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CII recommends a roadmap to enable Life Insurance Industry to grow at 12% CAGR and General Insurance Industry to grow at 22% CAGR over the next decade
Mar 23, 2015

The Indian insurance industry is currently the 16th largest market and expected to be one of the top 10 markets by 2025.

The last few years have been challenging for the industry with declining growth in life insurance premiums and significant challenges in non-life profitability. This was driven by a combination of macro-economic factors and structural challenges inherent in the insurance industry.

However, an improving economy with potential regulatory reforms and concerted action by the industry players can usher in an era of significant growth as well as value creation. Overall, the insurance industry in India (across life, general and health) can be as large as ~USD 250 bn.

CII report on “India Insurance Vision 2025: Building a USD 250 billion customer centric and value creating industry” defines the long-term vision and aspiration for the insurance industry. Done in partnership with McKinsey & Company it contains a fact-based view on the current state of the industry, its evolution over a period of time, key trends that will shape the industry in the next decade and therefore, the potential evolution.

“The Insurance industry in India is at an inflexion point in its development. With Government’s reformative drive and resolve, the industry can jointly achieve the vision of building a customer centric and value-creating industry over the next decade. The inclusive growth will enable India to become a global top 10 insurance market with a total Gross Written Premium (GWP) size of USD 250 Bn. However, to unlock this true potential, there needs to be a concerted action from all stakeholders.”, said Mr Chandrajit Banerjee, Director General, CII.

The report recommends a inclusive, progressive growth for the industry over the next decade. This will enable life insurance industry to grow at 12% CAGR over next decade to reach USD 160 bn – USD 175 bn and general insurance to grow at 22% CAGR to reach a GWP of USD 80 bn.

Building a value creating and trustworthy Life Insurance industry 

The Life Insurance industry has around 380 million policies in force (among the largest globally) and pays claims for around 12 per cent of the total deaths in the country. It has a critical role given the limited social security avenues available and has also played a crucial role in inculcating the savings habit among a large mass of the population which has limited access to other forms of savings.

Over the last five decades, the industry has developed significantly on dimensions related to access (measured through growth and penetration), efficiency and structure. In particular, the industry progressed during the 2000’s, post liberalisation and opening up of the industry to private and foreign competition. However, much of the gains of the first 10 years have been wiped out in the past 4 years as the industry has been impacted significantly by macro-economic, regulatory and internal structural challenges. The industry is at the crossroads today, with a real risk of losing its relevance if the status quo continues.

However, there is an alternative future that the industry can aspire to, one that will put on the path to sustainable value creation. In this “Vision 2025” scenario, the industry has the potential to reach a total GWP of around USD 175 billion by 2025, resulting in increased penetration (GWP to GWP of around 5 per cent and covering more than 700 million lives), with 3x growth in total AUM, superior efficiency (cost ratio of 50 to 55 per cent), significantly higher value for shareholders (3 to 4 per cent above cost of capital) and high loyalty and customer retention levels (persistency ratios at 80 per cent). This will require concerted action from all stakeholders.

For the Life Insurance industry to achieve its Vision 2025 aspirations, the various stakeholders will need to take concerted action. The current industry “break points” need to be converted into a virtuous cycle of benefits for all stakeholders.

  • Policy intervention by regulator: Incentivise long-term behavior; continue to push product reforms; deepen access and reach by promoting and enabling efficient business models; revisit distributor compensation norms; and strengthen supervisory approach to ensure a more healthy and stable industry structure.
  • Collected and coordinated action by industry: Raise the profile of Life Insurance for customers and distributors; invest in consumer awareness and education; define industry-wide performance standards for agency; and institutionalize skill building.
  • Individual player actions: Build customer centric business (moving away from distribution centric business that dominated till date)—product suite based on customer needs, fundamental shift in distribution model and focus on customer service and claims will become increasingly important

Building an inclusive, progressive and high performing General Insurance industry

The General Insurance industry in India has witnessed a strong performance with 18 per cent growth between 2005 and 2014 and is now a USD 13 billion industry breaking into the top 20 industry globally. It currently provides cover of more than USD 17,000 billion which is a testament of its importance. However, the interplay between various related elements – trust deficit between consumer and industry participants, large gaps in technical capabilities of players despite improvement in operating model, largely price driven competition as well as action of other stakeholders such as policy makers/regulators and other related stakeholders (e.g., reinsurers, Third Party Administrators, healthcare and motor insurance providers); has resulted in underperformance of industry across 3 core objectives:

  • Providing universal access and coverage: There is substantial scope to improve penetration and access across segments. For example, home insurance penetration is less than 1 per cent; there is significant under-insurance in segments such as two-wheelers and personal health; corporate (property and indemnity), SME and rural risk coverage are substantially lower than global benchmarks.
  • Delivering returns to shareholders: India has the highest combined ratio across developed and developing economies and time periods. This has been driven largely by substantially higher claims ratios. As a result, the industry has delivered poor returns to shareholders (pre- and post-detarrification adjusting for TP losses). While the average economics have been poor, there is huge spread in industry performance – a few players earn substantially higher returns compared to the rest of the industry, mainly due to their superior underwriting performance.
  • Customer experience and loyalty: The industry has improved customer service and experience (claims settled in 1 month are low at 56 per cent; however, customer grievances dropped from 2,800 per million policies in FY10 to 737 per million policies in FY13). Further, complaints have been lower compared to other financial services businesses.

