Insurance in the BRICS (Part 2)

India

View of Mumbai, India © Cididity Hat, CC BY-SA 3.0

The first steps of the Indian insurance date back to the late 19^th century, with first insurance company, Commercial Union Assurance, being established in 1862. After the withdrawal of the British, the industry was nationalized. In 1956, life insurance came under the control of the state with the creation of Life Insurance Corporation of India, which became the country’s sole life business. In 1974, it was the non-life insurance class that was nationalized with four companies sharing the market: New India, Oriental, United India and National. These new companies are headed by a holding company, General Insurance Corporation of India (GIC), which also acts as a reinsurer and regulator of the non-life market.

It is after privatization of the insurance industry in 1994 that the market begins to expand rapidly. In August 2012, non-life insurance sector has six national companies¹ and twenty-one privately owned ones, three of which specializing in health. Life insurance accounts for twenty four companies with only one endowed with state capital. GIC becomes the national reinsurer, receiving a legal cession of 10%.

Penetration and density rates

After reaching a maximum of 4.6% in 2009, life insurance penetration rate has been in sharp decline over the past three years. The study of non-life penetration rate has shown an almost stagnation state during the 2003-2009 period. It was not until 2010 that the rate has reported a significant increase.

In comparison with South Asian countries, insurance penetration rate is of 4.76% in Malaysia, 6% in Singapore and 4.17% in Thailand.

From 2003 to 2012, density, that is , the per capita amount dedicated to insurance, has almost gone threefold for life and non-life classes of business. Despite this growth, density in India (53 USD) is far below that of other BRICS countries: South Africa (1081 USD), Brazil (414 USD), Russia (182 USD) and China (179 USD).

¹The four companies established in 1974 along with the export credit insurer "Export Credit Guarantee Corporation" and agricultural insurer "Agriculture Insurance Co of India Ltd"

Evolution of penetration and density rates: 2003-2012

Source: Insurance Regulatory and Development Authority, India

Licensed insurers as at September 30, 2012

Source: Insurance Regulatory and Development Authority, India

Distribution network

Old Delhi street © McKay Savage, CC BY 2.0

In non-life insurance, the distribution of products is based on agents by 37%. Other networks include direct sales (32%) and brokers (18%). Bancassurance is poised to grow rapidly in the coming years due to the rising number of bank counters. Because the general population is poorly equipped with computers and other equipment of modern communication, the contribution of new technologies in the marketing of insurance products remains marginal.

Life market

Life insurance ranks high on the Indian market, being by far the leading industry in India. In 2012, life insurance companies reported a turnover of 55 billion USD, which accounts for 84.45% of total life and non-life premiums.

The top five life insurers, alone, detain 86.29 % of the market, 70.67% of which go to the only state insurer «Life Insurance Corporation» (LIC).

From 2008 to 2012, the life market has grown by nearly 10%, compared to 46% for non-life insurance. The year 2012 sustained a 14% decrease of life premiums, a decline accounted for, among other things, by significant changes in the insurance code.

Breakdown of life turnover per company

in thousands USD

Source: Insurance Regulatory and Development Authority, India

Non life market

In 2012 the four public companies: New India, United, National and Oriental control 57.79% of the market, with the first private company, ICICI Lombard, underwriting only 9.74% of the overall premiums.

The ten largest companies retain almost all receipts, that is, 87.3%.

Breakdown of non life turnover per company

in thousands USD

Source: Insurance Regulatory and Development Authority, India

The Indian market remains closed and hardly open to foreign capital. Foreign participation may not exceed 26% in an insurance company. This limit will soon be raised to 49%.

Nevertheless, the market remains quite competitive, with this competition being behind the drastic increase of loss ratios in non life insurance. Most insurers are struggling to make profits.

