Insurance Industry KPMG Report

Insurance Industry Road Ahead
Path for sustainable growth momentum and increasing protability

kpmg.com/in
Foreword
The Insurance industry in India has undergone transformational changes over the last 12 years. Liberalization has led to the entry of the largest insurance companies in the world, who have taken a strategic view on India being one of the top priority emerging markets. The industry has witnessed phases of rapid growth along with spans of growth moderation, intensifying competition with both life and general insurance segments having more than 20 competing companies, and signicant expansion of the customer base. There have also been number of product innovations and operational innovations necessitated by increased competition among the players. Changes in the regulatory environment had path-breaking impact on the development of the industry. While the life insurance industry got affected by the introduction of cap in charges, the general insurance industry got impacted by price detarifcation and Motor third party risk pooling arrangements. While the insurance industry still struggles to move out of the shadows cast by the challenges and uncertainties of the last few years, the strong fundamentals of the industry augur well for a roadmap to be drawn for sustainable long-term growth. The available headroom for development, sustainable external growth drivers, and competitive strategies would continue to drive growth in the gross written premiums. However, insurance companies would need to address the key concern around losses that continue to be a drag on the capital and on the shareholders return expectations. In order to achieve protable growth for long term sustainability, insurers have two key imperatives. Firstly, they would need to conserve capital and optimize the existing resource deployment and distribution networks. Secondly, they would need to innovate not only in terms of value propositions but more importantly in terms of operating models in order to develop sustainable competitive edge. Consumer awareness and protection has been a prominent part of the regulatory agenda. Regulatory developments in the recent years show the focus on increasing exibility in competitive strategies such as niche focus, merger and acquisitions and on removing structural anomalies in the products and operations. While these initiatives would enable long term industry growth, the role of the regulator in providing an enabling environment to achieve protable growth in the near to medium term cannot be undermined. The papers which form part of this report entitled Insurance Industry Road Ahead is an attempt to understand and discuss the various issues that the Indian insurance industry is dealing with, and to bring to the fore emerging trends that will shape the growth and protability of the industry in the near to medium term future. One of the papers focuses on the challenges and opportunities in microinsurance, where the development of products and operating models by the insurance companies addressing the needs of the microinsurance sector requires strong support from the government and the regulator.
Partner Management Consulting KPMG in India
Shashwat Sharma
Director General The Bengal Chamber of Commerce and Industry
P Roy
2013 KPMG, an Indian Registered Partnership and a member rm of the KPMG network of independent member rms afliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Contents
Indian Life Insurance Industry Time to optimise capital The decade gone by Finding the right distribution model Realigning the business model Innovating with new models Securing through complementary alternative channels 01 03 06 08 10 12
Indian General Insurance Industry Looking forward to protable growth Historical developments in the Indian general insurance industry Future Growth and protability trends in the General Insurance Industry
13 15 18
Conclusion 22
Microinsurance: Unlocking Indias huge insurance potential Microinsurance a brief concept Global overview and comparison with India Microinsurance in India Issues and challenges impeding the growth of microinsurance Regulatory update Potential solutions to further increase penetration and scaling-up microinsurance business Way forward
23 25 26 27 34 36 37 40
1 | Insurance industryRoad ahead
Insurance industryRoad ahead | 2
Indian Life Insurance Industry

Time to optimise capital
The decade gone by
Since the opening of the sector in 2001, Indian life insurance industry has gone through two cycles -- the rst one being characterised by a period of high growth (CAGR of approx. 31 percent in new business premium between 2001-10) and a at period (CAGR of around 2 percent in new business premium between 2010-12). During this period, there has been increase in penetration (from 2.3 percent in FY01 to 3.4 percent in FY12), increased coverage of lives, substantive growth through multiple channels (agency, banc-assurance, broking, direct, corporate agency amongst others) and increased competitiveness of the market (from four private players in FY01 to 23 private players in FY12).1 The sluggish period being experienced today by the Indian life insurance companies brings to fore the big challenge of protability. The industrys participants have been struggling to achieve protability in the face of high operating losses primarily on account of distribution and operating models. Cumulative losses for private life insurers are in excess of INR 187 billion till March 2012, majority of which have gone towards funding losses rather than for meeting solvency requirements.
1 Source for various growth gures quoted: Handbook on Indian Insurance Statistics 2011-12 published by IRDA
Exhibit 1 represents the equity in the business vis--vis the balance in the prot and loss during FY02 and FY12. The trend line represents the rst year premium earned by private life insurance companies.
Exhibit 1: Performance of Private sector life insurance companies
Source: Handbook on Indian Insurance Statistics 2011-2012
The period FY05 to FY10 was primarily dominated by linked life insurance business especially in case of the private sector insurance players. Performance of the Linked plans is directly linked to primary capital markets. The period FY06 to FY08 witnessed boom in the countrys capital market which beneted the insurance companies in turn. FY09 and FY10 witnessed slow down in the economy and thereby impacted the sale of policies. IRDA during July 2010 (and with modication in September 2010) came up with Unit Linked Insurance Plan (ULIP) guidelines capping upfront charges, returns and the commission pay-outs impacting the basis on which ULIPs were developed. Immediately following these guidelines, during FY11 and FY12, the industry witnessed a shift in the product mix from linked products to non-linked or commonly known traditional products. The premiums fell at an annual rate of around 19 percent (Exhibit 1) during FY11 and FY12. Currently, the premium mix of the industry is at a similar mix as of FY04 depicting almost a reset of the life insurance business.
Exhibit 2: Premium mix and falling growth rate (FY04- FY12)
Source: Handbook on Indian Insurance Statistics 2011-12 published by IRDA

Protability and return on invested capital

The protability is dependent on operating activities (selling new policies and servicing existing policies i.e., difference between premium revenue and total cost of insurance and operations) and nancing activities (investing the policies premium i.e., difference between actual investment returns and the returns credited to the policies and surrender and lapses of policies). Life insurance premiums generally decrease as sales of investment-linked and single premium life saving products decline and there is an increase in surrender and lapses. The industry in these two cycles has faced structural challenges that have adversely affected both aspects of operations and consequently overall protability. Firstly, demand was created for a product that transferred the investment risk, along with its return, to the customer. Secondly, in an economy that is undergoing a slowdown, investments have provided limited returns. The change in regulations had shifted the premium mix in favour of traditional products over the linked products. Generally in case of life insurance companies, the capital infused during the initial years is utilised in the initial set up costs and acquisition costs thereby leading to a gestation period of 7-8 years after which life companies may turn protable. Exhibit 3 represents the incremental equity infused by the private life insurance companies in the industry since FY04 and the movement in the cumulative balance in prot and loss account. Periods FY08 and FY09 witnessed heavy equity inows primarily to fund the growing business with boom in the economy and also on account of four new private players entering the life insurance industry.
Exhibit 3: Equity infusion and movement in prots / (losses) (FY04- FY12) (INR billion)
The periods FY11 and FY12 had a consolidated positive movement in the reserves. However, this positive movement was majorly driven by lapse prots on linked policies issued earlier. Insurance rules before September 2010 allowed insurance companies to write back the lapsed money as income in the books over a period of time. Estimates by an October 2012 Goldman Sachs Global investment research report for just six companies show lapse prots of INR 31.89 billion for two years ending 2011-12. The quality of earnings can be affected by non recurring items such as prots from lapsed policies. The industry is at critical juncture wherein it has to identify the right models for long term viability.
With economic growth expected to be slow in 2013 and a weakening global economic outlook as well, insurers will have to contend themselves with another year of weak investment returns. Moreover with the challenges faced by insurance companies with the high cost of distribution and operations, it is important that life insurers nd a sustainable model in the long term.
Finding the right distribution model

