Driving through India’s financial capital Mumbai, some of the brightest billboards that catch your eye promote insurance companies. Most of them represent big brands like New York Life, MetLife, Aviva and AIG. For the last five years, they have been working hard to make their presence felt in a under-insured market.

The insurance firms had little choice, considering that they had to grab consumers’ attention for their brand and products. Moreover, they had to wean them away from the state-owned insurers, chiefly the Life Insurance Co. (LIC) for life and General Insurance Corporation (GIC) for non-life (or property and casualty) insurance.

The hard work is paying off. For the first time since India’s insurance industry opened up in 2000, the numbers are looking up, albeit partly on investment returns. Six of the eight private general insurance companies reported net profits in 2005, in three years of setting shop against the expected five years or more. The 14 private life players are hoping to turn profits in two years or more. Normally, that could take 10 years in a new market.

And that market is growing rapidly. Total life insurance premiums grew 41% to nearly $8 billion in the financial year up to March 2006; non-life premiums grew 16% that year to about $4.4 billion. In the past year alone, private life insurers posted a whopping 85% growth in premiums collected at $2.23 billion. In the non-life sector, private players beat the industry’s 16% growth with nearly 27% at $4.4 billion in premiums collected. To put that in a peer group perspective, China collected $47 billion in 2003-04, 24% over that in the year before. In India, life is roughly three to four times bigger than non-life. And there is potential within life since most consumers see insurance as a tax-saving-cum-investment vehicle rather as than a pure cover.

In December 2000, foreign delegates representing the financial services industry at the Indian Economic Summit in New Delhi had reckoned that over the next five years, private insurance companies would secure 5% of the Indian market. But by November 2005, 14 private life insurers had captured about 34% of the market. Private non-life players, fewer in number, had secured a 26% market share. These are possibly the fastest growth rates private insurance players have seen in any part of the world. In India, it can only be compared with the aviation industry, where in 10 years private firms have grabbed about 50% of the market.

Waiting in the Wings

Not surprisingly, more foreign players are waiting to enter. The Principal Group of the U.S. (already with a presence in India’s mutual funds market) has struck a joint venture with two state-owned banks for a joint venture. South African Sanlam has received approval and its partner is the Shriram Group of Chennai. Others in line include AXA, Mitsubishi and Samsung. They join at least two other state-owned banks that wish to start insurance arms.

Foreign insurers have done well. Their issues are more to do with a rapidly maturing market than a nascent one. Their medium- to long-term intention is to reach out to the larger, semi-urban and rural markets with new products. The big bugbear for foreign insurance firms is ownership. They want 51% or more and that will take some time coming. For a country that has less than 1% of the global insurance pie, this may be an important trigger for further investment.

Foreign banks have been operating in India for about 150 years but were never given freedom to expand branches or access some kinds of business, like those from the government. Insurance is a different story. India had a competitive insurance market ever since the British-owned Oriental Life Insurance Co set up shop in 1823. The industry expanded as part of the private sector until 1956 when the government nationalized it. The LIC was then formed and it took over the management of some 245 companies, including 16 foreign firms.

In 2000, India’s insurance industry was opened up again, this time simultaneously to new Indian and foreign firms. Present regulations limit foreign participation to 26% of the joint venture company, a problem area as mentioned earlier. This may be the only major policy obstacle over time as seen by overseas firms. Despite that, there are 27 direct insurance players in the country already with more waiting in the wings.

McKinsey’s director in India and banking industry expert Leo Puri says the opening of insurance has been a smooth deregulation process. “The state mammoth, the LIC, has not been destabilized and the objective of deregulation has been met. Employment has grown and so as the insurance business.”

Bajaj Allianz Life Insurance CEO and Allianz country head Sam Ghosh concurs, “The insurance sector is one of the true success stories of the ongoing financial reforms and opening up of the industry to foreign players.”

