India at a glance
Economy: 5th largest in the world in terms of Purchasing Power Parity (PPP)
GDP growth Rate: Over 6% per year on an average for the last decade
Savings Rate: Around 26% of GDP Estimated middle class
population: 300 Million
Insured population: 70 million only
The Life Insurance Scenario in India
Since 1956, with the nationalization of insurance industry, the state-run Life Insurance Corporation of India (LIC) has held the monopoly in that country's life insurance sector. General Insurance Corporation of India (GIC), with its four subsidiaries, was its counterpart in the casualty sector. Over time, taking advantage of its monopoly and virtual prerogative in establishing premiums, LIC has evolved into a monolith. With around 600,000 agents in every nook and corner of the vast country, it has created an enviable brand name, particularly among the rural population of the country. It has around $40 billion as its life fund and is a strong player in the financial sector. However, on the qualitative side, it has very little to take pride in. And there lies the potential for foreign players to challenge this behemoth.
As is typical with monopolies, the premium rates charged by LIC are among the highest in the world, and its track record in customer service can, at best, be called shabby. With a huge unionized, rigid workforce mostly in the clerical category, LIC runs the risk of high fixed cost, which will be the deciding factor in productivity in the competitive scenario. While boasting full-scale automation of its operation, the truth is that its technology is outdated. The new players, with the state-of-the-art technology under their belt, will be in an advantageous position. 80% of LIC's business is procured by 20% of its ill-trained agent force. The foreign player, with the domestic partner's strong brand value, can test the unconventional distribution channels like brokers, the Internet, the banking distribution system, etc. Although foreign players may be tempted to keep their operation in the big cities for the 'creamy layer' of the society, the real market lies in rural India, which accounts for the lion's share of LIC's present business. The foreign player must learn to adapt to Indian realities. The well-publicized failures of world famous consumer goods companies like Electrolux, Whirlpool, Reebok, Nike etc. to gauge the Indian psyche and sentiments demonstrate the concept. They failed in the areas of realistic pricing, product promotion and reaching to the consumer. The foreign companies need to know the "ground realities" to the details.
Until recently, India continued to be one of the few remaining countries of the world to remain insulated from the direct foreign investment in its insurance sector. However, things are changing now with the passage of Insurance Regulatory Development Act (IRDA) through Indian Parliament in late 1999. A much awaited and much debated act, it met with strong resistance from the political institutions of India and took almost six years to see daylight. Though first recommended by Malhotra Committee on Insurance Reforms in 1994, what emerges is a diluted form of the original recommendations. However in the long awaited period of its passage, the issue was nationally debated and was finally 'de-politicized,' meaning that the reform path is 'irreversible.'
IRDA, for the time being, prohibits 100% foreign equity in insurance. It requires the Indian promoter to invest either wholly in an insurance venture or team up with a foreign insurer, with a cap of 26% of equity for a foreign partner. The Indian promoter is permitted to divest only after 10 years to the Indian public, through a public offering of shares, at which time the equity structure will provide for equal participation between the Indian and foreign partner with a share of 26% each in the share capital. The underlying tone of the 26% cap for the foreign insurer is to ensure that financial interest substantially vests with the Indian promoter, permitting the foreign co-promoter a definite say in direction and management (By Indian Company Law, 26% is the minimum equity to move a resolution or vetoing a resolution in Board of Directors' Meeting). It is important to note that the 26% level is the bargained solution by the privatization proponents (read Government) in the face of stiff political resistance. The main two political poles of Indian politics – the Congress Party and the Bharatiya Janata Party (BJP)- are both in favor of the reform. Only the extent of the reform and who-will-bell-the-cat-and-get-the-(dis)credit factor bar them in reaching a consensus for more sweeping reforms. The populist out-of-fashioned socialistic jingoism, masking these parties' rightist ideology, is fast losing its appeal to the masses. This will only hasten the reform process.
