India Insurance Market: A decade old or

dawn of a new era?

• Wednesday, January 5, 2011, 11:12

India has come a long way since the economic reforms in 1991, moving
from the growth rates of 5% into the orbit of 7-9% growth rates. This growth has been
structurally driven by economic reforms, private entrepreneurship and linkages to the global
economic boom.

A McKinsey study estimated that India is likely to emerge as the fifth largest consuming
nation in the globe by 2025. Significant demographic changes over the next two decades
should throw up major investment opportunities for businesses as well as investors, it said.

Every year, around Rs. 600,000 crores (Rs. 6 trillion) of household savings is being invested
into HH Financial assets. Around 18-20% of this income goes into insurance. Proposed
Direct Tax code, aimed at a substantial increase in income tax limit and product efficiency,
could also lead to higher contribution to insurance.

The Insurance Opportunity

With a massive population base and huge untapped and under-penetrated market, the
insurance industry is home to tremendous opportunity in India as well as foreign investors.
India today is the fifth largest life insurance market amongst the emerging insurance
economies globally and has grown at 25% CAGR since the market opened up in 2000. This
impressive growth in the market has been driven by fundamental factors like liberalization,
global economic boom, young population, growing middle class, rising income levels and
customer awareness.

India successfully scores over China when it comes to demographic profile, premium growth
rate, penetration level and as an investment destination. Going forward, rising affluence
levels are expected to increase the insurable population. India’s total insurance business
reached a level of US$ 58 billion in FY209-10 and and is now a top 10 global market which
is expected to grow further on the back of attractive customer demographics.

The year gone by – 2010

The Indian life insurance sector has been witness to varied phases witnessing a slew of
changes in the past year. Since 1999, when the government opened up the insurance sector by
allowing private companies to solicit insurance and also allowing foreign direct investment of
up to 26%, the insurance sector has been characterized by a booming market. Hence 2010,
was a landmark year in the history of the Indian insurance industry as it celebrated a decade
since the entry of the private sector into this business.

In 2010, Life insurance companies witnessed a 20% jump in weighted new business premium
collection during the first five months of the financial year. According to data released by the
Insurance Regulatory and Development Authority (IRDA), insurance companies garnered
around US$ 7 billion in weighted new business premium during April-August 2010, against
US$ 5.5 billion in the corresponding period last year.

The year 2010, ushered sweeping regulatory changes that altered the way industry worked. It
marked significant changes in product profile of unit-linked insurance plans. The new
guidelines capped the overall charges and also imposed a minimum prescribed return in order
to offer a better deal to investors.

It was the fastest set of regulatory changes ever seen in the shortest period of time. Many of
these changes had far reaching implications on the way the industry conducted business and
many would unequivocally say the industry was at cross-roads. Unlike the Unit Linked
product changes in January 2010, the regulatory changes in the later part of 2010 impacted
not only the products but also the broader insurance business model right from customer
segmentation, distribution models to the back office model including the customer service
proposition. The initial response was that of apprehension and close speculation, however,
once the changes were announced, most players were quick to comply with an appropriate
plan of action.

The transformation that earlier could have taken 10 years will now perhaps be achieved in the
next 3-4 years, thanks to new customer centric regulations. Insurance companies continue to
remain confident that sales would pick up in the coming months as distributors fully adapt to
the new commission regime and more customers bought insurance products, given that they
are now more customer-friendly.

The year ahead – 2011

The Insurance Regulatory and Development Authority (IRDA) brought about a number of
changes in 2010, which transformed the industry as a whole. It gave policyholders an option
to invest in insurance plans, which were more simplified, less expensive and long-term in
nature. Going forward, the regulator is likely to set up a policyholders’ protection fund also.
The fund will not only work towards protecting the interests of policyholders but will also
spread awareness about insurance. This will benefit both, the consumers as well as Insurance
companies.

While the long term perspective for insurance continues to remain bright for India, pressure
on cost and efficiency and increased focus on quality over quantity will continue to dominate
the strategic thought.

In keeping with the new requirements, life insurers have already started work on modifying
their strategies – not just bringing in new products, but also revamping their distribution – in
order to boost sales. The economic upturn will also help the life insurance market to regain
positive growth in terms of new business premium. The regulatory changes served to enhance
the overall value proposition to customers, while simultaneously placing the focus on cost
efficiencies and product profitability.

