Insurance Industry Road Ahead.

8/20/2019 Insurance Industry Road Ahead.

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InsuranceIndustry –

Road AheadPath for sustainable

growth momentum andincreasing profitability

kpmg.com/in


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The Insurance industry in India has undergone transformational changes over the last 12 years. Liberalization has led to

the entry of the largest insurance companies in the world, who have taken a strategic view on India being one of the top

priority emerging markets. The industry has witnessed phases of rapid growth along with spans of growth moderation,

intensifying competition with both life and general insurance segments having more than 20 competing companies,and significant expansion of the customer base. There have also been number of product innovations and operational

innovations necessitated by increased competition among the players. Changes in the regulatory environment

had path-breaking impact on the development of the industry. While the life insurance industry got affected by the

introduction of cap in charges, the general insurance industry got impacted by price detariffication and Motor third

party risk pooling arrangements.

While the insurance industry still struggles to move out of the shadows cast by the challenges and 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 available headroom for development, sustainable external growth drivers, and competitive

strategies would continue to drive growth in the gross written premiums. However, insurance companies

would need to address the key concern around losses that continue to be a drag on the capital and on the

shareholders’ return expectations. In order to achieve profitable growth for long term sustainability, insurers

have two key imperatives. Firstly, they would need to conserve capital and optimize the existing resourcedeployment and distribution networks. Secondly, they would need to innovate not only in terms of value

propositions but more importantly in terms of operating models in order to develop sustainable competitive

edge.

Consumer awareness and protection has been a prominent part of the regulatory agenda. Regulatory

developments in the recent years show the focus on increasing flexibility in competitive strategies such

as niche focus, merger and acquisitions and on removing structural anomalies in the products and

operations. While these initiatives would enable long term industry growth, the role of the regulator in

providing an enabling environment to achieve profitable growth in the near to medium term cannot be

undermined.

The papers which form part of this report entitled ’Insurance Industry – Road Ahead‘ is an attempt

to understand and discuss the various issues that the Indian insurance industry is dealing with, andto bring to the fore emerging trends that will shape the growth and profitability of the industry in

the near to medium term future. One of the papers focuses on the challenges and opportunities

in microinsurance, where the development of products and operating models by the insurance

companies addressing the needs of the microinsurance sector requires strong support from

the government and the regulator.

Foreword

Shashwat SharmaPartner

Management Consulting

KPMG in India

P RoyDirector General

The Bengal Chamber of

Commerce and Industry

© 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with K PMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.


3/48© 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with K PMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Contents

Indian Life Insurance Industry – Time to optimise capital 01

The decade gone by 03

Finding the right distribution model 06

Realigning the business model 08

Innovating with new models 10

Securing through complementary alternative channels 12

Indian General Insurance Industry –

Looking forward to profitable growth 13

Historical developments in the Indian general insurance industry 15

Future Growth and profitability trends in the General Insurance Industry 18

Conclusion 22

Microinsurance: Unlocking India’s huge insurance potential 23

Microinsurance – a brief concept 25

Global overview and comparison with India 26

Microinsurance in India 27

Issues and challenges impeding the growth of microinsurance 34

Regulatory update 36

Potential solutions to further increase penetration and

scaling-up microinsurance business 37

Way forward 40


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1 | Insurance industry–Road ahead



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Indian Life InsuranceIndustry

Time to optimise capital

Insurance industry–Road ahead | 2



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The decade gone by

Since the opening of the sector in 2001, Indian life insurance

industry has gone through two cycles -- the first one being

characterised by a period of high growth (CAGR of approx. 31

percent in new business premium between 2001-10) and a flatperiod (CAGR of around 2 percent in new business premium

between 2010-12). During this period, there has been increase

in penetration (from 2.3 percent in FY01 to 3.4 percent in FY12),

increased coverage of lives, substantive growth through multiple

channels (agency, banc-assurance, broking, direct, corporate

agency amongst others) and increased competitiveness of the

market (from four private players in FY01 to 23 private players in

FY12).1

The sluggish period being experienced today by the Indianlife insurance companies brings to fore the big challenge of

profitability. The industry’s participants have been struggling to

achieve profitability in the face of high operating losses primarily

on account of distribution and operating models. Cumulative

losses for private life insurers are in excess of INR 187 billion till

March 2012, majority of which have gone towards funding losses

rather than for meeting solvency requirements.

1 Source for various growth figures quoted: Handbook on Indian Insurance Statistics 2011-12 published by IRDA




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Exhibit 1 represents the equity in the business vis-à-vis the balance in the profit and loss during FY02 and

FY12. The trend line represents the first year premium earned by private life insurance companies.

The period FY05 to FY10 was primarily dominated by linked life insurance business especially in case of

the private sector insurance players. Performance of the Linked plans is directly linked to primary capital

markets. The period FY06 to FY08 witnessed boom in the country’s capital market which benefited the

insurance companies in turn. FY09 and FY10 witnessed slow down in the economy and thereby impacted

the sale of policies.

IRDA during July 2010 (and with modification in September 2010) came up with Unit Linked Insurance Plan

(ULIP) guidelines capping upfront charges, returns and the commission pay-outs impacting the basis on

which ULIPs were developed. Immediately following these guidelines, during FY11 and FY12, the industry

witnessed a shift in the product mix from linked products to non-linked or commonly known traditional

products. The premiums fell at an annual rate of around 19 percent (Exhibit 1) during FY11 and FY12.

Currently, the premium mix of the industry is at a similar mix as of FY04 depicting almost a reset of the life

insurance business.

Exhibit 1: Performance of Private sector life insurance companies

Exhibit 2: Premium mix and falling growth rate (FY04- FY12)

Source: Handbook on Indian Insurance Statistics 2011-2012

Source: Handbook on Indian Insurance Statistics 2011-12 published by IRDA




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Profitability and return on invested capital

The profitability is dependent on operating

activities (selling new policies and servicing

existing policies i.e., difference between

premium revenue and total cost of insurance andoperations) and financing activities (investing the

policies’ premium i.e., difference between actualinvestment returns and the returns credited to

the policies and surrender and lapses of policies).

Life insurance premiums generally decrease as

sales of investment-linked and single premium

life saving products decline and there is an

increase in surrender and lapses. The industry in

these two cycles has faced structural challenges

that have adversely affected both aspects of

operations and consequently overall profitability.

Firstly, demand was created for a product thattransferred the investment risk, along with its

return, to the customer. Secondly, in an economythat is undergoing a slowdown, investments have

provided limited returns.

The change in regulations had shifted the premium

mix in favour of traditional products over the

linked products. Generally in case of life insurance

companies, the capital infused during the initialyears is utilised in the initial set up costs and

acquisition costs thereby leading to a gestationperiod of 7-8 years after which life companies

may turn profitable. Exhibit 3 represents the

incremental equity infused by the private life

insurance companies in the industry since FY04

and the movement in the cumulative balance in

profit and loss account. Periods FY08 and FY09

witnessed heavy equity inflows primarily to fund

the growing business with boom in the economy

and also on account of four new private players

entering the life insurance industry.

