Over The Hump

Insurance in India has crossed an inflection point and is well on its way to becoming the next hot thing in financial services. The earth moved with the revolution in telecom and retail banking. Well, it is moving again with insurance.

By Shalini S. Dagar

Max New York Life Insurance Company's (MNYL) MD & CEO, Gary R. Bennett, believes there's a simple reason why insurance is the industry to be in India. "As people get more stuff, they need to insure themselves and all the stuff that they get," explains Bennett with his Aussie wry humour. Well, he is right. Indians are raking in the "stuff". As the India growth story unfolds, clocking an annual growth rate of 8 per cent and more, Indians are getting more prosperous. They are earning, spending and travelling more. And with their larger disposable incomes they are also buying more assets. So, apart from insuring themselves-the bread earners-they also need to insure their health, their cars, their property and other assets.

Understandably, then, the insurance business has been on fire in India. Life insurance business in terms of first year premium has shown a growth of more than 95 per cent over the previous year and non-life, or general insurance, is not far behind either, growing at 22 per cent during 2006-07 in terms of new business premium. So, is there a tipping point in the offing that will completely change the dynamics of the industry? According to industry executives, at least one inflexion point has already happened. "The life insurance industry, based on first-year premium, has transformed itself from annual growth rates of 16-17 per cent in 2004-05 to 34 per cent the following year and it has closed 2006-07 with a 95 percent growth," points out one senior executive as evidence of the inflection point.

And mind you, that includes stupendous growth by the state-owned life insurance giant, Life Insurance Corporation of India, which nearly doubled new premium business (more than 90 per cent) in 2006-07 and managed to arrest the steady decline in its market share. Birla Sun Life President and CEO, Vikram Mehmi, points to another valid data point. "This year-end, for our company the renewal business and new business would be roughly equal and from next year, renewal premium would be higher. I would call that an inflection point," he says.

"There's a raft of opportunities for insurance companies as India is driven by 25-year olds" Gary Bennett MD & CEO/ Max New York Life

Long Way to Go

However, there is more that can be expected. McKinsey & Co. has a theory that as the gdp of a country rises, insurance penetration shoots up manifold. Based on that argument, the sweet spot should be just a few years away. "Growth in insurance is by no means exhausted. There still is a lot of room to grow," says Tilman Ehrbeck, Partner, McKinsey.

Indeed. India still ranks low on the parameters of insurance penetration and density as compared to even other BRIC nations, leave alone the developed countries. There is quite a gap that needs to be filled (See Taking Cover). HDFC Standard Life's MD & CEO, Deepak M. Satwalekar agrees that the explosive growth in the financial services sector will continue. "I don't think we have seen anything yet. We have seen beginnings of it in retail banking, housing finance, credit cards, but we have not seen anything on the liabilities side," he says.

Although the growth in insurance may not rival the growth in sectors such as retail banking, it will nevertheless mirror the multiplicity of service providers, products and services. Partially, it is what some call the 'dance of the elephant'. McKinsey, in a recent study, predicts that Indian household incomes will almost triple over the next two decades if the economy moves at an annual growth rate of 7.3 per cent from 2005 to 2025.

"Some agents don't mind how they sell and what they sell to the customers" Bert Paterson MD/Aviva Life Insurance

MNYL's Bennett, who has been observing the changes in India for more than a decade now and still travels extensively across the country, says there is a raft of opportunities for insurance companies as nearly half a billion of 25-30-year-olds take the economy forward in the next few years. "This country is driven by 25-year olds. Over the next 25 years, they will have investment needs, protection needs, education needs for their children. In 5-10 years, they will seriously start thinking about what they will do when they retire, because they may not have come from traditional families with reasonable wealth or land."

As they move through their lives, the 20-somethings will have to invest for their own needs, those of their children and most probably even those of their parents. Therefore, there is definitely a trend towards an improvement in penetration and density of insurance in India. Says Prof Jyothi Lakshmi, an insurance expert and visiting faculty at IIM Bangalore: "Earlier, insurance was seen more as a savings instrument and not so much as risk cover, but now with events like the earthquakes and tsunami, there is greater awareness (even for general insurance)." Of course, aiding this process is the entry of private players and their aggressive marketing. Besides, the delivery channels have multiplied.

No wonder the gravy train is attracting newer players from across the world (See Waiting in the Wings). Is there space for all? The resounding answer from the industry is, yes. "In Japan, which is one-tenth the size of India, there are 44. In Taiwan there are 30 plus," Timothy E. Feige, Co-President, Prudential International Insurance Co., which intends to set up a life insurance joint venture with DLF, told BT on a recent trip to India. Just as the first wave of privatisation injected fresh air into the moribund insurance industry, so will the arrival of new players change its dynamics. Since they will not have the early mover advantage, their mantra would be innovation.

Not that the situation will not change for the private sector incumbents. McKinsey's Ehrbeck believes that the path to growth will now lie in segmentation. "We predict continued growth, continued differentiation of customers through product offering, channel architecture and services." However, as these players cannot acquire existing policies, they can only try to grab a share of the new policies that are sold. "Much will depend on their product configuration, their reach and the team they have," says Birla Sun Life's Mehmi, adding that some of the activities such as new product innovations will be seen in the coming year itself. ICICI Pru's launch of a diabetes policy was one such.