New York Life International was the first U.S. insurance Co. to set up shop in India in 2000. Its CEO, Joseph Gilmour says it helped to arrive at the time the market was being privatized: “We saw that as an opportunity. It was a situation that allowed us to work with the emerging market directly to have a regime of governance that would benefit all consumers and, of course, insurance companies.”

Only 22% of the insured population in India has life cover. Moreover, most of them are not covered adequately. More than 40% of insurance consumers think of it as a savings product while only 20% buy insurance on death risk considerations. Life insurance premiums contributed to less than 2% of the country’s GDP (now approaching $800 billion), compared to between 5% and 10% in developed countries. But the market is growing fast.

Many experts, including the former chairman of the Insurance Regulatory & Development Authority, (IRDA) N. Rangachary, then predicted that private players (including foreign) would grab a 10% to 15% market share in 10 years. (Rangachary led IRDA until mid-2003, covering a crucial period when the industry moved from nationalization to liberalization.) Figures now suggest new players had hit 9% in the second year of operations.

The future looks brighter. According to the current IRDA chairman, C. S. Rao, “a lot of people are underinsured, yet penetration rate and coverage per capita have gone up. Since 2000, penetration levels have risen from 2.3% to 2.88% (India’s population: 1.1 billion). Similarly, in terms of insurance density or premium per capita, the coverage is as high as $16.4 as opposed to $9.4 in 2002.”

LIC has retained its dominance in the market with a 78% share of the life business. Private players have grabbed the rest and their share is growing. With aggressive selling and marketing tie-ups (also known as bancassurance) with public sector banks, LIC is seen as having responded well to the changing rules of the game. For instance, LIC issued 10 million fresh policies in the current year up to mid-October, a 16% growth over the previous year. Last year, it issued 2.4 billion fresh policies.

General insurance was nationalized in 1972 and the four state-owned players control around 77% of the market (as of the end of 2005). GIC, which was once the parent of the four other state-owned general insurance companies, is now categorized as a reinsurer. The four companies — GIC, New India Assurance, Oriental Insurance and the United Insurance — work out of nearly 4,200 offices across the country and have a direct or indirect presence in 30 countries.

For some players, the life business has grown tremendously. The largest private insurer, ICICI Prudential (a joint venture between privately run ICICI Bank and Prudential) says it grew 106% between 2003 and 2004. ICICI Prudential also has the highest capitalization, at $200 million. But non-life has grown faster. In 2004, gross premium income was up 10% (approximately $4 billion). In the year before, that market grew 21%. Private insurance players (mostly with foreign joint ventures) took their share from 9.5% in 2003 to around 14% in 2004.

Bajaj Allianz General Insurance CEO Kamesh Goyalsays volumes have helped hit the profit line early. “Private insurers have been able to make profits because the high volumes have helped leverage management expenses.” He also says better spreads and reduced claims ratios contributed to companies turning profits much ahead of the five-year expected wait.

A good start has provided the confidence to think bigger. Says ICICI Prudential Life CEO and managing director Shikha Sharma, “The biggest challenge we face is to build a greater footprint with mass products. We may have to come out with different strategies for different markets.” The other big challenge is to expand the very acceptance of insurance and raise its levels. “India’s vast rural population, which is largely untapped, offers an opportunity as well as a formidable challenge for the new players.”

In addition, there is an acceptance that the insurance companies themselves are learning. “For the new players, the first few years have been on a learning curve, with the focus being on setting up capacity and base,” says Shivaji Dam, member of the board and former managing director of Kotak Mahindra Old Mutual Life (a joint venture with Old Mutual Life of the U.K.).

Non-life private players are also growing by taking bigger risks. The IRDA says much of the growth is in portfolios that are traditionally regarded as loss prone. As a result, motor insurance has grown 20%, health 27%, products like liability (directors, corporate, officers, physical products) have grown 100%. Until October of this year, private insurers had collected premiums worth $2.6 billion compared to $2.2 billion for the same period a year ago

Not surprisingly, the newer non-life players are attempting to dig deeper into existing business segments. Royal Sundaram Alliance managing director Antony Jacob says his company is gearing up to tap the small and medium business market. Tata AIG General Insurance CEO Dalip Verma broadly agrees the future lies in retail, so far considered out of reach because of high acquisition costs.

