INDUSTRY OUTLOOK AND MARKET POTENTIAL OF GENERAL INSURANCE IN INDIA

Dr. G Bharathi Kamath, Associate Professor-Economics

THEME FOR DISCUSSION

Present Scenario- economy/Insurance sector Drivers of the insurance market Potentials Expected pitfalls

CONTEXT

Major Changes Expected as Deregulation Continues

Insurance Companies

Insurance Industry

Economy

RECENT TRENDS AND ITS IMPLICATIONS

Impending Recession Inflationary Pressure

INDIAN ECONOMY-OUTLOOK
4th largest in terms of GDP PPP($4 trillion) 10th largest in terms of nominal GDP 2015India will overtake Japan and become 3rd largest Stable growth rate of 8-9% predicted by most rating agencies Favorable demographics Rising foreign exchange reserves Booming capital market FDI inflow

INDIA'S COMPARATIVE ECONOMIC POSITION IS IMPROVING

RELATIVE TO DEVELOPED AND DEVELOPING ECONOMIES
Twelfth largest economy in the world (2002) Real GDP (USD Bn)
USA Japan Germa France UK Italy China Brazil Canad Spain Korea India Mexic Russia Taiw a Poland

High, steady growth among different economies GDP CAGR from 1993 to 2002
10290 4280
% GDP growth
13 13 11 10 9 7 55 3 01 -1 -3 -5 -5 -7 -9 -10 -11 -13 -13

2390 1640 1510 1300 1290 940 770 670 590 570 500 480 370 180

India's Average GDP growth (93-02)

Max Average Min India China S HK Mexico UK USA (83-02) Korea India Taiwan Thailand Malaysia Brazil Japan (93-02)

Stable BoP position (2002) Current account surplus as a % of GDP

Stable and low inflation rates Average inflation rate from 1999-2002

4.7 0.3 0.7 1.9

5.4

6.3

8.3

12.5% 10.0% 6.7% 6.3% 3.8% 0.5% 0.3% -0.2% 0.0% Korea Thailand

India '94
India '02

-4.4 Brazil

-3.4 China Thailand Malaysia

Indonesia Brazil India

Mexico

Indonesia

Philippines

Russia

Poland

Taiwan

China

Note: Real GDP estimates Source: EIU, World Bank, Analyst reports, Literature review

Service Sector expected to grow@9-10% Industry @8% Agriculture @ 3-4%

REASONS FOR THIS PHENOMENAL GROWTH

Favorable macroeconomic environment with a high GDP growth which has led to rising income levels, increased demand for vehicles, increasing health awareness and health expenditure and a shift from agricultural economy to industrial and service-oriented economy. Demand for more customized and sophisticated risk solutions

INDIA INSURANCE INDUSTRY STATUS

India Has Come A Long Way In The Last Few Years

Life
2000 Number of players Premium income ($ billion) Insurance premium as % of GDP 1 25 CAGR: 26% 333 4.1% 29.7 2010

Non-Life 2010 2000 4 2

24

24(1)
67 CAGR: % 23

~1.2% ~

0.62% 6

~0.4% ~

Insurance Density per capita (Rs)

Several new products and channels

(1) Includes 4 nationalised companies Source: IRDA, Swiss Re

11

... INSURANCE IS POISED FOR GROWTH

Example: Life insurance penetration increases with affluence
Insurance premium as % GDP Threshold for 12 insurance pick-up

Three avenues for growth

1 Addition of new customers

10 8 6 4
INDIA

2 Existing customers buy more

2 0 100 0
1,000 1

3 Extension to new geographies

2 3 10,000 100,000 GDP per capita in USD (log scale)

(1) PPP adjusted GDP per capita higher by a factor of ~5-6; lower income categories not shown Source: Swiss Re; NCAER

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OVERALL HOWEVER INSURANCE STILL UNDER PENETRATED ...

... But still remains # 19 in insurance terms...
Premium income ($ Bn)

... with some product categories nascent

Pension scheme
1055

USA 479 247 171 164 112 60 59 50 47 47

Japan UK Germany France Italy S Korea Canada Netherlands Spain

Annuity scheme Health insurance

Disability and critical illness insurance

Professional liability Crop insurance Income protection Credit insurance
14

11China
...

19 India

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AS A FULLER PRODUCT LIST COME ON OFFER LATENT DEMAND WILL GET RELEASED
Pre 2000 Endowment and money back policy - ~98% to total premium income Today Variety of products with riders covering disability,critical illness, accidents etc. Increasing acceptance of variable returns and pure term products Unit linked products Home building structure and contents (penetration in India ~1% v/s ~70% in UK) Health insurance (penetration in India 1-2% v/s 10% in UK) Corporate and professional liability
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Tomorrow Pension scheme Annuity scheme Income protection Increased term

Life returns, limited, if any term

Products viewed as necessary evil for tax-breaks

Products with guaranteed

Personal non-life insurance products (except motor) virtually nil

Non Life Corporates buying Non life

New products emerging to cater to personal needs: Health Travel (overseas/domestic) Household articles Building (structure/content) Mobile insurance Credit insurance ...

