India’s life insurance market has been on a roller coaster ride since the turn of the millennium. Once every few years, it reached new heights just before taking a downward plunge. And the recent move to demonetize the Rs. 500 and Rs. 1,000 bank notes by the government seems to have added an extra large dip to that roller coaster ride.

India’s life insurance penetration increased from 2.53% to 4.6% between 2002 and 2009 but the happy days were short-lived and for the next six years, it saw a declining trend. According to data released by Insurance Regulatory and Development Authority of India (IRDAI), the trend finally changed in 2015, when penetration increased from 2.6% to 2.72%.

The level of insurance density, which increased from $11.7 in 2002 to $55.7 in 2010 also felt the impact and stood at $43.2 in 2015 which is low compared to other developed and emerging markets.

According to the Economic Survey, India’s insurance penetration in 2015 (2.7%) continued to be lower than the global average of 3.5%. As if the challenges were not enough, the financial sector now faces another threat in the form of demonetisation.

Where Do We Stand Right Now?

The year 2016 will go down in the history of India’s insurance sector as a period of 12 months in which the central government took many steps to promote both the life and non-life insurance sectors in the country. As a result, a new record premium of Rs. 1.38 trillion (US$20.54 billion) was registered between April 2015 and March 2016, representing a growth rate of about 22.5%.

According to a report published by the Indian Brand Equity Foundation in November 2016, the general insurance industry recorded 12% growth in Gross Direct Premium underwritten in April 2016 at Rs. 105.25 billion (US$1.55 billion).

The overall life insurance market has grown from US$10.5 billion in FY02 to US$27.5 billion in FY16 and has the potential to grow 2.0-2.5 times by 2020.

However, these numbers were estimated when Barack Obama was still the President of the United States, Rs. 500 and Rs. 1,000 notes were still valid in India, people were not made to deposit all their hard cash in the banks and there were no queues outside ATMs.

The Impact of Demonetization

The demonetization of Rs. 500 and Rs. 1,000 notes is being hailed as a bold and powerful move but given the existing uncertainty around it, it is impossible to make a call about its potential impact just yet. What one can do is weigh the potential short-term and long-term impacts to get a better picture of what lies in store for the insurance sector.

Short-Term Impact

  • Demonetisation is already having a negative impact on cash consumption and it is likely to stay this way in the near future, at least till the flow of cash stabilizes.
  • People will be reluctant to spend cash for sometime to come. The situation is similar to when the stock market crashes and investors have to watch their wealth disappearing in front of their eyes.
  • There will be cash scarcity for some time, till the currency that was taken out of the economy is replenished.

All these factors put together will slowdown the sales in the life and retirement sectors. Since, it is mandatory to have motor insurance, that sector will remain unaffected. If consumers have to make a choice, they might opt for health insurance, considering it has an immediate impact on one’s finances in the event of an illness.

Long-Term Impact

Considering that the government will bring in more measures to keep a check on size of the cash economy,

  • India’s median income will move up from the bottom of the pyramid, offering new opportunities.
  • Mobile and digital transactions will replace cash transactions to a large extent.
  • The money collected through taxes or bank deposits will help in creating a stronger economy. Money that was so far unaccounted for will be brought back into the system, which will further help banks offer loans and the government to make investments in infrastructure.

With more money within the system, the offers on various insurance policies, just like the interest rate on loans, is likely to become more enticing, attracting people to invest in life coverage. This in turn will boost the growth of the insurance industry, helping it focus on increasing penetration. Since smartphone penetration is increasing, it will be easier to spread information and knowledge about various products and online plans will become more popular.

What Can We Expect from the Market in the Coming Years?

India’s life insurance sector is the biggest in the world, with about 360 million policies active as of 2016. The sector is expected to grow at a Compound Annual Growth Rate (CAGR) of 12%-15% over the next five years. The size of the market as of FY16 was US$60 billion and the aim is to take it beyond US$160 billion over the next 10 years.

As far as penetration is concerned, the sector is expected to increase penetration levels by 5% by 2020 as well. Since India is the second most populace country in the world, it offers huge market potential and vast opportunity just waiting to be capitalized on.

Currently, India accounts for only 1.5% of the world’s total insurance premiums and 2% of the world’s life insurance premiums. It sits on the fifth spot in the world in terms of premium volume and certainly has the potential to grow exponentially.

Can Demonetisation Act as a Catalyst?

Penetration of insurance in India is half that of some of the developed countries. This is a clear sign that people are not yet convinced on the advantages of life coverage. For example, on September 1, 2016, the Indian Railway Catering and Tourism Corporation announced an optional travel insurance through its website with the promise of paying Rs. 10 lakhs in the event of a mishap.

According to reports by the Indian Express, only 128 out of 695 passengers on the Indore-Patna Express that was derailed in November 2016 utilized this facility to protect themselves and their families. And how much does this travel insurance from the Indian Railways cost? A mere Rs. 0.92!

So, it certainly isn’t about money, it’s about knowledge, awareness and valuing the future financial stability of one’s family. India’s insurable population is expected to touch 750 million in 2020, with life expectancy of 74 years, and even with a move like demonetization, the premiums remain affordable, despite any uncertainty regarding the economic future of the nation. What it comes down to is the understanding of the benefits that life insurance has to offer to the public.

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