Insurance: On the threshold of growth

The insurance industry saw some long-awaited beginnings towards consolidation during the current fiscal. With 24 life insurance companies and 24 general insurance companies, apart from five stand-alone health insurers in the fray, the marketplace does look a bit crowded.

Ever since the industry opened up at the turn of this century, new players have come in droves at intervals of every few years. The prospect of selling insurance products to a billion Indians seemed an alluring prospect to many companies who had begun to reach saturation in their developed markets. A number of joint ventures were formed and every top player in the world has a presence in the country now.

The standard line of those coming in has been that there is room for everyone and they are here to serve an ‘under-serviced’ market. The reality, however, was a fragmentation of capacity and intense competition among these players – with its negative side-effects of undercutting of rates and uneconomical business volumes in a number of industry segments.

While break-even was generally mentioned as about five years from inception, the period began to increase gradually as they were buffeted by a number of challenges and risks – regulatory and otherwise. A few companies have broken even during the past three years and the first listing on the bourses has also happened.

Yet, it must be said that the domestic growth environment did not fructify to the expected extent. Regulatory changes in rapid succession unsettled a number of players, notwithstanding the fact that the changes were broadly customer friendly and in their interests.

But with existing business models proving inadequate, promoters have become restive – particularly foreign partners who came to the country with rose-tinted glasses.

Insurance industry is a capital-intensive industry and definitely not for those with shallow pockets. And now, as the global growth has remained lukewarm in the aftermath of the 2008 crisis, it has made it more difficult for many foreign partners to continue pumping in money without being able to explain why they are not seeing the projected returns.

Mergers and acquisitions (M&A) activity tend to happen in such environments. Players seek to gain scale and remove weaker competitors who lack the financial muscle or take them over in their search for new markets and for gaining synergy and efficiency.

Two companies, L&T General Insurance, which merged into HDFC Ergo General Insurance, and Max Life, which merged into HDFC Life, have begun the process this fiscal. This is a trend that should pick up – although the numbers of mergers between various players will depend on how soon promoters make up their mind on what their core interests are and whether they are willing to grab the price available.

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