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Insurance Sector - India lures major investors
By Dr. Uday Lal Pai
Exclusively for InvestorIdeas.com
posted June 21, 2006
Growing steadily, the insurance sector in India is one of the most talked of sectors amongst the foreign investors. Numerous opportunities are available in this sector for both domestic as well as international players.
Traversing a full circle, from a liberal competitive market to nationalization and then back to liberalization, the insurance sector in India has shown rapid expansion over the past few years. Increasing demand of consumer and industrial products and services plus elimination of a few of the trade and investment barriers have been the main drivers behind the exponential growth of the insurance sector in India.
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Interest shown by U.K., in the insurance sector in India, was disclosed by John Cooke- the Chairman of Committee on Trade Liberalization and services recently. In view of the potential growth prospects, the insurance sector in India should permit Foreign Direct Investment of up to 48 percent, requested Cooke.
According to U.S. Ambassador to India David C. Mulford: "India's insurance market remains very small compared with some of the major emerging markets. South Africa and South Korea with a fraction (one-twentieth) of India's population do at least twice as much insurance business as Indian companies did in 2004. This is a major missed opportunity for India's economy. When markets are competitive and responsive to consumer demand and preference, it is the consumer that benefits in terms of lower cost and increased ability to manage risks. A vibrant insurance market supports the economy by providing long-term capital -- equity and debt -- to the private sector."
Ambassador Mulford says: "Insurance is a capital-intensive industry. It is also a long-gestation business. India's insurance industry needs capital, and a major source of capital would be from foreign investors, who are now limited to 26 percent ownership. India needs to raise the cap on Foreign Direct Investment (FDI) to attract capital for the industry."
The Ambassador stressed the need for India to restore the confidence of foreign investors: "For some time there has been an understanding that the FDI cap will be raised to 49 percent, and many companies entered the Indian market with this expectation. Failure to follow through in raising the cap is increasingly seen by investors as a breach of faith. I have come here today to say that this promise needs to be delivered, not 5 years from now, but soon, if India wishes to regain its credibility in the eyes of foreign investors."
Under a four-year $10 million initiative, the U.S. Agency for International Development (USAID) is assisting the Insurance Regulatory Development Authority of India (IRDA) in the development of the Indian insurance sector.
A flash back
Insurance is a federal subject in India. The primary legislation that deals with insurance business in India is: Insurance Act, 1938, and Insurance Regulatory & Development Authority Act, 1999. Insurance Industry has ombudsmen in 12 cities. By an act of parliament IRDA was constituted. The IRDA has been authorized to permit insurance companies registered outside India to set up liaison offices in the country.
Insurance industry, earlier comprised of only two state insurers. Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC) GIC had four subsidiary companies. With effect from Dec'2000, these subsidiaries have been de-linked from parent company and made as an independent insurance companies. Oriental Insurance Company Limited, New India Assurance Company Limited, National Insurance Company Limited and United India Insurance Company Limited.
The first batch of licenses were issued by the Insurance Regulatory and Development Authority (IRDA) in 2001. At present there are 13 players (including LIC) in the Indian Life Insurance Market. There are 10 firms in non-life insurance too.
Banks, serving as distribution channel for insurance products, have contributed about 20 per cent of the total insurance business in financial year 2005, according to a Fitch report on the insurance sector.
Bancassurance symbolizes the convergence of banking and insurance. Most new insurers have entered into memoranda of understanding with banks to use their branches as outlets for marketing standard products.
At present, there are 13 private insurers in the life sector and ten in the non-life sector. According to report, "Private insurers are able to garner a higher marketshare because they offer greater choice in terms of products and services and also make a concerted effort to increase consumer awareness about the benefits and importance of insurance via vigorous marketing."
Most private insurance companies are joint ventures between Indian and foreign partners; foreign partners' share is currently capped at 26%. Several new players are expected to enter India's rapidly growing insurance market in the next few years, especially if the foreign direct investment(FDI) limit is raised to 49%.
The increase in FDI will also allow a fresh infusion of capital into the insurance sector, given the business' strong capital needs.
