The private life insurance companies in India have been struggling to achieve profitability in the face of high operating losses primarily on account of distribution and operating models. According to a report by KPMG and Bengal National Chamber of Commerce and Industry – Insurance Industry: Road Ahead, “Cumulative losses for private life insurers in India are in excess of Rs.187 billion (till March 31, 2012), majority of which have gone towards funding losses rather than for meeting solvency requirements.”
For the uninitiated, since the opening of the sector in 2001, Indian life insurance industry has gone through two cycles – the first one being characterised by a period of high growth (CAGR of approximately 31% in new business premium between FY2001-10), and a flat period (CAGR of around 2% in new business premium between FY2010-12). During this period, there has been increase in penetration (from 2.3% in FY2001 to 3.4% in FY2012), increase in coverage of lives, substantive growth through multiple channels (agency, bancassurance, broking, direct, corporate agency amongst others) and an increase in competitiveness of the market (from just four private players in FY2001 to 23 private players in FY2012).
Interestingly, it was during this period the Indian life insurance industry expended in terms of premiums. Between FY2000 and FY2012, the industry grew by 28% in new business premiums (NBP), 27% in annualised premium equivalent (APE), and over 25% in gross written premiums (GWP), catapulting the industry to the top 10 markets globally. However, this growth was primarily driven by short-term investment-linked products with limited emphasis on providing long-term savings and protection (the level of protection in India is still at around 55% of GDP which is really low when compared with benchmarks in developed markets of 150-250%).
In fact, the period between FY2005 and FY2010 was primarily dominated by linked life insurance business, particularly in case of the private sector life insurance players. As performance of the linked plans is directly linked to primary capital markets therefore the industry benefited from the boom witnessed in the country’s capital market between FY2006 and FY2008. Similarly, FY2009 and FY2010 witnessed slow down in the economy and thereby impacted the sale of these policies.
Life insurance players faced yet another lethal blow when IRDA in July 2010 (and with modification in September 2010) came up with Unit Linked Insurance Plan (ULIP) guidelines capping upfront charges, returns and the commission pay-outs impacting the basis on which ULIPs were developed. Immediately following these guidelines, during FY2011 and FY2012, the industry witnessed a shift in the product mix (see chart) from linked products to non-linked or commonly known as traditional products (interestingly, the current premium mix of the industry is similar to the one in FY2004 depicting almost a reset of the life insurance business).
As a consequence growth momentum slowed considerably with the industry registering a negative growth of 13% APE (for the private sector the negative growth was even higher at 32%) between September 2010 and March 2011 and around 19% during FY2011 and FY2012. In fact, according to a recent McKinsey report, “The Indian life insurance industry is the least profitable market for its shareholders among all Asian countries. While the profit margins or the new business adjusted profit (NBAP) margins are at 18% for India, in China, Singapore, Malaysia and Thailand this is much higher, around 30-60%.” Even the return on reserves from the life insurance sector in the country is the lowest, at 27 basis points, whereas it is 118 basis points in China, 166 in Australia and 163 for Singapore. The reason is simple. In the decade ending FY2011, the total capital invested by private sector life insurers in India was over $7.5 billion, of which, over 50% or close to $4 billion was invested to fund accumulated losses, which have largely been incurred to create distribution capacity. This de-growth is significant considering the high base for corresponding period in the previous year. While this slowdown is expected to continue for another 1-2 years, the medium- to long-term growth prospects of the industry continue to remain attractive. According to a McKinsey research conducted across 60 countries (accounting for 99% of the world’s premiums), the Indian life insurance industry’s GWP is expected to grow at a rate of 13-14% to reach a total GWP of around $110 billion by FY2015. Based on this forecast, India will contribute about 10% of total global premium growth in this period and will one of the few major markets (top 15 in terms of global premium) globally to grow at double-digit rates over this period. But for this to happen, “the focus of the industry must broaden beyond growth to include two very important aspects which it has largely ignored in the past decade – providing long-term savings and protection to consumers, and driving profitability in the core life insurance business through sustainable business models,” says Naveen Tahilyani, Partner, McKinsey India.
Tahilyani seems to be right. While there is a stark difference in the starting position of players in terms of performance, none are close to achieving an appropriate balance between various economic objectives of growth, profitability and franchise quality. In fact, business models adopted by these life insurance players have become economically unviable with most of them struggling to strike a balance between multiple economic objectives. Even for the best performers, there is still a long way to go in meeting the global standard in terms of performance.
Thus, players need to re-align their business models in the new paradigm with careful consideration of several strategic issues – the first and foremost being the insurer-agency partnership. Reason: Agency remains a significant channel across markets in Asia and is typically the biggest contributor to profits. However, the situation in India is in stark contrast to the experience of other markets. India’s private life insurance companies had examined the well-entrenched LIC’s model of tied agents in detail and found it easy to replicate. They tweaked the overall branch-led operating model but retained the basic structure of brick and mortar branches and agency managers (or development officer in LIC parlance) on their payrolls i.e., the agency manager was an employee on fixed costs with some variable component. This made the agency model a high-cost distribution model pushing the breakeven for these private life insurers.
For insurers to realise the highest value from distribution, they must define an operating model which supports a multi-product, multi-channel distribution model that compliments an insurer’s revenue objectives and profit margins. After all, distribution is not only the forefront of the operations but also forms a large proportion of the operating expenses.
Secondly, insurers need to create a true win-win approach for bancassurance. Given the challenges faced by agency in India, bancassurance will emerge as an important channel going forward. While the upside potential in this channel is tremendous (with banks offering a significant opportunity to fully penetrate into their customer base), there are several challenges in the current model which constraint banks and insurer from fully tapping into this opportunity. Lack of tailored products for the banks, low front-line sales capability and productivity, lack of alignment with bank’s core priorities, etc are some hurdles that bancassurance is facing today. In this context, insurers will need to choose from one of two core models to balance multiple objectives: the fully integrated approach or the plug and play approach.
Last but not least, players should now focus on technology-driven model for urban India. There is enough evidence from developed markets that Internet penetration and usage have a positive correlation with the performance and activities of insurance companies at various levels – lower customer acquisition costs, improved access to information, product innovation that cater to the needs of the customers and enhanced convenience.
No doubt, the Indian life insurance industry is witnessing discontinuous changes which have the potential to alter the landscape going forward. If players want to win in this market they will have to fundamentally rethink their strategies and compete across dimensions. Adapting to the new rules will not only help players achieve a leadership position, but will also help them build sustainable and profitable businesses.
