THE insurance scene, especially that of life insurance, resembles the famous Charles Dickens conundrum of being the best of times and the worst of times simultaneously.
First, the flip side. Insurance perpetration in India is still at a low level at 4.1% of the GDP. In comparison, UK, South Africa and Taiwan have ratios between 11-13%. The global average is 6-9%. Only 24% of the Indian households own life insurance. Among the rural households, only 18% have life insurance protection. Only 14% of the policy owners are women.
Of the 321 million paid workers in India, only 105 million are covered. Among the 216 million uncovered workers, about two-thirds are "highly unlikely" to think about buying an insurance plan either because they feel they cannot afford it (63.5%) or because they (36.5%) are disinclined for various other reasons — 'not interested', 'no one has explained benefits to me' or 'poor investment', as per a recent IIMS Dataworks study.
On the bright side, this leaves the remaining one third of the working force who may buy a life insurance policy. Of these, nearly one out of five or 18% plan to do so. Further, the demand for life insurance continues to expand among existing policyholders (repeat purchase) and given the right atmosphere, are likely to buy more life insurance. In some states, as many as 40% of the existing customers believe this to be the case. Among the states, Kerala has topped among the policyholders' opinion about 'adequacy' of their coverage, while Chhattisgarh was at the bottom.
Other things being equal, the present $40-billion (Rs 1.7-trillion) market is expected to grow to $100 billion in the future, as per a recent Mckinsey and Co Report.
Some of the reasons that are holding back growth are:
Lack of suitable products : Insurance companies are ordained by the regulator Irda to fulfil a certain percentage of its business from rural areas. However, a lot of ground still needs to be covered by rural insurance. The rural citizen who is dissatisfied by the one-size-fits all products offered by companies is on the lookout for products to suit his specific needs. And by and large, he is still waiting. The advent of micro-insurance since 2005 and framing of suitable regulations in this regard have helped better focusing on the problems in expanding the reach in rural areas. Hopefully, real progress will be recorded some time soon.
Regulatory issues: Companies, especially standalone health insurers, are looking for flexibilities in minimum paid up capital requirements (pegged at Rs 100 crore), compensation structure to reward agents in rural areas, easier premium payment facilities for the ultimate customer as well as the primary contact point, the NGO's, greater freedom to devise relevant products. The Irda can justifiably take credit for being the first regulator in the would to formulate clear-cut guidelines for micro insurance. What remains to be done is to incorporate changes/amendments in all these areas in the light of experience.
Solvency requirement: The present stipulation of keeping 150% assets to match liabilities is seen to be too onerous by many insurance companies and experts. If the ratio is brought down to 100% (with freedom to increase it for specific plans) a sizeable amount of capital will be released for expansion of business activities. This is important as life insurance is a highly capital intensive business.
Labour reforms: LIC is a titan among life companies with about 70% market share. It is, however, hobbled by a huge unionised workforce in its class III and Class II cadres who often hold up operational reforms and prevent the corporation from realising economies of scale and scope. LIC can give better returns to its policyholders if the management is given a free hand to rationalise its workforce.
Legal reforms: Many of the legal provisions emanating form the Insurance Act 1938 are in great need of change. If the government is able to push the proposed amendments, it will impart great dynamism in the way business is done.
Agent's compensation: While the mutual fund industry has been nudged constantly to reduce transaction costs, the same cannot be said of the life insurance industry in India. The agents get a really huge initial commission of nearly 40% on the first premium they generate and 5% on subsequent premium payments. There is a strong case for downsizing the compensation to bring the costs down and thereby make life insurance less expensive and attractive. The regulator should play a decisive role here as Sebi did in the case of mutual funds.
Sleeping giant: The 40 odd insurance companies have accounted for an equity exposure of Rs 70,000 crore in the last fiscal. The current fiscal will see a 10–15% surge. LIC is a mega player with its Rs 6,50,000 crore in investible financial assets. At the end of the last financial year, LIC had Rs 90,000 crore mark-to-market investible funds purely out of its Ulip portfolio. LIC's net investment in equity in FY08 is estimated to be at Rs 6,000 crore or more. If the joint venture life companies and LIC is offered greater relaxation in and freedom they would register amazing progress to reach the $100 billion size much sooner than anticipated.
