Academy of BFSI,

Evolution of the General Insurance Industry

The general insurance industry has been the most happening industry of all industries today, so to say. The industry is witnessing several changes and has been very vibrant, which possibly no one would have ever thought of, before 20 years.

Each decade has witnessed certain landmark changes starting from 1994, when the Malhotra Committee gave its report – recommending suggestions for the improvement of the general insurance market. This paved way for the establishment of a regulator in 1999 with the IRDA Act of 1999.

The new millennium of 2000 saw the entry of a number of private players most of which have evolved as industry giants today. Traditionally, the market had only four public sector insurance companies right from its nationalization in 1972, apart from General Insurance Corporation of India, which was a holding company then.

This write-up attempts to capture few important milestones that took place in three different phases viz 1. Yesterday, meaning from the time of nationalization till the advent of private companies in 2000. 2. Today, meaning from the time of entry of private companies till date i.e. early 2018, which has seen phenomenal changes. 3. Tomorrow, meaning what the future holds for the general insurance industry given the current trends and changing needs of the dynamic market.

Yesterday

This period covers nearly four decades starting from 1972 when the industry was entirely ruled by PSU general insurance companies. During this period, most of the segments like Motor, Fire, Engineering (both annual and project), Marine, Workmen Compensation etc. were under tariff regime. The erstwhile Tariff Advisory Committee, which was an autonomous body of Government of India used to fix the tariff rate, policy terms, conditions, and so on. Marine was de-tariffed with effect from April 1994.

Despite a lot of unhealthy competition between the government-owned companies themselves, some of the departments like Fire and Engineering generated an underwriting profit. Motor and Health have historically been the most loss-making departments for various reasons. Group Health and Marine policies were highly cross-subsidized, especially, for the corporate sector. The premium charged for Marine and Group Health was abnormally low resulting in a huge imbalance between the portfolios.

Further, as market penetration was extremely low during this period and there was hardly any innovation in terms of products and processes, a strong need was felt to allow private players in the industry. It was with this view that a committee was formed in 1993 under the Chairmanship of Sri R N Malhotra to suggest the industry reforms. Some of the major suggestions submitted by the committee included permission to private players, promotion of foreign JV partners, the establishment of a regulatory body, financial security of insurance market, enhanced customer satisfaction with increased customer choice and low premium, and increase in professional standards with respect to the services rendered to customers.

Today

Following the recommendations of the Malhotra Committee, a new wave started in the insurance industry with the establishment of IRDA. Presently (2018), 33 insurance companies are actively operating in India, including few standalone health insurance companies.

During the period from 2002 to 2018, a number of new big regulations affected brokers, reinsurance, investments, product development and management etc. This included a huge attempt on the part of the regulator to infuse hygiene into the otherwise most pampered market. So several exhaustive regulations were introduced in respect of the functioning of all intermediaries, which included distribution channels like corporate agents, brokers, Motor Vehicle Dealers (MISP), micro insurance agents and few others like point of sales persons, insurance marketing firms etc. Many of these were also aimed at increasing the penetration level and making insurance available in Tier II and III cities easily and at affordable prices.

Two statutory bodies by the name Life Insurance Council and General Insurance Council also took birth during this period to connect the various stakeholders of the sector. These bodies are responsible for developing and coordinating discussions between the government, regulatory board, and the public.

This period also saw the emergence of new standalone health insurance companies. Few companies, though licensed for non-life, restricted their business purely for Motor and Liability and were thereby able to offer specialized services. The Third Party Administrators (TPAs) were also brought in to existence through which the claim servicing was outsourced.

The most historic de-tariffing for Motor, Property etc. happened in a phased manner between 2006 and 2008. In fact, it brought down the premium rates drastically low, leading to unhealthy competition amongst the players. The industry is still yet to come out of this unfortunate self-infliction in a mad run for the top line, which eventually led to increased loss ratios.

However, despite a steep reduction in prices, the growth of the market in terms of premium over the previous year has been impressive with a CAGR of around 18% from past one decade. This has resulted in huge increase in the value of insured assets or potential liabilities, but with reduced premium (disproportionate premium). It has led to narrowing down of difference between underwriting loss and investment profit. Most of the companies are able to survive only with the support of their investment profit as their Combined Operating Ratio (COR), which is Total claims + Cost of Business acquisition+ Management expenses, being over 100% or marginally less than 100%.

