India will become the sixth largest insurance market in the world in terms of premium volume by 2032, up from 10th largest in 2021
Life insurance profitability in India to benefit from rising interest rates. Pandemic-related claims continued to impact life insurers’ earnings in the first half of 2022, but we remain cautiously optimistic for continued normalisation. Since life insurance claims are driven by mortality experience and benefits are defined at the inception of the policy, inflation has a limited impact on life insurers
Non-life insurers will continue to face near-term headwinds in the profitability of their core underwriting portfolios due to geopolitical tensions, high inflation and intense competition.
India has one of the fastest growing insurance markets in the world. We estimate that total insurance premiums (life and non-life) will grow by an average 14% per annum in nominal local currency terms (9% per annum in real) over the next decade.
At this pace, India will become the sixth largest insurance market in the world in terms of premium volume by 2032, up from 10th largest in 2021. Rapid economic development and income growth, and higher risk awareness in large part due to the experience of the COVID-19 pandemic are expected to be among the main drivers of industry growth.
In 2021, the government raised the FDI limit (ie, on foreign ownership) in the insurance industry (in both the life and non-life sectors) to 74% from 49%, and there are expectations that it will be lifted to 100%.
This should further boost the development of the industry. Currently the insurance regulator is reviewing proposals to reduce paid-up capital requirements for new entrants, which could also support growth.
Investments in insurtech have increased rapidly in recent years, and today several digital platforms offera wide array of services.
The rise of insurtech will increase accessibility to and affordability of insurance, which could potentially boost demand significantly.
Life insurance: poised for rapid growth
We estimate that life insurance premium volumes in India will grow by 8.0% in real terms in 2022, surpassing USD 100 billion for the first time. The premium forecast takes into consideration India’s market potential as well as the historical elasticities. The likely drivers will be growing risk awareness, increasing demand for group policies and a favourable regulatory environment.
Strengthening digital distribution channels has been another focus area for life insurers. The pandemic experience has compelled insurers to develop and increase the digital distribution of their products and gain direct control of customer relationships.
India was the ninth largest life insurance market in the world with total premium volume of USD 97.7 billion in 2021.
Over the next decade, we forecast that premiums will grow by an annual average of 9% in real terms, making India the fifth largest market globally.
The life market remained resilient through the pandemic. Real premiums grew by 3.4% in 2020 and 8.5% in 2021, significantly above-trend (2010–2019 CAGR: 1.6%).
The impact of increased risk awareness and favourable regulatory developments also showed in strong growth in new business premiums and sums assured in 2021.
New business sums assured increased by 17.5% in nominal USD terms in 2021 from the previous year, compared with an annual average of 7.1% between 2017 and 2021. This growth was supported by the financialisation of savings away from physical (eg, real estate) to financial assets, and new product launches.10 It was based mainly on group business sums assured, which increased by 25% in nominal USD terms.
Individual business sums assured grew 6.7% after a moderate decline (–4.2%) in 2020 due to pandemic-related disruptions.
As per Swiss Re Institute estimates, the mortality protection gap in India stood at USD 40.4 billion (in premium equivalent terms) in 2021. This translated into an average mortality protection gap of 91%, meaning that the financial resources available to support the livelihood of surviving family members and pay outstanding debts in the event of premature death of the household breadwinner, were less than 9% of the total protection need.
A 2019 survey by Swiss Re Institute found that 44% of households have a mortality protection gap in excess of 90% of their protection needs, one of the highest in Asia. Life insurance penetration in India was 3.2% in 2021, almost twice the emerging market and slightly above the global average. Total mortality sums assured as a percentage of GDP in India has also increased considerably over the past two decades, from around 50% in 2001 to more than 100% in 2020, in line with other emerging as well as advanced markets.
However, most life products sold in India are savings-linked and have just a small protection component. This exposes households to large financing gap in the event of premature death of the breadwinner.
Non-life insurance industry in India
We forecast that the non-life insurance sector in India will continue to grow this year, but at a slower pace due to Russia-Ukraine war and high inflation. We see further slowdown in 2023 ahead of a recovery to 6.7% average annual growth in 2024 and 2025.
The non-life sector grew strongly in the 2010s, with premiums (including health) up an annual average 9.6%. The sector contracted slightly in 2020 due to COVID-19 lockdown measures, which also brought economic activity to a standstill.
However, strong growth in health premiums provided support and the non-life sector overall returned to 5.9% growth in 2021. Excluding health, sector premiums were down 0.9% last year.
Health insurance: the fastest growing line of business in India
Health premiums in India grew by 22.5% in real terms in 2021, the segment becoming the largest non-life line of business, mainly driven by pandemic-induced increased risk awareness.
The health segment has undergone significant change over the last few years, also due to rising healthcare costs and a high share of out-of-pocket spending on health.
We estimate that health premium growth will moderate slightly to 7.6% in real terms in 2022, mainly due to a higher base effect from strong double-digit growth in 2021 and high inflation.
The latter may lead to rising lapse rates. Health insurance growth will likely remain robust as the factors driving strong growth over the past decade remain in place. Moreover, the heightened risk awareness post COVID-19 will also support growth in the medium-term.
