Prafulla Salunkhe

NITIE Students Consulting Club

2

Insurance Industry: An overview A

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India ranked 10th among 147 countries in the life insurance business, with a share of 2.03 per cent during FY13

The country ranked 19th among 147 countries in the non-life premium income, with a share of 0.66 per cent in FY13

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The life insurance premium market expanded at a CAGR of 16.6 per cent, from USD11.5 billion in FY03 to USD53.3 billion in FY13

The non-life insurance premium market rose at a CAGR of 15.4 per cent, from USD3.1billion in FY03 to USD13.1 billion in FY13

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The share of private sector in the life insurance premiums increased from 5.7 per cent in FY03 to 28.7 per cent in FY13

The market share of private sector companies in the non-life insurance premium market rose from 9.5 per cent in FY03 to 42.9 per cent in FY13

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Crop insurance market in India is the largest in the world and covers around 30 million farmers; it accounted for nearly 5 per cent of the total non-life insurance premium in FY12

Strong growth in the automotive industry over the next decade to be a key driver of motor insurance

Health insurance continues to be one of the most rapidly growing sectors in the Indian insurance industry, and reported 16.1per cent growth in gross premiums in FY13

3

Insurance Industry: PESTL analysis

Political factors Increased service tax on premium

Ending of government monopoly

Increase in FDI limit

Favourable regulations for rural insurance

Economic factors Increase in gross domestic savings

Increase in share of insurance in countrys GDP

Increased share in govt. securities market

Insurance is biggest player in domestic equity market

Social factors

Low insurance coverage

Increase in life span

Uncertainty about life increasing

Changing perception in minds

Increase in life style diseases

Technological factors Automation of processes

Internet driven era

E-banking facility

Legal factors Changing regulation Renewal of registration

4

Why India is strong market in insurance industry?

Strong demand

Attractive opportunities

Increasing investments

Policy support

Growing interest in insurance

among people; innovative products

and distribution channels aiding

growth

Increasing demand for insurance

offshoring

Life insurance in low-income

urban areas

Health insurance, pension

segment

Strong growth potential for

micro insurance, especially

from rural areas

Rising participation by private players

has increased their market share in the

life insurance market to 29.3 per cent in

FY12 from 2 per cent in FY03

Increase in FDI limit to 49 per cent from

26 per cent, as proposed in 2012, will

further fuel investments

Tax incentives on insurance products

Passing of Insurance Bill gives IRDA flexibility

to frame regulations

Clarity on rules for insurance IPOs would

infuse liquidity in the industry

Repeated attempts to make the sector more

lucrative for foreign participants

Evolution of Indian Insurance Sector B

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95

6

The life insurance sector was made up of 154 domestic life insurers, 16 foreign life insurers and 75 provident funds

19

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-72

All life insurance companies were nationalised to form LIC in 1956 to increase penetration and protect policy holders from mismanagement

The non-life insurance business was nationalised to form GIC in 1972 1

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Malhotra Committee recommended opening up the insurance sector to private players

IRDA, LIC and GIC Acts were passed in 1999, making IRDA the statutory regulatory body for insurance and ending the monopoly of LIC and GIC

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Post liberalisation, the insurance industry recorded significant growth; the number of private players increased to 44 in 2012

Customers are more conscious of the benefits of insurance and its importance for a secure future

The industry has been spurred by product innovation, vibrant distribution channels, coupled with targeted publicity and promotional campaigns by the insurers

Organisation

Insurance Regulatory and Development Authority (IRDA) governs the Indian insurance sector

IRDA established in 1999 under IRDA act

It is responsible for regulating, promoting and ensuring orderly growth of the insurance and re-insurance

business in India

Ministry of finance (Govt. of India)

Life insurance (24 players)

Public (1 player)

Private (23 players)

Non life insurance (27 players)

Public (6 players)

Private (21 players)

Re-insurance (1 player) Public (1 player)

Insurance Regulatory and Development Authority (IRDA)

List of all players

1. Life insurers: https://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo129&mid=3.1.9

2. Non-life insurers: https://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo264&mid=3.2.10

3. Re-insurer: https://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo1687&mid=3.3.6

Indian insurance market

With a share of 2.03 per cent, India stood 10th among 147 countries in the life insurance business in FY13

