Indian insurance industry is likely to attract new entrants

Fitch Ratings says in a special report published that several new players are expected to enter India's rapidly growing insurance market in the next one to three years, especially if the foreign direct investment ('FDI') limit is raised. Most private insurance companies are joint ventures between Indian and foreign partners; foreign partners' share is currently capped at 26%.

The report notes that India's insurance industry has undergone major structural changes in recent times and now accounts for 10%-15% of India's total financial sector assets. Despite the strong growth and improving penetration levels, the Indian market is still quite small and holds the potential to expand further. Total gross premiums amounted to INR951.4 billion in FY05 (USD 21.2bn), split roughly 60:40 between life and non-life businesses respectively. Total (life and non-life) premiums were equivalent to 3.17% of GDP in 2004 as compared to 8.27% in the US, 7.89% in Europe (western, central and eastern) and 7.4% in Asia as a whole. This potential for growth is likely to attract more players.

At present, there are 13 private insurers in the life sector and 8 in the non-life sector. "Private insurers are rapidly gaining market share at the expense of the public sector and will continue to be aggressive in their attempt to capture an ever larger share of an expanding market," says Purvi Harlalka Analyst at Fitch India. "Private insurers are able to do this because they offer greater choice in terms of products and services and also make a concerted effort to increase consumer awareness about the benefits and importance of insurance via vigorous marketing."

Additionally private insurers have also focused on developing alternative distribution channels - among them corporate brokers, bancassurance, the internet and corporate agents. These have provided additional ways of getting products and services to customers, and now account for 25%-30% of private sector sales.

The agency also notes that the expected increase in the FDI to 49% from the current 26% level will allow a fresh infusion of capital into the insurance sector, given the business' strong capital needs.

Fitch has recently introduced National Insurer Financial Strength ('IFS') ratings in India. The national rating scale provides a relative measure of the rated entity's capacity to meet senior policyholder and contract obligations on a timely basis as compared with other rated entities in the country.