Why Indian
Life Insurance Market is best?
- Life insurance companies are turning to Asian
and Latin American markets for future growth.
- Asia accounts for more than 35% of the world’s
life insurance premiums.
- India is one of the biggest insurance markets
in the world, accounting for 2% of the world’s and 6% of Asia’s life
insurance premium volume.
- The Indian life insurance market has been
dominated by the government run LIC, but regulatory changes will allow
foreign players to compete.
- Growth potential is huge as less than a
quarter of the 1 billion strong population is covered by life insurance.
- A $60 billion market currently, but we expect
it to grow to around $120 billion by 2019, helped by an increase in
foreign investment.
Globalization
in the insurance business is not a new phenomenon as insurers like Canada’s
Manulife have been operating outside of their borders for over a hundred years.
However, recent spurts of development in Asia have caught the attention of more
life insurers in the western world. More than 35% of the world’s life insurance
premiums originate in Asia, up from 28% in 2008. Latin America’s contribution
to the global market is less than 10%, but the region has shown high growth of
more than 20% in the last few years.
These
developments have attracted insurers like MetLife and Prudential Financial towards
fast-growing economies. Prudential earns about 30% of its revenues from outside
the U.S. while Manulife and MetLife earn about a quarter of their revenues from
operations outside of North America. Given these figures, it is easy to see the
importance that international expansion holds for these companies. In the next
few articles, we will discuss some of the key, high growth life insurance
markets in the world beginning with India, which is getting ready to open its
market to foreign players.
Realty of
Indian Market
India
accounts for more than 2% of the world’s premiums and 6% of the premiums
originating in Asia. The country is the 10th-biggest insurance market in the
world and has the potential to grow exponentially in the coming years. While
regulatory hurdles and dominant incumbents bring challenges to foreign
companies looking to enter the Indian insurance market, low penetration and
opportunities in the market make it quite lucrative. In 2011, the life premium
volume for India was $60 billion, a little over 3% of the GDP. The GDP is
expected to grow at an average rate of 4.7% through 2018, and we expect life
insurance penetration to increase to around 4.6% by 2019. This would make India
a $120 billion market
History of
Indian Life Insurance Market
Life
insurance in the Indian market has been historically dominated by the
government run Life Insurance Corporation (LIC). The company was formed in 1956
by incorporating all 154 private life insurance companies existing in the
country at that time Indian Life Insurance companies, Researchers World.
However, following a strong wave of development throughout the country, the
Indian government allowed privatization in the insurance industry in 2000,
setting up the Insurance Regulatory and Development Authority (IRDA) to issue
licences to private life insurers. Foreign direct investment FDI was also
allowed up to a limit of 26%, which meant that non-Indian entities were allowed
to hold up to 26% of equity/share capital in the Indian insurance companies.
As a result,
23 private companies, mostly joint ventures, entered the market. These
companies include PNB Metlife India Life Insurance, Tata AIA Life, DLF
Pramerica Life Insurance (a joint venture between Prudential Financial and DLF)
and ICICI Prudential Life Insurance (a joint venture between British insurer
Prudential plc and ICICI). Following the de-nationalization, the life insurance
industry took off. From 2000 to 2011, new business premiums grew by 28% while gross written premiums increased by 25%. This growth
propelled India into the list of the top 10 life insurance markets in the world
[Asia Life Insurance Market, Towers Watson]. In 2011, the country accounted for 2.5% of the life
insurance premiums written worldwide [Sigma Report, Swiss Re].
Fighting The
Incumbent
Most of the aforementioned growth has been
restricted to the government run LIC. According to the IRDA’s annual report, the LIC still has a market
share greater than 70%. LIC’s established reputation and
distribution network have helped in this respect.
Unit linked
insurance policies (ULIP) are one of the most popular products in the Indian
market. In these policies, the policyholder pays out monthly premiums, some of
which is taken as insurance coverage while the rest is invested in debt and
equity instruments. As a result, the product acts as an investment instrument
while providing insurance coverage. In 2007, ULIPs accounted for almost
three-fourths of the premiums from new policies in India [Are Ulips better investment now?, 23 July, 2012, The Economic Times].
However,
regulatory changes, like the extension of the lock-in period from 3 to 5 years,
and volatile stock markets which led to a decline in yield had a detrimental
effect on the product’s popularity. ULIPs accounted for 37% of the
industry-wide premium income in 2010 and this figure came down substantially to
24% in 2011. Recent regulations on minimum life cover offered by ULIPs, the
duration of policies and surrender penalties have cut into insurers’ margins.
As a result, ULIP sales declined in the last two years leading to negative
growth in premiums [IRDA annual report]. However, now that regulations have been adopted by the insurance
market, we expect India to be back on the growth track.
Immense
Potential in Indian Market
While the life insurance market in India has
expanded through the last decade, the growth potential in still immense. The
country has a population of nearly 1.2 billion, with a GDP growth rate
estimated at 6% in 2014 by Morgan Stanley [Morgan Stanley cuts India’s
FY14 GDP forecast to 6%, 13 March,2013]. Based on the census conducted in
2001, the IRDA reported that there are
around 600 million insurable persons in the country. However, less than 50% of
this insurable population is covered by a life insurance plan. Private sector
companies have just over 40 million policies in force. The level of protection,
measured by the ratio between the assured sum and the GDP is around 55%, much
less than the developed markets like the U.S. and the U.K., which have
protection ratios around 150% to 250%.
The IRDA also revealed that life
insurance penetration measured as a ratio of premiums (in U.S. Dollar) to GDP
in (U.S. Dollar) increased from 2.15% in 2001 to 4.6% in 2009 but then declined
in 2011 to 3.4%. Although this is still an improvement over the base value, the
figure still lags far behind mature markets like the U.K., where penetration is
nearly 10%. The main reasons for this are the FDI limit of 26% and low
profitability levels in the Indian market. According to McKinsey, Indian business margins are
the lowest in Asia. Private sector insurers invested around $7.5 billion in the
Indian market between 2000 and 2011, of which around $4 billion was to fund
accumulated losses, mostly to create distribution capabilities.
To bridge the gap between insurable population and
policies in force, the Union Cabinet passed a proposal to increase foreign
direct investment in the insurance sector from 26% to 49% in 2012. This bill
has yet to be passed by the country’s parliament [Insurance and pension get FDI boost,
need parliament nod,
Indian Express, 5th October, 2012]. Under the legislation, there is a 10-year
lock-in period for investment to be limited to promoter group equity
investments. This basically means that insurance companies in India will have
to wait for at least 10 years before a public issue of equity through an
initial public offering .
Findings :-
As mentioned earlier, we estimate the life
insurance premium volume from the Indian market at $120 billion by 2019. This
is based on the GDP growth forecast in a base scenario. In an optimistic
scenario, the average GDP growth rate is expected to be around 5.7%, and
assuming insurance penetration of 4.6%, this would lead to premium volume of
$130 billion by 2019. The average GDP growth rate is expected to be around 3.6%
in a pessimistic scenario, which would lead to a premium volume of $110 billion
by 2019. In any case, India is a big market and has a huge potential for
insurers like Prudential, MetLife and Manulife. While we currently do not
provide a separate breakdown of India’s premium volume in our model, you can
modify the interactive charts below to gauge the effect a change in
international market shares would have on our price estimates for Prudential,
MetLife and Manulife.
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