The market was opened for foreign reinsurance companies to open branches in India resulting in more than five reinsurers establishing their offices in India. Two GI companies (one each from the public and private sector) went public, which was a historic moment for the industry.

Use of technology has made its way for pricing in retail products. Telematics in Motor and Wearables in Health are being used by companies to ensure merit-based pricing.

FDI, which was limited to 26% initially, now stands enhanced to 49%. So, there is no dearth of capital in this capital-intensive industry. Stringent regulations and monitoring of solvency margin (reserves and/or assets value to be at-least 1.5 times the value of the liabilities) is in place now. Effective policyholder’s interest protection regulations, monitoring of the functioning of intermediaries, standardization of health insurance practices, etc. are also worth mentioning here, which are directed towards ensuring more discipline and improved service.With all the above, the underwriting profit has still remained elusive for most of the insurance companies.  

Tomorrow

Insurance companies are seeing opportunities in every good and bad thing that happens in the market. Anything, which is likely to lead to financial loss, can have a policy to look into it, as long as the loss arises out of an uncertain event.

The events which jolted the entire banking industry in 2017 and the first quarter of 2018, have resulted in insurance companies revisiting their product design and tweaking the products to the extent that they become attractive to banks. There is also a realization amongst banks that a number of possible insurable losses have been covered inadequately.

Imposition of a mandatory provision on builders through RERA has pushed insurers into developing new products to meet the requirements of this new Act. This is a huge market in itself as it warrants long-term guarantee cover on construction quality, apart from a guarantee to the title, which was missing previously.

With growing incidences of cyber-crime, both individuals and entities are at risk today. It is now perceived to be one of the most sought-after risk coverage plans, particularly for entities to compensate their clients for loss of confidential data.

With newer provisions of Companies Act making directors and officers personally liable towards shareholders, government, creditors, society, employees etc., there is an increased realization among companies for taking liability policies to protect the interest of the management. The market size is expected to increase even more with a number of surveys predicting an expected premium income of Rs. 4,50,000 crore by 2025.

The regulator believes that it is time for the industry to move to risk-based solvency margin or capital structure to provide long-term stability to the market. It will help in moving to next level of reforms. A committee has been formed to go into its nuances and suggest the next set of norms.

It is also expected that a number of new insurance companies will line up to open shop in view of the huge size of the untapped market. The industry may also witness more consolidation and mergers, a speculation that has been making rounds in the market for quite some time.

The operational challenges include containing rising costs, getting over inefficiency in administration and claims management, address system failures etc. The picture is not as rosy as it looks, but not gloomy too. It requires an extensive adoption of technology-based application to support pricing such as Telematics, Wearables etc., which has already made inroads into the market slowly, but effectively.

The proposed ‘Ayushman Bharat’ programme, an initiative from the central government to cover 10 crore poor and vulnerable families for a sum insured of Rs. 5 lakh, is expected to be a game changer in the Health Insurance segment, the way the Group Health scheme is being operated today. The much-hyped Crop Insurance Scheme ‘Pradhan Mantri Fasal Bima Yojana’, a revenue-based concept to protect the farmers in times of distress is also expected to be a big focus of the industry.

Conclusion

A strong and supportive insurance industry is extremely important for the wellbeing of the nation. It acts as a catalyst for various government initiatives too. A good insurance market should narrow down the gap between the economic loss and insured loss so that the affected segment has compensation to bank upon. This is what is being attempted by all insurance companies and IRDAI through innovation in products, processes etc.

While the companies may look at generating underwriting profit i.e. profit from the core area of the insurance business, given the current day situation, it may still be a long way for many. There is a serious short supply of technical people who can support in designing flawless policies to meet the requirements of the market and price the same. This is a knowledge-based industry, so this is where the education industry should come to rescue in developing a generation of professionals who can fill the gap.

Author’s Note

This article has been authored by N.S. Prakash, Associate Dean, Insurance at Manipal Global Academy of BFSI.

This is a humble and maiden attempt on the part of the author to capture the macro view of the industry in his own words, entirely and purely based on individual perception. 

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