A spate of insurance IPOs in India has put the sector in the spotlight. The big question is: Is India primed for an insurance boom? With a more friendly regulatory environment and the potential for digitization, there’s plenty of room for growth, analysts say. And that growth could bring an uptick in foreign investment, some predict.
However, the initial results from the IPOs have been disappointing so far. First it was ICICI Prudential, a joint venture between private sector bank ICICI and a business unit of Prudential plc. The maiden listing of any general insurance company in India was oversubscribed three times. But the Rs. 6,057 crore ($930 million) issue listed at a 6.7% discount to offer price.
Then came SBI Life. A joint venture between the State Bank of India (SBI) and BNP Paribas Cardif, its initial public offer (IPO) closed on the first day with a mere 1.14% gain. The $1.29 billion issue was subscribed 3.58 times.
Another big disappointment came a few days later. ICICI Lombard General Insurance made a forgettable debut at a 1.66% discount to its issue price. The $880 million issue had received good investor response. It was oversubscribed three times. ICICI Lombard is backed by foreign private equity.
But the really bad news was reserved for the public sector General Insurance Corp (GIC), which slumped around 15% on debut after raising $1.72 billion in the country’s biggest IPO in seven years. This was expected. Indian financial daily Mint reports that Life Insurance Corp (LIC) had put in a major bid for GIC shares (to rescue it from the ignominy of under-subscription). “Sometimes the subscription is skewed, with a single government-owned institutional investor like LIC subscribing to more than 50% of the issue,” says Jayanta Nath Mukhopadhyaya, director of the Kolkata-based J.D. Birla Institute.
“Concerns about valuations have marred the debuts of some of the recent insurance IPOs, including ICICI Lombard, which fell on its first day of trading,” according to Reuters. “GIC was fairly priced relative to its domestic rivals but was more expensive than global peers.”
“Life insurance demand is mostly driven by a middle class that can afford it and an increasing old-age dependency ratio.” –Jean Lemaire
That happened on a day when the Bombay Stock Exchange sensitive index (Sensex) shot up 435 points (1.33%) on the back of a government decision to allot a whopping $32.43 billion for recapitalization of public sector banks, which have been facing problems of huge corporate bad debts. (See Insolvency in India: Why Essar Group Is Digging Deep for Funds).
Meanwhile, India’s third-largest private sector life insurer, HDFC Standard Life Insurance, a joint venture with U.K.-based Standard Life Aberdeen, has received approval from the Securities and Exchange Board of India for its $1.1 billion IPO. Others in the queue include the public sector New India Assurance, which is looking to raise around $1.5 billion.
MNCs Increase Stakes
There is related activity, too. “Around a dozen foreign promoters have increased their stakes in their Indian insurance joint ventures after the amendment to the insurance laws,” notes business daily The Economic Times. The 2015 amendment raises the foreign direct investment (FDI) limit from 26% to 49%. “Insurance sees FDI flow of $2 billion after amended law,” notes the newspaper.
Other changes have followed. The merger plan between HDFC Standard and Max Financial Services hit a regulatory hurdle. But the government hasn’t given up on merging the three general insurance majors — Oriental Insurance, National Insurance and United India Insurance. And foreign partners have become more active. For instance, fertilizer cooperative IFFCO has decided to divest its 21.64% stake in its insurance joint venture IFFCO Tokio General Insurance to its Japanese partner Tokio Marine Asia. Indian Potash will also divest its 1.36% holding. Tokio Marine’s stake will go up to 49%. But Standard Life is not one of the number of foreign partners seeking more. Gerry Grimstone, Standard Life chairman, says that they never intended to use up all the headroom. “We always knew that the eventual destination of this company was an IPO.”
All this activity begs a couple of questions. Why the IPO route? And, why now? “This may be the right time,” finance minister Arun Jaitley told a news channel. He was talking about public sector banks, which will be required to raise more equity after the government recapitalization largesse. But it could equally apply to insurance companies. (The only problem: Insurance companies haven’t delivered thanks to their high valuations and they may not attract retail investors.)
One reason for the timing is that public sector insurance companies had to wait for government permission. The others just savored the market flavor of the month and took a combined plunge.
Good Fundamentals
“Presently, the macroeconomic parameters of the Indian economy indicate robustness,” says Mukhopadhyaya. “Consequently, the Indian stock market has been in a sweet spot, further accentuated by global tailwinds.”
