Room for more players as insurance penetration still low

Since the Indian insurance sector opened up to private players in the year 2000, 23 life insurance, 18 general insurance and five stand-alone health insurance players have entered the market.

While the life and general insurance industry witnessed strong growth in the initial few years after privatisation, growth has been more sedate in recent years with retail new business growing by 5.3% in FY16 for life insurance players and gross written premium increasing by 13.8% in FY16 for general insurance players. Given the moderation in growth, there has been a slowdown in entry of new players, barring standalone health insurance segment which has seen a steady entry of new players.

While the change in FDI regulations last year has led to many foreign players increasing their stake in their Indian insurance joint ventures, there has been limited interest shown by Indian promoters in additional capital infusion in the sector. Recently, the insurance industry has also witnessed consolidation with two major deals receiving shareholder approval.

The question which most potential investors in the sector are asking is whether there is scope for additional players in the industry. In this context, it is important to look at the overall insurance coverage in India relative to other economies. When the insurance sector was opened to private players in 2001, India had an overall insurance penetration of 2.7%, while current penetration stands at 3.4% signifying relatively slow growth when considering the overall growth of the Indian economy. India is also significantly below the global average (6.2%) in terms of insurance penetration and also has a high level of protection gap relative to some of the comparable economies.

Opportunity for new entrants

One of the primary reasons for low insurance penetration, and a high protection gap is that insurance is still largely seen as a savings and investment product instead of a protection and annuity option. While this is a gap in the current market, it is also an opportunity for a potential new entrants.

 With respect to asset coverage as well, there is a significant gap in terms of overall insurance coverage, especially for retail assets. Given the long-term growth projections of the Indian economy which is expected to lead to significant asset creation as well as increase in the overall organised sector work force, there is significant long-term growth potential in the Indian insurance industry, especially for building a protection and pension focused business model.

Prior to nationalisation, India had 245 life and 107 general insurance players, with most of them operating in a localised manner. India is moving in line with global trend of having a few, large nationwide players supported by a number of localised life and general insurance players.

While the long-term potential for the insurance industry is bright, a new entrant would still face significant competition from existing players, some of whom are struggling to achieve growth and profitability. Insurance, especially life insurance, is also a business with relatively long gestation period and hence investor expectations on the time horizon for generating returns would have to be set adequately.

While there are clear opportunities for growth of the insurance sector as a whole, there also remain significant challenges which a new player looking to enter the industry must overcome. The key success factors for a new entrant in the Indian insurance industry can be considered as below:

Customer segmentation: A new player would need to decide niche customer segments and select geographies to build focus as it enters the market.

Access to customers: The traditional distribution channels of insurance, such as individual agent-based networks are under stress with limited profitability and high attrition rates. It is critical for a new entrant to invest upfront in building a distribution channel which would provide steady access to new customers.

  Strong underwriting ability: A new player will have to think through how it utilises the available data point, upcoming technologies such as telematics and other analytical solutions to build a robust underwriting model. Globally, the most successful insurers are characterised by the ability to selectively underwrite profitable segments of the industry.

  Robust claims and fraud management mechanism: In addition to selective underwriting, a successful insurance company also requires adequate claims management processes since fraudulent claims can quickly erode the net worth and capital adequacy of the insurer.

  Brand awareness: The benefit in an insurance policy is realised only after a claim incident has happened, while the premium is paid up front. Hence, a new entrant needs to invest significantly in building brand awareness and boosting consumer confidence in claims paying ability within its target segment.

While some of the players in the industry are struggling to build a profitable business, there is a strong business case being made out for a differentiated business model within the industry. As some of the existing players exit the market, there could be entry of additional players looking to tap the growing potential of the Indian insurance industry by focusing on niche segments.   

(The author is Partner – Financial Services at KPMG, India. Inputs from Raghav Malhotra, Manager at KPMG, India. Views expressed here are personal)