India’s life insurance industry is
poised to enter its third development phase that will be
characterised by stable, profitable growth.
This is the conclusion of a study,
Indian Insurance sector, Stepping into the next decade,
undertaken by the Confederation of Indian Industry (CII) and
professional services firm Ernst & Young (E&Y).
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In the study, CII and E&Y
emphasise that, in what they term Phase III of the industry’s
development, most large insurers are expected to decelerate the
pace of distribution growth and increase their focus on retention
of channel partners and improving channel productivity.
Dynamic insurance
market
“Insurance companies are poised for
a quantum leap in performance with unprecedented growth
opportunities, notwithstanding a temporary sliding growth curve,”
the study notes.
“India is fast emerging as one of
the world’s most dynamic insurance markets with significant
untapped potential.”
CII and E&Y explain that Phase
I of the industry’s development lasted from 2000 to 2005. This
phase followed the sector’s liberalisation in 1999, when the Indian
government permitted the establishment of private insurance
companies and foreign participation. However, foreign stakes in
Indian insurers was, and still is, limited to a 26% maximum.
Phase I was very developmental,
stresses the study, and saw an unprecedented surge in sales of
insurance products. It was also a period of heavy investment in
growth rather than seeking profitability.
The second phase in the life
industry’s development began in 2005 and lasted until 2009,
according to the study.
In Phase II, the study explains
that insurers focused on expanding their product range, developing
innovative products and building distribution channels.
“Insurers were shifting to
profitable growth,” notes the study.
In the life industry’s evolution
over the past decade, the study highlights that India’s growing
consumer class, rising insurance awareness, increasing domestic
savings and investments have been among key factors that have
driven market penetration of insurance products.
However, in Phase III of
development, the CII and E&Y anticipate insurers will have to
reach out to what are still “large untapped areas” of the Indian
market.
Of particular importance will be
financial literacy education required to incentivise Indian
households to transfer savings from physical assets to financial
assets. To this end, the distribution network’s reach will have to
expand considerably in rural areas, notes the study.
In Phase III, the study also
anticipates the involvement of the Insurance Regulatory and
Development Authority (IRDA) will rise.
Increased involvement by the IRDA
is already being seen in the form of recently introduced
regulations aimed at improving disclosure by and profitability and
capital of insurers and enhancing consumer protection.
In future, among the drivers of the
IRDA’s increased involvement will be a shift towards the European
Union’s Solvency II risk-based solvency norms, which the study
anticipate will occur over the next three to four years.
The study also anticipates that the
life industry may witness consolidation among smaller players.
Paving the way for this, the IRDA and the Securities and Exchange
Board of India (SEBI) are finalising guidelines for mergers and
acquisitions in the insurance industry. The SEBI is the primary
regulator on such matters.
Key
development
The study also point towards
another key development likely to be seen in Phase III, the listing
of insurance companies on the stock market.
“In a sector where none of the
players are listed, the IPO [initial public offer] of insurance
companies could be a milestone in the future growth of the sector,”
the study stresses.
Notably, in late-October the SEBI
gave the go-ahead for life insurance companies to proceed with
IPOs. However, a possible downside to this is that the IRDA is
insisting that only life insurers that have been in operation for
10 or more years be permitted to proceed with IPOs.
Another major issue has also still to be resolved: an increase
in the maximum stake a foreign company is permitted to own in an
Indian insurer. This is now subject to the pending Insurance Bill
in which it is proposed that the maximum stake by a foreign company
be increased 49%.
