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India's Insurance Sector

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Foreign investment and access to foreign capital by domestic companies is being progressively liberalised in India.

Insurance Regulatory and Development Authority

Pasisrama Bhavanam
5-9-58/B Basheer Bagh
Hyderabad - 500 004
Phone: +91 (040) 6820964
Fax: +91 (040) 6823334
Email: irda@irda.gov.in

Overview

INDIA is the 5th largest market in Asia by premium following Japan, Korea, China and Taiwan. The US$ 30 billion insurance business in India is expected to grow 17 per cent in fiscal 2008-09* if the country’s economy clocks 7.6 percent GDP. In fiscal 2007-08 life insurers grew their business by 23.3 percent to Rs.930 billion while general insurers posted growth of about 14 percent in premium income to Rs 298 billion. Presently the total number of insurers registered with the Insurance Regulatory and Development Authority (IRDA) stands at 42 : 21 in life insurance and 21 in general insurance segments. Some joint ventures include Tata AIG, Bajaj Allianz, ICICI Prudential, SBI Life, HDFC Standard Life, Birla Sunlife, Max New York Life and Bharti AXA Life.  

India is the fifth-largest country in Asia in terms of total insurance premium. The premium income in the country increased to 4.7 percent of GDP in fiscal 2006-07 from 3.3 percent in the fiscal 2002-03.Total premium in the insurance industry grew at a CAGR of 28.1 percent during the same period. The life insurance sector grew at a CAGR of 29.3 percent outsmarting the general insurance sector’s CAGR of 21.3 percent.

The Indian insurance sector has a turnover of around Rs 26,287 crore. The current FDI in this sector stands at around Rs 2500 crore and market experts expects FDI to zoom by about 2.5 times once the FDI cap is raised by another 23 percent to 49 percent.

The terror Pool, set up after 9/11 attacks, and being funded by the insurers currently has a corpus of Rs 1000 crore. The settlement of the claims for Taj, trindent and Oberoi amounting to Rs 500 crore could be well taken care of. The urrent coverage is till March 31, 2009. It is expected with renewals for next fiscal year, the Terror Pool fund will increase substantially. General Insurance Corporation (GIC), the Indian reinsurer, is planning to rise terrorism insurance cover to Rs 1000 crore from Rs 750 crore. Currently any claim beyond Rs 750 crore is covered by international insurers.

Meanwhile, on the expected line of foreign investors, the Congress(I)-led UPA government in New Delhi has introduced the Insurance Laws (Amendment) Bill 2008 in the upper house of Indian Parliament on December 22, 2008 that seeks to raise the Foreign Direct Invest (FDI) cap in the insurance sector from existing 26 percent to 49 percent. The government move is seen as the UPA government’s most significant and biggest reform measure in the financial sector since the then Finance minister P. Chidambaram in his Budget speech announced plan to hike FDI in insurance to 49 percent.

The Bill, once through in both houses of Parliament, will allow companies, exclusively into the business of health insurance, to operate with a minimum paid up capital of Rs 50 crore against the current minimum paid up capital of Rs 100 crore for any insurance business- Life or General. For re-insurance business the minimum paid-up capital will be Rs 200 crore. The Bill when translated into an Act would enable all the state-run general insurance companies- Oriental Insurance, New India Assurance, United India Insurance and National Insurance – to enter the capital market to mop up funds.

The Bill also seeks to allow Lloyd’s of London to enter Indian insurance market as a foreign company in joint venture partnership with local companies. The insurance regulatory body- IRDA, would chart the terms and conditions for cancellation of registration. Business without registration will invite fine up to Rs 25 crore. For not meeting the obligations for rural or social sector or third party insurance of motor vehicles, fine up to Rs 25 crore will be slapped.

According to the Bill, no insurance policy can be challenged after a gap of five years. It will protect the interest of policy holders against any possible litigation.

Besides Insurance Law (Amendment) Bill 2008, the government has also introduced another Bill namely, Life Insurance Corporation (Amendment) Bill to raise its capital from existing Rs 5 crore to Rs 100 crore. This would enable LIC comply with IRDA norms.

The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has projected that foreign direct investment (FDIs) will increase in insurance sector by $ 0.46 billion in next 2 years and likely to touch $ 0.96 billion as it is still regulated. A Paper on FDI’s Prospects in Insurance Sector brought out by the ASSOCHAM says that currently the total insurance market in India is about $ 30 billion, in which the element of FDI’s is $ 0.5 billion. This is 1.6 percent of total insurance business in India.

Despite, insurance being a highly regulated sector, however, in the first five months of current calendar, i.e. between January to May, it could attract FDI’s of $ 217.97 million which by any standard is not too insignificant. If the insurance sector is opened up to an extent of 49 percent for FDI’s, in next 2 years, i.e. by 2010, the FDI’s contribution to insurance business would touch nearly $ 2 billion. Currently, only 26 percent of FDI’s are permitted in insurance sector, the chamber expects. It is pointed out that the domestic insurance sector has been growing at an average speed of nearly 200 percent and that is why the chamber is of the view that by 2012, the total insurance business would touch $ 60 billion size.

In the life insurance sector particularly on FDI’s front, the growth that has taken between 2006 and 2007 is estimated to be around 270 percent. This itself speaks the significance and importance, investors are attaching to both life insurance and non-life insurance sector.

India’s insurance market lags behind other economies in the baseline measure of insurance penetration. At only 3.1 percent, India is well behind the 12.5 percent for the UK, 10.5 percent for Japan, 10.3 percent for Korea and 9.2 percent for the US. Currently, FDI represents only Rs.827 core of the Rs.3179 crore capitalizations of private life insurance companies. FDI in insurance would increase the penetration of insurance in India, where the penetration of insurance is abysmally low with insurance premium at about 3 percent of GDP against about 8 percent global average. This would be better through marketing effort by MNCs, better product innovation, consumer education etc.

