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    Bottomline: IRDAI’s growth push is well intended, but misguided

    Bottomline: IRDAI’s growth push is well intended, but misguided

    Bottomline: IRDAI’s growth push is well intended, but misguided
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    By Sonal Sachdev   IST (Updated)

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    The insurance regulator is proposing growth targets for life insurers to drive penetration, but its approach is flawed

    India is an under-insured country and given the lack of state-sponsored social security, like in several developed countries, the need to increase coverage is unquestionable. In this context, the insurance regulator, Insurance and Regulatory Development Authority of India (IRDAI)’s recent missive to life insurers asking them to target growth rates of between 15-50 percent in total business premium a year, based on their scale of operations with LIC at 15 percent and top private insurers at 30 percent, is clearly well intended
    IRDAI has also indicated it would like a component of salaries of CEOs of life insurers to be linked to performance on this count, to ensure accountability.
    This is all very good, but the plan is clearly not well thought out, and may well just be a decoy to get life insurers to the table to thrash out a more feasible plan. We’ll know in time.
    For now, let’s look at the lay of the land and why the proposed growth plan is flawed.
    Premiums, the wrong metric
    In India the protection gap, gap in life insurance needed and provided, is estimated at $16.5 trillion. That’s way more than in most other countries. In terms of sum assured (amount of protection value) to GDP too, India ranks poorly. But on premium to GDP, we fare better than a few of our neighbours. This also suggests that premium growth may not be the best metric to measure progress on expanding the base of life insurance.
    SUM ASSURED TO GDP
    CountryRatio
    Singapore332%
    Japan252%
    US251%
    Malaysia153%
    Thailand143%
    South Korea127%
    India23%
     
    PROTECTION GAP
    CountryGap ($ tn)
    India16.5
    Japan8.4
    South Korea3.9
    Australia2.8
    Indonesia2
    Thailand0.9
    Malaysia0.7
    Singapore0.6
    PREMIUM TO GDP
    CountryRatio
    Singapore7.60%
    South Korea6.40%
    Malaysia4.00%
    India3.20%
    China2.40%
    Indonesia1.40%
     
    The reason for this is that a large chunk of the premium collected by life insurers is for investments and not protection. In fact, a majority of the policies are sold as investment plans and not protection plans. So, despite premium growth, there isn’t any significant growth in protection. And while some insurers are focused on growing the share of pure protection policies in their business mix, this still remains a fairly small portion. The protection share for top private life insurers ranges between just 12 percent to 17 percent.
    PROTECTION SHARE IN MIX
    InsurerShare of APE (%)
    ICICI Pru17
    HDFC Life14
    SBI Life (of NBP)12
    Max Life14
    Interestingly, Life Insurance Corporation of India (LIC), by far the largest player in the industry accounting for 65 percent of premiums, accounts for just about 14.8 percent of the sum assured, that’s less than 15.8 percent for ICICI Prudential Life Insurance, which has a premium share of just 4.3 percent. This just shows that growing premiums won’t necessarily translate into more life insurance, just larger investment corpuses for many life insurers.
    Better metrics to use than premium could be the number of lives covered and the sum assured. This would put the focus on increasing coverage of the population while also ensuring that what’s offered is protection, not just investment products.
    Optimistic growth demand
    The other flaw in IRDAI’s proposal is the growth expectation. The life insurance industry has grown at a CAGR of just 10.4 percent since 2002 on new business premium, 14.2 percent on total business premium and 15.7 percent on sum assured. Expecting LIC to grow at 15-20 percent and top private insurers at 30 percent seems like a stretch of imagination, especially with no significant change in industry dynamics or policies.
    LIFE INSURANCE GROWTH IN INDIA
    YearNew Biz PremiumCAGR (%)Total Biz PremiumCAGR (%)Sum AssuredCAGR (%)SA/TBP (x)
    FY200211,60050,10011,81,20023.6
    FY201055,00021.52,65,40023.237,50,50015.514.1
    FY201540,800-5.83,28,1004.378,09,10015.823.8
    FY202175,70010.86,28,40011.41,88,61,50015.830.0
    In fact, ICICI Prudential Life Insurance in a presentation to project the high growth potential of the life insurance sector has assumed a CAGR of only 20 percent, which too some might consider optimistic, given the past track record.
     
    POTENTIAL @20% CAGR
    YearSum Assured / GDP (%)GDP CAGR (%)
    FY202123
    FY20253310
    FY20305310
    FY2035858
    Source: ICICI Pru Life
    POPULATION COVERAGE @20% CAGR
    YearInsured (mn)% of Adressable Population
    FY20217.411.7
    FY202516.115.6
    FY203040.824.5
    FY2035101.941.7
    Source: ICICI Pru Life
     
    Growth needs impetus
    Just asking the industry to grow won’t change anything. If the intent is to increase insurance penetration at the highest levels of Government, there must be policy measures that encourage its spread. Life insurers for long have been seeking a special carve-out of income tax concession or deduction for life insurance, but nothing has come of it. There needs to be an incentive and a policy push for life covers for the industry to be able to grow at an accelerated pace.
    Here it bears to note the significant under coverage of the tax-paying population in the country. Only about 12 percent of taxpayers in the country with greater than Rs 2.5 lakh annual income have life insurance.
    While getting individuals to take life covers is one way to expand penetration, getting organisations involved can provide further impetus. At present, all businesses employing more than 20 people need to register with the Employee Provident Fund Organisation. Perhaps the time has come to consider a similar mandate for providing pure life covers to employees. Many corporates today provide this voluntarily as part of their employee welfare and benefit programmes, but their numbers are fairly small when looking at the Indian organised landscape.
    The big hope
    The hope for Indians and the life insurance industry in India is that the regulator, IRDAI, and life insurers will use this opportunity to put their heads together and come up with a viable plan to increase penetration in the country, without ad hoc targets and policies that would detract from rather than further the common objectives.
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