The life insurance industry in India has shown tremendous development over the last decade. Post liberalization, there has been a significant increase in premiums, product options, number of players and distribution reach. Supported by a favourable regulatory environment, the number of insurers has grown rapidly from 1 player in FY 99-00 to 24 players in FY 10-11. In the same period, the total premium underwritten by the industry has grown from Rs. 26,250 cr. to Rs. 286,500 cr., an increase of almost 11 times.
With an increase in the number of players, the insurance industry has also become more competitive with insurers focusing on innovations in product design, distribution channels and service delivery. This, facilitated by rising disposable income levels and increase in financial literacy levels, has helped the industry develop at an enormous pace in a relatively short span of time. It has shown a robust growth Y-o-Y, and over the last 10 years, the total insurance market has grown at a healthy Compound Annual Growth Rate (CAGR) of over 25%.
For the insurance sector, insurance penetration and insurance density are two important indications of its potential and performance. Insurance penetration, which was 1.4% of Gross Domestic Product (GDP) in FY 99-00 before the industry opened up for private participation, has grown to 4.7% of GDP in FY 09-10. The number of life insurance policies in force has also increased nearly 12 fold over the past decade. With over 325 million policies in force in FY 10-11, India has the largest number of in-force policies in the world and is among the worlds Top 10 largest insurance markets by premium.
However, while the penetration figures have gone up, the level of protection cover that Indian customers have is very low as compared to other markets. The Sum Assured amount in any policy is the amount of money the family will get in case of death of the policy holder and indicates the level of protection that the customer has. Now the total Life Insurance Sum Assured in India as a multiple of GDP is just 0.3 times. Even in a small country like Taiwan, this figure stands at 2.3 times. The data clearly indicates that Indian customers are extremely under-protected and the families are not adequately prepared for any eventualities, which is indeed unfortunate.
There is a strong need for protection in our society, even more so as it evolves. There is a large growing middle class population with higher disposable incomes and greater purchasing power than before. Their lifestyles are changing for the better, but alongside, expenses to meet the rising lifestyle needs are increasing. So are other financial commitments such as credit card payments and loan installments. Life expectancy is on a rise and costs of education, marriage, housing, etc. are going up by the day. To add to it all, support systems are declining as joint family set ups are making way for nuclear families. In such a scenario, sustenance of current lifestyle will be unthinkable if something were to happen to the breadwinner in the family.
Along with a rising middle class, high income households are also increasing who have their own share of essential expenses to meet. Today, high income households in India earning greater than US$2,000 per month is more than twice that of Russia despite 80% lower GDP per capita. The need to protect current lifestyle in case of any eventuality is perhaps even more critical for these households.
With all the socio-economic and demographic changes that we see in the country, the industry has a set of challenges that it must address effectively before it enters into its next phase of growth.
Over the next few years, we will see a very different market. There will be many more customers spending much more on insurance and they will have more choices in terms of products and distribution channels. Insurers will need to be far more efficient while delivering superior products and services to their customers. They will need to be more focused around customer segments and innovate around distribution while ensuring significantly higher productivity in their traditional channels. There is a world of opportunities ahead and the future is bright for those who capitalize them on time, efficiently and successfully.
With an increase in the number of players, the insurance industry has also become more competitive with insurers focusing on innovations in product design, distribution channels and service delivery. This, facilitated by rising disposable income levels and increase in financial literacy levels, has helped the industry develop at an enormous pace in a relatively short span of time. It has shown a robust growth Y-o-Y, and over the last 10 years, the total insurance market has grown at a healthy Compound Annual Growth Rate (CAGR) of over 25%.
For the insurance sector, insurance penetration and insurance density are two important indications of its potential and performance. Insurance penetration, which was 1.4% of Gross Domestic Product (GDP) in FY 99-00 before the industry opened up for private participation, has grown to 4.7% of GDP in FY 09-10. The number of life insurance policies in force has also increased nearly 12 fold over the past decade. With over 325 million policies in force in FY 10-11, India has the largest number of in-force policies in the world and is among the worlds Top 10 largest insurance markets by premium.
However, while the penetration figures have gone up, the level of protection cover that Indian customers have is very low as compared to other markets. The Sum Assured amount in any policy is the amount of money the family will get in case of death of the policy holder and indicates the level of protection that the customer has. Now the total Life Insurance Sum Assured in India as a multiple of GDP is just 0.3 times. Even in a small country like Taiwan, this figure stands at 2.3 times. The data clearly indicates that Indian customers are extremely under-protected and the families are not adequately prepared for any eventualities, which is indeed unfortunate.
There is a strong need for protection in our society, even more so as it evolves. There is a large growing middle class population with higher disposable incomes and greater purchasing power than before. Their lifestyles are changing for the better, but alongside, expenses to meet the rising lifestyle needs are increasing. So are other financial commitments such as credit card payments and loan installments. Life expectancy is on a rise and costs of education, marriage, housing, etc. are going up by the day. To add to it all, support systems are declining as joint family set ups are making way for nuclear families. In such a scenario, sustenance of current lifestyle will be unthinkable if something were to happen to the breadwinner in the family.
Along with a rising middle class, high income households are also increasing who have their own share of essential expenses to meet. Today, high income households in India earning greater than US$2,000 per month is more than twice that of Russia despite 80% lower GDP per capita. The need to protect current lifestyle in case of any eventuality is perhaps even more critical for these households.
With all the socio-economic and demographic changes that we see in the country, the industry has a set of challenges that it must address effectively before it enters into its next phase of growth.
- Changing customers mindsets regarding the need and reason for buying life insurance: The fundamental purpose of life insurance is life protection. Insurers will need to educate Indian customers on the critical need for protection to provide financial security in the case of any eventuality rather than to look at insurance as merely a tax saving or an investment tool. There are already a number of attractive term products and other traditional products in the market which provide good protection cover along with reasonable saving opportunities. In addition, the new regulatory guidelines issued last year have also strengthened the life protection component in Unit Linked Insurance Products (ULIPs), which have traditionally been primarily investment-oriented. A focus on enhancing protection cover in the ULIPs by keeping the Sum Assured commitment high is definitely a step in the right direction.
- Creating viable and cost-effective distribution channels: India has a huge untapped market for life insurance. Even though insurance penetration and density has increased over the past decade, the industry still has a long way to go. There is a need to create cost-efficient distribution channels to create consumer awareness and deliver appropriate products, especially to the untapped rural sector and the underserved Tier II and Tier III cities. Insurers will also need to step up their focus on building innovative and alternate distribution channels by way of which more and more people can benefit from the protection that life insurance offers. There is also an opportunity to build new business models for select segments.
- Improving quality of insurance advice: Protection is always difficult to sell as it needs the insurance sales person to talk about an eventuality that no one wants to confront. Besides, financial illiteracy is still very low in India. The need of the hour is to provide high quality insurance advice to customers so that they are equipped to take the right financial decision. To do so, insurers need to invest significant time and resources in recruiting the right talent and developing a highly-trained sales force that can assess customers needs and offer relevant, personalized solutions. Insurers also need to focus on training their distributors and creating a culture of providing high quality advice, products and services.
Over the next few years, we will see a very different market. There will be many more customers spending much more on insurance and they will have more choices in terms of products and distribution channels. Insurers will need to be far more efficient while delivering superior products and services to their customers. They will need to be more focused around customer segments and innovate around distribution while ensuring significantly higher productivity in their traditional channels. There is a world of opportunities ahead and the future is bright for those who capitalize them on time, efficiently and successfully.
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