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Growth Of Insurance In India And China - Market Trends Common to China and India

Growth Of Insurance In India And China

Many local and international players are attracted by China's and India's market prospects - we are seeing three main trends that describe the environment they will have to operate in:
  • High growth potential in both markets
  • Competition is intensifying rapidly
  • Regulatory obstacles remain
High Growth Potential In Both Markets

Both China and India, despite their phenomenal growth over the last decade or so, retain significant growth potential. Penetration remains relatively low; the demographic trends are favorable; and these nations are in the middle of an incredible, sustained economic boom.



Insurance penetration, as a percentage of GDP, was 1.8 percent and 4.3 percent respectively in 2007, which is low compared with the more developed nations in the region. Hong Kong, for example, was at 10 percent, while Taiwan was at 13 percent - which might be an indication of what is still to come in China and India. Per capita premium is also low, at US$47 per person per year in China and US$46 in India, a mere 2 percent of equivalent expenditure in Japan.

These statistics suggest enormous latent demand which is in the process of being converted to sales, especially among the growing, and increasingly wealthy, middle class. Nominal per capita GDP is expected to nearly double between 2007 and 2012 in China to around US$5,000 per year, and in India to US$2,000. It is estimated that in China another 70 million households, earning more than US$10,000 per year, will join the ranks of the burgeoning middle class in just another five years. That figure will be nearly 30 million in India. Furthermore, this growth is expected to continue beyond the next decade. 

The McKinsey Global Institute's publication, The Bird of Gold: The Rise of India's Consumer Market, predicts growth of the average household disposable income in India to accelerate both in urban and rural areas. For urban households, disposable income will increase by 5.8 percent annually in real terms from 2005 to 2025 - accelerating from the 4.6 percent annual growth rate over the past two decades. Rural income would grow at a slower rate of 3.6 percent, but will nevertheless surpass today's average urban household income by 2025. 

In China, 65 percent of urban households will have an annual income over US$2,700 by 2025. In the same year, urban China will comprise of about 940 cities and towns with a total urban population of around 930 million people.

As the two countries' per capita GDP grows, this will drive the penetration of financial services in general, and life insurance in particular. Household savings rates are high, at 14 percent and 27 percent, in 2007, for China and India respectively, compared with 4.4 percent and -1 percent in the US and UK. This will accelerate insurance penetration and per capita coverage. 

In our Personal Financial Services surveys, conducted over the past decade in Asia, insurance comes out every time as one of the first financial products bought by the emerging, Asian-middleclass customers. As such, there is no doubt that the demand for savings, protection, and investment products will continue to grow rapidly over the next decades.

Competition Is Intensifying Rapidly

China and India's life insurance markets share a common history of stateowned monopolies dominating the home markets. The Chinese life insurance industry was nationalized after the establishment of the People's Republic of China in 1949, leading to the formation of a single entity - the People's Insurance Company of China (PICC). This company was later divided into two entities - PICC and what became China Life.

Similarly, India's LIC enjoyed a monopoly for nearly 50 years. The Indian life insurance industry was nationalized in 1956 when frequent insurance fraud attracted the attention of Indian legislators. LIC was formed with the intention to protect policyholders and was created by consolidating 245 private life insurers and other entities offering life insurance services.

In both markets, recent deregulation opened the doors to new, aggressive attackers. As of 2007, there were 53 life insurers in China, whereas in 2004, there were only 28. India started with only 4 private insurers when the market opened in 2000 - by mid-2008, there were 20.

Life for new attackers is not easy. In both markets, it is becoming increasingly difficult to capture additional market share. With incumbents fighting back and private domestic and foreign joint ventures innovating and bringing world class practices into these markets, the cost of competing keeps rising. Indeed, the "landgrab" phase for these markets might end much earlier than expected and a stronger focus on value creation will prevail.

The challenge is enormous for new entrants, or those looking to enter these markets. Playing catch up with a "me-too" approach is an increasingly difficult option; new entrants are already considering the adoption of more focused approaches. In India, some new entrants are deliberating strategies that will pinpoint specific customer segments or product classes (for example, pensions and health insurance). Nonetheless, both China and India are still very much at the beginning of their growth curve. This should continue to offer very attractive long-term opportunities, even for late entrants - if they can overcome the operational challenges and adopt a long-term perspective.

Regulatory Obstacles Remain

China and India remain two of the more tightly regulated markets in Asia; deregulation came much later than in most other markets. In China, waves of liberalization have allowed new players to compete for market share following the end of China Life's monopoly. 

In the late 1980s and early 1990s, we saw the emergence of domestic insurers such as Ping An and China Pacific, and, in 1992, AIG was the first foreign insurer to re-enter the China Life insurance market. By 2007, China Life's market share in new life insurance premium decreased to 40 percent. In India, at least 20 private life players have entered the market since 2000, most of them foreign-domestic joint ventures. Over the last 7-8 years, these private players have grown rapidly, taking about 50 percent of new business on an annual premium equivalent (APE) basis for 2007-08.

Although regulations have eased, they are - in particular, for foreign competitors - still more restrictive than in many other Asian countries where foreign ownership of life insurers has been largely deregulated with a few exceptions. In China, foreigners are limited to a 50 percent equity stake for a joint venture but equity stakes in local companies are restricted to 24.9 percent. 


A single foreign investor is limited to a maximum of a 20 percent stake, but the China Insurance Regulatory Commission (CIRC) sometimes grants exceptions, such as the Fortis investment into Taiping Life, in which the Benelux firm took a 24.9 percent stake. In India, the limit on foreign ownership is even lower at 26 percent, although this has not prevented foreign players from having effective operating control in some instances. These regulatory constraints mean that foreign players have no choice but to find suitable joint venture partners. 

Today, foreign joint-venture insurers' shares of the Chinese and Indian markers are still relatively small compared with the rest of Asia - in China they had an 8 percent market share in 2007 and in India, foreign joint ventures had 18 percent of market share in 2006.

The preceding few posts described some of the commonalities between China and India. Yet despite the inevitable comparisons, China and India are very different markets, with more differences than similarities. We will now highlight the rapid development of these two countries - arguably the most important two markets for global insurers in the next decade. To find out more, you can check Growth Of Insurance In India And China.