With 36 crore policies, India's life insurance industry is the largest in the world. In fact, the population of about 200 countries in the world is less than the total number of lives insured in India. However, despite such statistics, India continues to be underinsured. Life insurance penetration in the country, the ratio of premium underwritten in a year to the Gross Domestic Product (GDP), was a minuscule 3.17% in 2012.
However this does not mean that the life insurance industry is stagnating. It is one of the fastest growing industries in the country and is forecast to grow at a compounded annual growth rate (CAGR) of 12-15% over the next five years. In 2012-13, the industry grew by 7% in the first six months (until October 2013). The industry has set itself a target of increasing penetration levels to 5% by 2020. The sector has the potential to touch $1 trillion over the next seven years. The disparity between the current level and target level makes the Indian insurance market a lucrative opportunity for investors.
Factors fostering growth
Life insurers will find conditions that support their endeavours to bridge the insurance divide. The most critical determinants are India's favourable demographic, combined with increased awareness, a supportive regulatory environment, policies that support customer-centric products and practices that aid businesses.
India's insurable population is expected to increase to 75 crore in 2020, with an average life expectancy of 74 years. As the second most preferred financial instrument, life insurance will increasingly supplement household financial savings. It is estimated it will be about 35% of total savings by the end of this decade, as compared with 26% in 2009-10.
Foreign direct investment
The cap on foreign direct investment (FDI) in the sector is also expected to be increased from 26% to 49%. The Insurance Bill has been approved by the government and is soon likely to be cleared by Parliament. This alone is expected to increase FDI inflow to $10 million in the short term.
FDI, combined with accommodating regulations, will encourage more international insurance companies to enter India. Simultaneously, the move will also provide more capital to existing players to expand their reach in tier II and tier III markets. As life insurance is a capital-intensive industry, increased investments will impact efficiency and innovation.
Innovation, the magic mantra
New regulations to govern traditional policies and variable insurance policies are likely to be implemented in January 2014. These reforms aim to overhaul traditional products. Insurance companies have been given time up to 31 December 2013 to develop new products as per the new guidelines.
Unit-linked insurance plans (Ulip) are also being restructured to win back investor confidence. These include strict regulation by central agencies and lower commission for agents. Innovation that meets consumer needs, supported by technology, will be the differentiator for companies to increase market share.
The impact of the new regulations can be assessed only after the new products are unveiled. In 2013, investors preferred traditional plans over other products offered by insurers. This is likely to continue in the near future. However, given the improving macro-economic scenario, Ulips are poised to deliver value if subscribers stay invested.
The changes in conventional products indicate a paradigm shift of the investor's mindset. Insurance is no longer perceived as a tool to save tax, but as an important financial savings instrument. The modern policyholder is more aware and knowledgeable of his rights as the consumer. Consequently, focussing on the customer has become important for the Indian insurance industry.
Semiurban and rural customers will also benefit immensely from the industry's evolving distribution system. Common Service Centres (CSC), the cornerstone of the nation's e-Governance plan, could revolutionise the accessibility of insurance in remote parts of the country. It could be the key to improving penetration levels.
Currently, India has about 1 lakh CSCs, each serving a cluster of six or seven villages. Cumulatively, these centres serve about 6.5 lakh villages. The Irda, or Insurance Regulatory and Development Authority, has mandated a tie-up between CSCs and life insurance companies, which will help the latter reach customers in rural areas.
Irda has also authorised five repositories to open up e-Insurance accounts. Besides this, Irda is also taking measures to improve consumer trust in insurers through initiatives that increase awareness and by increasing the number of grievance cells and customer contact centres.
The future is bright
Besides the impact of regulatory measures, the economy and politics will influence the performance of the life insurance industry. The economy, in the macro sense, may face volatility owing the upcoming general elections in 2014.
While the insurance industry is party-agnostic, it does require stable economic conditions to perform, just like most other sector. The next government will need restore investor confidence to take advantage of regulatory reforms.
Further, the 2014-15 Union Budget should exempt life insurance products from taxation to provide investors an incentive to buy a policy. The insurance industry can gain leverage from India's burgeoning population only by providing a special tax window for life insurance policies.
While serving the critical mandate of securing against loss of life, the life insurance industry is also a critical contributor in enhancing financial inclusion and funding its infrastructure costs.
The 12th Five Year Plan outlines an expenditure of $1.2 trillion on infrastructure and is deficient by $300 billion. The insurance industry will play an important role in earning this budget deficit. Thus, the advancement of the insurance industry will also provide a strong impetus to meet the country's longterm infrastructure and financial goals.
Secretary General, Life Insurance Council