Insurance Sector Analysis Report 

Big Opportunity: India's Third Giant Leap

• The insurance industry can be broadly divided into two categories - life insurance and general insurance. Life insurance relates to risk cover for life or disability/accidents of an individual or a group of individuals while general insurance or non-life insurance covers risk to other insurable assets such as property, vehicles, health etc.
• 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. From a single insurer industry two decades ago, today the market is thriving with 24 life insurers and 34 general insurers.
• Insurance products are covered under the EEE method of taxation and are exempt from tax. This translates to an effective tax benefit of approximately 30% on select investments (including life insurance premiums) every financial year.
• The Government of India has released four flagship insurance schemes:

  Pradhan Mantri Jan Suraksha Bima Yojana: This scheme focusses on providing affordable insurance to people who are below the poverty line in rural areas.

  Pradhan Mantri Jeevan Jyoti Bima Yojana: This scheme provides life insurance for people employed within the unorganized sector.

  Atal Pension Yojana: This guarantees pension coverage to all citizens (in the unorganized sector) who join the National Pension System (NPS)

  Ayushman Bharat Yojana: Under this scheme, each beneficiary family will receive medical insurance coverage of Rs 500,000 which can be used to get treatment at public or private hospitals.

• As per the Union Budget 2019-20, 100% Foreign Direct Investment (FDI) was permitted for insurance intermediaries.
• Currently, there are 3 public sector and 3 private sector insurance companies listed on the exchanges.

• Supply
• Post the sector being privatized in 2000, there has been a steady rise in the number of players. Currently, there are 24 life insurance companies and 34 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
• Medium, given that entry is subject to license and regulations. However, other financial companies can enter the industry.
• Bargaining power of suppliers
• Distributors or agents have high bargaining power because they can influence customers in making choices
• Bargaining power of customers
• Bargaining power of customers especially corporates is high because they pay a huge amount of premium.
• Competition
• With entry of more players, the competition in the industry has been on a steady rise. Companies compete on price and also use low price and high returns strategy for customers to lure them.
• Threat of Substitutes
• Similarity in services makes switchover a potent threat. Investment oriented customers have switched to other avenues.

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• During FY20, the life insurance industry grew by 21% YoY to garner Rs 2,589 billion of new business premium. Private insurers grew by 5% YoY in individual business while group business saw a growth of 19% YoY. LIC recorded a growth of 8% in individual business and 39% in the group business.
• Within the life insurance industry, in the private sector, the top 7 insurers accounted for 78% of the market in FY20. Distribution arrangements with large banks has been a key driver for most of these insurers. Private insurers also increased their focus on the under-penetrated protection segment, both for individual and the group segments.
• Post the regulatory changes around unit linked products in September 2010, private life insurers shifted focus from a unit linked dominated product mix to a more diversified product mix. Share of non-linked products has increased from 74% to 83% for the industry and from 49% to 56% for private sector.
• Agency channel continued to be the predominant channel for the life insurance industry in FY20, mainly driven by LIC. There has been no significant change in the channel mix of the industry as well as the private sector from FY19 to FY20.
• The general insurance industry registered growth of 11.7% in FY20. The industry has grown at a CAGR of approximately 16.7% since fiscal 2001. The industry growth is driven by growth in Fire, Motor Third Party, Retail Health and Group Health insurance segments.
• The insurance sector saw rising investment during FY20. In April 2020, Axis Bank acquired an additional 29% stake in Max Life Insurance. In August 2020, ICICI Lombard Insurance agreed to acquire Bharti AXA General Insurance.
• In the aftermath of Covid-19 break-out, considering the prevailing situation, in April 2020 the IRDAI announced relaxation for payment of premium on renewals for Motor Third Party and Health insurance policies.
• The IRDAI also instructed insurers to expeditiously settle hospitalization claims related to coronavirus disease under health policies. It advised insurance companies to come out with policies to cover treatment costs for coronavirus infection, which has impacted millions of people worldwide.
• Moreover, the IRDAI stipulated that, in view of the emerging market conditions and to conserve capital with the insurance companies, urged all insurers to take conscious call to refrain from dividend payout from profits pertaining to FY20 till further instructions.

