The following is the presentation I have recently made of a research paper at a national conference on management and technology - “Restructuring Of Global Economy: Challenges Ahead,”
Introduction
n After belatedly opening the insurance sector in 2000, we have still not been able to sustain global competitiveness.
n The growth has been restricted. FDI has been kept at only 26% by the policy makers and the government mainly on account of the objection by the leftist parties who have influenced decision making over the last decade.
n This paper will analyze where the general insurance sector has gone wrong in India, what are all the wrong decisions the government has taken over the last decade and what it needs to do to make the Indian general insurance industry globally competitive.
The Fear of Losing Business and Jobs
n The problem with the four existing PSUs doing general insurance business have been their mind set.
n They have never faced perfect competition. In such a huge sector, even to this day the major part of the business is untapped and penetration very weak in the rural and semi-urban areas.
n So the fear of losing business to the private players when they came in 2000 was the first major roadblock to growth.
n The bigger problem is of the leftist trade unions who have always advocated guarantee of work even to the non-performers at the cost of the company and the country. It has hampered growth and made people a redundant workforce.
n We may refer to the short note on FDI in the insurance sector submitted by the Left parties to the central government some time in 2003. This was three years after the industry opened up and a few joint ventures with foreign insurance companies had started operating.
n They say that not only are the PSUs more profitable than the private ones, the private insurer which is most profitable (Reliance) is one which has no foreign equity.
n They also say that if profitability is taken to be an important indicator of efficiency, it is clear that the case for further hike in the FDI cap cannot be made on grounds of efficiency.
n Catching the bulls (read: competitors) by its horns is what makes a company successful. Competition is the gateway to growth. It requires a long term and futuristic decision making process.
n A strategic leader challenges the present set-up with a single question: why? repeatedly, to make the future as clear as the present for managers at all levels in the company.
n We can refer to Peter Drucker’s observation that by consciously using formal planning a company can exert some positive control over market forces.
n This has become the rationale for business strategy.
n Insurance MNCs have come to India as India and China are the two target markets for foreign companies for their huge consumer potential.
n The advantage of the existing four domestic companies in general insurance is that they have the financial muscle of being run by the government.
n Liberalization should have made the environment highly competitive as in many other industries. But most unfortunately that has not been the case in general insurance due to the cap on FDI of a meagre 26%.
n In such a scenario the companies should evaluate market conditions, do proper strategy formulation and implementation to establish their position.
The Fear of Facing Competition
n The Left parties are harping on two things, public sector and Indian companies, thereby not allowing FDI and the following competition in insurance.
n Once you prevent a foreign company from entering India and set up a joint venture, with a minimum and acceptable equity of 49%, you stop any competition.
n The insurance industry has continued from 1991 till 2011 for 20 years in this way. The PSUs that the leftist parties are supporting have never known what real competition is.
n It is the regulator, IRDA’s responsibility to see that no irregularities take place in any area of general insurance.
n After setting up of the Competition Commission of India the future of how business is and will be done in the country rests on their shoulders.
n They may have to take tough decisions which involve the Government and general insurance PSUs.
n The Commission should seek to function, and the Government should ensure that it helps the Commission function, independently and without any political interference.
n The Commission is a competition regulator and stakeholders should not expect it to play the role of an arbitrator for labour unions and management or a forum for enforcing ideas of social justice.
n The regulators need to have enough teeth to stimulate competition and growth nationally and globally in all areas of general insurance.
Potential growth areas for foreign companies
n Private companies are emerging as serious competitors not only in quality of products and services but also in terms of relative market size in fire, engineering and, lately, personal accident and health business.
n A key area of growth for foreign companies is writing Indian reinsurance.
n Aerospace and Space: Aviation insurance demand is being driven by the opening up of the local aviation market to private competitors.
n Catastrophe reinsurance: The huge discrepancy between economic losses vs. insured losses in recent tragedies has highlighted the need for catastrophe cover.
Catastrophe Exposure
n India is heavily exposed to natural catastrophe loss but is poorly insured against such risks.
n For example, in 1999, India accounted for approximately 25% of the world’s fatalities due to natural catastrophes; in 2001, this figure stood at 80%.
n Events in recent years, such as the 2005 Kashmir earthquake (more than 87,000 dead in India and Pakistan), the 2005 Mumbai floods (1,000 dead) and the 2004 tsunami (18,045 dead), have proved that India remains one of the catastrophe centres of the world. However, less than 15% of the damage caused is thought to have been insured.
n According to IRDA, India is said to be ranked among the top 50 countries suffering economic losses due to natural disasters. Most of the losses are uninsured.
n In India, the penetration of catastrophe insurance is under 0.5%, whereas in Turkey, it is to the tune of 17%. Foreign reinsurers are in demand because GIC does not want to take on 100% of the risk.
n One of the short-comings of the Indian insurance industry is the lack of credible data to simulate potential loss from a natural catastrophe of a high severity. At best, insurance companies are following an aggregate loss model whereby they assess the impact of a natural catastrophe by analyzing the severity of a single event applied to their portfolio.
