Indian insurance sector

Stepping into the next decade of growth

September 2010

Confederation of Indian Industry

Foreword
The insurance industry in India has progressed significantly over the last decade, which is amply evident in the strong growth
witnessed in the insurance premiums, strengthened outreach, increased number of players, product innovation and its
enhanced regulatory framework. A combination of these factors, along with strong economic growth in the last few years,
has positioned India as a regional insurance hub and a rapidly developing financial center.

The insurance industry is amid an exciting journey — there needs to be a persistent endeavor to sustain what has already
been achieved as well as expand beyond the current level. Furthermore, several reforms and policy measures, especially
during the last couple of years, have enabled a favorable environment for insurance companies to flourish in the country. The
coming years are critical as the regulator stance and approach of market participants will govern the strength, stability and
the sustained growth of the insurance sector.

The insurance sector has become a major contributor to economic development, especially to infrastructure development.
This growth has been fueled by India’s multiplying consumer class, rising insurance awareness, increasing domestic savings
and investments. Moreover, it has been the joint effort of all stakeholders, including the government, regulator and insurance
companies to enable the positive momentum of this industry. However, there is still a long way to cover on the road to
achieve financial inclusion and bring more and more people under the insurance blanket.

To this end, the Confederation of Indian Industry (CII) and Ernst & Young have co-authored this report to evaluate the current
state of the insurance industry, implication of new regulations and the steps that can be taken to strengthen the penetration
of insurance products.

Ashvin Parekh Chandrajit Banerjee

Partner & National Industry Leader, Director General,
Financial Services Confederation of Indian Industry
Ernst & Young Private Limited

Indian insurance sector: stepping into the next decade of growth 3

Contents
Executive summary........................................................................................................................ 1

Introduction................................................................................................................................... 3

Section I: Industry overview............................................................................................................ 5

Evolution of the industry........................................................................................................... 5

Current scenario....................................................................................................................... 7

Growth drivers........................................................................................................................ 10

Emerging trends..................................................................................................................... 11

Contribution of the insurance sector to the economy................................................................. 12

Section II: Industry at cross-roads of development........................................................................ 17

Insurance industry: significantly untapped latent potential......................................................... 17

Recent regulatory developments that govern the current market state........................................ 20

Section III: Critical factors for market development........................................................................ 25

Distribution channels.............................................................................................................. 25

Focus on financial inclusion..................................................................................................... 34

Consumer needs and preferences............................................................................................. 36

Way forward................................................................................................................................. 39

Bibliography................................................................................................................................. 42

4 Indian insurance sector: stepping into the next decade of growth

Indian insurance sector: stepping into the next decade of growth 5
 Executive summary
India’s rapid rate of economic growth over the past decade
has been one of the most significant developments in
the global economy. This growth traces its origin in the
introduction of economic liberalization in the early 1990s,
which has equipped India to exploit its economic potential
and substantially raise the standard of living of its people.
Together with other financial services, insurance services
contributed 7% of the country’s GDP in 2009. A well-
developed and evolved insurance sector is a boon for
economic development as it provides long-term funds for
infrastructure development and concurrently strengthens
the risk-taking ability of the country. Further, insurance
has been a notable employment generator, not only for the
insurance industry, but has also created significant demand
for a range of associated professionals such as brokers,
insurance advisors, agents, underwriters, claims managers
and actuaries.
By the nature of its business, insurance is closely linked to
saving and investing. Life insurance, funded pension systems
and non-life insurance have accumulated a significant
amount of capital over time, which can be invested
productively in the economy. The mutual dependence of
insurance and capital markets plays an instrumental role in
channeling funds and investment capabilities to augment
the development potential of the Indian economy.
India’s growing consumer class, rising insurance awareness,
increasing domestic savings and investments are among the
most critical factors that have positively driven the market
penetration of the insurance products among its consumer
1 Indian insurance sector: stepping into the next decade of growth
segments. However, there are large untapped areas, which
have yet not benefited from the upside of insurance.
Imparting financial literacy, incentivizing Indian households
to transfer savings from physical assets to financial assets
and taking the distribution network to rural areas are
expected to help bring more and more individuals within
the insurance ambit. While insurance penetration in India is
higher than that in countries such as China and Brazil, it still
has a considerably long way to go.
The insurance industry in India has visibly progressed
since the time when businesses were tightly regulated and
concentrated in the hands of a few public sector insurers.
Following the passage of the Insurance Regulatory and
Development Authority Act in 1999, India abandoned
public sector exclusivity in the insurance industry in favor
of market-driven competition. This shift has brought about
major changes to the industry. The new era of insurance
development has seen the entry of international insurers,
the proliferation of innovative products and distribution
channels, and the raising of supervision standards.
The period post-sector liberalization, which we call Phase
I, has witnessed an unprecedented surge in the sales of
insurance products, with the industry recording a CAGR of
24.2% in annualized premium equivalent during FY00–05.
The insurance industry, in its first phase of development, has
been relying on regular capital infusions from the promoters
as its lifeline. High new business strain and expanding
distribution networks have resulted in accounting losses
across the industry. In order to meet their commitment
toward claim settlement and reserve creation, promoters
have been investing additional capital, resulting in ”cash-
burn.” The tradeoff between ”growth” and ”profitability” was
heavily inclined toward the former.
The next four to five years can be termed as Phase II,
which saw players focus on an expanding product range,
developing innovative products and building a robust
distribution channel. During this period, i.e., FY05–09, the
industry grew at a CAGR of 25.9%. Insurers were shifting
weight from the Phase I philosophy of ”growth versus
profitability” to the Phase II mantra of ”profitable growth.”
As a result, the focus shifted from ”growth” to ”profitability,”
with product pricing becoming more rational based on more
conservative assumptions. Product innovation continued
and traditional policies gained some foothold in an otherwise
unit-linked incentive product (ULIP) driven market.
The Indian life insurance industry stands at the threshold
of launching its Phase III growth. The phase is marked by
bringing the industry to a stable position, ensuring “stable
profitable growth.” Most large players will now look to
decelerate the pace of distribution growth and increase
their focus on the retention of channel partners as well as
improve channel productivity. Further, insurance companies
are working toward improving persistency.
At this cross section, the role of the regulator becomes
critical. The Insurance Regulatory and Development
Authority (IRDA) is in the finalization stage vis-à-vis most of
its regulations, which would be instrumental in navigating
the future course of the insurance industry. IRDA has
introduced certain regulations to help improve disclosures,
Indian insurance sector: stepping into the next decade of growth
profitability and capital as well as ensure consumer
protection. Further, the regulator is amid finalizing the
norms for the initial public offering (IPO) of insurance
companies. In a sector where none of the players are listed,
the IPO of insurance companies could be a milestone in the
future growth of the sector.
Risk management plays a very critical role in the insurance
business. In the next three to four years, India plans to shift
from the current solvency I norms to risk-based solvency
norms, called the solvency II model. This change will result
in the better apportionment of risk in the backdrop of the
actual risk associated with the asset.
With the rising competition, the industry may also witness
consolidation among smaller players and the emergence
of some large players. The regulator is in the process of
finalizing guidelines for mergers and acquisitions in the
insurance space in India. The government, regulator and
the insurance companies are now focused on maintaining
a favorable environment for sustainable growth, higher
contribution of the industry to economic development and
the increasing reach of insurance to the underdeveloped
areas of the country.
To summarize, the Indian insurance industry is poised for a
quantum leap in performance with unprecedented growth
opportunities, notwithstanding a temporary sliding growth
curve. The stage is now well poised for the real show
to commence.
2
 Introduction
The economic reforms initiated in the early 90s paved the
way for the growth and opening up of the financial sector,
which led to a sustained period of economic growth. The
insurance industry was opened up for private players in
2000, and has seen tremendous growth over the past
decade with the entry of global insurance majors. India is
fast emerging as one of the world’s most dynamic insurance
markets with significant untapped potential.
The insurance sector plays a critical role in a country’s
economic development. It acts as a mobilizer of savings, a
financial intermediary, a promoter of investment activities,
a stabilizer of financial markets and a risk manager. The
3 Indian insurance sector: stepping into the next decade of growth
life insurance sector plays an important role in providing
risk cover, investment and tax planning for individuals; the
non-life insurance industry provides a risk cover for assets.
Health insurance and pension systems are fundamental to
protecting individuals against the hazards of life, and India,
as the second-most populous nation in the world, offers
significant potential for that type of cover. Furthermore,
fire and liability insurance are essential for corporations
to safeguard infrastructure projects and investment risks.
Private insurance systems complement social security
systems and add value by matching risk with price.
Appropriate risk pricing is one of the most powerful tools for significant untapped potential in various segments of the
setting the right incentives for the allocation of resources, a market. While the nation is heavily exposed to natural
feature which is the key to a fast-developing country such catastrophes, the insurance cover to mitigate the negative
as India. financial consequences of these adverse events is still
underdeveloped. The same is true for both pension and
By the nature of its business, insurance is closely related
health insurance, where insurers can play a critical role
to savings and investing. Life insurance, funded pension
in bridging demand and supply gaps. The major changes
systems, and to a lesser extent, non-life insurance, will
in both national economic policies and insurance
accumulate a significant amount of capital over time, which
regulations will highlight the prospects of these segments
can be invested productively in the economy.
going forward.
There are good reasons to expect that the growth
momentum can be sustained. In particular, there is

Indian insurance sector: stepping into the next decade of growth 4

 Section I:
Industry overview
The insurance industry in India has come a long way since
the time when businesses were tightly regulated and
concentrated in the hands of a few public sector insurers.
Following the passage of the Insurance Regulatory and
Development Authority Act in 1999, India abandoned
public sector exclusivity in the insurance industry in favor
of market-driven competition. This shift has brought about
major changes to the industry. The beginning of a new era of
insurance development has seen the entry of international
insurers, the proliferation of innovative products
and distribution channels, as well as the raising of
supervisory standards.
5 Indian insurance sector: stepping into the next decade of growth
Evolution of the industry
The growing demand for insurance around the world
continues to have a positive effect on the insurance industry
across all economies. India, being one of the fastest-growing
economies (even in the current global economic slowdown),
has exhibited a significant increase in its GDP, and an
even larger increase in its GDP per capita and disposable
income. Increasing disposable income, coupled with the high
potential demand for insurance offerings, has opened many
doors for both domestic and foreign insurers. The following
table briefly depicts the evolution of the insurance sector
in India.
Exhibit 1.1. Tracing the chronological evolution of the insurance industry

Year Event
1818 Oriental Life Insurance Co. was established in Calcutta.
1870 The first insurance company, Bombay Mutual Life Insurance Society, was formed.
1907 The Indian Mercantile Insurance Limited was formed.
1912 • ►
Life Insurance Companies Act and the Pension Fund Act of 1912

• Beginning of formal insurance regulations

1928 The Indian Insurance Companies Act was passed to collect statistical data on both life and non-life.
1938 The Insurance Act of 1938 was passed; there was strict state supervision to control frauds.
1956 • T
► he Central Government took over 245 Indian and foreign life insurers as well as provident societies and nationalized
these entities.
► • The LIC Act of 1956 was passed.
1957 The code of conduct by the General Insurance Council to ensure fair conduct and ethical business practices was framed.
1972 The General Insurance Business (Nationalization) Act was passed.
1991 Beginning of economic liberalization
1993 The Malhotra Committee was set up to complement the reforms initiated in the financial sector.
1994 Detariffication of aviation, liability, personal accidents and health and marine cargo products
1999 The Insurance Regulatory and Development Authority (IRDA) Bill was passed in the Parliament.
2000 • IRDA was incorporated as the statutory body to regulate and register private sector insurance companies.
• General Insurance Corporation (GIC), along with its four subsidiaries, i.e., National Insurance Company Ltd., Oriental
Insurance Company Ltd., New India Assurance Company Ltd. and United India Assurance Company Ltd., was made India’s
national reinsurer.
2005 Detariffication of marine hull
2006 Relaxation of foreign equity norms, thus facilitating the entry of new players
2007 Detariffication of all non-life insurance products except the auto third-party liability segment

Indian insurance sector: stepping into the next decade of growth 6

 In India, the Ministry of Finance is responsible for enacting
and implementing legislations for the insurance sector with
the Insurance Regulatory and Development Authority (IRDA)
entitled with the regulatory and developmental role. The
government also owns the majority share in some major
companies in both life and non-life insurance segments.
Exhibit 1.2 depicts the structure of the insurance industry
in India.
Current scenario
A growing middle-class segment, rising income, increasing
insurance awareness, rising investments and infrastructure
spending, have laid a strong foundation to extend insurance
services in India. The total premium of the insurance
industry has increased at a CAGR of 24.6% between FY03
and FY09 to reach INR2,523.9 billion in FY09.

