Indias Newly Opened P&C Insurance

Market Is Ready to Soar

Will Insurers and Investors Join In?
By Praveen Gupta, Gautam Mazumdar and Vikas Newatia

Indias newly opened and promising P&C* insurance market was fast out of the
gate; however, as the market matures, insurers are rethinking their participation
as they attempt to build a more solid business and attract investors.

Since its opening in 2000, Indias P&C insurance

sector has been, if anything, volatile. Like for most
nascent markets, rapid growth, competition for market
share and the temptation to cut corners marked its
development.

Ironically, these price wars coincided with the

beginning of a long slowdown in the global economy
that impacted India as well. The continued entry
of new P&C players during this economic downturn
adversely affected an already underpriced market.

In the early years, the pace of premium growth in P&C

insurance matched the gathering momentum of the
overall economy. India was experiencing a sustained
GDP growth rate of almost 8%. From 2001 to 2006,
Indian P&C insurers thrived, largely due to controlled
pricing, which provided sufficient margins and enabled
the pursuit of aggressive growth strategies which
sometimes meant bending or even breaking the rules.

Few players paused to consider a slowdown in the

economy. What started as a gold rush dissolved
into a mirage over the past seven to eight years
(Figure1). In hindsight, much of what went wrong
was of local making.

These questionable practices included subsidizing

non-tariff lines of business (those without prescribed
products and rates) like marine and group health for
large commercial clients by offering unimaginably
low premiums to offset margins in tariff (governed)
businesses like motor, fire and engineering, as
well as paying heavy overriding commissions and
other inducements to distributors. Most insurers
followed this cash-flow underwriting approach since
it reflected Indias booming economy. Unfortunately,
the scrum for market share eroded underwriting
prudence and discipline, which the industry has yet
to restore.
The detariffication of the Indian P&C insurance market
(with the exception of motor third-party liability risk)
in 2007 as a part of its ongoing deregulation was
a watershed in its evolution. Within a period of two
years, the market saw prices fall precipitously as
most insurers offered ridiculous price reductions
to scare off competitors or retain threatened turf.
Pricing for the mainstay of commercial lines like fire
and engineering plunged by over 90%. Motor own
(collision) damage premiums also fell, though by a
far lesser extent.
*

The

Indian P&C market

has grown considerably in
size since its opening, but
it has been marked with
unprofitability.

Products. Regulators did away with tariffs starting

in 2007, but did not permit changes in policy
wordings until years later. Even then, insurers
were not allowed to restrict the coverage provided
by tariff wordings, only broaden it.
Distribution. While regulators allowed the use of
several new distribution channels, insurers did a
poor job marketing their respective value
propositions.
People. The industrys workforce grew rapidly, but
carriers offered little in the way of professional
development.
Customers. Carriers took customers for granted
and at times did not treat them fairly.
Ignoring fundamentals. Insurers set aside critical
analytics for short-term course corrections and set
their sights mostly on top-line and valuation
measurements.
Despite recent poor performance, there are positive
developments. Health insurance, a significant
piece of the P&C sector, is growing, filling important
societal and marketplace needs. Health insurance
products have evolved more than any other line of
business. And the increase in IT core application
systems for customer service, data capture/storage/

In this article, the term P&C includes health insurers.

Emphasis 2015/2 | 21

Figure 1. High loss ratios and volatile financial performance accompanied

fastgrowth
Loss ratios
100%

$1,200

80%

$1,000
$800

60%

$600

40%

$400

20%

Non-life insurance GWP (US$ millions)

$0

2013 14

2012 13

2011 12

2010 11

2009 10

2008 09

2007 08

2006 07

2005 06

2004 05

2003 04

2002 03

2000 01

0%

2001 02

$200

Overall incurred claim ratio (%)

Financial performance
$250,000

$12,000

$200,000

$10,000

$150,000

$8,000

$100,000

$6,000

$50,000

$4,000

$0

$2,000

n
n

Non-life insurance GWP (US$ millions)

Underwriting profits (loss) (US$ millions)

n
n

$0

2013 14

2012 13

2011 12

2010 11

2009 10

2008 09

2007 08

2006 07

2005 06

2004 05

2003 04

2002 03

2000 01

$100,000

2001 02

$50,000

Investment income (US$ millions)

Aftertax profit (US$ millions)

Sources: IRDAI and mandatory public disclosures

Figure 2. How countries stack up

2011 12

2012 13

2013 14

2011 12

2012 13

2013 14

2010 11

2007 08
2007 08

2010 11

2006 07
2006 07

2009 10

2005 06
2005 06

2009 10

2004 05
2004 05

2008 09

2003 04
2003 04

2008 09

2002 03

$350
$300
$250
$200
$150
$100
$50
2001 02
n

China

These positive developments and anticipated

changes have renewed faith that the markets
performance will improve in the near future. Indias
new government has made it a priority to revive the
countrys economy, and the Insurance Regulatory
and Development Authority of India (IRDAI) intends
to fully deregulate motor third-party risk, which will
finally allow insurers to price risk on its merits.
Pricing corrections are also expected particularly
for underpriced commercial lines/group health/
motor third-party classes and improvements in
distribution networks will enable access to locations
with low insurance penetration.