Life insurers monitor and manage performance on an ongoing basis but as life insurance policies remain in force for many years and sometimes even decades, the ultimate protability of the underwritten business is only known in later years when all the policy obligations are fullled. The attractiveness of India has always been the sheer size of the market and nding the right distribution model to address the different target segments is of grave importance. As sale of new policies and increasing the penetration of life insurance is one of the levers of creating prots, the rst wave of insurance companies concentrated on building a distribution model to enable this lever. In that context, the private life insurers faced a unique challenge. Dilemma of the xed cost agency structure
Indias private life insurance companies had examined the well-entrenched LICs model of tied agents in detail and found it easy to replicate. They tweaked the overall branch-led operating model but retained the basic structure of brick and mortar branches and agency managers (or development ofcer in LIC parlance) on their payrolls i.e., the agency manager was an employee on xed costs with some variable component. This made the agency model a high-cost distribution model pushing the breakeven for these private life insurers. The model also had other drawbacks. Tied agency force was not always completely activated. A typical agency manager supervises 10-15 agents but sources mostly from 1-2 agents. The role and prole of the agency manager largely in the industry involves agent recruitment, proling, training, hand-holding and activation amongst others. Business generation through these agents typically ended with an achievement of Minimum Business Guarantee resulting in a long tail of agents whose business needed to be serviced in a similar manner to other agents who were highly productive. Fewer active agents are supporting the cost of management team which leads to increased operating cost. The growth of number of branches in tier I-III cities did not just justify the volume of premiums generated from these cities where competition intensity was fairly high. The issue got magnied when insurance companies opened branches in Tier IV-VI cities to nd them to be unviable due to limited market share in these locations for the private life insurance companies.
Inefcient agent recruitment process leads to high attrition amongst the agency managers and agents; it also leads to cost build up for recruitment, and training of this sales force. Some agents lack the skill to provide sound nancial advice and accordingly, there is a lot of mis-selling that also happens in this channel. The overall stickiness of this sales force needs to be increased to ensure a more sustainable model. Productivity of the agent does not improve linearly with lineage of the agents. An agent also has to work on building trust and credibility with his existing customers and increase his new customer base. Some agents who do not build rapport with the existing customer base and chase high value policies often lose motivation and become inactive.
Life insurance companies spend a signicant portion of their initial budget to set-up and streamline the operating model and the distribution process to acquire new business. For insurers to realise the highest value from distribution, they must dene an operating model which supports a multiproduct, multi-channel distribution model that compliments an insurers revenue objectives and prot margins. Distribution is not only the forefront of the operations but also forms a large proportion of the operating expenses. Accordingly, inefcient agent recruitment and high employee attrition are increasing the operating cost. Insurers can realise the highest value from their agent distribution channel by developing an integrated suite of services oriented to driving sales and reducing servicing costs.
Exhibit 4: Operating expenses as a percentage to net premium (FY04- FY12) (INR billion) Operating expenses percentage to Net Premium - Private vs. LIC
Declining volumes in the banc-assurance model

For the life insurance companies facing capital crunch, the bank channel became an instant favourite as it provided an easy access to an existing customer base but would also reduce the xed costs. For the banks, it was a source of additional fee-based income (no risk business) and also becoming a one-stop shop for nancial solutions for its customers. The customer viewed this channel as their trusted nancial advisor where they could buy products. Bank distribution of insurance products has gradually increased over the years to around 35 percent of new business premium of private life insurers (20 percent in terms of number of policies) in FY12 being sourced through the bancassurance channel.2 However, the difference in working style and culture of banks and insurance companies was starkly made evident by the fact that insurance is a business of solicitation unlike a typical banking service. The drive required in marketing an insurance product is far greater than that of a banking product, the need for which is more triggered by the customer than by the bank. Also, banks have started facing a conict of interest with insurance products substituting banking products like term deposits i.e., both being some form of investment vehicles. Reduction in deposits mobilisation affects the core business of banks and source of funds. Insurance products have become increasingly complex over a period of time, due to improvisation over the existing offerings as well as due to constant innovation, adding to even more difculties in comprehension of the products and marketing by the bank staff. Further, training of key bank staff on insurance sale and products across all branches also pose a challenge for the insurance companies. The sale through bank branches also depends on the motivation and support lent by the bank partner. This lends itself by way of having a network of branches that are not activated to sell insurance. The insurance companies have not been able to successfully mine the bank customer database for sale of new business especially of public sector banks which are still on the anvil of technology transformation. With the economics of all traditional distribution models being challenged, the life insurance industry today has begun to focus on operating expenses management and attempting to build a lean operating model. The industry has also continuously clamoured for greater exibility by relaxing outsourcing guidelines to improve their performance. But much can be done by realigning the operating model to access different segments of customers using existing infrastructure.
2 IRDA monthly journals, IRDA Annual Report 2011-12 and individual public disclosures of life insurance companies
Realigning the business model
Life insurers have traditionally aligned themselves to models that are inherently conventional in its approach - individual agents, banks, corporate agents and insurance brokers instead of giving importance to either the customer or product segmentation. In fact while many insurers have built customer relationship databases, the data itself is not mined or tracked to increase the positive interactions with the customer. This has resulted in lower persistency levels (poor customer loyalty) and even resulted in customers avoiding face-to-face interactions with insurance agents. Persistency was long ignored by the insurance companies when the growth in new business premium was high. However, with the growth slowing down, focus on retention of policies has gained focus. Explosion of technology backed with the increase in internet and mobile telephony provides a lowcost opportunity as now life insurers can leverage some of the success of online banking and e-commerce to build an online product bouquet that engages the customer and enables him/her to buy.
Technology-enabled model for urban India

There is enough evidence from developed markets that internet penetration and usage have a positive correlation with the performance and activities of insurance companies at various levels lower customer acquisition costs, improved access to information, product innovation that cater to the needs of the customers and enhanced convenience. India has only 150 million internet users as of February 2013 with a penetration of 12 percent making it one of the least penetrated of BRIC7 nations. However, there has been a surge in volume and value of retail transactions in the last decade that reects the comfort of the internet users to conduct nancial transactions online.
Exhibit 5: Growth in retail electronic transactions Retail electronic transactions Volume (millions) Amount (INR billions) Annualised growth rate ( percent) 27 .42% 59.71%
FY04 167 521
FY12 1,160 22,075
Source: Reserve Bank of India Bulletin 2011-12

Online sales of insurance products have one important distinction - since the customers needs and preferences have led to the purchase decision, the customer would ideally have made a properly informed choice. Also, since insurers do not have the opportunity to inuence the customers purchase decision, the design of the web portal needs to be easy to understand and interactive enough to make the transaction seamless. The products offered through this channel should meet the needs and offer benets/features that differentiate the product from the offerings of their competitors. In the past 2-3 years, a range of protection products that include health insurance as well have been offered to Indian consumers as against the pure term insurance policies that were sold earlier. Insurance companies in recent years have also witnessed that persistency and the proportion of claims being rejected is lower in case of the online customers making this segment an attractive and low cost channel. While the current size is marginal as compared to overall customer base and underwritten premium, the segment shall witness growth and reach a signicant size in the future as the internet penetration increases and awareness of the customers also rises.
advantage in the future. We provide below a ready reference, and to enable an understanding of the size of the opportunity, certain facts and gures of potential points of presence in the rural regions: As per the 2011 census, there were 589 District Panchayats, 6,321 Intermediate Panchayats and 238,957 Village Panchayats across India4 As at 31 May 2012, there were 713 Multi-State Co-operative Societies in India5 As at 31 March 2012, there were 9,743 branches of Micronance Institutions (MFIs) across India6 As at 31 March 2012, there were 10,78,407 government schools covering 644 districts across India7 As at date there are 48,125 voluntary organisations/state organisations registered under the NGO-partnership system with the Government of India8
Exhibit 6 Avenues to access the rural market
Center of Inuence (COI) model for rural India

Rural India and making the rural population nancially included has become a top priority for the Government. Many initiatives have been launched to enable this national agenda. For instance, Aadhaar by UIDAI3, new mobile-based platforms are emerging and banking correspondent guidelines have been issued by the Reserve Bank of India, all of which is aimed at making nancial services accessible to the rural areas. It is time insurance companies also join the bandwagon and nd enabling avenues that would make rural population insurance inclusive. Unlike in case of the urban regions, penetration of the insurance industry in rural regions has been relatively lower. Rural population has relatively lower access to information and lacks awareness of insurance products, mostly rendering them to be the un-insured class of population. However, in order to make them aware of the insurance products and more importantly the need for insurance, it is necessary to educate them in person thus requiring a high touch service model to be followed. This requires identifying the centres of inuence to create awareness of insurance products, educating them on the need to be insured and nally converting them in a cost effective manner to tap this un-insured and under-insured market. Exhibit 5 represents the different types of centres of inuence that are already present in a rural region. They potentially can be Headmasters of local government schools, Sarpanch of the gram panchayats, Non-Governmental Organizations (NGOs) and Self Help Groups (SHGs) that work in certain rural districts or even be the banking agent or business correspondent. Insurance companies can take a similar model to a larger population. The large untapped rural un-insured population represents a signicant growth opportunity and those who take the approach of identifying inuencers might have a distinct
Insuring people in the informal sector via microinsurance

The insurance industry plays a critical role in the growth and development of the overall economy. Insurers have been making increasing efforts to provide products to the low-income segments of the market. However, the challenges associated in reaching and providing affordable products to a large target segment is a major concern for the insurers. This is compounded by the lack of reliable data to design appropriate products for the largely uneducated customer segments. There is a need to create awareness about micro insurance products amongst the target customers and the regulator can play an important role in enabling an environment that is conducive to this. There is a strong case for life insurers to identify these existing avenues of business without being constrained by the availability of capital. Enabling these avenues and assisting them in making the purchase decision would mean realigning and reallocating the existing resources to these natural partnerships. Aligning the business model to customer requirements makes the operations cost effective and protable.
3 Unique Identication Authority of India under the aegis of the Planning Commission, Government of India 4 Source: http://lgdirectory.gov.in as per 2011 census 5 Source: Government of India, Ministry of Agriculture
6 Source: www.mn.org.in 7 Source: ww.dise.in 8 Source: http://ngo.india.gov.in/ngo_stateschemes_ngo.php
Innovating with new models
In times where it is important to conserve capital and allocate capital to resources that will deliver sustainable returns, no insurer can remain rigid in their distribution or operating model. Changing lifestyles and buying preferences will constantly dictate the future models of distribution. However, life insurers would also need to decide on the resources that need to be deployed to build these future models. While the urban market today might be comfortable buying online insurance products, they might not resist the warm smile of a life insurance agent. There are also successful models in other nancial and non-nancial services business that can be adapted to distribute life insurance products. It would be useful to examine some of them from an ideating perspective.
Peer-to-peer (P2P) insurance or social insurance