The periods FY11 and FY12 had a consolidatedpositive movement in the reserves. However,

this positive movement was majorly driven by

lapse profits on linked policies issued earlier.

Insurance rules before September 2010 allowed

insurance companies to write back the lapsedmoney as income in the books over a period of

time. Estimates by an October 2012 Goldman

Sachs Global investment research report for just

six companies show lapse profits of INR 31.89

billion for two years ending 2011-12. The quality of

earnings can be affected by non recurring items

such as profits from lapsed policies. The industry

is at critical juncture wherein it has to identify theright models for long term viability.

With economic growth expected to be slow in2013 and a weakening global economic outlook

as well, insurers will have to contend themselves

with another year of weak investment returns.

Moreover with the challenges faced by insurance

companies with the high cost of distribution andoperations, it is important that life insurers find a

sustainable model in the long term.

Exhibit 3: Equity infusion and movement in profits / (losses)

(FY04- FY12) (INR billion)





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Life insurers monitor and manage performance on an ongoing basis but as life

insurance policies remain in force for many years and sometimes even decades,

the ultimate profitability of the underwritten business is only known in later years

when all the policy obligations are fulfilled.

The attractiveness of India has always been the sheer size of the market and finding

the right distribution model to address the different target segments is of grave

importance. As sale of new policies and increasing the penetration of life insurance

is one of the levers of creating profits, the first wave of insurance companies

concentrated on building a distribution model to enable this lever. In that context,

the private life insurers faced a unique challenge.

Dilemma of the fixed cost agency structure

India’s private life insurance companies had

examined the well-entrenched LIC’s model of tiedagents in detail and found it easy to replicate. They

tweaked the overall branch-led operating model

but retained the basic structure of brick and mortar

branches and agency managers (or development

officer in LIC parlance) on their payrolls i.e., the

agency manager was an employee on fixed costs

with some variable component. This made theagency model a high-cost distribution model

pushing the breakeven for these private life

insurers. The model also had other drawbacks.

• Tied agency force was not always completely

activated. A typical agency manager supervises10-15 agents but sources mostly from 1-2

agents. The role and profile of the agencymanager largely in the industry involves agent

recruitment, profiling, training, hand-holding and

activation amongst others. Business generation

through these agents typically ended with anachievement of Minimum Business Guarantee

resulting in a long tail of agents whose business

needed to be serviced in a similar manner

to other agents who were highly productive.

Fewer active agents are supporting the cost of

management team which leads to increased

operating cost.

• The growth of number of branches in tier

I-III cities did not just justify the volume of

premiums generated from these cities where

competition intensity was fairly high. The issue

got magnified when insurance companiesopened branches in Tier IV-VI cities to find them

to be unviable due to limited market share inthese locations for the private life insurance

companies.

Finding the right distribution model




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• Inefficient agent recruitment process leads to high attrition

amongst the agency managers and agents; it also leads

to cost build up for recruitment, and training of this sales

force. Some agents lack the skill to provide sound financial

advice and accordingly, there is a lot of mis-selling that also

happens in this channel. The overall stickiness of this sales

force needs to be increased to ensure a more sustainable

model.

• Productivity of the agent does not improve linearly with

lineage of the agents. An agent also has to work on

building trust and credibility with his existing customers

and increase his new customer base. Some agents who

do not build rapport with the existing customer base

and chase high value policies often lose motivation and

become inactive.

Life insurance companies spend a significant portion of their

initial budget to set-up and streamline the operating model

and the distribution process to acquire new business. For

insurers to realise the highest value from distribution, they

must define an operating model which supports a multi-

product, multi-channel distribution model that compliments

an insurer’s revenue objectives and profit margins.

Distribution is not only the forefront of the operations but

also forms a large proportion of the operating expenses.

Accordingly, inefficient agent recruitment and high employeeattrition are increasing the operating cost. Insurers can realise

the highest value from their agent distribution channel by

developing an integrated suite of services oriented to driving

sales and reducing servicing costs.

Declining volumes in the banc-assurance model

For the life insurance companies facing capital crunch, the

bank channel became an instant favourite as it provided

an easy access to an existing customer base but would

also reduce the fixed costs. For the banks, it was a sourceof additional fee-based income (no risk business) and also

becoming a ‘one-stop shop’ for financial solutions for its

customers. The customer viewed this channel as their

‘trusted financial advisor’ where they could buy products. Bank

distribution of insurance products has gradually increasedover the years to around 35 percent of new business

premium of private life insurers (20 percent in terms of

number of policies) in FY12 being sourced through the banc-

assurance channel.2

However, the difference in working style and culture of banks

and insurance companies was starkly made evident by the

fact that insurance is a business of solicitation unlike a typical

banking service. The drive required in marketing an insurance

product is far greater than that of a banking product, the need

for which is more triggered by the customer than by the bank.

Also, banks have started facing a conflict of interest with

insurance products substituting banking products like termdeposits i.e., both being some form of investment vehicles.

Reduction in deposits mobilisation affects the core businessof banks and source of funds.

Insurance products have become increasingly complex

over a period of time, due to improvisation over the existing

offerings as well as due to constant innovation, adding to

even more difficulties in comprehension of the products andmarketing by the bank staff. Further, training of key bank staff

on insurance sale and products across all branches also pose

a challenge for the insurance companies. The sale through

bank branches also depends on the motivation and support

lent by the bank partner. This lends itself by way of having anetwork of branches that are not activated to sell insurance.

The insurance companies have not been able to successfullymine the bank customer database for sale of new business

especially of public sector banks which are still on the anvil of

technology transformation.

With the economics of all traditional distribution models

being challenged, the life insurance industry today has

begun to focus on operating expenses management and

attempting to build a lean operating model. The industry

has also continuously clamoured for greater flexibility by

relaxing outsourcing guidelines to improve their performance.But much can be done by realigning the operating model

to access different segments of customers using existing

infrastructure.

Exhibit 4: Operating expenses as a percentage to net premium (FY04- FY12) (INR billion)

Operating expenses percentage to Net Premium - Private vs. LIC


2 IRDA monthly journals, IRDA Annual Report 2011-12 and individual public disclosures of life insurance companies




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Realigning the business model

Life insurers have traditionally aligned themselves to models that are inherently

conventional in its approach - individual agents, banks, corporate agents and insurance

brokers instead of giving importance to either the customer or product segmentation. In

fact while many insurers have built customer relationship databases, the data itself is not

mined or tracked to increase the positive interactions with the customer. This has resultedin lower persistency levels (poor customer loyalty) and even resulted in customers

avoiding face-to-face interactions with insurance agents. Persistency was long ignored by

the insurance companies when the growth in new business premium was high. However,

with the growth slowing down, focus on retention of policies has gained focus. Explosion

of technology backed with the increase in internet and mobile telephony provides a low-

cost opportunity as now life insurers can leverage some of the success of online banking

and e-commerce to build an online product bouquet that engages the customer and

enables him/her to buy.

