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,
says that the sector is still in a nascent stage, with players in different stages of development and market presence.
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.
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.
Rising per capita incomes will increase insurance intensity per capita, resulting in average household premiums rising from Rs1,300 to Rs3,000-4,100, while the emergence of newly bankable households and substantial increase in supply side growth will raise penetration in urban and rural areas.
Besides, changes in the product mix would also drive the growth, with players making moves to lower the share of single premium products. Life insurance products would also fill the gap created by the growing demand for long-term savings and investments products.
McKinsey says players seeking to capture a substantive share of this growth opportunity would need to make distinct plays to cater to increasingly differentiated needs of different consumer segments in rural and urban areas.
Four key challenges before the sector include significant reliance on the easier-to-sell single-premium products and potentially volatile unit-linked policies and the under-utilization of alternative channels.
The agency model is the dominant sales channel accounting for more than 85% of fresh premiums, but overall inactivity and attrition is much higher at 50-55% than the global average of 25%, McKinsey said.
Business from health insurance and pension products are other potential areas private insurance companies can look at to increase their customer base.
“Given the fact that there is no real social security system in place in India and the life expectancy is increasing, there is also a need to launch new products such as retirement planning products in the market,” Bennett says.
The report says that India will need to provide for an ageing population in the medium term, with barely 11% of the estimated working population in the country eligible for formal old age social security benefits.
“Although a pension regulatory authority has been set up in India, pension issues are not moving fast given the Left parties’ interference. It is not easy for life insurance companies to have much business from the pension sector,” says S.K. Sethi, chief executive officer, Ria Insurance Brokers Pvt. Ltd, a New Delhi-based company.
The opportunity in the health insurance space is clear from the fact that currently, India has only 1.5-2% of total health-care expenditure covered through insurance products, though many life insurance companies offer critical illness cover to diversify their businesses.
Better distribution strategies are another way to improve the business. Life insurance companies have an opportunity to create targeted and tailored offerings for different segments, building a different business model and even a different brand for each of the three core segments of the market.
The report says that separate teams of financial advisers should cater to the high networth customer. Tailored products and group distribution model for low-income urban groups and partnerships with microfinance institutions for extensive consumer access and infrastructure are needed for distributing the service. “Multi-level selling is good as it can give more personalized services to the customers,” says Sethi.
“We see the need for life insurance players to develop bold, new approaches in several key areas as competition intensifies and the consumer base evolves. Doing so is a must if players want to create a winning proposition,” McKinsey & Co. partner Tilman Ehrbeck noted.
PTI and Reuters contributed to this story.