Some of the key initiatives which will continue to metamorphose the Insurance offerings with
more value additions and customer centric approach:

More balanced and efficient product mix

Additionally with changes in the regulatory environment there will be immense scope for
single premium / structured products to meet customer needs. There will be a balanced mix of
ULIPs and traditional products to suit various Life and savings needs of the customers.
Longevity - Higher life expectancy ratio will lead to growth of health & pension business
with the launch of a range of new product in the segment.

Focused distributor relationships

Over the years, growth was driven by significant capital infusion to build robust distribution
scale. This was a result of the complexities of the Indian market which was making the role
of middle-men significant. The times ahead will see cost effective intermediation in terms of
Agency channel and leveraging alternate channels.

Existing Agency model in India is at variance with internationally prevalent models. We will
see the model being driven by fewer hierarchies and leaner approach. There would be some
element of entrepreneurial spirit going forward. The role of bacassurance and larger broking
house is expected to increase in the months ahead. The year has already seen emergence of
alternate channels such as Internet, DM, and variants in Agency channel, which will further
see transformation in the New Year due to their cost - effective features. Overall, the
distribution channel is expected to see an increase in efficiency levels, alternative channels,
improved productivity and innovation.

Cost rationalization through an efficient operating model:

The right operating model will be more collaborative and would require organisations to
strategically balance their decisions on outsourcing v/s in house processing. There will be
higher need to process transaction volumes consistently at lowest possible costs and provide
right service delivery for efficient customer service. One should watch out for technology
betterment through initiatives like e-issuance of policies, straight through processing, reduced
operation costs and process optimizations in the next year.

Customer segmentation

Appropriate training and refined customer segmentation will play a pivotal role in delivering
effective sales support to offer best suited products to the customers. This will start becoming
prominent across all processes of Insurance companies from sales to service.

Value addition through efficiency

Regulatory changes will lead to more efficiency in products and services and will augment
offerings for increasingly knowledgeable consumers who demand high value. This would be
possible only through greater cost efficiencies. The products would be further simplified for
enabling sales using cost effective online channels. For instance earlier a “Pure-Term” was
bundled or sold as Cheapest Term plan. Next best thing would be to sell Pure Term plan
almost “exclusively” through internet with product simplification.

Usage of Technology for effective Sales and Customer Service:

Customers today are increasingly time poor, want it fast, now and cheap. They seek sincere
guidance and support in evaluation and this makes the role of the advisors or Insurance
sellers more critical. Hence it will become extremely important next year to leverage
technology and make optimum utilization of available sales tools to better analyze the
customer needs and truly partner with them.

An enhanced technology will provide single view of customers enabling easy cross-selling
and retention. Leveraging internet and other technology options will make it easier to process
requests, complaints and payments online. Accelerated claims settlement process and rapid
customer service will continue to remain the key strengths for the players.

Exploring the bottom of the pyramid and rural markets:

The level of insurance penetration in India, as a percentage of the GDP, is almost double of
China. However, penetration levels in rural India are lower – which makes these areas an
emerging and promising market for insurance players. The industry is expected to focus on
effective strategies that will increase insurance coverage among rural and low-income
households. Thus, bottom-of-the-pyramid products such as micro-insurance, will find favour.

There is immense scope for selling through 1-2 millions telecom franchisee, NGOs, RRBs,
Cooperatives, Post Offices, MFIs, Agri-retail for the insurers. It will be worthwhile involving
the unbanked population through flexible premium paying products and community based
policies. Additionally rural market is witnessing the emergence of need for composite
products and health insurance, thanks to increasing awareness and government initiatives
respectively.

Tapping the growing affluence levels in India

A buoyant economy is estimated to lead to an increase in India’s investible wealth to US$500

billion by 2012. As Indians accumulate more wealth, they are expected to set aside more
savings for retirement, as a result of which India’s share in the world’s life insurance industry
is set to rise.

India’s growing affluence is creating an attractive opportunity for the insurance sector, which
will see a diverse and wider palette of offerings for HNIs and the affluent category.

The year ahead will see customers benefiting across all areas; distributors interests are
aligned with customers’ and there is increased focus on value add services and protection.
Some of the key future trends that we are likely to see benefiting the industry are superiority
of ULIPs over long-term, focus on more protection given regulation and DTC. There will be
larger emphasis on advised based selling leading to rein on misselling and churning. All in all
focused differentiation will play a key role in an environment of decreasing customer loyalty
and increasing customer sophistication.