Technology-enabled model for urban IndiaThere is enough evidence from developed markets that internet penetration and usage have a positive

correlation with the performance and activities of insurance companies at various levels – lower customer

acquisition costs, improved access to information, product innovation that cater to the needs of the

customers and enhanced convenience. India has only 150 million internet users as of February 2013 with a

penetration of 12 percent making it one of the least penetrated of BRIC7 nations. However, there has been

a surge in volume and value of retail transactions in the last decade that reflects the comfort of the internet

users to conduct financial transactions online.

Retail electronic

transactions FY04 FY12Annualised growth

rate ( percent)

Volume (millions) 167 1,160 27.42%

Amount (INR billions) 521 22,075 59.71%

Exhibit 5: Growth in retail electronic transactions

Source: Reserve Bank of India Bulletin 2011-12




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Online sales of insurance products have one important

distinction - since the customers’ needs and preferences have

led to the purchase decision, the customer would ideally have

made a properly informed choice. Also, since insurers do not

have the opportunity to influence the customer’s purchasedecision, the design of the web portal needs to be easy to

understand and interactive enough to make the transaction

seamless. The products offered through this channel should

meet the needs and offer benefits/features that differentiatethe product from the offerings of their competitors.

In the past 2-3 years, a range of protection products that include

health insurance as well have been offered to Indian consumers

as against the pure term insurance policies that were sold

earlier. Insurance companies in recent years have also

witnessed that persistency and the proportion of claims being

rejected is lower in case of the online customers making this

segment an attractive and low cost channel. While the current

size is marginal as compared to overall customer base and

underwritten premium, the segment shall witness growth and

reach a significant size in the future as the internet penetration

increases and awareness of the customers also rises.

Center of Influence (COI) model for rural India

Rural India and making the rural population financially included

has become a top priority for the Government. Many initiatives

have been launched to enable this national agenda. For

instance, ‘Aadhaar’ by UIDAI3, new mobile-based platforms are

emerging and banking correspondent guidelines have beenissued by the Reserve Bank of India, all of which is aimed at

making financial services accessible to the rural areas. It is

time insurance companies also join the bandwagon and find

enabling avenues that would make rural population ‘insurance

inclusive’.

Unlike in case of the urban regions, penetration of the

insurance industry in rural regions has been relatively lower.

Rural population has relatively lower access to information

and lacks awareness of insurance products, mostly rendering

them to be the ‘un-insured’ class of population. However, in

order to make them aware of the insurance products and more

importantly the need for insurance, it is necessary to educate

them in person thus requiring a high touch service model to be

followed.

This requires identifying the ‘centres of influence’ to create

awareness of insurance products, educating them on the need

to be insured and finally converting them in a cost effective

manner to tap this ‘un-insured’ and ‘under-insured’ market.

Exhibit 5 represents the different types of centres of influencethat are already present in a rural region. They potentially can

be Headmasters of local government schools, Sarpanch of the

gram panchayats, Non-Governmental Organizations (NGOs)

and Self Help Groups (SHGs) that work in certain rural districts

or even be the banking agent or business correspondent.

Insurance companies can take a similar model to a larger

population.

The large untapped rural ‘un-insured’ population represents

a significant growth opportunity and those who take the

approach of identifying influencers might have a distinct

Exhibit 6 – Avenues to access the rural market

advantage in the future. We provide below a ready reference,

and to enable an understanding of the size of the opportunity,

certain facts and figures of potential points of presence in the

rural regions:

• As per the 2011 census, there were 589 District Panchayats,

6,321 Intermediate Panchayats and 238,957 Village

Panchayats across India4

•As at 31 May 2012, there were 713 Multi-State Co-operativeSocieties in India5

• As at 31 March 2012, there were 9,743 branches of

Microfinance Institutions (MFIs) across India6

• As at 31 March 2012, there were 10,78,407 government

schools covering 644 districts across India7

• As at date there are 48,125 voluntary organisations/state

organisations registered under the NGO-partnership system

with the Government of India8

Insuring people in the informal sector via micro-

insurance

The insurance industry plays a critical role in the growth and

development of the overall economy. Insurers have been

making increasing efforts to provide products to the low-income

segments of the market. However, the challenges associated

in reaching and providing affordable products to a large target

segment is a major concern for the insurers. This is compounded

by the lack of reliable data to design appropriate products for thelargely uneducated customer segments.

There is a need to create awareness about micro insurance

products amongst the target customers and the regulator

can play an important role in enabling an environment that isconducive to this.

There is a strong case for life insurers to identify these existing

avenues of business without being constrained by the availability

of capital. Enabling these avenues and assisting them in making

the purchase decision would mean realigning and reallocating

the existing resources to these natural partnerships. Aligning

the business model to customer requirements makes theoperations cost effective and profitable.

3 Unique Identification Authority of India under the aegis of thePlanning Commission, Government of India

4 Source: http://lgdirectory.gov.in as per 2011 census

5 Source: Government of India, Ministry of Agriculture

6 Source: www.mfin.org.in

7 Source: ww.dise.in

8 Source: http://ngo.india.gov.in/ngo_stateschemes_ngo.php




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Innovating with new models

In times where it is important to conserve capital and allocate capital to resources that

will deliver sustainable returns, no insurer can remain rigid in their distribution or operating

model. Changing lifestyles and buying preferences will constantly dictate the future

models of distribution. However, life insurers would also need to decide on the resources

that need to be deployed to build these future models. While the urban market today mightbe comfortable buying online insurance products, they might not resist the ’warm smile’ of

a life insurance agent. There are also successful models in other financial and non-financial

services business that can be adapted to distribute life insurance products. It would be

useful to examine some of them from an ‘ideating’ perspective.

Peer-to-peer (P2P) insurance or social insurance

This draws its influence from P2P lending which is the practice of lending money to unrelated individuals

or ‘peers’ without going through the traditional financial intermediary such as a bank or other traditional

financial institution. The lending takes place online on peer-to-peer lending companies’ websites using

various lending platforms and credit checking tools. Many such platforms exist today in the United Kingdom

and United States with the first one in India being the Bangalore-based DhanaX. In the UK, the first and

most successful P2P lender is Zopa which was founded in 2005 and has issued loans in the amount of GBP278 million with over 500,000 customers. There are now P2P lenders that are even using provision funds to

safeguard lenders against borrower defaults.

Following the success of these P2P lenders, this idea is currently being extended to insurance in

Germany as insurance is essentially a social network to share risk. Friendinsurance, a Berlin-based start-

up, is essentially allowing individuals to develop their own risk pools. The service is a combination of a

peer risk pool and a traditional insurance policy. Users of the service invite their friends to cover a smallportion of any claims that are made and the rest of the claims are paid by a conventional insurance policy.

This service, as claimed by the company, prevents insurance fraud and misconduct via means of social

control and reduces sales costs, discourages small claims and cuts administrative overhead.




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Direct delivery model

This is inspired by the Amway success of multi level marketing.

