Stringent traffic penalties and multi-year third-party (TP) policies on new vehicles will help capture the untapped TP business in India. While the Street is bullish about the growth and profitability prospects from increase in TP penetration, our calculation suggests that the headroom for premium growth may be limited to 26% of FY2019 motor TP premiums or 5-6% of overall industry premiums. Profitability may be higher due to higher inherent profitability in two-wheeler and car segments.
Street bullish on improvement in motor TP penetration
The Street has been bullish over the past few months on the general insurance industry’s growth prospects due to increase in TP motor penetration. Industry bodies have often argued that TP premium, although a regulatory compulsion, has low penetration in India. Vehicle owners often do not renew their policies beyond the first year/policy which is attached to the purchase of the vehicle. According to industry players, insurance compliance with commercial vehicle operators is high but lower with cars in the interiors and the lowest in two-wheelers. Industry and market players have lately been bullish on increase in motor TP penetration owing to two factors. First, the Supreme Court has made it mandatory for vehicle buyers to purchase three- and five-year TP policies on purchase of new cars and two-wheelers, respectively. This will reduce the risk of slippages in second to fifth year; insurers have the option of attaching single or multi-year own damage (OD) policies along with such TP policies. Secondly, the new Motor Vehicle Act, 2019 (which increased traffic penalties on uninsured vehicles) is driving penetration in motor TP as well. The Act increased penalties for driving uninsured vehicles by 2-4 times (to `2,000 for the first offence and `4,000 for the second offence).
Penetration levels are not so low
Based on our market sizing of the motor TP insurance space, the potential headroom for growth through increased compliance levels is about `100 billion (6% of the total general insurance premiums in India). Our analysis is based on domestic new vehicle sales volumes reported by SIAM. We have calculated the on-road vehicle population assuming a 12-year life for 2-wheelers and cars, 15-year life for LCVs and a 20-year life for M&HCVs. We considered TP premium rates prescribed by Insurance Regulatory and Development Authority of India (Irdai) for FY2018 and FY2019 to arrive at the potential size of TP market in India at `416 billion and `479 billion in FY2018 and FY2019, respectively, at 100% compliance. The Irdai reported total motor TP premium of `380 billion in FY2019, implying 79% penetration in the above-calculated potential demand. This calculation thus pegs the untapped market at `100 billion, indicating that the headroom for growth based on higher penetration levels is 25% of motor TP premium.
Relatively lower penetration levels for cars and two-wheelers
Market participants suggest that overall compliance is high for CV and lower for cars and two-wheelers. Assuming 90% compliance for all CVs, the residual premium for other segments like car and two-wheelers would be lower; the calculated compliance in case of cars and two wheelers is 67% thus providing 49% headroom for growth. Large players such as ICICI Lombard have 82% share of cars and two-wheelers in their motor business; the ratio is 60% for Bajaj Allianz. Hence, these players may be beneficiaries of higher penetration in cars and two-wheelers. More importantly, profitability may be higher in these segments as well.
Edited Excerpts from Kotak Institutional Equities Research report