Exhibit 1.2. Indian insurance industry structure Exhibit 1.3. Total premiums of the insurance industry
(life and non-life)
Ministry of Finance
(Government of India) 3,000 50
43
2,500

y-0-y growth (in %)

40
INR billion

IRDA 2,000
30
1,500 22 26 27
23 20
Life insurance Non-life insurance 1,000
14
500 10 10
Public Public 0 0
FY03 FY04 FY05 FY06 FY07 FY08 FY09
Private Private
Non-life insurance premium Life insurance premium
Source: IRDA Growth rate (in %)

Both the life and non-life insurance sectors in India, which Source: IRDA

were nationalized in the 1950s and 1960s, respectively,

were liberalized in the 1990s. Since the formation of IRDA
and the opening up of the insurance sector to private
players in 2000, the Indian insurance sector has witnessed
rapid growth.
The opening up of the insurance sector for private
participation/global players during the 1990s has
resulted in stiff competition among the players, with each
offering better quality products. This has certainly offered
consumers the choice to buy a product that best fits his or
her requirements.

7 Indian insurance sector: stepping into the next decade of growth

The number of players during the decade has increased from
four and eight in life and non-life insurance, respectively, in
2000 to 23 in life and 24 in non-life insurance (including 1
in reinsurance) industry as in August 2010.

Exhibit 1.4. Growth in the number of insurance players

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Life insurers
Public 1 1 1 1 1 1 1 1 1 1 1
Private 3 10 12 12 13 13 15 15 21 21 22
Non-life insurers
Public 4 4 5 6 6 6 6 6 6 6 6
Private 3 6 8 8 8 8 9 10 15 15 17
Reinsurer 1 1 1 1 1 1 1 1 1 1 1

Most of the private players in the Indian insurance industry In a fragmented industry, new players are gnawing away the
are a joint venture between a dominant Indian company and market share of larger players. The existing smaller players
a foreign insurer. have aggressive plans for network expansion as their foreign
partners are keen to capitalize on the enormous potential
Life insurance industry overview that is latent in the Indian life insurance market.
The life insurance sector grew at an impressive CAGR of
25.8% between FY03 and FY09, and the number of Exhibit 1.5. Market share amongst private players – FY10
policies issued increased at a CAGR of 12.3% during the (based on first year premiums) (in %)
same period.
ICICI Pru,16.5
As of August 2010, there were 23 players in the sector
(1 public and 22 private). The Life Insurance Corporation of
India (LIC) is the only public sector player, and held almost Others, 8.6
65% of the market share in FY10 (based on SBI Life, 18.3
New entrants, 4.0
first-year premiums).
Met Life, 2.8
To address the need for highly customized products and
Tata AIG, 3.4 Bajaj Allianz, 11.6
ensure prompt service, a large number of private sector
Kotak Mahindra, 3.5
players have entered the market. Innovative products,
MNYL, 4.8
aggressive marketing and effective distribution have Reliance Life, 10.2
enabled fledgling private insurance companies to sign up HDFC Standard, 8.5
Birla Sunlife, 7.7
Indian customers more rapidly than expected. Private sector
players are expected to play an increasingly important role Source: “IRDA annual report FY09, “IRDA Journal,” Insurance Regulatory
and Development Authority website, www.irdaindia.org, accessed 26 May 2010
in the growth of the insurance sector in the near future.

Indian insurance sector: stepping into the next decade of growth 8

 ICICI Prudential, Bajaj Allianz and SBI Life collectively
account for approximately 50% of the market share in the
private life insurance segment. To tap this opportunity,
banks have also started entering alliances with insurance
companies to develop/underwrite insurance products rather
than merely distribute them.
Non-life insurance industry overview
Between FY03 and FY10, the non-life insurance sector grew
at a CAGR of 17.05%. Intense competition that followed the
de-tariffication and pricing deregulation (which was started
during FY07) decelerated the growth momentum.
As of August 2010, the sector had a total of 24 players
(6 public insurers, 17 private insurers and 1 re-insurer).
The non-life insurance sector offers products such as auto
insurance, health insurance, fire insurance and marine
insurance. In FY10, the non-life insurance industry had the
following product mix.
Private sector players have now pivoted their focus on auto
Exhibit 1.6. Product mix (FY 10) (in %)
Engineering, 4.8
Auto, 43.5
Marine , 6.3
Fire, 11.3
All others, 7.2 Health, 20.8
Personal Aviation, 1.2
accidents, 2.5 Liability, 2.5%
Source: “IRDA Monthly Journal,” Insurance Regulatory and Development
Authority website, www.irdaindia.org, accessed 10 June 2010
9 Indian insurance sector: stepping into the next decade of growth
and health insurance. Out of the total non-life insurance
premiums during FY10, auto insurance accounted for 43.5%
of the market share. The health insurance segment has
posted the highest growth, with its share in the total non-life
insurance portfolio increasing from 12.8% in FY07 to 20.8%
in FY10. These two sectors are highly promising, and
are expected to increase their share manifold in the
coming years.
With the sector poised for immense growth, more players,
including monoline players, are expected to emerge in the
near future. The last two years has seen the emergence
of companies specializing in health insurance such as Star
Health & Allied Insurance and Apollo DKV.
In the last decade, it was observed that most players have
Exhibit 1.7. Market share among players in FY10 (in %)
Royal Sundaram, 2.4 Tata-AIG, 2.3
HDFC ERGO New India, 15.7
General, 2.4
Star Health and
Allied Insurance, 2.6
AIC, 4.0 United India,
13.6
IFFCO- Tokio, 4.3
Reliance General, 5.2
Oriental, 12.4
Bajaj Allianz, 6.6%
National, 12.1
Others, 7.9
ICICI-lombard, 8.6
Source: "IRDA annual report FY09 - IRDA Journal," Insurance Regulatory and
Development Authority website, www.irdaindia.org, accessed 26 May 2010
experienced growth by formulating aggressive growth
strategies and capitalizing on their distribution network
to target the retail segment. Although the players in the
private and public sector largely offer similar products in the
non-life insurance segment, private sector players outscore
their public sector counterparts in their quality of service.

Growth drivers
• India’s favorable demographics help strengthen
market penetration
The life insurance coverage in India is very low, and
many of those insured are underinsured. There is
immense potential as the working population (25–60
years) is expected to increase from 675.8 million to
795.5 million in the next 20 years (2006–2026). The
projected per capita GDP is expected to increase from
INR18,280 in FY01 to INR100,680 in FY26, which is
indicative of rising disposable incomes. The demand for
insurance products is expected to increase in light of
the increase in purchasing power.
Exhibit 1.8. Working population assessment and GDP
per capita till 2026
800
700
600
In million
Private sector insurers are more aggressive in this
segment. Favorable demographics, fast progression of
medical technology as well as the increasing demand
for better healthcare has facilitated growth in the
health insurance sector. Life insurance companies are
expected to target primarily the young population so
that they can amortize the risk over the policy term.
• Rising focus on the rural market
Since more than two-thirds of India’s population lives in
rural areas, micro insurance is seen as the most suitable
aid to reach the poor and socially disadvantaged
sections of society.
• Poor insurance literacy and awareness, high
transaction costs and inadequate understanding
of client needs and expectations has restricted the
demand for micro-insurance products. However,
the market remains significantly underserved,
120
creating a vast opportunity to reach a large number
100 of customers with good value insurance, whether
80 from the base of existing insurers or through retail

500
distribution networks.
INR

400 60
300 40 • In FY09, individuals generated new business premium
200 worth INR365.7 million under 2.15 million policies,
20
100 and the group insurance business amounted to
0 0 INR2,059.5 million under 126 million lives. LIC
2001 2006 2011 2016 2021 2026 contributed most of the business procured in this
Age group 25–60 (in million) Projected GDP per capita in '000s portfolio by garnering INR311.9 million of individual
premium from 1.54 million lives and INR1,726.9
Source: CMIE, Census of India 2001
million of group premium under 11.1 million lives.

• H
► ealth insurance attracts insurance companies
The Indian health insurance industry was valued at
INR51.2 billion as of FY10. During the period FY03–10,
the growth of the industry was recorded at a CAGR
of 32.59%. The share of health insurance was 20.8%
of the total non-life insurance premiums in FY10.
Health insurance premiums are expected to increase to
INR300 billion by 2015.
• LIC was the first player to offer specialized products
with lower premium costs for the rural population.
Other private players have also started focussing on
the rural market to strengthen their reach.
• Government tax incentives
Currently, insurance products enjoy EEE benefits, giving
insurance products an advantage over mutual funds.
Investors are motivated to purchase insurance products

Indian insurance sector: stepping into the next decade of growth 10

 to avail the nearly 30% effective tax benefit on select • Consolidation in future
investments (including life insurance premiums) made
The past few years have witnessed the entry of many
every financial year. Life insurance is already the most
companies in the domestic insurance industry, attracted
popular financial product among Indians because of
by the significant potential of insurance sector.
the tax benefits and income protection it offers in
However, increasing competition in easily accessible
a country where there is very little social security.
urban areas, the FDI limit of 26% and the recent
This drives more and more people to come within the
downturn in equity markets have impacted the growth
insurance ambit.
prospects of some small private insurance companies.