This draws its inuence from P2P lending which is the practice of lending money to unrelated individuals or peers without going through the traditional nancial intermediary such as a bank or other traditional nancial institution. The lending takes place online on peer-to-peer lending companies websites using various lending platforms and credit checking tools. Many such platforms exist today in the United Kingdom and United States with the rst one in India being the Bangalore-based DhanaX. In the UK, the rst and most successful P2P lender is Zopa which was founded in 2005 and has issued loans in the amount of GBP 278 million with over 500,000 customers. There are now P2P lenders that are even using provision funds to safeguard lenders against borrower defaults. Following the success of these P2P lenders, this idea is currently being extended to insurance in Germany as insurance is essentially a social network to share risk. Friendinsurance, a Berlin-based startup, is essentially allowing individuals to develop their own risk pools. The service is a combination of a peer risk pool and a traditional insurance policy. Users of the service invite their friends to cover a small portion of any claims that are made and the rest of the claims are paid by a conventional insurance policy. This service, as claimed by the company, prevents insurance fraud and misconduct via means of social control and reduces sales costs, discourages small claims and cuts administrative overhead.
Direct delivery model

This is inspired by the Amway success of multi level marketing. The direct-to-customer approach means that the life insurance companies have to focus on four key levers i. Customer segmentation and analytics for targeted approach to marketing ii. multi-channel strategy that creates value for the direct customer iii. Product offerings need to be simple and easy to understand; most importantly easy to explain iv. After sales support that should be technology-driven in order to remain cost-effective Customer data analytics based marketing strategy relies not on experience or gut-feel but on an understanding of customer preferences and price sensitivity. This enables insurers to interact with customers to maximise the retention (improvement in persistency ratios) and also identify crosssell opportunities. These interactions also provide a degree of comfort to the customers and builds condence in the insurer and their own purchase decisions. Further, the acquisition cost should be kept variable as far as possible to make the model a success
Mobile-based insurance model

There are over 865 million mobile users in India as of December 2012 of which around 535 million are urban users while 330 million are rural users9. This means that it has become a necessity that there is a proposition to be offered to the mobile customers. Extending the business capabilities to mobile devices has quickly become a fundamental requirement for companies. Customers increasingly expect it and business partners and employees have become more comfortable with communicating and sharing information anywhere, through any device. In a recent IBM Insurance Global CIO study10, it was found that there is huge potential to leverage the mobile platform for investments. In the same manner in which banks had taken to mobile banking applications a few years back and offering a mobile proposition, insurers might have to do the same. Till date, insurers have restricted themselves to creating applications for quote generation and simple afnity-based product sales. However, with the growth in mobile applications and smart phone usage, applications to assist in the sales process for agents/brokers are being developed. Several insurance companies in India have pilot tested the use of smart phones for the initial product information and lling of application forms to reduce policy issuance time. Further, applications are being developed for agents to access their training modules and their performance to date on the smart phones. As mobile users are already KYC11 compliant, and with Aadhaar-enabled bank accounts, piggy-backing on the mobile wallet, mobile banking platform to offer insurance solutions is a cost-effective method to tap a large market.
9 Source: TRAI Press Release No. 08/2013 dated 7 February 2013 Highlights of Telecom Subscription Data as on 31 December 2012 10 Source: The Essential CIO Insights from the Global Chief Information Ofcer Study, IBM Global Business Services. 11 Know Your Customer compliance based on Reserve Bank of Indias KYC guidelines of 2002
Securing through complementary alternative channels

The life insurance industry as a whole needs to address the challenge of conserving capital and keep reinventing itself to a whole new generation of customers. Despite all the pressures that have persisted across centuries, insurance still largely remains attached to the traditional models of consultative selling. In a country which is as diverse, insurers are expected to follow a multi channel approach. While banc-assurance is expected to drive near term growth and online holds a promise for the future, agency channel continues to dominate the channel mix today. There is an urgent need to take initiatives to revamp the agency channel to become cost effective and in tandem, identify alternative networks that complement the existing channels. Further, there have always been a few life insurers who have sought to identify niche markets like women-oriented products, worksite marketing, children future protection markets and pension markets. But these have not been happening on a consistent basis. The industrys business model needs to constantly innovate and evolve. There is an enormous opportunity for insurers who can get ahead of the curve, through identifying models and implementing new product solutions that would enable them to react quickly and effectively to changes in the environment. The relationship between people and technology is one of the key drivers for the growth of the industry led with the regulatory changes which will provide the much needed impetus. These should be treated as change catalysts as insurance companies position their organisations to meet the challenges ahead.
Indian General Insurance Industry

Looking forward to profitable growth
Historical developments in the Indian general insurance industry

The overall general insurance industry growth has kept pace with the GDP growth in the country and general insurance penetration has varied in a narrow band After liberalisation of the Indian insurance industry in the year 19992000, the Indian general insurance industry has witnessed rapid growth. The industry, in terms of gross direct premium, has grown from INR 11,446 crore in FY02 to INR 57 ,964 crore in FY12, which corresponds to a compounded annual growth rate (CAGR) of 17 .6 percent. Insurance density, which is dened as the ratio of premium underwritten in a given year to the total population, has increased from USD 2.4 in 2001 to USD 10 in 2011. The growth in the general insurance industry has kept pace with the nominal GDP growth rate resulting in general insurance penetration remaining stable in the range of 0.55% to 0.75% over the last 10 years.
Exhibit 1: Growth in the Indian general insurance industry
Source: Handbook on Indian Insurance Statistics 2011-2012
Changes in the regulatory environment substantially impacted the industry dynamics

Apart from macro-economic, social, and demographic growth drivers, the evolving regulatory landscape had a signicant impact on the growth and protability trends in the industry. The most notable of them was the price detarifcation in 2007 which signicantly impacted the premium rates and growth for commercial lines and health insurance.
Though the overall insurance penetration has remained in a narrow range, coverage of underlying risks has increased considerably
The insurance penetration statistics may not represent the true perspective on coverage of the underlying risk due to changes in the premium rates across segments which were signicantly inuenced by the regulations. In our estimates, the risk coverage has grown at an annual growth rate of approximately 25 percent. For example, in the health insurance segment, the number of persons covered has increased from approximately 80 lakhs in FY04 to approximately 7 .3 crore without taking into consideration the Rashtriya Swasthya Bima Yojna (RSBY) which has additionally covered more than 16 crore people by FY12. Even in commercial lines business, the premium growth over the years indicates considerable increase in the underlying risk coverage, especially considering the impact of price detarifcation.
Overall, while the industry achieved signicant growth over the past 5 years, the protability of industry deteriorated sharply
A multitude of factors adversely impacted the industry protability over the last ve years Price detarifcation provided freedom to general insurance companies to decide the premium rates in most of the product segments Between FY06 and FY12, 10 new companies have entered the general insurance business. Intensifying competition and focus on growth by the new entrants led to competitive pricing pressure Focus on growth by the insurers across the industry led to higher bargaining power of the intermediaries and limited control on the claims cost Limited or no increase in the TP premium rates for a number of years coupled with issues pertaining to third party liability caps as under The Motor Vehicles Act, led to extraordinarily high claims ratio in the segment which impacted the overall protability and solvency requirements for the general insurance companies.
Exhibit 3: Relative growth and protability of the general insurance product segments
Source: IRDA annual reports 2010, 2011 and 2012 Note: Size of the bubble indicates segment size (GDP in INR Cr)
Future growth and protability trends in the General Insurance Industry

