Study Notes

Economic Growth, Business Cycles and Insurance Penetration

Economic Growth, Business Cycles and Insurance Penetration

Learning Objectives:

At the end of this chapter, you will be able to:

 Know about economic growth and Insurance

 Know about business cycles and impact on insurance markets
 Know about insurance penetration
 Understand how can insurance penetration can be increased in India

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Economic Growth, Business Cycles and Insurance Penetration

Growth in the economy and insurance

The importance of insurance extends beyond the business realm and into the economy at large.
It significantly affects how firms develop, how individuals view economics, and how the world
advances. Even though you might not enjoy it, insurance is essential to the economy and you
need it to maintain your company.

One of the key stakeholders in the economy and a contributor to global growth is the insurance
sector. This is because they are among the safest investments one can make and contribute to
the steady operation of the global economy by paying insurance claims.

Insurance businesses support the health and vitality of our economy in a variety of ways.

Insurance providers help organisations lower risk and safeguard their employees:

Insurance is one of the most effective financial tools available to businesses to assist them in
coping with a calamity when it occurs. Additionally, when a worker gets harmed at work, the
employer's insurance helps to pay for the expense of the worker's care as well as any potential
wage loss.

Additionally, business insurance supports a company's growth. At its most basic level, insurance
acts as a protective safety net that enables businesses to take on riskier and lucrative ventures
than they otherwise might. These actions support businesses in running successfully, leading to
a rise in jobs and total economic activity.

Customers are given financial protection by insurance companies:

Insurance can help handle this uncertainty and potential loss by offering essential financial
protection. An insurance policy can assist customers in obtaining the funds they require in the
event of a catastrophe. Without insurance, many people in these circumstances would be under
severe financial strain and would even go bankrupt.

Insurance companies contribute to the support of initiatives for economic development:

The premiums that insurance firms do not use to cover claims and other operating costs are
frequently invested. These investments usually use stock, corporate and government bonds, and
mortgages on real estate to fund the construction of buildings and provide other essential support
to economic development initiatives around the nation.

An effective economy is woven together in large part by the insurance industry.

The stability of the financial system is improved through insurance:

Insurance is one of the most significant industries in the service industry. A crucial part of the
financial system are insurance companies. They pay a significant amount of state taxes. We are
all aware that taxes account for a sizable component of the state budget. As a result, the insurance
sector is essential to preserving the security of the financial and tax systems.

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Economic Growth, Business Cycles and Insurance Penetration

Insurance companies facilitate credit.

In order to establish or expand a business or to make a large purchase, consumers and

organisations frequently need to apply for a loan. Proof of insurance is frequently necessary
before a lending institution can finance a home, a car, or support entrepreneurs in order to cover
any potential damage (such as fire) and ensure that loans will be repaid. Instead of charging a
higher interest rate, lenders can now offer insurance.

Employment is provided through insurance:

One of the most pressing economic problems is unemployment. These days, many nations are
struggling with this issue. Most emerging nations are seeing an increase in the number of
unemployed people. However, by creating jobs, the insurance system contributes to the resolution
of this economic problem.

Increasing insurance leads to higher GDP:

The entire value of all finished products and services generated within the economy is known as
the gross domestic product (GDP). It accounts for all the output produced inside a nation's
boundaries. GDP calculates the monetary worth of the final goods and services—those
purchased by the consumer—produced in a nation over a certain time period (such as a quarter
or a year). GDP is made up of products and services generated for market consumption as well
as certain nonmarket production, including government-provided defence or educational services.
Gross national product, or GNP, is a different concept that accounts for all national output.
Therefore, if a German-owned corporation operates a factory in the United States, its output would
be counted as U.S. nonetheless, in German GNP.

One of the most significant macroeconomic indicators is GDP. The GDP of any nation is used to
gauge its level of development. There are numerous insurance plans that insurance companies
offer to their customers. Insurance companies employ these premiums for their financial and
investing activities in the economy. This technique raises the GDP of the economy as a result.

Insurance and business cycles

The cyclical phases of economic expansion and downturn are referred to as the business cycle.
The stages frequently follow a recognisable pattern since they are recurrent, with one phase
typically coming after the other.

When making important decisions, officials take into account the cyclical nature of the economy.
The repetition of the cycles does not necessarily make them avoidable. Variables including GDP,
production, employment, aggregate demand, real income, and consumer spending are to blame
for the variations. Trade cycles and economic cycles are other names for business cycles.

The business cycle contains four major phases:

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Economic Growth, Business Cycles and Insurance Penetration

Economic expansion is characterised as a period of growth when a country's GDP moves

upward or recovers over time. Numerous economic indicators, including consumer spending,
income, demand, supply, employment, output, and company returns, increase dramatically during
this phase.