Some industry watchers say customers don’t care who their insurers are. According to general insurer ICICI Lombard’s CEO Sandeep Bakhshi, “We believe the private-public distinction is now over after four years. One needs to start performing in terms of level of quality. Corporate customers like to see whether new players operate with a level of integrity and the value proposition they bring.”

Back in life, group insurance is a big segment. According to ICICI’s Sharma, “Group accounts for about 10% of total premium generated. And many players might be using it as market strategy.” Sharma admits her firm leverages parent ICICI Bank’s close corporate ties in procuring corporate superannuation and gratuity accounts.

The market will open up further when consumers show greater willingness to experiment. Unit Linked Insurance Plans (ULIPs) are among the most popular. ULIPS are similar to mutual fund products where the premium is invested in various equity and bond funds in keeping with the policy-holder’s risk appetite. Some players even allow for topping up the premium without affecting the sum assured or the value of the base policy. “Consumer attitudes and perception about insurance have changed,” notes Bajaj Allianz’s Ghosh. “Insurance is now considered a viable financial instrument to meet different needs.”

The big battle for share is being fought in the institutional market. There are two components to this. The first is concerns about large organizations buying insurance for their employees. While the bank owned insurance companies, such as ICICI Prudential and HDFC Standard Life, have an edge, everyone is hitting this segment aggressively. State-owned LIC has bagged some big deals here, including one totaling Rs. 1,300 crore ($282 million) with Infosys Technologies of Bangalore, covering 1,300 of the latter’s employees.

With all players investing almost uniformly in channels, the individual effort helps the collective. LIC, which pioneered the agent model, has gone from 700,000 foot soldiers or agents to more than a million. LIC also boasts a network of over 2,000 branches, 100 divisions and seven zonal offices. Your middle class neighbor may well double as an insurance agent in his spare time if he or she has a day job or it might be the only source of income. The total agent force in the country for all players is believed to be around 1.3 million, a figure that is expected to keep growing significantly.

According to HDFC Standard Life Insurance CEO Deepak Satwalekar, “As players look at ways of increasing their distribution network, offerings of various companies will become available to more people in more cities in the near future. This would mean both sales channels and service channels being set up.” It also means more foot soldiers.

There are some unresolved issues here, however. Bajaj Allianz’s Ghosh says that a cap on commissions paid to agents is crippling the insurer’s ability to attract the right talent. “Apart from a few professionals, the majority of agency forces today are part-timers. Companies need to have the freedom to design compensation plans for agents within a given overall set of guidelines.”

McKinsey’s Puri agrees. “The frontline sales team needs to be adequately trained to ensure customer retention. Failure on the part of the agents affects the brand and the churn of agents is also linked to the lapsing of policies. This explains the need to drive alternate channels of distribution.”

Other near-term obstacles include a 30% cap on “riders”. (Riders are a sort of toppings on the pizza. Along with a basic policy, one can take additional risk covers through riders. For instance, one could buy a “critical illness” rider along with a basic policy; critical illness cover cannot be an independent policy and is capped at 30% of the sum assured.) According to Ghosh, “There is an urgent need to remove the limitation on the number of new riders that can be provided to consumers. Globally, riders have proved to be an effective tool of increasing sale of insurance products. Insurers need to be able to adapt the same model in India as well.”

The biggest problem for the present is perhaps tariffs. According to ICICI Lombard’s Bakhshi, “The next big step is to open up or de-tariff the market. We expect that there will be difficulty. The industry has to first reach a level of maturity — which we now feel it has — before detariffing can take place. Once that happens, underwriting guidelines would come into play and it will be up to each player to ensure that each line of business is profitable.” Ghosh agrees. “Tariffs in a liberalized insurance market are an anachronism. Insurers will not be able to pass on the true benefits of liberalization to the consumer unless there is true competition in the pricing of all the non-life insurance products.”

