Insurance woes

Recent growth masks sustained underperformance

Over the course of the pandemic, insurance companies in India have done reasonably well. Health insurers saw a bump in the number of customers taking out standard health policies, and the number of payouts under automotive insurance schemes decreased because of lengthy and stringent lockdowns. Over the last financial year, gross direct premiums for the non-life insurers grew at 5.19 per cent with a total gross direct premium income (GDPI) of Rs 1.98 trillion. Life insurers also did well: They recorded a new business premium of Rs 2.78 trillion over the year, representing 7.49 per cent year-on-year growth. Within that segment, private providers did even better, growing at 16.29 per cent. Overall premiums for the life segment were Rs 5.73 trillion, with a private sector penetration of about a third. Within the non-life segment, private penetration is closing in on half the market.

Yet, in spite of the hopes for further growth, there is little doubt that the insurance sector continues to under-perform. The ratio of insurance premiums paid-to-GDP in India is 3.76 per cent, of which about a percentage point is non-life insurance. This is well below the global average. Nor has penetration to lower-income segments, women, or smaller towns expanded to the degree that it should have. Health insurance presents a particular problem that has been highlighted by the pandemic. The availability of standardised insurance plans, as recommended by the insurance regulator, has not really aided the public. Insurance companies rarely highlight these plans, preferring those that retain a certain ambiguity in their clauses that permit subsequent claims disputes. Meanwhile, the poor penetration of insurance means that there is a reverse adverse selection problem: Companies target high-end, healthy individuals, who are sold plans at premiums that may even be lower than the regulator’s standardised plans. This undercuts the whole point of standardisation.
 

Life insurance presents an even more intractable problem. Everywhere else in the world, insurance is sold as insurance and not as an investment. In India, unfortunately, it’s the other way around. Aggressive agents and “relationship managers” in banks mis-sell insurance as an investment product. Life insurers and, indeed, the government itself, are party to this mis-selling. As far as the government is concerned, the Life Insurance Company of India is a cash cow, and so it has no incentive to stop mis-selling of life insurance as an investment. The tax code is designed to aid this mis-selling, with life insurance premiums and unit-linked insurance plans traditionally classified alongside tax-saving investments such as the provident fund in Section 80C. (Health insurance is deductible up to Rs 20,000 under Section 80D.) There is thus an unhappy equilibrium in India where everyone is served but the customer. Insurers are focused on remunerative segments or mis-selling; and neither the regulator nor the government has an incentive to change things.

Hopefully, technology, divestment, and new foreign investment rules will help disturb this equilibrium. The government has finally taken steps to raise the foreign direct investment caps for the insurance sector, and promised that it will begin to divest its stake in LIC. Meanwhile, insurance aggregators are slowly but surely taking a bite out of the agent’s pie; they have only 1.3 per cent of the market in terms of premiums sold, but are growing. Unsurprisingly, some traditional insurers are unhappy with the transparency aggregators provide, and are withdrawing from these platforms. Yet digital transparency is likely the only way to overcome the regulatory abandonment of this vital sector.