India’s insurance industry: issues and challenges

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Our report, co-authored with the Confederation of Indian Industry (CII) outlines the current challenges faced by the insurance industry and steps that could be taken to ensure that the industry achieves its potential.

The Indian insurance industry seems to be in a state of flux. After a decade of strong growth, the Indian insurance industry is currently facing severe headwinds owing to:

  • Slowing growth
  • Rising costs
  • Deteriorating distribution structure
  • Stalled reforms

Indian economy and the insurance industry landscape
EY - Indian economy and the insurance industry landscape
Source:IRDA Annual Report 2010-11

Despite strong improvement in penetration and density in the last 10 years, India largely remains an under-penetrated market.

Despite strong improvement in penetration and density in the last 10 years, India largely remains an under-penetrated market. The market today is primarily dependent on push, tax incentives and mandatory buying for sales. There is very little customer pull, which will come from growing financial awareness and increasing savings and disposable income.

In the long run the insurance industry is still poised for a strong growth as the domestic economy is expected to grow steadily. This will lead to rise in per capita and disposable income, while savings are expected to be stable.

Insurance growth drivers in India

The demand for insurance products is likely to increase due to the exponential growth of household savings, purchasing power, the middle class and the country’s working population. Listed below, are the various underlying growth drivers for India’s insurance industry:

  • Growing of the financial industry as a whole
  • Growth of life and non-life industry
  • Promoting innovation and removing inefficiency
  • Competition and orderly growth
  • Growth of specific insurance segments such as motor insurance

Emerging trends

  • Multi-distribution i.e. increasing penetration through new modes of distribution such as the internet, direct and telemarketing and NGOs
  • Product innovation i.e. increased levels of customization through product innovation
  • Claims management i.e. timely and efficient management of claims to prevent delays which can increase the claims cost
  • Profitable growth i.e. expanding product range, developing innovative products and expanding distribution channels
  • Regulatory trends i.e. mandated regulatory changes by the IRDA to promote a competitive environment in both the life and non-life insurance sectors

Life insurance: key challenges

In FY12, the life insurance industry witnessed a decline in the first year premium collected which dropped from INR1, 258 billion in FY11 to INR1, 142 billion, a drop of approximately 10%. This was owing to the following challenges that the industry faced in

  • Products strategy and design
  • Cost
  • Taxation
  • Distribution
  • Prospects and challenges of various channels
  • Compensation
  • Customer service
  • Governance and regulatory issues

Non-life insurance: factors impacting growth

The non-life insurance industry has been growing in excess of 20% over the last two years however the penetration was as low as 0.7% of the GDP in FY10. The key factors for growth include:

  • Product pricing, innovation and simplicity
  • Distribution
  • Compensation
  • Micro-insurance in non-life widening reach
  • Governance and regulatory changes
  • Health insurance
  • Innovative products to counter the competition
  • Improved fraud control mechanisms
  • Standardization to reduce claims loss
  • Reducing inefficiencies by revisiting third party administrator (TPA) agreements

Way forward

The Indian insurance market is poised for strong growth in the long run. It stands at the threshold of moving towards a stable position, delivering “stable profitable growth.”

Significant latent market - The insurance market has a considerable amount of latent potential, given the fact that the Indian economy is expected to do well in the coming decades leading to increase in per capita incomes and awareness.

Channelizing industry focus - In meeting the significant potential, the industry has an increased role and responsibility. Three areas of focus could be — a) product innovation matching the risk profile of the policy holders b) reengineering the distribution and more significantly c) making sales and marketing more responsible and answerable.

Distribution - Distribution channels evolved in response to market dynamics and changing consumer preferences. The alignment of economic incentives with distribution dynamics should be driven by market forces rather than regulatory intervention.

Regulation - The industry should be given time to adjust to regulatory changes in a phased manner aligned with a regulatory impact assessment. Regulations need to drive transparency and simplification of products and services.

The stakeholders should eventually work toward maintaining a favourable environment for stable growth, increasing the penetration of insurance to rural and underpenetrated areas and increasing the contribution to the economy.