Understanding Insurance Penetration


Two of the most important and mostly used terminologies in insurance industry throughout the globe are insurance penetration and insurance density. In fact, these two are also used to compare the insurance industry of various countries and plays an important parameter for judging the insurance growth in any economy. In this post, I will discuss about Insurance penetration and will try to a make readers understand about the same and will be discussing Insurance density in a separate post.

Insurance Penetration: Technically, Insurance Penetration is the ration of premium underwritten in a particular year to the Gross Domestic Product (GDP) of the country and is expressed as a percentage. In other words, insurance penetration is the percentage contribution of the insurance sector to the GDP of the country. Let us understand with an example. Suppose the total premium underwritten in a Financial Year in a country is INR 1,00,00,000 and the GDP of the country of that Financial Year is INR 50,00,00,000. To calculate the insurance penetration, divide the premium underwritten to the GDP which means, (1,00,00,000/50,00,00,000 = 0.02) and expressing this as a percentage will come up to 2% (0.02*100 = 2). This means, the insurance penetration is 2%. Insurance Penetration is widely used and you will encounter this jargon in almost every insurance journals, reports, research papers etc.

As per the latest Insurance Regulatory and Development Authority of India (IRDAI) Annual Report 2017-18, the insurance penetration of India in 2017 was 3.69% which is a slight increase from 3.49% in 2016. Further, the insurance penetration can be segregated in to life insurance and non-life insurance. As per IRDAI Annual Report, the life insurance penetration and non-life insurance penetration of India in 2017-18 were 2.76% and 0.93% respectively.  For 2016-17, life insurance penetration and non-life insurance penetration were 2.72% and 0.72% respectively. This indicates a marginal increase in life insurance and non-life insurance penetration from 2016-17 to 2017-18. Let’s look at the insurance penetration of some of the countries which is given in the following table:

Insurance Penetration of selected countries (in %)
Country Year 2016 Year 2017
Life Non-Life Total Life Non-Life Total
Taiwan 16.65 3.34 19.99 17.89 3.42 21.32
Hong Kong 16.2 1.41 17.6 14.58 3.36 17.94
South Africa 11.52 2.74 14.27 11.02 2.74 13.75
South Korea 7.37 4.72 12.08 6.56 5 11.57
United Kingdom (UK) 7.58 2.58 10.16 7.22 2.36 9.58
France 6.06 3.17 9.23 5.77 3.18 8.95
Japan 7.15 2.37 9.51 6.26 2.34 8.59
Switzerland 4.72 4.12 8.85 4.41 4.12 8.53
Singapore 5.48 1.67 7.15 6.64 1.58 8.23
India 2.72 0.77 3.49 2.76 0.93 3.69
World 3.47 2.81 6.28 3.33 2.8 6.13
Source: Swiss Re, Sigma volumes, 3/2017and 3/2018

A closure look at the insurance penetration reveals that India is way behind the world average insurance penetration.  Taiwan is the country with highest insurance penetration of 21.32 % followed by Hong Kong and South Africa having insurance penetration of 17.94% and 13.75% respectively. Also, the above table reveals that Switzerland is the country where the gap between life and non-life insurance penetration is minimum. In fact, Switzerland has a proper distribution of life and non-life insurance business and both life and non-life insurance has almost equal contribution to the country’s GDP.

Insurance penetration is an indicator of growth of insurance sector for any economy in a particular year. It is widely used as a comparative tool to measure and compare insurance industry among various countries and hence knowing and understanding of insurance penetration is beneficial for all of us. Hope I was able to make you understand this jargon in simple terms. 🙂

Ashish Kumar

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Insurance industry in India


 

Insurance is a part of financial services apart from banking, capital market, money market etc. Insurance is considered as a protection from events which results into financial loss. The insurance industry in India comprises of life insurance, general insurance, stand alone health insurance and reinsurance. The Indian insurance industry is guided by Insurance Act, 1938 which was amended from time to time, the latest amendment happened in 2015.

This post briefly gives an overview of insurance sector in India particularly discussing about the regulator, life insurance, general insurance, stand alone health insurance and reinsurance. The life insurance comprises of around 79% of the market, the rest 21% is occupied by general insurance. Of the general insurance, motor insurance has the highest market share of 44% followed by health insurance having market share of 29%, as per IRDAI Annual Report 2015-16. It is worth to mention that the insurance industry in India has showed a significant growth after it got opened for private sector in the year 2000. Since then, the industry is growing rapidly. In 2015, the reinsurance sector was allowed for foreign players which were solely dominated by General Insurance Corporation of India (GIC Re).  A small discussion about regulator, life insurance, stand alone health insurance and reinsurance is mentioned below.

