The insurance industry in India appears full of life. Having grown at double-digit rates in the last couple of years, it is no surprise that new players are still queuing up to enter the market.But despite the huge untapped market potential that India has to offer, players may have to brace themselves for a slight dip in growth momentum, given the industry’s high reliance on market-linked insurance products. The unit-linked insurance policies, whose sales peaked in the last few years due to the bull run in the equity market, now make up as much as 85-90 per cent of the total insurance sales.
Slowdown – not yet
Would the recent downtrend in the equity market and the sector’s dependence on market-linked products pose challenges? The growth in premium collections during recent months provides no cause for concern. For FY08, while the industry grew by about 31 per cent, private players grew by 83 per cent; LIC registered a flat growth. However, the growth numbers for March 2008 were not as rosy. For private players, the growth in new business premium slowed down to 54 per cent in March.
The slowdown was sharper for LIC, which saw a 16 per cent decline in new business premium for the month. There, however, has been a rebound in the sector’s growth since then. Private players witnessed a 72 per cent year-on-year growth in new business sales in May 2008. This has also been on the back of a reshuffle in market shares between private players and the LIC, whose market share reduced to 38 per cent in May; it was about 48 per cent in FY08.
Players also hold the view that blips in the equity market would not materially impact collections, as ULIPs, as a product, target long-term investments. Mr Kamesh Goyal, CEO, Bajaj Allianz Life, feels, “Since the ULIP portfolio is managed with a long-term perspective, the hindrance of short-term swings in the market is countered to a great extent.” Will the growth continue if the equity markets fail to recover from their recent setbacks? The industry is not too sure of that. “The industry growth will definitely moderate. But that will be driven by both a high base effect and waning appetite for equity markets,” says Mr N.S. Kannan, Executive Director, ICICI Prudential Life Insurance Company. ” Despite that, the private sector is likely to manage a good 40 per cent growth this year”.
Most players are agreed that for long-term sustenance, there is a need for a greater understanding of equity-linked products. Any uninformed buying on the part of the policy holders or mis-selling by the insurance agents can bring the growth story to a halt in the long run. “Mis-selling will definitely impact the market badly,” says Mr Gary Bennett, Managing Director and CEO, Max New York Life. While currently there are not many genres of insurance products in India, Mr Bennett feels that India will, in a few years, see a host of new products getting introduced in the market. “ULIPs are a fantastic product, but they are not the only product. There is much more to come in India.”
Distribution holds the key
Product innovation apart, distribution looks to be a key ingredient for driving growth in the sector. “Insurance is still a push product in our country. So distribution is extremely critical,” feels Mr Kannan. “Agents need to create the need for insurance, especially in emerging markets like India, where research shows that life insurance is the last thing in the list of future purchases for the emerging middle class,” says Mr Goyal. So, while the industry’s fate may depend on the evolution of the need-based insurance products , the growth of individual companies would hinge on their distribution reach.
Mr Bennett says, “Distribution relationship is critical to the business as products can be replicated in no time.”
In a market that is quite homogenous, as far as insurance products are concerned, relationships with clients may be the only differentiating factor. Distribution capabilities and network cannot be easily replicated by competition; whereas, popular insurance products that manage to stir interest are easily imitable and can be offered by other players almost immediately.
“Production innovation can give a lead time of only six months before the product is replicated in the market. So that is the only short-term positive,” feels Mr Kannan. “For long-term growth, we need to look at continuous innovation in both products and distribution channels.”
Share of challenges
Expansion of the distribution network, however, has its share of challenges. Insurance companies with a direct distribution presence or the ones having distribution tie-ups with the promoter group’s bank (bancassurance) may have an edge over competition, given the IRDA’s regulation, which allows banks to sell policies of only one insurance company.
Insurers, who depend on other banks to cross-sell their products, may face challenges due to consolidation between banks. Higher dependence on banks that are potential acquisition targets maycall for the insurance company to periodically re-look its distribution tie-ups. The merger of Centurion Bank of Punjab and HDFC Bank is a case in point. Aviva Life, which sells its insurance products through Centurion Bank of Punjab, may have to find another bancassurance partner because after the merger, the bank may not be able to sell Aviva’s insurance policies. HDFC Bank already sells HDFC Standard Life’s insurance products.
More room for growth
, India however continues to be counted among the fastest growing insurance markets. “The Indian life insurance market has significant potential on account of low insurance penetration combined with low expenditure on life insurance,” says Mr Goyal. Even today, only about one-third of the addressable population in the country is covered under insurance. And the ones who are covered are under-covered, as over the last ten years income levels have shot up significantly. “Premium-to-GDP ratio in India is around 4.5 per cent. In UK, which is also a service economy, this ratio is 13 per cent. So, I think we are still under penetrated as far insurance is concerned,” says Mr Kannan. “Even if we consider the sum assured to GDP ratio, India is at 45 per cent, which is still below other Asian markets such as Singapore.”
It is perhaps this under-penetration that has enticed many newer players to enter our insurance market. HSBC, Fortis and Aegon are among the recent foreign players who have tied up with Indian companies to jointly float new insurance companies. The entry of new players would not only peg up the level of competition in this industry, it will also call for higher investments on distribution and infrastructure network by existing players.
Challenges galore for new players
New players, however, may find it more difficult as they will have much more to grapple with. Besides the higher capital expenditure, they can also have a tough time finding the right bancassurance partner. So, it is little wonder that some of the new insurance ventures have been floated with either domestic banks or with players who enjoy a high retail presence. For instance, IDBI Fortis Life Insurance Co Ltd, a joint venture between IDBI Bank, Federal Bank and Fortis will vend its policies through both the banks’ branches. On similar lines, HSBC’s insurance venture may ride on its branch network. “The reason for some of the private sector banks entering the life insurance sector can be to leverage on their customer base and branch network,” feels Mr Kannan.
“But new players should be willing to commit huge amount of investments for long term growth in this industry.” Among other companies that have entered the life insurance arena are Future Generali and Religare-Aegon. While they do not have any obvious bancassurance tie-ups in place, it bears attention that the Indian partners in both these ventures have a significant retail presence.
Source: Srividhya Sivakumar, (The Hindu Business Line)
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