General insurance industry in India presents signicant headroom for growth While the Indian general insurance industry has evolved signicantly over the past decade or so, the insurance penetration and insurance density levels are signicantly lower than the developed as well as comparable developing countries. The under-penetration is driven by lack of overall nancial awareness, lack of understanding of general insurance products, low perceived benets, and propensity to purchase insurance based on reactive drivers such as insistence by nancers, statutory requirements, etc.
Exhibit 4A: General insurance penetration in percentage (Ratio of Premium to GDP) Exhibit 4B: General insurance density (Ratio of premium in USD to population)
Source: Swiss Re, Sigma Volumes 2/2011 and 3/2012, Note: Data for India pertains to FY12 whereas for other countries, it pertains to the year 2011
Source: Swiss Re, Sigma Volumes 2/2011 and 3/2012, Note: Data for India pertains to FY12 whereas for other countries, it pertains to the year 2011
Study of global benchmarks reveals a strong correlation between GDP per capita and insurance penetration. The correlation suggests that the insurance penetration may increase up to 1 percent to 1.2 percent by FY20 considering the likely increase in the GDP per capita.
Indias expenditure pattern on healthcare suggests signicant headroom for growth for substitution of out-of-pocket expenditure by health insurance
Exhibit 5: Sources of Healthcare Expenditure
term. Product as well as operating model differentiation visa-vis multi-line players may help these players to develop a protable growth model. Large private sector players Large private sector players pose the biggest threat to public sector insurance companies due to more efcient operating models, highly capable talent pool, and signicantly higher usage of IT at a scale comparable to the public sector insurers. These players would drive the focus on operational effectiveness, channel productivity, enhanced pricing approaches in order to derive protable growth. Mid-sized private sector players Mid-sized private sector companies would need to select the areas of focus in terms of products and markets for pursuing long term growth. These players may actively seek inorganic routes in order to rapidly gain scale and leverage synergies to create competitive pressure. Public sector companies
Source: World Health Statistics 2012 published by World Health Organization, KPMG Analysis, data pertains to year 2010
In India, the share of out-of-pocket expenditure in overall healthcare expenditure is signicantly higher than comparable developing countries as well as the developed countries. Moreover, the government focus on healthcare spending is focussed on low income and below the poverty line segments. Considering the rising healthcare cost ination and changing disease pattern more towards lifestyle diseases in the urban areas, the health insurance market would have signicant headroom for growth as it would replace the out-of-pocket expenditure.
Public sector general insurance companies enjoy key advantages as against competition in terms of balance sheet strength, physical infrastructure, reach, channel strength and experience. Transformational initiatives addressing the HR challenges, IT capabilities, operational effectiveness, and enhanced pricing approaches may lead to substantial growth and protability benets.
The industry gross direct premium may grow at a CAGR of 16 percent in the medium to long term
Economic growth, socio-economic drivers, greater market penetration, rising prices of underlying assets, increase in healthcare costs would signicantly drive the growth of the general insurance industry in the medium to long term. The growth may also be supported by a focus on protability by public as well as private sector insurers resulting in lower propensity of price wars. The general insurance sector is expected to grow at a CAGR of 16 percent from FY12 INR 57 ,964 crore to approximately INR 194,000 crore by FY20
Competitive strategies could considerably impact the growth and protability of the overall general insurance industry
Competitive strategies adopted by players would have considerable impact on the growth and protability trends in the general insurance industry. Different competition segments have different strategic imperatives based on the historical business performance, capabilities developed over the period of time and strategic objectives of the promoters. New entrants targeting broad based presence New entrants focussing on high growth across segments are likely to have low protability in the initial years as their aim would mainly be on price or channel payout-based competition. These players may rapidly replicate the industry best practices since they would have limited legacy operating structures and assets. The same could enable protability and growth for these players in the medium term. New entrants with niche focus New entrants who are currently focussing on niche productmarket segments may bring the international best practices in products, managed care models, ancillary services such as wellness and disease management in the medium to long
Exhibit 6: Projected growth of the Indian General Insurance Industry (Gross Direct Premium) (units INR Crore)
Source: KPMG Analysis, IRDA Annual Report 2012
Growth in different product segments may be driven by segment specic drivers

