Life assurance: The battle for India

The burgeoning Indian middle class has created a fiercely competitive life assurance market in which Prudential and Aviva are major rivals. By James Daley
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The Independent Online

Rumours of an imminent break-up bid for Prudential were once again circulating the market yesterday, after the British insurer surprised investors on the downside, by revealing it had sold Egg, the internet bank, for £30m less than it had previously announced.

While there remain a handful of rivals who would be interested in picking up Prudential's UK assets at a knockdown price - and a few more who would like to get their hands on its US operations - the real scramble in the event of a break-up would be for Pru's Asian business - the engine of the company's growth.

By the end of last year, Asia was contributing more to Pru's bottom line than either its UK or US operations, generating a total operating profit of £864m. Furthermore, its new business profits are now almost as much in Asia as the UK and US put together.

After sacking its Asian chief executive last autumn, and replacing him with the former head of AIG's Asian health insurance operations, Barry Stowe, the company announced ambitious new targets to double its Asian new business profits between 2005 and 2009.

If a break-up were ever to materialise, it is thought Pru's Asian business could now fetch as much as £7bn.

The list of potential bidders would be certain to include Aviva, Pru's larger UK rival which made an audacious £17bn bid for the entire Prudential business 13 months ago. Although Aviva has strength in continental Europe which Prudential does not, its US and Asian businesses are significantly smaller than Pru's.

Since missing out last year, however, Aviva has not sat on its laurels. Within months of its bid collapsing, Aviva snapped up AmerUS across the Atlantic, and has been busy accelerating its organic progress in Asia - not least in India, where new business premiums increased by an impressive 171 per cent last year.

Over the past few years, India has quickly emerged as one of the most important markets in the world for life assurers. With a population of more than 1 billion, and an economy growing at almost 10 per cent a year, the Indian middle class is expanding at a meteoric pace - creating a boom in the market for savings, investments and insurance products.

Shortly after Indian independence, the government nationalised the life insurance market, handing a monopoly to the state-run Life Insurance Company. However, the market was finally opened up again at the turn of the millennium, encouraging dozens of private providers to take a foothold in the country.

So far, private providers have stolen 35 per cent of the market from the LIC - a share that is growing every year.

While China is often perceived to be the most important market in Asia for financial services firms, partly due to its larger population, Aviva's group executive director Philip Scott says India remains the more exciting of the two markets for Western insurers.

"I think India is more interesting taking a five to 10 year horizon, because there is a larger amount of the market available to international insurers," he says. "In China, over 90-plus per cent of the market is still in the hands of Chinese investors.

"India is also a market that understands the need to produce a return on capital. If you're in a business to make money on the capital you deploy, you will make money quicker in India than China."

From a standing start five years ago, Aviva has grown to become the seventh largest private provider in the Indian retail life assurance space, with a market share of around 5 per cent. However, it still lags a long way behind the Pru which was first out of the blocks when the Indian government deregulated the market at the turn of the millennium.

Pru teamed up with India's largest bank, ICICI - a joint venture that generated more than £1.5bn of new business premiums last year alone. After the state-owned LIC, it is the biggest provider in the life assurance market by quite some distance, with a market share of almost 30 per cent in the private sector.

However, Asia chief executive Barry Stowe admits that the market has become incredibly competitive. There are now some 15 providers competing in the same space as ICICI Prudential Life Assurance and dozens more moving into the mutual fund market since recent regulatory reforms began allowing private investors to place their money in overseas equity funds for the first time.

While Pru's dominance is helping it to sell a growing volume of unit-linked savings products, Mr Stowe's first job in his new role was to look at ways of accelerating growth amid an ever-competitive market.

As a result, he is currently spearheading a major drive into the private health insurance market - a sector which he insists will soon be very significant for the financial services industry.

"People for the first time are finally able to aspire to what we've taken for granted as quality health care," he said. "The government wants the healthcare infrastructure to be available... and [having seen the experience of the nationalised health services in the West], the government here are saying let's skip that stage and go straight to private."

Among Pru's new products is a policy to cover the cost of treatment for diagnosed diabetes sufferers - the first of its kind in the market. With India having one of the highest proportions of diabetes sufferers in the world, the group believes this will be a big seller. And every policy sold opens up the door for potential cross-selling opportunities of its other products.

On the savings front, Prudential is also looking at ways of tapping the 300 million potential customers who have only a small amount of money to save and potentially no bank account. Through its army of salesmen, which now totals more than 200,000, it recently launched a $1-a-month regular savings account, in association with one of India's growing number of micro-finance organisations, which help to provide simple banking facilities for those on lower incomes.

Owing to government regulations, Pru and Aviva still own only 26 per cent of their Indian life assurance joint ventures. However, the government has signalled its intention to increase this limit to 49 per cent in the near future, and both companies have options to buy out the additional 23 per cent from their partners as soon as the laws are relaxed - deals which will unlock millions of pounds of new profits for both groups.

In its recent full-year results, Aviva expressed some optimism that the rule change may come as soon as this year. However, Shikha Sharma, the managing director of ICICI believes that it may take much longer than people think, pointing out that, as long as there is a coalition government in India, it remains improbable it will be passed.

Mr Scott believes the current restrictions work against the Indian consumer, restricting the flow of capital into the market. Nevertheless, both companies have come to accept that changing the law is beyond their control.

Although both Aviva and Prudential will continue to protest that there is plenty of growth left in the UK market, it no longer offers the same attraction as Asia. If Pru's prize asset ever becomes available for sale, it will be sure to fetch a high price.

Who's who in India

Life Insurance Co

The state-owned company remains the dominant force in the Indian savings market, with around two-thirds of new business, but its position is being eroded as the private providers gain ground.

ICICI Prudential

Second-placed in the market, after which comes the joint venture between German insurer Allianz and the Indian motorcycle and scooter manufacturer Bajaj. The pair operate across both the life and general insurance markets and have moved from fifth to second in the private sector over the past three years.

Standard Life

Its partnership with Indian bank HDFC has the third largest share in the Indian life assurance market, but the Scottish insurer made a loss on its Asian operations last year, as it decided to invest heavily to grow its presence in the region.

SBI Life

Currently the fourth largest player in the market - a joint venture between Cardif, the life assurance arm of BNP Paribas, the French bank, and the State Bank of India.

Max New York Life

Fifth-placed among the private sector life insurers, a joint venture between Max India, a life assurance and healthcare group, and New York Life, one of America's largest insurers.