Peak: The economy reaches its highest point during the expansion phase, when the GDP surges
to its highest level. Economic indicators including income, consumer expenditure, and job levels
are still the same at this stage.

Contraction: The next phase of the economy's downturn is when the stagnating peak GDP
begins to fall away towards the trough. Production, employment, demand, supply, income, and
other economic factors all suffer as a result.

The economic cycle's trough is the point at which the GDP and other indices are at their lowest.
The economy stagnates at a negative growth rate throughout this time. The demand for goods
and services declines as well.

Industries go through expansion and contraction cycles, and the insurance sector is no exception.
Although no two cycles are exactly alike, the average length of an insurance sector cycle is
between two and ten years, and it includes stages with expanding and contracting insurance
availability. The insurance sector had been experiencing a depressed market for almost eight
years when, as a result of a number of reasons, the market started to level off in 2011. The soft
market had reached its bottom by the end of 2012, and a hard market is now in effect.

The slowdown's effects on the insurance sector

Every time there is a recession, the insurance sector typically anticipates the following:

1. There won't be as much demand.

The first and most visible consequence is this one. Despite the significance of insurance, fewer
firms and individuals have additional cash due to the slowing economy. The market won't reach
absolute zero, but demand for insurance will decline and competition will increase.

2. Pressure to settle lawsuits quickly has increased

The insurance firms invest the money that the insured pays in premium payments in mortgage-
backed assets, dividend-paying equities, real estate, and other financial institutions like banks.
The returns on these investments will be good now that the economy is doing well, and insurance
companies are less inclined to contest their claims settlement procedures.

However, in a weak economy, the rewards will be lower. Insurance companies will have to find a
way to get their money back. They will either challenge their current operations, particularly the
important ones like claims, or they will take out a loan on their own.

3. More regulations will apply to businesses.

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Economic Growth, Business Cycles and Insurance Penetration

Examining and surveillance of financial institutions becomes even more important in the unsure
and dismal economic environment. To prevent customers from any exploitation by these
institutions, stricter consumer protection regulations are put into place.

Through complicated rules and costly procedures, the government may decide to place insurance
businesses under tighter scrutiny. Additional costs for compliance and regulations will result from
this.

A Hard Market vs. a Soft Market: What Are They?

In the insurance sector, soft markets have the following characteristics:

• Reduced insurance costs

• Enhanced coverage

• Laxer underwriting standards, resulting in simpler underwriting

• Greater capacity, resulting in more policies and greater limits being written by insurance
companies

• Increased rivalry between insurance companies.

The bottom line of the insurance company is ultimately impacted by these rate cuts brought on
by a slow market, as an insurer depends on both investment income and insurance premiums to
turn a profit.

On the other side, a harsh market has the following traits:

• Increased insurance costs

• More demanding underwriting standards, which makes underwriting more challenging

• Reduced capacity, which results in fewer insurance policies being written by insurance
companies

• Less rivalry between insurance companies.

The main reasons for this shift in the insurance cycle from soft to harsh market conditions are a
spate of natural disasters and the lasting consequences of the economic slump.

Mother Nature: We saw a lot of high-level tornadoes in the Southeast and Midwest, considerable
flooding on the East Coast, a drought in the South, a sizable winter snowfall, and summer
hailstorms in the Midwest, just in the U.S. The trend has also persisted in 2012 as a result of
Hurricane Sandy's effects. Around the world, one of the biggest earthquakes ever recorded jolted
Japan, an extensive drought affected East Africa, Thailand experienced its worst flooding in 50
years, and the Philippines were battered by a powerful typhoon. All of these severe natural
disasters resulted in a huge rise in claims for insurance companies.

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Economic Growth, Business Cycles and Insurance Penetration

Economic Downturn: Insurance carriers rely on their return on investments to generate revenue
during periods of low rates and a soft market for the insurance sector.

In a challenging market, underwriting becomes more rigorous and strict. Underwriters are growing
more skilled every year, paying more attention to losses, safety records, and financials.

Insurance Penetration

Less than 5% of India's GDP is accounted for by the insurance sector. According to IRDAI data,
4.2% of India's GDP was covered by insurance in 2021–22. India falls well short of the worldwide
average of 7% of GDP in terms of penetration.

The penetration rate reveals a country's level of insurance industry development. The penetration
rate is calculated as the premium underwritten in a given year divided by the GDP.

4.2% of people have insurance, which is far below the 7% global average.

While the penetration of life insurance was 3.2%, which was fairly close to the global average of
3%, the penetration of non-life insurance was 1%, which was substantially lower than the global
average of 3.9%.

