Investors should have long-term view on insurance firms: ICICI Lombard CEO

CEOs of leading non-life insurance companies discuss the issues that the industry is facing and the opportunities ahead

How can the public sector general insurers revive themselves and what role do they play in the present scenario?
 
Alice Vaidyan: Look at how the state-owned general insurers have served the country and how they have grown over the years. Yes, I agree that there has been a fall in their market share from 55 per cent to 45 per cent. Probably, the announcement of the merger of the three companies did not give much confidence to the public. The government has not gone back on its decision on the merger. As far as we know, the merger is going ahead.

 
The merger is a good thing for the industry. Three public sector undertakings (PSUs) will merge, the fourth might merge, but we don’t know that as of now.
 

Varun Dua: India is sort of 20-30 cohorts. There are areas in this country where the PSU insures can provide their service and private insurers will never get there or get there in a very long time.  Players like us focus on digital India and millennials (probably the top 20-30 million), the private general insurers are looking at the urban to Tier-2 population. But there is a pretty large section in the country in the rural areas or tier 3 cities which can only be met by the PSUs. I don’t think the rural business is not profitable. It’s just that we don’t have the ability to reach there as of now. 

 
Anuj Gulati: As the economy has grown, insurance too has on an overall basis. Within that, competition has intensified. There are about 26-27 private and PSU general insurers and seven standalone health insurers. The knowledge base that the PSU insurers have and continue to have, helps them stand out in the market. And, a lot of us from the private sector continue to learn from them. As the market has gone retail, their ability to have change along with the market through technology, process to deliver has been slower than their private sector counterparts. In that sense, the PSU insurers have a role to play. They have to change rapidly to keep pace with the changing needs of the customers. But there is so much under-penetration and so much more growth to come that even now, it’s not too late. There is an opportunity for all, and all of us have to change with time if we want to continue to remain relevant.

 
Neelesh Garg: PSU insurers are great at certain things and they are not so great at certain things. When the sector got privatised, lot of the sales especially on the retail side were “pull-sales”. But wherever there was a latent demand, sales did not pick up. The private sector has gained market share by creating new demand in the market place and convincing the customers. It’s not necessarily that the public sector has lost space.
 
There are three kinds of customers: corporate, urban retail and rural retail. The first and the third is where the PSUs have a very strong advantage in terms of capacity, knowledge or the rural reach. In case of millennial customers and digital customers the private insurers have advantages in terms of speed and technology.

 
Bhargav Dasgupta: One of the challenges that PSU insurers had was for some time they were focused on market share, and market share at the cost of underwriting can always create damage. We are seeing a correction on that front. All the PSU insurers are changing on the pricing and the underwriting side. Then they will have the capital to invest in some of the more futuristic aspects.
 
Why are general insurers making underwriting losses?
 
Vaidyan: Insurance is a new thing to the markets. One cannot assess insurance companies on a quarter to quarter basis. One cannot take a very short term view of the industry. It has to be seen from a long term perspective. Insurance companies, world over, are benchmarked on annual performance. From GIC Re’s perspective, we have been growing on a year-on-year basis and we are growing profitably.

 
The non-life market has been making losses on underwriting ever since the property class and fire class were de-tariffed in 2007. So, that has rubbed off on all the companies in the market. But, the climate of investment income is very good here and the investment income has been subsidising the underwriting losses. So, overall companies have been making profit. I am very confident about the industry per se.
 
Dasgupta: Indian accounting standards are more conservative than the international standards. If we take a look at the long tail nature of our business, particularly in motor insurance, we have a large book where claims will be paid after five-six years. Unlike banking, we estimate the future losses and hold it on a nominal basis. This actually inflates the total provision that we make.

 
Indian general insurers’ combined ratio is not as bad as it optically looks like. Insurance is a very volatile business, especially general insurance. There will be quarters where we will have investment losses because we look at investment from a long term perspective. We do not do mark to market everyday unlike some other sectors, which is a good thing to do because then we can invest for a longer term. But when you take impact of the final losses, you may have investment volatility in a particular quarter. On the underwriting side, you will have volatility and that is more so for reinsurance companies than general insurance companies. I would urge the investors to understand the industry from a long term perspective rather than getting carried away by what has happened in a quarter.

