The insurance landscape in India is in the process of change. Closed to foreign competition since nationalisation in 1956, the Indian insurance industry was run by the government for over 40 years through the Life Insurance Corporation of India (LIC) that spanned the length and breadth of the country. While LIC had done a commendable job in growing the industry, the task of making an essential financial product such as life insurance available to the masses left scope for several more companies to participate in the arena.

Consider some facts. Only 22 percent of the insurable population possesses life insurance. What's more, in a country of over one billion, life insurance premia form only 1.8 percent of GDP, indicating the extent of underinsurance. Recognising the huge potential of the market and the need to make insurance, particularly life insurance, available on a wider scale, the government opened the industry to private players in 1999 and was flooded with applications. Major international insurers - Prudential and Standard Life of the UK, Sun Life of Canada and AIG, MetLife and New York Life of the US, to name a few - tied up with leading companies in India to reach out to this vast market. 

Today, the Indian insurance industry has over a dozen private players, each of which are making strides in raising awareness levels, introducing innovative products and increasing the penetration of life insurance in the vastly underinsured country. The success of the efforts is noteworthy - private players have captured over two percent of premium income in a little over one year of operations; a figure that is growing each month.

A large part of the success of the new entrants can be attributed to the government-appointed Insurance Regulatory and Development Agency (IRDA), which developed the regulatory framework. The regulations governing the life and non-life insurers are pragmatic and forward-looking, ensuring the customer is protected and creating an environment for thriving private sector participation and a level playing field. 

The biggest beneficiary of the competition amongst life insurers has been the consumer. A wide range of products, customer-focused service and professional advice has become the mainstay of the industry, with the Indian consumer forming the pivot of each company's strategy. We've seen a dramatic increase in customer awareness, with penetration of the category cutting across socio-economic classes and attracting people who have never purchased insurance before. With the heightened awareness comes a willingness to evaluate life insurance as an integral part of the financial planning kit, a significant change from the earlier attitude, where insurance was purchased as a tax-saving tool. The benefits of the increased awareness are evident - average premiums have risen to INR 6,000 p.a. and sums assured have climbed significantly, to about INR 280,000, in less than two years since the entry of private companies.

As with privatisation in any industry, the benefits aren't restricted to the customer alone, but extend to society at large, by generating employment opportunities for thousands. Over the past two years, insurance companies - both life and non-life - have collectively hired at least 6,000 employees to staff their operations across the country. Another 90,000-odd have been appointed as life insurance advisors who counsel and recommend products to insurance buyers. And because of the specialised nature of several functions in the insurance industry, we see completely new skill sets being created; skill sets that are lasting, unique and raise the bar within the industry. 

Lastly, the expansion of the insurance sector has seen a funds inflow to the country, estimated at over US$ 100 million over the past two years, a figure that is likely to rise six-fold over the next three years. While the foreign direct investment (FDI) generated through this route may seem low when compared to the funds inflow into power, telecom and manufacturing sectors, these funds are plied into long-term infrastructure projects that indirectly upgrade the standard of living for society as a whole. 

Against this backdrop, what does the future hold for the insurance industry? Plenty, and if the past two years is any indication of the future, its going to be very exciting. For starters, the industry is growing at a steady pace - 25-30 percent a year, and rising. The challenge for each player, and the industry as a whole remains the lack of consumer awareness about the need and specific benefits of life insurance, and we're sure to see all companies reaching out in unique and innovative ways to spread this awareness amongst consumers. 

For one, there is a gradual, but perceptible, evolution in the way the category is regarded. With advisors being trained to sell insurance as a solution that meets rational and emotional needs, no longer is life insurance a poorly understood product that is pushed onto people. Nor is it a product that is only to be bought hurriedly at the time of filing taxes. It's now catching on as an important element of the overall financial basket; one that is purchased to fulfil specific needs and has clear benefits. For instance, market-linked policies are gaining ground as customisable investment-cum-protection vehicles, a huge shift from the straitjacket approach to traditional policies. Term policies delicately, but directly, address the issue of "what if something were to happen to me?" by highlighting the need for providing for one's family. The change in approach and communication levels has paid off, and for companies, the implications of this shift are important and lasting - lapsation rates are bound to fall, products will not be sold on returns alone, and seasonality in sales will drop. 

Not only has there been a shift in the perceptions of life insurance, but also in the way it is sold. From being a purely advisor-driven business, the sector has seen the emergence of a number of channels, including bancassurance, corporate agents and direct marketing. These channels, though very new, are quickly gaining importance particularly because they present customers multiple ways of approaching life insurers. 

There has also been a huge improvement in service attitude and delivery. From a system that left policyholders running from pillar-to-post to get policies serviced, service levels are steadily rising to make the customer the focus of each initiative. Technology has come to our aid, giving us a platform, the reach and the ability to service each customer seamlessly. Multiple touch points have emerged - contact centres, email, facsimile, websites, and of course snail-mail - which enable the customer to get in touch with insurance companies quickly, easily and directly. What's more, he or she is in control of the process - response time has come down to 2-days and information availability has become immediate.

On the products front, there are two trends that stand out. The days of high-guaranteed return products, which were unsustainable, are over. Products are now priced, flexibly, realistically and are sustainable. So what does this mean for the consumer? With greater awareness, they are in a better position to understand the risks and the benefits, and are accepting new products. The other major change is the introduction of liquid, transparent and flexible policies, with unit-linked products leading the brigade. While such products are more complex, there is a distinct segment of investors who find such products appealing. As the market matures, the demand for unit-linked and related products will only increase.

Different products require different fund-management philosophies. Fund managers today have the challenging task of going beyond simply investing in instruments with the longest maturity, to now having to develop a customised fund-management strategy for each category of liability, be it term, endowment, unit-linked or pension. Another factor that's changed the operating environment drastically is the volatility of the Indian markets as a result of the close integration of the Indian markets with the global markets. Credible, insightful research strengthened by sophisticated asset-liability matching becomes of prime importance. And with wafer-thin margins, the need of the day is for comprehensive risk management strategies and transparent products that are priced closer-than-ever to the market.

A company might have the best products and the widest distribution, but without clear underwriting norms and guidelines, the strengths can often be eroded. Risk management and underwriting lies at the heart of the insurance business and will continue to dictate the customer profile, the way one solicits prospects and the way they are serviced for some time to come in India. 

It's clear that the face of life insurance in India is changing. But with the changes come a host of challenges, and it's only the credible players with a long-term vision and a robust business strategy that will survive. Whatever the developments, the future of this industry will surely be exciting.


About the Author: Ms Shikha Sharma is Managing Director & CEO, ICICI Prudential Life Insurance Company.