Insurance Industry Road Ahead FINAL PDF

Insurance
Industry
Road Ahead
Path for sustainable
growth momentum and
increasing profitability
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 significant 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 detariffication 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 profitable 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 flexibility 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 profitable 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 profitability 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.
Shashwat Sharma
Partner
Management Consulting
KPMG in India
P Roy
Director General
The Bengal Chamber of
Commerce and Industry
2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Contents
Indian Life Insurance Industry Time to optimise capital
01
The decade gone by
03
Finding the right distribution model
06
Realigning the business model
08
Innovating with new models
10
Securing through complementary alternative channels
12
Indian General Insurance Industry

Looking forward to profitable growth
13
Historical developments in the Indian general insurance industry
15
Future Growth and profitability trends in the General Insurance Industry
18
Conclusion 22
Microinsurance: Unlocking Indias huge insurance potential
23
Microinsurance a brief concept
25
Global overview and comparison with India
26
Microinsurance in India
27
Issues and challenges impeding the growth of microinsurance
34
Regulatory update
36
Potential solutions to further increase penetration and

scaling-up microinsurance business
37
Way forward
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 first one being
characterised by a period of high growth (CAGR of approx. 31
percent in new business premium between 2001-10) and a flat
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
profitability. The industrys participants have been struggling to
achieve profitability 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 figures 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 profit and loss during FY02 and
FY12. The trend line represents the first 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 benefited 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 modification 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

Profitability and return on invested capital

The profitability 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 financing 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 profitability.
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 profitable. 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
profit and loss account. Periods FY08 and FY09
witnessed heavy equity inflows 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 profits / (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 profits 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 profits of INR 31.89
billion for two years ending 2011-12. The quality of
earnings can be affected by non recurring items
such as profits 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 find 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 profitability of the underwritten business is only known in later years
when all the policy obligations are fulfilled.
The attractiveness of India has always been the sheer size of the market and finding
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 profits, the first 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 fixed 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
officer in LIC parlance) on their payrolls i.e., the
agency manager was an employee on fixed 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 profile of the agency
manager largely in the industry involves agent
recruitment, profiling, 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 magnified when insurance companies
opened branches in Tier IV-VI cities to find them
to be unviable due to limited market share in
these locations for the private life insurance
companies.
Inefficient 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 financial
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 significant 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 define an operating model which supports a multiproduct, multi-channel distribution model that compliments
an insurers revenue objectives and profit margins.
Distribution is not only the forefront of the operations but
also forms a large proportion of the operating expenses.
Accordingly, inefficient 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 fixed costs. For the banks, it was a source
of additional fee-based income (no risk business) and also
becoming a one-stop shop for financial solutions for its
customers. The customer viewed this channel as their
trusted financial 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 conflict 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 difficulties 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 flexibility 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 reflects the comfort of the internet
users to conduct financial transactions online.
Exhibit 5: Growth in retail electronic transactions
Retail electronic
transactions
FY04
FY12
Annualised growth
rate ( percent)
Volume (millions)
167
1,160
27.42%
Amount (INR billions)
521
22,075
59.71%
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 influence 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 benefits/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 significant 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 figures 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
Microfinance 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 Influence (COI) model for rural India

Rural India and making the rural population financially 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 financial services accessible to the rural areas. It is
time insurance companies also join the bandwagon and find
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 influence to create
awareness of insurance products, educating them on the need
to be insured and finally 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 influence
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 significant growth opportunity and those who take the
approach of identifying influencers might have a distinct
3 Unique Identification 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
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 profitable.
6 Source: www.mfin.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 financial and non-financial
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 influence from P2P lending which is the practice of lending money to unrelated individuals
or peers without going through the traditional financial intermediary such as a bank or other traditional
financial 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 first one in India being the Bangalore-based DhanaX. In the UK, the first 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
Mobile-based insurance 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
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.
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 confidence 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
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 affinity-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 filling
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
Officer 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 defined 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 significant impact on the growth and profitability trends in the industry. The most notable of them was
the price detariffication in 2007 which significantly 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 significantly influenced 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 detariffication.
Overall, while the industry achieved significant growth over the past 5 years, the
profitability of industry deteriorated sharply
A multitude of factors adversely impacted the industry profitability over the last five years
Price detariffication 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 profitability and solvency requirements for the general insurance
companies.
Exhibit 3: Relative growth and profitability 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 profitability trends