CUSTOMER AWARENESS IS KEY

Low penetration of personal non life products...
% customers having bought insurance in metros
Auto Health Accident Home Fire Theft

... due to low awareness for several types of insurance

% customers with unaided awareness of different types of insurance in metros

39 12 8 2 1 2

Auto Health Accident Home Fire Theft

45 19 17 9 6 2

Source: Survey of about 306 customers across Delhi, Mumbai and Kanpur conducted in 2002

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OPPORTUNITY

Low penetration ratio (Premium to GDP )

0.7%-

India 4.6% -US 3% -Europe 1.6%- Asia

Untapped Rural Market

KEY BUSINESS SEGMENTS

Motor - 43% Fire and Marine 11% and 6.3% Health 23%(only 2% in 2007) Engineering, aviation, liability, personal accident, small proportion Home insurance, Travel and students insurance yet to pick up

INSURANCE MARKET - AN OVERVIEW

13/04/2012

College of Insurance (III) New India Programme 19

COMPETITIVE LANDSCAPE AND PERFORMANCE

GROWTH STRATEGIES BY PRIVATE SECTORS

Huge agency force and distribution network Big marketing and promotional expense Product differentiation based on quality and service offerings Profitable customer segments

EMERGING AREAS AND UNTAPPED POTENTIAL

Health care and pension Home Insurance Multiple Distribution network Product Innovation Consolidation

THE 4 PILLAR MODEL FOR SOCIAL SECURITY

The 1st pillar Mandatory and state driven insurance programs The 2nd pillar - the Supplementary (often funding-based) occupational Insurance programs; The 3rd pillar - individual savings (personal savings and assets and life insurance). The 4th Pillar- post retirement work to sustain living and health expenses

HEALTH

2nd largest vertical showing a growth of 33%, CAGR of 28.5%, expected to continue in 2012-14
Health

care costs Health awareness Government support and incentives Huge demand supply gap

315 million are insurable and have a capacity to pay a premium of Rs. 1000 Challenge----
Unorganized

sectors Cover for under-priveledged

HOME INSURANCE
Also called householders or hazard insurance Penetration @0.18% of households 0.6% of the total non-life insurance market with premium of only Rs. 2 Billion Huge potential for combined policy Has the capacity to take the same trajectory as health insurance

MULTIPLE CHANNEL OF DISTRIBUTION

Bancassurance Direct selling agents Brokers Online Corporate agents (NBFC) Tie-up with Para banking companies Corporate agencies (NGO)

SHORTCOMINGS
Underwriting performance Risk management Pricing high reliance of investment income to offset underwriting loss, highly volatile income so not a sustainable model)

KEY REGULATIONS AND EXPECTED CHANGES

IRDA hinted at mandatory listing of insurance companies Health insurance portability scheme across non-life insurance from october 2011 M&A guidelines to pave way for consolidation Nod from IRDA, RBI, Finance Ministry SEBI and CCI for M&A Banks may be allowed to sell products of 2 insurance companies each in life and non-life intended to increase penetration Norms for improving transparency also being mooted FDI may be increased to 49%

FUTURE OUTLOOK KEY SUCCESS FACTORS (S&P)

Effective claims management Efficient underwriting skills Cost control measures Superior customer service Product innovation Timely regulatory reforms

BCG REPORT
350-400 billion in terms of premium income by 2020 India would be 3rd in life insurance market in the world One of the top 15 in the non-life

SIGNALS OF CONSOLIDATION

Indian Insurance Sector - Key Investments Hewlett-Packard (HP) owned IT services company Mphasis has acquired US-based software vendor Wyde Corporation. With this acquisition, Mphasis intends to align its applications and business process outsourcing (BPO) operations with Wydes insurance software platform Wynsure. The acquisition is the second one in insurance segment by Mphasis, which bought AIGs captive unit in India in 2009. The Competition Commission of India (CCI) has given its nod to Reliance Industries Ltd. (RIL) to buy Bharti Groups 74 per cent stake in each of Bharti AXA life and general insurance companies. Bharti Enterprises and French insurer AXA Group were in 74:26 joint venture (JV). While RIL will acquire 57 per cent of the pie, Reliance Industrial Infrastructure Ltd (RIIL) will buy the remaining 17 per cent held by Bharti in the two companies.

