INDIAN GENERAL INSURERS FACING PERSISTNT PROFIT CHANLLENGES

The Insurance Regulatory & Development Authority of India (IRDAI), along with the industry, has collectively undertaken the mission to insure every Indian, and provide insurance solutions to every business in the next 25 years, that is, by 2047. Currently, our insurance penetration hovers around 4.2 per cent as compared to the world average of 7 per cent. We have around 70 insurers for a country of 1.4 billion people. This untapped market is both an opportunity as well as a challenge for Indian insurance firms. The present number of insurance companies may not be sufficient to cover the market potential. Also, the product offering must innovate to enhance value for policyholders. To reach every nook and corner, technology can play a huge catalyst. More investments in technological systems as well as human capital is a must. Technologies like AI and ML and big data analytics are changing the face of insurance worldwide. For the third straight year, the non-life insurance sector is boosting top-line growth with higher-than-average price increases across nearly all lines of business—yet rising loss costs are making bottom-line profitability elusive for many carriers and the industry as a whole. The one-two punch of elevated inflation and catastrophic events could help fuel transformation in the way the sector interacts with consumers.

The Indian insurance industry is constantly evolving in terms of products, reforms, innovation and disruption. Being the oldest industries of modern civilization, the insurance sector is observing a tech revolution at a rapid pace. The changing climate scenario also poses a risk and thus the insurance industry must equip itself to address this. The Indian insurance sector is the tenth-largest in the world and is at an inflection point. Considering the large and unique market that India offers, a significant opportunity exists to close the existing protection gaps. This is further facilitated by a robust economy, an expanding middle class, a young population, growing disposable incomes, and widespread usage of technology. This is the time when we need to increase our pace and firm up The country’s general insurance companies are currently grappling with a crucial dilemma between pursuing growth and maintaining profitability at a time when they are allowed to spend more on operating expenses even as their margins have been narrowing;While India’s insurance sector has been growing dynamically in recent years, its share in the global insurance market remains abysmally low.Most insurers are realizing that reacting to risks may not be good enough and are undertaking transformation efforts aimed at preventing losses from happening in the first place.

Profit margins

An insurance company’s profit depends on the number of policies it writes, the premiums it charges, the return on its investments, business costs, and claims. Net profit margin (NPM) can help define a company’s overall financial health and measure how much net income is generated as a percentage of revenue. Insurance companies generate revenue through the insurance policies they write and through returns generated by investment activities. Insurance companies incur typical business costs including losses due to insurance claims. The net profit margins for the insurance industry vary depending on the type of insurance provided. As of Q2 2023, Accident and health insurance companies showed a net profit margin of 4.99% for the trailing 12 months (TTM). Individual insurance companies can have varying profitability ratios based on company strategies in marketing, sales, operations, and risk models.  Companies in the insurance sector incur costs and sell products and must find a profitable balance between operating costs and the prices the market will bear.

The calculation of net margins is significant to companies in the insurance sector because the values are so low. Many insurance firms operate on low margins, such as 2% to 3%. Smaller profit margins mean even the slightest changes in an insurance company’s cost structure or pricing can mean drastic changes in the company’s ability to generate profit and remain solvent.  The different types of profit margin are gross profit margin, operating profit margin, and net profit margin. Gross profit margin compares net sales minus the cost of goods sold to net sales. Operating profit margin compares operating income to revenue. Net profit margin looks at net profits to net sales. Insurance companies earn revenue from the insurance policies they write and the insurance premiums they collect. Insurance companies have a variety of costs, including overhead and claims. Regardless of company size, the net profit margin differs across the industry, depending on how the insurer does business and manages its expenses.

 Profitability of general insurance sector

India’s Insurance industry is one of the premium sectors experiencing upward growth. This upward growth of the insurance industry can be attributed to growing incomes and increasing awareness in the industry. General insurance industry’s GDPI  is expected to grow by 10-12% in FY2023, led by higher growth in the health and commercial business segments with increasing awareness of medical insurance and uptick in economic activity. Already the resumption of economic activity after the waning of Covid-19 infections, has led to the industry’s gross direct premium income (GDPI growth recovering by an estimated 11% in FY2022 (compared to a 4% growth in FY2021). The GDPI of PSU insurers is expected to grow moderately at 4-6%, while private insurers are expected to capture market share by growing at a higher rate of 13-15% in FY2023. However, economic uncertainty due to structural challenges in the automobile industry and rising commodity prices amid the geopolitical crisis pose downside risk to FY2023 growth.

