The life insurance industry witnessed a high-growth period (31 per cent compound annual growth rate — or CAGR — in new business premium during 2001-10) followed by moderation (2 per cent CAGR in new business premium during 2010-12) with reduced returns due to the economic slowdown and a customer shift towards traditional products. The cumulative losses of private life insurers exceeded Rs 18,700 crore until March 2012, a majority of which went towards funding losses rather than meeting solvency requirements. The insurers infused additional capital primarily to fund the initial setup and support the high acquisition costs through traditional agency and bank distribution models.

Besides enhancing the effectiveness of these channels, insurers need to develop complementary networks to sustain long-term growth and profitability. There is an enormous opportunity for insurers who can identify models and implement new product solutions that equip them to react quickly and effectively to changes in the environment.

The relationship between people and technology is one of the key drivers for the industry’s growth, led by the regulatory changes, which will provide the much-needed impetus.

Further, life insurers need to give greater importance to customer and product segmentation. The industry has poor customer loyalty and, with growth slowing, retaining customers is paramount.

General insurance

As far as general insurance is concerned, it has kept pace with the nominal GDP growth rate, with penetration stable in the range of 0.55 per cent to 0.75 per cent over the past decade. And with consistent economic growth, rising prices of underlying assets, changing consumption patterns, greater market penetration, and rising healthcare costs, the general insurance sector is expected to grow at a CAGR of 16 per cent to touch approximately Rs 1.94 lakh crore by 2020.

In future, to deliver on shareholders’ expectations, general insurance companies will be driven to strike a balance between growth, profitability and risk. This would entail marked changes in business strategy, which will cascade down to operational decisions related to product design, pricing and channel monitoring.

Micro-insurance

The insurance story in India would be incomplete without participation in financial inclusion through micro-insurance. Though insurers are increasingly making an effort to cover a wider population through need-based and easy-to-understand products, the long-term viability of the current business model is impacted by low customer-awareness, high distribution and transaction costs, and lack of actuarial and customer data for risk analysis and pricing. For micro-insurance businesses to succeed, there is need for structural and policy-level changes along with industry-led innovation.

Industry-led change/ innovation: Creation of a common database for micro-insurance and collaborative business models to leverage the reach of other mass distribution channels such as fast-moving consumer goods and telecom.

Technology enablement: Biometric devices, smart cards, and embedded devices for enabling transactions and interconnecting Aadhar card, voter ID card, PAN card and other personal information for segment-specific initiatives.

Regulatory structure and policies: Pooling premium across initiatives run by insurance companies, the Government, and postal services; regulating new channels for distribution; extending the Rashtriya Swasthya Bima Yojana beyond health to life and non-life, and expansion of coverage beyond the ‘below poverty line’ segment.

The author is Partner, KPMG in India