Such players may have to rethink about their future

Emerging trends
• Exploring multiple distribution channels for
insurance products
To increase market penetration, insurance companies
need to expand their distribution network. In the
recent past, the industry has witnessed the emergence
of alternate distribution channels, which include
bancassurance, direct selling agents, brokers, online
distribution, corporate agents such as non-banking
financial companies (NBFCs) and tie-ups of para-
banking companies with local corporate agencies (e.g.
NGOs) in remote areas.
Agencies have been the most important and effective
channel of distribution hitherto. The industry is viewing
the movement of intermediaries from mere agents
to advisors.
• Product innovation
With customers asking for higher levels of
customization, product innovation is one of the best
strategies for companies to increase their market share.
This also creates greater efficiency as companies can
maintain lower unit costs, offer improved services
and distributors can increase flexibility to pay higher
commissions and generate higher sales.
The pension sector, due to its inadequate penetration
(only 10% of the working population is covered) offers
tremendous potential for insurance companies to be
more innovative.
growth plans. Hence, consolidation with large and
established players may prove to be a better solution
for such small insurers. Larger companies would also
prefer to take over or merge with other companies with
established networks and avoid spending money in
marketing and promotion. Therefore, consolidation will
result in fewer but stronger players in the country as
well as generate healthy competition.
• Mounting focus on EV over profitability
Many companies are achieving profitability by
controlling expenses; releasing funds for future
appropriations as well as through a strong renewal
premium build up. As a few larger insurers continue
to expand, most are focused on cost rationalization
and the alignment of business models to ground level
realities. This will better equip insurers to realize
reported embedded value (EV) and generate value from
future new business.
In the short term, companies are likely to face
challenges to achieve the desired levels of profitability.
As companies are also planning to get listed and raise
funds, the higher profitability will help companies to
get a better valuation of shares. However, in the long
term, companies would need to focus on increasing
EV, as almost 70% of a company’s EV is influenced by
renewal business and profitability is not as much of an
indicator for valuation. Hence, players are now focusing
on increasing their EV than profitability figures.

11 Indian insurance sector: stepping into the next decade of growth

• Rising capital requirements
Since insurance is a capital-intensive industry, capital
requirements are likely to increase in the coming
period. The capital requirement in the life insurance
business is a function of the three factors: (1) sum at
risk; (2) policyholders’ assets; (3) new business strain
and expense overruns. With new guidelines in place,
capital requirements across the sector are likely to go
up due to:
• Higher sum assured driving higher sum at risk
• Greater allocation to policyholders’ assets due to
lower charges
• Back loading of charges is resulting in high new
business strain, and expense overruns due to low
productivity of the newly set distribution network (and
inability to recover corresponding costs upfront)
For non-life insurance companies, the growing demand
for health insurance products as well as motor
insurance products is likely to boost the
capital requirement.
With the capital market picking up and valuations on
the rise, insurance companies are exploring various
ways of increasing their capital base to invest in product
innovation, introducing new distribution channels,
educating customers, developing the brand, etc.
This is due to the following reasons:
• A major portion of the costs in insurance companies is
fixed (though it should be variable or semi-variable in
nature). Hence, the reduction in sales will not result in
the lowering of operational expenses, thus adversely
impacting margins. As such, reduced margins would
impact profitability, and insurers would need to invest
additional funds.
• The sustained bearishness in capital markets could
further pressurize the investment margins and
Indian insurance sector: stepping into the next decade of growth
increase the capital strain, especially in the case of
capital/return guarantee product.
• Besides, companies are likely to witness a slowdown
in new business growth. Companies may also opt
for product restructuring to lower their costs and
optimally utilize capital.
According to IRDA Regulations 2000, all insurance
companies are required to maintain a solvency ratio
of 1.5 at all times. But this solvency margin is not
sustainable. With the growing market risks, the level
of required capital will be linked to the risks inherent
in the underlying business. India is likely to start
implementing Solvency II norms in the next three to
four years.
The transition from Solvency I norms to Solvency II
norms by 2012 is expected to increase the demand
for actuaries and risk management professionals.
The regulator has also asked insurance companies
to get their risk management systems and processes
audited every three years by an external auditor. Many
insurance companies have started aligning themselves
with the new norms and hiring professionals to meet
the deadline.
Contribution of the insurance sector
to the economy
Insurance has had a very positive impact on India’s
economic development. The sector is gradually increasing
its contribution to the country’s GDP. In addition, insurance
is driving the infrastructure sector by increasing investments
each year. Further, insurance has boosted the employment
scenario in India by providing direct as well as indirect
employment opportunities.
Due to the healthy performance of the Indian economy,
the share of life insurance premiums in the gross domestic
savings (GDS) of the households sector has increased.
12
 Exhibit 1.9. Share of life insurance premiums in GDS Contribution of insurance to infrastructure
(household sector) (in %)
Generally, countries with strong insurance industries
20 have a robust infrastructure and strong capital formation.
17.9 17.6
15.9 Insurance generates long-term capital, which is required
15 12.3 to build infrastructure projects that have a long gestation
11.0
10 period. Concurrently, insurance protects individuals
and businesses from sudden unfavorable events. A well-
5 developed and evolved insurance sector is needed for
0 economic development as it provides long-term funds for
FY05 FY06 FY07 FY08 FY09 infrastructure development and simultaneously strengthens
the risk taking ability.
Source: IRDA, “National Income Statistics,” July 2010, CMIE
Although the insurance sector is relatively young in India, its
contribution to infrastructural development has been on a
The increased contribution of the insurance industry
visible rise as depicted in the following exhibit.
from the household GDS has been ploughed back into the
economy, generating higher growth. The following factors
showcase how the contribution of the insurance industry has
strengthened economic growth:

Exhibit 2.0. Contribution of various insurance products to infrastructure (in INR billion)

FY06 FY07 FY08 FY09

Investments from traditional products
Approved securities including Central 3,131 3,541 4,013 4,439
Government Securities
Infrastructure and social sector 546 759 763 756
Investment subject to exposure norms, 1,327 1,538 2,035 2,787
including other than approved investments
Housing and fire-fighting equipment 31 37 39 42
Unit-linked insurance product funds (ULIPs)
Approved investments 234 576 1,115 1,515
Other than approved investments 25 95 219 213

Source: “IRDA annual report FY09,” Insurance Regulatory and Development Authority website, www.irdaindia.org, accessed 20 August 2010

13 Indian insurance sector: stepping into the next decade of growth

In FY09, the total investments by the insurance industry
increased to INR9,742 billion, as against INR8,183 billion
in the previous year. Further, investments by both life and
non-life insurers increased by 20.2% and 4.6% to INR9,163
billion and INR589 billion, respectively, in FY09.
However, as outlined in the Eleventh Five Year Plan (2008–
2012), there is a significant fund requirement of INR20,562
billion in the infrastructure sector. Given an expected robust
increase in the insurance business and the increasing
participation of foreign insurers in India, insurance
companies are well positioned to contribute to infrastructure
development in the country.
These investments could further increase with the
development of sound debt markets, especially the market
for long-term government paper and income tax incentives
to attract savings for infrastructural schemes. The
direct investment of policyholder funds of life insurers in
government bonds is another way in which the industry has
helped the development of infrastructure. In addition, IRDA’s
mandate for insurance companies to invest 15% of their
annual sales in infrastructure is expected to boost
capital formation.
Contribution of insurance to FDI
The importance of FDI in the development of a capital-
deficient country such as India cannot be undermined.
This is where the high-growth sectors of an economy
play an important role by attracting substantial foreign
investments. Currently, the total FDI in the insurance sector,
which was INR50.3 billion at the end of FY09, is estimated
Indian insurance sector: stepping into the next decade of growth
to increase to approximately INR51 billion in FY10. It is
difficult to estimate, but an equal amount of additional
foreign investment, can roughly flow into the sector if the
government increases the FDI limit from 26% to 49%.
The insurance sector, by virtue of attracting long-term
funds, is best placed to channelize long-term funds toward
the productive sectors of the economy. Therefore, the
growth in their premium collections is expected to translate
into higher investments in other key sectors of the economy.
Therefore, the liberalization of FDI norms for insurance
would not only benefit the sector, but several other critical
sectors of the economy.
Contribution of insurance to the offshoring business
India has become one of the most popular destinations
for offshoring insurance processes, and leading insurance
companies in the US and Europe has moved their processes
either to their captive units or third-party outsourcing firms.
Currently, around 63% of India’s insurance outsourcing
revenues come from the US and around 22% from EMEA.
India offers varied insurance solutions dealing with health,
property, life, annuities, reinsurance and casualty, among
others. The following is a list of insurance services that are
outsourced to India.
The total revenues from the Indian offshore insurance
business process outsourcing services increased from
US$367 million in FY03 to US$790 million in FY07,
and are expected to reach US$2 billion by FY10. This
increased business will also result in increased employment
opportunities in the insurance offshoring business.
14
 Exhibit 2.1. Insurance services suite

Life insurance, pension

Property and casualty insurance Reinsurance
and annuities

Application Underwriting New business Policy Treaty Underwriting

process support administration administration support
BPO

Policy Claims Claims and Annuities Technical Claims

administration processing and issuance servicing accounting management
and maintenance adjudication

Customer relationship and Customer relationship and Reinsurance treaty

information management information management administration
Technology
enabled
Insurance Active
Active desk solution Insurance workflow
workflow desk solution

Open block life Closed block life

administration administration
Hire-to-retire Hire-to-retire
End-to-end Producer Retirement
platform administration services
service
Procure-to-pay Procure-to-pay

Procure-to-pay Hire-to-retire

Product Customer
Analytics Profitability analytics Claims analytics Risk analytics
analytics analytics

Life, retirement services,

Technology and Application development Business process and operations
producer administration
consulting and maintenance consulting
platform

Source: Infosys

15 Indian insurance sector: stepping into the next decade of growth

Contribution of insurance to employment
Insurance helps create both direct and indirect employment
in the economy. Alongside regular jobs in insurance, there is
always demand for a range of associated professionals such
as brokers, insurance advisors, agents, underwriters, claims
managers and actuaries.
IRDA has mandated the appointment of actuaries in all
insurance companies, ensuring the certification of all
products before launch. The insurance regulator has also
made it mandatory for appointed actuaries to attend all
board meetings to help the insurer ensure solvency at all
points in time.

The increasing insurance business has increased the
demand for highly skilled professionals as well as semi-
skilled and unskilled people. For example, life insurance
provided direct employment to an additional set of 30,912
people, besides adding more than 407,768 individual agents
during FY09.
To ensure continued growth, the need of the hour is trained
manpower with specialized knowledge about this industry.
Insurances companies need to invest in the professional
training of their employees, especially for subjects such as
underwriting, claims and risk management.