Stronger profitability enables non-life insurance industry to increase capital and capacity to match growing demand as risks evolve. The GDPI of private sector insurers grew at a faster rate of 14% (E) compared to the growth of 5% (E) witnessed by public sector undertaking (PSU) insurers in FY2022. The gross premium from the health segment experienced a steep Y-o-Y growth of 26% in 11M FY2022, while the fire segment premium grew by 8% in 11M FY2022 despite partial lockdowns across the country. Post the decline in FY2021, the motor business reported muted growth of 4% in 11M FY2022 on the lower base due to structural challenges in the automobile industry. However, the GDPI from the crop business declined by 20% in 11M FY2022 mainly due to the significant decline in the PSU business.

Decrease in profits

In India, insurance companies have often repositioned themselves in the broader economic fabric as stabilizers of business, markets and societies during economic upheavals. The general insurance industry recorded a decrease in profits, with public-sector general insurers posting losses, and their private-sector counterparts recording a slight fall in profits in FY19, relative to FY18. While premiums are still growing, the general insurance industry is experiencing underwriting losses, which increased by 45.5% for general insurers in FY19 compared to the previous year. These might very well be early warning signals of the insurance sector succumbing to the same malaise afflicting banks and NBFCs (non-banking financial companies) in India.

Further, there are concerns in the non-life insurance sector regarding product pricing and overcrowding in some segments, along with issues in the crop insurance segment. To maintain profitability, insurance companies are becoming increasingly dependent on their investment portfolio. They have also resorted to harmful practices, for example, undercutting premiums. Other challenges, such as the predominance of traditional distribution channels, also hinder the sector’s growth. Besides, insurers in India are capital-starved. A possible additional effect of this low level of capital is incipient new risks, and meager capital makes it difficult for insurers to rise to the challenge of new risks. Despite the stronger profitability outlook, industry expects the disequilibrium in demand and supply of non-life insurance to persist, and thus a continuation of current hard market conditions, especially in property catastrophe lines.

The slide continues unabated in PSUs

The combined market share of India’s four public-sector general insurance companies slid by 175 basis points year-on-year to 32.27% at the end of the financial year ended 31 March 2023 (FY2023). The public sector general insurance companies have been losing out to private players for many years now, and the slide continues unabated. According to latest data, the four public sector companies now account for less than a third of the non-life insurance market after losing a further 2% share in FY23. Budget 2018-19 had not provided for any capital infusion for the state-run insurance companies, though it gave Rs 2,500 crore, Rs 9,950 crore and Rs 5,000-crore capital to the three loss-making insurers during FY20, FY21 and FY22, respectively. But the central government decided not to pump in fresh capital in the PSU general insurance companies for 2022-23, even as every company witnessed a sharp deterioration in its solvency ratio since FY19.FY21 and FY22 were Covid-impacted years, when the general insurance industry had recorded huge underwriting losses as the insurers had to settle massive health insurance claims. Notably, total net losses for Oriental Insurance, United India and National Insurance Company stood at Rs 3,074.66 crore in FY21. For FY22, the total net losses saw a 125% rise to Rs 6929.52 crore. Net profit of New India Assurance, which leads the non-life insurance space, fell 89% year-on-year to Rs 177.92 crore in FY22 from Rs 1,627.76 crore in FY21.

The solvency ratios for these three companies remained dangerously below the level mandated by insurance regulator. As per IRDAIs mandate, the minimum solvency ratio an insurer must maintain is 1.5 to lower risks. In terms of solvency margin, the required value is 150%. Poor solvency ratios of state-run general insurers are a reflection of slow business growth and inadequate capital infusions from the government against a huge number of Covid treatment related claims. This prevented them from underwriting new business as being loss-making companies; they generally don’t get support from the reinsurers.

UNDERWRITING EXPERIENCE OF GENERAL AND HEALTH INSURERS

The only profit making state-run general insurer, New India Assurance, witnessed its number of employees shrink by 22% to 13,929 as on March 31, 2022 from 17,880 as on March 31, 2018. Oriental Insurance’s employee strength has fallen sharply by 31% to 9,440 as on March 31, 2022 from 13,667 as on March 31, 2018.

