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Can private insurers overtake state-owned monopolists?
Freny Patel | May 15, 2003 13:42 IST
On February 28, finance minister Jaswant Singh announced a special pension scheme -- Varishta Pension Bima Yojana -- targeted at retired people who were dependent on fixed income savings.
By May 12, newspapers reported that SBI Life Insurance Company would be the first to launch a similar product -- christened Pension Tatkal -- having already obtained clearance from the Insurance Regulatory and Development Authority.
Clearly, the speed at which files move in government offices and public sector enterprises -- Varishta was to be marketed through the Life Insurance Corporation of India -- has not improved. This didn't matter when LIC was the sole player. But now SBI Life has acquired a first-mover advantage that could well give it supremacy in this new segment of the market.
Does this suggest that the private sector is headed for dominance in the insurance business? The pace at which they've grown certainly suggests so. When the sector was opened up, LIC was expected to lose just about 10 per cent market share over a period of five years.
As it turns out, based on numbers released last week by the insurance regulator, within two years private insurance players have managed to capture over eight per cent of the new life business and 9.4 per cent of the non-life market.
Any optimism, however, would be premature. This performance can only be considered the first lap in a marathon race. The question is whether by 2006-07, private insurers will emulate their counterparts in mutual funds and banking. In the first, the private sector commands over 60 per cent of the funds under management.
In banking, the achievements are more modest. The nine new-generation private sector banks have been able to garner about 20 per cent of the assets (loans) and a little under 20 per cent of the deposits in their nine years of existence.
Analysts point out that the private banks' performance is partially because there were few heavyweights involved. In the insurance sector, on the other hand, the who's who in the global insurance arena have set up shop -- AIG, Allianz, AMP, Aviva, Cardif, Chubb, ING, Lombard, Metlife, New York Life, Old Mutual, Prudential, Royal Sun Alliance, Standard Life, Sun Life and Tokio Marine. No other country has the world's top companies battling in the same market within a short period of time.
And the 26 per cent cap on foreign investment has not been a deterrent.
"Foreign players are here for the long haul, and have demonstrated their long-term commitment by enhancing the investment in their joint ventures," says SBI Life chief executive R Krishnamurthy.
In less than two years, they have invested more than Rs 400 crore (Rs 4 billion) in India. This comes at a time when the global insurance industry is reeling under financial pressures.
Private sector players have seen 200 per cent growth in the second year of liberalisation. This has doubled their overall share from three or four per cent in year one to just under 10 per cent in a growing market.
This is largely attributed to the expertise brought in from abroad, in terms of information technology and better products.
Yet product innovation does not hold the key as products can be easily replicated within weeks. "The ones who succeed are the ones who pace themselves right. The spring and desire to be customer-centric and innovative should not wane," says ICICI Lombard General Insurance Company managing director and chief executive Sandeep Bakshi.
Competition between state insurance players and the new kids on the insurance block has seen the start of consumer-friendly moves. On the life side, consumer benefits are being redefined and customised to suit individual needs.
Private players have brought about change in terms of offering flexibility in packaging of products -- adding riders on to basic products so that the consumer is not forced to buy something he does not need.
"This takes us away from the era when players have to come out with some 50 or 60 products. That only ends up causing confusion in the minds of consumers and sales agents alike," says HDFC Standard Life general manager distribution Paresh Parasnis.
In non-life insurance, corporations are often calling the shots. This is more apparent in the non-tariff (or non-price controlled) business lines where the name of the game is to capture numbers, even if business is non-remunerative or economically unviable.
"There is huge discounting taking place and non-tariff premiums have reached a stage where they have become non-remunerative," points out Bakshi. In the marine insurance business, for instance, premiums have been static since 1994 even as the total value of policies has increased with the entry of private players.
India Inc is taking advantage of this competitive drive. Despite stern warnings issued by the IRDA to all general insurance companies against premature renewal of policies, many corporate houses went ahead and brought forward their risk covers. This was done to by-pass the hike in the service tax from five to eight per cent.
Corporations could not have done this without the help of their insurers -- both private and public. With little retail sales, corporate business contributes a large share of the premium for all general insurance companies.
With price-cut strategies like these, it is going to be long haul as players with the deepest pockets will hold out the longest. But there is another dimension to this. Having set standards in service quality and product innovation, the private players are hoping to quickly get out of the price competition.
"This has been the standard practice in the banking sector, where newly established banks are known to offer hefty discounts for services in order to build market share. Simultaneously, they build other platforms, which they can then leverage when it becomes obvious that the basic price strategy cannot be milked any further," points out an ex-banker turned insurer.
So do the respective players in the public and private domains feel they are operating in a level-playing environment? Bajaj Allianz General Insurance Company chief executive Sam Ghosh thinks so, saying: "Every company is free to practice what they think is right. The IRDA is doing its best to ensure a level-playing field."
LIC chairman S B Mathur thinks otherwise. He feels that with the state players having to report to a host of authorities -- the comptroller and auditor general, the Parliament, the finance ministry -- and not just the IRDA, there is no level-playing field.
Moreover, private insurers do not need to meet scheduled caste and scheduled tribe targets or set up a separate Hindi cell to promote the national language. Their operations are not an open secret. "Whatever we do becomes public knowledge," he says.
State insurers are also struggling when it comes to closing deals. "In the major cities, we now need to struggle to complete a sale because policy-holders are comparing products and asking for a better deal," says Mathur.
So where does the private sector see itself in the next 10 years?
Aviva's chief executive Stuart Purdy sees new players cornering over half the market. Analysts are not as optimistic. They picture the insurance sector moving more or less on the lines of the banking industry, where state player LIC will lose less than 50 per cent share over a span of 15 years or more.
Krishnamurthy points out that unlike public sector banks that took time to raise operating efficiencies on account of size and investment in information technology, "LIC has geared up its technology networking and focused on customer orientation in a short period."
Bakshi sees the distinction between private and public sector players blurring as each of the 12 companies in the non-life industry establish their own brand identity.
Overall, there is little room for complacence. Some time ago, IRDA chairman N Rangachary compared the new kids on the block to "children learning to walk and competing with adults who are already well adapted to the market place". In a market that is deep and growing, this could be both a challenge and an opportunity.