Indian insurers have numbers to crunch for maximum profit

Indian woman Amina Shah, a microfinance beneficiary, stitches a shirt as she waits for customers at her shop in a slum in Mumbai, India, Monday, March 7, 2011.Long heralded as a way to lift the downtrShow more

Nippon Life has acquired a 26 per cent stake in Reliance Life for 30.62 billion rupees (Dh2.49bn), the largest foreign direct investment into India's financial services industry.

The acquisition last week valued Reliance Life at about US$2.6bn (Dh9.55bn), which analysts say is "surprisingly high" and caused shares of Reliance Capital to rise 10 per cent.

The deal comes as the Indian finance ministry is considering an amendment to the insurance act, which would raise the limit for foreign direct investment to 49 from 26 per cent.

Reliance Life, which has been making noises about a listing, will probably wait for the government amendment to be approved by parliament before considering an IPO.

For Nippon Life, this inorganic growth arrangement will help it to penetrate a huge, under-served market. The Indian insurance industry is valued at $40bn, with annual growth of about 33 per cent. The state-owned Life Insurance Corporation (LIC) is the largest player, with 270 million policyholders, or a quarter of the country.

The other three quarters of the population include large sections of India - particularly the poor - that remain uninsured.

India has a high savings rate but the poor exist from month to month without putting money away. As Sendhil Mullainathan, the founder of the Poverty Action Lab, points out in a paper titled "Savings Policy and Decision Making in Low-Income Households", lack of financial slack plays an important role in poor households.

While the rich can cut back on consumption in one area to cushion against sudden financial needs in another, the poor don't have this luxury. They don't have any sort of insurance against medical emergencies, for instance.

The woman who works in my house, Geeta, saves only through one means: a chit fund. This is a uniquely Indian savings practice in which a group of women get together and put away money (usually about $10 or $20) every month. This money is given to a manager who saves it for a set period of between 12 and 24 months.

"Whenever I have an emergency I can break the chit and take out some money," says Geeta. "If I don't touch it, I will get a lump sum at the end."

Kerala state has about 5,000 chit funds, with each functioning a little differently. Some have auctions to figure out how the cash is disbursed, while others use a rotation system with each woman able to take out money according to needs and circumstances.

Maids and cleaning ladies depend on these chit funds to protect their earnings from their husbands who they say fritter away their hard-earned money on alcohol or impulse buys.

But chit funds are at the bottom of the insurance pyramid. Most middle-class Indians depend on Unit Linked Insurance Plans (Ulips), in which the money collected as premiums is invested in equities, offering protection and investment.

About 50 per cent of the life insurance industry uses Ulips. Last year, after a long battle between the Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Authority of India (Irda), the government ruled Ulips would be overseen by Irda to protect consumers against heavy fee structures.

Private distributors of insurance products felt the pinch because suddenly they had to charge a separate fee to their customers instead of being paid by the insurance company.

It has taken a year but slowly the industry has bounced back, veterans say, and it is becoming accustomed to the new rules and government supervision.

Next month, the US billionaire investor Warren Buffett will visit India to launch his company Berkshire Hathaway's partnership with Bajaj Allianz General Insurance. Berkshire India will sell general insurance products through its online insurance portal.

The average annual premium paid by Indians is $45, compared with $1,600 in the US and $3,000 in Japan.

The rationale in the insurance industry is that as the Indian economy grows, there is vast scope for further penetration and to increase the size of the premium by offering a variety of products, including health insurance schemes.

Despite an aggressive push by state governments for low-cost health insurance schemes, only about 20 per cent of Indians have some sort of medical insurance.

Large insurance providers are also trying new approaches. This month, IndiaFirst Life Insurance launched "LifeStore", a do-it-yourself online insurance portal to tap into India's 70 million internet users.

Life is cheap in India, my maid says. The trick for insurance providers is not only to figure out exactly how cheap it is in terms of premiums, but also to raise the cost of a life and collect all of the lives that are not under the insurance umbrella.

Shoba Narayan is a journalist and author based in Bangalore