 Key challenges facing India’s insurance industry

The insurance sector faces various challenges including Low insurance penetration and density rates. Rural participation of insurers remains deficient, and life insurers, especially private ones, gravitate towards the urban population, to the detriment of the rural population. Costs for firms in the insurance business include the money the insurer pays to service providers. For health insurers, this would be payments made to hospitals or doctors. In the case of automotive insurance, this includes payments made to repair shops or medical costs if injuries were involved.

Insurers in India lack sufficient capital, and their financial health, particularly that of the public-sector insurers, is in a precarious state. Even though the Government of India has already infused Rs. 25 billion in the three public-sector insurers – National Insurance, Oriental Insurance, and United India Insurance – through the first batch of ‘supplementary demands for grants’ for FY20, these insurers require an additional Rs. 100-120 billion in order to meet the stipulated solvency margin.

Growth VS Profitability

The country’s general insurance companies are currently grappling with a crucial dilemma between pursuing growth and maintaining profitability at a time when they are allowed to spend more on operating expenses even as their margins have been narrowing. In the fiscal year 2023, the combined ratio – an indicator of profitability, which is calculated by measuring the sum of incurred losses and operating expenses as a percentage of earned premiums – rose for almost all general insurers. If the combined ratio is below 100%, it indicates that the insurer is making an underwriting profit; if it’s above 100%, then the firm could be spending more in claims than it is earning through premiums. The insurer could still be profitable because the combined ratio does not take into account investment income. ICICI Lombard’s combined ratio stood at 104% last fiscal while that of and Acko General was 155%.

Government-owned Insurance companies have to focus on profitability than market share. The government has directed insurance companies to prioritize profitability over market share in order to achieve long-term sustainability. The stake of PSU general insurer, The New India Assurance declined drastically in January. This amounted to a drop from 20% in 2022 to 13.7% in January 2023. The government is less concerned about the share drop because the government is focused on encouraging the insurance sector to focus on profitability expansion rather than increasing market share.

Profitability factor

Agriculture insurance has been the largest contributor to property insurance premiums in India. It is expected to account for 49.3% of property insurance premiums in 2023. The launch of Saral Krishi Bima, a parametric insurance product, in May 2023 by the Agriculture Insurance Company of India (AIC), and the proposed launch of other parametric products will broaden the coverage of agriculture insurance. The premiums generated from the parametric products will also help property insurers partially mitigate the losses due to the high frequency of nat-cat events. AIC received a license to launch products that cover livestock, aquaculture, and the sericulture industry in April 2023. This will support agriculture insurance growth, which is expected to record a CAGR of 11.5% over 2023–27. Fire and natural hazards insurance is expected to account for 44.1% of the property insurance premiums in 2023. It is expected to grow at a CAGR of 10.8% over 2023–27. Its growth over the short term is expected to be impacted by recently enacted regulations aimed at improving market practices.

From April 2023, the IRDAI scrapped the burning cost measure charged by reinsurers to insurers towards fire reinsurance premiums. As insurers don’t have to pay this cost to reinsurers, it will reduce premiums, making fire insurance more affordable. In the same month, IRDAI also implemented fire insurance policies based on the claims history of policyholders for accurate policy pricing. Over the long term, the change will help in increasing customer confidence and support property insurance growth. Construction and engineering are expected to account for the remaining 6.7% of the property insurance premiums in 2023. Extreme weather events are expected to remain a major pain point for property insurers, prompting them to increase prices to maintain profitability. Insurers are likely to engage in alternate propositions such as parametric insurance and risk-based premium pricing to offset their exposure. ICICI Lombard General Insurance Company’s operating performance is strong, with a five-year average return-on-equity ratio of 18.5%

Long-term profitable growth

Even in this environment, where risks are increasingly becoming financially unsupportable, there may be opportunities available for proactive non-life insurers to generate long-term profitable growth. Insurers should consider going beyond their traditional risk-transfer models and instead become more of a protector of individual policyholders, businesses, and society at large. One area where the industry could face significant disruption is the opportunity and potential threat posed by the growth in embedded insurance. The concept is not new, but what’s changing rapidly is the volume of insurance premiums for major lines likely to be built into other types of third-party transactions, bypassing traditional sellers, such as insurance agents, upending direct-to-consumer sales from insurers, or even excluding legacy carriers altogether. Gross premiums are forecast to grow by as much as six times, to US$722 billion by 2030, with China and North America expected to account for around two-thirds of the global market.