Commercial insurance premium growth driver
n The widely acknowledged dynamism of the Indian economy is currently attracting global attention. Commercial enterprise is likely to benefit from this, and the success is likely to filter down to the general insurance sector.
n Reasons for this include:
n FDI: Foreign direct investment in industry is often made with several requirements that generally include adequate insurance cover. Sectors most likely to benefit from investment in the medium term are IT, pharmaceuticals and manufacturing. Product demand is likely to include product liability (for exporters) and directors’ and officers’ liability (D&O) cover.
n PPP infrastructure development: The quality of India’s ports, airports and railways leaves much to be desired, and infrastructure development in the next few years is likely to cost US$ 150 bn.
n For speedy infrastructure development and the shaky state of its public finances, the government has embraced the concept of public private partnerships (PPP).
n Examples include the Bandra Worli sea link project completed in Mumbai, which cost around US$ 560 m; the proposed development of a metro system in the cities of Ahmedabad and Gandhinagar in Gujarat at a cost of US$ 711 m; and a series of gas-based power plants across Gujarat at a cost of US$ 800 m per plant.
n Many more projects of this type are being scoped across India over the medium term, and the support of specialist commercial insurers will be required to ensure their success.
The Problems with the PSUs
n Focus on maintaining a strong status and market position within their local region rather than competing with one another.
n Sales focus rather than underwriting.
n Poor systems and poor claims-paying record.
n Staff leakage to the private players.
n Exposure to the poorly performing motor third-party liability sector.
The Private Players
n Small and flexible. Smaller and less disparate workforces than the PSUs and are therefore able to respond quickly to changes in market condition.
n Good staff, systems, processes and data. Taken the highest-calibre staff from the PSUs.
n The foreign partners have ensured high-quality systems and processes from the very beginning, so that the companies are run using international industry best practice standards, to provide a higher quality of data.
n Greater focus on underwriting. Product focus.
n Strong claims-paying reputation.
Lack of Penetration
n Despite the fact that general insurance business has been growing at a healthy rate of 16% annually between 2004-05 to 2008-09, its penetration level is just 0.60% of India’s GDP against world average of 2.14%, says a Joint Research Paper on Indian Insurance Industry brought out by CRISIL and ASSOCHAM.
n “India ranks 136th on penetration levels and lags behind China (106), Thailand (87), Russia (86), Brazil (85), Japan (61) and the US (9). The penetration of general insurance in India remains low on account of low consumer preference, largely untapped rural markets and constrained distribution channels”, adds the paper.
n Releasing the paper, ASSOCHAM President, Sajjan Jindal said, “One of the biggest constraints facing the general insurance business is the lack of reach beyond the cities.”
The main reasons for this dismal growth
- Unhealthy and illogical rate cutting (even up to 95% over previous tariff rating) particularly to corporate clients.
- Ignoring the personal line and also the rural business.
- Poor marketing and advertisements.
- Non development of new products.
Lack of Penetration
n The government still feels that private players will ruin the market, grabbing a large share. A similar example is the basic telephone services but still the dominance and market share of DoT has remained unaltered, even after the private players started their operations.
n This hypothesis of our government has been proved wrong in many emerging markets worldwide not only in insurance but numerous other sectors like power, energy, telecom, etc.
n As GIC and LIC are strong players in their respective business segments they may lose some market share but not the business.
What needs to be done?
n In today’s global environment, change rather than stability is the order of the day.
n Organizational change, like changes in work schedules, span of management, key strategies, needs to be done on a continuous basis.
n The history of business is that those companies which did not change or resisted it has paid a heavy price.
n General insurance companies, both the existing as well as the newer entrants into this industry, can formulate and implement the two generic business level strategies of cost leadership and differentiation.
n Cost leadership in operations would lead to economies of scale as well as development of efficient facilities.
n For marketing and sales, a small and highly trained sales force is required.
n In human resource management there should be policies and systems in place to reduce turnover costs. In addition, the company has to ensure intense and effective training programs to improve worker efficiency.
n As far as the corporate infrastructure is concerned, it should have cost effective MIS systems, relatively few managerial layers to reduce overhead and simplified planning policies to reduce planning costs.
n India’s semi-urban and rural areas show a grim picture of people who are not educated and poor. With education comes the need for being insured. Rural hut, shop and agricultural crop insurance are the three basic things to be insured other than the person’s life.
n Rural propositions in this year’s budget are more focused on the agricultural sector. Micro insurance products should ideally be exempted from service tax. This can trigger penetration of the insurance sector into the rural markets.
n The state governments should come ahead in this endeavour along with interested NGOs. They need to work with the village panchayat and Zillah parishad. One feasible option is to share the premium in a ratio of 50:50 with the insured.
n With the rising medical inflation it is disappointing that the Section 80-D benefits remain unchanged and neither is there any significant attempts made to increase health care infrastructure. This will lead to increased healthcare costs and consequently to rise in health insurance premiums.
n Insurance companies have to seriously take up corporate social responsibility in our country. It is surprising that while writing this paper I searched for examples of insurance companies which have done something for education and primary health or the society in India but failed to get a single one.
n It is high time the companies doing roaring business in India start doing their bit of social responsibility. Education of the poor, building primary health care centres in the remote villages, etc are things they should do. After being more than 10 years in India after liberalization this is the least that we expect from them.
n Corruption is another area of big concern particularly in motor and health policies. Many who are involved here like surveyors, third party associates (TPAs), private hospitals and nursing homes all form part of this vicious ring which make the insured and the company bleed. This has earned a very bad name for our country.
n The government should give tax reliefs over and above health and life insurance premium for individuals. If someone insures his house and its contents and takes a personal accident cover shouldn’t he be allowed tax relief for the premium he is paying year after year?
n To make the society more educated in insurance and its benefits the government needs to come forward first. In our country tax savings is a very big step in making people know about insurance.