Business Today

'The big change is in health insurance, people see value in it'

twitter-logo Anand Adhikari        Print Edition: Dec 11, 2011

J. Hari Narayan, 63, Chairman, Insurance Regulatory and Development Authority, or IRDA, travels incessantly on work. During a brief halt in Mumbai, on his way to Hyderabad, where IRDA is headquartered, JHN - as he is known in the industry - a 1973-batch Indian Administrative Service officer and classical music enthusiast, spoke to Anand Adhikari on the state of the general insurance business in the country. Edited excerpts:

J. Hari Narayan, Chairman, Insurance Regulatory and Development Authority
J. Hari Narayan, Chairman, Insurance Regulatory and Development Authority
What is your assessment of the private sector's performance in general insurance in the last 10 years?
The growth has been uneven in the general insurance sector, but lately it has picked up. In India, general insurance has traditionally been motor insurance because people see value in it. In any case, the law makes it compulsory. Therefore, about 50 per cent of the entire general insurance market is only motor insurance. The rest is highly specialised and in very small forms. There was not much going on in the general insurance space. There are two critical things. One, the person must perceive a risk. Two, he must get value for whatever cover he seeks. The big change that has been happening over the past five to six years is in health insurance. While the general insurance industry is growing at 25 to 26 per cent, health insurance is growing at 37 per cent. People see value in it. There is a real risk and they see value in having an insurance cover for meeting health contingencies. I think health insurance will probably overtake motor insurance in terms of the total premium paid.

Is the absence of a large general insurance product basket a reason for the uneven growth?
I would say people in India don't feel the need to protect themselves against fire, theft and other risks of this type. The companies will respond to consumer insurance needs if there is demand. They have actually hit upon health. That is something which the consumer wants, there is a need and the insurance industry is also well equipped to meet that need.

While the penetration of life insurance jumped from 1.75 per cent in 2001 to 5.25 per cent in 2010, figures for general insurance are quite dismal at 0.55 per cent in 2001 and 0.65 per cent in 2010. Why?
General insurance is really driven by concerns and anxiety about an event and actually buying protection against it. That is a value proposition. Look at how people value their cars and so buy insurance. Now health insurance is picking up after the advent of modern corporate hospitals and advancement of modern technology in health care.

J. Hari Narayan, Chairman, Insurance Regulatory and Development Authority
J. Hari Narayan, Chairman, Insurance Regulatory and Development Authority
Do you see more niche players focusing on only health emerging in the general insurance space?
It is bound to happen. There are already three companies focused solely on health. Today, the big issues on the health side are proper pricing, more efficient system of distributing products and having a more robust claims settlement process.

In the private sector, general insurance companies have managed to garner almost 40 per cent market share whereas their counterparts in life have just 25 to 30 per cent. How will you explain this?

Life insurance, by its very nature, is a very-long-term business. It requires financial strength and companies like Life Insurance Corporation of India, or LIC, which have enormous financial strength and deep pockets, have an advantage. There were other countries that nationalised insurance around the same time we did, but LIC grew from strength to strength whereas it is not the same case in other countries. That is why LIC continues to dominate the life insurance market. In general insurance, there were four nationalised companies with no common branding. Unlike life insurance, the general insurance business is short-term (one year) and also not very retail-oriented.

What are the issues engaging your attention as a regulator?
General insurance premiums are very low today. It is actually the premium that helps in meeting all the costs of an insurer like administration and operating costs and paying off insurance claims as and when they come. What we find is that after the de-tariffing in 2000, the companies were competing on the grounds of price. They drove the price down. While the consumers are getting a good deal, the companies are underpricing their products.

J. Hari Narayan, Chairman, Insurance Regulatory and Development Authority
 For a more detailed interview go to www.businesstoday.in/narayan
There are actually two sources for a general insurance company to meet its financial commitments. One is underwriting profit; the money left after charging all the costs and claims, if any. The other part is the investment income. It is a question of how well you manage your investment portfolio to earn an investment income.

After the de-tariffing, the underwriting income has gone as people are competing on price. In fact, the prices have become totally unsustainable. As a result, you have to depend only on investment income to make money. So the question is: how long can you keep living off investment income? One day, the investment will go away. That is fundamentally unstable in the longer run for private companies.

So pricing is a big issue?
I don't want to go back to the system where we fix the price. I think market discipline is good for companies. They will manage their businesses better and give services to customers. There was a good reason for detariffing. But as a regulator we keep thinking of what other steps we can take to help the companies regain a healthy and financially viable position. There are already provisions which we as a regulator oversee.

We already have two dozen general insurance players. Is there room for more?

There are 70 to 80 in Hong Kong alone. There are more general insurers in the countries of Southeast Asia. Looking at it that way, there is enough space in India.

Do you expect consolidation?
That should happen, but there is not much evidence of it happening. It may happen.

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