Indian Insurance market to be USD 400 BN by 2020!

A recent report by FICCI and BCG has suggested that the Indian Insurance market will grow to USD 350-400 BN by 2020, and will be the among the top three insurance markets in the heart. This sensational headline has warmed the hearts of many, and made everyone excited about the potential of the industry. It is worthwhile to bear in mind that the current market size is around Rs 3 lakh crores, which is USD 70 bn. So we are talking about a 5 times increase in the next 10 years. We feel this is too aggressive and is more a headline grabbing, stand out from the clutter, screaming for attention news item.

We would actually pay far more attention to some of the other items that the report mentions: 

1. Profitability is a huge issue for the Insurance industry in India, with the non life insurance industry having accumulated underwriting losses of Rs 30,000 crores and the life insurance industry have cumulative losses of Rs 16,000 crores

2. The agency model, the main distribution channel, is still proving to be unprofitable for the life and non life insurance sector

3.Insurance companies' obsession for topline growth has contributed to a inefficient, non sustainable operating model

4.Auto claims fraud, third party liability for motor and high level of claims for health insurance is crippling the general insurance industry in India

5. The recent tightening of charges for ULIPs has taken the wind out of the sails of the life insurance companies in India

IndiaFirst Life achieves sale of Rs 900 crores

IndiaFirst Life, which is a late entrant into the area of Life Insurance in India, has generated a creditable Rs 900 crores of premium in the first 500 days of its operation. IndiaFirst is a  joint venture between Legal and General, Andhra Bank and Bank of Baroda. It is headed by P Nandagopal, an industry veteran who was earlier the distribution head of Birla Sun Life and the CEO of Reliance Life. The team draws heavily from the  Reliance Life team, and it would be interesting to follow the progress made by this company in the coming months and years.

IPO norms by end of April 2011

The IRDA Chairman has announced that the IPO norms for insurance companies in India would be announced by the end of April 2011. Speaking at a conference in Delhi, the Chairman mentioned that a couple of private insurance companies would be completing 10 years of operation (HDFC Life and ICICI Prudential Life) by the end of April 2011, and the initial condition has been that private companies need to be in existence for 10 years before going public, thus norms need to be ready by then. 

It would be interesting to note which life insurance companies decide to tap the equity markets. While the markets have been on a roll, the regulations effective Sep 1 2010 for Unit Linked products (ULIPs) might depress valuations of the life insurance companies. While Bajaj, Max ,ICICI etc have their holding companies listed and the market has assigned an indirect value to the insurance companies, it would be nice to see how the market values a directly listed life or general insurance company. Insurance penetration which is at 5% of GDP and has a total market size of Rs 3 lakh crores still has a lot of potential to expand further in India, and that should keep the capital markets interested.

General Insurance Premiums to cost more

IRDA Chairman, J Harinarayan, has mentioned that premium rates for Motor Insurance, Health Insurance and other General Insurance products would see an increase very soon.

This is primarily driven by the fact that claims ratios of the GI companies have been higher than expected, and the insurance companies have needed to increase their provisioning. The key factor that has contributed to this higher provisioning is motor third party claims, where the premiums are ridiculously low. General Insurance companies have incurred a combined loss of Rs 3500 , primarily on account of motor claims.The third party motor insurance, which is a mandatory product, could see an increase by as much is 300-400%.

Because of higher provisioning, insurance companies might have lower capacity and that might lead to increased rates. However, the rise in rates is likely to be gradual instead of a steep one time hike.

PNB in final stages of selecting Bancassurance Partner for Life

Punjab National Bank, the second largest bank in the country, is in the final stages of selecting its life insurance partner. In a rigorous selection procedure, more than 40 companies  expressed their interest .Subsequently, PNB has arrived at the final list of 3 life insurance companies- Aviva Life, MetLife and Bharti Axa Life- and has dropped companies such as Birla Sun Life and Reliance Life from the list 

This deal is not a pure distribution arrangement but also an equity participation arrangement wherein PNB will acquire a substantial stake in the final insurance company that it selects. Axis Bank had entered into a similar sort of arrangement with Max New York Life where they had acquired about 5% stake in Max. In this case, the stake that the insurance company would need to offer would be significantly higher as all the three companies shortlisted would be having lower valuations than Max New York, and PNB is a larger bank with more branches, and thus brings more to the party. The other variable that has changed since the Max New York and Axis Bank is that life insurance valuations have got depressed since the new IRDA regulations effective since 1st Sep 2010.

This deal could be a potential game changer for the winning life insurance company as PNB has a huge branch network (5000 + branches). MetLife lost their largest partner Axis when Axis decided to tie up with Max after Shikha Sharma joined Axis. Aviva Life has also lost a few bank partners of late and Bharti Axa Life does not have any significant Bancassurance partner. We expect very aggressive bidding by all the three players left in the fray.

PNB is being advised by BCG, the consulting firm, through this selection process. Once PNB is done with this selection process, they would in all probabilities initiate the process for selecting the non-life partner.