Indias second largest public sector lender Punjab National Bank (PNB) is set to form a strategic alliance with insurance firm Metlife for its proposed life insurance business, wherein the bank would buy 30 per cent stake for an undisclosed amount. PNB also agreed to enter into a 10-year distribution tie-up with Metlife India. The deal is expected to close by the end of 2011. Cigna Corporation, American health insurance major, is planning to form a Joint Venture (JV) with an Indian company by August 2011 to mark its presence in the country's fast-growing health insurance sector.

MAJOR DRIVING FACTORS

=> Growing demand from semi-urban population => Entry of private players following the deregulation => Rising demand for retirement provision in the ageing population => The opening of the pension sector and the establishment of the new pension regulator => Rising per capita incomes among the strong middle class, and spreading affluence => Growing consumer class and increase in spending & saving capacity => Public private partnerships infrastructure development => Dearth of innovative & buyer-friendly insurance products => Success of Auto insurance sector

STRENGTHS/OPPORTUNITIES

The intense competition brought about by deregulation has encouraged the industry to innovate in all areas; from underwriting, marketing, policy holder servicing to record-keeping Aggressive marketing strategies by private sector insurers will buoy consumer awareness of risk and expand the markets for products Competition in a deregulated environment will allow market forces to set premiums that are appropriate for exposures and push insurers to differentiate their products and services Innovations in distribution and improvements in market penetration will follow as public and private insurers compete to market their products Allowing insurers to issue their own policy wordings and set their own rates will enable underwriters to tailor products to meet client needs The existence of stringent licensing requirements ensure that only adequately capitalized and professionally managed companies are eligible to carry out insurance and reinsurance The Insurance Regulatory Development Authority of Indias (IRDA) emphasis on quarterly reporting/monitoring of insurer solvency will enhance capital adequacy and transparency Licensed brokers are very much part of the intermediary structure and only those with adequate capital, professional experience and expertise will be licensed by IRDA

WEAKNESSES/CHALLENGES

Premiums rates will remain under pressure due to intense competition on the more profitable lines Falling premium income -- without a corresponding reduction in claims -- is likely to drive down profits Reinsurance is likely to cost more as treaty reinsurers reduce ceding commissions to compensate for the lower rates following deregulation Public and private sector insurers greater reliance on their investment portfolios to generate sufficient income and gains for net profits would subject them to the volatility of the financial markets Private insurers need to raise more capital, otherwise growth could be constrained since reliance on reinsurance for capital relief is not always viable or available Traditional distribution channels, especially tied agents, need to be improved to match the new product offerings There is general lack of transparency as financial and operational data for insurers are not readily available as none of Indias insurers are directly listed on stock exchanges Like all developing economies on a fast track, the shortage of trained insurance professionals and technicians at all levels cannot be remedied in the short term Natural catastrophes will always be present; the Indian sub-continent is vulnerable to cyclones, floods, hurricanes and earthquakes, and until there is a national capacity (similar to the terrorism pool) to manage losses, dependence on overseas reinsurers will continue

PORTERS FIVE FORCES MODEL

1-THREAT OF NEW ENTRANTS.

. The average entrepreneur can't come along and start a large insurance company. The threat of new entrants lies within the insurance industry itself. Some companies have carved out niche areas in which they underwrite insurance. These insurance companies are fearful of being squeezed out by the big players. Another threat for many insurance companies is other financial services companies entering the market. What would it take for a bank or investment bank to start offering insurance products? In some countries, only regulations that prevent banks and other financial firms from entering the industry. If those barriers were ever broken down, like they were in the U.S. with the Gramm-Leach-Bliley Act of 1999, you can be sure that the floodgates will open.

2-POWER OF SUPPLIERS.

The suppliers of capital might not pose a big threat, but the threat of suppliers luring away human capital does. If a talented insurance underwriter is working for a smaller insurance company (or one in a niche industry), there is the chance that person will be enticed away by larger companies looking to move into a particular market.

3-POWER OF BUYERS

The individual doesn't pose much of a threat to the insurance industry. Large corporate clients have a lot more bargaining power with insurance companies. Large corporate clients like airlines and pharmaceutical companies pay millions of dollars a year in premiums. Insurance companies try extremely hard to get high-margin corporate clients

4-AVAILABILITY OF SUBSTITUTES

This one is pretty straight forward, for there are plenty of substitutes in the insurance industry. Most large insurance companies offer similar suites of services. Whether it is auto, home, commercial, health or life insurance, chances are there are competitors that can offer similar services. In some areas of insurance, however, the availability of substitutes are few and far between. Companies focusing on niche areas usually have a competitive advantage, but this advantage depends entirely on the size of the niche and on whether there are any barriers preventing other firms from entering.

5-COMPETITIVE RIVALRY.