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• According to United Nations estimates, the working population in India is expected to increase by 26% by the year 2030 with a median age of 28 years. India has a very young population, especially compared to countries such as Japan, United States and China. These factors are likely to increase demand for insurance products.
• Increased urbanization is also expected to lead to an improvement in the standard of living and better access to financial products such as insurance. India's urban population is expected to increase by 42% by the year 2030.
• As compared to other developed economies, India remains vastly under-insured with respect to life insurance. The 'protection gap' in India at US$ 8.6 trillion is amongst the highest in the world. This, along with the evolution of the insurance distribution model and rising awareness about need for life insurance, enhances the opportunity.
• Non-life insurance penetration in India also continues to be low at around 1% of Gross Domestic Product against world average of 2.8%. Given India's demographic dividend, the sector is poised to reach newer heights in the coming years.
• The Indian health insurance market is underpenetrated. Only 1.5-2% of total healthcare expenditure in India is currently covered by insurance providers. Only 18% of people in urban areas and 14% in rural areas are covered under any kind of health insurance scheme
• Lack of government-funded health insurance options makes the market attractive for private players. Private insurance coverage is estimated to grow by nearly 15% annually till 2020. Introduction of health insurance portability is also expected to boost the growth of the health insurance sector.
• Investment in Information Technology (IT) to automate various processes and cut costs without affecting delivery will help drive additional sales for the sector. It is estimated that digitization will reduce 15-20% of the total cost for life insurance companies and 20-30% for non-life insurance companies. Starting October 2016, IRDAI has mandated having an e-insurance (electronic insurance) account to purchase insurance policies.
• New distribution channels like bancassurance, online distribution and NBFCs have widened the reach and reduced costs for the insurance sector. Firms have tied up with local NGOs to target lucrative rural markets.
• IRDAI recently allowed life insurance companies that have completed 10 years of operations to raise capital through initial public offerings (IPOs). Companies will be able to raise capital if they have an embedded value of twice the paid up equity capital. The Government of India plans to list Life Insurance Corporation of India (LIC) on the exchanges. The insurer is the oldest and largest in India, controlling 72% of the market and enjoying 66.2% share in total first-year premium collection. The total valuation of LIC stands between Rs 9,000 - 10,000 billion.

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What are the metrics used to evaluate insurance companies?

Insurance companies have some very distinct metrics of evaluation such as solvency ratio and embedded value (EmV).

Solvency ratio of an insurance company is the ratio of its net assets to the risks it has taken, usually net written premiums whereas Embedded Value (EmV) is the sum of adjusted net worth and the present value of the future profits.

The ratio of the company's market cap and the embedded value i.e the Price to Embedded Value Ratio (P/EmV) can be used to compare the valuation of life insurance companies.

One can also use Price to Book Value Ratio (P/BV) which compares a firm's market capitalization to its book value. A high P/BV indicates markets believe the company's assets to be undervalued and vice versa.

When is a good time to invest in the insurance sector?

The best time to invest in the insurance sector is when Price to Book Value (P/BV) valuations of insurance companies are attractive.

Where can I find a list of insurance stocks?

The details of listed insurance companies can be found on the NSE and BSE website. However, the financial information on these websites can be overwhelming.

For a more direct and concise view of this information, you can check out our list of insurance stocks.

Which insurance stocks were the top performers over the last 5 years?

General Insurance Corporation of India (GIC), ICICI Lombard General Insurance and New India Assurance were the top performers in terms of sales and profit growth.

GIC's performance can be attributed to its position as the dominant Indian reinsurer, its experienced management, and comfortable liquidity position whereas ICICI Lombard's performance can be attributed to the company's established market position as the leading private sector general insurance company, its healthy capitalization, and robust systems and processes.

Insurance companies such as HDFC Life that have listed more recently have also done very well. The stock of HDFC Life has given over 80% returns since its listing in 2017.

What kind of dividend yields do insurance stocks offer?

There is no consistent trend of dividends across the industry, with different companies having different dividend policies.

Which are the insurance stocks with the best shareholder returns?

Shareholder returns measure the total returns generated by a stock to an investor. This profitability helps gauge a company's effectiveness when it comes to using equity funding to run its daily operations. In the Indian stock market, ICICI Lombard General Insurance, HDFC Life, and SBI Life are the top insurance stocks right now with the best shareholder returns.

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