The Indian insurance industry seems to be in a state of flux. After a
decade of strong growth, the Indian insurance industry is currently facing
severe headwinds owing to:

– Slowing growth
– Rising costs
– Deteriorating distribution structure
– Stalled reforms

Indian economy and the insurance industry landscape
[image: EY – Indian economy and the insurance industry landscape]
Source:*IRDA Annual Report 2010-11*

Despite strong improvement in penetration and density in the last 10 years,
India largely remains an under-penetrated market.

Despite strong improvement in penetration and density in the last 10 years,
India largely remains an under-penetrated market. The market today is
primarily dependent on push, tax incentives and mandatory buying for sales.
There is very little customer pull, which will come from growing financial
awareness and increasing savings and disposable income.

In the long run the insurance industry is still poised for a strong growth
as the domestic economy is expected to grow steadily. This will lead to
rise in per capita and disposable income, while savings are expected to be
stable.
Insurance growth drivers in India

The demand for insurance products is likely to increase due to the
exponential growth of household savings, purchasing power, the middle class
and the country’s working population. Listed below, are the various
underlying growth drivers for India’s insurance industry:

– Growing of the financial industry as a whole
– Growth of life and non-life industry
– Promoting innovation and removing inefficiency
– Competition and orderly growth
– Growth of specific insurance segments such as motor insurance

Emerging trends

– Multi-distribution i.e. increasing penetration through new modes of
distribution such as the internet, direct and telemarketing and NGOs
– Product innovation i.e. increased levels of customization through
product innovation
– Claims management i.e. timely and efficient management of claims to
prevent delays which can increase the claims cost
– Profitable growth i.e. expanding product range, developing innovative
products and expanding distribution channels
– Regulatory trends i.e. mandated regulatory changes by the IRDA to
promote a competitive environment in both the life and non-life insurance
sectors

Life insurance: key challenges

In FY12, the life insurance industry witnessed a decline in the first year
premium collected which dropped from INR1, 258 billion in FY11 to INR1, 142
billion, a drop of approximately 10%. This was owing to the following
challenges that the industry faced in

– Products strategy and design
– Cost
– Taxation
– Distribution
– Prospects and challenges of various channels
– Compensation
– Customer service
– Governance and regulatory issues

Non-life insurance: factors impacting growth

The non-life insurance industry has been growing in excess of 20% over the
last two years however the penetration was as low as 0.7% of the GDP in
FY10. The key factors for growth include:

– Product pricing, innovation and simplicity
– Distribution
– Compensation
– Micro-insurance in non-life widening reach
– Governance and regulatory changes
– Health insurance
– Innovative products to counter the competition
– Improved fraud control mechanisms
– Standardization to reduce claims loss
– Reducing inefficiencies by revisiting third party administrator (TPA)
agreements

Way forward

The Indian insurance market is poised for strong growth in the long run. It
stands at the threshold of moving towards a stable position, delivering
“stable profitable growth.”

Significant latent market – The insurance market has a considerable amount
of latent potential, given the fact that the Indian economy is expected to
do well in the coming decades leading to increase in per capita incomes and
awareness.

Channelizing industry focus – In meeting the significant potential, the
industry has an increased role and responsibility. Three areas of focus
could be — a) product innovation matching the risk profile of the policy
holders b) reengineering the distribution and more significantly c) making
sales and marketing more responsible and answerable.

Distribution – Distribution channels evolved in response to market dynamics
and changing consumer preferences. The alignment of economic incentives
with distribution dynamics should be driven by market forces rather than
regulatory intervention.

Regulation – The industry should be given time to adjust to regulatory
changes in a phased manner aligned with a regulatory impact assessment.
Regulations need to drive transparency and simplification of products and
services.

The stakeholders should eventually work toward maintaining a favourable
environment for stable growth, increasing the penetration of insurance to
rural and underpenetrated areas and increasing the contribution to the
economy.