Still brimming with opportunity

Despite achieving phenomenal growth since being opened up to
private competition in 2000, India’s life insurance market remains
in an early growth phase. For foreign insurers prepared to meet the
many challenges, including the tough task of providing
micro-insurance, India still beckons.

On 19 April 2008, it will be eight years since the Indian
government passed into law the Insurance Regulatory and Development
Authority Act, a move that represented a major change in policy.
The act ended a situation which, since the nationalisation of
India’s 245 life insurers in 1956 and about 100 general insurers in
1972, had seen the market dominated by the state-owned life insurer
Life Insurance Corporation of India (LIC) and four state-owned
general insurers.

The most sweeping reform heralded by the act was the opening-up of
the insurance market to private companies. This set in motion
dynamic growth in India’s life insurance industry, as major foreign
insurers entered the market in quick succession by way of joint
ventures (JV) with Indian companies ranging from banks to
retailers.

Regulations

Indian regulations limit foreign companies to a maximum holding of
26 percent in a JV. Although the government wants to increase the
limit to 49 percent, any change is strongly opposed by the Left
Front – an alliance of the Communist Party of India (CPI) and three
other leftist parties. India’s ruling Congress Party relies on the
CPI and its three cohorts for support to maintain a majority in
parliament. By the end of 2001, ten JV life insurance companies had
been formed, a number that had grown to 14 by the end of September
2007. In addition to the 14 foreign JVs there is one wholly
Indian-owned life insurer, Sahara Life.

The secretary general of industry body the Life Insurance Council,
Shri S V Mony, anticipates that by early 2008 there will more than
20 life insurers operating in India.

 The most recent new entrant, Italian insurer
  Assicurazioni Generali, launched life and general
insurance companies in October in a JV with Indian consumer goods
company Future Group. UK bank HSBC is preparing to launch a JV life
insurance company with two Indian banks, Canara Bank and Oriental
Bank of Commerce. Generali, HSBC and already established players
are targeting a life insurance market that has delivered
exceptional growth since 2000 and still holds significant
potential.

 In fewer than eight years, private competition has
transformed India’s life insurance industry. Total premium income
in 1999 stood at a mere $6.07 billion, representing a market
penetration of only 1.39 percent of GDP and premiums per capita of
$6.20, according to reinsurer Swiss Re. Swiss Re’s data shows that
by 2006 premium income had soared at a 29.6 percent CAGR to $37.22
billion, market penetration to 4.1 percent of GDP and premiums per
capita to $33.20.

Private insurers have been at the forefront of growth, increasing
their market share of premium income at a brisk pace. In the first
half of India’s insurance industry’s fiscal year that ends on 31
March 2008, private insurers held a combined market share of 31.3
percent, according to the regulator, the Insurance Regulatory and
Development Authority (IRDA). This, for example, compared with a
market share of 28.6 percent at the end of the 2005/2006 fiscal
year and 11 percent at the end of the 2003/2004 fiscal year.

Still dominant

Although LIC has lost market share it remains by far the dominant
force in single premium business. In the six months to September
this year, the IRDA reported total first-year individual single
premium income of INR8,709.18 crore ($2.2 billion) of which
INR7,566.62 crore (86.9 percent) was attributed to LIC. In the
group single premium segment, LIC’s INR3,871.65 crore first-year
premium income gave it a similarly high 91.4 percent share.

Private insurers had a far more significant share of first-year
recurring premium income. In the individual segment this totalled
INR19,750.49 crore, of which private insurers’ share was 43
percent. This segment was also the largest, representing 59.6
percent of total first-year premium income, and the fastest
growing, rising by 42 percent compared with the corresponding six
months in 2006. Private insurers recorded an 85 percent increase to
INR8,438.16 crore, while LIC’s sales increased by 21 percent.

In the group recurring premium segment, private insurers were
responsible for all first-year recurring premium income, which
totalled INR454.52 crore, a 9.7 percent increase compared with the
corresponding six months in 2006.

Despite the pace set by India’s life insurance industry, since 2000
there has been much optimism that the growth momentum will be
sustained. Pointing to India’s rapid economic growth and high
savings rate (about 24 percent of private disposable income), Mony
predicted in a recent industry review: “Unless the sector makes
major strategic errors, growth of life insurance business will
remain high.”

According to the Reserve Bank of India, the country’s GDP grew by
9.1 percent in the fiscal year to March 2007 and is forecast to
grow by about 8.5 percent in the current year. India’s total GDP in
the fiscal year to March 2007 was $1.09 trillion.

Putting figures to growth prospects, consultancy McKinsey & Co
forecasts that India’s life insurance premiums will increase to
between $80 billion and $100 billion by 2012. According to
McKinsey, a number of factors will continue to drive growth, which
would require a CAGR of between 13.6 percent and 17.9 percent
between 2006 and 2012 if its estimates are to be met.

