India’s insurance sector offers strong growth

There is huge potential for growth in the insurance sector in India, based on a growing middle class, a rise in disposable income, policy reforms and growing awareness for insurance coverage amid the current low penetration levels

April 5, 2018

There are now 72 insurers operating in India, including 24 life insurers, 33 general insurers, six health insurers and nine re-insurers; Only seven of the 72 players are under public sector control

2017 was a landmark year with IPOs of five insurers successfully raising nearly US$7 billion, along with entry of new players such as Acko General Insurance and Edelweiss General Insurance

2018 is expected to see mergers and new IPOs in the insurance space; Government is aiming to merge Oriental Insurance, National Insurance and United India Insurance into a single entity

Vice President of India, M Venkaiah Naidu has stated at an international insurance meet that the India’s insurance sector is poised to grow to US$280 billion by 2020 from US$84.7 billion in 2017

Till the beginning of the last decade, the insurance sector in India was an exclusive preserve of a few Government-controlled enterprises. Liberalization of the sector in 2000 paved the way for entry of private players as well as for foreign direct investment (FDI) of up to 26 per cent equity. This not only increased the number of players, but also progressively brought about fundamental shifts in the industry in terms of infusion of capital, product offerings, use of technology, customer centricity, among other aspects. In March 2016, the Government increased the FDI limit from 26 per cent to 49 per cent under the automatic route. Within less than a year, at least 12 insurance companies approached the Foreign Investment Promotion Board (FIPB) to increase the stake held by their foreign partners.

New players in India’s insurance sector

Furthermore, in August 2016, the Insurance Regulatory and Development Authority (IRDA) of India allowed insurers to tap the financial market. ICICI Prudential Life Insurance Co Ltd launched the first initial public offering (IPO) within a month of IRDA’s go-ahead. In fact, 2017 turned out to be a landmark year with IPOs of five large insurers successfully raising nearly US$7 billion – ICICI Lombard General Insurance (US$877 million), GIC RE (US$1.7 billion), New India Assurance Co (US$1.5 billion), HDFC Standard Life Insurance Co (US$1.3 billion) and SBI Life Insurance Co (US$1.3 billion). The year also witnessed the entry of new players such as Acko General Insurance Co, DHFL General Insurance Ltd, Edelweiss General Insurance Co Ltd and Go Digit General Insurance Ltd.

With these additions, there are now 72 insurers operating in India (24 life insurers, 33 general insurers, six health insurers and nine re-insurers). Importantly, only seven of the 72 insurers are under public sector control, namely the Life Insurance Corp of India, General Insurance Corp of India Ltd, New India Assurance Co Ltd, United India Insurance Company Ltd, the Oriental Insurance Company Ltd, the National Insurance Co Ltd and the Agriculture Insurance Co of India Ltd. The remaining 54 are in the private sector, many of them with foreign partners. Among the life insurers, Life Insurance Corporation (LIC) is the sole public sector company.

Growth potential to drive expansion

While providing the insurers with much needed capital infusion for expansion and modernisation, the IPOs have also benefited consumers since the public flotations necessitated better disclosures and transparency; they are also expected to lead to good corporate governance. More insurance firms are expected to approach the capital market in 2018. Besides a spate of IPOs, 2018 is expected to witness some consolidations in the insurance space. In the 2018-19 budget speech, Finance Minister Arun Jaitley announced plans for a mega merger of three public sector insurance giants – Oriental Insurance, National Insurance and United India Insurance – into a single entity. This merger followed by a listing on the stock exchange will be the cornerstone of the government’s divestment target of US$12.3 billion for 2018-19.

India remains highly under-insured by global standards, accounting for less than 1.5 per cent of all global premiums (by number) and just about 2 per cent of life insurance premiums

After the insurance sector in India was opened up for private and foreign investment in 2001, the sector registered consistent growth till 2009-10. Thereafter the growth leveled off and even declined in the following years before showing signs of resurgence since 2015. However, India remains highly under-insured by global standards, accounting for less than 1.5 per cent of all global premiums (by number) and just about 2 per cent of life insurance premiums. Industry estimates put gross premiums for general insurance (excluding life, health and reinsurance) at about 0.8 per cent of India’s GDP – about one-third of the global average of around 2.5 per cent of the GDP.

Growing awareness for insurance coverage

Insurance density (per capita insurance premium) in 2016 was US$59.70, up from US$54.70 in 2015 as per the IRDAI Annual Report 2016-17, whereas the global average for insurance density is estimated to be around US$285. Similarly, although insurance penetration (percentage of insurance premium to GDP) increased slightly from 3.44 per cent in 2015 to 3.49 per cent in 2016, it is still considerably lower than the world average of 6.2 per cent. The 9.1 per cent growth in insurance premiums (total for life and non life) in India was higher than the average for Asia in 2016 at 7.9 per cent, as per the ‘World Insurance in 2016’ report published by reinsurance major, Swiss Re. Yet, the fact that emerging markets, mainly driven by robust growth in China, registered a 13.5 per cent growth in insurance premiums in 2016, further highlights the potential for sustained and even higher levels of growth in the coming years.

The number of middle class households is estimated to increase by more than fourfold to 148 million by 2030 from 32 million in 2010. Coupled with this, rising per capita income as well as higher rural income are likely to drive the growth of insurance sector. Gross household financial savings – the most important source of funds for investment in the economy – increased to 11.8 per cent of Gross National Disposable Income (GNDI) in 2017-18, up from 10.9 per cent in 2015-16. Of this, Insurance funds accounted for 2.9 per cent, second only to deposits at 7.3 per cent. In fact, the share of Insurance has steadily increased from 1.8 per cent in 2011-12 indicating a growing awareness for insurance coverage as per the IRDAI Annual Report 2016-17.

Improving economics, policies boosting sector

India is predominantly a life insurance driven market, with non-life insurance accounting for only 22 per cent share in premiums, against a global average of 55 per cent share. However, in 2016, non-life insurance sector grew by 12.9 per cent against 8 per cent growth in the life insurance segment, which is perhaps indicative of the changing markets dynamics. It is in this backdrop, that the Vice President of India, M Venkaiah Naidu, speaking at the valedictory session of the 4th South Asian Insurance Regulatory Meet and International Insurance Conference on February 11th, 2018, stated that the insurance industry in India is poised to grow to US$280 billion by 2020 from US$84.7 billion in 2017.

While a three-fold growth projection over the next three years is highly ambitious and optimistic, there is no denying the huge potential for growth of the insurance sector in India, based on a growing middle class, a rise in disposable incomes and growing awareness for insurance coverage amid the current low penetration levels. This growth prospect has created lucrative opportunities for foreign entities that are looking to enter India or expand in the market. Indian Government has also eased regulations pertaining to insurance sector participation and investment that has further boosted interest. These features have strengthened the fact that India offers unmatched opportunities, especially amid slowing growth worldwide.