The growth in non-life insurance premium in India outperformed the average global growth as well as the

emerging markets over 201012

-10%

-5%

0%

5%

10%

15%

2010 2011 2012 -2%

-10%

-7%

11%

-5%

5%

3%

-3%

2%

Life insurance premium growth rates

India Emerging World

0%

2%

4%

6%

8%

10%

12%

14%

2010 2011 2012

10%

14%

10% 9%

8% 9%

2% 2% 3%

Non Life insurance premium growth

rates

India Emerging World

Indian insurance market : Change in premium

Indian insurance sector shows

growth of premium at brisk

pace (Both for life insurance

and non life insurance sector)

The total insurance market

expanded from USD 14.7 billion

in FY 03 to USD 66.4 billion in

FY 13

Over FY 03- FY 13, total gross

written premiums increased at a

CAGR of 16.3 per cent

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13

Gross premium written in India (USD billion)

Indian insurance market : Premium for life insurance

The life insurance market grew

from USD11.5 billion to USD53.3

over FY 03- FY 13

CAGR of 16.6 %

The life insurance industry has

the potential to grow 2 times by

2020

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13

Gross in life insurance premium (USD billion)

Life insurance: Increasing penetration and density

2.60 2.50 2.8

3.9 4.4 4.2

4.7

4 3.5

3.2

FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12

Life insurance penetration (%)

Life insurance penetration (%)

13.40 15.70

20.4

31.2

43.9 40.9

47.7 52.5

48.6

FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12

Life insurance density (USD billion)

Life insurance density (USD billion)

On the life insurance side, the density fell 3.17 per cent in

2012 from 3.40 per cent in 2011. Life insurance density also

fell to $42.7 in 2012 from $49 in 2011.

Life insurance density is defined as the ratio of premium

underwritten to the total population in the given year

Penetration rate indicates the level of development of

insurance sector in a country. Penetration rate is measured as

the ratio of premium underwritten in a particular year to the

GDP

This increase is due to the entry of new players, introduction of

new products and channels of distribution and increasing

penetration of private insurance companies in uncovered

markets.

Indian insurance market : Share of private sector in life insurance

Share of private sector has been growing over the years, from around 2 per cent in FY03 to 27 per cent in

FY13

The Gross Direct Premium of private companies increased from USD0.2 billion in FY03 to USD14.4 billion in

FY13 at a CAGR of 51.1 per cent

98%

2%

Share of public & private sector in

life insurance segment (%)

Public Private

73%

27%

Public Private

FY 03 FY 13

Indian insurance market : Players in life insurance market

Currently, the life insurance

sector has 23* private players

compared to only four in FY02

LIC is still the market leader,

with 72.7 per cent share in

FY13, followed by ICICI

Prudential, with 4.7 per cent

share

73%

5%

4%

4%

2% 2%

2%

8%

Market share of major companies in terms of total life insurance

premium collected FY 13

LIC ICICI Prudential HDFC Standard SBI life Bajaj Allianz Max life Birla Sunlife Others

Indian insurance market : Non life insurance

The non-life insurance market

grew from USD3.4 billion in

FY04 to USD12.7 billion in

FY13

Over FY04FY13, non-life

insurance premiums

increased at a CAGR of 16.4

per cent

The number of policies

issued increased from 43.6

million in FY03 to 107.0

million in FY13, at a CAGR of

9.4 per cent

0.00 20.00 40.00 60.00 80.00 100.00 120.00

FY 03

FY 04

FY 05

FY 06

FY 07

FY 08

FY 09

FY 10

FY 11

FY 12

FY 13

Number of non-life insurance policies (million)

Non-Life insurance: Penetration and density lower than world average

0.67 0.63 0.61 0.63 0.63 0.61 0.66 0.66

0.73 0.78

FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13

Non Life insurance penetration (%)

Non Life insurance penetration (%)

3.50 4.00 4.4

5

6.3 6 6.7

8.7

10.1 10.5

FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13

Non Life insurance density (USD billion)

Non Life insurance density (USD billion)

The non-life insurance penetration rate was in the

range of 0.60.8 per cent over 200413

Non-life insurance density increased from USD3.5 in

FY04 to USD10.5 in FY13 at a CAGR of 13.0 per cent

The global average density of USD283.1 in 2012

indicates a huge potential for growth

Indian insurance market : Share in non-life insurance

Motor insurance forms the largest non-

life segment at 43.2 per cent share in

FY13, with Gross Direct Premium of

USD5,466.6 million

Medical insurance formed 21.8 per

cent of the total in FY13, with Gross

Direct Premium of USD2,763.9 million

Motor third party insurance, which

contributes nearly 50 per cent of the

total motor insurance premium,

remained the fastest growing segment

in FY13 with Gross Direct Premium of

USD2,390.8 million

43%

22%

10%

4%

4%

17%

Break up of non-life insurance market (FY 13)

