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The Actuary The magazine of the Institute & Faculty of Actuaries
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Life: A new dawn in India

India, as a global sweet spot, attracts the attention of every major insurer. The country started in 20th place in the global insurance league table when the market opened to private players in 2000, moving up to 11th place by 2010. Since 2000, a total of 22 life insurance companies have set up operations in India. Most major multinational insurers are represented through joint ventures (the only option for foreigners), and all but two new players are licensed as joint ventures. Total foreign direct investment in insurance companies stands at close to IRs51 billion (about US$1.1 billion). While the state-owned Life Insurance Corporation (LIC) still holds a significant majority of market share, other companies have established footholds (Figure 1).

Figure 1

Favourable economic profile
India is recognised globally for its trillion-dollar economy, consistent high growth of more than 8% per annum, its vibrant democracy and institutions, and cheap labour with good English skills. A recent study predicts that India’s economy will grow fivefold in the next 20 years.

The country’s favourable demographic profile is of special interest to insurers — 56% of Indians were under the age of 15 or over the age of 64 in 2010. Research shows that India’s working-age population will increase by 136 million by 2020. In comparison, China’s working age population will grow by 23 million. Indian households save more than those in other emerging markets such as China and Brazil. Household savings were 25% of India’s gross domestic savings in 2008, compared with 5% in Brazil and 15% in China. The figures for Britain and the US are 2% and 1% respectively.

The large young population, combined with the current low rate of life insurance penetration and high rate of personal savings, points to the upside potential for the Indian insurance market.

The propensity to save has led to a surge in investment-linked life insurance policies. The strong performance of Indian stock indices has aided this growth. The Indian stock market gave returns of 22% in 2010, a significant drop from the dizzying 90% gain in 2009, but still impressive nonetheless.

India has attracted a large number of multinational insurers in a short span of time. What have major players learned in the first decade of operations? There are five important lessons:

1. The importance of a strong local partner and brand
Private insurers have learned that the strength of their domestic partners and their market franchises are vital to sustainable growth. Insurance buyers rely more on the market standing and distribution network of local sponsors than the global image of their foreign counterparts.

At the same time, a few joint ventures have experienced growth constraints because local partners have not been ready to pump in capital as needed to support business volumes and solvency needs. As a result, well-capitalised banks are emerging as preferred partners in insurance ventures. Only sound and profitable banks get the necessary approval from the central bank to take a stake in Indian insurance businesses. In fact, entrants such as HSBC and Dai-ichi Life have offered high premiums to banks in order to forge partnerships.

2. Flexible product strategies
Life companies in India have learned that product strategies need to be under constant review to respond to changing risk appetites and customer preferences. As a result, product teams are under pressure to assess the market and come up with new plans, often on short notice, to satisfy distribution partners and as a response to the market environment.

Unit-linked insurance plans (ULIPs) are a prime example of the need to absolutely understand the marketplace. A few companies underestimated customer interest in ULIPs when they were introduced in 2003 and kept to their more traditional plans, thereby missing a slice of the pie. On the other hand, companies that relied solely on ULIPs suffered in the global financial crisis when customers took flight to safety, and again more recently in the wake of regulatory measures that sought to curb the excessive growth of ULIPs at the cost of traditional insurance plans.

3. Distribution efficiency
A key lesson for insurers in India is in distribution, which is witnessing the emergence of new channels such as bancassurance. While agencies remain the backbone of distribution, mass recruitment led to quality and sales skill issues, and widespread complaints of misrepresentation of insurance plans ensued.

Most agents consider insurance sales a secondary pursuit for additional income, and they often rely on their immediate contacts to make sales. This has led to high agent turnover and a high percentage of policy lapses, which has affected insurers’ long-term profitability. According to the regulator, the lapse rate on ULIP policies was 26% in 2006 and, according to Towers Watson’s estimates, that has climbed higher in recent years. The regulator has also voiced concerns about the status of orphan policies at many companies.

The low quality of sales and high incidence of policy discontinuance
are also evident in bank distribution. A 2008 study that benchmarked bancassurance distribution in India (which was followed by a second study in 2010), showed that distribution practices at bank branches are inefficient and are centred on sales push. Customer service is often mediocre. Indian banks have more than 400 million retail customers, and only about 1% of them have been cross-sold insurance. The potential is huge, and insurers are now waking up to the need for well-orchestrated implementation plans.

4. Large volumes and small tickets
When the market opened, most private insurers underestimated the Indian market’s potential volume and policy sizes. The volume of new business boomed (Figure 2).

Figure 2

In 2010, private insurers issued a total of 14.5 million policies, and the state-owned LIC issued close to 40 million. This translates to an average first-year premium of about IRs20,000 (about US$440) per policy. But because policyholders can pay their premium semi-annually or quarterly, transaction sizes are much lower than the annual premium. Managing the resulting huge transaction numbers and service levels has presented a challenge to insurers.

Insurers active in the rural and micro-insurance businesses have also learned to cater to customers who want small policies with annual premiums of IRs500 (about US$11) or even lower, and they have developed mechanisms to collect and account for small amounts.

5. Focus on cost management
Despite robust growth, good cost management is a key issue for private players. Indian regulations prescribe caps on costs, including management expenses. Most private players have breached this limit, citing the additional costs of start-up. While the operating costs ratio for private insurers came down to about 21% last year — a decline of 5% from the previous year — a recent set of new regulatory measures drastically lowering policy surrender charges and capping fund management fees has required insurers to relentlessly pursue cost-reduction initiatives.

Summary
These developments clearly show that the Indian insurance industry is poised for a big leap in performance and opportunities, notwithstanding the challenges and the strategic issues that the private players — and their foreign partners — face as part of this momentous growth.

Rajagopalan KrishnamurthyRajagopalan Krishnamurthyis managing director of products, distribution and markets at Towers Watson, India