The Indian insurance industry is currently ranked

16th globally and is expected to enter the top 10 by
2025. In that same period, Indias P&C insurance
sector is expected to reach US$80 billion in gross
written premium (GWP) from the current US$13 billion.

Density (US$)

$0

The growth of process-driven workflow for seamless

service delivery across stakeholders also reduced
administrative friction, encouraged standardization
and improved customer satisfaction. Finally, the
introduction of a variety of distribution channels,
including e-commerce platforms, is expected to
become popular with Internet-facile customers.

Bright Prospects

2002 03

2001 02

Penetration
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%

retrieval and sales enablement made insurance

products more efficient and affordable. In fact,
insurers are coming to realize that a greater focus
on data capture and collection may enable more
actuarially sound risk assessment and ratemaking.

n Malaysia

Source: IRDAI
22 towerswatson.com

n Thailand

n Brazil

n Russia

n India

n World

There are several reasons Indias P&C insurance

market will remain attractive. P&C insurance
penetration in India stagnated at 0.6% in the early
2000s and stood at 0.8% in FY2013 to FY2014,
far below the average penetration of 1.5% or more
in other Asian countries such as Malaysia, Thailand
and China (Figure 2). Indias P&C insurance density
(per capita spend) measured US$2.4 in FY2001 to
FY2002, and stood at US$11 in FY2013 to FY2014.
The recent comparative figure for China is nearly
nine times higher. So even in a down economy,
Indias P&C potential is enormous.

The main growth drivers in Indias P&C sector are:

Under-penetration and improving demographics
(i.e., one of the youngest populations in the
world), particularly in rural and semirural
locations, where the majority of the countrys
population lives
The perception of health insurance as a customer
need due to changing morbidity patterns, health
care cost inflation and the growth of the health
care infrastructure
Continued growth of the automobile sector and
stricter compliance with mandatory motor
third-party liability
Revived economic growth led by infrastructure
development, growth in manufacturing and an
expanding service sector economy
The retail market is likely to grow extensively, helped
by demographics. There is tremendous growth
potential in commercial lines as well, which will be
aided by the Indian governments recently launched
Make in India campaign. The effort to entice nonIndian manufacturers to establish operations in the
country will offer large global insurers with relevant
underwriting expertise ample opportunity in the
commercial lines business.

New Opportunities Require New Thinking

While the Indian P&C insurance market continues to
look attractive, unless it becomes profitable, investors
will stay away. Here are some corrective steps:
Change the mindset. Almost all P&C insurers appear
to have focused on top-line growth at the expense
of the bottom line. Insurers must think strategically
and concentrate on long-term profitability rather
than relying on short-term solutions such as using
investment income to offset underwriting losses.
Strengthen core functional areas. P&C insurers
must assign greater importance to core areas
such as risk management, underwriting, product
development, claim management and business
analytics. Insurance is a knowledge business,
and a consistent, concerted effort to deepen that
knowledge is needed.

Enhance the role of actuarial teams. Despite

ongoing directives from IRDAI, actuarially sound
decision making is still at a rudimentary stage.
An acute shortage of experienced actuaries is
thwarting efforts to put actuarial teams in place.
Adopt best practices. Adoption of best practices
is a long way off. Best practices should encompass
data analytics using best-in-class software tools
for a wide variety of core functional applications,
building comprehensive risk management
frameworks, and ensuring efficient management and
deployment of capital.
Measure and monitor profitability. For most Indian
P&C insurers, the net combined operating ratio (a
measure of profitability that compares losses and
expenses with earned premium), exceeds 100% and
in some cases has even reached as high as 140%.
Drilling down into business data, and creating timely
and relevant management information reports can
provide alerts for taking corrective steps and help
smooth results. The common practice of masking
poor underwriting by understating outstanding
liabilities has serious downsides. A good example
was the implosion of the motor third-party pool,
which necessitated an injection of nearly US$4
billion onto the balance sheets of all public sector
and a few private insurers. Understanding and
monitoring reserves is another vital and underused
management tool.
Build net worth. There has been significant capital
erosion for P&C companies, much of it attributable
to group health and motor third-party classes.
This has been especially dramatic in the case of
insurers who arrived post-deregulation. Gaining a
better understanding of capital, and its uses and
deployment will play an important role.