While, the overall macro-economic and socio-demographic factors would enable growth across the industry, each of the industry segments would have specic growth drivers with respect to the increase in the underlying assets or risks, market penetration and potential increase in the premium rates. Motor Increase in third party premium rates and focus on CV OD business by insurers considering the impact of the declined risk pool are expected to be the key drivers for this segment in the near future. In the medium to long term, resumption of growth trend in automobiles sales, increased penetration in the renewal business and emergence of large organized collaborators such as garage Preferred Provider Network (PPNs) are expected to provide the growth momentum for this segment. Health The retail sub-segment is expected to grow at a robust pace driven by increased penetration in tier II and III cities, substitution of out-of-pocket expenditure by health insurance spends, increasing urbanization, demographic shifts and medical ination. With increase in the maturity of the market, this segment is expected to see innovative products being offered by insurers like wellness management, managed healthcare etc. Though the group sub-segment is expected to have a relatively limited growth on account of penetration in the organized employment sector, the growth of this segment would be primarily driven by increase in the premium rates in the near term. The government sub-segment would continue to be driven by incremental coverage of the existing government schemes. However the premium rates would be impacted by competitive intensity in the tendering process. Fire Higher penetration into the SME segment as well as a moderate increase in premium rates would drive the growth of this segment in the near term. The growth in gross capital formation, including in the infrastructure sector, would continue to drive growth in this segment in the long term. Marine The near term drivers for the marine segment would continue to be the growth in GDP leading to increased international trade. In the medium term, improvement in surface transport infrastructure of the country is also expected to have a positive impact on this segment through increased opportunity for long distance goods transport within the country. This segment might also be impacted by the implementation of GST across states which could lead to shift in the strategy to locate manufacturing centres and warehouses. Others The sub-segments which constitute the Others are expected to grow in the near term on the back of increased penetration, especially in non-metro markets, and growth in the gross capital formation of the country. In the long term, increased market maturity would lead to the emergence of niche customer segments leading to new product introductions to suit their requirements.
Product mix would continue to be driven by motor and health insurance business
Considering the growth trends described above, the proportion of motor and health insurance businesses in the overall product mix is likely to go up further. Personal line business could be around 70 percent of the overall market. Among the commercial lines, proportion of re insurance business may marginally increase further.
Exhibit 7: Product mix projections
Source: IRDA Annual report 2012, KPMG Analysis
Claims ratios are likely to improve in most of the segments in the medium term
Protability of a large number of players, including that of public sector players, is signicantly low as of today. A number of factors like detarifcation, competitive pricing etc. have contributed to the overall low protability of the industry. Going
Segment Extent of change expected in incurred claims ratio in the medium term
forward, a number of drivers are likely to have considerable impact on the overall business protability. The factors impacting future protability are described as below:
Comments and drivers
Motor OD
Reduction up to 5 percent points
Reduction in Own Damage (OD) premium discounting to mitigate impact of higher Commercial Vehicle (CV) TP retention by insurers Improved claims management, fraud detection/ prevention Competitive intensity could continue to impact pricing. Formula linked and frequent TP tariff revision by IRDA Improved claims management, fraud detection / prevention Limitation on liability if amendments to the Motor Vehicle Act are passed. Enhanced product design with sub-caps, limits Standardization of denitions, processes Provider network negotiations and monitoring Fraud prevention and detection Operationalization of the common TPA of the public sector companies Part of the improvement would be offset by the adverse impact of pre-existing diseases being covered, ination in healthcare costs, pricing pressure due to entry of new players.
Motor TP
Reduction by more than 10 percent points
Retail health
Reduction by 5 percent to 10 percent points
Group health
Reduction by more than 10 percent points
All elements as mentioned for retail health except that premium rates in case of group health business are likely to increase in the near to medium term.
Government health Fire
Stable or moderate increase
Control over frauds and claims cost Standardization of denitions and processes However, tender driven process may lead to adverse pricing pressure. Reduction in discounting by insurers to improve segment protability Increase in share of low risk segments of the SME business Key risks would include large losses on corporate policies, limited bargaining power with corporate customers to improve pricing Reduction in premium discounting by insurers to improve protability Further improvement in the shipping transit environment and road safety Claims ratio in the segment are highly project specic and hence show a variation across players; no signicant change in loss ratio expected Competitive pressures on pricing in the existing customer base and segments such as travel Penetration in new segments without adequate ability to appropriately price the risk
Reduction by 5 percent to 10 percent points
Marine Cargo
Reduction up to 5 percent points
Engineering
Others
Bargaining power of intermediaries in the personal line business may reduce signicantly in the medium term
The disruptive power of internet as an intermediary Globally and also in India, internet has brought disruptive changes in the intermediation and retail trade business. Share of internet based sales in a number of categories of goods and services has already impacted the brick-and-mortar channel based sales in India. General insurance business is not likely to be an exception. According to our KPMG in India analysis, the internet user base is expected to reach 70 percent of total TV viewers by 2016. As per KPMG in India estimates, online shoppers are estimated to account for approximately 30 percent of the internet users and are expected to grow at a rapid pace over the next 4-5 years. General insurance companies are aggressively driving the online promotion and sales of the personal line products and are integrating the impersonal internet experience with telephonic interaction, chats and audio-visual support in the internet sales process. In our estimates, internet will constitute 15-20 percent of gross direct premium in personal line products by the year 2020 denting the criticality and bargaining power of other channels. Reduction in bargaining power of hospitals Controlling health insurance claims cost has been a key focus area for the industry in the recent past. Factors such as growth in the extent of healthcare expenditure funded through health insurance, rollout of the common Third Party Administrator (TPA) by the public sector companies, concentration of volumes with select number of players is likely to reduce the bargaining power of hospitals. The general insurance companies are likely to achieve greater level of control on claims cost supported by a number of factors including Standardization of treatment protocols and service levels Negotiations on treatment costs across various sub-categories Enhanced scrutiny on claims through in-house processing Focus on fraud prevention and detection Changing focus on channels from potential to performance As the focus of the industry shifts to protable growth, the emphasis is shifting to channel protability and performance from mere channel acquisition. Changes in the competition structure in terms of fewer new entrants, potential consolidation, increased product or customer segment focus by industry players are likely to reduce the intensity of competition for attracting channel partners. Industry players would focus on maximizing the return on spends on the channel and overall protability of the business contributed by the channels. While in the past, customer base and reach of the channel were the primary considerations for channel acquisition, going forward it would be the ability to inuence the customer base, loyalty and ability to obtain higher premium rates. Bargaining power of channels would increasingly depend on performance track record rather than on the potential offered.
Conclusion
In the last few years, growth was the primary agenda across competition segments including public sector, old private sector and new private sector general insurance players. Changes in the external environment would continue to present growth opportunities and insurance companies would be better equipped to exploit them based on market insights and internal capabilities developed over the period of time. In order to deliver on the shareholders expectations, the companies will be driven to strike a balance between growth, protability and risk as they go forward. This would entail marked changes in the business strategy and the same would be cascaded to operational decisions related to product design, pricing, channel monitoring, and operational effectiveness. Companies with a one-dimensional focus on growth or on protability would lose competitive power either due to strain on capital or due to insignicance of the scale. Either way, this would support the emerging trend of overall protable growth for the industry. Such a scenario would also aid niche players to develop sustainable business models and co-exist with the large players adding to the depth and maturity of the industry.
Microinsurance
Unlocking Indias huge insurance potential
Microinsurance a brief concept
Microinsurance refers to insurance products which are designed to provide risk cover for low-income people. Generally, these products are focused towards providing adequate coverage to this customer segment with exible payment schedules for the lower premiums. Although there are various benchmarks to distinguish microinsurance from insurance, product design (size of premium and risk cover) and access are key differentiators for microinsurance products. Simple products which are easily accessible through an efcient distribution process to keep the overall cost of products low are qualied under microinsurance.
Global overview and comparison with India
The last decade witnessed strong growth in the microinsurance sector worldwide with emergence of three strong growth regions Asia, Latin America and Africa. The growth in Asia, which accounts for roughly 80 percent of the global microinsurance market, is driven by large and dense populations, interest from public and private insurers, penetration of distribution channels and active government initiatives. While India and
China have been at the forefront, other Asian countries, such as Bangladesh, the Philippines and Indonesia are also witnessing rapid growth in microinsurance.1 Latin America and Africa, which account for 15 percent and 5 percent of the global microinsurance, respectively, are other promising growth markets for the sector. The following table depicts the growth of the microinsurance sector during the last decade.
Table: Estimated outreach of microinsurance: millions of risks covered Asia 2006* 2009 2011 350-400 66 45-50 Latin America 8 Africa 4-5 14.7 18-24 Less than 500 Total 78
Note: *Data for 100 poorest countries only Source: 'Protecting the poor: A Microinsurance compendium,' vol. II, Munich Re, Microinsurance Network and International Labor Ofce, 2012, p11.
Insurers are increasingly making an effort to cover the population by introducing need-based and easy-to-understand products. In Central and Eastern Europe, growth in microinsurance has not been as swift as compared to Asian and Latin American regions.
1 http://www.ilo.org/global/about-the-ilo/newsroom/news/WCMS_177356/lang--en/index.htm
Microinsurance in India
The microinsurance business took its roots in India with a few schemes launched by non government organizations (NGOs), micro nance institutions (MFIs), trade unions, hospitals and cooperatives to create an insurance fund against a specic peril. These schemes were outside the ambit of the regulations and operated more on good faith of these institutions. The microinsurance landscape changed with the rst set of regulations published in 2002 entitled the Obligations of Insurers to Rural Social Sectors. The regulations essentially promulgated a quota system to force new private sector insurers to sell a percentage of their insurance policies to de facto low-income clients. The Government of India formed a consultative group on microinsurance in 2003 to look into the issues faced by the microinsurance sector. The group highlighted the apathy of insurance companies towards microinsurance business, non-viability of standalone microinsurance programmes and huge potential of alternative channels amongst others. The Reserve Bank of India allowed regional rural banks (RRBs), which have good distribution reach in rural areas, to sell insurance as corporate agent, in 2004. In order to support the development and facilitate the growth of the sector, the insurance regulator Insurance Regulatory Development Authority (IRDA) came up with the microinsurance regulation in 2005. It was a pioneering approach which put India among the few countries to draft and implement specic microinsurance regulations. While the microinsurance regulations had a relatively narrow scope, focussing only on the partner-agent model, it nonetheless relaxed some of the conditions to facilitate distribution efciency and perpetrated the view to extend microinsurance from a social perspective to a commercial business opportunity.
The Indian microinsurance market is marked by various players operating a number of schemes:
Distribution channels
Distribution of microinsurance products is dependent on factors such as collaboration, relationship and trust with the low-income group while holding down associated costs. MFIs, NGOs, Regional Rural Banks, Self-help groups (SHGs) and their federations and cooperatives are the mostpreferred distribution channels led by their vast established networks and proximity to the target market. The selection of the right channel mix primarily depends on the region and product segment. In India and the Philippines, MFIs are predominately being used to distribute microinsurance products, while, in Brazil, utility and telecom companies are increasingly being used. However, insurers are continuously innovating and introducing distribution channels that are not only cost efcient but also have a wider reach. Technology is being extensively used to distribute microinsurance products more efciently and effectively. For example, mobile banking is gaining prominence as it is not only an enabler of client communications, but is also helpful in premium and data collection. However, the channel has limitations where faceto-face interaction is required.
Key regulations: Rural and social obligations, 2002 and Microinsurance regulations, 2005
In order to promote mass insurance coverage, the regulator established obligations of insurers to rural or social sectors in 2002 and has since amended it. While the rural sector obligations aim to cover the hinterland which is predominantly agrarian, the social sector includes unorganised, informal sector comprising economically vulnerable classes across rural and urban areas.
Regulations at a glance
Obligations of Insurers to Rural or Social Sectors, 2002 (and subsequent amendments) Rural Sector Life insurer: 5 percent of total policies in year 1 increasing to 20 percent by year 10 Non-life insurer: 2 percent of total gross premium in year 1 increasing to 7 percent by year 10 Life Insurance Corporation (LIC): 25 percent of total policies written direct in FY2010 Social Sector Both life and non-life insurer: 5,000 lives in year 1 growing to 55,000 by year 10 LIC: 20 lakh lives in FY2010
Microinsurance regulations, 2005 The regulation provides denitions of life and non-life microinsurance product on individual or group basis. The contracts covered included term, endowment, health, personal accident, hut, livestock and tools or instruments. Created a new distribution intermediary called the microinsurance agent and formalised the role of NGOs, MFIs) and SHGs that had access and experience in working with low income groups for at least 3 years. A micro nance agent is allowed to work with one life and one non-life insurer. Eliminated the need of a qualifying exam to become a microinsurance agent and lowered training requirement from 100 hours to 25
Product guidelines Life insurance Term (with/ without return of premium) Amount of cover: INR 5,000 50,000 Term: 5-15 years Endowment insurance Amount of cover: INR 5,000 30,000 Term: 5-15 years Health insurance (individual, family) Accident benet rider Amount of cover: INR 5,000 30,000 Term: 1-7 years Amount of cover: INR 10,000 50,000 Term: 5-15 years
hours in the local language thereby simplifying the recruitment process. However, this also translates into more push-based sales as opposed to a need-based sale. Capped commissions between 10 percent and 20 percent (life insurance single premium: 10 percent, life insurance regular premium: 20 percent of all years of premium payment term and non-life insurance: 15 percent) thereby realising the need of having higher payment for intermediation. Allowed for the bundling of life and non-life elements in one single product, thereby paving way for greater collaboration between life and non-life insurers.
Non-life insurance Dwelling and contents/ Livestock /Tools/ Crop insurance Health insurance (individual, family) Personal accident (per life/earning member of family) Amount of cover: INR 5,000 30,000 per asset cover Term: 1 year Amount of cover: INR 5,000 30,000 Term: 1 year Amount of cover: INR 10,000 50,000 Term: 1 year
With the formation of rural and social obligations, the regulator obligated the insurers to increase geographical penetration. However, microinsurance regulations do not have any coverage obligations and overlaps with the rural and social obligations in terms of coverage. Many Indian private insurers have not achieved
break-even since opening of the private insurance sector in 2000, and accordingly, the insurance companies have seen their model veering towards reducing losses rather than increasing reach at a low cost resulting in relative under development of the microinsurance segment.
Key risks covered in the microinsurance/rural segment in India

