Srirang Samant

A media report about Future Generali Life Insurance Company being reportedly acquired by Sachin Bansal, founder of India’s online retail giant Flipcart points to an ongoing and portentous consolidation of the market.

Another article had occurred in the same online news portal a few days ago about this e-commerce entrepreneur  approaching Liberty General Insurance Company,which was subsequently denied by the management in its letter to employees, but it did not issue a public denial.

Over the past year or so, five companies in the general insurance space were merged or bought over. It started with the buyout of DHFL General Insurance by founder of Flipcart, followed by buyout of Raheja QBE by PayTM, a mobile wallet pioneer. 

The other two are Bharti AXA, merging with ICICI Lombard and the reported buyout of Future Generali General Insurance by SBI General. If the unconfirmed reports about Liberty are true, three out of five are being bought out by e-commerce entrepreneurs and the remaining two are going to established financial conglomerates.

It is apparent that the Indian non-life insurance industry is going through inevitable consolidation -the only thing remarkable is that this phase has arrived so late. If one takes in to account another recent merger, that of Apollo-Munich with HDFC Ergo General Insurance, the trend becomes obvious. 

This article aims to highlight the factors behind the consolidation currently under way and the likely trajectory of this phenomena.

The starting point is the fact that quite a few of the private sector companies were ‘concierge’ Joint Ventures – that is, the Indian partner in the JV acted as an entry vehicle for the foreign partner, for a fee. 

This rent extraction opportunity was actually a fallout of thegovernment policies surrounding liberalisation of the market which capped the share of the foreign partnersat26 percent initially, thereby creating an arbitrage window for the potential Indian partners. 

Reportedly, in some cases the entire capital portion of the Indian partner was paid by the incoming foreign partner. 

During the initial opening up of the market nearly all life and non-life insurance companies barring a couple, were entirely or substantially funded by the foreign partner. Why? 

Because the ‘vast Indian middle class’ was marketed by the consultants to the overenthusiastic foreigners as the new Eldorado.

In the initial phase of liberalisation, the authorities were keen to ensure that the opening up of the sector is seen as a success. The comfort factor that the foreign partner had was that it could control the company, since in most cases it was the sole provider of the capital at risk. 

The regulator did not object strongly to this and control was therefore secured through various side agreements.This led to a mad rush of global names into India such as Allianz, AIG, AXA, Tokio Marine etc. At the end of the first decade after opening up, there were 23 life and15 non-life private sector companies, of which 21 Life and 14 non-life companies were joint ventures between foreign and Indian partners.

This number did not go up substantially over the following decade – by 2019 there were21private sector general insurers of which foreign JVs had declined to 14.

The market also grew at a rapid pace, fuelled by the country’s economic growth during the first decade of the millennium. 

However, this did not really lead to an increase in the size of the pie, going by the overall insurance premium as a percentage of the GDP. This remained nearly static at 0.6 percent in the first decade after opening up and at the end of the financial year 2019 it stood at 0.9 percent, an increase of 0.3 points in a decade.

This increase was partly due to fresh state spend on health insurance for a part of the populace, and increased spend on crop insurance. (As this article focuses mainly on the non-life space, most of the observations pertain to that segment unless stated otherwise). 

What really fuelled the hubris, especially in the non-life space, was the transfer of business from public sector insurance companies to private sector insurers. 

Conventional wisdom has it that when a closed market is opened up, the share of the new entrants eventually stabilises around 15 percent. 

In case of India, the market share of private sector companies outstripped the conventional wisdom benchmark and reached as high as 40 per cent very quickly. Private sector share now stands close to 50 percent of the market.

The drivers for the rapid growth of the private sector companies were some noteworthy market asymmetries. 

Firstly, due to the constraints that government ownership places on the public sector management, private companies werefar more customer focussed. They were able to bring in new technology and a pragmatic and flexible approach towards claim settlement. This is the visible part of the ‘success’ iceberg. 

The other part, which lies beneath the surface, is anotherwell-known but unacknowledged asymmetry. Most of the private sector companies openly flouted regulations related to pricing and intermediary commission. These companies worked around the regulatory caps on commission by paying excess commission in various guises to the agents and intermediaries. 

Public sector companies were unable to follow suit 
Secondly, during the first few years after the liberalisation, there was a mandated pricing formula – tariff – for most of the non-life products. Private companies found ways and means to undercut the tariff which also helped them greatly in acquiring market share from public sector companies. 

This became an accepted practice to the extent that the foreign partner of a private sector joint venture which wanted to stay fully compliant with the rules and regulations, was engineered out by its Indian partner.

The question arises as to how these companies could make a profit despite reckless pricing practices. Well,here lies the uniqueness of the general insurance market in India. 