Regulator:  Indian insurance industry is regulated by Insurance Regulatory and Development Authority of India (IRDAI) which was formed by an Act of Parliament in 1999. The Insurance Regulatory and Development Authority (IRDA) Act was passed in 1999 leading to the formation of IRDAI. IRDAI is headquartered in Hyderabad and has offices in New Delhi and Mumbai. The regulator is responsible for carrying various activities like granting license to insurance companies, framing regulations which the insurers need to follow, protecting policyholder’s interest etc. Breach of IRDAI regulations can have serious implications resulting from penalty to cancellation of license of the insurance company.

Life Insurance: At present, there are 24 life insurers in India, of which, Life Insurance Corporation of India (LIC) is wholly owned by the Government of India. LIC was formed in September 1956 by an Act of Parliament known as LIC Act, 1956.  Some of the private life insurers include ICICI Prudential Life Insurance, HDFC Standard Life Insurance, SBI Life Insurance etc.

General Insurance: Non-life or general insurance comprises of all kinds of insurance except life. It has various segments comprising of motor insurance, health insurance, fire insurance, marine insurance, engineering insurance, aviation insurance, satellite insurance etc. There are 33 non-life insurers operating in India consisting of public and private insurers. The public insurers include the following:

  • The New India Assurance Co Ltd. (NIACL), headquartered at Mumbai.
  • National Insurance Co Ltd. (NICL), headquartered at Kolkata.
  • Oriental Insurance Co Ltd (OIICL), headquartered at New Delhi.
  • United India Insurance Co Ltd (UIICL), headquartered at Chennai.
  • Export Credit Guarantee Corporation of India (ECGC)
  • Agriculture Insurance Company of India (AIC)

ECGC and AIC are known as specialized insurers. Apart from above mentioned public sector companies, some of the private non-life insurers include ICICI Lombard, HDFC Ergo General Insurance, SBI General Insurance, IFFCO Tokio General Insurance, Tata AIG General Insurance etc.

Standalone Health Insurance: These are those companies which are solely carrying their business on health insurance. There are six stand alone health insurers like Apollo Munich Health Insurance, Star and Allied Health Insurance, Max Bupa Health Insurance, Cigna TTK Health Insurance, Religare Health Insurance and Aditya Birla Health Insurance. One of the ways to recognize the stand alone health insurers is that the stand alone health insurers will have the word “health insurance” in the name of the company as in the above mentioned six stand alone health insurers.

Reinsurance: General Insurance Corporation of India (GIC Re) is owned by the Government of India and is the national reinsurer which is headquartered at Mumbai. The reinsurance industry in India is now opened for foreign players to open their branch offices in after the Insurance Act, 1938 was amended in 2015. At present there are 9 foreign reinsurers who have opened their branch offices in India. They are mentioned below:

  • Swiss Re
  • Munich Re
  • Llyod’s India
  • Reinsurance Group f America (RGA)
  • Hannover Re
  • SCOR
  • XL Insurance Company
  • Axa France Vie
  • General Reinsurance AG

It is important to note that apart from GIC Re and the above mentioned foreign reinsurers, ITI Re is the first private Indian reinsurance company which got licensed by IRDAI. Hence the Indian reinsurers include GIC Re and ITI Re.

 

Apart from the above players, the insurance industry also comprises of various intermediaries and distribution channels like agents, brokers, Insurance Marketing Firms (IMF), Web Aggregators etc. which I will discuss in separate post.

One thing to be noted is that the insurers in India can take part in either life insurance or general insurance business and not both. This means that a life insurer cannot start their business of motor insurance, fire insurance etc and vice versa. Health insurance is the only insurance product which can be offered by both non-life and life insurers. Non-life insurers can sell separate health insurance policy while life insurers offer health insurance in the form of riders. Riders are the extra benefits which are covered by paying some extra premium. Example of riders include Accidental Death Benefit (ADB) rider, critical illness rider etc. Life  insurers cannot offer separate health insurance products.

– Ashish Kumar