Why 2018 will be a year of consolidation for life insurers

In 2018, the private life insurance industry in India turns 18. The journey to adulthood has been eventful: from the initial high of the go-go years, the correction following the 2008 crisis, and the slow, upward curve in the past few years.

Looking back The year gone by was a remarkable one for the industry in many ways. It delivered growth at a very healthy rate, and the industry scored high on qualitative parameters such as persistency and claims ratio. The positive macro-economic sentiments, financialisation of savings, and the focus on the ‘protection’ business contributed to the strong performance of the sector.

By close of 2017, three private life insurers were publicly listed. This meant significantly higher levels of public disclosure, better appreciation of life insurance business models by analysts, and greater focus on governance in the industry.

The higher levels of technology adoption and the increasing degree of collaboration of insurers with fintechs and other digital providers have created opportunities to run the business differently. The regulator has been encouraging the industry with guidelines on products, technology usage, and in the area of customer service. These factors should spur growth in the medium term. In sum, we had a good year.

Looking ahead Where do we go from here? Let us look at three factors that are critical for the long-term sustenance of the industry: customer perception and awareness of life insurance; macro-economic factors; and the possibility of disruptions.

Life insurance penetration and awareness about the need for protection is woeful in India. The New Business Margins of the life insurance sector in India is among the lowest in the world. Also, there is a huge protection gap.

This has created a challenge for companies as they seek to expand their footprint in a manner that is financially viable. These are real industry problems that we need to solve.

How should we use new technology and create partner ecosystems so as to access uninsured customers, and do so profitably? How can we ensure that customers have a deeper understanding of their protection needs across life and health insurance, and how do we make it convenient for them to bridge it?

I believe the increasing digitisation of financial services and the deeper digital footprint (left behind by customers) across multiple ecosystems will provide us answers to these questions. It won’t be easy, but the smarter insurers among us will get there.

On the macroeconomic front, the broader economy is expected to pick up momentum. The industry has taken the adoption of the goods and services tax (GST) and the impact of demonetisation in its stride, and the growth story should remain intact. The trend of increasing financialisation of savings will contribute to the growth of life insurance. I also remain hopeful that Budget 2018 will bring cheer to the salaried, working class in terms of tax breaks, which should be positive for the industry. Also, the innovation on the products front, which the industry has been actively demonstrating, will make life insurance more attractive for customers.

The world over, financial services are experiencing a moment of disruption. Multiple smaller players are working on specific problems in the life insurance value chain — from customer on-boarding and financial planning to customer servicing. These are driving the incumbents to change their conventional way of thinking. These challengers have seen benefit in collaborating with the incumbents rather than trying to upend the business.

This trend will continue in the coming year. The traditional players will use data science, deep learning tools, automation, mobility and cloud computing to make their processes frictionless, reduce costs and improve their agility. The time is ripe for the larger players to see digital as a fundamentally new way of doing their business in its entirety.

Consolidation is inevitable In India, we have 24 players in a sharply competitive and capital-intensive industry. It is difficult to see how this industry structure will continue to sustain itself. We already have a strongly polarised industry, where the top 5 players account for over 75 per cent of the market share, and the next set of players find it difficult to sustain themselves and search for sources of differentiation.

Consolidation is inevitable in a scenario like this and it will help the industry and the customers alike. It won’t be easy because of the ownership structures in the industry, but something’s got to give.

I believe the year will be good for the industry overall if we stick to the basics. Simplifying products and the customer on-boarding process, focussing on protection products and staying customer-centric: these are factors in our control. If we do well on these fronts, we should remain fairly optimistic that the factors that are not in our control — like macro economic and regulatory trends — will play out to our advantage. We should stay the course and do the right things for our customers. This is not the time for a self-goal.

The author is Managing Director and CEO, HDFC Life

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