There are a number of formal and informal sector schemes that cover multiple risks faced by the rural Indian population. The lower strata of the Indian society not only face risks in the form of poverty, frequent natural catastrophes and less access to conventional forms of risk management, but also
Rural Indias microinsurance need
are least aware of the criticality to insure themselves against the same. While the study of risk has a vast scope, we have limited this section to introduction of the key risks along with some relevant schemes/products available in the market that address them.
Characteristics
High level of poverty Frequent catastrophes Lack of access to conventional forms of risk management Low awareness levels Small asset size leading to pricing constraints of products
Key risks faced

Individual: Life risk, Health risk and Personal accident Livelihood Agriculture: Weather risk, Crop produce risk Livestock risk
Need
Risk mitigation through Insurance
Individual risk
Life: While many individual and group life microinsurance products are offered by insurers in the form of term and endowment, credit life cover (protection against outstanding principal and interest of loan if the borrower dies) has been a starting point for many insurance companies in India, driven mostly by push-based sales by MFIs. However, credit life tends to offer little value to clients, with coverage limited to the duration of the loan. Examples: a. Janashree Bima Yojana a social security scheme of LIC (state owned largest life insurance company) launched in 2000, provides benet to the weaker sections of society (covers 45 vocational and occupational groups such as workers in foodstuff, textiles, wood, paper, leather products, brick kiln workers, carpenters, shermen, handicraft artisan, handloom amongst others). The premium for the scheme is INR 200 per member; 50 percent premium under the scheme is met out of the Social Security Fund. The balance premium is borne by the member and/ or Nodal Agency. The members get a cover of INR 30,000 (~USD 600) in the event of death, INR 75,000 (~USD 1500) in the event of death/total permanent disability and INR 37 ,500 (~USD 750) in the event of permanent partial disability. As on 31 March 2012, about 22 million people had been covered under this scheme. b. BASIX a leading MFI offers group life microinsurance in collaboration with Aviva Life Insurance Company India Ltd. In FY2011, it had over 2 million customers paying an average annual premium of < INR 100 (~USD 2). However, post Andhra Pradesh crisis in 2011, when the state government brought in legislation to curb coercive loan recovery practices and banned MFIs from approaching the doorstep of their customers, the MFI business in the state has fallen, resulting in the coverage almost halving to a little under 1 million customers.
Health/Personal accident: In India, health-care is funded mostly through out of pocket expenditure comprising ~60 percent of healthcare spending in 20102. Health is unarguably a product most demanded by low income groups. A number of schemes exist; donorfunded, subsidised, insurer and government schemes being the main formats. Examples: a. Rashtriya Swasthya Bima Yojana (RSBY) RSBY has been launched by Ministry of Labour and Employment, Government of India in 2008 to provide health insurance coverage for Below Poverty Line3 (BPL) families. Over 33 million BPL families (> 100 mn members) have been enrolled across 472 districts across the country; 12,531 hospitals empanelled to provide benets under the programme4. Key features of the scheme: Hospitalisation coverage up to INR 30,000 (~USD 550) for most of the diseases that require hospitalisation; cashless benet through smart card Fixed package rates for hospitals Pre-existing conditions are covered from day one and there is no age limit Coverage extends to ve members of the family which includes the head of household, spouse and up to three dependents Beneciaries need to pay only INR 30 (< USD 1) as registration fee while Central and State Government pays the premium to non-life insurers (maximum INR 750/ ~USD 14) selected by the State Government for each district on the basis of competitive bidding.
2 Source: World Health Organisation Databank 3 Below Poverty line when monthly consumption expenditure is less than ~INR 672 (~USD 12.2) in rural and less than ~INR 859.6 (~USD 15.6) in urban areas - Planning Commission of India 4 Source: RSBY ofcial website accessed on 18th Jan 2013
Trends and experience Initial trends indicate a downward premium trend owing to decrease in set-up expenses. However, burnout rates (includes the claims related expenses, Third Party Administrator (TPA) management fees and enrolment fees) for Round 2 indicate higher expenditure which could result in premium tightening by some of the participating insurers.
Premium trend in RSBY
Burnout ratio
b. Yeshasvini Co-operative Farmers Health Care Scheme
Yeshasvini Health Scheme - contribution and membership
Yeshasvini Health Scheme - claim experience and member fee
Yeshasvini Scheme is a contributory scheme of healthcare sponsored by co-operative farmers and the Government of Karnataka. The corpus of the scheme is mainly generated out of annual member contribution and State Government grants to cover the decit of resources. The Trust, depending upon the availability of resources, determines the contribution to be collected from the member beneciaries from time to time. The Trust has grown to a size of ~2.9 million enrollments with the contribution fee per member growing from INR 60 (~USD 1.1) in FY2004 to INR 200 (~USD 3.6) in FY13, in line with rising healthcare costs and maturity in claim experience which is also reected in the falling ratio of reimbursements to hospitals as percentage of the total contribution (members and government).
Livelihood risk
Agriculture (crop and weather risk): Indian agriculture is an important sector contributing ~14 percent to the GDP in FY12 and employs almost 60-65 percent of the Indian workforce. In a country like India, where crop production has been subjected to vagaries of weather and large-scale damages due to attack of pests and diseases, crop and weather insurance assumes a vital role in its stable growth. While crop insurance specically indemnies the cultivator against shortfall in crop yield, weather based crop insurance is based on the fact that weather conditions affect crop production even when a cultivator has taken all the care to ensure good harvest. Example: a. Weather Insurance Scheme by IFFCO Tokio General Insurance (ITGI) Mausam Bima Yojana and Barish Bima Yojana were launched as weather insurance products by ITGI. It uses the weather data from Indian Meteorological Department (IMD). Location wise historical and projected data are available at a price. Weather insurance products specically designed for certain crops and districts as cost of cultivation and loss could vary according to location and hence necessitate different premiums. Loss ratio of weather insurance products has been in range of ~70-75 percent. Animal husbandry (risk of death of animal): Livestock contributed to ~24 percent5 of Indias agricultural output in FY2011 and plays a vital role in improving the socioeconomic conditions of rural masses. Animal husbandry sector provides large self-employment opportunities, with 13.6 million workers in rural areas engaged in the farming of animals5. With such livestock dependency of a large population, livestock insurance protection provides a mechanism to the farmers and cattle rearers against any eventual loss of their animals due to death. Example: a. Livestock Insurance Scheme, a central government sponsored scheme Livestock Insurance Scheme, a central government sponsored scheme, was implemented on a pilot basis during 2005-08 in 100 selected districts. The scheme is now being implemented on a regular basis in 300 districts of the country by the respective states Livestock Development Board Indigenous / crossbred milch cattle and buffaloes are insured at maximum of their current market price, assessed jointly by the beneciary, authorised veterinary practitioner and the insurance agent. The premium of the insurance is subsidised to the tune of 50 percent, borne by the Central Government. Benet of subsidy is being provided to a maximum of two animals per beneciary for a policy a maximum of three years. For unique identication and reduction in frauds, successful implementation of tagging the animal is crucial. In this context, IFFCO-Tokio won ILO Innovation grant for using RFID technology as a means of identication and loss mitigation in livestock insurance. In this method, RFID microchip is inserted in the subcutaneous region of livestock and the unique identity can be scanned by a distant located scanner. Also, the photograph of the animal with its owner adds another layer of identication. Experience indicates lowering of fraudulent cases as removal of such tags usually requires a surgeon and tampering would result in loss of coverage.
5 Annual Report 2011-12, Department Of Animal Husbandry, Dairying & Fisheries, Ministry of Agriculture, Government of India
Issues and challenges impeding the growth of microinsurance

The lack of equitable participation in the India growth story is of concern to the Government and nancial services regulators. However, nancial inclusion is an expensive proposition. While the regulators have created policies to promote nancial inclusion, the current industry structures and economic models are not conducive to large scale success. Microinsurance (life, disability and health) coverage of the economically disadvantaged sections of Indian society is dismally low, and will remain so, until the regulators and insurers bring in policy changes and go beyond the traditional distribution models. We further look to identify the key issues and challenges from the perspective of the key microinsurance stakeholders - the un-insured customer, the distribution intermediary and the insurance company.
Challenges from the perspective of key stakeholders

