By Anurag Singh
When the industry was opened up to private players in 2001, it was thought of as a huge landmark in financial freedom for Indian consumers. After all, they could now get access to world class technology, customer service & fund management expertise of the private players who has tied up with the best of the global insurance players. The Indian market was at the cusp of a revolution, hugely “under-penetrated” with density of $ 9 per capita whereas developed markets had this number ranging from $1602 for US & $2568 for UK (2001). The analysts however missed (most analysts belonged to insurance companies or parent banks) the critical point that China, which beats us by 5 to 10 times on most economic parameters, was at $ 12 on life insurance penetration. This was to come back & bite them as we would see later. So what changed that the industry set on course to de-grow for years in a row since 2011 till 2015?
This paper has few perspectives. The start point is to understand the two critical metrics that we use to measure success of the insurance industry anywhere in the world.
Life Insurance density is defined as the ratio of premium underwritten in a given year to the total population.
As stated earlier, this varies from $ 3200 odd for countries like UK, France to $ 1300 odd for Australia & $ 1500 odd for US. India today stands at $ 54 appx. after touching $ 52 in 2009 itself. Meanwhile China, which started at $12 in 2001 has moved from $93 in 2009 to $ 201 in 2015. It now looks like a right balance where china is 4 times our size which compares proportional to other metrics also. So something tells me that we have reached our natural stable rate of life insurance density which should hover between $ 50 to $ 60 per capita in real terms till 2020.
Looks pessimistic? Well read on to know what the analysts are missing (or are asked to miss by their bosses to make favorable business projections & valuations). This brings us to the other critical & more relevant metric, life insurance penetration.
Life Insurance penetration is defined as the ratio of premium underwritten in a given year to the Gross Domestic Product (GDP).
I call this more relevant metric as it doesn’t deceive you by throwing in poor insurance density numbers for countries where the population is high but the markets might be close to saturation as the spread of income is concentrated in few pockets (India comes to mind immediately). Premium to per capita GDP will mostly give you a more logical number to compare amongst countries. So how do the numbers stack up here?
India started off at 2.15% in 2001 compared to China at 1.3% & mature markets were steady like US at 4.4% & 10.7% for UK. If we look at 2015, UK & US largely remain in the same zone which indicates that markets are in the state of entitlement & stable. Interesting stuff was expected in India & China.
While China moved steadily to 2.6% till 2015, India hit 4.9% penetration in 2009 itself (beating China & US…..wow) & has since fallen to 4.0% in 2014 & 3.3% in 2015. Something tells me that this is set to fall to honor all other macro indicators with China & US. So while China will increase to a higher ratio (depends on their policies as well for insurance), Indian penetration has to fall substantially below 4% to a modest 2%, even accounting for the fact that we still have a distribution led insurance industry wherein life insurance is sold by push rather than being bought by pull.
Let’s look at the below graph pulled out from a Geneva papers authored by the international association for study of insurance economics. It analyzes the world growth of insurance premium penetration (Life + General) with the rise of per capita GDP. As we can see, India with a per capita GDP of less than $2000 should have a life insurance penetration of around 1.5% or thereabout. We can be an exception at 2% but not too far from this rule, unless the govt promotes life insurance policies specifically thru tax incentives like in some European countries. We are well past that stage. We had touched 4.0% in 2006 itself & are now back to 2.6% after 10 years, all this while we never managed to cross 5%. You get a sense that there huge level of saturation in the market which will not allow us to cross even 3% convincingly now on life insurance premiums.
While I’m optimistic that our GDP will grow well for next few years (7% on new series), we can’t sustain 3.5% life insurance penetration for long unless we hit per capita GDP of $ 45000 like that of US. Since that is fairly unlikely, our life insurance penetration would fall below 2.5% by 2020 & below 2% by 2025. The fall could be much faster than this as Indian population is getting financially literate fast enough much to the discomfort of the sellers of endowment plans. Since most life insurance premium in India is investment rather than protection based, players like Policy Bazaar & AdviceMyMoney penetrating fast in the high income categories are making sure that this happens earlier than due.