Insurance industry - Challenges, reforms and realignment

1 Insurance industry challenges , reforms and realignment Confederation of Indian industry 1 Foreword .. 4. 2 Executive summary .. 5. 3 Introduction .. 6. Indian economy .. 6. Insurance industry landscape .. 8. 4 Underlying growth drivers for Insurance in India .. 12. Growing economy and purchasing 13. Rising focus on rural market .. 14. Rising demand for motor Insurance .. 14. Robust growth in health Insurance .. 14. Emerging trends .. 15. Regulatory trends .. 17. 5 Life Insurance : issues and 18. Products .. 18 6. Distribution .. 20. Customer servicing .. 22. Governance and regulatory issues .. 23. 6 Non-life Insurance : issues and 24. Products .. 24. Distribution .. 26. Governance and regulatory issues .. 29. Health Insurance .. 29. 7 Way forward .. 34. 8 Bibliography .. 36. Contents 2. 3. Foreword 1. After a decade of strong growth, the through constructive engagement and Indian Insurance industry is currently effective consultation with industry , facing severe headwinds, grappling emphasizing on proper market conduct, with slowing growth, rising costs, good governance, customer centricity and deteriorating distribution structure ]^ [a]fl \akljaZmlagf& Oal` Y \]fkalq g^.

2 Yf\ klYdd]\ j]^gjek& >gj l`] jkl lae]$ US$64 compared to US$118 in developing since the industry was liberalized and countries and US$3712 in advanced opened to private and foreign insurers, economies in 2010, the domestic the life Insurance segment witnessed Insurance industry still has considerable a year-on-year decline (around 10%) scope for growth. However, a rethinking of af l`] jkl q]Yj hj]eame [gdd][l]\& the approach is required for the industry The non-life segment is still struggling to achieve its potential. Innovation is the with underwriting losses, while health jkl [YkmYdlq af la_`ldq [gfljgdd]\ eYjc]lk . Insurance is facing high claims ratio and leading to drying up of incentives for af]^ [a]f[a]k af hgda[q Y\eafakljYlagf& product manufacturers and decline in business activities. However, this is not However, the picture is not all gloomy, to say that a free rein is recommended while in the short run the industry may ]kh][aYddq af fYf[aYd k]jna[]k k][lgj& 9.

3 Be undergoing a catharsis, the long- certain degree of freedom aligned with term picture is still compelling and a the market maturity may be desirable. stronger and better founded Insurance industry is likely to emerge from this Perhaps after a heady period of growth challenging situation. The industry and glowing projections of the future, needs to offer appropriate product it is time for the key stakeholders, designs, which enable customized , the industry , regulator and the solutions for evolving customer needs in government to make a concerted a professional and transparent manner, effort for the orderly development and build and maintain trust among existing sustained growth of the industry . and potential customers, effectively The Confederation of Indian industry (CII). \]dan]j l`] hjg\m[l Z]f] lk lg l`] . and Ernst & Young have co-authored this customers and adopt a professional report to outline the current issues and code of conduct.

4 At the same time, the challenges faced by the Insurance industry regulator needs to create a favorable and steps that could be taken to ensure environment for a competitive market that the industry achieves its potential. Ashvin Parekh Chandrajit Banerjee Partner and National industry Leader Director General Global Financial Services Confederation of Indian Industries Ernst & Young Private Limited Executive summary 2. The Indian Insurance industry seems business model for insurers has been The three standalone health insurers lg Z] af Y klYl] g^ mp& O`ad] l`]j] changing continuously for the past also performed well with a premium has been a perceptible change in the couple of years on account of regulatory underwritten growth of 13% for market dynamics since liberalization and changes. While the regulatory changes FY12, reaching billion from economic reforms , a considerable amount were aimed at customer protection and billion in FY11.

5 Health needs to be done for future growth and increasing transparency in pricing and insurers need to balance their portfolio, development of the market in an orderly operations, it gave the industry very which leans heavily towards group and sustained manner. Notwithstanding little time to adjust, leading to a lot of Insurance and introduce more products the strong improvement in penetration uncertainty in the market environment. In covering individuals. The claims and and density in the last 10 years, India addition to challenges in growth, pricing fraud monitoring process also needs largely remains an under-penetrated Yf\ hjg lYZadalq$ da^] afkmj]jk Yj] Ydkg lg Z] kaehda ]\$ klj]f_l`]f]\ Zq . market. The market today is primarily ^Y[]\ oal` Ka_fa [Yfl [`Ydd]f_]k gf l`] stricter guidelines for third party dependent on push, tax incentives and distribution front with a reducing agency administrators.

