Is Life Insurance The Next Sunrise Sector In India?

India’s life insurance sector is witnessing a structural change, and the pandemic at the start of the decade has hastened the process. Greater risk awareness among the general population and accelerated digitization of the user journey process- from comparing policies and buying to claim filings are some positive structural developments in the insurance sector in India.

According to a global reinsurer Swiss Re, the Indian life insurance industry is set to grow at an exceptional rate of 6.6% in 2022. And the premium collection is expected to cross the $100 billion mark for the first time, whereas the global life insurance premium growth is muted and expected to increase by 1.9% in 2023. 

According to a KPMG report, the Indian insurance sector is expected to grow at around 15% annually for the next three to five years.

So, do life insurance stocks make a case for becoming the next multibaggers in the Indian stock market or just a fad that should be ignored at all costs?

The factors that will be discussed in this blog article will help you come to a decision.

Life Insurance Sector in India: Industry Overview

India’s insurance sector is divided into life and non-life insurance, with 57 companies operating in the industry and 24 in the life insurance vertical. Of the 24 companies, LIC has the highest market share at 68.57% until July 2022, and HDFC Life comes a distant second with 18.4% in new business received premium.

The life insurance sector in India is growing at a rapid pace at 32-34% annually and is the fifth largest life insurance market in the emerging insurance economies globally. Some of the key highlights of the sector are:

• The life insurance to GDP ratio, an important metric to measure insurance penetration in the country, has grown to 3.2% in December 2021, up from 2.8% the previous year.
• Life insurers collected ₹3.10 lakh crore as premiums in FY22, up from ₹2.7 lakh crore in FY21. By FY31, the premiums from India’s life insurance industry are expected to reach ₹24 lakh crore ($318 billion).
• India is Asia’s second-largest insurance tech market, witnessing almost 35% of the $3.66 billion insurance-focused venture capital funding. In addition, the online market is estimated to be $1.25 billion by FY25, more than three times $365 million in FY20.
• During FY 2020-21, 28 million new life insurance policies were sold in India, with group non-single policies registering a healthy growth of 6.3%.

The Macro Growth Drivers

The following are the factors that could lead to the expansion of the user base in the Indian life insurance sector:

Demographic Advantage: India has the world’s largest youth and adolescent population and will continue to rise till 2030, according to UNFPA. In terms of life insurance market potential, there is an enormous untapped market as the cohort will continue to push growth until 2050.

Aspiring Middle Class: As per a World Economic Forum (WEF) report published in 2019, India will transform itself from an economy led by the bottom of the pyramid to one led by the middle-class segment. Nearly 80% of the growth contribution will come from the middle class, from the present 50%. The middle-class and upper-middle-class segment is expected to expand by 34% and 44% by 2030, with a significant reduction in the low-income segment.

Rising GDP per capita income: In March 2022, India’s GDP per capita income reached $2,231 compared to $1,968 the previous year and is expected to be around $5,700 by 2030.

High Mortality Protection Gap: It refers to differences in actual life cover taken against the required cover to ensure complete protection. India has the highest mortality protection gap in the Asia Pacific at 92%, meaning only ₹8 is in place in the form of savings and insurance for every ₹100. This offers life insurers a vast untapped market for excellent opportunities over the next 10 to 30 years.

The Micro Growth Drivers

The micro-growth drivers refer to the changes the insurance companies brought in response to the changing demand while entering a highly untapped market.

Customer Centricity: The simplification of the user journey process, from considering and buying to filing the claims. Leveraging technology, omnichannel presence, simplification of product construct, and user experience are helping to increase penetration and provide a superior customer experience.

Sachet product and customization: Every individual has different needs, and no one product fits all. Innovations like add-on covers that give additional policy coverage by paying a little extra premium over the base cover help customize the policy coverage according to one’s need. For example, taking critical illness add-on coverage with the base term life insurance helps to expand the policy’s scope and increase protection with a small extra premium amount.

Innovation and Use of Digital Channels: Mis-selling was rampant in the Indian life insurance sector before the digitization and online availability of insurance products. Steps like investment in creating knowledge resources by private life insurers to improve awareness and reducing the premium cost by selling insurance products directly have helped to clock growth in premium revenue. For instance, HDFC Life recorded 87% renewals based on premiums and 96% renewals based on the number of policies originating from digital channels collected online.

Big Data: One of the critical enablers in driving growth in the insurance sector in recent times is the use of big data to design products that suit dynamic users’ needs, smoothen customer acquisition, renewals and claim management process, and fraud management.

Indian Life Insurance Players

The Life Insurance sector in India is dominated by a recently listed, state-backed life insurance major LIC. However, private life insurers are steadily improving their market share through better customer outreach strategy, omnichannel presence, superior product construct, etc.

The major private life insurance players listed on the Indian stock market include HDFC Life, ICICI Pru Life, SBI Life, and Max India. At the end of September 2022, the market share of private life insurers was at 31.75%, while LIC held the remaining.

Conclusion

Although a vast untapped business potential exists for Indian life insurers, challenges remain. Risks like the Covid-19 pandemic have hurt the financials of life insurance companies. In addition, higher death claims and reduced new business growth in FY21 resulted in reduced profitability and underperformance of stocks by a large margin against the broader market.

However, the pandemic blip in life insurance stocks is not something big to worry about as it is an ordinary course of the business and will push for higher subscriptions to life and health insurance policies.

In the next few years, big things to watch out for are the reforms pushed by the government in the life insurance sector and how private life insurance players improve their market share. Synergies between the government and private insurance players can bring new possibilities for the industries and, possibly, wealth creation for insurance stockholders. 

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