Introduction:

The insurance industry in India witnessed a paradigm shift during the year 2000- 2001. Since 1973, the non-life insurance industry was dominated by the four nationalised insurance companies. Privatisation of the insurance sector opened the doors of opportunity for the big business houses of India.

 

With the government allowing FDI investment up to 26%, insurance majors across the globe found it appropriate to venture into India partnering the business houses desirous of making their mark in insurance sector.

The privatisation brought with it many hopes of increasing the insurance penetration levels , which till then showed a dismal figure, particularly in the non- life sector. Today twenty four insurance companies are licensed to do business in the non-life sector in India. Yet, unfortunately the penetration level measured as a % of the GDP, still stands at 0.66% for the non-life insurance sector, in India.

This figure is just marginally higher than Pakistan and Bangladesh. Countries like Hong Kong, Thailand, Singapore show a much higher percentage.

Can it be said that the insurance industry in India has not reached the maturity, yet?

The penetration continues to be a very low % of the GDP, be it the corporate or individual household. This particularly holds good for non-life insurance, which provides the insured a protection against a “risk” and is not really an investment which gives a return on maturity. The subsequent paragraphs dig into the possible drivers for such a low penetration

What could be the reasons of the low penetration percentage?

Will I get my money back at the end of the year?

The awareness level of insurance as a “risk transfer” mechanism is not high in India, particularly in the rural areas. Although, it is more than a decade now since the privatisation has taken place, still the basic need for insurance has not been felt. Serial bomb blasts , earthquake , flood, tsunami, cyclones have left deep scars   and have unearthed the ground reality that quite a significant part of the affected assets as well individuals , were not insured or not adequately insured.

People still view insurance not as a means of “protection” but as an investment mechanism. The very fact that the penetration of the life insurance sector as a % of GDP , is much higher as compared to non-life sector, shows that mindset of the people are more aligned towards “investment” rather than “risk”.

Bank insisted for the insurance cover ………

Many of the corporate assets, particularly in the small and medium sectors are insured because of the interests of the financial institutions. The financial institutions or the equity partners who are funding the business are worried about the investments which they are making  and needs the residual risks to be managed through risk transfer to insurers.

Thus an insurance policy becomes the foremost requirement for getting the loan sanctioned. But are they comprehensively insured? maybe not. In many cases the mortgagor takes an insurance cover only for the outstanding amount of loan,  and not for the real value of the assets .thus they are underinsured and in the event of loss will not be able to recover the full loss amount thus the basic purpose of insurance is defeated.

The “forced insurance covers” (i.e. the covers taken due to pressure of lenders) are only of basic nature. E.g. a garment manufacturing factory located in Srinagar may have been covered under a Standard fire and special perils policy (the bank insisted on that) …but nobody has bothered to look at

whether the policy covers earthquake and terrorism!

A mid segment hotel located in a   tourist spot might have taken a fire and burglary cover …but are they covered against “liability risks”…A guest of the hotel slipping near the swimming pool can file a suit for million dollars , which can dig a deep hole in the pocket of the owner . The financiers also may be looking only at the “traditional” insurance covers which can protect their interest …. The need for analysing the risk exposures often is a low priority area for everybody.

My contract requires so….else ……

The risks during the construction phase (whether it is a commercial complex under construction or new machinery and assembly line in a factory being erected), are insured, but mainly due to the contractual relationships…because the Principal has put a clause in the contract requiring the contractor to take an insurance cover.

However the terms and conditions of such insurance may be much restricted (contractor will obviously try to save on the premium). The construction linked insurances may be of some importance to big contractors and real estate owners ….but does an individual constructing his house really bothers to take the adequate insurance cover?

Most of the buildings and assets belonging to the government, roads, and flyovers are not insured or are not adequately insured ….the reasons for the  same are not really known. The disasters can hit any locations.

The problems for the future:

A retail store gutted in a market fire ,   a mid segment hotel   collapsing following an earthquake , stocks in a warehouse damaged beyond repair following   flood ….all these   are not unheard of . The effect of such damages is much bigger than what we can think of. The misery of the owner does not end with the mangling remains of the assets ….. The period during which the establishment is closed, has a crippling effect on the financial position of the owner. At one hand he has to get the assets reinstated and on the other he has to meet with the fixed costs and the loss of gross profit ……. Many such establishments will have no option, but to close down.

Huge impact on the economy of the country ….. More the time the corporate take to reinstate the business (in absence of insurance, he has to manage the funds); greater will be the effect on the economy of the country.  Lesser spread of risks …. If only the hazardous risks, which have higher probability of losses, are insured, while the less risky ones remain uninsured, it will have direct impact on the revenue and profitability of the insurers. An indirect effect of the same would be that reinsurers will shy away from the market and the capacity of the insurance industry as a whole will shrink.

Risk transfer is the last step in the process of risk management, but no doubt it is a critical one. The residual risks which still remain after all mitigation steps need to be handled and risk transfer is the only method for the same.

Natural catastrophes are not always avoidable, nor can their effects be completely reduced. It is essential that basic insurance cover for such events should exist , be it a corporate or an individual or a government establishment …Let us not forget “risk is like an elephant, it is difficult to put our hands around it”…..

By: Sagar Sanyal, Published in “The Insurance Times” July, 2012