Motor Medical insurance Fire Crop insurance Engineering Misc and others

Indian insurance market : Share of private sector in non-life insurance

The market share of private sector companies rose from 14.5 per cent in FY04 to 43.0 per cent in FY13

The Gross Direct Premium of private companies increased from USD0.5 billion in FY04 to USD5.5 billion in

FY13 at a CAGR of 33.1 per cent

85%

15%

Share of public & private sector in

non-life insurance segment (%)

Public Private

57%

43%

Public Private

FY 03 FY 13

Indian insurance market : Players in Non-life insurance market

The number of companies increased from 15 in FY04 to 27 in

FY13; six of these companies are in

the public sector

The public sector companies together accounted for about 57 per

cent of the total Gross Direct

Premium in the non-life insurance

segment

New India leads the market with 16.7 per cent market share

Private players are not far behind and compete better in the non-life

insurance segment

17%

13%

13%

9% 9%

6%

4%

29%

Market share of major companies in terms of total non-life

insurance premium collected FY 13

New India United India National Oriental ICICI Lombard Bajaj Allianz AIC Others

Indian insurance market : Notable trends

New distribution channels like bancassurance, online distribution and NBFCs have widened the reach and reduced costs

Firms have tied up with local NGOs to target lucrative rural markets

Emergence of new distribution channels

In the life insurance segment, share of the private sector in total premiums increased to 29.3 per cent in FY12 from 2.0 per cent in FY03

In the non-life insurance segment, share of the private sector increased to 42.9 per cent in FY13 from 14.5 per cent in FY04

Growing market share of private players

The life insurance sector has witnessed the launch of innovative products such as Unit Linked Insurance Plans (ULIPs)

Other traditional products have also been customised to meet specific needs of Indian consumers

Launch of innovative products

Large insurers continue to expand, focussing on cost rationalisation and aligning business models to realise reported embedded value (EV), and generate value from future business rather than focus on present profits

Mounting focus on EV over profitability

Indian insurance market : Increasing demand

Indias robust economy is expected to sustain the growth in insurance premiums written

Higher personal disposable incomes would result in higher household savings that will be channelled into different financial

savings instruments like insurance and pension policies

Household savings are expected to grow to USD540 billion by 2015E from USD89 billion in 2000

Financial savings are expected to grow to USD248 billion by 2015E from USD45 billion in 2000

0

100

200

300

400

500

600

2000 2010 FY 13 2015E

Household & Financial savings (USD billion)

Household savings Financial Savings

Growing affluence of the middle class

The emergence of an affluent middle class is triggering

demand for both life and non-life personal insurance lines

A rising number of young professionals are opting for health

insurance, motor insurance and ULIPs

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2020 2030

Indian residents shifting from low income

group to high income group

Deprived Aspirers Seekers Strivers Globals

Indian insurance market : Favourable policy measures

Insurance products are covered under the exempt, exempt, exempt (EEE) method of taxation.

This translates to an effective tax benefit of approximately 30 per cent on select Tax incentives

The proposed Insurance (Amendment) Bill is expected to empower IRDA to introduce regulations for promoting sustainable growth, providing the flexibility to frame regulations and increase the FDI limit to 49 per cent

The government has also extended Rashtriya Swasthya Bima Yojana (RSBY) to cover unorganised sector workers in hazardous mining and associated industries

Union Budget 201314

IRDA recently allowed life insurance companies that have completed 10 years of operations to raise capital through initial public offerings (IPOs)

Companies will be able to raise capital if they have embedded value of twice the paid up equity capital

Life insurance companies allowed to

go public

Increase in FDI limit will help companies raise capital and fund their expansion plans

Revival package by government will help companies get faster product clearances, tax incentives and ease in investment norms

