Insurance Industry in India – The Way Forward

• Industry Overview
• Impact of the COVID 19 Pandemic
• Long Term Implications

The insurance industry in India has seen a strong growth cycle post the year 2000 and reaping the benefits of the tailwind of strong economic growth environment in the country. The industry has seen a large expansion in the total number of policies in both, the life and general insurance segments. The favorable economic backdrop which resulted in the expanding per capita income and living standards coupled with a supportive demographic environment comprising of a growing middle class and a large young insurable population resulted in a strong growth cycle for the industry which has reached a total industry size of ~USD 280 Billion in 2020. 

The industry comprises of a total of 70 players involved in insurance activities which includes 24 life insurers, 27 general insurers, 7 standalone health insurers and 12 re-insurers. During the period 2015-19, the total premium received has grown at a CAGR of ~11.6% in the life insurance segment and 18.9% in the general insurance segment. As a result, the total premium received in the country has grown to a substantial INR 6.7 Trillion. The government involvement in the industry is significant in all segments including life, general and re-insurance which has helped keep the premium levels competitive in the industry has helped support the growth atmosphere in the industry.

However, the industry has been grappling with a weak trend in the insurance penetration of the country post the year 2008. This is primarily due to the weakening sales of market return linked insurance products in the aftermath of the global financial crisis that occurred during 2008. Although the total policy premiums in the industry have grown at a strong CAGR of 13.2% during the period 2015-19, the overall insurance industry is still significantly smaller than advanced economies such as USA, Germany and Japan. The insurance penetration in India stands at ~3.7% which is amongst the lowest in the G20 countries. This provides a huge scope for future growth in the industry in line with the medium-term economic growth prospects of the country and the large base of non-insured citizens.

Impact of the COVID 19 Pandemic

During the year 2020, the global spread of the coronavirus disease (COVID-19) has created a new set of challenges for the global economy. India has managed to contain the spread of the disease to a certain extent with the enforcement of large-scale lockdowns and restrictions on the movement of its citizens. However, the pandemic is causing a severe economic impact in the country. This has created some new challenges for the insurance industry in India.  The key challenges facing the industry revolve around:

1. Offline Sales Model – The insurance industry in India largely relies on an offline sales model which involves the use of agents and brokers to garner more than 64% of the total insurance policy sales in both the life and general insurance category. The lockdowns have resulted in a short-term impact on the sales volume of new policies. The total presence in online sales of new policies forms a share of less than 2% in the total volume which can result in near term weakness in the new policy sales of insurance companies.

2. Sharp Decline in the Returns on Investment Portfolios: The economic impact of the COVID 19 virus can be seen through the escalated volatility in all asset classes that form a core part of the investment portfolio of insurance companies. This is expected to have an impact on the liquidity of insurance companies to service their claims which can mount to levels beyond their cash reserves. The industry is also expected to see a weakness in the sales of market return linked insurance products like ULIPS that are the amongst the most profitable products for the life insurance companies.

3. Claim Filing Issues: The virus pandemic is expected to result in delayed filing, assessment and payouts of claims. This can impact the liability matching techniques used by the industry that ensure cash flow stability is maintained in each successive quarter.

4. Customer Premium Payment Issues: The economic impact of the virus pandemic is being felt across all sectors in the economy and the resultant effect has been industry wide pay cuts along with job losses. The Government of India has also provided a grace period towards those citizens who are unable to meet their insurance premium obligations during the lockdown period in the country. This is expected to create a short-term pressure on both, the new premium business and the renewal premiums.

The combination of these effects is expected to impact the profitability and growth of the insurance players in India in the short term. However, the insurance companies are expected to see a sharp recovery post the virus pandemic in light of the long-term implications on the industry.

Long Term Implications

In the short term, the coronavirus pandemic is expected to have a significant impact on the profitability and growth of the insurance industry in India. However, this has created an environment that is supportive of the long-term structural story in the industry. The industry can benefit significantly from the ongoing transition in the sales approach and the consumer mindset towards insurance coverage:

• Transition in the mode of sales – The insurance industry in India has begun to push its sales towards the online sales channel directly from the websites of insurance companies and through third party online sales platforms. This should augur well for the industry as it significantly cuts down on agent commissions and insurance brokerage fees which can form as much as 40% of the first year premium paid by the customer depending on the policy details. The transition of the sales channel should help improve the overall margins of the underwriting business by eliminating commissions and can also lead to discounted premiums to the customers.
• Psychological Impact of the Pandemic – The coronavirus pandemic has highlighted the costs of risks associated with mortality and medical costs that would need to be borne by people who still remain uninsured. This is expected to boost the total policy coverage of the population as more people are expected to show interest in the policies that are meant to cover the risk factors associated with mortality and health. In the long term, this should lead to higher insured policy values and an increased number of policies sold which can help deepen the insurance penetration and density in the country.