Financial Services in India- Brief Overview

Financial services industry is the mainstay of any economy as it mirrors the financial health of the country. Indian financial markets are highly regulated with different authorities keeping an eye on every avenue of financial sub-segments viz. Stock markets, mutual funds, insurance and banking. Stock markets are regulated by Securities and Exchange Board of India (SEBI) while Insurance Regulatory and Development Authority (IRDA) keeps an eye on the insurance industry. Similarly, Reserve Bank of India (RBI) keeps a check on the Indian banking sector and Association of Mutual Funds in India (AMFI) takes care of the mutual fund segment. India boasts of a Rs 23, 000 crore (US$ 4.44 billion) - financial services distribution and advice market. Recent developments, Government measures, key facts and figures pertaining to the same are discussed hereafter

Indian Insurance Industry: Brief overview

India is one of the fastest growing insurance markets in the world. Growing interest towards insurance among people; innovative products and distribution channels are aiding the growth of insurance sector. Increasing demand for insurance is off shoring. The total insurance market has grown from US$ 14 billion in 2003 to US$ 67 billion in the year 2009-10. Over FY 2003-10, premiums have increased at a compound annual growth rate (CAGR) of 25 per cent. Motor insurance forms the largest non life segment with a share of 43 per cent followed by Health insurance accounting 21 per cent of the total. The IRDA Act, 1999, has allowed a FDI of up to 26 per cent in the insurance sector on automatic route subject to obtaining license from IRDA. Authorities are now considering an increase of FDI limit to 49 per cent through the Insurance Laws Amendment Bill. The SEBI has relaxed rules to allow more life insurers to launch public offers. Investments from the private sector are increasing as they see a huge opportunity in the growing insurance sector of the country. The Indian insurance industry is hugely driven by higher disposable incomes, changing demographics, Government efforts, launch of new products, lesser complexities and entry of foreign players. The sector is not only outpacing India's economic growth figures, but is also standing strong as an important financial segment through turbulent times. As per industry estimates, insurance penetration in India stood at 5.1 per cent in fiscal 2010-11. While life insurance penetration was marked at 4.4 per cent during the year, general insurance sector penetrated to an extent of 0.7 per cent in 2010. As of now, insurance accounts for just 3 per cent of overall healthcare expenditure in India which implies that there lies a great potential to enhance the penetration of insurance as a concept. The scope of growth is further enhanced by rural India's development as a major contributor to the economy as the clan residing in hinterlands is increasingly getting aware of new products and services across all the economic and social segments. The Rs 2.9 trillion (US$ 58.7 billion)-Indian life insurance industry has emerged as the mainstay of entire insurance space. With over 35 crore life insurance policies in force, the industry has registered remarkable growth since its privatisation in 2000. The overview further discusses how the sector has fared in terms of growth, developments and Government participation in the recent past.

Indian Insurance Industry: Recent Statistics

The 24 life insurance players' premiums collected in April-December 2011 stood at Rs 71,953.54 crore (US$ 14.59 billion) while the industry sold about 27.24 million policies during the period, according to data collected by the IRDA. With respect to general insurance industry, there was a growth of 24 per cent in first three quarters of 2011-12 in gross written premium collected. The general insurance industry collected premium of Rs 42,023.3 crore (US$ 8.51 billion) by writing new policies during the period. While private insurers registered a growth of 26.73 per cent in premium collection at Rs 17,525.3 crore (US$ 3.55 billion), the four state-owned general insurance companies collected Rs 24,498.1 crore (US$ 5 billion) (22.1 per cent higher than the corresponding period a year ago).

Health Insurance Industry in India

According to a recent report by UK-based research firm BRIC data, Indian health insurance market would scale new heights in terms of growth owing to the country's robust economic growth, changing demographic patterns, expected increase in FDI limits and the expansion of distribution networks. The Indian health insurance segment accounted for 3.2 per cent of the overall insurance industry in 2011 thereby leaving a lot of scope for further growth and penetration. During the review period (2007-2011), the penetration of Indian health insurance products stepped up from 0.07 per cent in 2007 to 0.19 per cent in 2011, as many new policies were sold in hinterlands. The health insurance business constitutes more than 25 per cent of the general insurance industry in India. Health insurance premium collection during the April-September period of 2011-12 rose 21.3 per cent to Rs 6,721.53 crore (US$ 1.36 billion) from Rs 5,540.34 crore (US$ 1.12 billion) in the year-ago period.

