"Very few companies have broken even in this industry, and many are sitting on huge accumulated losses "
Talking about global trends, if we look at the year 2009 then insurance premiums fell by 2% globally and the size of the life insurance industry was about $2,332 billion. The 2% downturn came mainly due to the developed countries: particularly the US and UK were adversely hit because of the market conditions. Emerging markets did very well, which is what brought the figure to a negative 2%, which otherwise would have been as high as -4 or -5%. India and China grew by around 10% and Latin America grew by 7.8% mainly because in Brazil there was a high popularity of ULIPs. If we look at non life premium, it was largely flat and idecreased by around 0.1%, to reach around $1,735 million globally.

The outlook for 2010 looks better mainly due to expected recovery in market conditions as compared to 2009. Recovery in market conditions would automatically lead to higher amount of ULIP sales. Also, it will lead to a better return on investment for investment companies, particularly general insurance companies. If you look at the Indian insurance industry, the new business premium stood at $2.5 billion for the year 2009-10, a growth of 25% over last year. The good part is life insurance industry in India is now about 2.5% of the global life insurance industry. 8-10 years back, we were hardly 0.5% of the global life insurance industry. In a period of 10 years the growth has been rapid, employing over 2.5 lakh people directly. Over 3 million agents are dependent on this industry. Assets managed are over a million crore rupees which is humongous. New equity investments over Rs.600 billion were made in 2009-10 into the equity markets. If we take life and general insurance together, it contributes to around 5% of India’s GDP. That’s almost equivalent to the amount that Mumbai as a city contributes to the Indian GDP. The government should realise that this industry needs to be handled with care because if there are very sudden and drastic changes, it could hit the industry, it could hit a lot of people directly associated with this industry and a whole lot of industries which provide services to this industry. This is the only industry in India today which has mobilised retail savings for capital markets, and not just when markets are up, even when they’re down. Talking about challenges facing this industry today, it would be the regulatory changes. Recently, there were some issues between regulators that are now being sorted out. But the main regulatory issues, including minimum IRR specifications year wise, imposition of greater surrender charges, specification of a minimum amount of life cover which is now being defined by the regulators (which was earlier much lower but is being increased now), imposing a minimum guarantee on pension products, all these and others will have an impact on the insurance industry that it will lead to a change in product design, change of distribution mechanism, change in operational efficiency – all of which are fundamental to any insurance company. Most importantly, profitability of the insurance companies would definitely be impacted by these regulatory changes. Very few insurance companies have broken even as of now and those who might have broken even in one year, are also sitting on very high amount of accumulated losses.
Any regulation at this stage, which would make it more difficult for an insurance company to function or be profitable, would obviously make shareholders very nervous and consolidation could happen. The scenario going ahead looks a tougher than it was a few years back. It will become difficult to raise capital as investors would be more careful. And of course, the way the products are being structured now might result in insurance companies needing more capital. As far as product design is concerned minimum ticket size will increase. Given this, 70% of the life insurance business would be impacted and the way the regulations are being put – while they are good in intention and will do a lot of good to the customer – they might create a situation where companies are not able to sell to a large section of the society.

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Source : IIPM Editorial, 2011.

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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