Insurance Broking Business– An investment perspective
The overall size of insurance industry as measured in terms of Total Premium was ₹ 8,27,500 Crores (US$ 110 billion) in FY 2021 as per data collated from IRDA. This industry is expected to grow at a 17.8% CAGR to reach ₹ 39,00,000 Crores (US$ 520 billion) by FY2030, with life, health and other non-life insurance growing at 18.8%, 15.3% and 13.5% CAGR respectively, as per Frost & Sullivan report.
However, as compared with global peers, India has a highly underpenetrated insurance market. India was amongst the lowest in the world in terms of Sum Assured as % of GDP in 2020. India mortality protection gap as a percentage of protection was at 83.0% in 2019, one of highest in the world, despite Indian households being disproportionately dependent on a single income earner.
Financial illiteracy, lack of awareness of need and sufficiency of insurance, low household disposable income, complex products, gaps in product offerings and inefficiencies in distribution system has attributed to Low penetration in Insurance Industry. Opaque cost structures, hidden fees, incomprehensive language and jargons being used by the industry participants, has made people averse to insurance products. With limited disposable income, it is also difficult for most people in India to pay annual premiums to protect their life, health and other assets. The majority of people in India also view life insurance as an investment and tax-saving tool. People have been unenthusiastic to pure protection products as no monetary benefits accrues during life of the individual. On the distribution side, reach remains low and is a push driven model with agents, brokers and bank channels serving as primary sales channel. Lastly, there is no legal requirement for people in India to purchase non-life insurance (except for vehicle owners to have 3rd party motor insurance), contributing to its low penetration.
With the intention of increasing distribution reach as well as enhance penetration of insurance in the country, IRDA introduced the Point of Salespersons (PoSP) model of distribution in 2015. Prior to the passing of this regulation, an agent could only sell policies from 1 insurer each in motor, health, and lifelines of businesses. The way agents usually used to work around this would be to register with multiple insurance companies using names of family members like wife, brother, father, mother etc. This has now been modified. But now PoSPs after undergoing basic training and certification, can sell a variety of pre-underwritten or standard insurance products to their customers across insurers. PoSP need a minimum qualification of just 10th pass to qualify compared to traditional insurance agent. The training and certification are also basic and easy to follow for beginners, who may not have in-depth knowledge of insurance products. It is an ideal choice for people looking to enter the industry and start an independent self-fulfilling career. Broad differences are highlighted hereunder:
|Conducted by Insurer / intermediary
|Conducted by IRDA
|A POSP can sell simple, transparent insurance plans which provide complete protection and tax benefits. They sell products that are pre-underwritten and specifically approved by IRDAI for solicitation through POSP. These products are pretty basic, so they come with clear and straight fixed benefits and do not need elaborate explanations for the customer. A PoSP cannot sell complicated or high-risk products.
|An agent can sell all approved products whether pre-underwritten or tailor-made for their customers. They can help their prospects customise policies to meet their exact needs, and advice clients on policy matters. They can sell complicated as well as high-risk products.
This has created the emergence of this PoSP agent mode of distribution. Number of PoSP agents increased from 539,080 in FY20 to 827,901 in FY21 recording a growth of 50%+. The inherence advantage that a PoSP agent has is his ability to sell policies across insurers and across products. This allows him to cater to the variety of tasks from his customers rather than being limited to products of one insurer.
In addition to functionalities other difference between an insurance broker and an insurance agent is the people/organization they represent respectively.
An insurance broker represents the end client whereas an insurance agent represents the Insurer. An Insurance Broker is normally interested in selling, buying, or negotiating various financial products best suited to their individual client’s needs for compensation. This means that they are more interested in finding out what’s best for the client and can offer a host of options from across Insurers, as per client’s requirements. An Insurance Agent, on the other hand, sells, negotiates, or promotes financial products on behalf of their employer organization. They act as the sales representatives for the company and its financial products.
