A look at India’s life insurance sector
An analysis of life insurance industry using industry data!
Life insurance industry in India, like most other things, is a mixed bag with some incredible achievements and a lot of mediocrity. Let’s begin by quickly looking at the Indian industry viz-a-viz rest of the world.
Insurance industry in India
Globally, share of life insurance business in total premium is ~55%. In India, that figure is 79%. This shows 2 things:
a) relative success of life insurance products and
b) poor performance of other insurance segments relative to life.
Life insurance penetration is ~2.7%, which means that for every 100$ of GDP India generates, 2.7$ is collected via life insurance premium. This figure is lower than world average that is around 3.5%. As per SwissRe, India ranks 10′th in the world in terms of absolute premium.
Insurance density, which is a real measure of maturity of insurance sector, is defined as total insurance premium by the population. This number for life insurance is 43$ — that means, on average, every Indian is paying roughly 2500 rupees annually for protecting his/her life.
Insurance penetration and density peaked in 2010 but both metrics have been dropping ever since (coinciding with the drop in popularity of Unit Linked Insurance Plans).
Overall, India is doing reasonably well in terms of ‘reach’ in life insurance sector
Overall coverage
If we look at the overall industry, a total of 32.7 crore policies are in force currently with 2.67 crore new policies issued in 2015–16. Total sum assured by all life insurance companies put together as of 2016 is ~85 lac crores.
Product segmentation in India
Broadly speaking life insurance companies have 2 types of products based on payment schedule — single premium products that have only one single lump-sum payout and regular premium products that have annual payouts. As per IRDA data, single premium products are growing at a very health Y-o-Y rate of over 30% and capture a healthy 63% of overall new business booked.
Renewal is of course a big chunk of the annual premium in life insurance business. For every rupee earned as premium, 63 paisa comes from renewals of the older policies.
Another classification in life insurance products is linked v/s un-linked. A linked insurance plan offers protection to a customer while staying invested in the market (stocks, bonds or mutual funds). So performance of investment is linked to market performance. Payment of such plans can again be a single lump sum payment or a regular payment.
Linked products contributed to approximately 13% of total premium while non-linked products contribute to 87% of total premium.
Company wise Market Share
There are a total of 24 life insurance companies in India, 23 private and one public sector company underwriting a total of 3,66,943 crores in 2015–16. Of this, LIC is the only public sector company contributing 72% of total premium whereas all the remaining 23 private companies contribute 28% of premium. Domination of LIC is slowly waning and every passing year, a great proportion of new business is captured by private players. Lot of LIC’s domination comes from its vast pool of renewal premium which isn’t going to drop anytime soon.
Leaving LIC, the top 5 players in the life insurance space are ICICI Prudential, HDFC Standard, SBI Life, Max Life and Bajaj Allianz. ICICI Prudential being the largest private player commands ~5% market share and between them, top 5 companies cover 18% of market share.
Distribution channels
Life insurance products in India are distributed by individual agents, corporate agents, banks (bancassurance), brokers and direct selling by insurance companies themselves. Largest number of policies sold and also the highest amount of premium sold is via the individual agent channel. As of 2016, a total of 20 lac individual agents are registered in India.
Last few years, bancassurance channel has been expanding aggressively in-terms of market share and individual agent channel has been shrinking. It is expected that the individual agent model will degrade exponentially in future as new online/direct channels take its place. Amount of labor is too high and efficiency of labor is too low to justify this channel for the overall industry; this channel is ripe for a technological disruption.
Average premium per policy for an individual agent is Rs 18,000 whereas for a corporate agent, this number is Rs 48,000.
ICICI Prudential, Max New York and SBI Life policies sold by individual agents have the highest premium per policy. Tata AIA and ICICI Prudential policies sold by corporate agents have the highest premium per policy. Compared to this, LIC offers very competitive prices to both individual and corporate agents.
Overall business growth
Overall life insurance business in last 3 years has grown at 8% CAGR with bulk of that growth coming from private players. Private players have grown at more than double the rate (~14%) compared to LIC (~6%). Part of this is also because private players are starting from a much lower base.
Geographic distribution
Top 6 states account for 55% of all premium in the country. Maharashtra tops the list both in terms of number of policies issued and also the premium. Other top states in terms of premium are West Bengal, Uttar Pradesh, Gujarat, Tamil Nadu and Karnataka.
Top 5 states cover more than 50% in terms of policies issued and premium collected
Claim history and settlement ratios
An average of 8.5 lacs of claims are settled in a year with a claim settlement of ~12,600 crores. Last 3 years have seen a growth rate of 7.8% in claims. Considering that the overall business has grown by 8%, operational ratio for life insurance business is fairly stable.
Commission paid by insurance companies
Commission paid as a percentage of insurance premium is reducing over the years. This is partly because distribution is increasingly moving away from agents. Other reason for this is also the increasing popularity of simple term insurance that offers lesser commission rates.
LIC traditionally has offered better commission rates than its private counterparts. Following table shows the commission rates over last 3 years.
Retention of Customers
Persistency is the ratio of customers who renew their policies without allowing them to lapse. Persistency ratio directly tells us the retention rate of customers. High persistency ratio is extremely important for an industry that offers long term benefits to customers.
Low persistency ratio is an unfortunate reality of Indian life insurance industry. Overall average persistency after first year is 60% which drops to a paltry 29% after fifth year. Out of every 100 customers, only 60 survive by the end of first year and only 30 survive by the time the policy is 5 years old.
This is very different for global life insurance companies. Overall, OECD countries reported a 90% persistency after first year and a 65% persistency after 5 years.
Indian life insurance persistency is almost 40% that of global average.
Assets under Management
Overall, insurance companies are managing assets worth ~25 lac crores as of March 2016. Assets are split among the life fund, Pension & annuity fund and lastly, unit ULIP fund.
More than 2/3'rd assets are held in Life fund that essentially comprises of government, money market and equity securities.
Solvency ratio of insurance companies
Solvency ratio for insurance companies is the ratio of Net liabilities to equity capital. Greater the solvency ratio, better is the chance of insurance company to survive large losses. LIC has the lowest solvency because the govt. of India is the final underwriter in case a worst case scenario pans out.
Incase of private insurers, Bajaj Allianz has the best solvency ratio among larger companies.
Profitability of insurance companies
As of 2016, total Equity capital base of Insurance companies was 26,691 crores and a net profit of 7414 crores giving a healthy Return on Equity of 27%.
Bajaj, ICICI Prudential and HDFC have a solid income generating portfolio and good operational efficiency and underwriting infrastructure that churns out strong bottomline numbers. LIC on the other hand has a poor business efficiency and hence has a much lower profit levels when compared to total business premium.
Overall, life insurance business has good competition and good solvency levels.
