FY17. Despite the underwriting losses, the industry has been profitable at the net level, supported by healthy investment income both in the form of income from interest, dividend, rents, and profit from sale of investments.

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  • Robust GDP growth translating into rising income, low inflation driving overall savings, growing urbanisation enhancing financial literacy, and increasing awareness in the lower sections of the society courtesy the government's strong push are likely to be growth drivers for the insurance sector. In the last two years, the government introduced the Pradhan Mantri Jeevan Jyoti Bima Yojana, a life insurance scheme and Pradhan Mantri Jeevan Suraksha Bima Yojana, an accidental death and disability cover for the bottom of the pyramid. Earlier, in 2014, it launched the Pradhan Mantri Jan Dhan Yojana, which provided insurance and health cover for people aged between 18 and 50, and having a savings bank account. Other government sponsored life insurance schemes include the Aam Aadmi Bima Yojana, the postal rural life insurance scheme, and health insurance schemes such as ESIS and Rashtriya Swasthya Bima Yojana. The government's massive push for greater financial inclusion through schemes such as Jan Dhan Yojana will increase awareness about the need and benefits of life and health insurance, and support the growth of the insurance sector.
  • Health insurance coverage in the country remains abysmally low with a mere 27% of the population having a health cover out of which only 20% is provided by commercial insurance providers (life and non-life) with the remaining covered under government sponsored schemes. Factors such as rising cost of healthcare, constraints for government spending, and growing demand for quality healthcare with rising incomes will drive the demand for health insurance in the country. Further, the government wants to increase the cropped area covered by the Pradhan Mantri Fasal Bima Yojana from 30% to 50% that will aid the growth of non-life insurance business in the country.
  • Another demand driver for the insurance sector is the low pension coverage. As of 2014, around 8% of the retirees within the private sector receive a pension providing a huge opportunity for insurance companies. Further, the provision of additional tax benefits to the extent of employers' contribution to the New Pension Scheme will aid growth in pension premium.
  • A host of regulatory changes are expected to support the long-term growth and development of the industry. In 2015, the foreign ownership cap was raised from 26% to 49% of paid-up equity capital. Insurers have also been allowed to raise hybrid capital such as subordinated debt and/or preference shares. These measures are expected to fund the future growth of the industry. Large foreign reinsurers have been permitted to set up branches in the country benefitting direct insurance companies in managing their risk coverage more efficiently.
  • IRDAI has also made regulatory changes to provide greater protection and benefits to consumers. In 2010, the front-loading of costs for linked insurance products was reduced and lock-in period for unit linked policies (ULIPs) was increased from three to five years making it a long-term investment product with potentially better returns. With the decline in commission and increase in the lock-in period, selling of linked products became a less-lucrative proposition for agents thereby putting a plug on miss-selling.
  • In 2016, the IRDAI made changes in the commission structure to bring more consistency into the commissions paid on regular premium based insurance products. The commission on single premium was capped at 2% of the premium and the premium on regular insurance products with a paying term of five years, was capped at 15% in the first year and 7.5% thereafter. In case of pension products, the commission was capped at 2% of the single premium and in case of regular insurance products, the commission was capped at 7.5% for the first year and 2% for each renewal.
  • The protection margin for India was the highest amongst all the countries at 92% in Asia Pacific, as per a Swiss Re report. This means that for US$ 100 of insurance protection requirement, only US$ 8 was actually insured as of 2014. This indicates the absence or the inadequacy of pure protection coverage (term insurance) for a large part of the population and immense potential for the insurance industry.

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  • Combined ratio: This is the measure of profitability which is used to indicate how well the general insurer's underwriting operations are performing. The combined ratio is calculated by taking a percentage of claims incurred divided by premiums earned plus percentage of expenses of management and net commission and then dividing the quotient by premium. A ratio below 100% indicates that the company is making underwriting income while a ratio above 100% means that the company is paying out more money than it is receiving from premiums
  • Underwriting loss: premium earned inadequate to cover claims and claim related expenses, commission and operating expenses resulting in a loss at the underwriting level
  • Reinsurance: The transaction whereby the assuming insurer ("reinsurer"), in consideration of premium paid, agrees to indemnify another insurer ("ceding company") against all or part of the loss which the latter may sustain under a specific policy or group of policies which it has issued
  • Non-participating policy: Policies without participation in profits, means policies which are not entitled to any share in surplus (profits) during the term of the policy
  • Linked Product: life insurance, pension or health insurance contract under which benefits are wholly or partly to be determined by reference to the value of underlying assets or any approved index

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