The direct-to-customer approach means that the life insurancecompanies have to focus on four key levers –

i. Customer segmentation and analytics for targeted approach

to marketing

ii. multi-channel strategy that creates value for the direct

customer

iii. Product offerings need to be simple and easy to understand;

most importantly easy to explain

iv. After sales support that should be technology-driven in order

to remain cost-effective

Customer data analytics based marketing strategy relies

not on experience or ‘gut-feel’ but on an understanding of

customer preferences and price sensitivity. This enables

insurers to interact with customers to maximise the retention

(improvement in persistency ratios) and also identify cross-sell opportunities. These interactions also provide a degree of

comfort to the customers and builds confidence in the insurerand their own purchase decisions. Further, the acquisition cost

should be kept variable as far as possible to make the model a

success

Mobile-based insurance model

There are over 865 million mobile users in India as of

December 2012 of which around 535 million are urban userswhile 330 million are rural users9. This means that it has

become a necessity that there is a proposition to be offered

to the mobile customers. Extending the business capabilities

to mobile devices has quickly become a fundamentalrequirement for companies. Customers increasingly expect

it and business partners and employees have become more

comfortable with communicating and sharing information

anywhere, through any device.

In a recent IBM Insurance Global CIO study10, it was found

that there is huge potential to leverage the mobile platform

for investments. In the same manner in which banks had

taken to mobile banking applications a few years back and

offering a mobile proposition, insurers might have to do the

same. Till date, insurers have restricted themselves to creating

applications for quote generation and simple affinity-based

product sales. However, with the growth in mobile applicationsand smart phone usage, applications to assist in the sales

process for agents/brokers are being developed. Severalinsurance companies in India have pilot tested the use of

smart phones for the initial product information and filling

of application forms to reduce policy issuance time. Further,

applications are being developed for agents to access their

training modules and their performance to date on the smart

phones. As mobile users are already KYC11 compliant, and

with ‘Aadhaar’-enabled bank accounts, piggy-backing on the

mobile wallet, mobile banking platform to offer insurance

solutions is a cost-effective method to tap a large market.

9 Source: TRAI Press Release No. 08/2013 dated 7 February 2013 – Highlightsof Telecom Subscription Data as on 31 December 2012

10 Source: The Essential CIO – Insights from the Global Chief InformationOfficer Study, IBM Global Business Services.

11 Know Your Customer compliance based on Reserve Bank of India’s KYCguidelines of 2002




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Securing through complementaryalternative channels

The life insurance industry as a whole needs to address the challenge of

conserving capital and keep reinventing itself to a whole new generation

of customers. Despite all the pressures that have persisted across

centuries, insurance still largely remains attached to the traditional

models of consultative selling. In a country which is as diverse, insurersare expected to follow a multi channel approach. While banc-assurance

is expected to drive near term growth and online holds a promise for the

future, agency channel continues to dominate the channel mix today.

There is an urgent need to take initiatives to revamp the agency channel to

become cost effective and in tandem, identify alternative networks that

complement the existing channels.

Further, there have always been a few life insurers who have sought to

identify niche markets like women-oriented products, worksite marketing,

children future protection markets and pension markets. But these have

not been happening on a consistent basis. The industry’s business modelneeds to constantly innovate and evolve.

There is an enormous opportunity for insurers who can get ahead of

the curve, through identifying models and implementing new product

solutions that would enable them to react quickly and effectively to

changes in the environment. The relationship between people and

technology is one of the key drivers for the growth of the industry led

with the regulatory changes which will provide the much needed impetus.

These should be treated as change catalysts as insurance companies

position their organisations to meet the challenges ahead.




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Indian General InsuranceIndustry

Looking forward to

profitable growth




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Historical developments in the Indiangeneral insurance industry

The overall general insurance industry growth has kept pace with the

GDP growth in the country and general insurance penetration has

varied in a narrow band

After liberalisation of the Indian insurance industry in the year 1999-2000, the Indian general insurance industry has witnessed rapid growth.

The industry, in terms of gross direct premium, has grown from INR

11,446 crore in FY02 to INR 57,964 crore in FY12, which corresponds to

a compounded annual growth rate (CAGR) of 17.6 percent. Insurance

density, which is defined as the ratio of premium underwritten in a given

year to the total population, has increased from USD 2.4 in 2001 to USD

10 in 2011. The growth in the general insurance industry has kept pace with

the nominal GDP growth rate resulting in general insurance penetration

remaining stable in the range of 0.55% to 0.75% over the last 10 years.

Exhibit 1: Growth in the Indian general insurance industry

Source: Handbook on Indian Insurance Statistics 2011-2012




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Changes in the regulatory environment substantially impacted the industry dynamics

Apart from macro-economic, social, and demographic growth drivers, the evolving regulatory landscape

had a significant impact on the growth and profitability trends in the industry. The most notable of them was

the price detariffication in 2007 which significantly impacted the premium rates and growth for commercial

lines and health insurance.

Though the overall insurance penetration has remained in a narrow range, coverageof underlying risks has increased considerably

The insurance penetration statistics may not represent the true perspective on coverage of the underlying

risk due to changes in the premium rates across segments which were significantly influenced by the

regulations. In our estimates, the risk coverage has grown at an annual growth rate of approximately 25

percent. For example, in the health insurance segment, the number of persons covered has increased from

approximately 80 lakhs in FY04 to approximately 7.3 crore without taking into consideration the Rashtriya

Swasthya Bima Yojna (‘RSBY’) which has additionally covered more than 16 crore people by FY12. Even

in commercial lines business, the premium growth over the years indicates considerable increase in the

underlying risk coverage, especially considering the impact of price detariffication.




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Overall, while the industry achieved significant growth over the past 5 years, theprofitability of industry deteriorated sharply

A multitude of factors adversely impacted the industry profitability over the last five years

• Price detariffication provided freedom to general insurance companies to decide the premium rates in

most of the product segments

• Between FY06 and FY12, 10 new companies have entered the general insurance business. Intensifying

competition and focus on growth by the new entrants led to competitive pricing pressure

• Focus on growth by the insurers across the industry led to higher bargaining power of the intermediaries

and limited control on the claims cost

• Limited or no increase in the TP premium rates for a number of years coupled with issues pertaining

to third party liability caps as under The Motor Vehicles Act, led to extraordinarily high claims ratio in thesegment which impacted the overall profitability and solvency requirements for the general insurance

companies.

Exhibit 3: Relative growth and profitability of the general insurance product segments

Source: IRDA annual reports 2010, 2011 and 2012Note: Size of the bubble indicates segment size (GDP in INR Cr)




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Exhibit 4A: General insurance penetration in percentage

(Ratio of Premium to GDP)

Source: Swiss Re, Sigma Volumes 2/2011 and 3/2012,Note: Data for India pertains to FY12 whereas for other countries, itpertains to the year 2011

Source: Swiss Re, Sigma Volumes 2/2011 and 3/2012,Note: Data for India pertains to FY12 whereas for other countries, itpertains to the year 2011

Exhibit 4B: General insurance density (Ratio of premium in

USD to population)

Future growth and profitability trendsin the General Insurance Industry

General insurance industry in India presents significant headroom for growth

While the Indian general insurance industry has evolved significantly over the past decade

or so, the insurance penetration and insurance density levels are significantly lower than

the developed as well as comparable developing countries. The under-penetration is drivenby lack of overall financial awareness, lack of understanding of general insurance products,

low perceived benefits, and propensity to purchase insurance based on reactive drivers

such as insistence by financers, statutory requirements, etc.