Exhibit 2.2. Growing employment in the life insurance industry

Parameter FY00 FY06 FY07 FY08 FY09

Direct employees 1,23,000 1,52,449 1,87,403 2,54,332 2,85,244
Individual agents 7,14,000 14,22,609 19,85,457 24,98,513 29,06,281
Source: Life Insurance Council of India

Indian insurance sector: stepping into the next decade of growth 16

 Section II:
Industry at cross-roads
of development

Insurance industry: significantly
untapped latent potential
India’s insurance industry has witnessed rapid growth during
the last decade. Consequently, many foreign companies
have expressed their interest in investing in domestic
insurance companies, despite the Government of India’s
regulation, which mandates that the foreign shareholding
limit is fixed at 26% for the life as well as non-life
insurance sectors.
The country’s strong economic growth in recent years has
helped increase penetration levels substantially. Premium
income, as a percentage of GDP, increased from 3.3%
in FY03 to 7.6% in FY09. However, the penetration of
insurance in India still continues to be low, as compared to
other developed and developing economies.
Exhibit 2.3. Insurance premiums as a % of GDP
7.3
8 6.3
In percentage
The Indian life insurance sector has witnessed exponential
growth, driven by innovation in product offerings and
distribution owing to market entrants since the opening up
of the sector in 2000. Currently, it is the fifth-largest life
insurance market in Asia. The rapid expansion in the life
sector coincided with a period of rising household savings
and a growing middle class, backed with strong economic
growth. Innovative product design (e.g. launch of ULIPs)
and aggressive distribution strategies (e.g. development of
bancassurance) by private sector players have significantly
contributed to strong premium growth. The following
diagram shows the increasing premium per capita during the
same period.
Exhibit 2.4. Per capita insurance premium
2,500 2,187.1
2,013.8
2,000 1,716.1
1,921.9
7.6 1,769.3
1,500

1,197.2 1,479.1
6.7
6 4.8 6.4 952.0
3.7 4.2 5.5 1,000 637.9 776.1
3.3 1,003.6
4 4.1
3.5 785.4
500 628.3 265.2
2 2.7 3.0 0.9 0.9 0.9 528.4 166.6 193.7 237.0 244.5
0.6 0.7 0.7 0.8 109.5 147.8
0 0
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY03 FY04 FY05 FY06 FY07 FY08 FY09

Non-life insurance premium contribution as a % of GDP Non-life insurance premium per capita
Life insurance premium contribution as a % of GDP Life insurance premium per capita
Total insurance premium contribution as a % of GDP Total insurance premium per capita

Source: “IRDA annual report FY03–09,” Insurance Regulatory and Development Source: “IRDA annual report FY03-09,” Insurance Regulatory and Development
Authority website, www.irdaindia.org, accessed August 2010; CMIE Authority website, www.irdaindia.org, accessed August 2010; CMIE

17 Indian insurance sector: stepping into the next decade of growth

The global economy has slowly started recovering from the
economic recession. Lagging employment, coupled with
declining aggregate wages, a weakened residential and
commercial real estate market, tight credit and a behavioral
shift on the part of consumers from consumption to savings
are factors contributing to a delayed recovery. Although
the global insurance industry has not been impacted by the
financial crisis as much as the banks, it still has its set of
issues. The leading five issues on the global insurance watch
list are:
• Managing risk: The most significant concern for insurance
companies is risk in all its forms. Increasingly, insurance
companies are adopting an enterprise-wide view of
managing risks—employing a framework to address them
across the organization.
• Promoting compliance: The cost of regulatory compliance
and the attendant reputational risk of non-compliance are
on the rise.
• Growing globally: The expansion into new markets is
expected to help drive profits, as developed economies
witness slower growth in the demand for insurance.
• Lack of innovation around products and delivery: The
use of technology and emphasis on innovation will help
provide better service and delivery. Institutions can also
strengthen their ties with customers and differentiate
themselves from competition.
• Adapting to demographic shifts: The demographic
changes in North America, Europe, Japan and other areas
is starting to shift assets from equities to annuities as well
as other fixed-income products.

Exhibit 2.5. Global comparison of insurance premiums, penetration and density for both life and non-life segments

Non-life premiums in 2009 Life premiums in 2009

Country Premiums, Penetration, Density, Premiums, Penetration, Density,
US$ million % of GDP US$ per capita US$ million % of GDP US$ per capita
Developed
Australia 27,849 3 1,308.0 32,468 3.4 1,524.8
France 88993 3.1 1,289.4 194077 7.2 2,979.8
Germany 126,591 3.7 1,518.7 111,776 3.3 1,359.7
Singapore 5,188 1.7 645.6 9,057 5.1 1,912.0
South Korea 34,527 3.9 709.7 57,436 6.5 1,180.6
United Kingdom 91,560 3 1,051.2 217,681 10 3,527.6
United Arab Emirates 4,381 2.1 952.7 732 0.4 159.2
United States 647,401 4.5 2,107.3 492,345 3.5 1,602.6

Indian insurance sector: stepping into the next decade of growth 18

 Non-life premiums in 2009 Life premiums in 2009
Country Premiums, Penetration, Density, Premiums, Penetration, Density,
US$ million % of GDP US$ per capita US$ million % of GDP US$ per capita
Developing
Bangladesh 205 0.2 1.3 636 0.7 3.9
Brazil 23,979 1.5 123.8 24,781 1.6 127.9
China 53,872 1.1 40 109,175 2.3 81.1
India 6,375 0.9 6.7 46,206 6.6 48.1
Indonesia 2,219 0.4 9.6 5,066 0.9 22
Malaysia 3,158 1.6 115 5,682 2.9 206.9
Mexico 9,664 1.1 88.2 7,688 0.9 70.1
Pakistan 650 0.4 3.6 543 0.3 3
Philippines 835 0.5 9.1 1,563 1 17
Romania 2,365 1.4 111.2 533 0.3 25.1
Russia 38,940 2.4 276.4 636 0 4.5
South Africa 8,215 2.9 163.9 28,773 10 574.2
Sri Lanka 358 0.9 17.7 238 0.6 11.8
Taiwan 11,443 3 494.8 52,204 13.8 2,257.3
Thailand 4,248 1.6 62.7 6,212 2.4 91.7
Vietnam 769 0.8 8.7 671 0.7 7.6

Source: “World Insurance in 2009,” Swiss Re, June 2010, Insurance Regulatory and Development Authority website, www.irdaindia.org, accessed
06 January 2010

According to Swiss Re, among the key Asian markets, India
is likely to have the fastest-growing life insurance market,
with life premium poised to grow at a CAGR of 15% for the
next decade, slightly faster than the 14% expected for China.
The growing consumer class, rising insurance awareness and
greater infrastructure spending have made India and China
the two most promising markets in Asia. Europe and the
Americas represent relatively mature insurance markets.
Though India’s penetration appears higher, it is not
excessive, given the high level of investments in insurance
policies underwritten. Nonetheless, besides India, Taiwan is
the other Asian market that shares similar characteristics.
Taiwan has the highest insurance penetration in Asia, largely
driven by the immense popularity of ULIPs.
The progress of the Indian insurance industry over the
last decade has been the most crucial period in the
establishment of this industry; post the formation of IRDA
in 2000. The initial four to five years witnessed the entry of
many private players, each trying to acquire market share.
The latter part of this phase witnessed a heightened focus
on the expanding product range, developing innovative
products and building a robust distribution channel. The last
one to two years have been very critical as the industry is

