A simple way to get a sense of competition in the insurance sector is to look at aggregation sites like (policybazar.com or for example). You will get 15-20 quotes for a query about vehicle insurance and as many if not more for other categories, such as life or health.
For an old fogey like me, this is hard to believe.
Not so long ago, there were five Indian insurers, and each was entirely government owned. Today, the Insurance Regulatory and Development Authority lists a total of 24 life insurers, 33 general insurers, two re-insurers, and 17 health insurers. Most are private service providers, often with an overseas major partner. The opening up of the sector has meant vast improvements in terms of choices. This has also led to fraud in some cases, such as the notorious mis-selling of Unit Linked Insurance Plans or ULIPs in the early 2000s.
In the last year or so, the sector has seen the launch of multiple initial public offerings. The IRDA allowed insurers to tap the financial market only in August 2016, when it finalised the norms for making public issues, through which companies could list their stocks in the market for public investment. ICICI Prudential Life Insurance launched the first IPO in September 2016, within a month of IRDA’s go-ahead.
Numerous other companies have followed, including ICICI Lombard General Insurance, SBI Life and General Insurance Corporation to name a few. Just this month, the government-owned New India Assurance kicked off its IPO followed by HDFC Standard Life Insurance, which made its debut on the stock market on Friday after floating its IPO earlier this month. Each of these issues raised substantial sums.
There are more primary issues from insurers in the pipeline, including from public sector units. The government wants to divest 25% in each of the insurers it owns, in several tranches, and it has started this process with the General Insurance Corporation and the New India Assurance IPOs.
The stock market is booming, which means that the insurance sector might easily mop up Rs 35,000 crore or more through IPOs in this financial year.
Scope for growth
India is exceedingly under-insured by global standards. In the last financial year, insurance penetration reached 3.4% in India. The country accounts for less than 1.5% of all global premiums (by number) and just about 2% of life insurance premiums. But with close to 12% of global population, it can aim for a growth of at least six times in the sector.
The gross premiums for general insurance (all kinds of insurance barring life, health and reinsurance) are reckoned to be about 0.8% of India’s GDP – that’s about one-third the global average of around 2.5% of the GDP.
Overall, insurance per capita is $13 for India and around $285 globally. India’s nominal per capita ($1,709 in 2016, according to World Bank Data) is also much lower than the global average per capita ($10,150). But even adjusting for that, India’s per-capita insurance cover is roughly one-fourth of what it could be.
Hence, the Ministry of Commerce estimates that the Indian insurance sector could grow four times in the next decade, growing to $240 billion from its current size of $60 billion. Those estimates may not be out of line.
From a historical perspective, insurance has been the fastest-growing global industry over several centuries. The European voyages of exploration that opened up sea routes to Asia were generally backed by pioneering insurers. Marine insurance for ships and cargoes and agricultural insurance against crop failures – these were early risks covered in pre-industrial societies.
By the 19th century, everything from new railway lines, to undersea telegraph cables and Chicago slaughterhouses were being insured. Modern commerce would be inconceivable without insurance cover for most big projects. Even factors like risks arising from political instability are covered by global insurers. offering a backstop to businesses that operate in volatile environments.
This business can be vastly profitable. A comparison of the insurance and banking sectors is illuminating. Banks borrow money at varied rates of interest and tenures. Some of those loans are demand deposits that can redeemed anytime, as in savings accounts. Other loans have defined tenures for deposits.
Insurers on the other hand receive premiums. For term insurance, which is the most common kind, customers pay a premium regularly and insurance companies need to pay up only if there is a valid claim. Even “money-back” premia on some life insurance policies carry very low interest, or zero interest. Insurers therefore have access to long-term funds at nearly zero cost.
Banks have problems lending money out for longer than the average tenure of loans they have taken. Let us say the bulk of a bank’s funds consist of loans for tenures of one year or less (money people have put into fixed deposits or savings accounts). That bank cannot safely lend this for five-year tenures, since the creditors may want their money back. Hence, banks are always struggling to handle asset-liability mismatches, when the liabilities (loans taken) are short-tenure and profitable assets (or the loans given) are long-term.
Insurers do not have that problem. They can lend, or otherwise invest, for the very long-term. The world’s greatest investor, Warren Buffett, is also one of the world’s largest insurers. That is not coincidental. He has used his insurance funds wisely.
Consider something like a toll-road project, a telecom network, or a power plant. These are capital-intensive works. These are also long-gestation – they take years to complete and earn zero revenue until they are ready. Once up and running, these projects may be highly profitable. Insurers can fund this sort of project with much greater comfort than banks.
Proceed with caution
The flip side of the equation: insurers earn a living by taking big bets that can blow up spectacularly. Usually the premiums charged are a small fraction of the potential risk covered. One tsunami or super-cyclone that wipes out an entire coastline, or a disaster at a nuclear plant (or both), or even a military coup, might drive insurers into bankruptcy. Insurers offering crop insurance have to reckon with the possibility of seasonal droughts or floods that lead to claims across entire districts.
Hence, regulators demand that the promoters of insurance companies have plenty of their own skin in the game so as to be able to cover disasters. There are high equity and reserve requirements. That is one reason for insurers to raise cash through the equity market.
So, how does one value an insurance company? This is not easy. You may have a sense of the premium growth potential or the breadth and efficiency of the marketing network, but it hard to get a sense of the risk. Public sector insurance companies are more exposed to risks because they are forced to offer highly-subsidised crop insurance, or health covers. They are also often forced to invest in poor public sector assets, like bankrupt banks.
As the industry gears up for a potential boom, citizens can tap into it by subscribing to insurance IPOs, or buying into already-listed insurance companies. But this comes at a high risk. And the old principle of caveat emptor – let the buyer beware – applies.
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