We believe insurers have an opportunity to meet the evolving customer needs through innovative product offerings.
Despite strong growth in health insurance premiums over the past decade, the health protection gap (HPG) in India is one of the highest in the world.
As per a recent estimate from Swiss Re Institute, the HPG in India was 35% vs 7.5% globally in 2021. As per WHO estimates, total public and private health spending in India was estimated to be 3.0% of GDP in 2019, well below the global average of 9.8%.
The government accounts for approximately one-third of total health expenditures. That constrains the capacity and quality of public services available, and drives those who can pay for treatment (around one-third of the population) to seek treatment in private hospitals. This has resulted in out-of-pocket expenditure accounting for more than half of total healthcare spending in India.
Low insurance penetration is another reason for the high HPG in India. An estimated 7% of the population is pushed below the poverty line because of having to pay for healthcare services from their personal savings.
As per a report published by Niti Aayog in October 2021, around 30% of India’s population has no health insurance.This segment predominantly constitutes the self-employed (agriculture and non-agriculture) informal sector in rural areas, and a broad array of informal, semi-formal and formal occupations in urban areas.
The Ayushman Bharat – Pradhan Mantri Jan Arogya Yojana
(AB-PMJAY) and State government extension schemes provide comprehensive hospitalisation cover to the poorest 50% of the population.
Around 20% of individuals are covered through social health insurance and private voluntary health insurance.
The pandemic has brought a shift in consumer behaviour towards purchasing a health insurance and simultaneous investment by insurers to improve their digital capabilities.
These developments should contribute to reducing the HPG. Data- and digital-driven capabilities will likely make the buying process easier and, among others, should broaden insurance reach to millennials and the younger population.
There is also evidence of growing use of technology in the other areas of insurance value chain.Several data-driven innovations and digital tools to speed up administrative tasks such as underwriting, claims processing and handling customer queries are gaining popularity.
Motor insurance set to recover
Motor is the second largest non-life insurance line of business in India.
We estimate that motor premiums will grow by 2.9% in real terms in 2022, based mainly on a stronger economic activity and higher levels of mobility post pandemic. High fuel prices and rising interest rates may limit demand for passenger vehicles this year and next.
However, we estimate premiums will grow in line with our forecast of 7% average annual GDP growth over the next 10 years, supported by an expanding middle class and rising usage of cab services.
Moreover, insurtech and digitisation, and partnerships between auto makers and financial service firms should extend insurance reach.
Motor premium volumes shrank by 7.4% and 1.6% in 2020 and 2021, respectively,mainly due to lockdowns, travel restrictions and social distancing. New car sales slumped during the pandemic as showrooms or dealerships were closed.
According to the Federation of Automobile Dealers Associations, there was a 30% year-on-year drop in vehicle sales in the financial year 2020–2021.
A majority of personal auto insurance policies in India are sold through agents (38%) and corporate tie-ups and brokers (37%).The nationwide lockdown forced people to remain indoors and minimise physical contact with the outside world and consequently, the number of motor insurance policies sold and renewed plunged during the same period.
Subsidy cuts lead to decline in agriculture insurance premiums
We estimate that the agriculture insurance segment, the third largest line of non-life business in India, will continue to contract in 2022, although at a slower pace than in prior years.
Agriculture premiums declined by 9% and 13% in real terms in 2020 and 2021, respectively, after the central government cut the premium subsidy in crop insurance schemes from 50% to 30% for non-irrigated crops, and to 25% for irrigated crops.
We expect premium growth to pick-up gradually from 2023 as the impact of regulatory changes is absorbed. The government also made enrollment of farmers in the Pradhan Mantri Fasal Bima Yojana (PMFBY) and Restructured Weather Based Crop Insurance Scheme (RWBCIS) voluntary from 2020.16 These factors led to a decline in farmer enrolment in the plans.
Agriculture insurance premiums grew very rapidly after the inception of the governmentsubsidised Pradhan Mantri Fasal Bima Yojana (PMFBY) programme in 2016. Premiums rose be 245% in that year and remained strong until 2019.
Agriculture business has remained under-priced and unprofitable for most insurers due to the nature and intent of the scheme. The loss ratio fluctuated between 93% and 120% from 2017 to 2021, averaging an annual 106%.
Industry profitability outlook
We expect life insurance profitability in India to benefit from rising interest rates. Pandemic-related claims continued to impact life insurers’ earnings in the first half of 2022, but we remain cautiously optimistic for continued normalisation.
Since life insurance claims are driven by mortality experience and benefits are defined at the inception of the policy, inflation has a limited impact on life insurers.
We anticipate that non-life insurers will continue to face near-term headwinds in the profitability of their core underwriting portfolios due to geopolitical tensions, high inflation and intense competition.
India’s insurers have historically benefitted from favourable investment income, but the pandemic and geopolitical tensions may pressure returns on investments. At the same time, the impact of high inflation will show in rising claims. In construction, supply disruptions and labour shortages have led to an increase in repair and rebuilding costs, and in turn higher claims. In motor, claims costs have risen as shortages of parts have kept the price of new and used vehicles historically high.
Accident, motor liability and general liability business will also likely be impacted, with high inflation feeding through into bodily injury claims.