BFSI - An Overview of the Insurance Industry
Insurance Industry in India formulates yet another pillar of the BFSI sector. By simple definition, to ensure something means to safeguard or preserve value by assuring a repayment on the incurred damages. There are two parts to the equation. The insurer i.e. the authority that guarantees to pay back the damages caused by a particular mishap, and the beneficiary (or simply the customer) who enrolls into a scheme. This principle could be applied to insure almost anything. Businesses can protect their assets (such as property, machinery, etc.) against theft, natural disasters, etc. Individuals can get themselves insured. In India, the Insurance Industry Sectors are divided into categories based on the type of service they render. The following diagram illustrates the service arms of this sector in India.
Before the turn of the century, the Indian Insurance industry was an intermesh of restrictions and regulatory red flags. Yet, akin to other vibrant developing economies of the world, the erstwhile government of the time showed openness for reforms. So while good oversight remains, there are far more competitive players in the industry than there used to be. In the year 2000, India opened its doors to private players and Foreign Direct Investment (FDI). The participation of the latter was capped at 49% in 2014. It would be useful for first-time readers to have a definitive overview of the arms of the insurance sector.
What is Life Insurance?
A Life Insurance policy is a contract-drawn arrangement between the insurer and a beneficiary. The working law behind such an arrangement is that the insurer promises to pay the beneficiary a specified sum of money factoring in the:
- The date of maturity/completion of the policy.
- Any other pre-determined date at periodic intervals, if part of the agreement.
- The untimely death of the beneficiary, in which case the payment is made towards the nominees of the policyholder by the insurer.
Policyholders make payments towards the insurer periodically, which are called premiums. This could either be monthly, yearly, or a lump sum/one-time payment. Given the uncertainty of life, life insurance is looked upon as a safe bet for two unavoidable stages. The first involves retiring with ample savings at hand to provide for oneself in the absence of a regular income. The other is the untimely demise of the beneficiary which often leaves a vacuum of finances in its stead for the dependent kin of the family. Especially, in this second case, life insurance emerges as a way to ensure financial support in desperate times.
India’s Life Insurance sector has approximately 360 million policyholders. In recent times the Indian life insurance market was valued at INR 4,185 Billion. Thanks to the uplifting rural conditions in the country, life insurance is projected to experience a compound annual growth rate (CAGR) of about 11.6% up until 2023. India ranks among the top 10 countries (out of 88) in regards to the global life insurance sector. Life insurance is expected to account for 35% of India’s savings by 2020.
Life Insurance Corporation of India is the only player in the public sector. The private sector has 23 players.
What is General Insurance?
The term ‘General’ offers many variants offering safeguards against wide-ranging issues. It can be used to ensure the property against natural disasters such as floods, storms, earthquakes, landslides, etc. Additionally, it also covers man-made disasters like riots, burglary, terrorism, etc. and extends the same towards personal insurance that in turn covers, health, travel and accidents, and liability insurance. Some examples of General Insurances in India are:
1. Health Insurance
Health insurance plans allow the policyholder to be treated for ailments (that are included in the policy) without paying any cash. Customers could opt for individual health insurance plans, family health insurance plans (also called family floater health insurance), critical illness insurance, group health insurance, hospital daily cash benefits, and senior citizen health insurance plans. The insurer could cover such charges as hospitalization, operational supplies, etc. Beneficiaries could also avail reimbursements for such expenses through the policy after making the payment from their side first. Presently, such insurance is referred to as a Mediclaim.
2. Motor Insurance
Motor Insurance is designed to cover on-road and off-road damages to a vehicle. A user-centric motor insurance policy often includes damages incurred from both natural and man-made disasters. The Indian law mandates every vehicle owner to insure their vehicle. To facilitate enrolees major insurance vendors offer motor insurance online.
3. Travel Insurance
A travel insurance cover is targeted towards travelers who’d like to secure their belongings against unexpected losses whether traveling internationally or domestically. Whereas cheaper policies would include only the incurred medical expenses, detailed policies offer additives such as trip cancellation, lost luggage, and even liability insurance. People are prompted to buy travel insurance usually when they book tickets online.
4. Marine Insurance
The marine insurance industry covers the cargo that is shipped either domestically or internationally. Shipping is fraught with the risk of damages which could be due to labor negligence, or other logistical issues. The marine insurance policy is meant for both importers and exporters of goods.
5. Home Insurance
It is also referred to as homeowner’s insurance. A home insurance policy generally covers private property. The home insurance coverage could include damages to property, appliances, furniture, or any other contents stored at home due to man-made or natural disasters.
In FY19, the general insurance sector of India was valued at $24.3 billion. Analysts expect this sector to continue to grow following the adoption of technology, increased outreach of education, and positive geopolitical changes for the economy.
What is Re-Insurance?
Re-Insurance is a general practice followed by institutional insurers to protect the business against unexpected activation volume of claims. The insurer purchases insurance from a second insurance company, to safeguard or hedge its finances if too many policyholders apply for claims at the same time. This could happen in the case of a natural disaster. When one insurer purchases such a scheme, they pass on the responsibility of settling a claim to their insurer.
Financial entities opting for reinsurance are referred to as ceding companies and the insurer offering the same is called the reinsurer. The reinsurance sector is entirely public with the General Insurance Corporation of India acting as the re-insurer. Informally referred to as the General Insurance Company, it was the sole reinsurer in the country till late 2016 when the market was opened to foreign reinsurance players such as those from France, Germany, and Switzerland. India’s reinsurance sector is expected to grow at a CAGR of 11-14% till 2022 and could be valued by then at US$ 11 Billion.
What is IRDAI?
The Insurance Regulatory Development Authority of India was set up in 1999 with the primary functions of acting as a statutory body for insurance companies in India. Along with regulating legal practices for such businesses, it also sees the promotion and awareness of such schemes to the general public.