Indian insurers’ growth to rebound backed by health, protection business, says Moody’s analyst

The Moody’s report said that India's low rate of insurance penetration (premiums as a percentage of GDP) indicates that there is ample scope for continued premium growth. The overall insurance penetration rate stood at 3.8 percent in 2018, low compared with developed markets such as the UK (10.3 percent) and the US (11.4 percent), and also below large developing markets such as China (4.3 percent).

Economic performance hit affects insurers

Moody’s said that India's economic performance is increasingly weak. The report expects real GDP to contract by 10.6 percent in the fiscal year starting April 2020, compared with our previous forecast of a 4 percent contraction.

Londe explained that the economic slump had an adverse impact on the Indian insurance industry’s premiums.

In the April to December 2020 period, premium growth slowed to 2.5 percent in general insurance, while life insurance new business premiums fell by 1.7 percent. This compares with growth of 11.7 percent and 20.6 percent for general and life insurance premiums respectively in the previous fiscal.

However, he added that the sustained strong demand for health insurance has slowed the decline. Health premiums rose 13.7 percent in the April to December 2020 period. This was in line with the 13.4 percent growth in the previous fiscal.

The Moody’s report said that persistently strong sales of health insurance reflect rising consumer awareness of the product as a result of the coronavirus pandemic, combined with insurers' efforts to develop their digital sales channels.

Moneycontrol had reported how health insurance overtook motor insurance as the largest business segment among non-life insurers.

Solvency pressures may aid M&A, capital infusion

Some Indian insurers’ solvency remains inadequate due to weak profitability, resulting from the intense competition in the market as per the Moody’s report.

Londe explained that the general insurance sector's profitability has been under particular pressure, with a combined ratio of 117.6 percent.

While positive investment results have previously helped compensate for a weak underwriting performance, falling yields have reduced this source of support, he explained.

The government also took steps to ensure that state-run insurers are giving a helping hand to boost their profitability.

On July 8, the Union Cabinet chaired by Prime Minister Narendra Modi called off a 2018 Budget proposal to merge three state-owned general insurers, National Insurance, Oriental Insurance and United India Insurance.

Instead, the government approved a capital infusion for an overall value of Rs 12,450 crore (including Rs. 2,500 crore infused in FY20) in the three insurers.

“We see the capital injection as credit positive as it will allow the insurers to enhance their risk-based pricing and underwriting discipline, helping them generate organic capital growth and attract foreign reinsurance coverage. Given the capital increase is happening for state-run insurers, their focus on underwriting discipline and risk-based pricing will trickle down and benefit the wider market,” he added.

In the private sector, he explained that profitability and solvency concerns are driving M&A.

"Capital raising must be accompanied by an increased focus on writing profitable business to put these companies on a sound financial footing in the long term," he said.

The risk-based capital regime that could be introduced in India in the next two years may also lead to some shake-up in the industry. Risk-based capital refers to holding according to the business written by individual insurers and their allied risks.

"The shift to a risk-based capital regime usually brings some shock to the industry in the short term but market will benefit in the longer term. Here, smaller insurance players may face pressure and may look at merger or consolidation in some way," he added.