Praveen Gupta
Managing Director
andCEO.
Raheja QBE General
Insurance Company
Limited,
Mumbai

Gautam Mazumdar
Senior Consultant,
General Insurance.
Towers Watson,
Gurgaon

Vikas Newatia
Director and Practice
Leader, General
Insurance, India and
Southeast Asia.
Towers Watson,
Gurgaon

The

Indian insurance industry is currently

ranked 16th globally and is expected to enter
the top 10 by 2025.

Emphasis 2015/2 | 23

The

retail market is likely

to grow extensively,
helped by demographics.
There is tremendous
growth potential in
commercial lines as well.

Pricing adequately. The business-at-any-cost

syndrome has encouraged some P&C insurers to
devolve from predatory to suicidal pricing. Insurers
have knowingly accepted risks at lower-thanexpected cost of claims. This trend is particularly
evident in commercial lines where corporate
customers expect continuous premium reductions
regardless of the quality of risk or loss history.
However, some of the more profitable private
sector insurers are undertaking in-depth actuarial
evaluation and targeting more lucrative segments
even in a highly price-sensitive market and
succeeding.
Control costs. In any highly competitive and pricesensitive business, the importance of cost control
cannot be overstated. In an effort to reduce costs
and gain efficiency, several P&C insurers have
started going direct to their customers via online
distribution. This direct-to-customer digital outreach
can unlock significant savings.
Review regulations. The IRDAIs numerous rules
and regulations are designed to inculcate industry
best practices. But they also raise some pertinent
questions. For instance, can or should IRDAI monitor
the underwriting performance of P&C insurers? And
will insurers skirt recent instructions about burning
costs (the estimated cost of claims) in the next
reporting period?
Evaluate public sector general insurers (PSUs).
The P&C sector in India continues to be heavily
influenced by PSUs that collectively dominate market
share. Their reliance on investment income while
continuing to write new business has set a poor
example for private sector P&C insurers. The Indian
government contemplated divesting its ownership in
PSUs but decided to defer divestment in the hope
that improvement in their bottom lines will fetch
better valuations. Meanwhile, the government has
shied away from holding PSUs top management
accountable for their underwriting performances.
Manage fraud. Fraud in the P&C sector is
understood to be so widespread that if insurers
could lower their fraud losses by just 10%, their
underwriting performance would start looking much
healthier. However, this is an industry-wide issue
requiring support from the government.

24 towerswatson.com

Build and nurture knowledge. Insurers must invest

in building and developing knowledge at different
levels of the organization. The current workforce is
young and energetic but needs ongoing mentoring
and professional development. Insurers must invest
in their human capital.
Raise workforce productivity levels. The entry of
new companies has boosted the P&C markets
efficiency, but there is still room for quantitative and
qualitative service improvements through further
streamlining, checks and controls, benchmarking,
and continuous training.
Improve distribution. Distributors hold much more
power in their relationships with P&C insurers.
Insurers must look for alternatives that offer them
access to newer customers and newer markets at a
sustainable cost.

Worth the Investment

Despite its shortcomings and growing pains, Indias
P&C insurance industry still merits the serious
attention of global players looking for attractive
new markets. There are several compelling reasons
why investors should consider India as a long-term
investment destination. Apart from becoming one
of the largest P&C insurance markets globally by
FY2025, it offers:
An upwardly mobile and highly aspirational young
population
Increased urbanization, which will create 100
high-tech smart cities
Increased asset ownership, with a focus on
housing and mobility
Growing entrepreneurship
Rising awareness and absorption of technology
across all levels of society
Rapidly growing digital influence on buying
behavior, which has the potential of unlimited
reach at costs that are significantly lower
An open mind toward products and services that
were shunned by earlier generations

Figure 3. The Indian P&C markets promise

GWP (US$ billions) based on increasing penetration
$80
$60

Following the Indian governments decision to

increase the extent of overseas ownership in Indian
insurers from 26% to 49%, the market is poised to
grow handsomely (Figure 3).
The growth potential is well established. Many global
P&C insurers are simply biding their time before
entering the Indian market. Foreign companies
already invested may want to increase their stakes
in Indian insurers and have a larger say in their
management. Foreign investors will need to encourage
local managements to raise performance standards
and disavow the idea of business as usual.
Above all, the industry must rise to a new level of
professionalism, where performance is measured
on sustainable and profitable growth, and inefficient
legacy practices are replaced with best practices.
For comments or questions, contact
Praveen Gupta at +91 22 42313600,
praveen.gupta@rahejaqbe.com;
Gautam Mazumdar at +91 124 433 7160,
gautam.mazumdar@towerswatson.com; or
Vikas Newatia at +91 124 433 7171,
vikas.newatia@towerswatson.com.

$40
$20
$0

2014

2020

2025

GWP (US$ billions) based on increasing density

$200
$150
$100
$50
$0

2014

2020

2025

Source: Towers Watson

Despite

its shortcomings and growing pains,

Indias P&C insurance industry still merits the
serious attention of global players looking for
attractive new markets.

Emphasis 2015/2 | 25