Approval of increase in FDI limit and revival

package

Indian insurance market : Key regulatory changes

1999

2001

2002

2006

IRDA cleared bill

IRDA issues TPA

regulations

Foreign players

allowed to

enter with 26 per cent

FDI cap

IRDA insurance

brokers and

corporate agent

regulation

Entry of stand alone

health insurance

allowed Changes

Impacts

Liberalisation of

sector and

formation of an

independent

regulator

Entry of TPAs specifically

focussed on servicing

health

insurance business

Entry of foreign players

infusing

capital and technical

expertise

Thrust on

insurance distribution

through corporate

intermediaries

Entry of stand alone

health insurance players

in the market

Indian insurance market : Key regulatory changes

2007

2010

2011

2012

2013

Changes

Impacts

Creation of Indian

Motor Third Party

Insurance Pool

Price

detariffication

Mechanism to

equitably share CVTP

losses

Significant change in

the premium rates for

the commercial lines

IRDA came

out with new

guidelines for

equity-linked

insurance

products

Reduced the

first-year

agent

commission

and lock in

period

extended

Merger and

Acquisition

guidelines

Enabled

consolidation,

inorganic

transactions in

the industry

Introduction of

Declined Risk

pool, TP

premium

increase

Improvement

in overall

profitability of

the CV

segment

FDI cap raised

from 26 to 49 per cent

under automatic

route by cabinet

Cabinet

approval on

the FDI cap

increase

Indian insurance market : Opportunities across business lines

Opportunities in Indian Insurance

Market

Micro-Insurance

Health insurance markets

Motor insurance markets

Low income

urban and pension markets

Crop insurance

Life insurance : Low-income urban and pension market

Urban low-income insurance penetration in India is expected to

have increased to 40 per cent in 2012 from 30 per cent in 2007

Rapid development in Tier II and Tier III cities and growth in new

bankable households have led to the emergence of a large

insurable class with an appetite for sophisticated life insurance

products

Insurance density and penetration remain at very low levels

compared to that in developed countries; this indicates a strong

potential for growth in future

Business models need to be customised accordingly to maintain

cost-effectiveness, as most low-income customers would be

small-ticket accounts, though huge in numbers

2007 2012

Urban low income

insurance penetration 30% 40%

Increasing life expectancy, favourable savings and

greater employment in the private sector will fuel

demand for pension plans

The opening of pension market with the passing of the

PFRDA Bill 2011 will make the pension market more

conducive for private life insurers

Proposed new pension bill by government will further

provide new opportunities to insurers

There is scope to introduce new-generation pension

products such as Variable Annuity and Inflation

Indexed Annuity

2010 2025E

Indian Retirement

market (USD billion) 40.00 84.00

Non-Life insurance : Motor insurance market

The number of new policies issued increased at a CAGR

of 9.4 per cent from FY03 to FY13, from 43.6 million to

107.0 million

Despite strong growth, non-life insurance sector remains

far from tapped, with penetration rates (premium to GDP

ratios) remaining low at 0.78 per cent in 2012 compared

to an average of 4.5 per cent in the US and global

average of 2.8 per cent

Strong growth in the automotive industry over the next

decade will be a key driver of motor insurance

Proposed IRDA draft envisages a 1080 per cent rise in

premium rates for the erstwhile loss-making third-party

motor insurance

0

5

10

15

20

25

30

35

Car Commercial 2 & 3 wheelers

Vehicle production in India (million units)

2010 2020 E

Non-Life insurance : Health insurance markets

Only 1.52 per cent of total healthcare expenditure in India is currently covered by insurance providers

From 13.3 per cent of the total non-life insurance premium in FY07, health insurance currently contributes 22.2 percent

Total health insurance premiums increased from USD733.1 million in FY07 to USD2,824.7 million in FY13 at a CAGR of

29.1 per cent

Health insurance continues to be one of the most rapidly growing sectors in the Indian insurance industry; it reported

16.1 per cent growth in gross premiums in FY13

Absence of a government-funded health insurance makes the market attractive for private players

IRDA recommended the government to reduce capital requirements for stand-alone health insurance companies

from USD21 million to USD10 million

Introduction of health insurance portability expected to boost the

orderly growth of the health insurance sector

Penetration of health insurance is expected to more than double by

2020

Increasing penetration of health insurance likely to be driven by

government-sponsored initiatives such as RSBY and ESIC

Government-sponsored programmes expected to provide coverage

to nearly 380 million people by 2020

Private insurance coverage is estimated to grow by nearly 15 per

cent annually till 2020

2005 2015 E

Health

insurance

policies

(million)

110.00 220.00

0

100

200

300

400

500

600

700

2010 2020E

Population covered by health

insurance (million)