A Matter of Reach

However, product innovation alone will not help matters, believes Uday Sankar Roy, MD & CEO of SBI Life. "In this market, competitive edge provided by product innovation can sustain only for a couple of months, since products can easily be cloned. Tomorrow's business will be dictated by distribution networks of far reach," says Roy. Predictably, insurers are pumping in big money in scaling up their agency force and opening new branches.

The state-owned giant came roaring back in 2006-07 thanks to unit-linked policies T.S.Vijayan Chairman/Life Insurance Corp.

Agents will continue to be the dominant channel for distribution, since insurance is a product that is sold and not bought. However, they are likely to be less significant for new players as they get ready to tap the market as soon as possible. "Agency is a time-consuming channel," says Gaurang Shah of Kotak Mahindra Old Mutual Life Insurance. As the products themselves become more complex, the top-performers in the agency model may transform into independent financial agents, who will give advice on total investment requirements of the clients.

Banks, an alternate to agents, are now another traditional distribution channel. And a very useful one for some. SBI Life, for instance, is able to control its cost of operations quite significantly simply by leveraging the 14,000-branch network of its parent the State Bank of India. Yet, the efficacy of banks as a channel is going to be challenged, with several state-owned banks getting into insurance product manufacturing. They would then like to distribute their own products, since current guidelines require exclusive banking channel tie-ups. "Over time, exclusivity in bank relationships is likely to disappear," feels MNYL's Bennett. The IRDA is already considering multiple bank partners.

In either case, there is uncertainty for new players. Hence, players without banking entities would continue to protect their turf, but will clearly focus on their own networks. "In coming 2-3 years there will be polarisation in distribution-insurance companies with own banks and without banks," says Mehmi. "Those with banks would leverage their existing investments in the bank branches, while those without banks would leverage their investments in their own branches and other innovative channels such as tele-marketing or web-based channels."

"Much will depend on the new players' product configuration, their reach and their team" Vikram Mehmi President & CEO/Birla Sun Life

A new player such as Bharti AXA may want to leverage the huge subscriber base available with its sister concern Bharti Airtel. Kishore Biyani-promoted Future Group's insurance venture is likely to tap into the vast retail network available to Pantaloon Retail. Akhila Srinivasan, 46, MD, Shriram Life Insurance Company, concedes that her company, as a late entrant, will have to deal with competition, which going forward would be the biggest challenge for new entrants. "However, we can leverage the strengths of our other businesses (chit funds, truck finance, consumer durables and personal finance, enterprise finance and insurance broking). All of this means more than 600 offices and 65,000 agents across the country." Of those, Shriram Life has already converted 10,000 into IRDA-approved agents.

Some others say that conventional channels are beginning to saturate. "We have to think afresh. Our current distribution channels are continuing to exhaust us," says Sandeep Bakhshi, MD & CEO of ICICI Lombard. What frustrates him is the fact that telecom companies are able to do a 10-rupee transaction whereas the insurance companies struggle to complete an 800-rupee transaction to cover two-wheelers. Bakhshi is quite clear that the main story in the coming years will relate to technology, servicing and distribution.

Life Beyond Metros

Another significant trend will be the movement away from true blue urban centres. More and more players are moving into the second and third rung of towns to tap newer opportunities. "Insurance will go beyond these ponds of metropolitan areas," says MNYL's Bennett. General insurer ICICI Lombard has an internal financial inclusion group. "The mindset has to be in terms of doing low-ticket transactions, technology, large channel and high level of servicing," says Lombard's Bakhshi.

The largest private sector insurer is growing at a frenetic pace, and moving into smaller towns Shikha Sharma MD & CEO/ICICI-Pru

However, this sharp acceleration in growth is putting pressure on the industry in many ways-right down from getting funds to fuel that growth to getting suitable sales and marketing people, to scaling up on the technology front and incorporating suitable risk management strategies. Although it may seem like a happy problem, Satwalekar assures that "we manage with difficulty."

Across the industry, trained manpower, consumer education and awareness, good quality data and use of technology at the customer interaction level are already getting in the way of growth. Says Bert Paterson, Managing Director, Aviva Life Insurance: "Some agents don't mind how they sell and what they sell to the customers." Adds S.V. Mony, Secretary General, Life Insurance Council of India: "Availability of skilled and professional manpower can cause downstream issues in control mechanisms, hr, compliance and the like."

According to industry experts, there is a demand for two lakh agents every year to add to the 15 lakh already available. Add to it specialised skills such as actuarial, underwriting, and investment, and the shortage becomes acute. India currently has around 30-40 actuaries. However, as Mony points out, even a city like Sydney in Australia with fewer insurance companies and a much smaller population has around 500 actuaries.

Insurance industry is currently poaching from other aligned industries such as telecom and retail, but then it is equally at risk of attrition due to people leaving for other industries. However, the biggest hurdle in the way of the industry's growth is a lack of capital. The section that follows tells you what innovative methods insurers are using to overcome the constraint.

-additional reporting by Nitya Varadarajan, E. Kumar Sharma and Saumya Bhattacharya