in the General Insurance Industry
General insurance industry in India presents significant headroom for growth
While the Indian general insurance industry has evolved significantly over the past decade
or so, the insurance penetration and insurance density levels are significantly lower than
the developed as well as comparable developing countries. The under-penetration is driven
by lack of overall financial awareness, lack of understanding of general insurance products,
low perceived benefits, and propensity to purchase insurance based on reactive drivers
such as insistence by financers, 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 significant 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
profitable growth model.
Large private sector players
Large private sector players pose the biggest threat to
public sector insurance companies due to more efficient
operating models, highly capable talent pool, and significantly
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 profitable 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 significantly 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 inflation and changing
disease pattern more towards lifestyle diseases in the urban
areas, the health insurance market would have significant
headroom for growth as it would replace the out-of-pocket
expenditure.
Competitive strategies could considerably impact

the growth and profitability of the overall general
insurance industry
Competitive strategies adopted by players would have
considerable impact on the growth and profitability 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.
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 profitability benefits.
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 significantly drive the growth of the
general insurance industry in the medium to long term. The
growth may also be supported by a focus on profitability 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
Exhibit 6: Projected growth of the Indian General Insurance

Industry (Gross Direct Premium) (units INR Crore)
New entrants targeting broad based presence

New entrants focussing on high growth across segments
are likely to have low profitability 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 profitability 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
Source: KPMG Analysis, IRDA Annual Report 2012
Growth in different product segments may be driven by segment

specific drivers
While, the overall macro-economic and socio-demographic factors would enable
growth across the industry, each of the industry segments would have specific
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 inflation.
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
Exhibit 7: Product mix projections
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 fire insurance
business may marginally increase further.
Source: IRDA Annual report 2012, KPMG Analysis
Claims ratios are likely to improve in most of the segments in the medium term
Profitability of a large number of players, including that of
public sector players, is significantly low as of today. A number
of factors like detariffication, competitive pricing etc. have
contributed to the overall low profitability of the industry. Going
Segment
Motor OD
Extent of change expected in

incurred claims ratio in the
medium term
Reduction up to 5 percent points
Motor TP
Reduction by more
than 10 percent points
Retail health
Reduction by
5 percent to 10 percent points
Group health
forward, a number of drivers are likely to have considerable

impact on the overall business profitability. The factors
impacting future profitability are described as below:
Comments and drivers
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 definitions, 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, inflation in healthcare costs, pricing pressure due to entry of new players.
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.
Reduction by more
than 10 percent points
Government
health
Fire
Stable or moderate increase
Reduction by
5 percent to 10 percent points
Marine Cargo
Reduction up to 5 percent points
Engineering
Others
Control over frauds and claims cost

Standardization of definitions and processes
However, tender driven process may lead to adverse pricing pressure.
Reduction in discounting by insurers to improve segment profitability
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 profitability
Further improvement in the shipping transit environment and road safety
Claims ratio in the segment are highly project specific and hence show a variation across
players; no significant 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
Bargaining power of intermediaries in the personal line business may reduce

significantly 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 profitable
growth, the emphasis is shifting to channel
profitability 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 profitability 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 influence 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, profitability
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 profitability would lose competitive power either due to strain on capital or due to insignificance
of the scale. Either way, this would support the emerging trend of overall profitable 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 flexible 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
efficient distribution process to keep the overall cost of
products low are qualified 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
2006*
2009
2011
Asia
Latin America
Africa
Total
66
4-5
78
350-400
14.7
45-50
18-24
Less than 500
Note: *Data for 100 poorest countries only

