Introduction
There is a continuous presence of uncertainty since COVID from late 2019. The people globally witnessed unprecedented deaths, economic volatility due to forced lockdown, loss of jobs resulting in a rise in unemployment adversely impacting gross domestic product of most nations. The two years of 2020 and 2021 saw dissolving many businesses models where they had to change the business and start afresh. The lockdown resulted in an increase in online culture.
Just when scientists overpowered the COVID, the Ukraine-Russia war started in February 2022. This led to a rise in global inflation, shortage in food supply, deglobalization, and adverse impact on the already stressed environment. The rise in inflation caused most of the central banks to increase interest rates, making it difficult for home seekers and raising capital for new businesses.
The further conflict of Isreal and Hamas in October 2023 continued level of high inflation, increase in crude oil price further worsening of global economy, rise in geo-political risk, volatile stock market.
The high degree of uncertainty requires a proper risk management plan to steer the business out of the woods. The purpose of the article is to analyze the current prevailing risks and look back to the risks that are already crystalized, take the lessons and prepare for the future. There are only two ways to manage risk, either you plan to manage risk or do crisis management. Here the example considered is the Indian insurance industry for the period of 2019-20 to 2023-24 as how COVID impacted its business parameters. And whether it serves as a warning signal for the future risks resulting from tariff war, climate risk or some unprecedented new risks that we are currently not aware of.
Let’s look at some of the parameters of Indian Insurance industry.
Analysis of Impact of COVID on Indian Insurance Sector
Premium Income
The analysis of the Indian insurance industry is performed for the period 2019-20 to 2023-24 that covers the peak of the COVID during 2020 and 2021. The graph-1 represent the premium income for life, non-life and total industry. There is a consistent growth in the premium income over this period. The growth in premium income to both life and non-life industries suggest no impact of COVID.
Graph-1
Over the last five years, uncertainty has been at the highest level. The adversities and inflation led to volatile growth in real premiums in the Indian insurance market between 2020 to 2023-shown in graph 2 below. Real premium growth is the increase in insurance premiums after adjusting for inflation. It measures the change in premiums adjusted for the effects of price increases over time, offering a more reliable measure of the insurance market’s expansion. The effect of height inflation is shown in the year 2023 post ongoing two geo-political war.
Graph-2
Similarly, the contribution of premium within the gross domestic product (GDP) also declined from 2021-22 as shown in graph 3 below. In fact, the rise in the insurance penetration in the year 2021-22 at the peak of COVID is due to a fall in the GDP rather than increase in premium income. The insurance penetration started falling after 2021-22 because premium income growth could not keep pace with the growth of GDP.
Graph 3
Profit After Tax
Graph 4 represents the profit after tax (PAT) for life, non-life and insurance industry. The PAT for life insurance industry suffered an 11% reduction in FY 2021-22 from INR 8661 Cr to INR 7751 Cr, also during this FY, general insurance industry also suffered losses resulting in reduction in total profit compared to previous financial year. The general insurance industry suffered losses from 2022-23 as well. The impact of COVID is visible on the PAT of the insurance industry in FY 2021-22. However, in FY 2022-23 there is an increase in life insurance profit and 722% in total PAT of the insurance industry. This however explains that the profit for life and non-life industries decreased in the year 2021-22 due to COVID and non-life continued to suffer losses in subsequent two years.
Graph 4
Death Claim in Life Insurance Industry
During the peak of the COVID in 2020-21 and 2021-22, the death claim of life insurance industry increased by 41% and 45% respectively and then reduced by 32% in 2022-23 and minor increase of 2% in 2023-24. This again explains that the pandemic risk crystalized within the Indian life insurance market.