“The insurance industry in India is truly coming of age,” says Boston Consulting (BCG) India managing director Alpesh Shah and the author of a report titled, “The Changing Face of Indian Insurance: Bigger, Better, Faster.” “In the case of life insurance, while the sector has not shown much growth over the past few years, the top few players are all showing good profitable businesses. (See Insurance: Indian and Foreign Firms Test Positive for Growth Steroid). In the case of non-life, the industry has been aided by the around 17% per annum growth over the past decade. In addition, the favorable regulatory and pricing changes as well as the efficiency coming from digitization means that most non-life businesses are now profitable. And the outlook is also positive. It is because of these reasons that we see a spate of insurance sector IPOs now.”
He disagrees, however, with the common belief that foreign majors are seeking higher stakes in their Indian JVs. This has been true in other sectors; a 51% holding in the subsidiary means that the parent can consolidate its accounts. In insurance, thanks to the 49% ceiling, it is a non-issue.
“Insurance is, inherently, a very data-driven business, but it’s been strangely uncoordinated.” –Peter Fader
“It is currently estimated that the Indian insurance industry will need more than $8 billion worth of capital to improve its solvency standards and increase penetration levels,” notes a study by broking house KR Choksey. It has probably started off on the wrong foot. “It appears that the pricing of the IPOs have been done aggressively, leaving little on the table for the retail investors,” says Mukhopadhyaya. “For example, the GIC IPO which was priced at around $60, is now trading around a dollar less. The area of concern is that the funds raised are only partially going to the company (as the lions’ share of the IPO is an offer for sale). I apprehend that many of the insurance companies may face solvency/capital adequacy problems as they have the potential to grow at a scorching pace in a large, underinsured country like India.”
Everyone is relying on growth. “The Indian economy is one of the most attractive destinations in the emerging markets for insurance investment given that its sheer size and low level of penetration offer huge growth potential,” says a report by rating agency Crisil titled, “The Next Game in Insurance.” “The industry is currently the 15th largest world market, with a total premium of $60 billion in 2014.”
Beyond the numbers, there are far-reaching societal implications and changes at work. “My perception is that life insurance demand is mostly driven by a middle class that can afford it and an increasing old-age dependency ratio,” says Jean Lemaire, professor of statistics at Wharton.
He looks at the level of development of a country needed to start life insurance. “While there is evidence that the Romans practiced some early form of life insurance including annuities, the real beginnings can be traced to the British Isles,” he notes. “Following the early work of Sir Edmond Halley who surveyed ages at death in cemeteries in the late 17th century, early mortality tables were developed and applied to life insurance. A key date is 1762 which saw the foundation of the Equitable Life Assurance Society in London — the first company to market modern life insurance policies. I link this development to the very beginnings of the industrial revolution, and a new concept: disposable income. Insurance, especially life insurance, is a secondary good, meaning that consumers can only consider its purchase after essential goods have been bought.” While the average income of individuals did not rise much or at all until the 18th century, he points out, the industrial revolution started a trend of growing income: Average income has grown at a 2% to 3% pace since then, and continues to do so. “Life insurance can only develop when there is an established middle class with disposable income,” he says.
“A second factor is a high old-age dependency ratio,” Lemaire notes. “Why is there a big difference between China (where life insurance is growing at an annual pace of more than 10%) and India? Children, I guess. Fertility rates. The ‘four grandparents – two parents – one kid’ situation in China has put enormous pressure on the one kid to take care of parents, and life insurance is one of the ways to make sure grandparents will be provided for even if the one kid dies. With a fertility rate much higher in India (at least in many states), this pressure is much reduced, as several kids are expected to be around to take care of the elderly.”
He adds: “Life expectancy is positively correlated with life insurance penetration, but in my opinion this could possibly be a spurious effect. Life expectancy and income are highly correlated, so quite possibly it is income that drives the purchase of life insurance, not so much life expectancy.”
