G N Bajpai: The quest for cover

The life insurance industry is indeed pleased. Unexpectedly high growth in new premium income (NPI) seems to be the reason for the general good cheer. There are performers like Bajaj Alliance and HDFC Standard Life, exhibiting (during the current financial year) growth of 237 per cent and 177 per cent, respectively, as on September 30, 2005, in NPI. Even the behemoth that is Life Insurance Corporation is experiencing growth of 23 per cent. There are a few laggards like Birla Sun life and SBI Life, with negative growth of -12 per cent and -0.34 per cent, respectively, during the same period. This certainly looks odd.

In the post-liberalisation five-year period (2000-05), the compound annual rate of growth (CAGR) in new premium income has been of the order of 25 per cent. Apparently, the opening up of the sector has been a watershed development. Products, distribution channels and strategy have undergone transformation, partly introduced by the new players and partly induced by environmental developments like the bottoming out of interest rates, the steady dismantling of administered high-yielding savings instruments, and the resurgence of capital markets.

India's free insurance market has gone through two phases of experimentation, first of nationalisation and then liberalisation. The rationale of the two at two different junctures of our post-1947 history was to help society benefit from the innovation of risk sharing. Even though a five-year period may be too short to evaluate the efficacy of the decision, it may be worthwhile to assess if the sector is moving towards its goal.

While premium income is an important barometer of the performance of a life insurance company, it is only one of quite a few. Most industry pundits have argued that the number of policies sold is a more important indicator, particularly if the average size of the policy is over the inflection point of surplus contribution.

It is important to note that in the same five-year frame, the CAGR on the number of policies has been only 9 per cent. Further, the performance of the industry in the three-year (2002-05) frame, after the private sector companies travelled out of the birth phase, is even less flattering: CAGR of NPI has been only 4.3 per cent, and of policies 4.6 per cent. This indicates that the performance of the industry in the five-year frame has been driven mainly by LIC, which has grown at an enviable rate. Some of the private sector companies too can boast of 3-4 digit growth rates during this period, but this is largely because the denominator is very small. However, the subject under evaluation is industry performance, and not individual companies.

The obvious question is, what drives the growth of NPI if the customer base is not getting bigger? Elementary, my dear Watson, it is the upsurge in the capital market. Unit-linked policies are hot property in the life insurance product basket. A decline in the absolute investible accretion to the life insurance sector fund, from Rs 91,000 crore to Rs 75,828 crore in 2004-05 (Financial Express, November 29) validates this assertion. Whereas not capitalising on unfolding opportunities could be imprudent, betting on wobbly phenomena shows no great wisdom. The history of life insurance in the western world holds out a lesson: Diversify, hold on to your core business, and build a sustainable model, or be damned in not too distant a future.

The social security network in India is woefully weak. The country's economic resources are not enough to organise even a minimum-security cover, given the population of the needy. Delivery under the extant social safety schemes is a serious issue. Globally, the trend is to encourage citizens to weave their own nest.

The population in India is young, large, and growing. The economy is on a sustainable high-growth trajectory. Income levels even in semi-urban and rural areas are rising fast. Disposable incomes are also increasing exponentially. A World Bank study has indicated that India's dependency ratio will drop from 62 basis points in 2000 to 48 basis points in 2010. A 14-basis-point reduction would result in the household savings rate (HHS) rising to 39 per cent of GDP in 2010, the study outlined. And with GDP rising at the current average (last three years) of 7 per cent, the pool of household savings will increase nearly three-fold. Holding on even to the current share of 7.25 per cent (2003-04) of the HHS, which should normally swell with dynamism in the industry (it was 9 per cent in 2001-02), would warrant an industry-wide annual growth rate of over 75 per cent.

Inflation is under control. Administered interest rates are being steadily phased out. The joint family umbrella of security is disintegrating. With the opening up of the market, the scope for innovation is plentiful. Experimentation is affordable. The Indian life insurance market is thus ready for expansion and the potential for growth is tremendous. However, growth, particularly in the matter of reaching out to a vast pool of the insurable, leaves much to be desired, if the CAGR on the number of policies is any indication. The reasons are not far to seek""organic growth-stereotyped vision, conventional methods, and borrowed techniques.

Insurance is fundamentally a distribution business. Life insurance marketing in India continues to be mostly a matter of legwork. Building distribution channels is effort-intensive, with the added handicaps of a long gestation period and a high turnover. If the work of building distribution networks is driven by insurers alone, progress will remain slow and coverage scanty in a peninsular Indian market.

Globally, the industry is getting segmented into producers of service, marketers of service, and producer-marketers of service. The regulatory framework is not conducive to the development of stand-alone and independent distribution networks or mere service providers. The strategic approach of the insurance companies is focused more on tied agency network, which can deliver run-of-the-mill development, in fits and starts at that, because of the high turnover.

The country's quest for cover continues with a transformed configuration of the prospects (with more disposable incomes), providers (transnationally successful life insurers) and promoters, but with traditional pace. The solution lies in having an adequate number of producers of service, thousands of well-regulated distribution networks, innovative policy approaches, and customised strategic initiatives.

NB: The source of most of the data used in the article is the IRDA website

The author is former chairman, Sebi, and former chairman, Life Insurance Corporation