6 Despite strong growth, mandatory buying for sales. There is very force and uncertainties in alternate the non-life segment also faces stiff little customer pull, which will come from channels such as Bancassurance. The challenges in distribution, pricing af[j]Ykaf_ fYf[aYd YoYj]f]kk Ydgf_ cap on commission and expense ratios and claims management and these with increasing savings and disposable further imposes restriction on the issues need to be addressed on a income. Till then the stakeholders will competiveness of insurers and limits priority to sustain the growth. `Yn] lg kljan] ^gj hjg\m[l kaehda [Ylagf$ the expansion of distribution channels. L`] af\mkljq ak Yl Yf af ]pagf hgafl Yf\ . increasing transparency of cost and The non-life premium underwritten despite the signs of stress there is a silver pricing, effective distribution and grew by 23% in FY12, reaching lining.

7 The Insurance industry stands at improving customer servicing to drive INR530 billion from INR430 billion in the threshold of moving toward a stable sales. In the long run the Insurance FY11, but the segment is saddled with hgkalagf$ \]dan]jaf_ klYZd] hjg lYZd] . industry is still poised for a strong growth considerable underwriting losses and growth. Most players will now look to as the domestic economy is expected pricing issues in addition to high claims reassess the entire business model from to grow steadily, leading to rise in per ratio exerting increasing pressure product, pricing, risk management, capita and disposable income, while gf hjg lYZadalq& Afkmj]jk f]]\ lg acquiring rural customers, distribution, savings are expected to be stable. strengthen their risk assessment and claims and fraud management and a >gj l`] jkl lae] af )* q]Yjk$ l`] underwriting mechanisms.

8 There is a realistic pace of growth. The industry life Insurance industry witnessed a decline requirement today for long-term assets, is also likely to witness consolidation af l`] jkl q]Yj hj]eame [gdd][l]\ af Z]f] l Yf\ `]Ydl` hgda[a]k lg k]jn] l`] Yk Yf\ o`]f l`] j]_mdYlgj fYdar]k l`] . FY12, which declined people till the time Insurance in India is guidelines for mergers and acquisitions. from INR1,258 billion in FY11 to considered as a household requirement The stakeholders should work toward INR1,142 billion, a drop of approximately than just a temporary risk-mitigating maintaining a favorable environment 10%. There is a perceptible shift in the tool. Furthermore the pace of reforms for stable growth, increasing the life Insurance market as the sales of Unit needs to be increased especially in the penetration of Insurance to rural and Linked Insurance Plans (ULIP) products areas of pricing and reinsurance.

9 Underpenetrated areas and increasing witnessed a drop in sales and customer the contribution to the economy. move toward traditional products. The >Y[]\ oal` Y h]jkakl]fl `a_` af Ylagf gn]j l`] dYkl log . q]Yjk Yf\ [gfk]im]fldq$ Y `a_` afl]j]kl jYl] j]_ae]$ . l`] ][gfgeq k]]ek lg `Yn] dgkl kge] kl]Ye Introduction 3. Indian economy India recorded a growth in the gross =mjgrgf]$ l`] c]q af\a[Ylgjk \g fgl j] ][l . domestic product (GDP) of for a very strong picture. Growth forecasts FY12, which was a sharp decline from for FY13 and FY14 are muted as well. the witnessed in FY10. Faced with Monetary measures seem to have had Y h]jkakl]fl `a_` af Ylagf gn]j l`] dYkl dalld] ]^^][l gf l`] af Ylagf af l`] YZk]f[] . two years and consequently, a high g^ k[Yd la_`l]faf_ Zq l`] _gn]jfe]fl& . interest rate regime, the economy seems The prevalent high interest rate scenario to have lost some steam.

10 Although it has led to reduction in corporate can be primarily attributed to the global activity and shrinking of margins. economic conditions and problems in the Exhibit GDP growth rate Growth rate - GDP (at factor cost). FY07 FY08 FY09 FY10 FY11 FY12. Source: RBI Annual Report, 2011. 6 Insurance industry : challenges , reforms and realignment Global growth is projected to drop L`] k`Yj] g^ fYf[aYd kYnaf_k [`Yff]d]\ Exhibit Constitution of from around 4% in 2011 (year ending to the Insurance industry is approximately household savings December) to around in 2012 24% and given the backdrop of Household savings-constitution because of weak activity during 2H11 moderating economic growth it might and 1H12 according the IMF World change a bit. However, it is not expected Economic Outlook released in April 2012. to vary drastically.