Insurance penetration is skewed towards the larger accounts and there is a legion of small enterprises that has not assessed or addressed its insurance requirements adequately

The general insurance industry has witnessed much less-and certainly more muted-action post privatisation than the life insurance industry. As against the 12 new entrants in the life insurance sector, there are only seven in the general insurance industry and there is no immediate "waiting list" either. Further, there is far less activity in terms of aggressive media campaigns or rapid ramping up in distribution assets, compared to the life insurance sector.

However, this has not made the task of the new entrants any easier-in many ways, this is a much tougher landscape for industry participants. First, the total market size in annual premiums is about half that of life insurance. Second, India is at a much earlier stage of development for general than for life insurance-an overwhelming majority of the demand is still generated by some form of mandatory or regulatory requirement. Third, the lack of-to the point of being non-existent-quality data on risks and associated parameters handicaps product innovation and other development measure that could be employed by industry participants. And last but not the least, the global outlook for this industry remains ambivalent.

The general insurance industry in India has currently about Rs 12,000 crore of premium income, with a five-year compounded annual growth rate in the 11 per cent range. The first important issue with the market is that GIC's book of business is not profitable at the underwriting level. The general insurance business-before accounting for the investment income that the GIC companies make-is in the red, and has been so for the last few years. This is of critical importance to all participants in the business. In the monopoly era, with government being the ultimate owner of all general insurance companies, the source of profitability did not matter much. However, now that the GIC companies are facing competition, the new entrants will likely target those lines of business that are profitable on an underwriting basis and eschew those that are not. This will significantly impact GIC's overall profitability, as very soon, the investment income will not be able to "hide" the underwriting losses.

Next, going by GIC classification, the general insurance business is broken into three product lines-fire and allied perils (25 per cent), marine (10 per cent) and miscellaneous (65 per cent). However, this classification is not meaningful as it clubs many diverse lines of businesses into one large block-miscellaneous-and does not offer any insights into distinctive drivers of various businesses within any of the three classes.

A better starting point of examining the challenges is to divide the overall market numbers into two very broad but internally consistent areas-one, that comprises of general insurance products bought by commercial undertakings and second, those bought by individuals. This will allow industry participants to start understanding elements of consumer behavior more clearly and give them an ability to design appropriate measures to develop and profit from sub-segments of the market that are most amenable to providing attractive business potential.

Commercial insurance encompasses a very large variety of products including fire and allied risks insurance, marine insurance, casualty, and workmen's compensation. In India, however, the most 'developed' products lines are those that are mandatory for the commercial establishments to purchase. For example, banks and other financial institutions require that assets financed by them be insured against fire and allied risks. A direct corollary of this is that insurance penetration is skewed towards the larger accounts and there is a legion of small enterprises (right from the neighborhood corner-shop to medium-size industrial units) that have not assessed or addressed their insurance requirements adequately.

Three key issues have to be addressed to further develop the commercial insurance market. First, there is a crying need to enhance penetration in the small and medium establishments. Currently, this market is underserved at all stages of the fulfillment cycle-accounts are neither identified nor targeted in a systematic manner, product development for this segment has never been a priority, incentives in the current system work against such accounts and for those minority that do buy insurance, claims servicing is poor. Tapping into this potential will likely require both a high-decibel education and awareness campaign and creating targeted product development and distribution system that caters to the requirements of such customers.

The second issue in expanding commercial insurance market relates to product emphasis. Current preponderance of fire and allied perils insurance within the overall commercial insurance book is rooted in the days when the primary assets of a commercial enterprise were physical assets-factories, machinery and inventories.

Now, with an increasingly large part of the economy centered on knowledge and human assets, the continuing mindset of focusing on fire and allied perils sales means that these new economy firms are shortchanged-they require more non-conventional products that the GIC companies have not been able to provide. This is a gaping hole and the new entrants-with access to international product development expertise-are best positioned to quickly fill this vacuum.

Lastly, even for the larger accounts, replicating the current distribution system is inviting trouble. GIC companies work with a multi-layered distribution and support system that impedes quick decision-making and is a major contributor to an unsustainable expense ratio. In addition, the producer incentives are almost exclusively based on growth in revenues (that is, premium collection) and therefore there is little or no responsibility for account profitability.

