Optimum Number of Life Insurers in India?

It is nearly seven years since the Indian insurance market was opened up. In life insurance, we have seen unprecedented growth which is continuing. By the end of the financial year 2007-08 we are likely to see more than twenty life insurance companies in India. A frequently asked question is: what is the optimum number of insurance companies that is ideal for India’s needs? Considering that life insurance penetration is 3% of GDP and that one is aiming at say 7% or 8% of GDP, that vast sections of people are still not covered by life insurance and large geographical areas are untouched by insurance, we can say that we have a long way to go and that there is room for more insurance companies. The annual ‘new business’ growth has been around 100% for the last three years and it looks likely that such a growth will continue for some time. That such an incredible growth, to a great extent, has been due to ULIP products is another matter. A significant part of ‘current issues’ are consequent to such high growth.   With current and projected growth of the Indian economy at 9% for the foreseeable future, domestic savings rate can be expected to grow from, or at least be stable at 23-24%.  It follows that unless the sector makes major strategic errors, growth of life insurance business will remain high.

Predicting a company’s future over long term is difficult enough; attempting that for a sector in a market is much more risky. Yet when one discusses ‘current issues in life assurance (CILA)’ one must devote thought to market-related strategic issues and directions and to mid-term and long-term solutions. In a recent special issue of Harvard Business Review on ‘long term planning’ its editor concludes his observations saying: ‘…the art of managing for the long term is the art of making the whole greater than the sum of its parts’.  I believe this is apt for our life insurance market. It is necessary to create a market that fits the HBR editor’s comment and one needs to keep this in mind when analyzing current issues and identifying solutions. It is also said that ‘building the future is really about building the present……..and a …. leader must be careful to stay close to the front line-the people who deal with customers and markets’ (Maurice Levy-HBR). In this context let us look at the industry issues in ‘building the present’ and what steps are needed to resolve them and take the industry forward in a wholesome, healthy and customer-oriented manner.

It is essential that the life insurance market functions with ‘optimum efficiency’ and ensures that resources are allocated efficiently, ‘ensuring customer choice and value’ (Skipper).  An efficient market will have innovative and constantly improving products, predictable and affordable prices and transparent practices.  But no market is perfect and our life insurance sector has more than its share of imperfections. In a perfect market a regulator is perhaps not needed. Information asymmetry between the three viz. insurer-intermediary-customer is a major imperfection that manifests itself in several of our operational issues and regulatory interventions.  Dr. Harold Skipper notes: “…within a competitive insurance market government / regulatory interventions are desirable only if three conditions exist:

a.       Actual or potential market imperfections exist

b.      The market imperfections could and do lead to economic inefficiency or inequity

c.       Government (regulatory) action can ameliorate the inefficiency / inequity.”