Recent Developments
Health insurance policies are on their way to get 'age-free'. Though the proposal is still at a nascent stage, IRDA has already taken a step towards this concept by making it mandatory for policies to have 'life long' renewal clause. This implies that once a health insurance policy is issued, an insurer would be obliged to continue renewing such a policy during the policyholder's lifetime. However, the entry age barrier would continue to be there Some general insurance companies have already started applying for such 'age-free' policies. For instance, Apollo Munich Insurance applied for such a policy a few months back and is awaiting regulator's approval Cigna TTK Health, a joint venture (JV) company between US-based Cigna Corporation and India's TTK Group, is in the process of applying for the R1 licence with the regulator IRDA and expects to commence operations in the first quarter of 2013 The JV firm, being the new entrant on the Indian health insurance block, intends to be innovative and hence plans to set up a distribution network through which simple health insurance products could be sold by pharmacies themselves State-owned Life Insurance Corporation (LIC) would buy 5 per cent stake in Punjab & Sind Bank. The bank's proposal to issue 11.2 million fresh shares is awaiting Securities and Exchange Board of India (SEBI)'s decision regarding the rate and is eventually subject to approval from the Government of India and other regulatory entities

The infusion of additional capital aims at strengthening bank's 'Capital to Risk-weighted Assets Ratio' (CRAR) and support its business growth HDFC Life, a private life insurance company and a JV between India's Housing Development Finance Corporation Ltd (HDFC) and UK's Standard Life plc has launched its first international operations with the opening of its representative office in Dubai. The launch comes as a result of the company's strategy to serve large non-resident Indian (NRI) base in the Gulf region In a bid to enhance overall customer offering and rapidly expand its motor insurance business, private insurer SBI General has entered an alliance with My TVS and India Assistance. The tie-up aims to provide emergency roadside assistance to its policy holders anytime and for any car across the country

Government Initiatives
The Ministry of Finance is planning to appoint an independent advisor at the Insurance Regulatory and Development Authority (IRDA), who would directly report to the Government and assist the regulator in policy decisions. Also, the Government may set up advisory groups across segments to discuss issues relating to growth, product development, insurance penetration and regulations pertaining to the sector. Further, insurance regulator IRDA may soon give its nod for making insurance policies available in demat form, paving way for e-insurance accounts and e-policies. Five entities CAMS, Karvy, NSDL, CDSL and STCI have already been shortlisted to set up and operate insurance repositories. An insurance repository is a company that maintains data on insurance policies electronically on behalf of insurers. If IRDA give its approval, India would probably be the first country in the world to undertake such a massive activity of converting physical insurance policy certificates into electronic form.

Road Ahead
According to a report by BRIC data, the market size of Indian life insurance industry is anticipated to touch US$ 111.9 billion in 2015 from US$ 66.5 billion in 2011, marking a compounded annual growth rate (CAGR) of 14.1 per cent. The report estimates that India would be the third-largest market for life insurance in the world by 2015, only after China and Japan. At present, India stands 12th among the top global markets for life insurance. Also, the number of policies sold is expected to increase to 85.21 million in 2015 from 53.23 million in 2010. While individual life insurance segment is expected to account for 79.3 per cent of the life insurance industry in 2015 (from 74.8 per cent in 2010), unit-linked insurance plans (ULIPs) are estimated to be fastest growing product category at a CAGR of 21.2 per cent during that year.

General insurers told to bring in Rs 8,000-crore capital

The insurance regulator has asked general insurance companies to infuse about Rs 8,000 crore as capital. This amount will have to be brought within the next two years to boost their capital that has suffered erosion due to losses in the motor portfolio (principally, third party motor pool). According to a circular received by the general insurers on Thursday, general insurers can absorb the losses caused by the motor third party pool either in one go or over three years, including this year.

This has been necessitated due to the dismantling of the motor third party pool from March 31, 2012. The IRDA has provided a concession in its prudential prescriptions. It has done this by relaxing the minimum solvency ratio to be maintained by companies to between 1 and 1.1 times, if they are ready to absorb the losses immediately. Currently they are expected to maintain a minimum solvency ratio of 1.5 ( that is, assets should be 1.5 times the liabilities). The losses incurred during 2007-08 and 2008-09 will have to borne by companies during this financial year itself. Companies have been given the option of deferring the absorption of losses (from 2009-10 onwards) over the next three years. In that case, the required solvency ratios will vary at 1.3 times, 1.4 times and 1.5 times for 2012, 2013 and 2014 respectively, the circular says. According to IRDA estimation, public and private sector insurers would have infuse about Rs 4,000 crore each. The actual amount would vary from company to company, in line with the market share.

IMPACT
This move will not impact customers or policyholders directly. There will be no impact on how the business operates,'' Dr Amarnath Ananthanarayanan, Chief Executive Officer, Bharti AXA General Insurance Company Ltd, told Business Line. Companies, however, would have to provide for capital infusion/footing the losses. This is going to make things simple for accounting and bearing of liabilities among others, he added. Premium rates, however, are expected to go up because of other aspects like annual review of rates.