Put together, this has created a situation where the larger accounts change providers quite infrequently, and at that based solely on imputed discounts (pricing for fire and allied risks-the primary premiums earner-is based on tariffs so there is no overt discounting in this category). New entrants-and even GIC companies in the competitive era-have to look at overall account profitability and manage the large contributors to their books carefully to ensure that a marketshare focus does not irretrievably depress industry profitability.

Despite these important outstanding market development issues, commercial insurance business is far more developed than the market for general insurance products sold to individuals.

The largest book of business among such lines is the motor insurance business. In this, driven largely by a cumbersome-and in many instances, corrupt- claims settlement process on top of basic consumer ennui, the historical experience is that a large part of the potential market buys only the mandatory "third-party-liability-only" insurance instead of the comprehensive coverage.

This has led to substantial automatic adverse selection in the motor book and contributes to high losses in this line. The potential for enhancing both the size of the book and its profitability performance is significant and an area that none of the entrants (or any one of the four incumbents) can afford to ignore. The new entrants are going straight to the car manufacturers and their dealers and tying up with them to try and lock-in customers along with the purchase of new vehicles.

This approach is likely to become increasingly more important in the mix of available distribution options. However, the spate of discounts, rebates and other freebies seen over the last 12 months is unsustainable and will have to yield to more cost-effective, yet meaningful differentiators such as performance on claims service and ease of processing applications.

For non-motor assets owned by individuals, the current insurance business in India can safely be characterised as non-existent. Penetration of homeowners policy-that covers both the house and contents therein-is extremely low due to a variety of factors, including fear of wealth watching and a lack of sales push. Some recent legislative changes have provided the much-needed impetus to property insurance in select parts of the country, but there is a long way to go before this market attains any significant size.

Health insurance-the second-largest pool of business from individuals-is also still in its infancy in India. Worse still, burdened by an ill-informed intent to provide some form of health or social security, GIC companies have conditioned the market with a product that is completely unremunerative for its providers. Despite a recent, 30 per cent rate increase for its MediClaim product, GIC companies are expected to again lose significant money in this business.

Studies have shown that in addition to increasing healthcare costs, the deterioration in loss performance of this business is because of a mix of healthcare provider-induced moral hazard and adverse risk selection.

While health insurance is an important issue for the government as well as the IRDA (all new entrants had to specifically refer to their plans for health insurance in their applications for licence), as long as such irrational competition from the incumbent persists, private companies are likely to offer health insurance only to the extent required to complete mandatory requirements and that too by crafting products that are, even if not profitable, at least neutral in their impact on the bottomline. Thus, not only in their self-interest, but also to foster the development of health insurance segment in India, GIC companies need to take a hard look at the features and pricing of MediClaim and reconfigure the product to make it profitable.

Personal accident insurance is another area that can be developed into a sizeable book. It provides cover-at a very reasonable cost-against a whole range of situations and is ideally suited for large cross-sections of the Indian society in the informal sector. Till date, the low ticket-value of these products (which resulted in very low absolute commission values for tied agents) meant that these were not sold aggressively.

The new entrants are focusing on tying up with banks, credit card companies and other such groups to access consumers directly.

However, to access the real opportunity, industry participants will have to find ways to reach the much larger mass of population that is not found in the these easily available "elite listings".

The regulators also have a role to play in encouraging the development of this line. Currently, accounting norms do not allow insurance companies to defer any customer acquisition costs. For direct mail and other such programs, there is a substantial up-front cost that pays off over multiple periods in the form of premiums earned. In such a situation, if the accounting norms do not allow deferring costs, solvency margins can get strained and thus set a limit to the extent to which companies can employ such techniques.

The upshot of this discussion, therefore, is that the landscape for general insurance business in India requires very careful understanding- both to assess clearly the business opportunity (size) and the underlying landmines (profitability).

Developing the market will require concerted efforts from all participants and the correct starting point is an in-depth line-wise analysis of various businesses-even in the context of a significantly data-deficient environment.

Nikhil Prasad Ojha is a Senior Principal at The Monitor Group-a global strategy consulting firm founded by Michael Porter. He is based in Mumbai and can be reached at Nikhil_Ojha@Monitor.com