19 Indian insurance sector: stepping into the next decade of growth

trying to sustain its growth in light of the new regulations
being formulated.
The Indian insurance industry is at a threshold from where
it can witness the next growth wave, if presented with a
favorable policy framework and an enabling distribution
environment. The industry is poised to witness the
emergence of new leaders who would carve a niche for
themselves by using instruments such as alternative
channels of distribution, cost management and product
innovation, among others.
At this cross section, the role of the regulator is very
significant. IRDA is in the finalization stage of most of the
regulations pertaining to the industry. The regulator has
introduced certain regulations to help improve disclosures,
profitability, capital, consumer protection, etc.
Recent regulatory developments
that govern the current
market state
The development of the insurance industry in India, as
in other international markets, is likely to be critically
dependent on the nature and quality of regulation. The role
of the regulator in most markets is to ensure efficiency,
transparency and fair play, while at the same time, protect
the interests of the consumer. The IRDA Act 2000 has
delineated the broad regulatory framework within which
insurance companies are expected to operate in India. The
provisions of this act address issues related to ownership,
solvency, investment portfolio construction, commission
structures, reporting formats and accounting standards.
The minimum paid-up equity capital requirement has
been set at INR1 billion. The insurance business is capital
intensive, and international experience suggests that, on
an average, non-life insurance companies require four to
five years to break even. In the interim, these companies
would require regular capital infusion for funding expected
Indian insurance sector: stepping into the next decade of growth
losses and meeting solvency requirements. In this context,
given the existing regulatory constraints of foreign direct
investment by the overseas partner, a substantial part of the
funding would have to be done by the Indian partner, whose
financial strength is likely to influence the credit strength of
the joint venture.
Given the evolutionary stage of the Indian insurance
industry, one of the focal points for the regulator has been
to drive stability and solvency in the industry. The act also
mentions broad guidelines for the construction of the
investment portfolios of life insurance companies. These
norms have been designed to make sure that an insurer
does not take on unsustainable risks in deploying funds
collected by way of premiums. Overall, the regulatory
environment is favorable and takes care that players
maintain prudent underwriting standards, and reserve
valuation and investment practices. The primary objective
for the current regulations is to promote stability and fair
play in the market place. Some of the recent regulatory
changes and their impact include:
New disclosure norms
IRDA has come up with the following disclosure norms:
• IRDA has issued disclosure norms for insurance
companies, mandating them to publish accounts on a half-
yearly basis. The disclosure norms are seen as a precursor
to allowing insurance companies to hit the primary
market. According to the new norms, insurers will have to
publish their balance sheet on a half-yearly basis, starting
from the period ending 31 March 2010.
Disclosures to be made for a company launching an IPO
• All financial disclosures for the past five years prior to
the IPO have to be available on the company website. In
addition, insurance companies have to disclose the data
on various parameters such as the calculation of economic
capital, surrender and lapse experience of business and
expense patterns for the five-year period.
20
 • Insurance companies that intend to go public would
also need to disclose required and available solvency
margins for five years, capital structure and details of
investment performance. A wide range of risk factors
related to credit, market, insurance, liquidity, operational
and asset and liability management need to be disclosed
clearly by the insurers, accompanied by a report from
an independent external actuary on the reasonableness
of the methodology adopted and assumptions made to
determine valuations.
• IRDA has also instructed all life insurers to explicitly
disclose, in their benefit Illustration document, the exact
amount of commission/brokerage paid by insurers to
insurance agents. This circular came into effect from 1
July 2010.
Implications
The regulator has directed all firms to come up with a public
disclosure framework to ensure a fair and stable insurance
market. These norms would help investors to be fully aware
of the financial performance, company profile, financial
position, risk exposure, elements of corporate governance in
place and the management of the insurance companies.
The standard on public disclosures for the insurance
companies, which has been prepared out of the leading
international practices followed by the International
Association of International Supervisors (IAIS), will
strengthen corporate governance and market discipline.
According to IRDA, the circular on the disclosure of agent
commission will enhance transparency by providing
prospective policyholders with details of the exact amount of
commission/brokerage paid by insurers to insurance agents,
thus making it pro-investor. However, on the negative side,
this move may encourage many insurance agents to rebate
commissions to their clients, which is an illegal practice.
Altered commission structure of agents
• Insurers would be allowed to charge up to 4% on annual
premium paid on ULIPs for the first five years, and
thereafter, charges will be reduced during the tenure of
the policy. This figure narrows down to 3% by the tenth
21 Indian insurance sector: stepping into the next decade of growth
year in a tapered scale, ending with 2.25% after the
fifteenth year. The new guidelines apply from 1 September
2010. Earlier, the regulator had allowed commissions
charged by agents to not exceed 40%.
• For single-premium products, the maximum commission
rate is 2% of the premium paid, and for regular premium
products, the rate is in the range of 15%–30% of premium
in the first year, followed by 5%–7% in the subsequent
years.
• According to the draft guidelines, all life insurance agents
will have to gather a minimum of INR150,000 as the
first-year premium or sell a minimum of 20 life insurance
contracts. When an agent falls short of achieving either
of the above, they would have to proportionately achieve
more in either one to make up for the shortfall. Where
the average annual persistency ratio is less than 50%, the
license of the agent will not be renewed.
Implications
This move by the IRDA reflects its efforts to ensure
transparency and implement more stringent disclosure
norms to avoid mis-selling. This is likely to allow insurers to
recover their cost in a “more transparent and informed way,”
thereby reducing “unfair practices” and the “information
gap” in domestic insurance to enhance market discipline.
Any variation in the payment structure of agents will also
help companies to reduce their costs. Further, tenure-
based commissions will definitely benefit the industry. High
commission is also expected to come down and there will
be better reward for longer-term policies than the shorter-
term ones.
Customers are the largest gainers from this change, as
products will now be more transparent, customer-friendly
and aimed at protecting their long-term interests.
With the implementation of the IRDA’s new norm, insurance
companies may initially face a setback in policy sale
numbers and total premiums. Although the IRDA stance is in
favor of bringing transparency in the commission structure
of agents, this norm could negatively impact agents as well,
at least in the short term. To address the impact of reduced
commission, insurance companies may resort to innovative
ways of compensating their top-performing agents. Non-
commission-based remuneration may increase. Companies
may expand their different reward and recognition programs
to make the sale of ULIPs attractive for agents in light of
these recent changes.
In the long term, the role of agents is expected to evolve
with this policy change. In future, increased transparency is
likely to make agents more accountable not only in selling
the right products, but also in providing better customer
service. This is also likely to guarantee that agents justify
the commissions they earn. From being mere agents, they
will be expected to serve as financial planners selling a
bouquet of financial products.
IPO norms for insurance company
• The insurance regulator has reduced the waiting period for
an insurance company to make an IPO from 10 years to 5
years after commencing operations.
• IRDA has finalized its IPO guidelines and has sent them
to the Securities and Exchange Board of India (SEBI).
SEBI will club IRDA’s recommendations with its general
guidelines on IPOs for any company that wants to raise
money from the public through equity shares.
• The norms for correct valuation, disclosure of operating
results and profit and loss account and filing of the
draft red herring prospectus are the three essentials
that a company has to fulfill when opting for a public
float. Besides, companies would have to make financial
disclosures, risk disclosures, investment performance, etc.
(details stated in the above section — “New
disclosure norms”).
Implications
Insurance companies need capital to expand, innovate
and sustain in the market. Insurance companies typically
prefer to raise capital by floating an IPO. There can be a
mix of a fresh issue of shares as well as the sale of shares
by the parent company. Most companies prefer this route
when they do not have enough capital to plough back into
their business. With the IPO route of raising capital, Indian
Indian insurance sector: stepping into the next decade of growth
promoters will get the opportunity to put their equity into
the market as well as FIIs will also be able to participate and
acquire stakes.
Promoting health insurance
• IRDA has allowed insurance companies to offer “Health
plus Life Combi Product,” a policy that would provide
life cover along with health insurance to subscribers.
Under the guidelines issued by the IRDA, life and non-life
insurance firms can also partner in offering the health-
plus-life cover. The combi products may be promoted by all
life insurance and non-life insurance companies, however,
a tie up is permitted between one life insurer and one non-
life insurer only. Thus, a life insurer is permitted to enter
an alliance with only one non-life insurer and vice-versa.
• The sale of combi products can be made through direct
marketing channels, brokers and composite individual and
corporate agents, common to both insurers. However,
these products are not allowed to be marketed through
“bank referral” arrangements. The regulator further
specified that the guidelines do not apply to micro-
insurance products, which are governed by IRDA (Micro
Insurance) Regulations, 2005.
• Under the ”Combi Product,” the underwriting of the
respective portion of the risks will be underwritten by
respective insurance companies, i.e., life insurance risk
will be underwritten by the life insurance company and the
health insurance portion of risk will be underwritten by the
non-life insurance company.
Implications
Life insurance has a much deeper penetration in India, as
compared to the non-life insurance segment. This step is in
sync with the government’s, regulator’s and the insurance
company’s strategy to cover more people under the
insurance umbrella.
As insurers leverage on the marketing and operational
network of their partner insurers, the proposed product
innovation is expected to facilitate policy holders to select
an integrated product of their choice under a single roof
without shopping around the market for two different
22
 insurance coverage options from two different insurers.
Therefore, insurers are expected to offer appropriate covers
as an attractive proposition for the policyholders.
Alteration in ULIPs
IRDA has attempted to make ULIP a long-term protection
contract covering risks related to mortality, longevity
and health by simultaneously offering a fair deal to the
policyholder and doing away with the excesses in the
system. The key changes introduced through the new
guidelines are as follows:
• Lock-in period: IRDA has increased the lock-in period for
all ULIPs from three years to five years, including top-
up premiums, thereby making them long-term financial
instruments that provide risk protection. All limited
premium ULIPs, other than single premium products, will
have a premium paying term of at least five years.
• Level paying premiums: All regular premium/limited
premium ULIPs will have uniform/level paying premiums.
Any additional payments will be treated as a single
premium for the purpose of an insurance cover.
• Even distribution of charges: The charges on ULIPs are
mandated to be evenly distributed during the lock-in
period in order to eliminate high front ending of expenses.
• Increase in risk component: Further, all ULIPs, other than
pension and annuity products, will provide a mortality
cover or a health cover, thereby increasing the risk cover
component in such products.
• Cap on surrender charges: IRDA has recommended a cap
on the surrender charges at up to 15% of the fund value in
the first year for policies with a tenor more than 10 years
and 12.5% for policies with a tenor of less than 10 years.
This charge comes down to 5% and 2.5%, respectively, in
the fifth year of the policy, and becomes nil for policies of
less than 10 years after the fifth year. For tenors above 10
years, the charge in the sixth year is 2.5%, which becomes
nil in the seventh year.
23 Indian insurance sector: stepping into the next decade of growth
• Minimum guaranteed return for pension products:
Regarding pension products, all ULIP pension/annuity
products will offer a minimum guaranteed return of 4.5%
per annum, or as specified by the IRDA from time to time.
This will provide protection to the life time savings of
pensioners from any adverse fluctuations at the time
of maturity.
Implications
The impact of these new guidelines on customers will be
favorable due to lower charges and guaranteed returns,
among other reasons. However, these changes will
also impact the margins of life insurers, as the charges,
particularly surrender charges, are capped. This could have
an adverse impact on their profitability.
The possibility of a decline in the profitability and increase
in the capital requirements of life insurers has resulted in
discounting the previously high multiples assigned to the
new business achieved profits (NBAP), and as such, there
could be a decline in the valuation assigned to the life
insurance business. The changes in ULIPs guidelines could
also result in a delay in the IPO plans of a number of players
as they will have to rework their product offerings.
Though it may make selling difficult as it would make
products inflexible, it would certainly reduce persistency
risk, make AUMs stable, and boost the overall
certainty on assumptions and the profitability of the
business underwritten.
Other regulations
Besides the above regulations, IRDA and the government
are in the process of drafting more regulatory reforms for
the industry such as:
• With the private players completing nearly 10 years of
existence, the industry is seeking alternative ways to
meet its capital needs. The government is considering
 increasing the upper limit in FDI from the current 26% to
49%. Foreign partners are largely unwilling to dilute their
stakes below 26%, since most of them enter the business
in anticipation of the limit being increased. This may result
in the local partner being compelled to reduce its stake
to 49% to meet the new norms. This could create its own
complications, since according to the Indian company law;
a 51% stake ensures ownership.
• IRDA is finalizing directives and detailed guidelines for
mergers and acquisitions in the insurance sector.
• The policy document for the smooth transition from
Solvency I to Solvency II is in the draft stage.
• A data warehouse is being set up to monitor the
settlement of insurance claims, better customer
relationship management and facilitate better
decision making.
• IRDA is considering allowing banks to tie up with multiple
insurance companies to vend their products. This will give
bank customers a wider menu of options to select from, so
that they can buy insurance products based on
their needs.
• IRDA will soon come up with norms to define terms such
as critical illness and hospitalization cost, among others,
a move that will reduce the scope for disputes between
insurers and hospitals.
Regulation affects the economics of both the supply
side (the policyholders — supplier of funds) as well as the
demand side (the insurers — borrowers of funds). The Indian
consumer, being extremely price sensitive, adjusts rapidly
to the altered economics, which could affect the persistency
trend in the industry. IRDA’s role will be critical for further
industry growth and the rise in penetration levels.

Indian insurance sector: stepping into the next decade of growth 24

 Section III:
Critical factors for
market development
Distribution channels
The effectiveness and cost of diverse distribution strategies
of different players is crucial in ensuring the success of
players in the insurance business, particularly in the retail
lines of business. The low differentiation among retail
insurance products suggests the criticality of distribution
reach and efficiency for success in this business.
The factors that determine the choice of the distribution
channel of an insurance company are:
• Where are the customers?
• What is target customer profile?
• Which product (linked, traditional, term, etc.) can be sold
through distribution channel?
• Which channel provides best buying experience and value
to target customer segment?
• What is the operational cost involved in each type
of channel?
The customer preferences vary by market segment
vis-à-vis geography, age, income, life style, etc., and market
characteristics change over time.
25 Indian insurance sector: stepping into the next decade of growth
Role of intermediaries/distributors/financial advisors
Insurance has to be sold the world over, and the Indian
market is no exception. The touch point with the ultimate
customer is the distributor or the producer, and the role
played by them in insurance markets is critical.
Insurance distribution is not simply about pushing products.
An outsized share of the value across the entire insurance
industry value chain is added in distribution. For customers,
it is in distribution that needs are understood and assessed,
options (from full risk transfer to self insurance and more
exotic methods of managing risk) are identified, and counsel
on the choice of carriers and other providers is given. It
is because of distribution that relationships and trust are
built with agents, brokers and customers, opportunities are
identified and created, and products and services are sold.
It is the distributor who makes the difference in terms of
the quality of advice for the choice of product, servicing of
policy post sale and the settlement of claims. In the Indian
market, with their distinct cultural and social ethos, these
conditions play a major role in shaping the distribution
channels and their effectiveness.
The figure below provides an estimate of the current
market share of the various distribution channels used by
life insurers, and gives a view of how these channels could
develop in the future.
Exhibit 2.6.: Current market share and potential In today’s scenario, insurance companies must move from
market growth selling insurance to marketing an essential financial product.
High The distributors have to become trusted financial advisors
for the clients and trusted business associates for the
Tied agents insurance companies.
Potential channel growth

Bancassurance
The most prominent models of insurance distribution are:
(Medium term)

Corporate agents
• Agents
Brokers
Insurance agents have to know which product will appeal
Direct to customers, and also know their competitors’ products
in the same space to be effective sales individuals who can
Worksite
sell their company and its products to the customers. To
Internet
Low the average customer, every new company is the same. Life
Low High insurance in India has been mostly distributed through an
Current market share
elaborate network of agents.
Bancassurance: Insurance products Direct: Sales through call
offered through banks centres and/or direct mailing The agency force has a high gestation period and is
Brokers: Representatives for buyers Internet: E-commerce sales more suitable to sell complex risk-based products. The
who deal with either agents or through internet portals product market focus on relatively simpler ULIPs makes
companies in arranging for coverage
Tied agents: Insurance predominantly agency-based models relatively expensive.
Corporate agents: Non-bank companies aligned agency force
institutions involved in the Worksite: Marketing arrangements
Agents are divided into various categories, depending on the
sale of insurance products with entities to sell insurance to skills, experience and productivity. Companies are focusing
their employees on identifying training needs and increasing the productivity
Source: Watson Wyatt of agents. Exhibit 2.7 provides features of agents at
different levels:

Indian insurance sector: stepping into the next decade of growth 26

 Exhibit 2.7. Tied agency model

► Low productivity
Nascent ► Heavy investment required in product and process training
agency force

