India is often depicted as an insurer's dream; with a population of 1.3 billion and drastically low levels of market penetration, solid long-term returns are virtually guaranteed.
But the reality has so far proved to be very different and little has changed in the 17 years since India allowed the establishment of private insurance companies in 2000, with major insurers left stranded on a range of issues such as controlled pricing, high expense ratios and massive underwriting losses.
There are signs, though, that the industry is on the cusp of major change, thanks to a number of recent government reforms that could yet help it fulfill its promise.
By raising the foreign shareholding cap on local insurance companies to 49% from 26%, overseas investors are being encouraged to have more sway over operations and the introduction of new products.
Since the law was changed in March 2015, India’s Foreign Investment Promotion Board has approved 15 investments with a combined value of more than $1 billion by foreign insurers including Nippon Life Insurance, AIA International, Sun Life, and Aviva Life.
At the same time private insurers are being asked to push forward with plans to list on the local stock market to improve transparency and accountability.
ICICI Prudential Life is the only group to heed the call so far, having completed a $912 million initial public offering in September -- India's biggest in six years.
But there are others in the pipeline. SBI Life Insurance has hired investment banks for a $700 million flotation later this year, while HDFC Life Insurance has said it will revisit plans to list after calling off a merger with Max Life Insurance in late July.
And it's not just the private sector. State-owned insurance companies are ready to go public too, potentially adding more choice to the burgeoning Indian equity sector.
In the 2016/17 budget announced this March, Indian finance minister Arun Jaitley unveiled plans to divest 25% in each of the five state-owned non-life insurers.
General Insurance Corporation of India and New India Assurance have each filed official listing applications in the last two months and are expected to raise a combined $2.5 billion, making them a key driving force for Indian equity capital markets this year.
More IPOs are in the works early next year. According to the Insurance Regulatory and Development Authority (IRDA), National Insurance, Oriental Insurance, and United India Insurance will also all be privatised before the current financial year ends next April.
The plan appears to be over ambitious now that the fiscal year is already nearly halfway gone. But in any case, there is little doubt about the government's intention to change the way how state-owned insurers are run by introducing market forces.
Stepping up
By exposing state-owned insurers to greater public scrutiny, the government wants to overhaul the sector, which have suffered from weak management and low profits as companies have competed hard in an underpenetrated market, depressing premiums and inflating payouts.
In the second half of last year alone, the five state-owned insurers booked total underwriting losses of over $1 billion.
“The intense competition between [state-owned] non-life insurance companies has been affecting their profitability,” K K Srinivasan, former secretary general of the tariff advisory committee at IRDA, said.
At the same time these companies have lagged private insurers in terms of product innovation. While private insurers have embraced the digital world to offer customized and customer-friendly products, most of them still offer generic insurance products through direct sales and agents.
ICICI Lombard, meanwhile, partnered with redBus to provide travel insurance policies for bus commuters, showing how insurance companies can expand their partnerships with players beyond financial services.
Growing insurance capital
The upcoming IPO wave will provide insurance companies with a new channel to raise additional capital in the future. This is important as they prepare to expand their businesses in line with expected higher penetration rates in rural India through mobile devices.
The IRDA plans to increase total insurance penetration to 5% by 2020 from 3.3% in 2014.
As Indian insurance companies grow, so too will the pool of insurance company capital eligible for investment in Indian assets, creating an increasingly important source of investment demand.
“In recent years insurance funds have been a major force of capital inflow into India’s capital markets,” Srinivasan Subramanian, head of institutional equities at Axis Capital, said. “Foreign capital played an important role of how assets are priced in India, but now domestic funds are becoming more dominant with the increasing inflow of insurance and pension capital.”
IRDA last year began allowing insurers to invest in additional tier-1 perpetual bonds issued by banks. Then in June the regulator issued new rules permitting insurance firms to invest in real estate investment trusts and infrastructure trusts.
There are still many hurdles to clear before India’s insurance industry can become a stable and highly profitable business. Low insurance awareness, taxation issues and incapability to design the right products that suit the rapidly-changing Indian lifestyle still remain as some of the major obstacles.
But as the industry opens its door to foreign and public investors, there is little doubt that the insurance sector will garner more attention in the years to come.
