Indian life insurance lagged Asian peers: McKinsey

Says private insurers serving a minuscule segment to meet narrow investment needs

India’s life insurance sector has underperformed compared to its Asian peers, says a report by McKinsey & Company.

The report says none of the private insurers here are creating value of the type indicated by the potential, all of them serving a minuscule segment, mainly to meet narrow investment needs.

Even within this confined space, says the report, they demonstrate a significant spread in performance, which is driven largely by distribution strategy.

“While most carriers offer affluent consumers a similar product mix, including a high share of investment-focused Unit-Linked Insurance Plans (Ulips), a few have outperformed by investing in their distribution channels.”

It added the leaders tend to focus on bancassurance, for example, and leverage partnerships with banks to expand scale and brand, to grow market share and profit margins.

It says unlike other markets, growth in India’s life insurance sector is correlated more closely to equity market performance than rising gross domestic product. For over a decade, it says, the private segment has delivered overall returns far below the cost of capital and even below those in other Asian markets.

While there were some positive returns between 2011 and 2014, it said even the bright spots were mostly illusory. “Between 2011 and 2014, for example, private life insurers in aggregate generated positive returns but our analysis show this rebound was driven primarily by surrenders and lapses on Ulips as equity markets weakened.”

The report also said insurers, rather than trying to build the skills of agents to sell higher margin protection products as affluency rises, continue to chase revenue-focused growth in the hope of building scale and growing their way out of the profitability challenge.

It sees the largest untapped potential in two areas — growing penetration in a few specific regions and unleashing the latent demand for protection products. As affluence rises, demand for protection, pensions, annuities and long-term care products will provide significant opportunities for growth.

For value growth, McKinsey has suggested they expand capabilities in agency and lower costs, besides reinventing relationships with customers and distributors by using digital tools and analytics. It also said they should build risk and capital management skills, besides leveraging existing customer relationships.