Study of global benchmarks reveals a strong correlation between GDP per capita andinsurance penetration. The correlation suggests that the insurance penetration may

increase up to 1 percent to 1.2 percent by FY20 considering the likely increase in the

GDP per capita.




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India’s expenditure pattern on healthcare

suggests significant headroom for growth for

substitution of out-of-pocket expenditure by

health insurance

Exhibit 5: Sources of Healthcare Expenditure

Exhibit 6: Projected growth of the Indian General InsuranceIndustry (Gross Direct Premium) (units INR Crore)

Source: World Health Statistics 2012 published by World HealthOrganization, KPMG Analysis, data pertains to year 2010

Source: KPMG Analysis, IRDA Annual Report 2012

In India, the share of out-of-pocket expenditure in overall

healthcare expenditure is significantly higher than comparable

developing countries as well as the developed countries.

Moreover, the government focus on healthcare spending is

focussed on low income and below the poverty line segments.

Considering the rising healthcare cost inflation and changing

disease pattern more towards lifestyle diseases in the urbanareas, the health insurance market would have significant

headroom for growth as it would replace the out-of-pocket

expenditure.

Competitive strategies could considerably impact

the growth and profitability of the overall general

insurance industry

Competitive strategies adopted by players would have

considerable impact on the growth and profitability trends

in the general insurance industry. Different competition

segments have different strategic imperatives based on thehistorical business performance, capabilities developed over

the period of time and strategic objectives of the promoters.

New entrants targeting broad based presence

New entrants focussing on high growth across segments

are likely to have low profitability in the initial years as their

aim would mainly be on price or channel payout-based

competition. These players may rapidly replicate the industry

best practices since they would have limited legacy operating

structures and assets. The same could enable profitability and

growth for these players in the medium term.

New entrants with niche focus

New entrants who are currently focussing on niche product-

market segments may bring the international best practices

in products, managed care models, ancillary services such

as wellness and disease management in the medium to long

term. Product as well as operating model differentiation vis-

a-vis multi-line players may help these players to develop a

profitable growth model.

Large private sector players

Large private sector players pose the biggest threat to

public sector insurance companies due to more efficient

operating models, highly capable talent pool, and significantly

higher usage of IT at a scale comparable to the public sector

insurers. These players would drive the focus on operationaleffectiveness, channel productivity, enhanced pricing

approaches in order to derive profitable growth.

Mid-sized private sector players

Mid-sized private sector companies would need to select the

areas of focus in terms of products and markets for pursuing

long term growth. These players may actively seek inorganic

routes in order to rapidly gain scale and leverage synergies to

create competitive pressure.

Public sector companies

Public sector general insurance companies enjoy key

advantages as against competition in terms of balance sheet

strength, physical infrastructure, reach, channel strength

and experience. Transformational initiatives addressing theHR challenges, IT capabilities, operational effectiveness, and

enhanced pricing approaches may lead to substantial growth

and profitability benefits.

The industry gross direct premium may grow at a

CAGR of 16 percent in the medium to long termEconomic growth, socio-economic drivers, greater market

penetration, rising prices of underlying assets, increase in

healthcare costs would significantly drive the growth of the

general insurance industry in the medium to long term. The

growth may also be supported by a focus on profitability by

public as well as private sector insurers resulting in lower

propensity of price wars. The general insurance sector is

expected to grow at a CAGR of 16 percent from FY12 INR

57,964 crore to approximately INR 194,000 crore by FY20




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Growth in different product segments may be driven by segment

specific drivers

While, the overall macro-economic and socio-demographic factors would enable

growth across the industry, each of the industry segments would have specific

growth drivers with respect to the increase in the underlying assets or risks, market

penetration and potential increase in the premium rates.

Motor

Increase in third party premium rates and focus on CV OD business by insurers

considering the impact of the declined risk pool are expected to be the key drivers

for this segment in the near future. In the medium to long term, resumption of

growth trend in automobiles sales, increased penetration in the renewal businessand emergence of large organized collaborators such as garage Preferred Provider

Network (PPNs) are expected to provide the growth momentum for this segment.

Health

The retail sub-segment is expected to grow at a robust pace driven by increased

penetration in tier II and III cities, substitution of out-of-pocket expenditure by healthinsurance spends, increasing urbanization, demographic shifts and medical inflation.

With increase in the maturity of the market, this segment is expected to seeinnovative products being offered by insurers like wellness management, managed

healthcare etc.

Though the group sub-segment is expected to have a relatively limited growth on

account of penetration in the organized employment sector, the growth of this

segment would be primarily driven by increase in the premium rates in the near term.

The government sub-segment would continue to be driven by incremental coverage

of the existing government schemes. However the premium rates would be

impacted by competitive intensity in the tendering process.

Fire

Higher penetration into the SME segment as well as a moderate increase in

premium rates would drive the growth of this segment in the near term. The growth

in gross capital formation, including in the infrastructure sector, would continue to

drive growth in this segment in the long term.

Marine

The near term drivers for the marine segment would continue to be the growth in

GDP leading to increased international trade. In the medium term, improvement

in surface transport infrastructure of the country is also expected to have a

positive impact on this segment through increased opportunity for long distancegoods transport within the country. This segment might also be impacted by the

implementation of GST across states which could lead to shift in the strategy to

locate manufacturing centres and warehouses.

Others

The sub-segments which constitute the ‘Others’ are expected to grow in the near

term on the back of increased penetration, especially in non-metro markets, and

growth in the gross capital formation of the country. In the long term, increased

market maturity would lead to the emergence of niche customer segments leading

to new product introductions to suit their requirements.




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Product mix would continue to be driven by

motor and health insurance business

Considering the growth trends described above, the

proportion of motor and health insurance businesses in the

overall product mix is likely to go up further. Personal line

business could be around 70 percent of the overall market.

Among the commercial lines, proportion of fire insurancebusiness may marginally increase further.

Claims ratios are likely to improve in most of the segments in the medium term

Profitability of a large number of players, including that of

public sector players, is significantly low as of today. A number

of factors like detariffication, competitive pricing etc. have

contributed to the overall low profitability of the industry. Going

forward, a number of drivers are likely to have considerable

impact on the overall business profitability. The factors

impacting future profitability are described as below:

Segment Extent of change expected in

incurred claims ratio in the

medium term

Comments and drivers

Motor OD

Reduction up to 5 percent points

• Reduction in Own Damage (OD) premium discounting to mitigate impact of higherCommercial Vehicle (CV) TP retention by insurers

• Improved claims management, fraud detection/ prevention

• Competitive intensity could continue to impact pricing.

