Risks and rewards in opening Indian insurance to FDI

Asia World

Authors: S Jayaprakash, Mahesh Talreja and Arjun Kumar, IMPRI

India’s insurance sector has significantly liberalised since 2000. Insurance is different from other financial products in that the more insurance distribution is spread, the more risk is shared among many. As such, expanding insurance clients is important for the economy. Though government schemes are increasing exposure to insurance, it is in the hands of insurers and intermediaries to upsell and cross-sell.

A vehicle passes a life insurance bill board of Prudential-ICICI in Bombay, India, 30 September 2002 (Photo: Reuters/Stringer JSG).

A vehicle passes a life insurance bill board of Prudential-ICICI in Bombay, India, 30 September 2002 (Photo: Reuters/Stringer JSG).

The insurance sector can be measured by two widely used indicators: insurance penetration and insurance density. Insurance penetration means total insurance premiums as a percentage of GDP, while insurance density is defined as premiums per capita. The Swiss Re Institute’s World Insurance Report 2018 ranks India 41st globally in insurance penetration and 73rd globally in insurance density.

There were 68 insurers operating in India as of March 2018, according to the Insurance Regulatory and Development Authority of India (IRDAI). The India Brand Equity Foundation suggests that gross premiums written in India reached Rs 5.53 trillion (US$94.48 billion) in the 2018 financial year, with Rs 4.58 trillion (US$71.1 billion) from life insurance and Rs 1.51 trillion (US$23.38 billion) from general insurance. How can India’s insurance sector grow?

In July 2019, the Indian government announced an increase to the foreign direct investment (FDI) cap on insurance intermediaries from 49 per cent to 100 per cent. This was a necessary move to increase the growth momentum of insurance density and penetration in India.

The insurance sector should take note of the successes of the e-commerce and consumer internet sector. Start-ups like Zomato, Swiggy, Amazon, Flipkart, Paytm and Oyo have achieved success based on two key factors: their strong distribution channels for services that reach into even small cities of India and their efficient customer service. Some of these start-ups are yet to generate profit but are still valued at billions of US dollars for fulfilling the needs of customers and providing choice.

Risk insurance products may increase both in penetration and density by following the same e-commerce principles of distribution and customer satisfaction. The Indian population is not averse to new products, should these products be advertised well and fit the needs of consumers.

When it comes to life insurance, distribution is dominated by individual and corporate agents (around 90 per cent). Brokers sell only about 1 per cent of life insurance in India. In 2017–18, IRDAI reported that individual agents have sold around Rs 25 million (US$350,000) of policies, while brokers sold only Rs 230,000 (US$3000). Brokers have limited impact and exposure on the life insurance market.

On the general insurance side, almost 25 per cent of business is done through brokers. Although brokers are not presently dominant in either market, they are significant enough in general insurance that the increased FDI cap for brokers will have a noticeable impact on the market. Having more foreign brokers in India may also eventually alter the landscape of the life insurance market.

The Indian insurance sector’s low penetration and density does not stem from a lack of choice in insurance companies or products. There is no dearth of insurance companies and insurance products can easily be customised to the needs of customers. It is likely a distribution issue. For insurers to reach the population and understand its needs, it is important to strengthen distribution channels. Allowing 100 per cent FDI in intermediaries will likely spread the presence of brokers into many new geographical areas.

Further, allowing 100 per cent FDI may encourage the entrance of giant global insurance brokers whose technological and analytical capabilities have enormous potential in India. They may help in devising strategies for better sales, customer behaviour identification and targeting, and product improvements. An improved product and greater understanding of the market will improve both insurance penetration and density.

The insurance broking market is highly competitive. With the entrance of global broking giants, it could become difficult for small- and medium-sized local brokers to survive. Bigger firms have strong financial backing and new technology that local brokers do not. This is not an inevitability though as local brokers can adapt.

Global insurance firms can offer valuable lessons to the Indian insurance industry that may end up making it more competitive. At present, brokers are perceived as price discoverers and little else in India, giving them little room for growth. Global firms understand that selling insurance should come alongside other services: claims management, risk management, insurance consulting and market knowledge. Upskilling to provide this value addition will allow the local broking industry to grow. A new wave of capital flowing into insurance broking should also set up new professional standards in the corporate salesforce, making the insurance sector more accountable and transparent.

The insurance industry in India has the capacity to grow, but it requires some outside influence to do so. Allowing 100 per cent FDI in intermediaries will contribute enormously to improving product quality and reach.

S Jayaprakash, Mahesh Talreja and Arjun Kumar are with the Impact and Policy Research Institute (IMPRI), New Delhi.

This article is drawn from a longer paper by the authors found here at IndraStra Global.

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