Source: 'Protecting the poor: A Microinsurance compendium,' vol. II, Munich Re, Microinsurance Network and International
Labor Office, 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 finance institutions (MFIs), trade unions,
hospitals and cooperatives to create an insurance fund
against a specific 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 first 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 specific 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 efficiency 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.
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.
However, insurers are continuously innovating and

introducing distribution channels that are not only cost
efficient but also have a wider reach. Technology is being
extensively used to distribute microinsurance products
more efficiently 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.
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
Microinsurance regulations, 2005

The regulation provides definitions 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
finance 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
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
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.
Product guidelines
Life insurance
Term (with/ without
return of premium)
Amount of cover: INR

5,000 50,000
Term: 5-15 years
Non-life insurance
Dwelling and contents/
Livestock /Tools/ Crop
insurance

5,000 30,000 per
asset cover
Term: 1 year
Endowment insurance

5,000 30,000
Health insurance
(individual, family)
Term: 5-15 years

Health insurance
(individual, family)

5,000 30,000
Term: 1-7 years
Accident benefit rider

5,000 30,000
Term: 1 year
Personal accident (per

life/earning member of
family)

10,000 50,000
Term: 1 year

10,000 50,000
Term: 5-15 years
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
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.
Rural Indias microinsurance need
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
Need
Individual: Life risk, Health risk and

Personal accident
Livelihood
Agriculture: Weather risk, Crop
produce risk
Risk mitigation
through Insurance
Livestock risk
Individual risk
Health/Personal accident:
Life:
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.
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 benefit 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, fishermen,
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.
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
benefits 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 benefit 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 five members of the family which
includes the head of household, spouse and up to
three dependents
Beneficiaries 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 official 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 deficit of resources. The Trust, depending upon
the availability of resources, determines the contribution to
be collected from the member beneficiaries 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 reflected in the falling ratio of reimbursements
to hospitals as percentage of the total contribution (members
and government).
Livelihood risk
Agriculture (crop and weather risk):
Animal husbandry (risk of death of animal):
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 specifically indemnifies 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.
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. 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 specifically 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.
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 beneficiary, 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.
Benefit of subsidy is being provided to a maximum of
two animals per beneficiary for a policy a maximum of
three years.
For unique identification 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 identification 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 identification. 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
financial services regulators.
However, financial inclusion is an expensive
proposition. While the regulators have created
policies to promote financial 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 insufficient benefits
Product not suitable for specific
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
Insurance company
Hinterland population spread over

a large area
High transaction cost against low

ticket size
Lack of sufficient incentives to

cover operations cost
Poor documentation (such as

Identity card, age, address proof)
Lack of training and

understanding of product fitment
to customer needs
Largely un-banked target

customers
Risk of losing respect in the local

community if the insurer does not
honour a claim
Lack of actuarial data for risk

analysis and pricing
Risk of adverse selection
High distribution and transaction

expenses
Limited health infrastructure
in rural areas, makes health
insurance difficult to sell
Low renewal rate
Rural and micro-insurance
coverage limited to fulfillment of
rural or social obligations
The un-insured customer

Given the lack of social security in India, in the event
of disability, meager financial 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 significant drain on the countrys limited resources.
Most customers in the target segment have low financial
literacy and are unable to view insurance as a risk mitigation
tool. Low awareness levels and lack of understanding of
underlying benefits creates a barrier to purchase of intangible
assets.
Further, the insurance companies have been focussing
on reducing losses and improving profitability 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 difficult 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 difficult 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
significant 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 specific
and simple products, and above all, by simplifying the
processes of underwriting and claims management.
Regulatory update
Regulatory update exposure draft on microinsurance (modifications) 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 Office (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 fit 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.
* This entity/individual is now permitted for

appointment as Micro Insurance Agent as per
IRDA Circular dated 03 April, 2013
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
sufficient to acquire insurance policies.
Banking correspondent allowed to sell
microinsurance products.
Goal of having an office 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.
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 profile 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