Motor TP

Reduction by morethan 10 percent points

• Formula linked and frequent TP tariff revision by IRDA

• Improved claims management, fraud detection / prevention

• Limitation on liability if amendments to the Motor Vehicle Act are passed.

Retail health

Reduction by5 percent to 10 percent points

• Enhanced product design with sub-caps, limits

• Standardization of definitions, processes

• Provider network negotiations and monitoring

• Fraud prevention and detection

• Operationalization of the common TPA of the public sector companies

• Part of the improvement would be offset by the adverse impact of pre-existing diseasesbeing covered, inflation in healthcare costs, pricing pressure due to entry of new players.

Group health

Reduction by morethan 10 percent points

• All elements as mentioned for retail health except that premium rates in case of grouphealth business are likely to increase in the near to medium term.

Government

health

Stable or moderate increase

• Control over frauds and claims cost

• Standardization of definitions and processes

• However, tender driven process may lead to adverse pricing pressure.

Fire

Reduction by5 percent to 10 percent points

• Reduction in discounting by insurers to improve segment profitability

• Increase in share of low risk segments of the SME business

• Key risks would include large losses on corporate policies, limited bargaining power withcorporate customers to improve pricing

Marine Cargo

Reduction up to 5 percent points

• Reduction in premium discounting by insurers to improve profitability

• Further improvement in the shipping transit environment and road safety

Engineering Stable or moderate increase

• Claims ratio in the segment are highly project specific and hence show a variation acrossplayers; no significant change in loss ratio expected

Others

Stable or moderate increase

• Competitive pressures on pricing in the existing customer base and segments such astravel

• Penetration in new segments without adequate ability to appropriately price the risk

Exhibit 7: Product mix projections


Source: IRDA Annual report 2012, KPMG Analysis



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Bargaining power of intermediaries in the personal line business may reduce

significantly in the medium term

The disruptive power of internet as an

intermediary

Globally and also in India, internet has brought

disruptive changes in the intermediation and retailtrade business. Share of internet based sales in a

number of categories of goods and services has

already impacted the brick-and-mortar channel

based sales in India. General insurance business

is not likely to be an exception. According to

our KPMG in India analysis, the internet user

base is expected to reach 70 percent of total TV

viewers by 2016. As per KPMG in India estimates,

online shoppers are estimated to account for

approximately 30 percent of the internet users

and are expected to grow at a rapid pace over the

next 4-5 years. General insurance companies areaggressively driving the online promotion and sales

of the personal line products and are integrating

the impersonal internet experience with telephonic

interaction, chats and audio-visual support in the

internet sales process. In our estimates, internet

will constitute 15-20 percent of gross direct

premium in personal line products by the year 2020

denting the criticality and bargaining power of other

channels.

Reduction in bargaining power of hospitals

Controlling health insurance claims cost has beena key focus area for the industry in the recent past.

Factors such as growth in the extent of healthcare

expenditure funded through health insurance, roll-

out of the common Third Party Administrator (TPA)

by the public sector companies, concentration ofvolumes with select number of players is likely to

reduce the bargaining power of hospitals.

The general insurance companies are likely to

achieve greater level of control on claims cost

supported by a number of factors including

• Standardization of treatment protocols andservice levels

• Negotiations on treatment costs across various

sub-categories

• Enhanced scrutiny on claims through in-house

processing

• Focus on fraud prevention and detection

Changing focus on channels from potential to

performance

As the focus of the industry shifts to profitablegrowth, the emphasis is shifting to channel

profitability and performance from mere channel

acquisition. Changes in the competition structure

in terms of fewer new entrants, potential

consolidation, increased product or customer

segment focus by industry players are likely to

reduce the intensity of competition for attracting

channel partners. Industry players would focus on

maximizing the return on spends on the channel

and overall profitability of the business contributed

by the channels. While in the past, customer

base and reach of the channel were the primaryconsiderations for channel acquisition, going

forward it would be the ability to influence the

customer base, loyalty and ability to obtain higher

premium rates. Bargaining power of channels

would increasingly depend on performance track

record rather than on the potential offered.

Conclusion

In the last few years, growth was the primary agenda across competition segments

including public sector, old private sector and new private sector general insurance players.

Changes in the external environment would continue to present growth opportunities and

insurance companies would be better equipped to exploit them based on market insights and

internal capabilities developed over the period of time. In order to deliver on the shareholders’

expectations, the companies will be driven to strike a balance between growth, profitability

and risk as they go forward. This would entail marked changes in the business strategy and the

same would be cascaded to operational decisions related to product design, pricing, channel

monitoring, and operational effectiveness. Companies with a one-dimensional focus on growth oron profitability would lose competitive power either due to strain on capital or due to insignificance

of the scale. Either way, this would support the emerging trend of overall profitable growth for the

industry. Such a scenario would also aid niche players to develop sustainable business models and

co-exist with the large players adding to the depth and maturity of the industry.




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Microinsurance

Unlocking India’s huge

insurance potential




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Microinsurance a brief concept

Microinsurance refers to insurance products which

are designed to provide risk cover for low-income

people. Generally, these products are focused

towards providing adequate coverage to this customer

segment with flexible payment schedules for the lower

premiums. Although there are various benchmarks to

distinguish microinsurance from insurance, product

design (size of premium and risk cover) and access

are key differentiators for microinsurance products.

Simple products which are easily accessible through an

efficient distribution process to keep the overall cost of

products low are qualified under microinsurance.




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Global overview andcomparison with India

The last decade witnessed strong growth in the

microinsurance sector worldwide with emergence

of three strong growth regions – Asia, Latin

America and Africa. The growth in Asia, whichaccounts for roughly 80 percent of the global

microinsurance market, is driven by large and

dense populations, interest from public and private

insurers, penetration of distribution channels and

active government initiatives. While India and

China have been at the forefront, other Asian

countries, such as Bangladesh, the Philippines

and Indonesia are also witnessing rapid growth in

microinsurance.

1

Latin America and Africa, whichaccount for 15 percent and 5 percent of the global

microinsurance, respectively, are other promising

growth markets for the sector. The following table

depicts the growth of the microinsurance sector

during the last decade.

Insurers are increasingly making an effort to cover the population by introducing

need-based and easy-to-understand products. In Central and Eastern Europe,

growth in microinsurance has not been as swift as compared to Asian and Latin

American regions.

Table: Estimated outreach of microinsurance: millions of risks covered

Note: *Data for 100 poorest countries only

Source: 'Protecting the poor: A Microinsurance compendium,' vol. II, Munich Re, Microinsurance Network and InternationalLabor Office, 2012, p11.

1 http://www.ilo.org/global/about-the-ilo/newsroom/news/WCMS_177356/lang--en/index.htm

Asia Latin America Africa Total

2006* 66 8 4-5 78

2009 - - 14.7 -

2011 350-400 45-50 18-24 Less than 500




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Microinsurance in India

The microinsurance business took its roots in India with a

few schemes launched by non government organizations

(NGOs), micro finance institutions (MFIs), trade unions,

hospitals and cooperatives to create an insurance fund

against a specific peril. These schemes were outside the

ambit of the regulations and operated more on good faithof these institutions.

