With the government increasing the FDI limit to 49 percent, there is a keen sense of anticipation within the Indian insurance industry that is expecting a flush of foreign investment in the sector.
However, valuation of insurance companies is still a relative novelty for investment analysts in India, as the industry has historically been isolated from the analysts' radar.
A joint study by CII and Towers Watson, titled Indian Insurance Sector: In Pursuit of Value demonstrates the measurement of value from insurance business and chronicles the industry's experience to date in being able to deliver stakeholder value for both consumers and providers of insurance.
The report is particularly useful for newcomers to Indian insurance analysis and would also serve as a key reference document for seasoned sector observers. The study sheds light on sources of profits for insurers and through stylized case studies, illustrates possible paradoxes in the analysis of long term life insurance business for the shrewd investor.
Despite recent challenges - including a raft of regulatory changes, growing competition, mis-selling and a prolonged economic slowdown - that have all required insurers to constantly reassess their business strategies, the study has highlights that insurers remain upbeat about the industry's prospects and have emerged anew seeking growth, momentum and value.
The report identifies four fundamental drivers that would help realise the value that this sector promises:
Business optimization: to remedy high expenses and poor persistency that has plagued the sector. Highlighting the long-term nature of the insurance business, the report argues that to achieve the desired optimization it is critical to set the right KPIs to ensure management focus remains on long term value drivers rather than achieving short-term milestones.
The right product-price-process proposition: need for being customer centric, adopting need-based selling and enhancing the customer value proposition.
Favourable macroeconomic fundamentals: Young Indian population, optimistic market sentiment and government policy announcements act as the right ingredients for insurers to flourish.
Confidence building: concerted effort aimed at regaining customer confidence that has been dented due to negative press that the sector has faced recently.
Commenting on the findings of the report, Sanjiv Bajaj, Chairman, CII National Committee on Insurance and Pensions and Managing Director, Bajaj Finserv Ltd said "The government has done a commendable job with FDI in creating a conducive environment for the sector to realise its full potential and unlock value. It is now critical for all the stakeholders, led by the insurance companies, to make a concerted effort in building a value creating and value delivering industry, thus staking claim to its rightful position among the most promising insurance markets in the world.
Vivek Jalan, Director, Risk Consulting, Towers Watson India further added, "With all the corrective measures and regulatory changes in the past, the Indian insurance industry is poised for positive growth. To achieve this, it is important for companies to realign their business model as well as maintain realistic expectations. Further, how efficiently insurers are able to utilise the expected capital infusion from foreign partners will be a key determinant of growth and profitability."
Distribution appears to have posed maximum challenges for the insurance sector in the recent past, yet continues to be seen as the major driver of value in future. A majority of the bigger challenges faced by life insurers have either been related directly to distribution channels - for example, retention and productivity of agency force and managing third-party distribution tie-ups or indirectly (such as, managing policy persistency). Similarly, the balance of power being significantly in favor of the distributors was one of the major challenges faced by the non-life insurance companies as well.
The inability to balance growth with profits was cited as one of the key challenges faced by non-life companies. Inefficiency prevalent within the insurance sector is again one of the key challenges that need to be overcome for all stakeholders, including policyholders, investors and distributors, to realize the true potential of the business.
