Rise in savings and gradual increase in the share of insurance funds in net financial savings will be key to the growth of life insurance sector
The life insurance industry in India stood at Rs 4.2 trillion ($64.6 billion) as of FY17, with insurance penetration at 2.72% and insurance density of $46.5. Total premium recorded CAGR of 10.4% in FY07-17 with private players growing at two times of Life Insurance Corporation of India (LIC) in the same period, gaining market share. We expect a similar trend to continue in future with private players set to register CAGR of 18.4% over FY17-20 vis-à-vis industry growth of 13.5%.
Rise in financial savings and gradual increase in the share of insurance funds in net financial savings would be the key catalysts for the growth of life insurance sector. We expect household savings to clock CAGR of 14% over FY17-20, while net financial savings are expected to grow at a faster rate of 15.5%, forming 39% of household savings by 2020 from average of 36.4% over FY12-FY16.
We believe that buoyancy in the Indian capital markets will keep the ball rolling for investment-linked insurance products while product innovation in protection is expected to pull demand in the high-margin segment, eventually improving insurance penetration in the country and future profitability of the insurance companies. As per our estimates, growth in new business premium (NBP) will be in the range of 20-30% on an average over the next three years while at a lower cost multiplier effect.
Protection growth to drive margin
India’s sum assured-to-GDP, a key measure of insurance protection in an economy, is significantly lower than that of other countries. This indicates that India is still underinsured and there is significant scope for growth. Gradual pick-up in the economy, structural growth story in place (amid increasing share of working population), growing urbanisation, rising life expectancy, improving healthcare spending and pension needs will drive strong growth in life insurance products over the next decade.
According to Swiss Re, protection gap in India stood at $8.6 trillion in 2014, having mortality gap margin of 92%, highest among countries in Asia-Pacific. This in itself represents a huge untapped opportunity. Profit margins are also significantly higher in the protection business.
Improvement in persistency key
Post regulatory overhaul, persistency went for a toss, but with strong product makeover, we are witnessing a gradual improvement in persistency ratios (13M persistency at 60-80%) while still having headroom for improvement, to be at par with Asian peers (13M persistency at > 90%). We have done sensitivity check and have observed that players with higher linked portfolio are more sensitive to cyclical shocks vis-à-vis traditional/balanced mix portfolio.
Insurance companies with optimal scale of operations, efficient use of distribution channels (bank-led insurers, higher agent productivity and higher business/ branch), better operating efficiency (lower expense ratios), healthy persistency ratios and higher new business mix from protection business can drive future growth and will lead the improvement in new business margins. Agency-driven model is likely to pick up pace again with focus on sale of traditional products. We believe that bank-promoted insurance companies have an advantage on the back of access to their parent’s strong distribution network.
Excerpts from ‘Life Insurance: Play on protection to drive future profitability’ report by Emkay