State insurance

RSBY

ESIC

Govt. employee

insurance Private

insurance

Micro insurance : Tapping Indias rural wealth

Macro level (The enabling environment)

Intermediate level (Support infrastructure)

Micro level (Policy holders)

IRDA drafted micro insurance guidelines in 2010,

which contain numerous favourable measures

such as

Lower threshold limits for agents commissions

Rural areas must account for 7 per cent of new life insurance policies in the first year of

firms operation and rise to 20 per cent over

the next 10 years

In order to reduce micro insurance distribution costs, IRDA proposed micro insurance schemes to

supplement existing government insurance schemes

The number of regional rural banks and NGOs operating in the rural sector will aid distribution of

micro insurance products

The annual income growth rate in rural India is expected to increase to 3.6 per cent over 201030

from 2.8 per cent during 19902010

About 5 million people currently have micro insurance, while the entire market is expected to

be in the range of 140300 million

Microinsurance : Tapping Indias rural wealth

FY 09 FY 10 FY 11 FY 12

Private 2.1 3 2.6 1.5

Public 12.6 16.8 16.3 13.3

Total 14.7 19.8 18.9 14.8

0

5

10

15

20

25

Number of micro-insurance policies (millions)

FY 09 FY 10 FY 11 FY 12

Private 8.4 5.1 5.7 4.3

Public 43.9 79.3 57.9 43.7

Total 52.3 84.4 63.6 48

0

10

20

30

40

50

60

70

80

90

New Business premium (USD millions)

Crop Insurance : Opportunities

Crop insurance market in India is the largest in the world,

covering around 30 million farmers

Crop insurance accounted for nearly 5 per cent of the total non-

life insurance premium in FY12

To provide crop insurance to farmers, Government has launched

various schemes like National Agriculture Insurance Scheme

(NAIS), Modified National Agriculture Insurance Scheme (MNAIS)

and Weather-based Crop Insurance Scheme (WBCIS)

The number of farmers covered increased at a CAGR of 11.5 per

cent from FY08 to FY12, while the sum insured rose at a CAGR of

22.0 per cent from USD6.5 billion to USD12.1 billion over the

same period

There is huge scope for increasing coverage, as only 30 million

farmers out of 120 million are insured under crop insurance

schemes

Government of India plans to increase the coverage to 50 million

during the 12th Five-Year Plan

0

5

10

15

20

25

30

FY08 FY09 FY10 FY11 FY12

Number of farmers covered (million)

WBCIS

MNAIS

NAIS

0

2

4

6

8

10

12

14

FY08 FY09 FY10 FY11 FY12

Sum insured (USD billion)

WBCIS

MNAIS

NAIS

Indian insurance market : Ways to market development

Distribution channels

The effectiveness and cost of diverse distribution strategies of different players is crucial in ensuring the success of players in the insurance business, particularly in the retail lines of business.

Focus on financial inclusion

The approach to insurance must be in sync with the evolving times. The mission of the insurance sector in India should be to extend the insurance coverage over a larger section of the population and a wider segment of activities.

Consumer needs and preferences

The growth in insurance industry has been spurred by product innovation, vibrant distribution channels, coupled with targeted publicity and promotional campaigns by the insurers. Innovation has come not only in the form of benefits attached to the products, but also in the delivery mechanism through various marketing tie-ups. All these efforts have brought insurance closer to the customer as well as made it more relevant.

Indian insurance market : Way forward

Significant latent market

The insurance market has a considerable amount of latent potential, given the fact that the Indian economy is expected to do well in the coming decades leading to increase in per capita incomes and awareness.

Channelizing industry focus

In meeting the significant potential, the industry has an increased role and responsibility. Three areas of focus could be a) product innovation matching the risk profile of the policy holders b) reengineering the distribution and more significantly c) making sales and marketing more responsible and answerable.

Distribution Distribution channels evolved in response to market dynamics and changing consumer preferences. The alignment of economic incentives with distribution dynamics should be driven by market forces rather than regulatory intervention.

Regulation The industry should be given time to adjust to regulatory changes in a phased manner aligned with a regulatory impact assessment. Regulations need to drive transparency and simplification of products and services.

The Indian insurance market is poised for strong growth in the

long run. It stands at the

threshold of moving towards a

stable position, delivering

stable profitable growth.

The stakeholders should eventually work toward

maintaining a favourable

environment for stable growth,

increasing the penetration of

insurance to rural and

underpenetrated areas and

increasing the contribution to

the economy.