Lending financials have been the key focus area of investors for decades, given their long history in the stock market as well as their large-market capitalisation. That said, over the past five years, non-lending financials have started leaving their mark on the stock market, too, the largest sub-sector being life and general insurance, followed by the stocks of asset management companies (AMCs).
This segment is destined to grow at a fast pace and offer significant moneymaking opportunities to the investors.
If we were to focus on the opportunities in the insurance space, we would find that the space is divided between life and non-life insurance providers.
Life Insurance: Life insurance is hugely underpenetrated in India. Life insurance penetration as a percentage of the gross domestic product (GDP), stands at merely 3 per cent, with the insurance density at $59 per person. Insurance density in India is a fraction of that at other markets in the world. This under-penetration becomes further stark in some of the key segments, such as protection, where India would have one of the highest protection gap at 83 per cent, and retrials, which is at a fraction at most of the large markets. With an increasing ageing population and families getting more nuclear, pension can be one of the key product for the Indian life insurance companies now.
India has been a saver’s market for decades. But now, with increasing prosperity, people are becoming more risk-averse, especially when it comes to buying products in the mortality health and longevity (retiral) segment of the market. Thus, a lot of incremental growth may come from these two segments.
Private sector life insurance has been growing new business in double digits for the last seven years, except for the Covid years of FY20 and FY21, where the growth was in single digit, but still positive, making life insurance one of the most defensive sectors.
Also, the manner in which current life insurance sector is positioned with majority of businesses in participating and unit-linked insurance products, (Ulips), the balance sheet is significantly risk-free compared to lending financials. Hence, lending financials would have a much stable profitability, at least in the next decade.
Further impetus can be expected for the sector by making people more aware of the risks, and with the regulator pushing for significant growth in this direction.
Multiple media reports suggest that the regulator is pushing for multi-fold growth in the sector in the next five years. The targets may be steep, but this can change the fortune of the sector for investors, if the regulator can bring in significant reforms on regulations with more focus on board driven regulation, on the lines of what the Reserve Bank of India (RBI) has done for banking for day-to-day functioning, and clear and transparent and few rules around ownership structure of these companies.
Non-Life Insurance: Companies in this segment insure risks other than life. The regulator also came out with a separate segment called standalone health insurers (SAHI) to further increase penetration in the health segment of the market. Non-life penetration is lower than even the life side of the business, with premium as a percentage of the GDP at 1 per cent, and insurance density at $22. This is a fraction of most of the large economies.
This segment has grown at double digit CAGR for more than 15 years. Even during the peak of the covid year, it grew by more than 10 per cent.
Health insurance could be one of the most lucrative segment, which is growing at significantly higher rate, and with India having the second largest population in the world, this could be one of the largest market, and could be a growth opportunity for decades
Like life insurance, the regulator wants significant growth in this segment as well, and hence, any regulatory action can trigger a re-rating.
Overall, non lending financials per se, and specifically insurance companies, can become a large and relevant portion of the stock market in the coming decade, and provide investors with opportunities to create wealth.
The author is a fund manager at Motilal Oswal Asset Management Company
(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)