A Look At The Indian Life Insurance Market

Includes: MET, MFC, PRU
by: Trefis

Quick Take

  • Life insurance companies are turning to Asian and Latin American markets for future growth.
  • Asia accounts for more than 35% of the world’s life insurance premiums.
  • India is one of the biggest insurance markets in the world, accounting for 2% of the world’s and 6% of Asia’s life insurance premium volume.
  • The Indian life insurance market has been dominated by the government run LIC, but regulatory changes will allow foreign players to compete.
  • Growth potential is huge as less than a quarter of the 1 billion strong population is covered by life insurance.
  • A $60 billion market currently, but we expect it to grow to around $120 billion by 2019, helped by an increase in foreign investment.

Globalization in the insurance business is not a new phenomenon as insurers like Canada’s Manulife (NYSE:MFC) have been operating outside of their borders for over a hundred years. However, recent spurts of development in Asia have caught the attention of more life insurers in the western world. More than 35% of the world’s life insurance premiums originate in Asia, up from 28% in 2008. Latin America’s contribution to the global market is less than 10%, but the region has shown high growth of more than 20% in the last few years.

These developments have attracted insurers like MetLife (NYSE:MET) and Prudential Financial (NYSE:PRU) towards fast-growing economies. Prudential earns about 30% of its revenues from outside the U.S. while Manulife and MetLife earn about a quarter of their revenues from operations outside of North America. Given these figures, it is easy to see the importance that international expansion holds for these companies. In the next few articles, we will discuss some of the key, high growth life insurance markets in the world beginning with India, which is getting ready to open its market to foreign players.


India accounts for more than 2% of the world’s premiums and 6% of the premiums originating in Asia. The country is the 10th-biggest insurance market in the world and has the potential to grow exponentially in the coming years. While regulatory hurdles and dominant incumbents bring challenges to foreign companies looking to enter the Indian insurance market, low penetration and opportunities in the market make it quite lucrative. In 2011, the life premium volume for India was $60 billion, a little over 3% of the GDP. The GDP is expected to grow at an average rate of 4.7% through 2018, and we expect life insurance penetration to increase to around 4.6% by 2019. This would make India a $120 billion market [Comparison of Base Scenario with Optimistic and Pessimistic Scenarios, 2013 – 2025 (January 2013)].

A Brief History Of The Market

Life insurance in the Indian market has been historically dominated by the government run Life Insurance Corporation (LIC). The company was formed in 1956 by incorporating all 154 private life insurance companies existing in the country at that time [INDIAN LIFE INSURANCE INDUSTRY, Researchers World]. However, following a strong wave of development throughout the country, the Indian government allowed privatization in the insurance industry in 2000, setting up the Insurance Regulatory and Development Authority (IRDA) to issue licences to private life insurers. Foreign direct investment (NYSE:FDI) was also allowed up to a limit of 26%, which meant that non-Indian entities were allowed to hold up to 26% of equity/share capital in the Indian insurance companies.

As a result, 23 private companies, mostly joint ventures, entered the market. These companies include PNB Metlife India Life Insurance, Tata AIA Life, DLF Pramerica Life Insurance (a joint venture between Prudential Financial and DLF) and ICICI Prudential Life Insurance (a joint venture between British insurer Prudential plc and ICICI). Following the de-nationalization, the life insurance industry took off. From 2000 to 2011, new business premiums (NBP) grew by 28% while gross written premiums increased by 25% [India Life Insurance 2.0, McKinsey&Company]. This growth propelled India into the list of the top 10 life insurance markets in the world [Asia Life Insurance Market, Towers Watson]. In 2011, the country accounted for 2.5% of the life insurance premiums written worldwide [Sigma Report, Swiss Re].

Fighting The Incumbent

Most of the aforementioned growth has been restricted to the government run LIC. According to the IRDA’s annual report, the LIC still has a market share greater than 70%. LIC’s established reputation and distribution network have helped in this respect.

Unit linked insurance policies (ULIP) are one of the most popular products in the Indian market. In these policies, the policyholder pays out monthly premiums, some of which is taken as insurance coverage while the rest is invested in debt and equity instruments. As a result, the product acts as an investment instrument while providing insurance coverage. In 2007, ULIPs accounted for almost three-fourths of the premiums from new policies in India [Are Ulips better investment now?, 23 July, 2012, The Economic Times].

However, regulatory changes, like the extension of the lock-in period from 3 to 5 years, and volatile stock markets which led to a decline in yield had a detrimental effect on the product’s popularity. ULIPs accounted for 37% of the industry-wide premium income in 2010 and this figure came down substantially to 24% in 2011. Recent regulations on minimum life cover offered by ULIPs, the duration of policies and surrender penalties have cut into insurers’ margins. As a result, ULIP sales declined in the last two years leading to negative growth in premiums [IRDA annual report]. However, now that regulations have been adopted by the insurance market, we expect India to be back on the growth track.

Immense Potential

While the life insurance market in India has expanded through the last decade, the growth potential in still immense. The country has a population of nearly 1.2 billion, with a GDP growth rate estimated at 6% in 2014 by Morgan Stanley [Morgan Stanley cuts India’s FY14 GDP forecast to 6%, 13 March,2013]. Based on the census conducted in 2001, the IRDA reported that there are around 600 million insurable persons in the country. However, less than 50% of this insurable population is covered by a life insurance plan. Private sector companies have just over 40 million policies in force. The level of protection, measured by the ratio between the assured sum and the GDP is around 55%, much less than the developed markets like the U.S. and the U.K., which have protection ratios around 150% to 250%.

The IRDA also revealed that life insurance penetration measured as a ratio of premiums (in U.S. Dollar) to GDP in (U.S. Dollar) increased from 2.15% in 2001 to 4.6% in 2009 but then declined in 2011 to 3.4%. Although this is still an improvement over the base value, the figure still lags far behind mature markets like the U.K., where penetration is nearly 10%. The main reasons for this are the FDI limit of 26% and low profitability levels in the Indian market. According to McKinsey, Indian business margins are the lowest in Asia. Private sector insurers invested around $7.5 billion in the Indian market between 2000 and 2011, of which around $4 billion was to fund accumulated losses, mostly to create distribution capabilities.

To bridge the gap between insurable population and policies in force, the Union Cabinet passed a proposal to increase foreign direct investment in the insurance sector from 26% to 49% in 2012. This bill has yet to be passed by the country’s parliament [Insurance and pension get FDI boost, need parliament nod, Indian Express, 5th October, 2012]. Under the legislation, there is a 10-year lock-in period for investment to be limited to promoter group equity investments. This basically means that insurance companies in India will have to wait for at least 10 years before a public issue of equity through an initial public offering .

The Final Take

As mentioned earlier, we estimate the life insurance premium volume from the Indian market at $120 billion by 2019. This is based on the GDP growth forecast in a base scenario. In an optimistic scenario, the average GDP growth rate is expected to be around 5.7%, and assuming insurance penetration of 4.6%, this would lead to premium volume of $130 billion by 2019. The average GDP growth rate is expected to be around 3.6% in a pessimistic scenario, which would lead to a premium volume of $110 billion by 2019. In any case, India is a big market and has a huge potential for insurers like Prudential, MetLife and Manulife. While we currently do not provide a separate breakdown of India’s premium volume in our model, you can modify the interactive charts below to gauge the effect a change in international market shares would have on our price estimates for Prudential, MetLife and Manulife.

We have used figures from Swiss Re’s World Insurance report. Figures for GDP growth are taken from the World Bank’s website.

Disclaimer: No positions