Competition; major regulatory change; growth ambitions – a set of forces is pressing in on India’s insurance sector. The combination is set to prompt a bout of mergers over the next few years.

Today, the country’s insurance market has around 62 participants, 24 of which are life insurers, according to data from the Insurance Regulatory and Development Authority of India (Irdai).

These companies are largely doing well. India’s insurance market is growing fast and profitability has been picking up. That is leading players to seek to build revenues and assets as fast as possible. Consolidation is a proven way to do that.

The impetus to do so is being made more urgent by the interest in tech giants such as Amazon entering the distribution space. That could transform how the industry operates.

Meanwhile the industry is bracing itself for looming regulatory and accounting changes, which could raise operating and compliance costs and affect products and how insurers invest. These factors are likely to pressurise many of the country’s insurers. Those with the deepest pockets and an ability to adapt are most likely to come out on top. Smaller players or those less able to be nimble could see alliances or sales as their best longer term strategy.

HUGE POTENTIAL

Over the past two decades, India’s life insurance business has been in flux. State-owned Life Insurance Corporation ruled for decades, but private insurers have grabbed almost 30% of the market after the government opened it to private sector competition in 2000.

Life insurance accounts for about 77% of the $420 billion Indian insurance industry, according to regulatory data.

India has all the ingredients for insurance to grow. Insurance penetration in the country stood at just 3.7% of GDP at the end of 2017, well below the global average of 6.3%.

It also has a growing middle class, a young population and increasing awareness about the need for protection and retirement planning. That’s helped the life insurance industry’s assets under management (AUM) to grow by a compound growth rate of 13%, from $266 billion at the end of March 2014 to around $387 billion at the end of March 2017. Experts told AsianInvestor that this rate will continue or accelerate over the next five years.

Indian lifers, however, are a fragmented lot. The top five – ICICI Prudential Life Insurance, HDFC Standard Life, SBI Life, Max Life and Kotak Mahindra Life Insurance – account for about 38% of the private life insurance market share. The remaining 62% is split between 19 companies.

Most Indian insurers are in a healthy spot. It can take seven to eight years for new life insurers to generate profits, but “most Indian insurers have now crossed that hump,” noted Karthik Srinivasan, group head for financial ratings at ICRA.

Eighteen of India’s 24 private life insurers reported profits in the financial year ending March 31, 2017, according to the insurance regulator’s latest available annual report.

“The sector is still very much in its growth phase, and while there are pricing pressures I would not say the market is terribly overcrowded,” said Sampath Reddy, chief investment officer at Bajaj Allianz, which has assets under management of around $7 billion.

MOUNTING COMPETITION

While India’s insurance industry is growing, scale matters – as it does in most other industries.

Joydeep K Roy, partner and leader for insurance and allied businesses at PricewaterhouseCoopers (PwC), noted that bigger insurers enjoy economies of scale, helping them manage costs and investments more efficiently.

“Companies need to have reasonable size, which could be on the lines of an ICICI Pru or HDFC Standard Life [which have around $15 billion to $19 billion in assets under management] and generate at least $1 billion in new business annually,” he told AsianInvestor. 

He believes market players will seek consolidation to build scale. Already, some insurers are seeking capital to grow more rapidly. When capital-raising rules were relaxed in mid-2016, several rushed sought funds from public markets to expand their operations.

So far, six insurers have listed on the main stock exchanges, including three lifers – HDFC Standard Life, ICICI Prudential Life Insurance and SBI Life.

“With some large insurance companies having listed, there is reasonably fierce competition to retain clients and corporate agents like banks, which can lead to compression of margins for the industry as a whole and adds to the risk,” said Sudhakar Shanbhag, the chief investment officer of Kotak Life Insurance. His company has about $3.8 billion in AUM.

This is the first of a two-part feature that was published in the October/November issue of AsianInvestor magazine. Watch out for the second part in coming days.