New Delhi: India’s life insurance firms have exceeded expectations in terms of growing their business in rural India, both among the rural wealthy and the not-so-wealthy, and most firms in the business are actually ahead of targets laid down by the sector’s regulator, Insurance Regulatory and Development Authority, or Irda.
The companies claim that apart from helping them grow sales in locations outside the near-saturated urban markets, this strategy also helps them maintain their profitability at existing levels—which means that rural policies are as profitable as urban ones.
Towards Inclusive Growth (Graphic)
An analysis of data from seven life insurers for 2007-08 (data from previous years was not made available by the companies) accounting for at least 80% of the market, reveals that all of them topped their individual targets laid down by Irda. The targets vary every year.
The seven firms are Life Insurance Corp. of India, Aviva Life Insurance Co. India Ltd, SBI Life Insurance Co. Ltd, ICICI Prudential Life Insurance Co. Ltd, Birla Sun Life Insurance Co. Ltd, Reliance Life Insurance Co. Ltd and Max New York Life Insurance Co. Ltd.
ICICI Prudential Life, for instance, covered 117,000 customers in rural areas in 2007-08, as against its target of 25,000. “All our regular product offerings are made available to the customers in the rural segment. The company also offers a small ticket size policy called ‘Suraksha’, a microinsurance policy, to suit the needs of the rural customers,” said Rishi Srivastava, senior vice-president and head, rural business, ICICI Prudential Life.
In the case of SBI Life, the firm was expected to sell 18% of all its policies in the rural areas. It ended up selling 22%. “Rural and social insurance is a very good business opportunity. With urban areas having high insurance penetration, the next growth driver will be rural population,” said U.S. Roy, managing director and CEO of SBI Life.
Much of this growth is on account of Irda’s emphasis on selling policies in rural areas, admitted an executive with a private sector insurance firm. “Growth rate in the rural and social sector has definitely been picking up as a result of the Irda focus on this sector. Our rural policies in 2007-08 registered a growth of 150% in comparison to 140% growth by the urban policies,” said P. Nandagopal, CEO of Reliance Life Insurance.
According to India Invest Incomes and Savings Survey 2007 by IIMS Dataworks, a Noida-based retail finance research firm, 58% of India’s 105.4 million insured people (out of a total of 321 million people who constitute the country’s paid workforce) are from the rural areas. However, in terms of penetration, or the number of policyholders compared with the total population, urban India is ahead. Thus, penetration in urban India is 47% (which means that almost one out of every two paid workers in urban India is insured), while it is only 27% in rural areas.
Significantly, insurance firms did even better in terms of their so-called social sector objectives. The “rural business“ of these firms includes policies sold to both rich and poor people in rural areas. “Social business” includes only the number of policies sold to poor and economically backward people.
The latest annual report of Irda states that of the 16 life insurers in India, 14 fulfilled their social sector obligations in 2006-2007. Bharti Axa Life Insurance Co. Ltd and Shriram Life Insurance Co. Ltd, both launched in the course of 2006, did not meet their social regulations.
And, in 2007-08, the seven firms that account for at least 80% of the market exceeded the targets substantially.
“Historically, insurance penetration in the social sector has been much lower than that in the rural sector,” said Reliance’s Nandagopal. “However, considering that the social sector insurance needs are largely addressed through cheaper group insurance policies, it has been easier to increase penetration in this sector. This has also resulted in a higher growth rate in social sector.”
In June 2007, Irda changed its insurance norms to ensure benefits of insurance reach socially and economically backward segments of the population. “The current upgradation of microinsurance guidelines with rural and social obligation will help us ensure the quality of work,” said C.R. Muralidharan, finance member of Irda. Under the new guidelines, policies sold to the social sector need to have a minimum sum assured of Rs5,000 or a maximum of Rs50,000. In the case of the rural sector, the minimum sum assured is Rs5,000.
Insurance executives claim that firms also benefit from the low costs of distribution in rural areas. “Rural and social sectors policies are sold through a multi-channel approach, including hiring agents from villagers, and tie-ups with banks, non-governmental organizations and microfinance institutions. It helps us in saving around 10-15% of the distribution cost,” said Rajesh Sud, executive director, distribution, Max New York Life.
And the profit margins remain the same.
“Given the fact that we sell same policies in rural and urban India, margins are similar from both the segments,” said ICICI’s Srivastava.
“If the scheme is not profitable, we increase the premium on the policy or roll it back in consultation with the group policyholders,” said an official who did not wish to be identified at India’s largest life insurer, the state-owned LIC.