Un-insured target customer
Low product awareness Aversion to purchase of an intangible asset Perception of insufcient benets Product not suitable for specic strata or business needs Time for claim settlement too long as compared to the urgency when required Lack of trust in the insurer to honour claim
Distribution intermediary
Hinterland population spread over a large area Lack of sufcient incentives to cover operations cost Lack of training and understanding of product tment to customer needs Risk of losing respect in the local community if the insurer does not honour a claim
Insurance company
High transaction cost against low ticket size Poor documentation (such as Identity card, age, address proof) Largely un-banked target customers Risk of adverse selection Lack of actuarial data for risk analysis and pricing High distribution and transaction expenses Limited health infrastructure in rural areas, makes health insurance difcult to sell Low renewal rate Rural and micro-insurance coverage limited to fulllment of rural or social obligations
The un-insured customer Given the lack of social security in India, in the event of disability, meager nancial savings and reliance on borrowings from unorganised lenders are the only options available to a majority of the poor. While the developed countries provide social security network to their citizens, Indias large population and low per capita income implies that provision for any sort of social security system is bound to be a signicant drain on the countrys limited resources. Most customers in the target segment have low nancial literacy and are unable to view insurance as a risk mitigation tool. Low awareness levels and lack of understanding of underlying benets creates a barrier to purchase of intangible assets. Further, the insurance companies have been focussing on reducing losses and improving protability rather than increasing cost effective distribution reach to the lower strata. Poorly designed policies, lack of education, mis-selling through inadequately trained agents and rejections during claims settlement has led to lack of trust with this customer segment. Distribution intermediary It is imperative to use an effective distribution channel mix to reach out to the target customer segment. Poor households live for the present rather than the future. Given their fatalistic attitude, the concept of insurance is linked to expenditure, rather than risk cover. Lack of adequate
training to the distribution intermediary coupled with lack of motivation, makes it difcult to explain the products to largely uneducated customers. The feasibility of various products is also dependent on the availability of infrastructure, which is often lacking or low in quality. Limited incentive on a low premium product makes it difcult to cover operational costs of reaching out to the customers. Further, delays in claim settlement and complicated formalities by the insurance companies also pose as a road block. It is important for the intermediaries to be able to build personal credibility with the client. Poor governance structure of the intermediaries also poses a signicant challenge in building a sustainable model between the intermediary and the insurance companies. Insurance company Insurance companies are faced with challenges like high cost of customer acquisition given the high operating and administrative cost involved in reaching remote areas vs. value of premiums and unpredictable payment capacity of the segment. Moreover, given some of the operating models of the insurance companies the cost of customer service is also high. Regulatory compliance in terms of statutory requirements for customer acquisition, documentation also forces a cost build up for the companies. The companies do not have enough data on various subsegments and associated risks for analysis and pricing. As a result, the claims ratio in the microinsurance segment is unpredictable.
For microinsurance to succeed, demand has to be generated through building awareness, creating specic and simple products, and above all, by simplifying the processes of underwriting and claims management.
Regulatory update
Regulatory update exposure draft on microinsurance (modications) regulations

Life insurance Primary Agricultural Co-operative Societies (PACSs) are being considered to act as Microinsurance Agents.* The individual agents licensed (with their respective addresses) in the rural areas where population is less than 2,000 are proposed to be entitled to Microinsurance commission. Individual owners of kirana shops / fair price shops / medical shops / petrol bunks / individual Public Call Ofce (PCO) operators are proposed to be allowed to categorise as Microinsurance agents.* It is proposed to permit the Insurers to redesign/repackage the existing regular products so as to ensure that they t within the extant regulatory parameters that have been prescribed It is proposed to make it mandatory to all insurers that their entire existing infrastructure; branch network shall be made available to microinsurance policyholders and microinsurance agents for effective rendering of microinsurance policy service. Non-life insurance Non-life insurance company has the option of appointing microinsurance agents either to any one sector of; micro enterprises or to small enterprises or to medium enterprises or to all three or any combination of two. Capacity building amongst the microinsurance agents. The maximum premium allowed under this segment of non-life microinsurance policy is proposed to be pegged at INR 25,000. Proposals in The Finance Bill, 2013 Empowering insurance companies to open branches in tier II cities and below without prior approval of the IRDA. Know your customer (KYC) of the banks will be sufcient to acquire insurance policies. Banking correspondent allowed to sell microinsurance products. Goal of having an ofce of LIC and one public general insurance company in town with population of 10,000 or more. Some of the above mentioned proposed regulatory changes are expected to provide much needed impetus by addressing the key challenges and paving the way for increasing microinsurance penetration in the country.
* This entity/individual is now permitted for appointment as Micro Insurance Agent as per IRDA Circular dated 03 April, 2013
Potential solutions to further increase penetration and scaling-up microinsurance business

In this section, we have attempted to examine a range of regulatory, technological and industry led change catalysts to address the challenges. The collected effect of these change catalysts should support the industry in meeting the objective of scaling up the microinsurance business. The combined impact of these drivers is far greater than by themselves changes in the regulatory structure must be accompanied by industry led innovation, which in turn must be enabled through the effective use of evolving technology.
1. Regulatory structure and policies

While the regulatory structure for the industry will continue to evolve, special attention will be paid to the regulatory framework for microinsurance.
Key driver Evolved regulations
Likely future direction There is a critical need to set microinsurance goals at an industry level and then supporting the industry with the right set of policies and reporting procedures. Currently there are no microinsurance goals on business numbers. Microinsurance overlaps with rural category regulation for which the goal is on number of cases as a percentage of total cases. There is a need for the regulator to create a supportive framework, such that the goals can be drawn on contribution to premium (as opposed to cases) which would also drive the insurers to devise innovative models to serve the target microinsurance population. Need to create grievance channels and a resolution system appropriate for low income policy holders. Regulating new channels for distribution and mandating risk carriers which are unregulated or under other authorities to become licensed. Central and state Government funding for insurance: RSBY could be extended beyond health and transformed into the parent scheme for both life and health insurance. With extension of coverage beyond the poor class to low income self employed groups, the risk prole is expected to improve and even savings and retirement schemes can be offered to the mass segment.
Cost and Risk sharing models
A microinsurance exchange, where graded portfolios (by underwriter, risk assessment, mortality statistics etc.) can be traded. Innovative structures at an industry level, such as the pool and the exchange, will enable microinsurance initiatives to be managed as a collective rather than by the replication of underwriting risks and costs by each company. A microinsurance pool, enabled by the pooling together of all revenues accrued through initiatives run by insurance companies, the Government, postal services amongst others. Payment of claims will be managed by the pool based on information stored in smart cards or mobile phones.
2. Industry led change/innovation

Ultimately, the mantle of increasing the penetration of microinsurance in India will fall on the insurance industry. Enabled by favourable regulatory structures, the industry will be empowered to innovate in low-cost customer acquisition, product designs and pricing, customer service and in claims handling. While each insurance company will develop its own strategies and capabilities, it will also have the opportunity to create path-breaking collaborative models. The combination of internal and collaborative models will be the catalyst for increased microinsurance penetration.
Key driver Creation of common databases for microinsurance Likely future direction The need to reduce operating costs in microinsurance will drive a model that includes shared infrastructure and a shared database. By itself, it will allow insurers to amortise costs, but linked to the microinsurance pool, it will have signicant impact on reducing costs. The biggest advantage accruing from a shared database will be the availability of a signicantly larger set of information required for modelling, risk analysis and fraud protection. This is similar in concept to a credit bureaus database accessed by all members. Collaborative industry models FMCG, telecom, retail, railways, cable TV, broadband and other mass distribution/reach companies can bundle insurance covers with their products or services and share customer information leading to better understanding of segment behavior
3. Leveraging technology
The incredible innovations in technology, over the past 20 years, have transformed the way that humans and organisations exist. In areas like information aggregation and management, communications and human-machine interfaces, technology has enabled new paradigms. Future indicates an increase in the rate of technology innovation.
Key driver Wireless access Likely future direction An increasing number of the Indian population will be connected to wireless networks either as telecom subscribers or through embedded devices (smart cards, biometric devices, embedded identication tags etc.). With signicant progress in the miniaturisation of wireless transmitters and the resulting low costs, almost everything will be connected in the future PAN Card, AADHAR card (for individual identication), Voter ID card and many personal items. All of this will lead to the generation of massive amounts of segment specic data, enabling a sharper focus on product development for the target market. Leveraging off recent initiatives by the Central and many State Governments like issuance of smart cards to the poorest Indians to keep track of nancial payments and health records. The newer generation of smart cards will be enabled with one or two biometric sensors and a wireless interface. These cards will have enough memory to store nancial transactions, health history for a signicant period of time. These cards will not be proprietary to any particular IT platform/ language/ Operating System to enable universal usage.
Biometric devices, smart cards, embedded devices
High powered computing engines and mass storage [cloud computing]
In the future, massive data stores will enable companies to collect, collate and manage the huge volumes of data that will be generated through the wireless devices and other customer interaction channels. These companies will use sophisticated data analysis tools to analyse all types of trends by demographic or geographical proling, multiple economic segments, products, risk classes, by channel views and nally for each individual customer.
Way forward
For India to reach its rightful place as a developed nation, it must nancially empower its entire population. A key element of this empowerment is a base risk cover that covers elements of life, disability and health. This empowerment can only be achieved through the collaborative efforts of the government, regulators and private enterprises, who must be able to build commercially viable and scalable models for nancial inclusion. The key issues and challenges impending growth of microinsurance in India from the perspective of the key stakeholders - the un-insured customer, the distribution intermediary and the insurance company, can be addressed by way of structural regulatory and policy changes coupled with extensive leverage of emerging technologies. Regulatory and structural changes should encourage further capital deployment and enable operational exibility resulting in reduction in customer acquisition and policy management costs. The suggested measures will aid in increasing the microinsurance penetration in our country which can be achieved through focussed efforts and suitable partnerships across the industry and government bodies.
KPMG in India
KPMG in India, a professional services rm, is the Indian member rm of KPMG International and was established in September 1993. Our professionals leverage the global network of rms, providing detailed knowledge of local laws, regulations, markets and competition. KPMG in India provide services to over 4,500 international and national clients, in India. KPMG has ofces across India in Delhi, Chandigarh, Ahmedabad, Mumbai, Pune, Chennai, Bangalore, Kochi, Hyderabad and Kolkata. The Indian rm has access to more than 7 ,000 Indian and expatriate professionals, many of whom are internationally trained. We strive to provide rapid, performance-based, industry-focused and technology-enabled services, which reect a shared knowledge of global and local industries and our experience of the Indian business environment. KPMG is a global network of professional rms providing Audit, Tax and Advisory services. We operate in 156 countries and have 152,000 people working in member rms around the world. Our Audit practice endeavors to provide robust and risk based audit services that address our rms' clients' strategic priorities and business processes. KPMG's Tax services are designed to reect the unique needs and objectives of each client, whether we are dealing with the tax aspects of a cross-border acquisition or developing and helping to implement a global transfer pricing strategy. In practical terms that means, KPMG rms' work with their clients to assist them in achieving effective tax compliance and managing tax risks, while helping to control costs. KPMG Advisory professionals provide advice and assistance to enable companies, intermediaries and public sector bodies to mitigate risk, improve performance, and create value. KPMG rms provide a wide range of Risk Consulting, Management Consulting and Transactions & Restructuring services that can help clients respond to immediate needs as well as put in place the strategies for the longer term.
THE BENGAL CHAMBER OF COMMERCE AND INDUSTRY