The microinsurance landscape changed with the first set

of regulations published in 2002 entitled the ‘Obligations

of Insurers to Rural Social Sectors.’ The regulations

essentially promulgated a quota system to force newprivate sector insurers to sell a percentage of their

insurance policies to de facto low-income clients.

The Government of India formed a consultative group on

microinsurance in 2003 to look into the issues faced by the

microinsurance sector. The group highlighted the apathy of

insurance companies towards microinsurance business,

non-viability of standalone microinsurance programmes

and huge potential of alternative channels amongst others.

The Reserve Bank of India allowed regional rural banks

(RRBs), which have good distribution reach in rural areas,

to sell insurance as ‘corporate agent,’ in 2004.

In order to support the development and facilitate thegrowth of the sector, the insurance regulator Insurance

Regulatory Development Authority (IRDA) came up with

the microinsurance regulation in 2005. It was a pioneering

approach which put India among the few countries to

draft and implement specific microinsurance regulations.While the microinsurance regulations had a relatively

narrow scope, focussing only on the partner-agent model,

it nonetheless relaxed some of the conditions to facilitate

distribution efficiency and perpetrated the view to extend

microinsurance from a social perspective to a commercial

business opportunity.

The Indian microinsurance market is marked by various players operating a number of schemes:




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Distribution channels

Distribution of microinsurance products is dependent on

factors such as collaboration, relationship and trust with

the low-income group while holding down associated

costs. MFIs, NGOs, Regional Rural Banks, Self-help groups

(SHGs) and their federations and cooperatives are the most-preferred distribution channels led by their vast established

networks and proximity to the target market.

The selection of the right channel mix primarily depends

on the region and product segment. In India and the

Philippines, MFIs are predominately being used to distribute

microinsurance products, while, in Brazil, utility and telecom

companies are increasingly being used.

However, insurers are continuously innovating and

introducing distribution channels that are not only cost

efficient but also have a wider reach. Technology is being

extensively used to distribute microinsurance productsmore efficiently and effectively. For example, mobile banking

is gaining prominence as it is not only an enabler of client

communications, but is also helpful in premium and data

collection. However, the channel has limitations where face-

to-face interaction is required.

Key regulations: Rural and social obligations,

2002 and Microinsurance regulations, 2005

In order to promote mass insurance coverage, the

regulator established obligations of insurers to rural or

social sectors in 2002 and has since amended it. Whilethe rural sector obligations aim to cover the hinterland

which is predominantly agrarian, the social sector includes

unorganised, informal sector comprising economically

vulnerable classes across rural and urban areas.




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Regulations at a glanceObligations of Insurers to Rural or Social Sectors, 2002 (and subsequent amendments)

Rural Sector

• Life insurer: 5 percent of total policies in year 1

increasing to 20 percent by year 10

• Non-life insurer: 2 percent of total gross

premium in year 1 increasing to 7 percent by

year 10

• Life Insurance Corporation (LIC): 25 percent of

total policies written direct in FY2010

Social Sector

• Both life and non-life insurer: 5,000 lives in year

1 growing to 55,000 by year 10

• LIC: 20 lakh lives in FY2010

Microinsurance regulations, 2005

• The regulation provides definitions of life and

non-life microinsurance product on individual

or group basis. The contracts covered included

term, endowment, health, personal accident,

hut, livestock and tools or instruments.

• Created a new distribution intermediary called

the microinsurance agent and formalised

the role of NGOs, MFIs) and SHGs that hadaccess and experience in working with low

income groups for at least 3 years. A micro

finance agent is allowed to work with one life

and one non-life insurer.

• Eliminated the need of a qualifying exam to

become a microinsurance agent and lowered

training requirement from 100 hours to 25

hours in the local language thereby simplifying

the recruitment process. However, this also

translates into more push-based sales as

opposed to a need-based sale.

• Capped commissions between 10 percent

and 20 percent (life insurance – single

premium: 10 percent, life insurance – regular

premium: 20 percent of all years of premiumpayment term and non-life insurance: 15

percent) thereby realising the need of having

higher payment for intermediation.

• Allowed for the bundling of life and non-life

elements in one single product, thereby

paving way for greater collaboration between

life and non-life insurers.

With the formation of rural and social obligations,

the regulator obligated the insurers to

increase geographical penetration. However,microinsurance regulations do not have any

coverage obligations and overlaps with the rural

and social obligations in terms of coverage.

Many Indian private insurers have not achieved

break-even since opening of the private

insurance sector in 2000, and accordingly, the

insurance companies have seen their modelveering towards reducing losses rather than

increasing reach at a low cost resulting in relative

under development of the microinsurance

segment.

Product guidelines

Life insurance Non-life insurance

Term (with/ without

return of premium)

• Amount of cover: INR

5,000 – 50,000

• Term: 5-15 years

Dwelling and contents/

Livestock /Tools/ Crop

insurance


5,000 – 30,000 per

asset cover

• Term: 1 year

Endowment insurance • Amount of cover: INR

5,000 – 30,000


Health insurance

(individual, family)


5,000 – 30,000

• Term: 1 year

Health insurance

(individual, family)


5,000 – 30,000

• Term: 1-7 years

Personal accident (per

life/earning member of

family)


10,000 – 50,000

• Term: 1 year

Accident benefit rider • Amount of cover: INR

10,000 – 50,000





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Key risks covered in the microinsurance/rural segment in India

There are a number of formal and informal sector schemesthat cover multiple risks faced by the rural Indian population.

The lower strata of the Indian society not only face risks in

the form of poverty, frequent natural catastrophes and less

access to conventional forms of risk management, but also

are least aware of the criticality to insure themselves againstthe same. While the study of risk has a vast scope, we have

limited this section to introduction of the key risks along with

some relevant schemes/products available in the market that

address them.

Individual risk

Life:

While many individual and group life microinsurance products

are offered by insurers in the form of term and endowment,

credit life cover (protection against outstanding principal and

interest of loan if the borrower dies) has been a starting point

for many insurance companies in India, driven mostly by

push-based sales by MFIs. However, credit life tends to offer

little value to clients, with coverage limited to the duration ofthe loan.

Examples:

a. Janashree Bima Yojana – a social security scheme of LIC

(state owned largest life insurance company) launched in

2000, provides benefit to the weaker sections of society

(covers 45 vocational and occupational groups such

as workers in foodstuff, textiles, wood, paper, leather

products, brick kiln workers, carpenters, fishermen,

handicraft artisan, handloom amongst others). Thepremium for the scheme is INR 200 per member; 50

percent premium under the scheme is met out of the

Social Security Fund. The balance premium is borne bythe member and/ or Nodal Agency. The members get a

cover of INR 30,000 (~USD 600) in the event of death, INR

75,000 (~USD 1500) in the event of death/total permanent

disability and INR 37,500 (~USD 750) in the event of

permanent partial disability. As on 31 March 2012, about

22 million people had been covered under this scheme.

b. BASIX – a leading MFI offers group life microinsurance

in collaboration with Aviva Life Insurance Company India

Ltd. In FY2011, it had over 2 million customers paying an

average annual premium of < INR 100 (~USD 2). However,

post Andhra Pradesh crisis in 2011, when the state

government brought in legislation to curb coercive loanrecovery practices and banned MFIs from approaching the

doorstep of their customers, the MFI business in the statehas fallen, resulting in the coverage almost halving to a

little under 1 million customers.