Among the positive factors underpinning growth prospects is rising
disposable household income, which McKinsey anticipates will
maintain a CAGR of 5.3 percent compared with 3.6 percent over the
past two decades. In addition, McKinsey believes market penetration
will continue to increase, rising to between 5.1 percent and 6.2
percent of GDP by 2012. McKinsey also forecasts that the average
annual household premium will rise to between INR3,000 crore and
INR4,100 crore by 2012.

The Indian life insurance industry also has a particularly
significant attribute in its favour in the form of positive
customer perceptions towards it, according to a study conducted in
12 cities by McKinsey of recent and intending buyers of life
insurance products. “Consumers rank life insurance higher than
other investment options because of ease and convenience in
investing, tax benefits and protection,” noted McKinsey.

Low-risk, high-return investment

The consultancy added that Indian investors perceive life insurance
as a low-risk, high-return investment. This perception, explained
McKinsey, was driven by a high level of awareness of LIC and its
record of producing stable long-term returns. However, to achieve
its potential the Indian life insurance industry must address a
number of challenges, among which is a need to improve consumer
education.

This shortcoming was highlighted by an extensive study commissioned
by Max New York Life, a JV between US insurer New York Life and
Indian conglomerate Max India, and undertaken by the National
Council of Applied Economic Research (NCAER), a non-profit Indian
research institution.

The study, in which 63,000 households in rural and urban areas were
surveyed, was a “first-of-its-kind” in India to assess the income,
expenditure and saving patterns of households based on primary
data, explained Rajesh Shukla, project leader and an NCAER senior
fellow. “The key objective was to evaluate the financial risk
profile of Indian households by assessing how they earn, spend and
save and to understand the significance and potential of life
insurance in particular as a risk-mitigating tool for Indian
households,” said Shukla.

The overriding conclusion reached by the NCAER was that despite
accelerating economic growth, the majority of people have
inadequate financial protection. Commenting on this conclusion,
Gary Bennett, MD and CEO of Max New York Life, said there is a lack
of understanding about the real benefits of life insurance for
financial protection and long-term wealth creation. “The life
insurance industry needs to educate Indian households about their
risk profile through sound quality advice and the right mix of
product offerings,” said Bennett.

Among the notable findings of the survey was that, while 78 percent
of households surveyed were aware of life insurance, only 24
percent of Indian households own a life insurance policy. This
leaves most households vulnerable to unforeseen events as, revealed
the survey, 96 percent of households felt that they could not
survive for more than one year on their current savings should they
suffer the loss of a major source of household income.

The situation is, however, not the result of a poor household
savings ethic. Indeed, the survey found that although 81 percent of
households save, most do not invest wisely. “Currently, 51 percent
of Indian households deposit their savings in banks and 36 percent
simply keep their savings at home,” stressed Max New York Life’s
COO, Sunil Sharma.

The survey also revealed that 54 percent of households are
confident about their current and future financial stability and
highlighted that in India insurance is largely used as a tax and
saving tool, rather than for protection. “Indians have a misplaced
optimism and tend to believe that nothing will happen to them and
that savings will take care of things in case something was to
happen,” noted the NCAER. “There is need to reorient the consumer
about the benefits of life insurance for both financial protection
and long-term wealth creation.”

Women are particularly underserved by insurers and, according to
the NCAER, represent only 14 percent of all life insurance policy
owners. Rural dwellers are another population segment that remains
under-served: studies such as that undertaken by McKinsey indicate
that penetration of life insurance is about one-third of the level
in urban areas. However, rural India – which, according to the 2001
Census of India, is home to 742 million (72 percent) of the
country’s total population of 1.1 billion – is a market segment
life insurers cannot ignore.

Indeed, the Indian government since 2002 has mandated that private
insurers must establish a presence in rural areas. According to
financial services consultancy Watson Wyatt, regulations require
life insurers to write a growing proportion of their business in
the rural market, starting at 7 percent of the number of policies
written in their first year of business and growing up to 16
percent in year five and beyond.

The regulations, explained Watson Wyatt, define a rural area as one
with a total population of fewer than 5,000, with a population
density of less than 400 per square kilometre, and where more than
25 percent of the male working population is engaged in
agricultural pursuits. Effectively, this definition covers 72
percent of the rural population.

Watson Wyatt added that in addition to coverage of the rural
population, regulations require mandatory insurance coverage for a
proportion of the population falling into the “social sector”,
defined as sections of the population such as agricultural
labourers, road construction workers, fishermen, artisans and
physically challenged self-employed individuals. Insurance
companies are required to cover a minimum of 5,000 such lives in
the first year of operation, increasing to 20,000 lives in the
fifth year of operation.

