Bcg Insurance Report

INDIA INSURANCETurning 10, Going on 20

Facilitates lending to businessesPromote higher productivity and growth by

enabling risk averse individuals to take higher risks.

Provide capital for long-term needs such as infrastructure

Offer societal support for poorer sections of the society to continue development.

Role of insurance in economic development

Customer –”Going wide and deep”Penetration = Premium *100 GDPIncreased from 2.3% in 2001 to 5.2% presently

Product– “from a seller’s market to a buyer’s market”

There is almost 70% reduction in price of term insurance

Tailor made products and innovation(add-ons) has entered

THE PAST

Distribution – “ From agency alone to multichannel”

Channel 2001 2011

Life insurance

Non-life insurance

Life insurance

Non-life insurance

Earlier

Third party agency 80% 75% 51% 17%

Direct(in-house salaried sales force)

20% 25% 11% 36%

Now* Bancassurance 25% 14%

Broking 3% 18%

Corporate agency 10% 10%

Auto dealer channel 6%

Branches- 6-fold 2200 in 2001 to 12000 in 2010Agents - .6 million in 2001 to 3 million in 2011 Competition– “from a monopoly to a

competitive market” The success of many first generation entrants

attracted the second generation of competitors, leading to a total of 45 companies.

Reach – “multiplying the reach 3-5x”

Insurance industry facing challenging times

The biggest challenge- to sustain profitabilityLife insurance– cumulative loss– 16000 crores

Non-life insurance– combined ratio = operating expences+claims+commissions*100 Net earned premium= 120%(for the past 5 years)Total underwriting loss= Rs 30000 crore

THE CURRENT

Life insurance- challenge -- high expense ratioTo cover cost, the average monthly ANBP per agency

manager = Rs200000 In reality = Rs125000Activation ratio(for agency)= 20%Currently 40-45% of companies is doing business in

150-200 towns where owning a branch is not viable.Non-life insuranceAgents not finding it lucrativeAs premium of Rs 5-10 lakhs gives only 5-8 thousand

as commission.

“Agency is looking for the elusive profitable operating model”

The key challenge in the Indian insurance market has been the top-line growth at any cost, as they appear to have forgotten the clichéd phrase

Top-line is vanity; bottom-line is sanityOPEX Ratio = Operating expenses Net earned premiumFor top 10 life insurers= 15% to 30%International benchmark= 10% to 15%For smaller companies= 25%Non-life insurers= 32%International benchmark= 15%to 20%

Insurance missing its uncle scrooge!

Non-life sector- High claim cost is the main reason for underwriting loss

Claim ratio= 80-85%International benchmark= 60%-70% ReasonsHigh auto third-party claimsHigh loss ratio In health (above 100%)High payouts per claims events

“High,Higher,highest” Claim costs

Less than 10% of the customers bought policy from the same company

Focus– pure” land Grab”Intermediary centric In Health insurance- Data is retained by

TPAs In Auto insurance- Age of the owner having

relevance on pricing is not even asked.Cross selling ratio continue to be low and low

persistency will remain as a challenge.

Where the intermediary is the customer and the end customer is forgotten

Colossal no. of changes have been implemented in the past 2 years

2010 was the year of the productKey changesCommission caps for channel for ULIPsCaps on surrender chargesMinimum guaranteed return on pension

product(now revised)Impact Shift towards sale of single premium and non-

linked productsShift in focus on more productive distribution

network.

Regulatory changes turning the world upside down

In FY 2020Life insurance could be 6-8 times the FY 2010,Non-life insurance 5-6 times the FY 2010.

Financial savings as a percentage of total savings has grown from approx. 40% in 2000

to 50% in 2010And expected to become 60% in 2020

THE FUTURE

Penetration of both life and non life is correlated to GDP per capita.

As GDP , penetration of insurance premium as a %age of GDP also .

It is supported byRising income levelsLevel of education increases

Higher penetration

As life expectancy and cost of living has been increasing, Indian customers require innovative wealth management, protection and retirement solutions

No. of large corporate has increased from 24(in2000) to 114(in 2010).

Increased sophistication and complexity of business comes the need for innovative and sophisticated insurance products

New products

The next decade will be as transformational as the past decade has been.

Massive changes are expected in

Product mixCustomer mixChannel/penetration mixProducts/services offeredPricing etc.

The Indian insurance market in 2020

In life insurance, regulatory changes are likely to shift the product mix– with single premium and non-linked products likely to grow.

Pension will be large, as low penetration and inadequate pension cover will drive growth in “true pension”

In Non-life insurance,Auto insurance will continue to dominateHealth insurance will emerge as a 2nd dominant

product

Product mix

Shift “from basic products to comprehensive solutions”

In Health insurance- from simple ‘reimbursement of hospitalization’ products to ‘solutions 'that cover disease management and wellness

Exotic insurance products such as vintage car insurance and art insurance will come in the market

Life insurance market will see the emergence of variables annuities.

Product/service offering

SMEs accounts for only 15% of the corporate insurance business and have a low 10-20% penetration.

Probability of large claims is low and underwriting risks are majorly retained.

As the financial inclusion is the top national priority, rural insurance will also grow.

Customer mix – “SMEs and micro/rural, the next frontier

In a deregulated and de-tariffed environment- pricing is the biggest challenge.

Globally insurance pricing is significantly more sophisticated than seen In India.

Ex. Auto insuranceCompanies are experimenting with risk- based

pricing and also attempts to offer pay-per use pricing.

Pricing – “from copying competition to risk based”

Tele and online channel will become more imp

Broking and bancassurance will grow rapidlyChannel management approach will become

more professionalEmergence of the “direct- internet+phone”

channel.Proliferation of alternate channel like tie-up

with retailers, FMCG, airlines, hospitals etc

Channel mix- “bancassurance and direct, the two emerging giants”

Fix the agency operating modelBuild strategic, long–term non–agencyPartnerships“Incubate, experiment, and develop”alternative channelsDevelop a customer–centric operatingModelTarget customer / product white spacesGo lean — “lean is in”

Action agenda for life insurers- the journey to sustained profitability

Create optimal product portfolioInnovate to target product / customerwhite spacesMove toward risk–based pricingDevelop next–generation claimsmanagement processesGo direct — build alternative channels forretail productsDefine and enhance agency sales–forceoperating model

Action Agenda for Non–Life Insurers —The Journey to Sustained OperatingProfits

Relax ownership normsDefine IPO normsEnhance bancassurance distributionEnable “direct” channelRefine outsourcing guidelinesCreate environment to enable electronicstatements of insurance

Action Agenda for Regulator /Government

Refine investment normsDefine flexible normsBuild depth in debt / bond / derivative marketEnsure appropriate taxation policies