Relative tax advantage of Ulips and rationalisation in its costs make it an attractive investment proposition for investors to meet their life goals, along with insurance cover.
Insurance is an important financial savings product in India. Household financial savings data shows that insurance funds contributed 1.9% of the Gross National Disposable Income (GNDI) in India in 2017-18, making it the third largest component of household financial savings after bank deposits and provident and pension funds, according to RBI Annual Report 2017-18. On a relative basis, shares and debentures (which also includes mutual funds) contributed 0.9% of GNDI in 2017-2018.
Density of insurance
Insurance penetration in India (measured by ratio of premium to GDP) is lower than the global average, and also lower than a host of its Asian peers. Life insurance penetration in India stands at 2.72, compared to global penetration of 3.47, while certain countries such as Taiwan, Hong Kong and South Africa have penetration levels in double-digits. Meanwhile the total insurance penetration (both life and non-life) in India stands at 3.49, compared to 6.28 for the world.
Another way to analyse is the insurance density level or ratio of premium in US$ to total population. For India, the life insurance density was $46.5 compared to $353 for the world in 2016 (Irdai annual report). However, it is expected that for countries with lower per capita GDP, the insurance density levels will be relatively lower than countries with higher per capita GDP. Although, given India’s relatively lower per capita GDP its insurance penetration stands relatively higher to countries with comparable per capita GDP such as Pakistan, Bangladesh, Vietnam, Philippines, Sri Lanka and Indonesia.
Other insurance trends
Life insurance penetration trend in India has been volatile over the years. It picked up from 2005 onwards and peaked in 2008-09 helped by Ulips (Unit Linked Insurance Plans) to some extent. From there, insurance penetration has come down over the years—led to some extent by surrender and outflows from Ulip funds. However, the insurance penetration in India seems to have bottomed out, and has gradually picked up in past few years.
If we look at growth in premium over the past few years, growth is more visible in linked products (ULIPs). The annualised premium equivalent (APE) growth for linked products has been a healthy 36% CAGR for 2013-14 to 2016-17. Over the same period, the growth in premium for non-linked products (traditional insurance plans) has been flat at an industry level. The growth of linked products has been on a relatively smaller base, as a major part of the total annual premium market share is for non-linked products (around 85-87% market share). The market share of linked products is relatively lower at 13-15% of overall annual premium.
The channels for distribution of life insurance is also gradually changing. Although in life insurance industry, banks play a dominant role in distribution (called Bancassurance channel), followed by agency channel (life insurance agents); direct channels, especially online channel, is starting to gain traction, due to increased digitisation and internet usage in India.
Going forward, the relative tax advantage of Ulips funds may also help to pick up inflows in this product category. The rationalisation of costs for Ulips over the years due to regulatory changes and distribution dynamics, have also made them a relatively attractive investment proposition for investors to meet their life goals, along with insurance cover.
The online medium could further help to increase penetration of life insurance (especially Ulips) in India. One cannot ignore the massive strides that e-commerce is taking in India, and the possible disruption that it can make in distribution for the life insurance space in India.
-Tarun Chugh is MD & CEO, Bajaj Allianz Life Insurance Company