We have a positive outlook on Indian insurance sector
Mohammed Ali Londe is vice-president senior analyst at Moody’s Ratings. In an interview with Falaknaaz Syed, he discusses the factors that would impact the Indian insurance sector in the short to long term.
Q1. How do you view the profitability of the Indian insurance companies compared to their Asian peers?
Ans--We haven't done a comparison to the Asian peers, but what I can comment on the Indian sector's profitability is that our outlook is positive. What is underpinning that is, first of all, there is premium growth available. So it's not a shrinking, but a vastly growing market driven by the economic expansion, increasing demand as well as increasing per capita average income of households. That is positive for insurance growth. So, insurance growth is going to aid profitability because in tandem we are expecting the state-owned insurers that have a major stake in the sector to improve their underwriting profitability. As they improve their underwriting profitability and pricing adequacy, this will have a trickle-down impact and alleviation on the underwriting profitability pressures of the wider private sector as well. And this is what we are seeing.
Q2. What are the other positives that give you the confidence?
Ans--If you compare fiscal years 2022, 2023 and 2024, we are continuously seeing an improvement in the underwriting profitability of the overall Indian insurance sector. If the proposed change to the FDI happens (raising FDI from 74 per cent to 100 per cent), this will attract more foreign insurers, and that for us is a positive. The other changes (in the Insurance Bill) around capital requirements that are positive, again, around bifurcating the different types of insurers with their capital requirements, which again gives companies the ability to inject the right amount of capital and be efficient with their capital usage. So again, attracting more investment and more companies to enter these different fields, whether that's micro-insurance or monoline insurance, is positive as well.
Q3. Do you see reinsurance companies raising premium rates because of the fire in California?
Ans---Widely, our view is that for them, this is just an earnings impact, it's not a capital impact. Having said that, in terms of the impact of that globally, what we have seen is that NATCAT events are increasing. Even in regions where NATCAT events were not there, we're seeing more NATCAT events. We saw even in the GCC, we had the April storms of 2024. Events that were not seen were marked as one-in-a-hundred-year events. So overall, we are seeing an increase in NATCAT and that has been reflected by the reinsurers in their pricing as well, which is why we have a positive outlook on reinsurance globally. Because of the heightened risks that the reinsurers are able to price, the premium rates have increased, which is aiding the reinsurers to make sure that their underwriting pricing adequacies are there.
Q4. What are the challenges for the Indian insurance sector?
Ans---The challenges we're seeing are short-term challenges, but on the medium to long-term, these are positive. These are normal regulatory updates that IRDA is looking to implement, such as around risk-based capital and governance. Yes, in the initial implementation stages, these changes do bring implementation hurdles and costs, which are sometimes cumbersome, especially for the smaller insurers, but overall for the industry in the medium to long-term, these improve capital adequacy, capital monitoring, they improve the financial flexibility, profitability and overall governance of the industry. Another change that we see that's on the cards, which is yet to be slated in terms of when it is to be implemented, is the shift to the equivalent of IFRS 17, which is the India IAS 117. This again, in the short-term, is challenging because it requires reporting amendments, and overall accounting changes as well as how the board manages the company changes. But the focus shifts from top-line underwriting to bottom-line underwriting, because it takes into account the credit as well as the discounting of all the balances. So again, while this is a short-term challenge but over the medium to long-term, it does improve the transparency as well as aid the governance of the companies.
Q5. Is there any estimate as to what kind of capital the entire industry will require once IAS 117 is implemented?
Ans--- We're not aware of the amount of capital that would be required. But what we've seen with IFRS 17 is this has also brought in additional costs because there is a more ingrained requirement for actuarial inputs, as well as external consultants, are generally used to help them do the gap analysis for the changeover, as well as system implementations. So there are additional costs. But what we have seen generally is that in companies that are writing annualized premiums, specifically in the non-life industry, the impact on capital is relatively low. The major impact comes for longer-term premiums, especially those sorts of contracts that are in the life insurance space. And as a result, there have been certain impacts on capital for them. I'm not talking about the Indian industry, but elsewhere where IFRS 17 has been implemented.
Q6. Do you see consolidation in the life and non-life insurance space?
Ans---Of course. Now, one thing that is driving pressure on capital adequacy is the growth in premiums. Because the premiums are not necessarily translating to underwriting profit, what this means is that in terms of solvency, the premium growth is applying pressure on the capital adequacy of the sector. This is why we have already seen a lot of infusion of capital from insurers to maintain capital adequacy. Another way to ensure that solvency requirements are maintained and met, capital adequacy is maintained, is M&A, which is what we have seen in other regions as well. We've seen this in GCC, we've seen this in other parts of Asia as well, where smaller insurers, in order to attain better efficiency in expenses, as well as maintain capital adequacy, have chosen to merge. This is a trend that we are expecting to continue in this region as well, in India as well, as part of insurers trying to improve their capital adequacy, as well as achieve better expense efficiencies scale.
Q7. India’s insurance penetration is much below the world average.
Ans---That's indicative of a developing market. But the reason why we are positive on the Indian sector is because the fundamentals of the premium growth are the expanding economy, which we continue to see to expand. Future growth will continue for the Indian sector, as well as because there is rising awareness. And that should gradually improve the insurance penetration. India's insurance density (insurance premiums per capita) rose to $95 in FY 2023 from $92 in FY 2022, up from a historical average of below $80. So there's already a significant improvement in insurance density.
