December 2011 www.deloitte.com/in
Indian Insurance sector poised for its next stage of growth The puzzle of untapped potential Redefining Customer Value Proposition Improving Operational Performance Key challenges in leveraging Innovation Improving the Innovation Quotient Conclusion Contacts 1 2 3 6 7 8 12 13
Indian Insurance sector poised for its next stage of growth
The insurance sector in India has grown at a fast rate post-liberalization in 1999. In the last decade, total premium grew at a CAGR of 25% and reached a total of $67 billion in 2010. Indian Life insurance industry (which contributes 88% of total Life and General insurance premium in India) has emerged as the 9th largest life insurance market in the world. Yet, Insurance penetration (measured as ratio of premium underwritten to GDP) was only at 5.2 % in 2010 – significantly lower than Asian peers like South Korea, Taiwan, Japan and Hong Kong which boast an insurance density greater than 10%. 1 With low insurance penetration levels, growth potential remains promising. More importantly, the pace and nature of growth will likely see a change where new behaviours and dynamics of demand and supply will apply. On the demand side, growth is being fuelled by the growing population base, rising purchasing power, increased insurance awareness, increased domestic savings and rising financial literacy. The suppliers are correspondingly playing a market making role as competition heightens and differentiation become necessary for profitable growth. In the new order, innovating across the business lifecycle has become a necessity.
Source: IRDA Annual report 2010
Indian Insurance Sector Innovate Now Or Stagnate
The puzzle of untapped potential
While the growth in Insurance industry has been at 25% in the past decade, a closer look suggests that this growth has come at a cost. Private insurance companies have incurred high expenses in the last decade in increasing awareness about the need of insurance, developing brand strength, establishing distribution channels and setting-up branch network and other infrastructure. Most insurers‟ initial plans of breaking-even within first 7 to 9 years of operations has been fraught with challenges. Some of the challenges can be characterized as growing pains, while others are more fundamental and intrinsic to how players have approached market making. To begin with, awareness levels of insurance offerings are low (e.g. compared to banking products) except for products like motor insurance where insurance is mandatory. Even when awareness of insurance products exists, the perceived value of buying insurance remains low for reasons like high expectations on returns (which other financial products may offer) and the belief that risk coverage is not needed. Hence, insurance remains a „push‟ rather than a „pull‟ product in India. Even among those who do buy insurance, the lapse ratios are high (average ~25% lapse ratio for top 13 players as per IRDA 2010 annual report) and many buyers lose interest due to mismatch between expected returns and actual benefits. In order to attract customers, the insurers have (especially in non-life insurance, post de-tariffing) resorted to premium discounting which may have impacted the profitability and quality of risks underwritten. Reaching out to the potential willing buyers and servicing them is also a challenge considering the sparsely spread population, especially outside the metros and Tier-I cities. The industry has faced challenges in acquiring and retaining (internal and external) channel teams considering the huge gap between the demand and the supply of dependable and skilled personnel, resulting in high cost of customer acquisition and operations. In our view, despite the latent potential, in the short term, Insurers will continue to be confronted by a multitude of...