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Retail reality - The Financial Express

09 March, 2009

Not very long ago, the word 'insurance' in India was synonymous with the ubiquitous life insurance agent, tirelessly pursuing all and sundry with his insurance policies armed with his never-say-die attitude. The general insurance scene was dominated by the four stars - New India Assurance Company Ltd, Oriental Insurance Company, National Insurance Company Ltd and United India Insurance Company Ltd.  Those were the days when the customer was not yet crowned the king! He had little choice when it came to products or pricing.  With the privatisation of the insurance sector in 2001, things changed overnight, as private insurers entered the hitherto protected terrain in the insurance sector. Rules of the game were rewritten. The market changed overnight from being a sellers market to a buyers market, where the customer finally got the opportunity to negotiate on his terms. Prospective as well as new entrants in the industry were euphoric about the exciting business prospects in this new emerging market. Since then, it has been a long rough road, strewn with roses and mostly thorns for private players. It was not easy competing with big public sector players whose large capitalisation and years of market exposure gave them a definite edge.

In continuation with the insurance reforms, the regulators decided to de-regulate the tariff system in the insurance segment. This was announced in April 2007. The de-tarrification of the insurance industry was long overdue and succeeded in rationalising the rates across all portfolios. In the past, rates in certain portfolios such as property were extremely high as compared to the international rates and we were seen to be subsidising the rates in the motor portfolio, which were extremely low. Today, with de-tarrification, each portfolio stands alone and the market decides the rates. Today, the market has become intensely competitive with many more new players entering the fray and pricing is no longer the only differentiator to sell. Private players have had to think on their feet to develop new propositions. The pressure and intense competition has galvanised the players to innovate and enhance their technical skills and distribution capabilities.

Unfortunately, irrational and intense competition spurred a price war amongst the insurers, which has made commercial business an increasingly tough proposition with thinning margins. The concentration of risk in the corporate business segment and the high cost of acquisition have made the insurers look at the retail sector with a renewed interest. The retail business holds a tremendous potential for growth for the insurance industry and is now being looked at as a lifeline for the beleaguered industry, which is struggling to maintain its bottomline in the face of increasing losses from the commercial segment. A huge potential customer base among the sea of uninsured in the country, coupled with a low cost of acquisition, makes the retail sector an attractive proposition for the industry. Consider this, a customer can go online, pay with his credit card and buy a health, home or a travel policy within a span of five minutes. Compare that with securing a commercial business account, which is a complicated process involving risk engineers, senior underwriters and reinsurers. The entire process can take two months or more. A claim from a corporate account is also a protracted process and so is every renewal. This is not to negate the importance of a commercial account for a company but an insurer requires the right product mix of retail business with commercial business for consistent revenue generation. Besides, a separate pool for third party risk for insurers and the expected introduction of add-on covers is making retail business a much more attractive proposition than ever before.

The rise of the Indian middle class has also seen a change in their spending patterns. There is an emerging desire to spend on factors such as entertainment and insurance other than the basic necessities. Demographic trends in India indicate major social and economic shifts during the next 10 to 15 years. More than two-thirds of the population will become literate. The growing middle class with significant spending power will drive growth. More employment and higher disposable incomes of households are already encouraging consumers to spend on personal assets, including cars, houses and household contents, etc. According to the McKinsey report: 'The Rise of India's Consumer Market', published in May 2007, India's economic growth has accelerated significantly over the past two decades and so, too, has the spending power of its citizens. Real average household disposable income has roughly doubled since 1985. With rising incomes, household consumption has soared and with it the emergence of a new Indian middle class.

The report further shows that if India continues on its current high growth path, the Indian market over the next two decades will undergo a major transformation. Income levels will almost triple and India will climb from its current position as the 12th largest consumer market to become the world's fifth-largest consumer market by 2025. In its report - 'Insurance Sector Futuristic Growth' ASSOCHAM has stated that India''s insurance sector is likely to reach $46.25 billion by 2010. The report said, "The total insurance business will reach a level of $46.25 billion in the next two years from the current level of $1.15 billion." As Indian incomes rise, the shape of the country''s income pyramid will also change dramatically. Over 291 million people will move from desperate poverty to a more sustainable life, and India''s middle class will swell by over ten times from its current size of 50 million to 583 million people. Indian spending patterns will also evolve, with basic necessities such as food and apparel declining in relative importance, and categories such as communications and health care growing rapidly. It is this combination of increasing middle class, rising incomes and increase in spending patterns that will set the stage for the 'Next Big Step in Insurance' - Retail

As India's economy expands, so too does the potential need for risk protection among individuals and business. This increased spending and the growth of the middle class will fuel the growth of non-life insurance. The greatest challenge for insurers today is to increase awareness about general insurance, particularly personal products like health, home, personal accident, hospital cash or travel. Pan India penetration of the market will go hand in hand with an increase in awareness levels. Life insurance has always been more successful in penetrating the market because of the psyche of the average Indian who associates the loss of the sole earning member with a terrible calamity but does not think the same way about health or home, which are best left to fate.

In our country, general insurance has been a poor cousin of life insurance. Consider this: if you were to mention the word 'insurance' to anyone, the first word that would spring in his mind would be the omnipresent life insurance agent. Good health or protecting our homes is left to karma or fate. This attitude reveals the enormous potential for growth in this segment and the general insurance industry has initiated aggressive marketing campaigns to spread the message. The potential of the Internet has been recognised and unleashed to disseminate the missive - protect your health, protect your home, don't wait for disaster to strike. The insurance industry in India had seen nothing like this and everyone is scrambling for the biggest share of the pie. Despite the anxiety, the apprehension and the pressure building among the player, only good can come from this. Someone once famously said, 'Competition is the whetstone of talent". -The author is managing director, Royal Sundaram Alliance Insurance Company