Opinion
India insured by 2047: Insurance companies must be profitable to achieve this
Summary
- For the insurance sector to attract more investor interest and expand coverage, its returns need to be impressive, but insurers need to fix what looks like a muddled business model. Any delay would make it harder to enhance industry capacity and achieve IRDA’s dream of universal coverage by 2047.
In synchrony with the broader national intent of India becoming a developed nation, the Insurance Regulatory and Development Authority of India (IRDA) has embraced the laudable goal of “India Insured by 2047." The objective is to ensure that “every citizen has appropriate life, health and property cover and every enterprise is supported by an appropriate solution" and to make India’s insurance sector “globally competitive," as elaborated in a press release.
Enthusiasm within the IRDA is palpable. Coordinated attempts are afoot to usher in regulatory changes and push insurance companies to reach out wider, especially to the rural uninsured, and diversify their product baskets to make insurance more accessible, affordable and relatable.
Also read: Health Insurance: New IRDAI rules to give impetus to senior citizens with pre existing diseases
Meeting such ambitious aspirations would warrant building capacity, elevating competencies and ushering in creativity.
The government think-tank Niti Aayog projects India’s GDP at about $30 trillion in 2047. The global average premium (on both life and non-life policies) as a proportion of GDP, a measure of the concept’s penetration, is 6.8%. This would translate into an Indian insurance industry worth $2.04 trillion in annual premium payments in 2047.
If we attain the penetration level of South Korea (11.1%) or Taiwan (11.4%), the market’s size would be larger. India’s insurance penetration was at 4.1% in 2023 and the industry was placed at $92 billion. To reach $2.04 trillion in 23 years would require a compounded annual growth rate (CAGR) of 14.2%.
Can it be achieved? Near stagnant penetration even after this sector’s liberalization more than two decades ago does not inspire confidence.
The edifice of the insurance industry stands on three pillars: Insurance companies, distribution networks and the regulatory framework. For premium income to multiply, all three must perform well. Insurers are the prime movers.
Currently, India has 67 insurance companies, 24 offering life covers, 26 providing non-life coverage, five specialized in health insurance and 12 offering services of reinsurance (including branches of foreign companies). In the US , in contrast, there were 2,456 insurers in 2022, while China (with 3.9% penetration) had 237 and the UK, 402.
Also read: Beyond medical emergencies: General insurance products you need to invest in for a stress-free life
If the size of India’s industry is to grow 22 times in the next 23 years, the current capacity would be wholly inadequate. Given advances in technology, productivity enhancement tools and growth in our GDP per capita, our capacity would need a 10-fold increase.
There are few applications for insurance licences that await IRDA approval and foreign players like New York Life, Aegon, etc, have either exited the market or are trying to exit. Indian promoters are not very enthusiastic either.
It is essential to understand and assess the causes for low enthusiasm among both Indian and foreign aspirants; as our insurance industry holds immense potential, this should not be the case.
A broad analysis of the balance sheets of insurance companies shows that it usually takes more than a decade for a life-insurance company to be profitable; non-life and health insurers face more uncertain profitability. The ‘combined cost ratio’ of insurance companies, except a few honourable exceptions, is more than 100%.
The Nifty, a barometer of India’s equity market, has delivered an annual return (the index’s CAGR, i.e.) of 17.6% in the last five years, 11.8% in 15 years and 28.4% in one year. Returns-on-equity north of 15% are being notched up by well-managed companies in other sectors. Relative to the Nifty and Bank Nifty, star private insurers HDFC Life, ICICI Pru Life and SBI Life have delivered significantly negative returns in the last 18 months.
Indian or foreign, any entrepreneur, company or individual is prompted to invest by the expected rate of return. If higher returns can be garnered by directly investing in the Indian equity market or another line of business, the narrative that draws investors to invest in the country’s insurance industry needs to be more compelling.
The causes of the insurance industry’s low profitability, inter alia, seem to be: One, a race to the bottom in pricing, particularly in the case of non-life coverage, including health and pure life term policies; and two, high customer acquisition costs. Large policy distributors like banks and non-bank financial companies have gained in profitability while inflicting long-lasting pain on the balance sheets of insurers.
The regulator has been liberal and amended regulations to prevent sideways compensation payments to distributors. An acceptable level of ‘total management expenses,’ inclusive of acquisition costs, has been specified. Unfortunately, even that is being breached often. Yet, in a liberalized market, it is neither desirable nor appropriate to control and marshal pricing. The tariff-heavy environment was dismantled for that very reason.
Insurers have a hierarchical organization design with three-four layers, must bear inelastic fixed costs and have a muddled revenue model that seems to have outlived its utility in the contemporary setting. For this industry to improve profitability, attract investors and fulfil the IRDA’s ambitions, this model needs to be re-engineered.
Ignoring or delaying this will make capacity enhancement elusive and the distant dream of 2047 harder to realize. The sector needs urgent attention. The regulator must seize the moment and propose alternatives in consultation with industry leaders.