The use of parametric insurance is also expanding, where claim triggers and automatic payments are based on an index or specific widespread event rather than a particular loss. In addition to more coverage being offered for natural disaster losses, new areas covered by parametric policies include cyber exposures and operational downtimes due to cloud outages. Underserved communities might also benefit from parametric catastrophe coverage purchased on a group basis for a particular neighborhood rather than by individual consumers. A couple of Fiji-based insurers paid out US$50k to 559 smallholder farmers, fishermen, and market vendors in response to cyclones. There is a need to exploit all technological options available to create a seamless experience for policyholders. All of this would require growth capital. An effective, business driven Fraud Risk Management (FRM) approach should encompass controls that prevent the occurrence of fraud, detect fraud, and provide an effective response mechanism to limit the consequences.

Evolving to strengthen relationships and profitability

India is one of the fastest-growing economies in the world and is home to a large population of over 1.4 billion people. The country’s insurance industry is rapidly growing, with an expected market size of $280 billion by 2025, a compound annual growth rate (CAGR) of 12%-15%, primarily attributable to rising awareness about the importance of insurance and increasing disposable incomes. ICICI Lombard, Bajaj Allianz and New India Assurance are the top three general insurers in terms of profit after taxation (PAT) in FY 2022-23. ICICI Lombard topped the list with net profit of Rs. 1730 crore in FY 2023, its profit has increased by 36% from 1270 crore in FY 2022. Bajaj Allianz and the New India Assurance book PAT of Rs. 1350 crore and Rs. 1060 crore respectively in FY 2023.  HDFC Ergo and Tata AIG were the next two in the list with net profit of Rs. 653 crore and Rs. 550 crore respectively.

For the third straight year, the non-life insurance sector is boosting top-line growth with higher-than-average price increases across nearly all lines of business—yet rising loss costs are making bottom-line profitability elusive for many carriers and the industry as a whole. The one-two punch of elevated inflation and catastrophic events could help fuel transformation in the way the sector interacts with consumers. As India continues to surge forward in the digital arena, various sectors are undergoing transformative changes. Among these, the business insurance sector has been somewhat overshadowed in mainstream discussions, yet it is experiencing seismic shifts, particularly through technology’s democratizing force.

The comprehensive reforms of IRDAI have overall positive implications for both the insurance industry and policyholders, by encouraging healthy competition, better affordability, improving service quality, increasing customer satisfaction, and promoting insurance penetration, thereby creating a more accessible and inclusive insurance landscape. This encourages a competitive market, allowing insurers to customise commission structures based on market needs. It would facilitate them to develop new business models, products, strategies, internal processes and enable them to fulfill the mission of Insurance for All. It would also provide insurers the flexibility to manage their expenses based on their growth aspirations. The board-approved policy enhances transparency, accountability, and adherence to regulations, enabling a more efficient distribution system and boosting customer confidence and satisfaction.

The Government of India has also opened up FDI (foreign direct investment) in insurance up to 74 per cent (from 49 per cent). FDI in intermediaries has been permitted up to 100 per cent. The facilitations have garnered interest from the stakeholders, with four new insurance companies having been registered in the last one year and a few more applications are under consideration. This is a testimony to the interest being generated in the insurance sector of India. This may lead to more players, more expertise, more technology and more capital in the sector and thus ultimately towards realising our vision of ‘Bimakrit Bharat’ where every citizen, family, business will be adequately protected and insured. Regulations must remain outcomes focused. Regulations must be audited for a clear nexus with these objectives and be suitably eased on failing the test.

No specific number is considered to be a good profit margin. Each industry and sector operates differently. Companies in different sectors have different costs General insurance premiums in India are forecast to exceed INR3.91tn ($47bn) by 2030 based on historical data of 20 years. However, the premiums may cross the INR5tn mark by that year, considering regulatory reforms intended to achieve “Insurance for All” by 2047 and an anticipated increase in the number of market participants and intermediaries. In comparison, non-life premiums reached CNY2.57tn in the financial year ended 31 March 2023. Increased use of AI and ML can help insurers understand changing risk dynamics and customer needs. Risk-Based Capital (RBC) implementation by 2024-25 can enable risk-based premium rates and product innovation. Increasing digital usage among customers will drive end-to-end digital experiences and technological applications. New online distribution models like B2C, B2B, and B2B2C will be key growth drivers. Additionally, several other factors are influencing the industry and have significant potential to shape its future trajectory. Capital infusion is crucial to expanding insurance business and increasing insurance penetration. The industry requires a greater number of intermediaries and insurance players to sustain anticipated growth and profitability.