► Insurers’ focus on controlling attrition

"Trained" and
"independent" ► Insurers' brand strength, product innovation and commission rates are critical in preventing attrition
agency force
► High productivity
"Mature" and ► Loyalty (propelled by trailing commission build up)
"highly" productive ► Equips the organization with the ability to sell complex risk and asset protection products
agency force

Source: “Life Insurance,” Edelweiss, 6 August 2010, via Thomson Research

Agents are responsible for the reputation of the company
they are working for and have their obligations toward
their clients. Here are some of the basic functions that
agents perform:
• Provide all the necessary application forms
• Submit application forms to the company
• Arrange for all the medical tests and related formalities
• Provide reminders premiums payments and
return receipts
• Should help customers make necessary changes in
address, nomination, etc.
• Help in the process of assignment
• Assist customers for any loan applications and
related formalities
• Should help customers revive lapsed policies
• Assist in claiming death benefits, if required
Besides the above, agents are now moving from the
sole contact point between a customer and an insurance
company to become financial advisors. Agents would now
be responsible for explaining the nature of a policy to
customers as that will help customers to take informed
decisions. Their role is likely to enhance, as they will not
only sell insurance products, but offer other financial
products as well to enhance customer benefits.
The limiting factor for prospective insurers will be the
extensive and costly distribution structure equipped for
reaching this segment. While public sector companies are
able to attract agents, they continue to suffer from high
attrition rates due to the indiscriminate agent appointment.
The most successful of these companies’ tied agents are
hardly of the elite variety of salespeople. They are still the
neighborhood do-gooders — the postman, the schoolteacher
and the shopkeeper — who know the people and are
themselves known in the community.
The challenge here is the lack of knowledge of the
competitive market and the inability to do intelligent
comparisons with the competitors’ products. New companies
are looking for educated and aware individuals with a
marketing flair, an elite group that can be attracted only
with high remuneration and the lure of a fashionable job, all
of which may not be possible in this business with its price
pressures and the complexity of selling insurance. With
this kind of segmentation of intermediaries, the test for
the insurance company lies in training and educating these
people to become effective sales individuals.

27 Indian insurance sector: stepping into the next decade of growth

Further, IRDA holds a mandatory test and other training
programs for agents in India. IRDA norms are becoming
increasingly stiff for agents (commission reduced and spread
over a longer period of time) is likely to be even more strict,
which would impact agents in the short term.
• Bancassurance
Market entrants cannot expect to replicate the extensive
distribution network of the nationalized insurance
companies. Building a distribution network is expensive
and time consuming. As a result, private insurers have
largely followed a strategy similar to that of the foreign
banks, i.e., starting from the affluent segment and gradually
strengthening the distribution network to reach out to the
middle-income segment.
Bank-backed insurers and those promoted by large banks that
are better positioned due to their relatively lower development
costs, predominantly variable cost structure (typically opening
own sales branches imply higher fixed and semi-variable costs)
and the integration of systems that may reduce the cost
of operations.
Though bank-backed insurers are better placed because of
their strong brand, variable cost business models, access to
the bank’s database and walk-in customers, which help reduce
overall acquisition costs, LIC clearly stands as an exception to
this tenet because of its scale of operations and productivity
achieved over years of operations.
The bancassurance model functions at various levels, each
party having a different level of agreement. Exhibit 2.8
explains the various bancassurance models with their features.

Exhibit 2.8. Bancassurance model

► Insurer able to leverage the bank's infrastructure; source of fee-based income for the bank
► Bank and insurer may have a fragmented view of their customers
Distribution ► Low level of integration
agreement
► Reluctance of bank staff to sell insurance; insurer has little control over distribution

► Insurer able to leverage the bank's infrastructure; source of fee-based income for the bank
► Integration in product development and channel management
Strategic ► Sharing of customer database
allowance ► Reluctance of bank staff to sell insurance to sell insurance; insurer has little control over distribution

► Joint decision making; bank participation in product and distribution design

► High system integration, infrastrucural utilization; low-cost model
Joint ► Insurer loses control on distribution
venture ► Bank may be able to realize higher profitability as an insurance distributor rather than as a producer

► Full integration of system; low–cost model

► Potential for fully integrated products and developing a one–stop shop for financial services
Financial ► Insurer is ill equipped to exercise control over distribution
services
group ► Bank may be able to realize higher profitability as an insurance distributor rather than as a producer

Source: “Life Insurance,” Edelweiss, 6 August 2010, via Thomson Research

Indian insurance sector: stepping into the next decade of growth 28

 Technological advances are expected to enable new
distribution channels, while recent regulatory changes
(bank’s entry into insurance) are expected to allow cross-
selling between financial services companies. However,
banc-assurance is expected to gain considerable popularity.
The increased alliances between banks and insurance
companies position the selling of insurance products by
banks as an opportunity to leverage their extensive branch
network and broaden their income base to include more
fee-based business. Insurers equally see bancassurance as
a low-cost option to expand their distribution network and
foray into previously inaccessible segments of the market.
• Other distribution methods
Alternate distribution channels are needed for the
following reasons:
• To increase insurance penetration in the country
• To differentiate on the basis of customer service; to
retain and attract new customers to expand business
• To increase insurance awareness and knowledge
among people
• To satisfy the needs of more demanding customers
• To improve cost efficiency in insurance distribution
Private players are exploring several alternatives to reduce
the cost of replicating the distribution network of public
sector insurance companies. While third-party distribution in
fast-moving consumer goods is a possibility, the complexity
of insurance products, especially given the low awareness
levels, would necessitate direct selling.
One potential channel is marketing through corporate
employers, i.e., employers purchase products on behalf of
the employees or at least support the marketing effort. The
concept of “worksite marketing,” i.e., the sale of voluntary
insurance products to employees at the worksite through
payroll deduction has become common. Worksite marketing,
which was once the realm of a few small companies, selling
just a few products, has now stretched to large companies,
offering a variety of worksite products.
29 Indian insurance sector: stepping into the next decade of growth
Brokers and corporate agents constitute a small part of
the distribution system in India. As on 31 March 2010,
there were 259 direct brokers, 33 composite brokers and
6 re-insurance brokers. While not many large brokers are
present in the Indian market at the moment, the overall
contribution from corporate brokers is likely to increase as
many corporate agents are now becoming brokers. Global
insurance brokers such as Aon, Marsh, Willis and Howden
have also entered the Indian market.
Some products, once they receive a high level of penetration
and awareness, can become commodities and be sold
through more impersonal channels. The use of the internet
to distribute life insurance products has only recently
emerged, and has not made a significant impact so far,
partly because of the substantial advisory component of
most life insurance products.
The penetration in rural and semi-urban areas has become
the core of distribution strategy of insurers. As in metros
and urban areas, insurers have targeted the mass-affluent
segment in rural areas as well. The cost of setting up
operations in rural/semi-urban areas is far lower compared
with those in metros and urban areas. There is a promising
potential of rural and semi-urban offices with unrelenting
expansion in these areas and the presence of multiple
insurers may result in sub-optimal operations.
These distribution networks have reached an unprecedented
scale from mobile phone companies to microfinance
institutions to supermarket chains and churches. Customers,
in vast numbers, who were previously off the grid are now
within reach.
Challenges with the existing distribution model
India is arguably one of the most challenging and promising
emerging insurance markets. Its rapidly growing economy,
coupled with a young and diverse population, open ample
opportunities for the development of insurance. However,
there is much to be done to realize this potential. In today’s
Indian insurance market, the main challenge to insurers and
intermediaries are:
• Building faith about the company in the minds of clients
• Intermediaries being able to build personal credibility
with clients
• Controlling operating expenses by reducing
distribution costs
• Coping with IRDA norms on their commission
It is the traditionally tied agents that have been the primary
channels of insurance distribution in the Indian market.
Public sector insurance companies have their branches
in almost all parts of the country and have attracted local
people to become their agents. These agents are from
various segments in society and collectively cover the entire
spectrum of the society. A person who has lived in the
locality for many years sells the products of the insurance
company with a local branch nearby. This ensures the last
mile touch point being closer to the customer. Of course,
the profile of the people who acted as agents suggests that
they may not have been sufficiently knowledgeable about
the different products offered, and may not have sold the
appropriate product to the client. Nonetheless, the customer
Indian insurance sector: stepping into the next decade of growth
trusted the agent and the company. This arrangement
worked satisfactorily in the absence of competition.
In today’s scenario, agents continue as the prime channel
for insurance distribution in India, as is the case in most
markets, supported by call centers to a small extent. Nearly
all the new players follow this model primarily because the
regulations for other channels are yet to be put in place.
However, there is great excitement in the industry over the
impending broker regulations and companies are planning
all possible channels in their enthusiasm to strengthen
volumes. The belief that all these channels will grow and
seamlessly integrate to bring in business seems a fallacy.
Since controlling expenses has become a challenge and
most of these expenses are incurred on distribution, the
issue of efficient cost management is strongly linked to
effective distribution. With the new IRDA regulation on
the commission structure, distributors will earn lower
commissions, going forward, and will have to accordingly
adjust their business models. The challenge will be no less
for insurance companies. The fixed and semi-variable costs
in the business are high. With restriction on the ability to
push the product, gaining scales will not be easy for all.
30
 A two-pronged approach to cost management can develops, there are various other distribution channels
be envisaged: that come to the fore to supplement the agency model.
However, the types and reach of different channels is
• Cut commission pay-outs
affected by a variety of factors such as the size and potential
• Shift toward variable cost distribution models of the insurance market, geographical scenario, culture,
For a standalone insurer, achieving this will be a herculean literacy level, complexity levels of the insurance products,
task, requiring the potential to execute low-cost customer development of the information technology infrastructure,
capture independent of the distributor. In the absence of and the availability of associated distribution channels.
product differentiation, the options available to insurers are
Other distribution channels such as independent financial
limited to:
advisors (IFAs), brokers, bancassurance and electronic
• Build a low-cost reach, which is the most desired and channels emerge as the market moves to developing and
most difficult mature phases. Insurers deploy various channels, keeping
• Generate higher investment yields that may strengthen in mind the complexity of the products involved and target
the sales pitch the customer base, besides optimizing their distribution
• Build a strong retail brand, which will be expensive costs. Local rules and regulations also play an important
role in deciding the penetration of any distribution channel.
The insurance industry in India has seen the emergence Although the composition of various insurance distribution
of large bank-backed insurers. So far, the regulator has channels could vary across different insurance markets, it
allowed banks to enter only into corporate agency tie-ups broadly moves from being predominantly an agency model
with insurers. Hence, banks promoting insurance companies to a multi-distribution model with a significant role played by
remained tied to their ventures, putting to question the IFAs and brokers. The following figure explains the evolution
existence of the arm’s length relationship between the bank of insurance distribution network across countries.
and insurance subsidiary.
Exhibit 2.9. Evolution of the distribution network
The emergence of a much more difficult and evolving
market scene, with existing players, more new players Emerging Developing Mature type A Mature type B
coming in and global marketing practices and ideas being
Others Others Others Others
tested, is distinctly visible. But none of this has changed the
IFAs/brokers IFAs/brokers
fundamental character of the market.
Bancassurance, IFAs/brokers
including JVs
Experiences from developed insurance markets worldwide Bancassurance,
Tied agents including JVs
Globally, various insurance markets are at varying stages Bancassurance,
of development, which is also reflected in their insurance Tied agents including JVs
distribution networks. On one hand, the distribution network
Tied agents Tied agents
primarily comprises agents, given the higher face-to-face
interaction required to educate people about insurance
products. Primarily, insurers follow a push strategy to Poland France Netherlands
market their offerings. As the insurance penetration India Spain Australia
China Italy US
Turkey UK

Source: “Life Insurance,” Edelweiss, 6 August 2010, via Thomson Research

31 Indian insurance sector: stepping into the next decade of growth

Multiple distribution networks create a range of
opportunities for insurers to attract and serve customers
in a differentiated way, keeping in mind the customer’s
preferred combination of product, pricing, service and
channel. It is a way to reach customers who could not be
reached before, and to extract more value from existing
customers. It is, therefore, a powerful lever to increase
market and customer access, especially in mature
insurance markets.