The chamber President Sajjan Jindal maintains that insurance sector in India has the capability of raising long term capital from the market as it is the only avenue where people put in money for as long as 30 years even more. An increase in FDI in insurance would indirectly be a boon for the Indian economy, the investments not withstanding but by making more people invest in long term funds to fuel the growth of the Indian economy, he feels. 

Since end of 2000 when insurance was privatized, life insurance company promoters pumped in Rs 21,000 crore so far. The distribution network also expanded significantly. In the second quarter of fiscal 2008-09 1480 branches were added including 1293 branches set up by private sector life insurers. During this period the life industry added 53332 employees to their payrolls. The number of pay-roll employees now crossing over 300,000. Of the total 10,037 branches of life insurance companies around 7,000 are in semi urban and rural areas. By the end of 1^st quarter of current fiscal (2008-09) the total assets of the life insurance companies stood at Rs 857,500 crore. Of this, Unit Linked Policies ( ULIP) accounts for Rs 140,000 crore. The total premium of all insurance companies taken together aggregated to Rs 86,500 crore in the first half of current fiscal.

Yet another highly prospective business segment is health insurance. According to a CII-E&Y study report, the health insurance premium income

is likely to touch Rs 30,000 crore in 2015 from the existing Rs 4,000 crore. The premium was Rs 670 crore in fiscal 2001-02. It is expected that the hike in FDI for the insurance sector from 26 percent to 49 percent will boost the healthcare business.

The immense business potential in health sector is reflected in the fact that only about 1 percent of the country’s population is presently covered under health insurance policies. The fillip to the health insurance segment will also come when the Insurance Regulatory and Development Authority’s (IRDA) recommendation to bring down capital requirements for stand-alone health insurance companies from Rs 100 crore to Rs 50 crore. In fact, the Insurance Laws (Amendment) Bill 2008 makes provision to allow companies, exclusively into the business of health insurance, to operate with a minimum paid up capital of Rs 50 crore against the current minimum paid up capital of Rs 100 crore for any insurance business- Life or General. This is expected to prompt entry of more health insurance companies into the country.

Micro insurance is yet another which is yet to be explored optimally. The CII-E&Y report says that micro health insurance schemes in India have achieved good enrolment levels among their target populations including poor. Out of the total insurance premium of Rs 100,000 crore collected in fiscal 2007-08, micro-insurance accounted for a meager Rs 125 crore.
 
The CII-E&Y recommendations include introduction of risk-based capital in the life insurance segment, institutionalization of underwriting and marketing skills in the general insurance segment, articulation of proper reforms and industry compliance for health insurance and regulatory and industry endeavor to promote deepening of markets for micro insurance.

The health expenditure across the country was Rs 180,000 crore in 2007. With healthcare costs escalation, rising demand for healthcare services and limited access of the low-income group to quality healthcare, health insurance is emerging as an alternative mechanism for financing healthcare. And with merely 12 percent of the population being covered, companies are looking at the health insurance space as a lucrative segment.

The state-owned companies constitute nearly 70 percent of the health insurance market and private companies account for the remaining 30 percent As the out-of-pocket expenditure on healthcare is pegged at more than 70%, private insurers are treating this as an important target market. ICICI Prudential has started a division catering to health insurance, while Bupa-Max is awaiting the IRDA’s approval to launch health insurance schemes. LIC recently unveiled its health insurance scheme to compete with players such as Apollo, Star and Bajaj Allianz.

Bajaj Allianz head of health insurance Shreeraj Deshpande said, “We are going to the semi-urban and rural areas. We are targeting the informal sector by having viable products and communicating through NGOs.” The channels of reach are also seeing a change, with companies tapping banks’ databases in an attempt to reach people. “Banks will play an important role in selling policies, given the difficult environment. The entry of additional companies into the health insurance sector will depend on regulations and companies’ abilities to make profits,” he said.

“The growth in healthcare will be supported by standalone health insurance companies and new players. Moreover, domestic life insurance players are augmenting their product portfolios with innovative standalone health insurance products for catering to the growing health insurance segment,” the report stated.

Commenting on the prospect of the general insurance industry in India a Moody’s-ICRA report on Indian General Insurance Industry Outlook said: The outlook for the general insurance industry in India is stable based on Moody’s expectations for steady fundamental credit conditions in the sector over the next 12-18 months. With the Indian economy forecast to grow at 7.5% in 2008 and given rising income levels and higher risk awareness among insureds, the country’s insurers are optimistic about demand for their products. However, intense competition from new entrants, deregulation and a moderation in returns from the equities market will pressure pricing and ultimately short-term profitability.”

“At the same time, despite rising inflation and a severe correction in the stock market (the key Sensex index fell 26% in 1Q2008), the prevailing view in Asia is that while China and India are not insulated from the credit crisis afflicting the US and EU, domestic demand is strong enough to support GDP growth1. Being less export dependent, India is also less vulnerable than some of its neighbors”, the Report pointed out.

According to Moody’s-ICRA report published in April 2008, “Rising income levels, low penetration for most consumer products, availability of financing and changes in lifestyles/ aspirations are likely to sustain consumer demand over the next few years. In the short term, the focus on infrastructure development will keep the economy going, even if the tightening in credit leads to a slowdown in consumer spending.”

“Furthermore, over the medium and long term, India’s insurance market will continue to experience major changes as its operating environment increasingly deregulates. On the one hand, a mix of new products, new delivery systems and a greater awareness of risk will generate growth. On the other hand, competition will remain intense as private sector insurers and those about to enter India seek to win market share from the more established public sector entities,” the report indicated.

*India’s fiscal year is April to March