Before describing this feature, it is important to note that hardly any private sector non-life insurance company ever made ‘pure’ profit in the first decade. 
In non-life insurance, the best yardstick of the performance of the business is its combined ratio. Most of the non-life companies in India have consistently had a combined ratio above hundred percent, that is, their outgoes were more than their premium income.This is where another unique feature of the market comes in. 

India has what is known as a ‘cash and carry’ system, that is, premium must be paid in full before the insurance policy comes in force. Since most of the claims don’t come in until some time has elapsed from the issuance of policy, and importantly, quite a large part of claims, such as Motor Third Party, are paid over a period of few years after the claim takes place, Insurance companies have a large cash pool which yields a fair amount of investment income. 

Therefore, ‘cash flow underwriting’ provided a level of cushion to the financial downside of high combined ratio.The combined results of the Indian non-life insurance market are telling:in 2018-19 the net underwriting loss for private sector insurers as a group was 6.10 per cent. It was far higher for public sector insurers, at 33.34 percent. 

Yet another asymmetry was the capital glut in the global economy post the 2008 financial crisis. A fair section of the USD 13 Trillion or so of ‘quantitative easing’ found its way into India via FPIs, private equity and venture capital. Insurance, both life and non-life, were the darling of investors, who wanted a piece of the ‘financial services’ pie. 

This meant that there was no shortage of capital providers for these companies. It quickly dawned on the market participants that what attracts investors most is a ‘growth business’ regardless of its near-termprofitability. 

Therefore, most of the participants in the game went hammer and tongs after growth to push up the valuation. This valuation was meant to be encashed either through new investor participation (at over-hyped valuation) or upon listing of the company. For example, a successful non-life company was priced at 46 PE ratio when it did its IPO a few years ago.

If one looks behind the growth numbers of both life and non-life sectors, it becomes clear that this was a combination of serendipitous events.In non-life sector thegrowth was primarily driven by private auto segment. 

Due to the economic impetus of the past two decades, auto industry expanded rapidly – passenger four-wheelerproduction went up from less than 100,000 a year in the early nineties to nearly a 100,000 vehicles per month a few years ago. Two-wheeler production numbers reached a million a month. Market growth was essentially led by motor premium which constituted the largest segment of non-life business until recently. This was closely followed by thegrowth of health insurance premium, which eventually overtook motor to became the largest segment of non-life market.  

According to IRDAI annual report, share of motor insurance premium was 30 percent and that of health insurance, 38 percent in the year 2018-19. In India, health insurance is basically a hospitalisation cost reimbursement product, and the steadyexodus of the populace from inadequate and shoddy government run facilities to private sector care providers fuelled this growth.

Growth in health insurance premiums was also facilitated by the government sponsored schemes for poorer sections of the populace, which gave the insurance companies another market opening to inflate the book. 

To cap it all,the government also introduced widespread crop insurance and the insurance companies jumped on the bandwagon. This provided tremendous boost to their top lines, fuelling the perception that the Indian insurance market has unlimited growth potential.

More sober international insurers were quick to note this anomaly. What also dampened their initial enthusiasm wasthat the much-awaitedhike in FDI limit from 26 to 49 per cent a few years ago came with a big rider –management control of the insurance joint venture had to be in Indian hands. This amounted to re-writing the contract between two private entities at the behest of the government.

The JVs had to comply with this condition even if the foreign partner did not want to raise its share beyond 26 per cent. Which investor would like to commit its capital without having a say in the management, particularly if the foreign partner regards itself as the domain expert?

The recent spate of consolidation is driven by all of the above factors – stagnation in all lines of business except auto and health,and the fact that crop insurance is not the most desirable of the businesses as it is best left to the specialist crop insurers.

 International insurers are also wary of the statutory restriction on management control as they would have no choice if the local partner chose to play hard ball.

The activity in M&A space seems to point to a future where the market will be divided between traditional, full service companies and pure online insurers. There are a couple of such insurance companies in the non-life space and it can be expected that the recent acquisitions by the tech entrepreneurs will accelerate this trend. 

A noticeably clear sign of this is Amazon selling auto insurance in India through Acko, an online insurance company which is backed by some of the same investors that have backed Amazon’s India SPV.

To draw upon Greek mythology, it is obvious that the initial hubris is now followed by nemesis,. The most likely survivors to emerge from this churn will be the five or six big private sector companies and one large public sector non-life insurer.

Nemesis will follow for the rest in the form of merger or takeover.One only hopes that this catharsis leads to a metamorphosis of the entire sector. 


The author has worked in senior leadership roles in the general insurance Industry, both in public and private sectors, in India and abroad. He has been privy to the transition of this industry from public to private sector in the country and was the founding CEO of a multinational insurance joint venture company in India.