India Opens Insurance Sector To Foreign Players

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The Indian parliament recently ratified the long-pending Insurance Laws (Amendments) Bill. The law has hiked the foreign investment limit for insurance companies to 49% from 26%, still requiring ownership of insurance ventures to remain with Indian entities. [1] The law was designed to facilitate growth, ease the barriers to entry to the market, and should also encourage consolidation within the market. It also aims to enable the infusion of much-needed capital in the insurance sector. At present, it is estimated that the insurance industry in India will require more than $8 billion in capital to increase penetration levels and also improve solvency standards. [2] MetLife (NYSE:MET) and AIG (NYSE:AIG) are some of the foreign players who already have operations in India through joint ventures.

Asia-Pacific is an important market for MetLife, AIG, Prudential (NYSE:PRU) and Manulife (NYSE:MFC). MetLife, for example, earned $8 billion in premiums from the region, similar to what it earned in the U.S. in 2014. Although Japan is the chief contributor to these revenues, expansion in emerging markets such as India will be key to the companies’ growth in the Asian region. The size of the life insurance market in India offers a very lucrative business opportunity to global insurance companies. The country’s insurance market is expected to quadruple in size over the next 10 years from its current size of $60 billion. During this period, the life insurance market is slated to cross $160 billion. [3] To put the opportunity in context, if MetLife is able to capture 5% of the Indian life insurance market by the end of the decade it would result in a 10% upside to our current price estimate of $58 for the company. 

In this article we take a 360 degree view of India’s life insurance market and the outlook for the sector.

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Indian Life Insurance Market Opportunity

The Indian insurance market is a huge business opportunity waiting to be harnessed. India currently accounts for less than 1.5% of the world’s total insurance premiums and about 2% of the world’s life insurance premiums despite being the second most populous nation. [4] The country is the fifteenth largest insurance market in the world in terms of premium volume, and has the potential to grow exponentially in the coming years.  Life insurance penetration in India is just 3.1% of GDP, which has almost doubled since 2000. [5] In comparison, the U.S. has a penetration level of 7.5% and in Japan it is as high as 11%. The world average is 6.3%. In 2013, the life insurance premium volume for India was $52 billion. [6] A fast growing economy (the World Bank forecasts 5-7% growth in GDP over the coming years), rising income levels and improving life expectancy rates are some of the many favorable factors that are likely to boost growth in the sector in the coming years. [7] India’s life insurance market – which is the largest market in the world in terms of the number of policies at 360 million – is expected to grow at a healthy pace of 12-15% (CAGR) in the next five years. [2] This presents a massive opportunity for American insurance companies, especially with the new rules in place.

The Road Ahead

The relaxation of foreign investment rules has received a positive response from MetLife. U.K. based insurers Standard Life and Allianz have also announced plans to increase their stakes in joint ventures with HDFC and Bajaj Finserv Limited, respectively. Over the coming quarters we expect to see a slew of joint venture deals between global insurance giants and local players. New entrants will, however, face an array of challenges in the market. The Indian market is currently dominated by Life Insurance Corporation (a government-controlled company), which controls nearly 75% of the market. New entrants will also need to find ways to appeal to the fast-growing middle class population, though partnering with local players should help in that regard.

With the expected influx of private players and heightened competition, consumers should have access to a wider pool of insurance products, which should ultimately help the Indian market evolve. Distribution channels will also be key to penetrating the market. The bancassurance model could play a key role in this, and the relaxation of rules about companies directly recruiting distribution agents will also help. [3] We will be keeping a close watch on how the latest reforms pan out and the subsequent impact on the entry and expansion of foreign insurers in the country.

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Notes:
  1. Major Highlights of the Insurance Laws (Amendment) Bill, Press Information Bureau, Government of India []
  2. Insurance Sector in India, India Brand Equity Foundation [] []
  3. Firms can appoint agents without insurance regulator’s licence, LiveMint [] []
  4. Addressing Inequality in South Asia, Martin Rama, Pradeep K. Mitra et al, World Bank []
  5. Economic Survey 2014-15, Ministry of Finance, Government of India []
  6. World Insurance in 2013, Swiss Re Sigma 2014 []
  7. Data on India, The World Bank []