Exhibit 3.0. Current state of distribution across geographies

Agency Bancassurance Telemarketing Virtual* Worksite Micro Wealth Takaful

marketing mgmt
Australia Mature Mature Mature Mature Growing — Mature —
China Mature Growing Emerging Emerging Emerging Emerging Emerging —
Hong Kong Mature Mature Mature Growing Emerging — Mature —
India Mature Growing Growing Emerging Emerging Growing Emerging —
Indonesia Mature Growing Emerging Emerging Emerging Emerging Emerging Growing
Japan Mature Mature Mature Mature Mature — Mature —
Malaysia Mature Growing Emerging Emerging Emerging Emerging Emerging Growing
New Zealand Mature Mature Mature Growing Growing — Growing —
Philippines Mature Emerging Emerging Emerging Emerging Emerging Emerging —
Singapore Mature Mature Growing Growing Emerging — Growing Emerging
South Korea Mature Mature Mature Mature Emerging — Mature —
Taiwan Mature Mature Growing Mature Emerging Emerging Growing —
Thailand Mature Growing Emerging Emerging Emerging Emerging Emerging Emerging
Vietnam Mature Growing Emerging Emerging Emerging Emerging Emerging —

* Includes electronic kiosks, mobile phones, and Internet

Source: More than one approach: Alternative insurance distribution models in Asia Pacific, Deloitte, 19 March 2010

Indian insurance sector: stepping into the next decade of growth 32

 The mix of distribution channels is matched by the diversity
of the cultural, infrastructural and regulatory environments.
It is evident that a ”one size fits all” model is not the best
approach. Rather, a multi-pronged approach that factors
in country-specific details, penetration rates and cultural
characteristics appears to be the most successful model.
Conversely, market segmentation and the unique needs
of customer groups appear to be dictating the distribution
channel used in a specific country.
United Kingdom
Insurance distribution channels have evolved through
various phases in the UK. Before 1990s, the majority
of insurance distribution was undertaken by the direct
sales force of insurance companies. However, after the
implementation of “polarization” rules, which mandated
individuals and companies selling insurance to tie to one
company or remain independent to manage all products
across the market, IFAs became a prominent player in
insurance distribution. Currently, around 45% of life
insurance and 85% of pension business is done by IFAs in
the UK.
Besides IFAs, there are also tied advisors, which can be
grouped under two categories — tied advisors (working for
one financial institution) and multi-tied advisors (offering
products from a selection of the market and usually paid on
a commission basis). Typically, tied and multi-tied advisors
cater to mass markets and offer simple products, whereas
independent IFAs target high net worth customers and offer
customized products.
33 Indian insurance sector: stepping into the next decade of growth
Further, bancassurance has also emerged as a prominent
distribution channel for insurance products. Post
depolarization, a variety of bancassurance models emerged
in the UK. It has emerged as an important channel for the
distribution of simple products such as ULIPs and bond
products. The bancassurance market share stood at 20.3%
in 2006 in the UK.
Organized retailers such as Tesco, Sainbury and ASDA
constitute another interesting channel that has emerged in
the UK. They can act as a corporate agent or as a referral,
and are among the largest distributors of insurance products
in the UK. Various functions during the policy cycle are
managed between retailers and insurers. This channel can
be integrated to the agency channel for better servicing and
for establishing one-to-one relationships with customers.
To conclude, in the UK, banks have emerged as a preferred
channel for the distribution of savings/simple ULIPs; IFAs
and banks for pension/retirement products and insurance
companies/tied agency for risk protection products.
Insurance is a ”push” product. Hence, the role of
intermediary is crucial in influencing the buyer and
creating a committed customer base. In the insurers’ value
chain, significant value is generated at the distribution
stage. Distribution strength is a key to the scalability and
sustainability of the insurance business. Given the nature of
the product and the emerging regulatory environment, the
existing distribution strategy has been challenged.
Going forward, in India, commission rates are likely to
drop, impacting the front-line sales force, corporate agents
and brokers. Alternative channels such as bancassurance,
e-channels will gain more prominence. The rural/semi-urban
distribution strategy will undergo a change; insurers will
focus on the leading 20 towns over the medium term, rather
than experimenting with the low per-capita income under-
penetrated areas.
down to the poorest of the poor. The Eleventh Five Year Plan
puts special emphasis to promote more inclusive growth in
the financial services sector. The need for the delivery of
financial services at an affordable cost to vast sections of
disadvantaged and low-income groups is on the rise.
Financial inclusion is likely to increase in the light of limited
social security by the government.

Focus on financial inclusion In India, the government provides very limited social
security to its citizens as reflected in the fact that less than
The approach to insurance must be in sync with the evolving 4% of the population is covered under any of the social
times. The mission of the insurance sector in India should security schemes.
be to extend the insurance coverage over a larger section of
Further, the self-employed or those working for small
the population and a wider segment of activities.
enterprises are exempt from contributing to the employees’
Around 40% of the population does not have access to provident fund and need to make their own arrangements
the organized financial services sector in India. There is a for savings and a protection cover. The growth of nuclear
significant demand for these services in excluded regions families in urban locations resulting in the breakdown of
where it is difficult to provide these financial services. traditional old age support structures also supports
Therefore, a large section of the excluded population has to this trend.
rely on the informal sector (moneylenders etc) for availing
Exhibit 3.1 clearly depicts that the government expenditure
finance that is usually available at exorbitant rates.
on public social protection and health expenditure is very
Apart from the obvious and apparent benefits of improving low as compared to other countries. In the light of the
living standards, financial inclusion has a multiplier effect. need of protection instruments, there may be an expected
By increasing the number of people in the umbrella, the increase in the demand for financial products in the years
value of the entire national financial system increases. The to come.
consequent fuller participation by all in the financial system
makes monetary policy more effective, and thus provides Exhibit 3.1. Public protection and health expenditure as a
an enabling environment for non-inflationary sustainable % of government expenditure (2004)
economic growth. 70
59.6
60 51.6
Despite a robust growth of 30%–40% in premiums during
50
2003–2008, the per capita insurance premium is also low 39.9
40
due to a large population base and the financial exclusion 30 26.1 24.0
20.8
of a large section of this population. The government has 20 12.0 9.0
realized the need to increase financial inclusion in the 10 7.0
1.5
financial services sector, especially in insurance. 0
-10
Germany

Japan

USA

HK

China

Thailand

South Korea

Singapore

Indonesia

India

Need to increase financial inclusion in India

Since economic liberalization started in 1990s in India,
financial inclusion has been at the forefront of policy makers
to ensure that the benefit of economic growth percolates Source: “India Life Insurance Sector,” Credit Suisse, 29 July 2009, via
Thomson Research

Indian insurance sector: stepping into the next decade of growth 34

 Measures to increase financial inclusion in India a wide population, a consistent and harmonized approach
There are various measures that have been taken to by all the stakeholders may prove to be more effective and
increase insurance penetration in India, although, with bring in the desired results.
varied success. Some of these are listed below: The primary objective of all stakeholders (regulator
• Increase financial literacy and insurance companies) should not only be limited
to encourage people to buy insurance policies, but also
Given the low literacy level of around 65%, it is imperative to ensure that all the individuals or families should be
to have even lower financial literacy among the populace. reasonably familiar with the concepts of insurance,
The situation is worse in semi-urban and rural areas, products, means of delivery, grievance handling process,
where many people are not even aware of the concept of customers’ rights, etc. They should feel comfortable in
insurance. Therefore, various stakeholders in the industry transacting with the insurance companies and
need to promote financial literacy and educate populace their representatives.
about insurance.
• Motivating Indian households transfer savings from
Unlike other disciplines of finance, insurance is introduced to physical assets to financial assets
a person at a much later stage of life, which results in limited
knowledge. Hence, the level of awareness about insurance Household savings comprises both financial and physical
products and services is very low. savings. The majority of the Indians prefer their savings in
the form of physical assets instead of financial instruments,
The low level of financial literacy has been an issue in not and this trend is likely to continue despite the India growth
only developing countries, but also in many of the developed story. Although financial inclusion is a mantra for the RBI
countries. Countries such as the US, Australia, New Zealand and the government, it is estimated that the financial
and the UK, among others, have taken considerable steps in savings of the household sector have been declining over
ensuring higher levels of financial literacy. Some of the years.
these are:
In the coming years, banks, insurance companies and other
• Establishment of ”The Adult Financial Literacy Advisory financial institutions should focus on channelizing savings
Group” by the UK Government in 2000 to recommend from physical assets to financial assets.
ways to improve financial literacy of the adult population
with a specific emphasis on those who are disadvantaged Exhibit 3.2. Distribution of physical and financial savings in
India (as a % of household savings)
• Joint effort of the US Federal Government, state
governments and other stakeholders in the insurance 100
sector to teach family economics and finance 80 54 53 53 51 52 51 54
69 58
60
• Measures taken by the Insurance Council of New Zealand 40
as a part of ”The Enterprise New Zealand Trust’s Financial 20 46 47 47 42 49 48 49 46
31
Literacy Programme” to educate on risk and insurance in 0
more than 100 schools
1970–71

1980–81

1990–91

2000–01

2004–05

2005–06

2006–07

2007–08

2008–09

Closer home, IRDA had undertaken a publicity campaign to

improve awareness and knowledge about insurance products
to enable customers to take informed decisions. As India has Financial assets Physical assets