India is ranked 20 in FY 2021–22 for penetration. Taiwan, South Africa, the United States, and
the United Kingdom report higher penetration rates, at 14.8%, 12.2%, 11.7%, and 11.1%,
respectively.

Non-life insurance penetration was 1.00% in the previous fiscal year, compared to 3.20% for the
life insurance market. Analysis reveals that while India's non-life insurance penetration was
appallingly low compared to the global average of 3.9%, the penetration of life insurance was in
line with the global average of 3%.

The level of insurance industry development is indicated by insurance penetration.

While the ratio of insurance premium to GDP is used to measure penetration.

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Economic Growth, Business Cycles and Insurance Penetration

Source : IRDAI Annual Report -2021-22

We currently lag significantly behind even regional competitors like Malaysia and Thailand in this
metric.

India's penetration of the life insurance market is 3.2%, which is on par with the 3.3% global
average. Compared to the global average of 4%, the figure for non-life sectors is extremely low
at just 1%.

Major Factors Contributing to India's Low Insurance Penetration

• Lack of insurance education and information among the general people.

Why Indian consumers see insurance more as an expense than an investment.

• The lengthy paperwork required to acquire insurance is one of the elements leading to the low
penetration rate.

• Since most of the plans on the market are challenging for consumers to comprehend, the
majority of them choose not to purchase such insurance.

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Economic Growth, Business Cycles and Insurance Penetration

Several Options to Increase Penetration

The Regulator's Developmental Role

The development of the entire economy depends critically on the insurance sector. The IRDAI
has given the non-life insurance sector a clear directive to boost general insurance penetration
from the present 1% to 2.5% by FY27. In order to achieve this, the regulator is recommending
expanding the range of distribution channels, making it simpler to file for new products, and using
technology throughout the value chain. All of these recent steps are a positive step towards the
IRDAI's goal of providing insurance for everyone by 2047.

Insurance education and awareness

In India, there is still a significant lack of knowledge regarding insurance. All interested parties,
including insurers, regulators, and intermediaries, must raise awareness through a variety of
programmes, including digital marketing and conventional media channels. Mutual Fund Sahi
Ha, a successful campaign by AMFI, the mutual fund regulator, raised consumer awareness of
mutual funds as a saving strategy. Stakeholders must carry out similar insurance awareness
campaigns.

The Pandemic's effect on risk awareness boosted the insurance sector, thus insurance
companies must take use of this chance to penetrate the Indian market more deeply.

Driving Rural Insurance Distribution

It is crucial to include the uninsured rural areas and the urban poor in the insurance coverage in
order to enhance the insurance penetration in India. Insurance providers will need to provide
creative, affordable insurance solutions that fit that market. It is necessary to investigate
combining offline agent deployment through CSCs and post offices with online sales. Here,
working together with the social sector and NGOs would be a productive strategy to address last-
mile connection issues in rural areas.

Product innovation and affordable options

For practically all non-life insurance products and some life insurance products, IRDAI has
implemented the "use & file" approach. Insurance providers will need to create novel, cost-
efficient, and straightforward retail insurance products.

In order to increase insurance knowledge and penetration, IRDAI should permit the sale of a
greater range of insurance products on the PoSP platform. Small-ticket insurance solutions
should be developed by insurers, and they should make sure that more people can access
innovative and affordable coverage. Individual Cyber, Pet/Cattle Insurance, Loss of Income
Insurance, Local Travel Insurance, Laptop & Mobile Insurance, and Hospital Cash Insurance are
a few good examples of such goods. These solutions can be customised to meet the needs of

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each retail customer, allowing Indian consumers to gradually get familiar with the concept of
insurance and begin to appreciate its advantages.

Information & Innovation

India's insurance market is rapidly changing, with big data and digital transformation providing a
significant boost. Over 150 insurtech start-ups are now active in India. Utilising technology to
notify and resolve claims is streamlining procedures and cutting down on TATs, which will
increase customer confidence. Machine learning has the potential to significantly improve the
operations and complaint procedures of insurance firms, reduce claim fraud, and automate
settlements. The integration of technology throughout the insurance sales cycle will revolutionise
the market over the coming years and significantly increase insurance penetration.

Insurance Programmes Sponsored by the Government

The government has made significant contributions to increasing insurance coverage in the nation
through the Pradhan Mantri Jeevan Jyoti Bima Yojana, Aayushman Jan Arogya Yojana, Fasal
Bima Yojana, and Pradhan Mantri Suraksha Bima Yojana. Similar insurance programmes for low-
income households' homes and cars will enhance the economy's growth.

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