“The insurance industry in India is truly coming of age.” –Alpesh Shah
But you cannot set up China as a model. “Insurance — and specifically retail insurance — is purely a local business,” says Shah. “So, there is no real value in comparing across countries.” Shah also disagrees that MNCs are hoping for further changes in the law which will allow for a 49% stake. “We need to separate the industry into at least two parts — life insurance and non-life insurance,” he says. “Life is the space that has been struggling for growth over the past few years. Non-life insurance has been growing at around 17% for the past many years. The question is why has life insurance not been growing as much. The reasons are many. [But] growth has not really been only capital constrained. And even within that it has nothing to do with the color of the money – whether Indian or foreign.”
So is India all set for an insurance boom? “More than a fifth of India’s population falls below the poverty line, and hundreds of millions have limited awareness and access to financial services,” says the Crisil report. Those problems will have to be addressed first. But a start has been made.
‘Potential to Leapfrog’
There is another asset the country has on its side. India is technology territory. And, as every analysis points out, technology could work wonders. “I do believe that there is potential to leapfrog other nations in this case,” says Wharton marketing professor Peter Fader. “Insurance is, inherently, a very data-driven business, but it’s been strangely uncoordinated, i.e., between the actuaries in the back office and the marketing/sales people in the front office. If the business people would do a better job of coordinating with the actuaries, then amazing things could happen. Not only do I see potential to leapfrog other insurance companies, but I can see them jumping beyond leading firms in other industries (e.g., hospitality, mobile gaming, e-commerce, etc.) that are respected as leading-edge drivers of analytical expertise.”
“Given the extensive use of internet-driven solutions in developed markets, there is a visible inclination for local insurers to adopt digital and mobile capabilities to lower customer acquisition and servicing costs and provide improved convenience and access to information,” according to an Ernst & Young report titled, “India Insurance: Industry Developments Fostering Positive Market Sentiment.” According to the BCG report by Shah: “Traditional operating models and organization structures of insurance companies do not allow for an entrepreneurial approach required for disruptive innovations in products and processes. Insurance companies will need to explore the opportunity to groom the InsurTechs through separate incubators and innovation labs that isolate the innovation effort from the traditional way of working.”
“The Indian stock market has been in a sweet spot, further accentuated by global tailwinds.” –J.M. Mukhopadhyaya
“The country remains grossly underinsured at just 3.9% — most of it life [coverage] — compared with the global average of 6.3%,” says the Crisil report. “Further, the annual insurance premium per capita (density) is abysmal at $52 or less than 1% of annual income compared with 7% and 12% in the U.S. and the U.K., respectively.”
“Globally, insurance is the core part of any economy,” Bhargav Dasgupta, MD & CEO of ICICI Lombard told The Economic Times. “In most of the markets you will see a number of insurance companies in the top 10, top 20 companies. So, having four-five companies from insurance is not a large number in the context of India.”
While India copes with its own problems, the attention of the world may be moving elsewhere. Lemaire refers to an article in Sigma Re, a publication of the Swiss Re Institute. “Behind the excitement created by the leading emerging markets such as Brazil, India or China, there is a group of ‘frontier markets’ which have a promising outlook for economic growth and offer attractive long-term potential for insurers.” Swiss Re’s latest study looks at 21 frontier markets such as Nigeria, Ecuador, Vietnam and Azerbaijan.
But between Azerbaijan and India, the latter (with a 2016 population of 1.324 billion) is surely the bigger beneficiary of this demographic dividend.
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Anumakonda Jagadeesh
Excellent.
Life Insurance is one of the fastest growing sector in India since 2000 as Government allowed Private players and FDI up to 26% and recently Cabinet approved a proposal to increase it to 49%. In 1955, mean risk per policy of Indian and foreign life insurers amounted respectively to ₹2,950 & ₹7,859 (worth ₹15 lakh & ₹41 lakh in 2017 prices). Life Insurance in India was nationalised by incorporating Life Insurance Corporation (LIC) in 1956. All private life insurance companies at that time were taken over by LIC. In 1993, the Government of India appointed RN Malhotra Committee to lay down a road map for privatisation of the life insurance sector.
While the committee submitted its report in 1994, it took another six years before the enabling legislation was passed in the year 2000, legislation amending the Insurance Act of 1938 and legislating the Insurance Regulatory and Development Authority Act of 2000. The same year the newly appointed insurance regulator – Insurance Regulatory and Development Authority IRDA—started issuing licenses to private life insurers.
