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History Of Insurance In India - Rediscovering Private Insurance

History Of Insurance In India

The year 2000 was a watershed for India. After 50 years of state monopoly, the market was reopened to private insurers. With that reopening, the Indian life insurance market ballooned from US$9 billion in gross premiums in 2000 to US$52 billion in 2007. It is rapidly catching up with the rest of the large Asian markets, and we would expect it to become Asia's third-largest insurance market by 2012, and feature in the top 10 globally. 

Market penetration remains modest by international standards at 4 percent of GDP but it is already higher than levels that prevail in China, while GWP per capita of US$46 is at par with China and significantly greater than Vietnam, the Philippines, or Indonesia. With a forecasted real GDP growth of around 8 percent, India is offering similar long-term growth potential to China. 

Equally, economic development is spreading from the large urban centers to smaller towns and even rural areas, and households are entering the ranks of the middle class at breakneck speed. For example, households earning more than US$10,000 per annum are expected to grow from 9.6 million in 2007 to 32.8 million in 2012 - creating a whole group of customers who can afford life insurance.

The tied sales force remains the dominant sales channel, accounting for nearly 90 percent of new individual business sales in 2007. Major players have aggressively scaled up their sales forces over the past seven years. LIC still has the largest sales force in absolute numbers, with roughly 1.2 million agents; those of most other players have been growing by mid-double digits. Meanwhile, bancassurance grew from 6.2 percent of new business premium in 2004 to 9 percent in 2007. This is still low compared to other Asian markets, and in India many state-owned and rural banks have not yet started to sell insurance products at all. But as more and more banks take up bancassurance, this is expected to be among the biggest growth drivers in the future.

In terms of products, the aggressive push to sell investment-linked policies has contributed to the fast growth of the Indian market. Investment-linked sales grew from 9 percent of new business premium in 2004 to 75 percent in 2008. Investment-linked sales alone contributed to around 92 percent of absolute new business premium growth during that period. The perception of life insurance being an investment tool, as opposed to a means of regular saving has also been a major driver of this trend. 

Indian customers appear to be more speculative and short-term driven, based on a survey of insurance agents in seven countries. These products have done very well because of the strong performance of the local stock market. It remains to be seen what will happen to investment-linked, single-premium products as the stock market weakens. In particular, the trend of some private insurers to sell investment-linked policies on a negative embedded value (EV) basis is worrisome. Investment-linked products account for more than 85 percent of premium from private players; for players wanting to build market share, these are the easiest products to push into the market.

Since the deregulation of the Indian market in 2000 there has been a major shift in the competitive landscape. LIC's market share of new business premium dropped from 100 percent to 64 percent in 2007, as at least 20 private players entered the market including international insurance companies such as Prudential (UK), Allianz, and Standard Life. Nonetheless, LIC, which is still state-owned, is holding onto its leadership position and is trying to fight back. 

Despite an initially steep decline in new business share to 71 percent from 2000 to 2005, LIC still generated 74 percent of new business premium in India for 2006. LIC fights to maintain market share by drawing on what worked for the new entrants (that is, product innovation and aggressive hiring of more agents) and leveraging its formidable brand (India's most recognized financial services brand) and massive distribution. 

LIC has 2,048 branches, 100 divisional offices, eight zonal offices and, as we have discussed, retains over one million agents. In the fiscal year 2006-07, LIC's number of policyholders is said to have exceeded a whopping 200 million (collectively, the policyholders could become the world's fourth most populous nation).

McKinsey's consumer research confirms that over 97 percent of consumers are aware of LIC without any kind of prompting and over 90 percent of Indian consumers are inclined to approach LIC when in need of insurance. There has also been a conscious push to improve agent productivity. Based on our research we estimate that the value of new personal business per active agent rose by an impressive 70 percent from 2005-06 to 2006-07.

Nevertheless, LIC's market share may still be on a long-term declining trend. To hold market share, LIC actively pushed single-premium policies. When regular-premium products regained popularity, LIC experienced a steep dive in market share, dropping to 45 percent in April and May 2008. At the time of writing, LIC was still struggling with the fall in market share. The final outcome is yet to be decided.

At the same time, some private-sector players have reached a meaningful scale. The largest among them have written almost two million policies in over 500 locations across the country. The two largest private life insurers - ICICI-Prudential and BAJAJ-Allianz - accounted for nearly 50 percent of non-LIC market share in 2006. 

Significantly, these players are entering second- and third-tier towns, and even rural areas. For instance, ICICI-Prudential, through a bancassurance tie-up with 10 regional rural banks, has access to about 10,000 rural and semi-rural bank branches in five Indian states. Most of the private-sector players are growing either through bancassurance or increasing their sales forces.

The massive size of these sales forces mirrors the challenges in China. In fact, we were struck by the similarities of the nature of these sales forces in both markets. Saddled with low productivity, high turnover, part-time agents, and nonstandardized practices, the Indian insurers face exactly the same challenges as Chinese insurers do. They will need to standardize operating practices across the country, reduce turnover by focusing on better recruiting processes, and focus on upgrading professionalism over time. Investment in management talent and supporting infrastructure will also be required.

New entrants continue to be interested in the market, with most domestic entities choosing to partner with a foreign insurer. Despite a 26 percent foreign ownership cap for life insurance, only two out of 20 private Indian insurers in 2007 were 100 percent domestically owned.

There is talk of the government moving to increase the maximum foreign share in joint ventures from 26 percent to 49 percent. If this is so, it is likely to attract even more foreign insurers who are currently hesitant due to the 26 percent ownership cap. Market insiders believe that foreign insurers are not, and really should not, be deterred by the ownership cap. The current regulatory situation has not prevented some foreign insurers from effectively controlling the management of their joint venture partnerships, such as the BAJAJ-Mlianz venture, which is in essence run by Allianz. But it is important to note that more often than not, it is the domestic Indian partner who has management control.

Once in the market, a single license allows access to all Indian cities and towns with no geographical restrictions (a situation very unlike that of China). Similarly, there are no restrictions in terms of the number of branches an insurance player can open and the product lines that the branches can sell. 

There are, however, regulatory challenges that players in India must contend with. One key challenge is the current bancassurance regulation, which restricts any bank to distributing the insurance products of only one life insurer. This creates tremendous competition for distribution deals with the better banks in the country (deals are typically renegotiated every three years). An open architecture regulation that will allow banks to market multiple manufacturers' products has been discussed but its timing is uncertain.

Players in India are also coming under increasingly vigilant regulations in terms of selling investment-linked products. In order to prevent misselling, the regulator is beginning to introduce more stringent customer disclosure practices as well as modifications to product features that discourage investment-linked products from merely acting as a substitute for mutual funds.

Looking forward, the Indian life insurance industry is at a unique point in its evolution. Momentum from accelerating economic growth and India's favorable demographics will drive insurance premium growth, making it one of the most attractive financial services markets in the world. We forecast that the Indian insurance market will grow at close to 19 percent per annum from 2007 to 2012. 

In addition, in the midst of this massive growth phase, the market is witnessing significant shifts in competitive dynamics: customer needs are evolving, untapped segments of the market are emerging, and competition has become more sophisticated. To win in the next decade in India, players must be able to outperform the rest of the competition. To find out more, you can check out History Of Insurance In India.