"Size does matter"- An analysis of Insurance market in India, opportunities and challenges

The sheer size of the Indian population has been one of the most talked about topics in the last decade and rightly so at that. The challenge here is to arrive at a price that is acceptable to them and more importantly to the insurers underwriting practices without un-settling margins to unacceptable levels.

India’s population continues to grow and based on UN Statistics, I would forecast the same to be at around 1.4 billion by 2020. Even if one were to take a conservative 7-8% insurance penetration by 2020 (UK currently is at around 11% currently), the insured population in India would touch 105-115 million people, i.e. almost 1.6 to 1.7 times the size of the entire UK population. Now that’s an impressive stat in itself and it explains why most global insurers and Indian conglomerates are rushing into enter this market.

India registered an impressive 8+% real GDP growth from 2004-2008. She also reported 5+% growth in a recessionary market in 2009, when most countries are officially declaring recession by reporting 2 consecutive quarters of negative growth. This points to an abating economy fueled by its expanding service industry. Today, the services industry contributes a little more than 50% of our GDP, which mirrors some of the mature economies like USA and UK. Where we differ is the 21% contribution that Agriculture brings to our economies as against the 2-3% most developed economies report. However, this movement has been most impressive considering the fact that India reported less than 20% service industry contribution and more than 40-50% contribution from Agriculture before we signed the GATT agreement in 1991. Its movement to a more knowledge and skill driven services industry augurs well for generations to come and to the income of the government as it represents a richer economy. True that more than 35% of our population are illiterate and they might not be able to find work outside of agriculture and related industry, but an un-acceptably large-scale dependence on agriculture also needs the government to constantly pump in capital into the economy by way of subsidies for fertilizers, food grains and the like.

From an insurer’s point of view, this paradigm shift offers a changing economy with a sleuth of opportunities:

 Shrinking but significant number of pure play agriculturists; many of whom are large scale producers who can be offered crop insurance, tractor insurance and other related products
o A reducing but significant group of agriculturists are supported by government programs to maintain social balance and regional considerations. These groups can be offered group mortgage protection covers for the bank loans they take, crop and tractor policies
 It lets our insurers focus on specific regions and sects of farmers. The challenge however is to thrust underwriting practices of scientific farming, irrigation and other risk mitigation measures on this group of farmers, who are largely illiterate.
 Growing Services sector
o Creamy layer of the Middle class population- The 11.5 million middle class Indians of working age (18-59 years) with annual incomes between Rs 250,000 and Rs1 Million account for Rs1.1 trillion in accumulated savings (Average savings-30%). They have had a higher risk appetite on the back of a 5+ year bull run. However, with the recent downturn and almost 60% reduction in Index value from January 21st to October 30, 2008, this group of customers are growingly becoming more aware of the need of having a balanced portfolio and owning products with lesser but guaranteed returns
 A host of guaranteed Unit linked products have been launched by most competitors in the fag end of 2008 and 2009
o Middle class population- With a middle class population spanning around 380-400 million individuals who can afford life protection and would growingly buy auto and realty products, it presents insurers with tremendous opportunity to offer no frills low margin insurance products to a huge base of people. Just the size of the middle class population is larger than that of USA, which is three times the size of India in terms of area
 Pension opportunity- With huge untapped potential and privatization of New Pension System (NPS), India’s NPS has the potential to reach US $ 26 Billion by 2020 (Launched in 2009)
• Approx 15- 20 million of India's 400-million workforce has a retirement plan; most can afford private plan
 Spiraling healthcare costs- This presents tremendous opportunity to insurers as a significant number of middle class Indians do not have any sort of health cover. People above 55 years still find it difficult to land a half-decent health policy.
 Absence of any mass-based government initiatives like free emergency care or social security in itself presents insurers with tremendous opportunity
 Indian market is expected to be completely de-tariffed by 2010- currently several restrictions remain on loading and terms. This coupled with 2 critical regulations in 2008-2009, that of reduced capital requirements for stand-alone health insurance companies (from INR1000 million to INR500 million) and permission for life insurers to sell health insurance is expected to give a major fillip to the health insurance scene in India
 Poor loss ratios (150+% for public and 100% for private players) in 2007-2008 & poor health care infrastructure in semi-urban and rural areas continue to be major challenges.
 Rural/Semi-urban population
o If insurers can get the price right, we are talking about a potential 20%* of India’s 700 odd million population living in rural/semi-urban areas, who can be tapped.
o Significant shift in regional patterns for life insurance has been reported on the back of mandatory norms from regulators (life- 7%-15% of policies from 1-5 th year of operation) and improved distribution connectivity and awareness among parts of the 70% of India’s population which lives in semi-urban/rural areas. The Semi-urban and rural areas are expected to contribute more than 60% of all new business from 2012. This is in sync with the population pattern as well of the country.
o Innovations in Distribution is the key
 Regional Rural Banks, Co-operative banks, schemes like Kissan credit cards (30 million customers) are critical to selling life insurance in rural areas due to the high trust quotient associated with banks and also the fact that more than 50-60% of their savings are in bank deposits
 Grocery stores, milk co-operatives, local libraries are critical areas of interaction with rural population
 Individuals with sufficient local clout- Head master, Sarpanch etc, are also essential in improving insurance awareness

From politicians who constantly talk about the need to bring the “Aam Admi” (common man) into main stream, to insurers who are constantly looking at unearthing ways and means to sell insurance to the common man, size of the Indian population and its real value has remained an enigma.

Sources: IMF, IRDA, Insurance websites, Doman B, Financial newspaper articles, Economist. Detailed source list is available for reference.


Opinions expressed in this article are solely that of mine and not be construed as those of the company I belong to or in my capacity as a researcher within the organization. This is purely an expression of my thoughts and views on the market. Having said that, the data points used in my study have been well researched for accuracy from credible publications/sources.)