Source: “National Income Statistics,” July 2010, CMIE

35 Indian insurance sector: stepping into the next decade of growth

Traditionally, a sizable percentage of the Indian population
has been more risk-averse, investing most of their savings in
physical assets rather than financial instruments. Therefore,
the government should incentivize investments in financial
instruments. Combined with an increasing savings rate,
this trend is expected to be extremely beneficial to the
life insurance industry. This change has started to happen
over the years; however, increasing financial literacy and
awareness are likely to boost this further. the realm of financial services and outside. All these efforts
• Improve access and reach vast sections of the
underprivileged and low-income groups
In a diverse and large country such as India, various factors
such as a vast geographical spread, lack of technology and
affordability of insurance products have been a hindrance to
financial inclusion. Hence, the use of different distribution
channels, developing products for the poor, cheaper
access to financial products, etc., would help increase
financial inclusion.
• Insurance as a tax saving instrument
In India, insurance has so far been viewed primarily as a
tax-saving instrument. This is evident in the fact that the
majority of the insurance policies are purchased in the last
two months of the financial year (February and March). As a
result, many Indians buy insurance policies without regard
to their actual insurance needs. Further, many policyholders
do not reassess their insurance cover, as their income level
increases and the standard of living improves. Thus, a large
number of policyholders are underinsured.
India has an approximately 3.5% tax-paying population,
which is very small. But with the increase in disposable
income and the inclusion of more people in the tax bracket,
the sale of tax-saving products, especially investment in
insurance products is likely to increase.
Financial inclusion will be achieved by creating a supportive
socio-economic environment to build and sustain it. The
process of financial inclusion should be a virtuous circle
of sustainable income generation programs for the poor,
followed by customized products by the financial system
delivered with the help of intermediaries on a mass scale by
leveraging technology and related infrastructure.
Indian insurance sector: stepping into the next decade of growth
Consumer needs and preferences
The growth in insurance industry has been spurred by
product innovation, vibrant distribution channels, coupled
with targeted publicity and promotional campaigns by
the insurers. Innovation has come not only in the form of
benefits attached to the products, but also in the delivery
mechanism through various marketing tie-ups both within
have brought insurance closer to the customer as well as
made it more relevant.
One of the crucial areas in the insurance sector is the
adoption of new technology in the industry. It is an accepted
fact that the insurance business is technology-driven. It
has the potential to save costs, and hence, the scope for
reducing the price of product. The coming years will witness
a total revolution in the ways of doing business. E-commerce
will be increasingly used in all the sectors, including banks
and insurance and products will be sold on the internet.
Insurance plans for children are fast becoming popular, as
they not only offer payouts that can be timed to coincide
with certain milestones in a child’s life, but also financial
security if the parent dies. All the life insurance companies
are now expressing a keen inclination toward children’s
insurance plans and are willing to come out with new
innovative product lines in the future. According to industry
estimates, 20%–30% of the business of many companies
currently comes from children-specific insurance
policies alone.
Emerging lifestyle trends amid a changing fabric of the
Indian society have also modified social and financial
behavior. For instance, an increase in the number of
working women has led to a demand for life insurance
policies, which in turn has helped women through a
micro-entrepreneurship initiative.
Project insurance is another area, which is increasingly
gaining significant traction. This type of insurance has been
prevalent for decades for those who undertake diverse
and risky projects, whether government, public sector or
private sector. With the new developments, particularly
36
 in the economic and industrial areas, apart from projects
such manufacturing units, sales units and medium-sized
factories, a large number of infrastructure projects such
as constructing roads, canals, flyovers and bridges, and
industrial units are coming up in significant numbers. There
is, therefore, immense potential for this class of insurance.

ULIP is one of the most successful innovative products in

India. As a product, ULIP gained popularity post 2003, with
an evolving market opportunity on the back of a booming
equity market, low household equity penetration and
heavy channel incentivization. Product innovation is likely
to continue and traditional policies are set to gain some
foothold in an otherwise ULIP-driven market.

Insurance companies are now coming up with usage-based

insurance, also known as pay-as-you-drive, which is a type of
automobile insurance, whereby the costs of auto insurance
depend upon the type of vehicle used, measured against
“time, distance and place.” This differs from traditional
insurance, which attempts to differentiate and reward
“safe” drivers, giving them lower premiums and/or a
no-claims bonus.

The evolving customer preferences and the need for

developing customized products is the new mantra of
growth, which most companies are following. In line with
the product philosophy to introduce an innovative range
of products that are most suitable to different customer
needs, companies are introducing more customer-friendly
products. The role of customized products is also seen in
providing a competitive advantage.

37 Indian insurance sector: stepping into the next decade of growth

Indian insurance sector: stepping into the next decade of growth 38
 Way forward
• Vast potential; poised to sustain robust growth
India is poised to experience major changes in its insurance
markets as insurers operate in an increasingly deregulated
and liberalized environment. However, despite the
liberalization in the insurance sector, public sector insurance
companies are expected to maintain their dominant
positions, at least in the foreseeable future. Nevertheless,
given the enormous potential of the Indian market, it is
expected that there will be enough business for the
industry entrants.
For consumers, the opening up of the insurance sector is
indicative of new products, increased product variants and
improved customer service. Product innovation and channel
diversification would gain momentum, in line with the global
trend of the convergence of financial services.
For the government, insurance, especially life insurance,
can complement state-security programs. It can relieve
pressure on social welfare systems and allow individuals
to customize their security programs in accordance with
their own preferences. This substitution role is especially
valuable, given the rising demand for social security and
increased financial challenges faced by the Indian social
insurance system. In the coming years, the government
expects insurance to be a key contributor to the large capital
requirement for funding planned infrastructure projects in
the country.
39 Indian insurance sector: stepping into the next decade of growth
The life insurance segment is a major attraction for private
and foreign players. Life insurance players are realigning
their business strategies in response to new IRDA norms
on capping charges. In the long term, this can create entry
barriers and strengthen the competitive strength of the
incumbents. IRDA is also expecting more applications for
licenses over the next one or two years due to the rising
inclination of banks to venture into the insurance segment.
• Tightening the belt by leveraging technology and exploring
alternate low-cost channels
The sector is likely to witness an increase in the usage
of technology in distribution channels. Moreover, a shift
from the agency model of distribution to models, such as
bancassurance, brokers, etc., will help increase reach and
reduce costs. In addition, there is significant potential in the
micro-insurance segment with the majority of the Indian
population residing in rural areas.
After the de-tarrification, the non-life insurance sector has
witnessed a slowdown in premium growth. However, in the
next three or four years, the industry is likely to grow at a
stable rate. Both health insurance and auto insurance are
highly promising, and are expected to increase their share
manifold in the coming years.
The reinsurance industry is likely to increase pricing rates
in the light of increasing claims and decline in the value of
investment income following the financial crisis. The market
has to ensure that domestic companies increase their
own capacities and introduce stricter guidelines as first-
hand risk carriers. Insurance companies have to establish
business relations with their reinsurer to prevent them
from the worldwide reinsurance cycle that affects capacity
and stability. In future, insurance companies are likely
to compete on a number of parameters, including price,
products, underwriting and innovative sales methods. Poorly
managed companies with a weak capital base are expected
to either drop out of the market or become uncompetitive
on premium rates and profits. For insurance companies,
profit from innovation will be integral to driving success,
and technology will help private insurers to develop and
customize products to befit individual needs.
India is likely to continue its strong premium growth
momentum, provided private sector players continue to
be innovative with optimal product design and distribution
channel usage. Robust ULIP sales during the equity market
downturn and the recent resumption of ULIP sales are
testaments to the strong demand for insurance products
in India.
The Asia-Pacific region has dynamic and varied insurance
markets. Most countries are experiencing a significant shift
in population demographics, standard of living, income
levels as well as the education scenario. Consequently,
insurance industries do not follow a standardized model for
effective distribution channels.
Indian insurance sector: stepping into the next decade of growth
The ability of any private sector insurer to outperform its
peers hinges on its ability to improve its channel usage
and productivity. Insurers would do well to tap into new
customers through new channels, while bolstering existing
channel productivity to generate more business or improve
upon the quality of business already being generated.
Among all channels, the agency force presents the largest
improvement opportunity. Although the agency model has
been and will remain a major distribution channel, insurers
should combine multiple channels in order to meet the
needs of a socio-economically and religiously diverse region.
Insurers need to first establish their physical presence in
new cities and towns, and then recruit and train agents.
Drawing experience from the UK market, insurers may also
want to effectively use retail chains for better servicing
customers and building one-to-one relationships.
Seeing that commissions, i.e., the variable costs paid
across all channels should be the same, building the agency
business incurs most fixed costs. The expansion in agency
force would be the most expensive way forward, although
it would potentially provide the best returns since this
distribution means is more stable than bancassurance
and there is plenty of room for improvement as agent
productivity is very low in India currently. Agent poaching
and high attrition rates are some of the problems faced by
insurers, but these are no different from the problems faced
in other developing markets such as China.
40
 • Sustaining growth through increased transparency
Given the rapid increase in costs associated with building
a robust agency force, insurers are also building low-
cost channels such as direct marketing, internet and
telemarketing channels to sell simple insurance policies and
service existing policyholders. Direct distribution incurs
much lower commission and is suited for simple products
for which face-to-face interaction is not required for their
initiation or concluding sales. Recently, a leading insurance
player has launched the first fully online term insurance
product, which is substantially low priced, as compared to
the company’s conventional term products. Internet as a
channel to launch new and innovative products will be widely
used in the future as e-commerce continues to witness a
surge in the country.
The insurance industry is at a very critical stage, from where
either it can flourish or can witness muted growth. The
last decade has been a phase of growth and development.
41 Indian insurance sector: stepping into the next decade of growth
But now is the time for growth, along with stabilization.
IRDA, on its part, is facilitating the expansion of the sector
by formulating enabling regulations. However, along with
keeping the interests of the customers at the forefront,
there is a need to facilitate a favorable environment
for distribution intermediaries, which can result in the
exponential growth of the sector.
The regulator has devised a framework for insurers to make
the disclosure of financial statements, investment portfolio
as well as operating ratios. These disclosures are expected
to make the industry stronger as well as earn the faith of its
stakeholders. The shift from solvency I to solvency II is also
taken as a big step toward risk management. IRDA is also
considering the formulation of rules and regulations for a
smooth transition to this new regulatory standard.
The growth potential and opportunities for the Indian
insurance industry is vast. In the wake of the improving
global financial situation, the industry is expected to be a
major contributor to the country’s economic growth.
Bibliography

• Insurance Regulatory and Development Authority (IRDA)

• Reserve Bank of India
• Life Insurance Council
• General Insurance Council
• Centre for Monitoring Indian Economy
• Insurance industry: the evolving dynamics, Ernst & Young, 2009
• “World Insurance in 2009,” Swiss Re
• “Life Insurance,” Edelweiss, 6 August 2010, via Thomson Research
• “India Life Insurance Sector,” Credit Suisse, 29 July 2009, via Thomson Research
• “IRDA’s new guidelines on ULIPs to impact profitability of Life Insurers,” First Global, 9 July 2010, via Thomson Research
• “All is well,” RBS, 8 February 2010, via Thomson Research
• “India Life Insurance,” ICICI Securities, 23 September 2010, via Thomson Research
• Neha Singhvi and Prachi Bhatt, “Distribution Channels in Life Insurance,” Bimaquest - Vol. VIII Issue I, January 2008
• Sreedevi Lakshmikutty and Sridharan Baskar, “Insurance Distribution in India - A Perspective,” Domain Competency Group
(Insurance), Infosys Technologies Limited
• “Alternative insurance distribution models in Asia Pacific,” Deloitte
• “The Emergence of Alternative Distribution in India,” Towers Watson
• S. Varadharajan, “Future Generali to introduce use-based insurance product,” The Hindu, 10 August 2010, via Dow Jones
Factiva, © 2010 Kasturi & Sons Ltd.
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Way forward
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CII is a non-government, not-for-profit, industry led and industry managed organisation, playing a proactive role in India’s
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creating livelihoods is the best act of corporate social responsibility. Looking ahead, the focus for 2010-11 would be on the
four key Enablers for Sustainable Enterprises: Education, Employability, Innovation and Entrepreneurship. While Education
and Employability help create a qualified and skilled workforce, Innovation and Entrepreneurship would drive growth and
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With 65 offices in India including 7 Centres of Excellence, 10 overseas in Africa, Australia, Austria, China, France, Germany,
Japan, Singapore, UK, and USA, and institutional partnerships with 223 counterpart organisations in 90 countries, CII
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43 Indian insurance sector: stepping into the next decade of growth

Notes

Indian insurance sector: stepping into the next decade of growth 44

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