 
Vaidyan: If you see the market now, a lot of correction is happening. Our market is growing like no other market in the world. If we take the western markets and the Asian markets, all are growing in single digits. Western markets are going at 2-5 per cent. India is among the few markets globally growing in double digits.
 
We are seeing growth at 13-15 per cent and this growth is here to stay. It’s only a matter of time that India will become the fastest growing insurance market in the world. We are the 10th largest life insurance in the world and the 15th largest general insurance market in the world. So given the growth opportunities here and because of all the government efforts, it’s only a matter of time that the market will become profitable. Investors should be a bit patient and it will be both rewarding and satisfying for them.

 
What are the product innovations at present and how can the regulator help to better the customer experience?
 
Garg: There is a significant amount of product innovation that has happened in the last 20 years of the insurance industry. Lot of the product innovation depends on the size of the market and customer demand. Four or five insurance companies have title insurance products but because of some constraints, very few successful sales have happened. Cyber insurance has taken off in a big way in India.
 
A lot of people in the industry would know that traditionally motor insurance used to provide one-third coverage because of various exclusions. Now, we have products which are covering 100 per cent of your motor car. So, that is a big innovation. Similarly, in factory insurance, most of the coverage, earlier, was only for tangible risks (physical property). There is a significant coverage on intangible risks now.

 
Are there other new-age products?
 
Garg: Today, we have a product which is insuring corporates in mergers and acquisitions. It’s a first world product that we are seeing in India now. Similarly, we have a product which provides coverage for an initial public offering (IPO) for any corporate which goes for public listing.
 
In the US, there are products for things like vacation cancellations. It’s not that we cannot do such products but the market for such kinds of products in India still seems to be very small. But, the way the middle class is growing, we will see such products pick up pace in India.

 
Dua: It is a matter of time that products like vacation cancelling will come into India.  From the regulatory side, we need lighter regime on product approvals. A lot of times we get stuck. 
 
Gulati: A lot of it is do with the fact that once your economy hits a certain level of income, that is when the industry starts to take off and we are just about at that cusp now. Fundamentally, we are getting to that point now where the affordability of the large consuming middle class is increasing, so the need for protection products, risk management in retail consumers’ mind is rising and that is starting to lead to innovation in products. 

 
From the regulatory angle, what we have seen in the last two-three years is significant freeing up of product. From group side, there is the use and file method. There is discussion to the same on the retail side. So, we are getting into that regime and it’s good that we are doing it in a step by step method because it has brought a lot of discipline to the market. The hard part about insurance is your losses show up after 15-18 months. So, the innovation should happen in a gradual manner or else it will be disruptive which will be a huge challenge on capital and sustainability.

 
Dasgupta: On title insurance, we have a product out there but the take-up is really poor but it will pick up. As an industry we have to be very responsible. When we push the regulator, the regulator also worries about the consequences on the policyholders. We have to launch products in a manner which is sustainable from the policyholders’ perspective and for our shareholders. While the regulator is making a lot of changes on the group side and the sandbox idea that they have talked about is a very good idea.
 
What we need is a much differentiated approach to different companies in the market. Within certain constraints of limits, maybe in terms of the amount of business that you write or your past track record in terms of your discipline, or the way you have conducted yourself, the regulator could gradually start becoming a bit more lenient towards a certain set of companies to allow them to experiment while they allow the sandbox for everyone. 

 
Vaidyan: India is one of the biggest markets. Non-life insurers wrote premiums to the tune of Rs 1.5 trillion last year and we are looking at a 20 per cent increase this year. On the other hand, life insurers have underwritten premiums to the tune of Rs 4.5 trillion. So, it’s a substantial market. But the fact remains that, insurance is still a push product and it has not become a pull product yet. Innovation in products will take time but it is happening in a big way across the industry.
 
It’s not that product innovation is not happening, it is happening in a big way. If you see on the technology front, the biggest change we saw was when the crop insurance scheme was launched. It was one of the big game-changers in the market and we will see more of such activities in the future.

 
India has a huge growth potential and there is room for everyone to grow. We are seeing new products are coming up and new companies are coming up and lot of intermediation is happening in the insurance space. Still, the fact remains that insurance is not as popular as banking.