The state of Indian life insurance sector[/b]
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The life insurance industry has witnessed a phenomenal increase in demand over the last few years. The main reason for this change is the growing awareness about the importance of life insurance, increasing life expectancy rates, changing demographics, etc. A large number of private sector players have entered this market as customers now demand highly customized products and prompt service. The life insurance industry in India was nationalized under the Life Insurance Corporation Act of 1956. Until 1999, when the Insurance Regulatory and Development Authority Act was passed, LIC was the only life insurance provider. Since liberalization, a total of 20 life companies have been formed, with the majority of them being joint ventures with foreign companies.
The following paragraphs outline current status of Indian life insurance industry in terms of products offered, premium collected, market share etc among Public and private sector life insurers
Life insurance products are offered either for individuals or groups.
???? Individual products
Participating products
In participating policies, insurers are required to share any surplus generated with the policyholders. This includes Money Back, Endowment, Whole Life variants, etc. These policies are the most dominant product range in the middle income segment as they are a source of savings for customers, give assured returns, and cater to non-investment savvy consumers. However, these products are pooled investments and are often not adequately transparent with consumers.
Unit-linked (ULIP)
These policies are becoming increasingly popular as they provide a combination of contingency coverage and market linked investment returns. For most insurance companies, especially the new private sector ones, ULIPs account for approximately 90% of their total portfolio. ULIPs primarily cater to high income and/or investment-savvy clients. These products are generally more flexible but have a higher risk associated with them. Capital requirement is lower, as compared to other policies, because most of the investment risk is borne by the policyholders.
Pure risk cover products
These products are the simplest form of insurance. They include term and
term with return of premium variants. In the last few years, their popularity
has increased as consumers purchase them with housing loans. However, their contribution to the sector as a whole is still small as people focus on savings and investment-type policies.
Riders
These are extra coverage policies that policyholders purchase to supplement
their principal policies. They include accidental death and dismemberment,
health and illness, pure term, and waiver of premium variants. Due to high costs and lack of trained agents, riders are not very common in India. However, these products are highly profitable.
???? Group products
Group protection
These are yearly group term contracts, single premium, deposit-linked, loan/mortgage cover variants. Group products are primarily sold to employer-employee groups. In most cases, affinity group segments buy them. These products are highly price-sensitive and have a long gestation period for sales.
Group funds
These include super-annuation, gratuity funds, leave encashment variants, etc. These products are also highly price sensitive and have a long gestation
period for sales. As the investment track record and servicing standards
of a company are the key to its sales, specialized sales teams are required
for such funds. These products have low profitability and high capital
requirements to maintain solvency.
Innovative products
The growth in the number of insurance companies has reiterated the need for companies to differentiate themselves to increase their market share. Product innovation is one of the best tools for companies to increase their presence in the market by offering products that suit their customers best.
The most significant product innovation to take place in the life insurance
segment is the launch of ULIPs, which have become extremely popular due to their insurance-cum-investment profile. Higher returns amid a sustained bull run in equity markets have also contributed to their popularity. Both traditional and unit-linked products are positioned for various customer segments such as child, women, health, retirement, whole life, endowment, etc. Due to its inadequate penetration (only 10% of the working population
is covered), the pension sector has tremendous potential for insurance
companies to be more innovative
Key trends in Indian Life insurance sector
The growth in the private sector has gained significant visibility in the life insurance segment over the years. The number of private sector companies offering life insurance products has increased from 3 in FY00 to 21 in FY08. Interestingly, there is only one public company in the insurance sector offering life insurance products — Life Insurance Corporation (LIC) of India. LIC has been losing market share to the private sector since the onset of sector liberalization. On comparing the total premiums of the private and public sectors, the contribution of the private sector has increased from 2% in FY03 to approximately 18% in FY07. The share of the public sector, which was 82% in FY07, is on a gradual decline.
When we look at the first year premium contribution by the private and public sectors, LIC still holds a monopoly. However, the share of premiums from private companies has increased from a mere 6% in FY03 to approximately 36% in FY08. LIC is losing market share to the private sector as private players are offering a larger variety of products. Additionally, these companies are pursuing aggressive marketing and distribution growth
strategies, thereby increasing their consumer reach. Besides LIC, postal life insurance started in 1884 as a welfare measure for the employees of the Posts & Telegraphs Department under the Government of India to the Secretary of State. Due to the popularity of its schemes, its benefits were extended to various departments across the Central Government as well as state governments. Currently, postal life insurance is open to all employees
in the Central Government as well as state governments, nationalized banks, public sector undertakings, financial institutions, government aided
educational institutions and local bodies such as municipalities and “zila parisads.” In 1995, the benefits of postal life insurance were also extended to the rural populace of the country under the banner of “Rural Postal Life Insurance.” Private players are not only outgrowing LIC in terms of the number of policies sold, but are earning higher premiums per policy as well. The number of policies sold by life insurance companies increased at a CAGR of 14.9% from FY03 to FY08. The following graph depicts number of policies sold in life insurance sector over the years.
When comparing various players on the number of policies sold, LIC undoubtedly tops the rank. Among private players, Bajaj Allianz and ICICI Prudential are the frontrunners. There are some new players such as Sahara Life, Shriram life, Reliance Life, Future Generali and Bharti Axa Life.
The number of policies sold by LIC is the highest because it is the oldest player in the industry. However, on reviewing the first year premiums in FY07, the growth of LIC was recorded at 118%, as compared to SBI life and Met Life, which registered a growth of 210% and 141%, respectively.
Recent developments
The life segment is a major attraction for private players as the growth rate continues to be impressive. The pace of growth in life insurance has raised the expectation levels for more activity in the form of joint ventures between multinational insurance companies and their Indian counterparts. IRDA has issued primary licenses to three new joint ventures in life insurance — Aegon Religare, Canara Bank-HSBC-OBC and DLF Primerica. The entity formed through the joint venture between telecom service provider Bharti and AXA of France has also entered as a non-traditional player in the life insurance segment. IRDA is also expecting more applications for licenses over the next one/two years due to the rising inclination of banks to delve into insurance offerings. The ventures between Andhra Bank- Legal, General-Bank of Baroda and Bank of India-Daichi-Union Bank of India are also likely to enter the insurance space in the near future. Innovative products, aggressive marketing and effective distribution have enabled fledgling private insurance companies to sign up Indian customers at a faster than expected pace. Indians, who had always seen life insurance as a tax-saving device, are now actively seeking new product options in the private sector.