life After

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Low insurance penetration leaves 1.2b Indians vulnerable to unforeseen events

life After
India is a $2 trillion economy. But less than 4 per cent of that goes into insurance, life or non-life. Our rich Asian fellow-nations have a better record: Hong Kong is 12.4 per cent, Japan 11.4 per cent, South Korea 12.1 per cent and Taiwan 18.2 per cent.

Even those in our league in our continent are better off, like Malaysia (4.8 per cent), Singapore (6 per cent) and Thailand (5 per cent). For the record, the world average is 6.5 per cent.

What’s more worrying, the average has been declining and would continue to do so in 2014 at least, despite the government trying its best to make insurance a part of most Indians’ lives. It opened the insurance market for foreign participation in 2001 and floated several state-sponsored insurance schemes.

Well, the number of insurance firms has surely multiplied. At last count there were 52, of which 24 were in the life insurance business and the rest in non-life. Not bad, considering there was a time when insurance was a state monopoly. So, why is this not reflected in the ratio of premium underwritten annually to our GDP (a factor otherwise known as insurance penetration)?

Rajesh Sud, CEO and MD of Max Life Insurance, explains: In the first decade of private firms coming in, insurance penetration rose. But it foundered later on the economic slowdown and inflation. This put less disposable money in the hands of people. Their propensity was to put money in real estate and gold rather than insurance.

Plus, those who combined stock market and insurance and thought they would make money found their Ulips had lost the sheen. “This resulted in a large number of surrenders in the past three years,” argues Sud.

And then there was over-regulation. But there were other reasons too. Like rampant mis-selling (basically means the agent lying to you about a policy) of Ulips to people who knew nothing about how the stock market worked.

Moreover, a legion of insurance agents enticed policyholders to surrender old policies and buy new ones. This was tacitly encouraged by insurance companies that earned a surrender fee; the agent happily took his 40 per cent cut from the first-year premium.

Just how big the racket was is indicated in a Goldman Sachs report that says six big insurers profited by Rs 3,189 crore from lapsed policies in just two years: 2010-11 and 2011-12.

Other than insurance penetration, insurance density is the second indicator of the industry’s expanse. Life insurance penetration in India went up from 2.15 per cent in 2001 to 4.60 per cent in 2009 before slipping to 4.40 per cent in 2010, 3.40 per cent in 2011 and further to 3.17 per cent in 2012. Non-life insurance penetration has been between 0.55 per cent and 0.71 per cent for 11 years, save 2012 when it spiked to 0.78 per cent.

The other indicator, insurance density, is the ratio of premium underwritten in a country in a year to its population (measured in dollars for convenience and comparison).

Life insurance density had risen consistently since the business was opened to the private sector in 2000. But 2011 was a break. Still life insurance density has gone up from $9.1 in 2001 to $42.7 in 2012 though it had reached a peak of $55.7 in 2010.

In non-life, the insurance density, $2.4 in 2001, reached the peak of $10.5 in 2012. Still, it was much below the world average of $283.10.

India does poorly within BRIC nations too. The insurance density in Brazil is $188.7. Other Asian nations too beat India hands down: Hong Kong has a density of $519.2, Japan $1024.9, Malaysia $184.3, Singapore $890.2, South Korea $1207.3, Taiwan $652 and Thailand $109.7.

One silver lining is that life insurance has actually spread, though marginally, in India. So have increased the average insurance cover purchased by individuals and the total number of policies in force. Yet, a vast majority of our population still has to make do without insurance.

For a perspective, consider this: India has a population of over 1.2 billion. Of them just 28.7 million are in the workforce. And, of this workforce, only 11 per cent are in the organised sector. Simply put, only this 11 per cent section of the working people ca0n afford insurance of any kind. As for the rest, all they have is providence.

The Insurance Regulatory and Development Authority (Irda) has tried much to make insurance popular — and safe — with new product regulations for traditional policies and variable linked insurance plans about a year ago.

