India's insurance industry is at a crossroads. While the demand for insurance products is projected to grow due to the growth of both household savings and working population, the growth rate of the industry in the last two years has actually declined. Adequate capital to scale up operations is a major constraint for smaller and new companies. The industry is a highly capital-intensive one and requires capital infusion at regular intervals. Even fixed costs are high in India because of the vast geographical spread and smaller players with limited access to capital often do not have adequate funds to scale up their operations.
An E&Y report says that private insurance companies have a high expense ratio as compared with public sector insurance companies. The expense ratio, which includes operating expense and commission expense, is around 30.6% for private sector life insurance companies and around 30.1% for non-life private insurers. For long-term sustainability and profitability, this ratio should not be more than 10-15% as per the norms in developed countries. As India's insurance industry is at a nascent stage, many companies are yet to break even and rising expenses can further delay the process.
An FDI increase from the current 26% to the proposed 49% could help smaller players access capital, technology and actuarial know-how and product development. This will help insurers reduce operating expenses and secure a strong foothold in a rapidly growing insurance market. Going ahead, insurance companies will have to compete on a number of parameters like price, product underwriting and innovative sales strategies, and customise products to suit individual needs.
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