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
significant impact on reducing costs.
The biggest advantage accruing from a shared database will be the availability
of a significantly 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
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 identification tags etc.). With
significant 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 identification), Voter ID card and many
personal items. All of this will lead to the generation of massive amounts of
segment specific data, enabling a sharper focus on product development for
the target market.
Biometric devices,
smart cards,
embedded devices
Leveraging off recent initiatives by the Central and many State Governments
like issuance of smart cards to the poorest Indians to keep track of financial
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 financial transactions, health history for a significant period
of time. These cards will not be proprietary to any particular IT platform/
language/ Operating System to enable universal usage.
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 profiling, multiple
economic segments, products, risk classes, by channel views and finally for
each individual customer.
Way forward
For India to reach its rightful place as a developed nation, it must

financially 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 financial 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 flexibility 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 firm, is the Indian member firm
of KPMG International and was established in September 1993. Our
professionals leverage the global network of firms, 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 offices across India in Delhi, Chandigarh,
Ahmedabad, Mumbai, Pune, Chennai, Bangalore, Kochi, Hyderabad
and Kolkata. The Indian firm 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 reflect a shared knowledge of
global and local industries and our experience of the Indian business
environment.
KPMG is a global network of professional firms providing Audit, Tax
and Advisory services. We operate in 156 countries and have 152,000
people working in member firms around the world.
Our Audit practice endeavors to provide robust and risk based audit
services that address our firms' clients' strategic priorities and
business processes.
KPMG's Tax services are designed to reflect 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
firms' 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 firms 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 significant
legislations.
Our legacy
The Chamber turned into the financial 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 first 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 first Life Assurance Legislation (1910) and played
a critical role in framing the countrys first Income Tax legislation.
These apart, the Chamber has also suggested modifications in the
Indian Companies Act and the Indian Insurance Act and examined
and suggested changes in the first 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 financial 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 firm 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 find 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
P Roy
Head
Markets
T: +91 22 3090 2040
E: pudhas@kpmg.com
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
T: +91 33 4403 4095
E: ambarish@kpmg.com
Shashwat Sharma
Partner
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 firm of the KPMG network of independent member firms affiliated
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.

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Insurance

The decade gone by

Finding the right distribution model

Realigning the business model

Innovating with new models

Securing through complementary alternative channels

Indian General Insurance Industry

Historical developments in the Indian general insurance industry

Future Growth and profitability trends in the General Insurance Industry

Microinsurance: Unlocking Indias huge insurance potential

Microinsurance a brief concept

Global overview and comparison with India

Issues and challenges impeding the growth of microinsurance

Potential solutions to further increase penetration and

1 | Insurance industryRoad ahead

Insurance industryRoad ahead | 2

Indian Life Insurance

3 | Insurance industryRoad ahead

The decade gone by

Since the opening of the sector in 2001, Indian life insurance

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

Profitability and return on invested capital

The change in regulations had shifted the premium

Exhibit 3: Equity infusion and movement in profits / (losses)

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

The periods FY11 and FY12 had a consolidated

With economic growth expected to be slow in

Insurance industryRoad ahead | 6

Finding the right distribution model

activation amongst others. Business generation

7 | Insurance industryRoad ahead

Inefficient agent recruitment process leads to high attrition

Life insurance companies spend a significant portion of their

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

Declining volumes in the banc-assurance model

Insurance products have become increasingly complex

Insurance industryRoad ahead | 8

Realigning the business model

Technology-enabled model for urban India

Amount (INR billions)

Source: Reserve Bank of India Bulletin 2011-12

9 | Insurance industryRoad ahead

Online sales of insurance products have one important

advantage in the future. We provide below a ready reference,

Center of Influence (COI) model for rural India

3 Unique Identification Authority of India under the aegis of the

Insuring people in the informal sector via microinsurance

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

This is inspired by the Amway success of multi level marketing.

There are over 865 million mobile users in India as of

i. Customer segmentation and analytics for targeted approach

In a recent IBM Insurance Global CIO study10, it was found

Insurance industryRoad ahead | 12

Securing through complementary

13 | Insurance industryRoad ahead