India’s General Insurance penetration level is just 0.60% of its GDP against world average of 2.14%
Despite the fact that general insurance business has been growing at a healthy rate of 16% annually between 2004-05 to 2008-09, its penetration level is just 0.60% of India’s GDP against world average of 2.14%, says a Joint Research Paper on Indian Insurance Industry brought out by CRISIL and ASSOCHAM.
“India ranks 136th on penetration levels and lags behind China (106), Thailand (87), Russia (86), Brazil (85), Japan (61) and the US (9). The penetration of general insurance in India remains low on account of low consumer preference, largely untapped rural markets and constrained distribution channels”, adds the Paper.
General insurance in India is a Rs 300 billion business in terms of annual premium. General insurance business in India grew by a healthy 16 per cent annually during the past 5 years. The growth was led by motor insurance and health insurance which grew by 16 per cent and 37 per cent, respectively, on an annual basis. Growth has been driven both by the increase in the value of underlying assets with rising GDP and personal incomes, as well as, by the increasing penetration across categories.
“one of the biggest constraints facing the general insurance business is the lack of reach beyond the cities. While life insurance players are struggling with the quality of insurance advisors, general insurance players face difficulty in getting intermediaries to distribute their products. The average ticket size and the commission rates are extremely low (compared to life insurance).
While the average ticket size of a life insurance product is around Rs 20,000, the average ticket size for a general insurance policy is lower at around Rs 5,000. Further, with commission rates for general insurance being at around 10-15 per cent, compared to life insurance which is around 35-40 per cent (in the first year), intermediaries do not prefer to distribute general insurance products”.
According to the Paper, over the past 5 years, the motor insurance segment has grown around 16 per cent annually during 2004-05 and 2008-09. This has been largely driven by growth in vehicle sales (annual growth of 12 per cent) as well as by the sharp increase in third party premium rates since 2007.
There are two types of auto policies - third party (TP) and own damage (OD). Under the third party insurance policy, the insurance company agrees to cover the insured person, if he is sued or held legally liable for injuries or damage done to a third party. The ‘own-damage’ policy covers physical damage to the vehicles in case of an accident. The product offerings can therefore be categorised as either third party policies or comprehensive policies (which include both TP and OD). The third party policy is mandated by law, whereas comprehensive policy is optional.
In India most of the motor insurance policies belong to the third party category. However customers are increasingly taking comprehensive policies, due to growing awareness and increasing sales of relatively expensive vehicles. The increasing sales of comprehensive policies have also contributed to the value growth of motor insurance premiums apart from the increase in third party premium rates and the growth in automobile sales.
With India having a high number of road accidents (annually around 0.13 million), its claims ratio has been a cause of concern. The lack of road discipline and poor road conditions have been the main causes for the high incidence of accidents. In 2007-08 the overall claims ratio for motor vehicles was 92.3 per cent, being especially high for the third-party segment. (For private cars, the OD-incurred claims ratio was 65.4 per cent, while the TP-incurred claims ratio was 183.0 per cent in 2005-06.) This is also the reason why the private insurance companies prefer to provide comprehensive policies instead of standalone third-party policies.
Health insurance is the second-largest contributor to the general insurance space after motor insurance and has also been the fastest-growing segment. Health insurance as indicated by its premium, is a Rs 61 billion business annually and has grown at a 5-year CAGR of 37 per cent. Improving per capita income, rising healthcare costs, and increasing group cover by the employers has propelled its growth.
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