Graph 5
Operating Expenses
There is a steady increase in the operating expenses from 2019-20 to 2022-23 at an annual rate of 4%, 13% and 28% respectively in three financial years followed by a fall of 12% in 2023-24. This coincides with the COVID period in 2020 and 2021. The rise in operating expenses in 2022-23 is substantial at 28%, represented by 25% in the life insurance industry and 32% in the non-life industry. The fall in operating expenses in 2023-24 in life insurance industry is 0.5% and 29.5% in non-life industry resulted in total fall in 12%
Operating Expenses
There is a steady increase in the operating expenses from 2019-20 to 2022-23 at an annual rate of 4%, 13% and 28% respectively in three financial years followed by a fall of 12% in 2023-24. This coincides with the COVID period in 2020 and 2021. The rise in operating expenses in 2022-23 is substantial at 28%, represented by 25% in the life insurance industry and 32% in the non-life industry. The fall in operating expenses in 2023-24 in life insurance industry is 0.5% and 29.5% in non-life industry resulted in total fall in 12%
Graph-6
Discussion
The nominal premium income had consistent growth over the last five years period from 2019-20 to 2023-24 indicating no impact of COVID. On the one hand, there was a risk of a reduction in premium income because of job losses, on the other hand, there was increased awareness towards insurance due to adversities observed during corona. The second reason could have played a dominant role in consistently increasing the premium income.
During the period of COVID, interest rates and inflation were low and therefore in 2021 and 2022, there was a consistent growth of around 7% in real premium, however, post Russia-Ukraine war, the inflation shot up due adverse economic impact led to decrease in the real premium income in 2023 of 2.4%.
On the other hand, insurance penetration had a consistent fall since 2021-22 indicating that the growth in the premium income is not keeping pace with the growth in the Gross Domestic Product (GDP).
The period of COVID also led to an increase in operating expenses. The increase in claim and operating expenses may have led to a reduction in the profit for the industry in the year 2021-22 from the previous year of 2020-21.
The life insurance claim increased during 2020-21 and 2021-22 at the peak of the COVID; though most of the life insurance companies had reinsured a high percentage of term insurance products that resulted in the losses to most of the reinsurance companies during this period. COVID is a good reminder of the value of risk management. It is important to foresee and anticipate the risk and price accordingly. In the current situation of prevailing geo-political risk and tariff war, the next risk should be anticipated. Climate risk is also knocking on the door.
In the midst of Ukraine-Russia and conflict in Gulf , the new economic order is developing due to introduction of reciprocal tariff by President Trump in early 2025. If the current level of tariff introduced stays will shift the world economic order. There could be a fall in exports (Gems, diamonds etc.), a rise in unemployment, a fall in stock price (Indian market crashed by 4% after introduction of 26% tariff on India [1]), a fall in economic activity resulting in a drop in GDP. As per the press [1] several economists including Goldman Sachs have decreased the GDP by 20 to 40 basis points to 6.1%
With an uncertain economic environment and likely job cuts, people would like to hold the money rather than invest in the market, further reducing demand for goods. This is likely to have an adverse impact on businesses resulting in a fall in revenue during 2025-26. This may lead to an impact on the premium income for the insurance sector. The central bank (RBI) may also reduce the interest rate to make the lending cheaper to boost the economy. This on the one hand may make taking loan cheaper for customers but on the other hand for the insurance sector, this may bring the interest rate risk because many Indian life insurance companies have sold traditional products with high-interest rate guarantees. The volatile economy has a volatile stock market where selling unit-linked new business could be challenging. Under such scenario surrenders may also increase reducing fee income to insurance companies. There could also be an increase in lapse rate due to customers preferring to hold the money and rise in unemployment.
Conclusion
There are couple of parameters such as death claim, increase in operating expenses, fall in profit after tax, fall in real premium growth within the Indian insurance industry that suggest that there was an adverse impact due to COVID. The message is that the industry was impacted, and it is now time to learn from experience and prepare for the future. This is possible through improving the risk management practices, implementing enterprise wise risk management rather than silo approach, embedding risk culture, proactive in risk assessment, improving the corporate governance, and improving risk management education.
The introduction of a reciprocal tariff is another example of the sudden emergence of a new risk that was not anticipated six months back, therefore, the corporates need to be prepared for the sudden spurt of risks. To fight such an uncertain environment, there is a need to be risk-ready at all the time.
Authored By: Dr Sonjai Kumar, CFIRM, SIRM