The Bengal Chamber of Commerce and Industry was set up in 1853. For the last one and a half centuries, the Chamber has played a pioneering role as a helmsman, steering the evolution of Commerce and Industry in India. Our vision The Chambers vision is to be the most valued Partner of Commerce, Industry, Academia, Professionals and Governments for achieving responsible economic growth as well as accomplishing their societal and environmental needs. Donning its multiple roles as catalyst, initiator, facilitator, business partner and service provider, the Chamber has helped Governments, both at the Centre and State in crafting pioneering and signicant legislations. Our legacy The Chamber turned into the nancial universe of the East from the mid 19th century not merely as a forum for networking, but as a powerful enabler lobbying for the development of the economy and infrastructure. It became the rst port of call on matters of Federal and State Government policies and legislation. The legislations that the Chamber reviewed and commented upon before their passage through the Parliament and Assembly are too numerous to be commented upon separately. Just to mention a few, the Chamber was associated with the framing of the Customs Act; played a major role in the framing of tariff policy and shipping laws; helped draft the rst Life Assurance Legislation (1910) and played a critical role in framing the countrys rst Income Tax legislation. These apart, the Chamber has also suggested modications in the Indian Companies Act and the Indian Insurance Act and examined and suggested changes in the rst Indian Electricity Bill (1902). The Bengal Chamber was involved in the conceptualization of the airport at Dum Dum and the Howrah Bridge and had lobbied for the creation of overland trade routes with China through Tibet. These are only a few of the quintessential feathers that adorn the Chambers cap. The Bengal Chamber has helped in the formation of a slew of educational and cultural institutions Indian Institute of Management Calcutta, Indian Institute of Social Welfare and Business Management (IISWBM), Nazrul Manch and the Academy of Fine Arts apart from bringing to Kolkata the son-et-lumiere at the Victoria Memorial. For society The Chamber has always recognized the fact that in the new environment of society, industry and business, the need for Corporates to internalize and demonstrate their responsibilities to the society in which they operate is no longer a matter of debate. From being the chief relief distributor during the Great Bengal Famine of 1943 to adopting a Rural Development Programme in a cluster of twenty villages near Kolkata from 1977 to 1985 to initiating a movement on Corporate Citizenship and Social Responsibility and taking up relief work for Cyclone Aila affected villages in Sunderbans, the Chamber has taken CSR as one of the guiding principles for business operations. A plethora of activities Today, the Chamber has over 300 members from industry, trade and commerce. The Chambers interest and operations range from organizing mega seminars and relevant events on the brick industry to the new-age click organizations. From nancial services, insurance, banking and taxation to focusing on the environment and energy sectors, the Chambers range of operations is diverse and evolving over time. The Chamber today is deeply involved in areas like Healthcare, Education, Energy and Environment, Information Technology, Finance and Banking, Corporate Governance, MSME Development, Manufacturing to name a few and has now assumed a multi-faceted role. The Chamber is also rm in its commitment to catalyze growth all over West Bengal and therefore, is continuing with its initiatives in Taratolla, Durgapur and North Bengal. While the focus in Taratolla is infrastructure development and also developing the area as a manufacturing hub, the endeavour in Durgapur is to facilitate green development, clean technology and discuss environmental aspects of industrial production apart from focusing on Industrial Relations for harmonious growth, education and career issues and lifestyle aspects. In North Bengal the focus has been on tourism and farming issues. Much is happening in the East today, but much still remains to be done. The doors to the world are now open. In this new environment, West Bengal can nd its destiny and become the gateway to the East. The Bengal Chamber shares this truth with the people of West Bengal and the region.
Acknowledgements
Shashwat Sharma, Sanjay Doshi, Basant Venugopal, Aniruddha Marathe, Kartik Shanker, Sreenivasan S.R.
KPMG in India contacts
The Bengal Chamber of Commerce and Industry contacts
Pradeep Udhas
Head Markets T: +91 22 3090 2040 E: pudhas@kpmg.com
P Roy
Director General T: +91 33 2230 8396 E: director_general@bengalchamber.com
Akeel Master
Partner and Head Financial services T: +91 22 3090 2486 E: amaster@kpmg.com
Naresh Makhijani
Partner Tax T: +91 22 3090 2120 E: nareshmakhijani@kpmg.com
Ambarish Dasgupta
Head Management Consulting T: +91 33 4403 4095 E: ambarish@kpmg.com
Shashwat Sharma
Partner Management Consulting T: +91 22 3090 2547 E: shashwats@kpmg.com
kpmg.com/in
bengalchamber.com
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 2013 KPMG, an Indian Registered Partnership and a member rm of the KPMG network of independent member rms afliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. Printed in India.

Insurance Industry KPMG Report

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Insurance Industry KPMG Report

Uploaded by

Copyright:

Available Formats

Insurance Industry Road Ahead

Path for sustainable growth momentum and increasing protability

Partner Management Consulting KPMG in India

Director General The Bengal Chamber of Commerce and Industry

1 | Insurance industryRoad ahead

Insurance industryRoad ahead | 2

Indian Life Insurance Industry

3 | Insurance industryRoad ahead

The decade gone by

Insurance industryRoad ahead | 4

Source: Handbook on Indian Insurance Statistics 2011-2012

Source: Handbook on Indian Insurance Statistics 2011-12 published by IRDA

5 | Insurance industryRoad ahead

Protability and return on invested capital

Source: Handbook on Indian Insurance Statistics 2011-12 published by IRDA

Insurance industryRoad ahead | 6

Finding the right distribution model

7 | Insurance industryRoad ahead

Source: Handbook on Indian Insurance Statistics 2011-12 published by IRDA

Declining volumes in the banc-assurance model

Insurance industryRoad ahead | 8

Realigning the business model

Technology-enabled model for urban India

FY04 167 521

FY12 1,160 22,075

Source: Reserve Bank of India Bulletin 2011-12

9 | Insurance industryRoad ahead

Center of Inuence (COI) model for rural India

Insuring people in the informal sector via microinsurance

6 Source: www.mn.org.in 7 Source: ww.dise.in 8 Source: http://ngo.india.gov.in/ngo_stateschemes_ngo.php

Insurance industryRoad ahead | 10

Innovating with new models

Peer-to-peer (P2P) insurance or social insurance

11 | Insurance industryRoad ahead

Direct delivery model

Mobile-based insurance model

Insurance industryRoad ahead | 12

Securing through complementary alternative channels

13 | Insurance industryRoad ahead

Insurance industryRoad ahead | 14

Indian General Insurance Industry

15 | Insurance industryRoad ahead

Historical developments in the Indian general insurance industry

Source: Handbook on Indian Insurance Statistics 2011-2012

Insurance industryRoad ahead | 16

Changes in the regulatory environment substantially impacted the industry dynamics

17 | Insurance industryRoad ahead

Insurance industryRoad ahead | 18

Future growth and protability trends in the General Insurance Industry

19 | Insurance industryRoad ahead

Source: KPMG Analysis, IRDA Annual Report 2012

Insurance industryRoad ahead | 20

Growth in different product segments may be driven by segment specic drivers

21 | Insurance industryRoad ahead

Exhibit 7: Product mix projections

Source: IRDA Annual report 2012, KPMG Analysis

Comments and drivers

Reduction up to 5 percent points

Reduction by more than 10 percent points

Reduction by 5 percent to 10 percent points

Reduction by more than 10 percent points

Government health Fire

Stable or moderate increase

Reduction by 5 percent to 10 percent points