In the new traditional products, the sum assured and the minimum death benefit were increased, and agent’s commission was linked to the premium-paying period. Plus, guaranteed surrender values (GSV) of traditional plans have been defined and increased substantially.

GSV would be 30 per cent of all premiums paid after the first year; but the caveat is that premiums must be paid for at least three years running.

In new products GSV increases progressively with the tenure of a policy. It would be 30 per cent of the premium paid in the second policy year, 50 per cent of the premium paid till year seven and progressively increase after that.

The traditional insurance regulations, effective from this month, would nearly halve the margins of life insurance companies, according to Karni Singh Arha, CFO of IndiaFirst Life Insurance. According to him, earlier life insurers made profits because of high surrender charges in old traditional policies and Ulips.

Also, the new regulations would force life insurers to control their direct cost such as salaries, discourage them from opening branches. Besides, they would be obliged to improve the performance of their agents.

A former Irda official agrees that the new regulations have reduced the surrender charges for customers and made it necessary for companies to focus on long-term sales.

This was perhaps necessary because life insurers made money from shareholder funds, own operations, policies that remained live for long, assets under management, and — most importantly — from lapsed policies and surrender charges.

They would have to be more cautious in selling and nursing policies. In sum, the customer would now get “genuine products”, remarks the Irda ex-official. An improvement is already visible. Lapses have marginally reduced for some companies.

This man believes 3-4 per cent insurance penetration is healthy and perhaps on the ‘higher side’ given our per capita income and in comparison to other countries of our size.

Irda’s annual report for 2012-13 says LIC’s lapse ratio increased to 5.6 per cent from 5 per cent in 2011-2012; whereas private life insurers suffered from very high ratios of 17 per cent to 42 per cent. (Lapse ratio is the number of policies lapsing in a year divided by the average of the policies in force at the start and end of the year.)

The report also reveals wide disparity in life coverage from state to state. In 2012-13 the highest life insurance penetration of 2 to 0.8 per cent was in Chandigarh, Delhi, Assam, West Bengal and Maharashtra.

The insurance density was Rs 4,862.8 in Chandigarh, Rs 1,983 in Delhi, Rs 2,096 in Goa, Rs 975 in Maharashtra, Rs 769 in Kerala and Rs 757 in

Himachal Pradesh.

According to the Insurance Information Bureau (IIB), Kerala, Haryana, Punjab, Himachal and Karnataka cover half the top 50 districts in terms of agency penetration.

The top 50 districts themselves (under 8 per cent of the total number of districts in India) have 29 per cent of all-India life agency licences and 26 per cent of all insurance offices.

Among other Irda initiatives to increase penetration is the introduction a year ago of regulations on solvency requirements and management expenses on opening offices in tier-II and still smaller locations without prior approval. This has been done to increase insurance penetration in rural and semi-urban areas.

For micro insurance products, Irda has permitted district cooperative banks, regional rural banks and even kirana shops to become agents.

Another innovation, this one by the government, is the common service centres (CSC) that would offer insurance services. This is part of the national e-governance plan (NeGP), which in turn is part of the national common minimum programme.

For better penetration outside urban centres, Irda now allows banks to act as insurance brokers. Following this, a bank can take up insurance broking without setting up a subsidiary. As a broker, it could sell products of multiple insurance companies. So far the rule was that a bank must tie up separately with a life, a non-life and a health insurance company. The nearly 55,000 bank branches in the country have never sold a life insurance policy and they are not going to do so anytime soon. For, banks, many of which have started their own insurance firms, have refused to become brokers for other insurers. They would rather function as corporate agents of their own insurance companies.

To achieve an increase, Sud suggests that the government incentivise long-term savings in insurance and pensions by creating a separate category of tax exemption. “Also, the industry needs a period of stability with no further changes in regulations.”

Making insurers and their respective bancassurance partners submit plans to Irda on how they plan to increase insurance penetration, would also be of help.

When such is the dismal state of insurance in India, where was the world? A global report published by reinsurance major Swiss Re says global life insurance premium in real terms (adjusted for inflation) grew by 2.3 per cent in 2012 to $2,621 billion after a contraction of 3.3 per cent in 2011. The 2012 expansion came mainly from the emerging markets.

