Life insurance in India on growth path

The Indian insurance industry has undergone transformational changes since 2000 when the industry was liberalised. With a one-player market to 24 in 13 years, the industry has witnessed phases of rapid growth along with extent of growth moderation and intensifying competition.

There have also been a number of product and operational innovations necessitated by consumer need and increased competition among the players. Changes in the regulatory environment also had a path-breaking impact on the development of the industry. While the insurance industry still struggles to move out of the shadows cast by the challenges posed by economic uncertainties of the last few years, the strong fundamentals of the industry augur well for a roadmap to be drawn for sustainable long-term growth.

The decade 2001-10 was characterised by a period of high growth (compound annual growth rate of 31 percent in new business premium) and a flat growth (CAGR of around two percent in new business premium between 2010-12), according to KPMG.

There was exponential growth in the first decade of insurance industry liberalization. Backed by innovative products and aggressive expansion of distribution, the life insurance industry grew at jet speed. However, this frenzied growth also brought in its wake issues related to product design, market conduct, complaints of management and the necessity to make course correction for the long term health of the industry.

Regulatory changes were introduced during the past two years and life insurance companies adopted many new customer-centric practices in this period. Product-related changes, first in ULIPs (Unit Linked Insurance Plans) in September 2011 and now in traditional products, will have the biggest impact on the industry.

New Product guidelines

The new guidelines for both linked and non-linked products will now come into force from the beginning of year 2014, an extension of three months from earlier specified date. This additional period will ensure that life insurers enter the crucial quarter of Jan-March with a full bouquet of products and the sellers are well trained in the nuances of all these new products.

These product guidelines are in line with the IRDA's regulatory theme of customer orientation and long-term nature of the life insurance business. The guidelines follow two overarching themes of providing Guarantee and enhancing Transparency. The major changes introduced include - Higher Death Benefit, Guaranteed Surrender Value and mandatory Benefit Illustration for all life insurance products.

The changes related to death benefit and surrender value may marginally reduce the customers' overall maturity benefit, i.e., policy IRR, especially at higher ages but will ensure that life insurance serves the purpose of providing life cover which no other financial instrument offers.

All ULIPs are currently sold mandatorily with a personalised Benefit Illustration. This requirement is now being extended to other product forms. The new guidelines have also provided for setting up a "With Profit Committee" at the board level.

While personalized benefit illustration will provide for greater transparency in the pre-sales discussion, the With Profit Committee is likely to lead to greater governance in the administration of Participating policies. Premium paying term linked distributors' commission will promote the long-term nature of insurance products.

Future looks good

India continues to be a country of savers though we have witnessed a decline in the household savings rate in the past couple of years. In India, the problem lies in household savings lying idle or getting invested in saving instruments that do not help them achieve their life stage goals. There is a worrying trend of larger portion of household savings getting into non-productive physical assets such as real estate and gold.

But even then, the future looks interesting for the life insurance industry with several changes in regulatory framework which will lead to further change in the way the industry conducts its business and engages with its customers. World over it has been observed that the life insurance industry does behave in a counter cyclical manner in many cases, e.g., in a situation where the economic growth is slowing down, due to other factors such as high current account and fiscal deficits, currency depreciation, high interest rates, savings rate will continue to be high, leading to higher demand for life insurance.

Life insurance is a big savings vehicle along with banking in such uncertain economic environment and so we expect the industry to fare reasonably well. Demographic factors such as growing middle class, young insurable population and growing awareness of the need for protection and retirement planning will also support the growth of Indian life insurance.

For life insurance, it is time to re-commit itself to customer-centric behaviour, product solutions based on consumer needs, ethical market conduct, transparency and governance. The growth will be the natural outcome for now and years to come.