Insurance Sector in India- Revenues, Growth & Trends

Posted in Finance Articles, Total Reads: 1107 , Published on 27 October 2015

India has a large divide in different aspects of life and nowhere is the divide as evident as in the insurance sector. India’s insurance sector is one of the largest in the world in terms of the money involved. Yet, the overall penetration of this sector is pretty low as compared to the developed economies of the world. There are lots of opportunities to improve the insurance penetration in India and the following analysis would help us understand the insurance sector in a better way.

Revenue and cost drivers

The business model of an Insurance company is to collect more premium and returns on investments than what gets paid out in case of claims or other losses. They also need to provide their services at a competitive price in order to brave the market competition.

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The major drivers of revenue for an Insurance company are as follows:

• Underwriting - It is process in which the company decides what all risks need to be ensured and how much premium can be charged for covering the risk. In other words, underwriting is the revenue generated by the premiums on insurance policies less the cost of settling claims.

• Investing – It is the process in which the company invests the premium which they collect from the insured parties to increase their investing income. The extent of return from investments can be understood from the fact that during 2013-14, LIC booked profits of about Rs. 21000 crore in the stock market. According to a report in Business Standard, LIC is expected to double its equity investments in FY-15 to Rs.60000 crore.

• Reinsurance commission - Apart from underwriting and investing, a part of their revenue is also contributed by the commission an insurance company pays while purchasing insurance from one or more insurance companies (i.e. the insurer) directly or through a broker.

The primary cost drivers in the Insurance business are:

• Claim handling Cost – It is the cost incurred by an insurance company in processing the claims made by the insured party. This component affects the profitability of the firm in a significant way. Claims made have to be validated, negotiated and further processed before the final settlement is made. All these procedures carry administrative and operational cost which is borne by the insurer.

• Customer acquisition cost – The insurance industry is a very competitive industry. A lot of effort is put in to acquire new customers for the company. The process has a high cost associated to it in the form of expenses for countless ads on television, in print and online publicity with enticements for customers to sign up or switch providers.

Growth drivers

The following developments seem to be the major factors contributing to the steady growth of the insurance sector:

• High economic growth – We are witnessing a significant growth in the Indian economy. The World Bank has projected India to be the fastest growing economy this year. The high growth rate is expected to give more purchasing power to the people and augment the net disposable income of the public. With rising awareness on the need for insurance in today’s world, a significant proportion of this purchasing power is slated to boost the insurance sector.

• Inroads made in the rural sector – Around 70% of India’s population has a rural base and their consumption pattern and choices are changing with time. After 2005, the Insurance regulator came up with micro insurance policies specially designed for the rural people. Additionally, the government mandates that a portion of the insurance policies are to be done for the rural mass. These developments should encourage the players to step in to the rural area as well.

• Growth of non- life insurance – With a steady shift of people from the primary to the secondary and tertiary sectors, India is witnessing an increment in the number of passenger and commercial vehicles. This gives a boost to the motor insurance sector.

• Also, the rising healthcare cost has led to a growth of the health insurance sector. Awareness about health due to various schemes and non-government interventions has sensitized people to the need of health insurance.

Industry Trends

The following market trends are going to define the strategies adopted by the Insurance companies.

• Multiple channels of distribution – Earlier, in the life insurance industry, the majority of distribution was done through the agencies. Around 90% of the business used to come from them. Recently, the role of alternate distribution channels is increasing. For e.g. rural development organizations such as NGOs and Trusts are playing a big role in increasing the insurance coverage in the rural area. Thus, finding the right distribution channel and managing it is going to be a big challenge for the industry.

• e-Insurance – The growth of internet and technology has enabled people to procure a policy at a lower rate directly from the company rather than buying the same plan from an agent. The problem is in getting the support from the agent for that policy, if there is a claim or maturity. This is a growing concern for the public which needs to be carefully addressed.

• Claim management – The problem discussed above is further worsened by the fact that there is a high rate of decline of the no. of agents in the industry. As a result, Claim management becomes extremely difficult for the companies as people generally look for the assistance of the insurance agents.

• Role of FDI – The insurance bill which is already passed by the Lok Sabha intends to raise the cap on Foreign Direct Investment (FDI) from 26% to 49%. This is a welcome sign for the capital intensive Insurance Sector because insurers are finding it difficult to continue investing in this business.

Future Prospects 

The insurance sector in India is projected to grow at a compounded rate of 12-15% for the next five years. With an increasing population and rising cost of healthcare, around 75 crore Indians are expected to be insured by 2020.As a result, the importance of Insurance in financial planning is set to increase. Currently, LIC is the only public sector insurance company with a whopping 73% of the market share. The industry thus needs more players to cater to the projected demand. Although India has seen a ten-fold rise in Insurance coverage, the Insurance coverage is extremely low in comparison to some of the developed countries. For eg. Only around 5.5% of Indians are covered under health insurance compared to 83.3% Americans. The insurance market needs to be further opened up so that more foreign companies can join the competition. Equally important is the role of a Grievance Redressal system to look into matters involving negligence and failure to deliver by the insurance companies.

In all, the state of the Insurance industry in the near future looks quite promising. The role of foreign capital would be crucial to the success of this sector. The role of government is equally critical to ensure that the concerns of both the parties i.e. the insurer and the insured are carefully dealt with.

This article has been authored by Satyam Shandilya from IIM Indore


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