The rural challenge

Rural areas in particular present a major challenge as, explained
Watson Wyatt, they encompass about 700,000 villages across a wide
variety of regions and consumer groups. Underscoring this point, a
study by the United Nations Development Programme (UNDP) noted that
standardised product designs do not meet client needs as these tend
to be localised.

Other significant difficulties include the small policy sizes
associated with micro insurance, obtaining acceptable proof of age
and collecting and remitting premiums promptly and accurately.
Rural policyholders also often experience difficulty with making
premium payments on a regular basis, resulting in high level of
policy termination. However, rural dwellers are eager life
insurance buyers. Watson Wyatt noted that unlike urban areas where
the purchase of insurance is often influenced by tax
considerations, rural buyers tend to view life insurance as a
reliable and essential form of saving. Indicative of a strong
savings ethic, Watson Wyatt added, rural customers prefer endowment
products with policy terms of 25 years and longer. According to the
UNDP, based on a conservative estimate the potential size of
India’s rural life insurance market is between $342 million and
$447 million.

Distribution in rural areas is being tackled in a number of ways.
Some private insurers are opting for co-operation with rural banks.
One of these is ICICI Prudential Life (IPL), India’s largest
private life insurance company.

In 2006 IPL forged a bancassurance alliance with ten regional rural
banks via its existing partnership with the Bank of India, a move
that now gives IPL access to about 10,000 rural and semi-rural bank
branches in five Indian states. According to a study by Dutch
bancassurer ING, each rural bank branch provides access to 15 to 20
villages with populations of more than 5,000.

Watson Wyatt noted that in another approach to rural distribution,
a few insurers are also entering into tie-ups with large consumer
goods marketing companies that have an established presence in
rural regions. For example, insurers have linked with Hindustan
Lever, a local subsidiary of Unilever, which has set up a rural
chain of stores run by women, called Shakti, to sell consumer
products.

Profitability challenge

However, even when the distribution problem is solved, generating
profit from operations in rural areas is likely to prove a
long-term affair. In its study, the UNDP noted: “Pricing of
insurance products for low income populations is a critical issue
linked to supply and demand. Premiums alone may not be ad-equate to
provide full risk cover while cover-ing costs. Thus, early years of
micro insurance offerings require soft funding to cover start-up
costs.”

As an example of the long road to profitability, the UNDP cited a
distribution model developed by Tata-AIG Life with the assistance
of a grant from the UK government’s Department for International
Development. Named the Community Rural Insurance Groups model, it
involves non-government organisations that sell and service micro
insurance products.

The UNDP said the project demonstrated that the premium pay-ments
alone could not result in profits in the short term because costs
of $240,000 incurred to develop distribution channels have, since
the inception of the model in March 2002, exceeded a total premium
income of $120,000. The UNDP’s report was published in June
2007.

Health insurance

The other major challenge facing Indian insurers is provision of
health insurance. According to Watson Wyatt, 0.5 percent of India’s
population is covered by private health insurance and about 8
percent by government schemes. Watson Wyatt added that one-half of
people hospitalised are forced to take loans or sell assets to meet
health care bills. Notably, health care costs in India account for
5 percent of GDP, 80 percent of which is private out-of-pocket
spend.

Supply of appropriate products is a primary reason for low
penetration of health insurance. Even among the very poor, a study
undertaken by the Indian government found that the poor would
prefer to have insurance benefits for hospitalisation and drug
costs, and compensa-tion for loss of earnings due to
hospitalisation. Indeed, the study noted that health insurance was
perhaps in greatest demand but in short sup-ply due to difficulties
in operating health insurance schemes.

Fortunately, the health care infrastructure required for a vibrant
health insurance sector to thrive is being put in place, continued
Watson Wyatt. The consultancy explained that while in 2005 there
were only a small number of health care providers there is now a
plethora of other providers in the market, all setting up
world-class tertiary health care facilities.

Progress is being reflected in rapidly growing health insurance
premium income. In the 12 months to 31 March 2007, general insurers
reported a premium income of INR32 crore, up 44 percent compared
with the previous fiscal year, said Watson Wyatt. Life insurers do
not report health insurance premiums separately.

Stand-alone health insurers are also making an appearance. The
first, Star Health & Allied, launched in April 2006; the second
entrant, Apollo DKV, a JV between Apollo Group, India’s largest
health care provider, and the health insurance unit of German
insurer ERGO, DKV, launched in August 2007. According to Watson
Wyatt, there are positive signs that other major health insurers
from overseas, such as Aetna (US), Cigna (US) and BUPA (UK), are
interested in entering the Indian health insurance market. “There
is a unique opportunity to capture market share while the market is
relatively young and in a dynamic phase of development for early
entrants,” concluded Watson Wyatt.