Yet another hitch the Indian operations of U.S. insurers face is in accounting treatment. Life insurance companies will take at least another two years to break even under the Indian accounting standards, said Sunil Kakar, chief financial officer of Max New York Life. He says overall expenses accounted for are lower under the U.S. GAAP (Generally Accepted Accounting Principles) compared to the Indian standard. This is because the U.S. GAAP allows expenses, such as first-year commissions, to be amortized over the length of the policy. But under Indian norms, companies are not permitted to defer acquisition costs — commission rates are usually 40% of the first premium income — over the life of the policy, says Kakar. As these acquisition costs have to be absorbed within the same year and cannot be deferred, life insurance companies such as Max New York Life say that it is possible to break even only in the 7th or 8th year of operations.

Meanwhile, insurers are going all-out to get new business, leaning heavily on modes like bancassurance. This typically involves sale of insurance products through banks and their channels such as branches and ATMs. With 65,000 bank branches across the country, or one per average of 15,000 people, the dispersion is high. Aviva, whose Indian partner is the Dabur group in New Delhi, claims it has the largest number of bancassurance tie-ups. Last month it announced tie-ups with 11 co-operative or regional banks.

S. Krishnamurthy, CEO of SBI Life, subsidiary of India’s largest bank State Bank of India, says banks themselves have gained from such linkages. In the first quarter of 2004-05, half the firm’s total premium collection of $11 million came from bancassurance. “Productivity per bank employee is much higher than that of the traditional agents,” says Krishnamurthy.

With growth on their mind, foreign insurers want faster deregulation. With initial success has come the desire for more, notably the opportunity for foreign players to go up to 49% of the joint venture. McKinsey’s Puri says the key issue today is ownership. “Each time the global players invest in information technology, management time and expertise, they get back only 26% in economic benefits.”

And most companies are waiting. New York Life’s Gilmour asks, “Do we want to increase our stake? The simple answer is yes. We really negotiated that right at the beginning.” New York Life works with 50-50 partnerships in other Asian markets, such as in China with Haier and in Thailand with Siam Commercial Bank.

But is it a doomsday scenario if that were not to happen? “Oh, the worst case scenario is that the business will need to grow more slowly,” says Philip G. Scott, group executive director of Aviva. His firm reported a 251% growth in gross written premiums for the first six months of 2004-05. Aviva first came to India in 1834 and was the largest insurer at the time of nationalization.

Another focus on will be managing risk. “The central theme for managing the Indian insurance industry in the future will be risk identification, risk assessment, risk monitoring and control,” says Ghosh. Adds HDFC Standard’s Satwalekar, “Apart from extending distribution reach, new players would focus on good investment and cost management.”

Meanwhile, insurers are getting more innovative, using the Internet, newspaper advertisements, billboards and television commercials as well. Insurers are already among the most aggressive telemarketers in urban India, along with credit cards and banks. Some, like Tata AIG, hired actor Naseeruddin Shah, who some view as India’s Marlon Brando. In one hurriedly withdrawn campaign, Shah posed in an advertisement that promised your heirs a death benefit of Rs. 1 crore ($220,000) for a mere Rs. 99 ($2) per month. The advertisement did not say that AIG’s policy would work only if you happened to die on one of six national holidays.

Australian cricketer Steve Waugh models for AMP Sanmar Assurance. In one campaign, he smiles at you while seated on a park bench with three smartly dressed boys and girls. The tag line says, “Starting today, you have a world champion on your side.” Max New York Life recently signed up Rahul Dravid, star batsman and captain of India’s cricket team.

The tag lines are catchy. Aviva says “Kal Pe Control,” a Hindi-English mix that translates as “Control your tomorrow.” MetLife and New York Life have adapted to local tastes. New York Life’s global line is “The Company You Keep.” In India, it’s a more informal “Your Partner for Life.”

MetLife sticks to its U.S. tagline: “Have You Met Life Today?” The hope, obviously, is that if they haven’t done so already, many Indians soon will.