It would be evident from the above explanation that the PoSP agent is not directly linked to or represent any particular Insurer but associated with or works like an insurance broker. In fact, the creation of the PoSP agent framework with the ability to work across Insurers has created a new breed of large Insurance brokers. These brokers invest significantly in technology and process to enable them to scale up the business.
Progress of broking business:
Insurance broking as distribution mechanism has been growing rapidly over the last few years
- Motor Insurance: Rise in people’s affordability of owning motor vehicles is expected drive demand for motor insurance. Penetration of broking as a distribution medium has been greatest in the motor insurance line of business given the easier nature of the motor insurance product. Broking revenue has increased from 23% of overall retail revenues in FY17 to 35% in FY21. Distribution via agents contributed to 39% of motor GWP in FY21. Our view is that the broking distribution medium contribution would be able to take even incremental share from the agents share of the business. Overall motor industry size in FY21 was INR [67,800] Crs. At a [13.5] % CAGR the industry is expected to reach INR ~ [211,905] Cr by FY30. Of this the broking distribution would at least contribute 40%, thereby reaching a likely market size of INR ~ [84,762] Cr.
- Health Insurance: Health insurance historically has grown at 15%+ over the last 5 years to INR 25,840 Cr. The lack of public health infrastructure, insufficient coverage of health insurance by government and expensive private healthcare facilities has brought insurance into limelight particularly during impending COVID-19 pandemic. Going forward, with rising medical costs and ~15% of the population in India turning 40 years old in the next ten years, India’s health expenditure is expected to grow manifold. As a result, health insurance segment will become one of the most significant contributors to the growth of overall non-life insurance in India. Agents and brokers put together contribute 79% of the overall FY21 revenues. Of this Broker contributed 5% of overall FY21 revenues. We believe the broker’s share of overall revenues by FY30 should increase to at least 20%+ i.e., ~INR 46,000 Crs as there is increased focus in this segment from players such as Turtlemint, Renewbuy, InsuranceDekho etc., to cross sell health policies by its existing broking distribution network.
- Life Insurance: India’s life insurance market is expected to grow at 18.8% p.a. to reach ₹₹ 29,63,500 Crores in FY2030, driven by favourable macro indicators, rising awareness towards financial products and services, digitization and simplification of products and processes, widening of distributions channels, innovations and customizations in products and favourable government policies and regulatory push. 40% of the gross Life insurance premium booked during FY 21 was from the individual policies. LIC has ~50% market share and we believe this may continue. We believe 10% share of the individual retail life insurance market can be contributed by broking firms from the current 2-3%. Hence share of broking firms can go up to INR~ [59,000] Cr by FY30
Overall broking industry expected to increase to INR ~190,000 Cr by FY30, growing at a CAGR of 22+ %
Key funded brokers leveraging digital onboarding and rapidly expanding the POSP agent network are:
- Turtlemint: Started in 2015, raised ₹975 Cr till date from Sequoia, Jungle Ventures, CGV Capital, Nexus Ventures and Blume ventures. Current market leader in this space.
- Renewbuy: Started in 2014, raised ~₹700 Cr till date and is funded by Mount Nathan Advisors, IIFL Asset Management with last round in November-2021.
- InsuranceDekho: Started in 2018, Company is part of the CarDekho group which has been funded by funds such as Sequoia, Hillhouse Capital, CapitalG, Leapfrog.
- PolicyBazaar: Biggest B2C player in India. However recently launched B2B operations. Got listed on the exchanges in Q4CY21.
The top 3 players in this space have already crossed INR 1000 crores of Gross Written Premium (GWP) per year and are scaling up rapidly. The key to growth in this space would be incremental addition of PoSP agents as well targeting areas where existing agents haven’t penetrated as yet (Tier 3 and 4 cities). We believe given the inherent differences between a PoSP agent and a regular agent, agent additions would also over time migrate to more of a PoSP broking model. There are multiple well-funded players operating in this broking space, and they would spend on ramping on up technology integration with insurers, marketing spends, technology innovations for ramp-up of agent additions, process improvements etc. Over time this could have 2-3 large players with pan-India reach and ability to sell policies across motor, life and health lines of businesses.