August , 2023
India needs to elevate the penetration and density of insurance
17:01 pm

Kishore Kumar Biswas

The insurance sector holds significant importance in a modern economy and its development is assessed through two key indicators: insurance penetration and insurance density. Insurance penetration is the percentage of total insurance paid in a year relative to the GDP of that year, while insurance density refers to the ratio of premium to population, usually measured in US dollars for international comparisons. Unfortunately, India has been lagging behind the global average in both these aspects.

Distinguishing between life and non-life insurances, there are two types of insurance: life insurance and general (non-life) insurance. Life insurance policies provide coverage against the risk of life, while general insurance covers all other risks except for life-related risks. Five key differences set the two apart: Firstly, life insurance is a contract that covers the life risk of insured persons, whereas general insurance covers many other areas not covered by life insurance. Secondly, life insurance is a term contract, whereas general insurance operates on a short-term basis. Thirdly, life insurance requires premium payments throughout the term, whereas general insurance involves a lump sum premium. Fourthly, the insurable amount is paid either upon the occurrence of the event or on maturity for life insurance, whereas for general insurance, the liability will be paid upon the occurrence of uncertain events. Lastly, for life insurance, the insurable interest must be present at the time of the contract, whereas for general insurance, it must be present at the time of the contract and at the time of the loss.

India's status in the insurance sector is determined by the two indicators, penetration and density of insurance. The penetration of the Indian insurance industry was 4.2% of GDP in 2021-22, far below the global average of 7% of GDP, ranking India 20th in FY 2021-22. For example, Taiwan had 14.8%, South Africa 12.2%, USA 11.7%, and UK 11.1%, according to a report.

On the other hand, the penetration of life insurance (total premium paid in a year to GDP) has shown significant improvement. The Covid-19 pandemic has been a major driving factor in this increase. No awareness program or advertisement had the same impact as the pandemic. The penetration of life insurance reached 3.2% in 2020, the year Covid-19 hit, compared to 2.82% in 2019, bringing it closer to the global average. Surprisingly, the penetration of life insurance was 3.4% in 2011, but it gradually declined over the years, reaching its lowest level at 2.62% in 2014. It then marginally improved to 2.82% in 2019.

However, the penetration of non-life insurance remains very low, standing at 1% in 2020, while the global average at that time was 4.1% in the non-life segment. It is crucial to consider India's population number and density when analyzing these figures. In 2020, the density for life insurance was $59, while for non-life insurance, it was $19. Both these figures are significantly lower than the global averages of $4360 for life insurance and $4449 for non-life insurance in FY2020.

A notable challenge faced by the insurance sector in India is the weakening position of public sector unit (PSU) insurers compared to private players. Previously, PSU companies dominated the insurance market in India, but the liberalization of the economy allowed numerous private insurance companies to enter the market, some forming joint ventures with foreign insurers. Currently, there are a total of 58 insurance companies operating in India, including 24 life insurers and 34 non-life insurers. LIC remains the only PSU life insurance company in the country.

The market share of PSU insurers has decreased from 100% to 32% in FY 2023. While the advancement of private sector players can be attributed to more efficient operating models, a highly capable talent pool, and greater usage of IT, these factors alone do not explain the declining trend of PSU insurers’ share. Government indecision regarding the management of insurance units has been a major factor in this decline. Announcements about mergers were made, but implementation has been lacking, leading to uncertainty among clients. This confusion was exacerbated by similar signals from the government in subsequent budget speeches. Additionally, PSU insurers faced significant losses due to Covid-19 related health insurance claims, contributing to their deteriorating solvency ratio. Inadequate financial infusion and slow business growth have further exacerbated the situation, leading to a shortage of quality manpower. The government now holds the responsibility of revitalizing PSU insurers.

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