Evolution of the main technical highlights of the non life market: 2008-2012

in USD

* Including commissions

Evolution of premiums, losses and results: 2008-2012

in thousands USD Source: Insurance Regulatory and Development Authority, India

Evolution of ratios: 2008-2012

Breakdown of non life premiums per class of business: 2008-2012

The Indian market, along with the Russian market, is the most diversified in the BRIC group, with motor class accounting for less than 50% of all insurance premiums. The turnover achieved in health insurance comes second with 22.27% of revenues. Miscellaneous risks and fire insurance follow with 16.18% and 10.27% respectively.

in thousands USD

Source: Insurance Regulatory and Development Authority, India

Life and non life market

in thousands USD

in thousands USD

Russia

St. Basil’s Cathedral, Moscow © Alvesgaspar, CC BY-SA 3.0

Insurance is not a new activity in Russia since its beginnings date back to the late 18th century and the era of Catherine II. It started with a long process of development which culminated at the end of the 1917 Revolution with the nationalization of the entire sector. It was not until 1988 that the state monopoly and that of the national company Ingosstrakh came to an end. Private companies, are henceforth authorized, to get established. Transforming the insurance landscape has been laborious while renovation work is great: new insurance code in 1992, privatization of Ingosstrakh in 2001, introducing the obligation of motor third party liability insurance in 2003, etc.

By the end of 2012, the number of insurers registered on the market was only 458, compared to 918 in 2006 and several thousands in the 1990s. The introduction of a minimum capital in 2006 and the obligation of splitting life and non-life activities into two separate entities have contributed to the decline in the number of players on the market. On the other hand, licenses have been suspended and insurers have merged, but the majority of insurance companies remain poorly capitalized.

Compared to other markets undergoing transition, the evolution of the Russian market remains particularly slow and difficult. This is due to the huge undertaking required to overhaul the sector in depth. The transition period is now over, yet public mistrust of the insurance business lingers on.

Penetration and density rates

All experts are unanimously confident about the immense growth potential of the insurance sector in the country. The low penetration rate of 1.3% in 2012, caused mainly by the skepticism of consumer, means there is significant margin for improvement.

Large neighboring countries such as Poland (3.90%) or Ukraine (2.19%) have much higher penetration rates than Russia.

Source: Sigma, Swiss Re

The insurance distribution network

World Trade Centre, Moscow © Bradmoscu, CC BY-SA 3.0

In Russia, despite the high rates of commission allocated by companies to general agents, the latter control 50% of the premiums written in non-life insurance.

Direct sale comes as the second channel of marketing insurance with 37% of premiums volumes. Brokers are there only for major corporates, while new technologies are scarcely used, just like bancassurance whose role is minor.

Evolution of life and non life premiums

The turnover posted by all insurers in 2012 amounted to 26 billion USD. The non-life sector dominates with 93.35% of market shares, while life insurance is struggling to take off, accounting for just 6.65% of sales.

in millions USD

RUB: Ruble Sources: Sigma, Swiss Re et l’assureur Ingosstrakh

The top 10 insurers in 2012*

in millions USD *Estimates of Atlas

Evolution of the first 10 insurers’ market shares: 2010-2012

in billions USD Sources: Sigma, Swiss Re et KPMG

Turnover’s breakdown per class of business

Like most developing countries, it is the motor class which dominates, accounting for 30% of the market in 2012. Property damage and health classes follow with 28% and 17% respectively.

The results of mandatory risks (motor, passengers transport, hazardous industrial risks) are poor. Because of the underpricing of risks, the loss ratios of these classes reach and sometimes exceed 90%, which highlights very high combined ratios.

In the life sector, insurance difficulties result from the Russians’ lack of confidence in their financial system and from the high rate of inflation, which is likely to discourage financial savings.

Sources: KPMG

A booming sector

Despite the slow pace of reforms, the sector has been on a steady growth in terms of premium volume since 2010. It is the strong economic recovery of the country as of 2010 that boosted the market turnover.

Source: Sigma, Swiss Re

Commonalities to insurance markets in the BRICs

• Market structure is similar. Dominance, with the exception of India, of non-life business in which motor, and thus compulsory insurance schemes in general, play a key role.
• Most people are not convinced about the usefulness of insurance.
• The reform package introduced is relatively fast, even if this fact is less obvious in Russia.
• The strong growth of GDP leads to a strong development of insurance.
• Highly concentrated markets. Despite a plethora of companies, the top five insurers have a significant share of the turnover.

Insurance in the BRICs in some figures

Population, GDP and inflation rate in 2012

Source: Sigma. Swiss Re

Insurance penetration in % of GDP in 2012

Source: Sigma, Swiss Re

Insurance density per capita in 2012

in USD

Source: Sigma, Swiss Re

Insurance premiums underwritten in the BRICs

in millions USD

Source: Sigma, Swiss Re and Insurance Regulatory and Development Authority for India