Comparison with China
Currently India and China are the most lucrative insurance markets in the world. India and China constitute the home of half of the population of the world and their recent rapid economic development makes them attractive for foreign investment. Though India's economic development is not as rapid as China's, it enjoys comparative strength in the socio-political front. India is the world's largest democracy and democracy is deep- rooted in its social and political institutions. The executive and the judiciary system are the continuation of British legacy, which ruled India for 200 years. English, the unofficial language of correspondence and instruction, is well spoken by the educated. Another strength is its abundant highly educated skilled workforce. India's stride in the fields of software and logical ability is well known in the world. The savings rate is quite high in US standards. All this makes India an attractive destination of US insurance companies.
Insurance sector reforms have been slow to take shape, taking nearly a decade. Thanks to the proposed reforms, quite a few global insurance majors are streaming into the country. A burgeoning middle class, high per capita savings, and low penetration of insurance are some of the key factors responsible for the tremendous interest foreign insurance companies are showing in the Indian insurance industry. An insurance survey by LIC and KPMG reveals interesting facets of the emerging trends in the Indian insurance industry. The annual growth in the average insurance premium in India has been 8.2 per cent compared with the global average of 3-4 per cent. Insurance density in the country, based on per capita premium, was $5 in the life insurance segment and $2 in the general segment. Compared with the Indian life insurance standard, insurance density stood at $3,236 in Japan, $1,079 in the US, $18 in Brazil and $14 in Mexico.
The share of life insurance premium to GDP was 1.29 per cent in India, which is abysmal in the global standard. Despite these opportunities, however, there is also a rough ride ahead for the new players in India. This is because, unlike in the West, insurance is sold more as an instrument of savings in India than as a product offering protection and security. LIC's 1996 insurance survey reveals that more than 40 per cent of insurance-buyers look at insurance products as a means of savings. Risk coverage is only a secondary objective. Nearly 26 per cent of the insurance policies sold are on considerations of old age security. Only 18 per cent of insurance policies are sold on death risk considerations. Between expectation and reality, of course, there is a bridge. Will the average citizen reach out to private players and invest his lifetime's earnings with them? Here, the new companies probably will be fighting a mindset. The Life Insurance Corporation and General Insurance Corporation, by virtue of their monopoly status, are so deeply entrenched in the popular psyche that it would likely reqiuire Herculean effort to sell the idea of private insurance products. They have to educate the people, and integrate the sector with its world counterpart by shifting its leaning from savings to risk hedging.
The economic reform process in India is 'irreversible' and is producing a strong efficient financial system in the model of its US counterpart. The insurance companies will only hasten the process. From a socio-economic development point of view, the huge amount of funds that will be at the disposal of players will be directed in desired avenues like infrastructure, housing, safe drinking water, electricity and primary education. The growth of the debt market, which hitherto had been a neglected child of the capital market, will also get a boost as the funds from insurance companies start flowing into the kitty of the corporate sector. Once again this will boost demand and growth by raising employment levels. Similarly, stock market investments will further aid the growth of the capital market and equity cult. The multiplier effect will be enormous. Policyholders will get better pricing of products from insurance majors. Permission to invest more in corporate equity and debt instruments would also enhance returns on policy funds. Once the benefit of opening the sector becomes noticed in the society, the misplaced concern regarding 'flight of money outside the country' will be removed from the mindset of people, which should aid in garnering popular support for the free, competitive liberalized economy.
Facing the reality of a saturated home market, the US insurance companies must look outward and concentrate on the real growth economies like India and China. Since the gestation period of the typical insurance business is around ten years, it is high time to make their presence felt in India. The new players will have to prove their creditworthiness. It will be a time consuming and difficult task to win customers away from LIC and gain their trust. Their track record and brand value in overseas market will not help them much in getting immediate brand recognition in India. Though they may piggyback on the brand names of their local partner, in the long run, it is their persistent track record and creditworthiness, which will matter. So, being among the first will be a deciding factor in the success in this business. Already several companies have entered into the market and a dozen companies have joined with foreign partners (see table). The real growth in twenty-first century will come from the countries like India and China. Delay may doom future efforts to stake a claim in these high potential markets.