The author is associate professor, Birla Institute of
Management Technology
First, the flip side. Insurance perpetration in India is still at a low level at 4.1% of the GDP. In comparison, UK, South Africa and Taiwan have ratios between 11-13%. The global average is 6-9%. Only 24% of the Indian households own life insurance. Among the rural households, only 18% have life insurance protection. Only 14% of the policy owners are women.
Of the 321 million paid workers in India, only 105 million are covered. Among the 216 million uncovered workers, about two-thirds are "highly unlikely" to think about buying an insurance plan either because they feel they cannot afford it (63.5%) or because they (36.5%) are disinclined for various other reasons — 'not interested', 'no one has explained benefits to me' or 'poor investment', as per a recent IIMS Dataworks study.
On the bright side, this leaves the remaining one third of the working force who may buy a life insurance policy. Of these, nearly one out of five or 18% plan to do so. Further, the demand for life insurance continues to expand among existing policyholders (repeat purchase) and given the right atmosphere, are likely to buy more life insurance. In some states, as many as 40% of the existing customers believe this to be the case. Among the states, Kerala has topped among the policyholders' opinion about 'adequacy' of their coverage, while Chhattisgarh was at the bottom.
Other things being equal, the present $40-billion (Rs 1.7-trillion) market is expected to grow to $100 billion in the future, as per a recent Mckinsey and Co Report.
Some of the reasons that are holding back growth are:
Lack of suitable products : Insurance companies are ordained by the regulator Irda to fulfil a certain percentage of its business from rural areas. However, a lot of ground still needs to be covered by rural insurance. The rural citizen who is dissatisfied by the one-size-fits all products offered by companies is on the lookout for products to suit his specific needs. And by and large, he is still waiting. The advent of micro-insurance since 2005 and framing of suitable regulations in this regard have helped better focusing on the problems in expanding the reach in rural areas. Hopefully, real progress will be recorded some time soon.
Regulatory issues: Companies, especially standalone health insurers, are looking for flexibilities in minimum paid up capital requirements (pegged at Rs 100 crore), compensation structure to reward agents in rural areas, easier premium payment facilities for the ultimate customer as well as the primary contact point, the NGO's, greater freedom to devise relevant products. The Irda can justifiably take credit for being the first regulator in the would to formulate clear-cut guidelines for micro insurance. What remains to be done is to incorporate changes/amendments in all these areas in the light of experience.
Solvency requirement: The present stipulation of keeping 150% assets to match liabilities is seen to be too onerous by many insurance companies and experts. If the ratio is brought down to 100% (with freedom to increase it for specific plans) a sizeable amount of capital will be released for expansion of business activities. This is important as life insurance is a highly capital intensive business.
Labour reforms: LIC is a titan among life companies with about 70% market share. It is, however, hobbled by a huge unionised workforce in its class III and Class II cadres who often hold up operational reforms and prevent the corporation from realising economies of scale and scope. LIC can give better returns to its policyholders if the management is given a free hand to rationalise its workforce.
Legal reforms: Many of the legal provisions emanating form the Insurance Act 1938 are in great need of change. If the government is able to push the proposed amendments, it will impart great dynamism in the way business is done.
Agent's compensation: While the mutual fund industry has been nudged constantly to reduce transaction costs, the same cannot be said of the life insurance industry in India. The agents get a really huge initial commission of nearly 40% on the first premium they generate and 5% on subsequent premium payments. There is a strong case for downsizing the compensation to bring the costs down and thereby make life insurance less expensive and attractive. The regulator should play a decisive role here as Sebi did in the case of mutual funds.
Sleeping giant: The 40 odd insurance companies have accounted for an equity exposure of Rs 70,000 crore in the last fiscal. The current fiscal will see a 10–15% surge. LIC is a mega player with its Rs 6,50,000 crore in investible financial assets. At the end of the last financial year, LIC had Rs 90,000 crore mark-to-market investible funds purely out of its Ulip portfolio. LIC's net investment in equity in FY08 is estimated to be at Rs 6,000 crore or more. If the joint venture life companies and LIC is offered greater relaxation in and freedom they would register amazing progress to reach the $100 billion size much sooner than anticipated.
The author is associate professor, Birla Institute of
Management Technology
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