The Indian life insurance sector has underperformed compared to its Asian peers, said a report by McKinsey & Company.
The report ‘The Life Journey India’ said that none of the private insurers in India are creating value as per the market potential.
The report said that this is because they are all serving a miniscule segment of consumers, mainly to meet narrowinvestment needs.
However, it added that even within this confined space, they demonstrate a significant spread in performance, which is driven largely by distributionstrategy.
“While most carriers offer affluent consumers a similar product mix, including a high share of investment-focused unit-linked insurance plans (Ulips), a few have outperformed the industry by investing in their distribution channels,” it said.
It added that the leaders tend to focus on bancassurance, for example, and leverage strategic and exclusive partnerships with banks to leverage their scale, footprint, and brand to grow market share and profit margins.
The report pointed that unlike other markets, however, growth in India’s life insurance industry is correlated more closely to equity market performance than rising gross domestic product.
It said that for more than a decade, the private industry has delivered overall returns far below the cost of capital and even below the returns in other Asian markets.
While there were some positive returns between 2011 and 2014, it said that even the bright spots are mostly illusory.
“Between 2011 and 2014, for example, private life insurers in aggregate generated positive returns, but our analysis shows that this rebound was driven primarily by surrenders and lapses on Ulips as equity markets weakened,” it said.
The report also said that insurers, rather than trying to build the skills of agents to sell higher margin protection products as affluency rises, continue to chase top-line investment-focused growth in the hopes of building scale and growing their way out of the profitability challenge.
According to the report, in what may be the world’s most promising insurance market, they see the largest untapped potential in two areas: growing penetration in a few specific geographies and unleashing latent demand for protection products.
With respect to products, it said that as affluence rises, demand for protection, pensions, annuities and long-term care products will provide significant opportunities for growth.
For value growth, McKinsey in this report has suggested that they should expand capabilities in agency and lower costs, reinvent relationships with customers and distributors by using digital tools and analytics.
It also said that they should also build risk and capital management skills and leverage the in-force book and existing customer relationships.