The insurance industry is becoming highly competitive. The difference between one insurance company and another is usually not that great. As a result, insurance has become more like a commodity - an area in which the insurance company with the low cost structure, greater efficiency and better customer service will beat out competitors. Insurance companies also use higher investment returns and a variety of insurance investment products to try to lure in customers. In the long run, we're likely to see more consolidation in the insurance industry. Larger companies prefer to take over or merge with other companies rather than spend the money to market and advertise to people.

CHANGING CUSTOMER EXPECTATIONS IN INSURANCE SECTOR

Pre to Post Liberalization

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COMPARISONS OF FACTORS INFLUENCING INSURANCE MARKET

Pre Liberalisation
Security Savings Tax Rebate 43% 14% 43%

Post Liberalisation
Security 50% Savings* 34% Tax Rebate 16% * childrens education, daughters marriage, retirement plan

Motivating Factor(s) for Considering Insurance

Sources of Information on Insurance & Product Awareness

Friends, Colleagues, Relatives and Agent Low awareness of several insurance products due to poor communication in spite of availability Money Back Endowment Whole Life 60% 40% 0% Additionally from direct mailers, consumer meets, internet & media (mass media & outdoor) Rising level of awareness of new products of both LIC and private companies

Choice of First Policy

Money Back 42% Endowment 48% Whole Life 10% This change in product-mix reflects maturing of the insurance customer
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PRE PURCHASE PROCESS : LIFE

Pre Liberalisation
Approach of Agent - informal and through referral Long term family type of relationship Often selling insurance as commodity Average communication skills

Post Liberalisation
Approach - more professional, sometimes aggressive (in one or two private company agents) Proactive in contacting prospects directly, often has to start from selling concept of insurance rather than product Conducts financial health check up and then offers suitable products / solutions Better communicator & presenter Handles larger number of queries

Approach of the Agent and Consumers Experience

Awareness & Consideration of Private Players

Private Companies Overall SECA SEC B SEC C Awareness 73% 93% 83% 50% Consideration 35% 65% 30% 10% SEC B & C prospect not influenced much by direct contact of agent and generally takes decision only after consulting informed family member or friend.
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AWARENESS OF NEW PRODUCTS- LIFE

Though most SEC A & some SEC B customers have generally heard of change in product offering after liberalization but unable to provide any details. Only some customers have mentioned new products such as Products with multiple riders-medical, accident, waiver of premium rider Pension/retirement benefit plans Flexi premium plans product with single premium and short time premium option Some customers exposed to new products perceive new products similar to old ones and do not offer any additional advantage. New policies are like old wine in new bottle

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PURCHASE PROCESS : LIFE

Pre Liberalisation
No. of customers getting discount : 50% Rate of discount : 25%-50% of first year premium Mode - Registered post for LIC, hand delivered by agent in 23% cases

Post Liberalisation Discount Offering Practices

Customers getting discount : 33% (highest in Delhi) Rate of discount : More or less same

Policy Delivery
Mode - Registered post for LIC - Courier for private companies In both cases, policy comes in attractive, protective plastic jacket Time taken LIC Private Co Up to 1 week 5% 85% Up to one month 77% 15% > 1 month 18% 0%
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Time taken Up to 1 week One month > 1 month

0% 65% 35%

POST PURCHASE PROCESS : LIFE

Pre Liberalisation
Generally no correspondence from either company or agent except for late premium payment reminder from company Agent maintained informal contact with close customers

Post Liberalisation
Mailers from both private companies & LIC on products & services, greeting cards on birthdays, anniversary and new year Phone calls from private company call centres Agent in regular contact for offering new products

Correspondence (other than premium notice) from Company / Agent

Delay in Premium Payment

Incidence of delay high 30% (due to irregular receipt of premium notice from
company / reminder from agent)

Incidence of delay low

15%

(more regular receipt of premium notice from company / reminder from agent)

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CHANGING CUSTOMER EXPECTATIONS - LIFE

Role of IRDA

Educate public on regulatory safeguards, investment guidelines and plough back of profits (several people had expressed concern about security of their money, credibility of private insurance companys investment of funds in foreign markets and repatriation of profits to foreign countries) Inform public on Social and Rural obligations of private players (several people believed that only LIC was responsible for insuring the poor)

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CHANGING TRENDS IN SAVINGS PATTERN

Pre Liberalisation
Saving Instruments Insurance Bank Deposit PPF NSC Shares Post office Bonds Gold TOTAL % of Respondents 23 28 19 12 7 7 0 4_ 100

Post Liberalisation
Saving Instruments Insurance Bank Deposit PPF NSC Shares Post office Bonds Gold TOTAL % of Respondents 33 44 8 0 3 3 9 0_ 100

* When the respondents were asked where they would invest their extra income, if any, the top responses were recorded as above

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