The future direction of the industry will also be shaped by the interplay of these stakeholders – the individual insurers’ efforts to upgrade their capabilities, industry conduct and level of collaboration, and external influence, policy actions in particular.

If the industry maintains status quo with only a few insurers building holistic capabilities and the policy environment continues to be conservative, then the outcome could be one of “unfulfilled” potential with GWP of USD 50 billion, CoR of 108-110 per cent and RoE of 6-8 per cent.

The upside case for the “Vision 2025” is substantial – GWP of ~USD 80 billion (CAGR of 17-19 per cent) by 2025 at a CoR of 99-101 per cent and ROE of 21-23 per cent.

To help the general insurance industry unlock its full potential and realise its ambitious vision, the various industry stakeholders will need to take a set of coordinated actions.

  • The regulator and policy makers will need to foster deeper penetration and enable use of common infrastructure; the industry will collectively need to build consumer awareness, co-sponsor common infrastructure, encourage appropriate market conduct and collaborate with other associated industries to create new market opportunities.
  • Individual insurers will need to build distinctive granular customer insight, upgrade to next gen technical capabilities and build operating models to drive better efficiency

Building a healthy India through an effective Health Insurance industry

An effective Health Insurance system is pivotal to ensure a “healthy” India; given rising Non Communicable Diseases (NCDs), unabated medical inflation (north of 10%), low government spend (around 30 per cent) and high out-of-pocket (OOP; 60 per cent+) expenditure.

The industry has witnessed rapid growth in the last decade (30 per cent CAGR versus 14 per cent life, 18% non-life). But, overall penetration is still low due to poor coverage of the “individual” through retail schemes, which is critical given the population structure (very high share of self-employed).

The government sponsored Rashtriya Swasthya Bima Yojna (RSBY) provides coverage to the population below the poverty line. The corporate business owners, mass affluent and above have more than 40 per cent penetration. However, 120 to 150 million households above the poverty line with annual income of USD 500 to 3,500 that work primarily in the informal sector have access to neither corporate nor government coverage. As a result, this segment has less than 10 per cent penetration. The small business segment (about 20 million HH) is also significantly under-penetrated at less than 5 per cent.

This under-performance is driven by an interplay across multiple stakeholders. Consumer awareness is low and there is significant trust deficit vis-à-vis insurers and providers. This is driven by the transactional nature of insurer-consumer relationship, and claims rejection on highly technical grounds that are not clearly communicated during the time of sale. Price is still the primary basis of competition with limited innovation by players. Further, the relationship between providers and payors remains transactional at best and hostile at worst. The absence of healthcare standards and protocols makes it difficult to measure quality and outcomes and control fraud and abuse.

The government has recently announced its intention to promote universal health coverage.

There are several learning from other markets which are relevant to India in this context. In many markets, the government has historically played an active role in healthcare coverage.

However, this is proving to be insufficient. Hence, there is an emerging trend of an increasing role for private insurers in conjunction with government schemes, e.g., Brazil with 53 per cent private spend in spite of an excellent universal health scheme, more than 40 per cent of which is covered via insurers. This reinforces the importance of private health insurance in the context of the broader healthcare ecosystem.

Similarly in many countries, industry bodies have played an effective role in setting up standards and protocols and creating consumer awareness, e.g., the German Insurance Association (GDV) has worked closely with hospital providers to set up standardised treatment protocols and negotiate the right amount of discounts for insurers. It also articulates and represents the positions of the German insurance industry before society, politicians, businesses, the media and academia to ensure suitable brand-building and customer awareness. Great value can be gained if the regulator, industry bodies and players collaborate to drive standards, conduct and awareness.

The health ecosystem is quite complex with inter-linkages between various key stakeholders, i.e., insurers, government, regulator, corporates and providers. Going forward, we believe a collaborative push across all stakeholders for holistic innovation is essential to enable an increase in penetration across segments i.e., extending the infrastructure from the Below Poverty Line schemes to cover a large proportion of the Above Poverty Line/Deprived population (through simple covers, group/co-operative buying structures to reduce burden for individual consumers).

Driving innovation could increase overall health insurance penetration to more than 75 per cent (~1 billion lives covered) resulting in GWP of ~USD 25 billion and reduce the share of (OOP) expenses in healthcare (to less than 35 per cent). Further, the industry could also realise significant value by adopting better practices (in terms of pricing, underwriting, claims management, risk and fraud management). The combined ratio of the health insurance segment could be at a sustainable level of less than 100 per cent.

To ensure that the health industry achieves the holistic breakthrough situation, all stakeholders will need to make concerted efforts.

  • The regulator will need to accelerate distribution and product reforms; the government needs to expedite healthcare reforms across the complete value chain; providers will need to invest in public-private partnership to build rural and semi-urban reach.
  • The industry will need to build common infrastructure and individual players will need to continue investing in distribution and upgrading their technical capabilities.

CII is positive that all the industry stakeholders will work in a concerted manner to help to achieve the vision of building a value creating and customer centric insurance industry over the next decade.

New Delhi
23 March, 2015

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