For smaller players in the life insurance industry, a report by consultancy firm McKinsey and Co. could offer pointers on how to take on behemoth Life Insurance Corp. of India Ltd (LIC), which has 70% of the market.
The McKinsey report, titled India Insurance 2012: Fortune Favours the Bold,
Untapped market: A villager fills a fuel barrel at a petrol station near Aligarh. The McKinsey report on insurance says rural penetration is likely to rise from about 25% to 35-42% in 2012.
says that the sector is still in a nascent stage, with players in different stages of development and market presence.
The report says that their strategies and business models are largely one-size-fits-all, with reliance on low-margin single-premium policies and unit-linked products, as well as fairly indifferentiated distribution models.
This is where the smaller insurers and new entrants can hope to stand out. With 65% of the life insurance business coming from the rich urban class, they can look at rural and low-income group as potential demand drivers.
The McKinsey report says that rural penetration is likely to increase from about 25% at present to 35-42% in 2012. Penetration in the low-income segment in urban India would also rise from 30% to 35-40% by that time.
Life insurance companies also seem to agree on this. “We are looking at geographical expansion, both in rural and urban India, to grow in size,” says Gary R. Bennett, managing director and chief executive officer, Max New York Life Insurance Co. Ltd.
Given the recent rapid increase in disposable incomes, the insurance industry is growing at a fair clip of 40% in India, and going by the report, the industry size is going to double in the next five years.
The report says that total market premiums are likely to more than double during this period from about $40 billion (Rs1.6 trillion) to $80-100 billion by 2012. It implies a compounded annual growth rate of 19-23% in new business annual premium from 2007 to 2012.
That may appear slow when compared with the current growth rate of 40%, but considering the larger base, it is one of the highest growth sectors in the financial industry.
India’s ratio of life insurance premium to its gross domestic product (GDP) is around 4% against 6-9% in the developed world. But, the report says, it could rise to 5.1-6.2% by 2012, in tandem with the country’s demographic profile.
That Indians rank life insurance higher than other investment options for tax benefits and protection will also help, it notes.
According to McKinsey & Co.’s associate partner Anu Madgavkar, apart from rising incomes, three factors would drive growth in the next five years—the emergence of newly bankable households, a better product mix, and growing demand for long-term savings and investment instruments.