The current state of affair
India's insurance industry is yet another example of the positive effects of competition and new investors in the marketplace. India opened its insurance market to the private sector in 1999 when parliament passed a new law establishing an independent regulatory body to oversee the insurance market. The law opened the door for participation of private insurance companies and a limited participation of foreign insurance companies through joint ventures with Indian companies. The law also charged insurance companies to make available insurance products and services to the huge segment of the population that are vulnerable and not necessarily part of the formal economy.
The results of the liberalization are there for everyone to see. The insurance markets -- both life and non-life -- have grown impressively. IRDA is working on a regulatory framework that helps level the playing field for all types of insurance companies, irrespective of their ownership. Since 1999, IRDA has licensed 22 new private Indian insurance companies, an overwhelming number of which have global insurance companies as their partners. To date, the industry has attracted foreign direct investment of $235 million.
In 2004, Indian insurance companies mobilized over $21 billion, nearly three times as much as in 1999 ($8 billion). In other countries, this kind of capital mobilization provides crucial resources for investment in infrastructure, corporate businesses, long-term bonds, and municipal projects. Once India does more to free insurance companies to invest in such important sectors, it too can gain benefit from this long-term financial resource.
Currently within the 1.2 million agents in India, LIC alone has over one million agents, pointed out the report. However the advantage that private insurers such as ICICI Prudential, HDFC Standard Life and SBI Life enjoy is the presence of their domestic partners in the banking space.
During 2005-06 (India follows April 1- March 31 fiscal year system) the life insurance sector has grown by 35 per cent in terms of new business premium last fiscal. The new premium pie has grown to $ 8.158 billion, from $ 6.05 billion in the previous year.
LIC's market share has been further reduced to 71.4 percent from 78.1 percent. Among the private players, Bajaj Allianz Life has edged out ICICI Prudential Life at the number one position. Bajaj Allianz Life grew by 216 percent and clocked in new business premium of $617 million. The company cornered a market share of 7.56 per cent. ICICI Prudential on the other hand garnered premium of $599 million and holds a market share of 7.35 per cent.
The other private player that registered significant growth in the fiscal 2005-06 was HDFC Standard Life.
LIC, the market leader
The Life Insurance Corporation of India (LIC), a public sector enterprise, is the largest insurance company in India, selling insurance products and related services.
The Life Insurance Corporation has earned $1.32 billion profit in
2005-06 while its first year premium income during the period grew by a record 48% to $4.1 billion. Besides new products in existing categories, LIC has approached regulator IRDA for launching a micro insurance product for the rural poor. "Our surplus (profit) was $1.32 billion in 2005-06," LIC's outgoing chairman A K Shukla said.
Shukla said LIC's total investment in stocks is likely to increase to $9.09 billion from $7.73 billion at present. LIC, which is celebrating its Golden Jubilee year, has launched new products in life insurance, pension and annuity, and is now working on a micro insurance product. "We have sent a micro insurance product to IRDA for approval," Shukla said, adding that it would be launched soon. He said LIC has also requested IRDA to allow it to partner with more than one general insurer for micro insurance due to large scale operations in the country.
An average of 30-35%growth annually is what the LIC is currently setting its sights on.
TS Vijayan, who was appointed chairman of the LIC recently says: "I want to transform LIC into a world-class global conglomerate. I want to see LIC as a
$228 billion asset-based company and would also like to increase investments in the equity market to the permissible extent, thus yielding profit to policy-holders. I would like to provide training to our marketing personnel and create marketing professionals with specialization in bancassurance, pension and group insurance, micro-insurance and conventional marketing."
Commenting on losing market share to the private sector an issue for you, he said: "Market share is a mathematical function of growth rate and since the private players' base is small, it is obvious that they will grow at a faster rate and this will lead to a fall in our market share initially. However, what is more important is growth and we are satisfied with our growth so far."
"In spite of competition, we have shown a 31.77% growth in policies and 48.56% growth in premium for 2005-06. We have sold more than 30 million policies in 2005-06 which amounts to a market share of 89.08%.
This has been our best ever performance in the sale of policies and growth rate so far. We are also geared for this competition and are working in the direction of improving our market share," he added.
Tapping foreign investments
The Government of India is pushing ahead with the proposal to hike the FDI cap in the insurance sector from 26 percent to 49 percent.