In advanced markets premium grew by only 1.8 per cent in 2012 and had actually shrank by 3 per cent in 2011. Premium in advanced Asian markets (including Japan, Hong Kong, South Korea and Taiwan) grew by 8.8 per cent. In the US the increase was 2.3 per cent.

However, in western Europe premium continued to contract but at a slower rate of 3.1 per cent in 2012 than the 9.7 per cent contraction in 2011. In emerging markets, which propped up the global industry, premium increased by 4.9 per cent in 2012.

The report also points to global shifts taking place. Over the last half century, the share of premium has shifted away from Europe and Anglo Saxon market to Asian markets. The share of the first group in global premium fell from 93 per cent in 1962 to 56 per cent in 2012. Over the next 10 years, this shift would be more pronounced. By 2023 China would become the second largest market after the US.

In India’s non-life insurance sector, penetration is worse than in the life segment. This despite India being home to the world’s third largest cluster of micro, small and medium enterprises, numbering over 26 million units. Besides, there are over 15 million small shops. Yet insurance penetration is a measly 0.7 per cent.

A global report of Lloyd’s of London finds there is an annualised $20 billion uninsured losses in India, a part of a $168 billion loss in 17 severely underinsured cou-ntries. Eight of these countries are in Asia.

In five of the 17 countries, the average uninsured loss due to major catastrophes is at least 80 per cent. The average uninsured cost of a catastrophe is $1.96 billion in India. Uninsured losses, both government and the private sector, fall by 13 per cent for every 1 per cent rise in insurance penetration.

In non-life insurance one development that can make a change for the better is the emergence of health insurance. Though the base of this business was extremely small (and still is so), it has grown at a CAGR of 30.05 per cent in the past seven years, much faster than the CAGR of 17.5 per cent in GDP during the period.

Thus, the penetration of health insurance as a proportion of GDP has grown sharply, unlike in the rest of non-life business. But credit for this may go to the government health insurance schemes.

According to an India Merchant Chamber paper, only a small fraction of the population is covered by medical insurance. In the Planning Commission’s estimates 300 million Indians have health cover. But mostly they are covered by central and state schemes. In a population of 1.2 billion, barely 55 million pay for private health insurance.

Still, 80 per cent of all health expenditure in India is privately borne because government spending is low. The chamber report quotes a World Bank study that says barely seven of every 100 Indians buy health insurance.

According to KG Krishnamoorthy Rao, MD and CEO of Future Generali India Insurance, non-life insurance premium has increased in a big way from Rs 11,500 crore in 2001-2002 to Rs 69,000 crore 2012-13. “But this growth as a percentage of GDP does not look substantial.”

It is not clear if Rao is hoping or despairing when he points to another Swiss Re study that says insurance penetration increases once per capita income rises above $1,000.

“Since India’s per capita income has crossed $1,000 I expect growth to come provided we increase awareness. The General Insurance Council and the Irda are launching insurance awareness campaigns. This should help increase penetration,” adds Krishnamoorthy.

Rakesh Jain, MD and CEO of Reliance General Insurance, debunks the comparison of insurance penetration in India with other countries. “Non-life insurance penetration is also a function affordability. For most Indians it’s survival that is primary.”

His formula for increasing penetration is to customise products to the client’s needs. For instance, introducing lifestyle or wellness features could sell health insurance products more. Like everyone else, he also roots for selling insurance in rural India, poorly served by insurers now.

Irda’s annual report also says exactly the same thing: that non-life coverage in the districts is poor. “The four public sector non-life insurers have offices in 573 of India’s 640 districts. But private general insurers have offices in only 280 districts.

As of March 31, 2013, 67 districts did not have any life insurance office. Private life insurers have no offices in 382 districts. Only 19 of India’s 35 states/ union territories have non-life insurance offices in all districts.”

This may be the reason for the much lower non-life insurance penetration than life insurance penetration, concludes the Irda report.

Yes, Indian insurance has a long way to go.

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