What the performance of LIC reveals about India’s economy

Buried deep in the 663-page red herring prospectus (RHP) is an interesting fact. India’s insurance penetration has fallen from 4.4% in 2010 to 3.2% in 2020. This refers to total insurance premiums paid during the year as a percentage of gross domestic product (GDP). The RHP attributes this fall to “a slowdown in economic growth and in the insurance business due to regulatory changes".

Let’s first talk about regulatory changes. As the RHP points out: “The Insurance Regulatory and Development Authority of India (Payment of Commission or Remuneration or Reward to Insurance Agents and Insurance Intermediaries) Regulations, 2016, limits our ability to incentivise our insurance intermediaries… by imposing limits on the payment of commission." The Insurance Regulatory and Development Authority (IRDA) is the sector’s regulator. These intermediaries are mostly individual agents, corporate agents, insurance brokers, bancassurance partners, etc.

In the years up to 2016, insurance companies were allowed to pay huge commissions to agents. This led to misselling and the IRDA had to cap commissions. This consumer-friendly move has hurt LIC, which tells us that insurance remains a push product which needs to be sold by agents and is not something people typically buy on their own. Unless this changes, Indian insurance penetration is likely to remain low.

In fact, actual penetration might be even lower, simply because what gets sold in the name of insurance are largely investment plans. LIC sells very little term insurance or the purest form of it, where a nominee is paid a sum assured in case of the policyholder’s death. From April 2021 to December 2021, the first nine months of last fiscal, new business premium coming in from term insurance stood at ₹1.5 billion or around 0.42% of overall new individual business premium coming in. In 2020-21, it was at 0.34%. Other forms of life-insurance policies are largely investments mixed with some cover (‘savings policies’ as they are called).

As LIC’s RHP points out: “Due to the higher share of savings than protection in life insurance premiums… actual protection provided by insurance… would be much lower compared with even other developing markets." Also, the per capita premium (or insurance density) in India was at $59 in 2020. Hence, “insurance density in India remains very low compared with other… emerging market economies."

One reason for this lies in the fact that buying insurance in India is very closely linked to saving taxes. This association is so strong that the minds of most people seem not to register the actual need of buying term life insurance for the sake of protecting their future. Of course, term insurance has a lower premium and that automatically means lower commissions for agents in absolute terms. Hence, they have little incentive to sell them. There is no separate tax deduction available for term insurance, limiting its demand.

The other reason attributed by LIC’s RHP for poor insurance penetration is the economic slowdown. Economic conditions in 2020-21 can be attributed to the covid pandemic. Nonetheless, India’s economy was slowing down even before that. Between 2016-17 and 2019-20, the economy grew by 18% in real terms adjusted for inflation. In a similar period before that, it grew 26%. As the latest Reserve Bank of India (RBI) Report on Currency and Finance points out: “Following a consumption-led brief boom during 2014-17, the economy eventually entered a phase of slowdown from 2017-18 onwards, with GDP growth moderating for eight successive quarters." This also explains disappointing insurance penetration in the country.

How does the future look? As the RBI Report points out: “India is expected to overcome covid-19 losses in 2034-35." As several other economic indicators show, India’s not so well-to-do have had to face a bulk of these losses.

How does this impact LIC? Calculations made from data presented in LIC’s RHP suggest that from April to December 2021, the company sold 71.8% of the country’s new individual policies. But it gathered only 43.2% of the new business premium. Similarly, in 2020-21, it had sold 74.6% of the total new individual policies in the country but gathered only around 49.4% of the new business premium.

This means two things. One is that the well-off in Indian society buy larger insurance policies, involving the payment of bigger premiums, from private companies. Two, it also means that the sections of society which LIC largely caters to are in some financial trouble and hence are not in a position to buy life insurance policies like earlier.

To conclude, all this suggests that insurance penetration in the country is not going to go up quickly. The under penetration of insurance is one reason being offered by stock-market brokers to nudge investors into investing in LIC’s IPO. Interestingly, India’s insurance penetration for April to December 2021 stood at an even lower 2.7%, and the chances of this problem continuing are on the higher side.

Vivek Kaul is the author of ‘Bad Money’.