Types of Life Insurance in India
Life insurance products come in a variety of offerings catering to the investment needs and objectives of different kinds of investors. Following is the list of broad categories of life insurance products:
Term Insurance Policies
The basic premise of a term insurance policy is to secure the immediate needs of nominees or beneficiaries in the event of sudden or unfortunate demise of the policy holder. The policy holder does not get any monetary benefit at the end of the policy term except for the tax benefits he or she can choose to avail of throughout the tenure of the policy. In the event of death of the policy holder, the sum assured is paid to his or her beneficiaries. Term insurance policies are also relatively cheaper to acquire as compared to other insurance products.
Money-back Policies
Money back policies are basically an extension of endowment plans wherein the policy holder receives a fixed amount at specific intervals throughout the duration of the policy. In the event of the unfortunate death of the policy holder, the full sum assured is paid to the beneficiaries. The terms again might slightly vary from one insurance company to another.
Whole life policies
A whole life insurance plan covers the insured over his life. The primary feature of this product is that the validity of the policy is not defined so the policyholder enjoys the life cover throughout his life.
Unit-linked Investment Policies (ULIP
Unit linked insurance policies again belong to the insurance-cum-investment category where one gets to enjoy the benefits of both insurance and investment. While a part of the monthly premium pay-out goes towards the insurance cover, the remaining money is invested in various types of funds that invest in debt and equity instruments. ULIP plans are more or less similar in comparison to mutual funds except for the difference that ULIPs offer the additional benefit of insurance.
Pension Policies
Pension policies let individuals determine a fixed stream of income post retirement. This basically is a retirement planning investment scheme where the sum assured or the monthly pay-out after retirement entirely depends on the capital invested, the investment timeframe, and the age at which one wishes to retire. There are again several types of pension plans that cater to different investment needs. Now it is recognized as insurance product and being regulated by IRDA.
Foreign Direct Investment (FDI) Policy in Insurance Sector
Seeking to more investment in insurance sector, on March 18,2016 government allowed FDI upto 49% in insurance sector from 26% in domestic insurance companies by overseas companies without the prior approval. Earlier 26% FDI was approved through automatic route. For FDI upto 49% approval of Foreign Investment Promotion Board is required subject to the verification of insurance regularity authority of India. There are 52 insurance companies in India out of which 24 are life insurance companies and 28 are general insuranace companies.
Initial Public Offer (IPO) rules for Indian Life Insurance Companies
A key piece of legislation impacting on the Life Insurance industries capital raising abilities is the lock-in period of 10 years for investment to be limited to promoter group equity investments. Under the Insurance Guidelines, Indian Life Insurance companies can opt for a public issue of equity through an Initial Public Offer (IPO) after 10 years of operations.
In October 2010, the securities market regulator, Securities and Exchange Board of India (SEBI), issued disclosure norms for Indian Life Insurance Companies seeking to make an initial public offer for sale of equity shares to the public.
Indian life insurance industry overview
All life insurance companies in India have to comply with the strict regulations laid out by Insurance Regulatory and Development Authority of India (IRDAI).
Life Insurance Corporation of India (LIC), the state owned behemoth, remains by far the largest player in the market. The private companies like Exide Life Insurance have come out with products called ULIPs (Unit Linked Investment Plans) which offer both life cover as well as scope for savings or investment options as the customer desires. These type of plans are subject to a minimum lock-in period of five years to prevent misuse of the significant tax benefits offered to such plans under the Income Tax Act. Comparison of such products with mutual funds would be erroneous.
Commission / intermediation fees
• The maximum commission limits as per statutory provisions are:
Agency commission for retail life insurance business:
• 7- 25% for 1st year premium if the premium paying term is more than 20 years
• 7- 10% for 1st year premium if the premium paying term is more than 15 years
• 7- 10% for 1st year premium if the premium paying term is less than 10 years
• 7% – yr 2 and 3rd year and 3.5% – thereafter for all premium paying terms.
In case of Mutual fund related – Unit linked policies it varies between 1.5% to 6% on the premium paid.
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• Agency commission for retail pension
• 7.5% for 1st year premium and 2.5% thereafter
• Maximum broker commission – 30%
• Referral fees to banks – Max 55% for regular premium and 10% for single premium. However, in any case this fee cannot be more than the agency commission as filed under the product.
• However, the above commission may be further subject to the product wise limits specified by IRDA while approving the product(Wikipedia).
Dr.A.Jagadeesh Nellore(AP),India