Health/Personal accident:

In India, health-care is funded mostly through out of pocket

expenditure comprising ~60 percent of healthcare spending

in 20102. Health is unarguably a product most demanded

by low income groups. A number of schemes exist; donor-funded, subsidised, insurer and government schemes being

the main formats.

Examples:

a. Rashtriya Swasthya Bima Yojana (RSBY)• RSBY has been launched by Ministry of Labour and

Employment, Government of India in 2008 to provide

health insurance coverage for Below Poverty Line3

(BPL) families. Over 33 million BPL families (> 100 mn

members) have been enrolled across 472 districts across

the country; 12,531 hospitals empanelled to provide

benefits under the programme4.

Key features of the scheme:

– Hospitalisation coverage up to INR 30,000 (~USD 550)

for most of the diseases that require hospitalisation;

cashless benefit through smart card

– Fixed package rates for hospitals

– Pre-existing conditions are covered from day one and

there is no age limit

– Coverage extends to five members of the family which

includes the head of household, spouse and up to

three dependents

– Beneficiaries need to pay only INR 30 (< USD 1) as

registration fee while Central and State Government

pays the premium to non-life insurers (maximum INR

750/ ~USD 14) selected by the State Government for

each district on the basis of competitive bidding.

2 Source: World Health Organisation Databank

3 Below Poverty line when monthly consumption expenditure is less than~INR 672 (~USD 12.2) in rural and less than ~INR 859.6 (~USD 15.6) in urbanareas - Planning Commission of India

4 Source: RSBY official website accessed on 18th Jan 2013

Rural India’s microinsurance need

Characteristics Key risks faced Need

• High level of poverty

• Frequent catastrophes

• Lack of access to conventional forms of

risk management

• Low awareness levels

• Small asset size leading to pricing

constraints of products

• Individual: Life risk, Health risk and

Personal accident

• Livelihood

– Agriculture: Weather risk, Crop

produce risk

– Livestock risk

Risk mitigation

through Insurance




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Trends and experience

Initial trends indicate a downward premium trend owing to decrease in set-upexpenses. However, burnout rates (includes the claims related expenses, Third

Party Administrator (TPA) management fees and enrolment fees) for Round 2

indicate higher expenditure which could result in premium tightening by some of

the participating insurers.

Premium trend in RSBY Burnout ratio




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b. Yeshasvini Co-operative Farmers Health Care Scheme

Yeshasvini Scheme is a contributory scheme of healthcaresponsored by co-operative farmers and the Government of

Karnataka. The corpus of the scheme is mainly generated out

of annual member contribution and State Government grants

to cover the deficit of resources. The Trust, depending upon

the availability of resources, determines the contribution to

be collected from the member beneficiaries from time to

time. The Trust has grown to a size of ~2.9 million enrollments

with the contribution fee per member growing from INR 60

(~USD 1.1) in FY2004 to INR 200 (~USD 3.6) in FY13, in line

with rising healthcare costs and maturity in claim experience

which is also reflected in the falling ratio of reimbursements

to hospitals as percentage of the total contribution (membersand government).

Yeshasvini Health Scheme - contribution and membership

Yeshasvini Health Scheme - claim experience and member fee




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Livelihood risk

Agriculture (crop and weather risk):

Indian agriculture is an important sector contributing ~14

percent to the GDP in FY12 and employs almost 60-65

percent of the Indian workforce. In a country like India, wherecrop production has been subjected to vagaries of weather

and large-scale damages due to attack of pests and diseases,crop and weather insurance assumes a vital role in its stable

growth. While crop insurance specifically indemnifies the

cultivator against shortfall in crop yield, weather based crop

insurance is based on the fact that weather conditions affect

crop production even when a cultivator has taken all the care

to ensure good harvest.

Example:

a. Weather Insurance Scheme by IFFCO Tokio General

Insurance (ITGI)

• Mausam Bima Yojana and Barish Bima Yojana were

launched as weather insurance products by ITGI. Ituses the weather data from Indian Meteorological

Department (IMD). Location wise historical and

projected data are available at a price.

• Weather insurance products specifically designed for

certain crops and districts as cost of cultivation and loss

could vary according to location and hence necessitate

different premiums.

• Loss ratio of weather insurance products has been in

range of ~70-75 percent.

Animal husbandry (risk of death of animal):

Livestock contributed to ~24 percent5 of India’s agricultural

output in FY2011 and plays a vital role in improving the socio-

economic conditions of rural masses. Animal husbandrysector provides large self-employment opportunities,

with 13.6 million workers in rural areas engaged in thefarming of animals5. With such livestock dependency of a

large population, livestock insurance protection provides

a mechanism to the farmers and cattle rearers against any

eventual loss of their animals due to death.

Example:

a. Livestock Insurance Scheme, a central government

sponsored scheme

• Livestock Insurance Scheme, a central government

sponsored scheme, was implemented on a pilot basisduring 2005-08 in 100 selected districts. The scheme

is now being implemented on a regular basis in 300districts of the country by the respective state’s

Livestock Development Board

• Indigenous / crossbred milch cattle and buffaloes

are insured at maximum of their current market

price, assessed jointly by the beneficiary, authorised

veterinary practitioner and the insurance agent.

• The premium of the insurance is subsidised to the tune

of 50 percent, borne by the Central Government.

• Benefit of subsidy is being provided to a maximum oftwo animals per beneficiary for a policy a maximum of

three years.

• For unique identification and reduction in frauds,

successful implementation of tagging the animalis crucial. In this context, IFFCO-Tokio won ILO

Innovation grant for ‘using RFID technology as a

means of identification and loss mitigation in livestock

insurance’. In this method, RFID microchip is inserted

in the subcutaneous region of livestock and the unique

identity can be scanned by a distant located scanner.

Also, the photograph of the animal with its owner adds

another layer of identification. Experience indicates

lowering of fraudulent cases as removal of such tags

usually requires a surgeon and tampering would result

in loss of coverage.

5 Annual Report 2011-12, Department Of Animal Husbandry, Dairying &Fisheries, Ministry of Agriculture, Government of India




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Issues and challenges impeding thegrowth of microinsurance

The lack of equitable participation in the India

growth story is of concern to the Government and

financial services regulators.

However, financial inclusion is an expensive

proposition. While the regulators have created

policies to promote financial inclusion, the currentindustry structures and economic models are not

conduciv

Insurance Industry Road Ahead.

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