Ashok Jha, Secretary, Department of Economic Affairs, said that legislative amendments to increase the cap were under consideration.
"As far as a hike in FDI (in insurance sector) is concerned, an announcement has already been made. The legislation is under consideration,'' Jha said.
Unlike other sectors, a legislative amendment would be required to permit higher level of FDI in insurance as the cap has been imposed through the IRDA Act itself.
Insurance employee unions opposed the Union Government's proposal to lift the cap on foreign equity stake from the current level of 26 per cent and have threatened to intensify their agitation against the move.
Amanullah Khan, National Joint Secretary of the All India Insurance Employees Association (AIIEA), said that the insurance employees were organizing a five-day general conference to deliberate on these issues. The trade unions are concerned that raising the cap would result in the "private sector players adopting unethical practices for increasing business."
However, the Government has adopted a cautious approach in implementing its proposal as the Left parties (that support the ruling party) have been repeatedly expressing their opposition to any such moves.
On the other hand, there has been intense pressure from foreign insurers and other powerful quarters to hike the cap to 49 per cent as had been indicated earlier.
The Association of British Insurers (ABI) has said that the Indian Government's proposal to hike the insurance FDI cap from 26 percent to 49 percent is vital for the growth of the Indian insurance industry.
"Insurance is a capital intensive industry. Raising the FDI cap from
26 percent to 49 percent is vital for existing joint venture companies to raise more capital," Stephen Haddrill, Director General, ABI, said.
Almost all the foreign partners in over 20 life and general insurance joint ventures have already expressed keenness in hiking their stakes to 49% when a the necessary legislation is passed in Parliament.
Another development, which is adding to the discomfort to foreign players, is the acute shortage of domestic partners which can invest 74% of the initial capital of $22.7 million. This shortage of domestic players has increased the valuation of the stakes to be hold by domestic players. "The overseas partners are prepared to pay high premium from the day one to the domestic partner and if it is ready to pull out of the existing partner the valuation stake is still higher.
This is also luring the domestic players to look for a new partner," explained sources at a life insurance joint venture.
$60 billion business by the year 2010
A recent market research report named "Indian Insurance Industry Forecast (2007-2009)" published by RNCOS- a growing market research and analysis firm says: "India is the 5th largest economy in the world and it is likely that the number of consumers, mostly from middle class background, shall reach around $600mn within the next five years."
An exponential growth of 500% is projected in the insurance industry in India within the next four years. With rural and semi urban consumers contributing for about $36 billion, out of which $24 billion will come through life insurance while the rest will be derived from non-life insurance sector, the industry will observe an exceptional spurt in the next four years. The shoot in the industry will make the insurance industry in India a $60 billion business by the year 2010.
Indian economy, predominantly an agrarian economy, offers enormous growth opportunities for the insurance sector. As per experts, rural sector can become a prominent contributor in the overall growth of the insurance industry in India, provided the needs & occupational structure of people living in villages is understood. For instance, various crops that are comparatively expensive need to be covered under crop insurance schemes.
Also, there are various other requirements of the farmers that need to be looked after by the insurance companies.
Meanwhile, the Fitch report observes that the domestic insurance industry accounts for nearly 10-15 per cent of the country's total financial sector assets. Despite the strong growth and improving penetration levels, the market is still quite small and holds the potential to expand further. Total gross premiums amounted to US $21.6 billion in FY05, split roughly in the ratio 60:40 between life and non-life businesses, respectively. Total (life and non-life) premiums were equivalent to 3.17% of GDP in 2004 as compared to 8.27% in the US, 7.89% in Europe (western, central and eastern) and 7.4% in Asia as a whole. This potential for growth is likely to attract more players.
Looking at the expected GDP growth rate of above 8% in the coming years, corporate capex plans and government spending on infrastructure and the social sector, interest rates are likely to be maintained at current levels with an upward bias. The equity markets have posted a positive return for the third consecutive year. The Indian market has become an attractive investment avenue for global institutional investors. The emergence of mutual funds as a preferred vehicle for equity investments also augurs well for the markets.
Disclaimer
Dr. Uday Lal Pai is an independent columnist for this web site.
Dr. Uday Lal Pai may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment. InvestorIdeas.com Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
Dr. Uday Lal Pai is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.
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