1/ 👇Thread on key gaps I see in the motor insurance industry in India. Summarising the root cause in 1 line: “almost all inefficiencies are because the distribution channel owns the customer, and not the insurer”.
2/ First a quick overview of the market. Motor insurance in India was a ~$8B premium market in FY17-18. Of this, ~$4M came from private car insurance (Car), ~$3B from commercial vehicles (CV) and ~$1B from 2-wheelers (2W).
3/ There are 2 components of motor insurance i.e. own damage (OD) and third party (TP). OD covers for damages to vehicle, while TP covers for damages to public property, other passengers etc. Of ~$8B, both OD and TP are ~$4B each.
4/ I will focus this thread on ~$4B Car market only, as problems in other 2 segments are not very different. Math of ~$4B is the following: ~30M on-road cars * 85% car insurance penetration * Rs 10K avg net premium paid per year (net of GST).
5/ As you can see, the insurance penetration in Car in very high at ~85%. Govt mandates this, and imposes a penalty of ~Rs 4K if found without insurance. Of 85%, ~75% cars take both OD and TP, while ~10% take only TP.
6/ And of ~Rs 10K net avg premium that Car sees, ~Rs 3K is TP and ~Rs 7K is OD at overall level.
7/ Value chain of Car is very interesting. Of Rs 100 net premium collected by insurer, ~Rs 75 gets paid to garages for claims, ~Rs 20 to distribution channel as commission, and ~Rs 10 to cover OPEX and fixed costs (for an insurer operating at scale).
8/ So, total costs are ~105% of net premium collected. This ~5% loss is called the underwriting loss. Money is made on the float - called investment income. Insurers typically make ~10% annual investment yield on float.
9/ There was no insurer, but for Bajaj Allianz, which had a positive underwriting income for Car in FY17-18. All made underwriting losses. ICICI Lombard was near break even.
10/ Average float period (time b/w premium collection and claim payout) for OD is 6mo+ i.e. assuming an OD claim happens mid year.
11/ While for TP, avg float period is often >1.5 yrs as claims are often made later by a third party, which increase the investment income in absolute terms.
12/ Industry as a whole barely breaks even, and often investment income is not able to cover underwriting losses. However, private players like Bajaj Allianz followed by ICICI Lombard are best of the lot in terms of motor profitability.
13/ Players in motor insurance see valuation multiples which are 1-4x of net premium collected - basis scale and profitability. For ex. ICICI Lombard with ~$0.7B in net motor premium, is likely to have bagged a 4-5x premium multiple.
14/ There are 4 public insurers. And 17 private. Of ~$8B, public and private share is ~$4B each. Largest private players are ICICI Lombard and Bajaj Allianz with ~9% and ~7% premium share respectively.
15/ Now, let’s talk about Car insurance distribution markert. Like we said earlier, of ~$4B Car premium collected, distribution channel makes ~20% avg i.e. ~$0.8B commission pool. OEM dealerships have a 50-55% share of that.
16/ Individual agents have 30-35% share. Rest is distributed between direct channel, bancassurance, corporate agents etc. In OEM, Maruti is dominant with ~50% commission share, followed by Hyundai at ~15%.
17/ There are a few brokers in insurance distribution, however their focus is on CV and not Cars. 2 prominent names include Marsh India and Aditya Birla Insurance broker.
18/ Now coming to key problems in Car insurance. The root problem is that the distribution channel owns the customer relationship and insurer is the dumb guy at the back end. All other problems are a symptom of this.
19/ And the dominant distribution channel is the OEMs, in particular Maruti and Hyundai with ~65% combined share in OEMs. As a result, OEM’s set the price of new car insurance with ridiculous commission margins, often as high as ~40-50%.
20/ Car buyers end up paying this high price. Most are also unaware that buying from outside will be 30-40% cheaper. OEM dealers also tell them false stories of cashless facility on OEM garages unavailable - if purchased from outside.
21/ Then on every renewal, the distribution channel forces insurers to pay commissions as high as ~15-20% of net premium. Distribution channel doesn’t share contact details of the customer so insurer can’t reach out directly for renewals.
22/ Even if the insurer has the contact details, they’re often bound by legal contract with OEMs who impose otherwise.
23/ Industry follows a primitive underwriting where they underwrite the vehicle and not the car buyer. This is why the new car price for any 2 users in the same city is the same.
24/ For the most part, insurer is unaware of who the car buyer is - as the distribution channel esp the OEMs don’t share the accurate name and contact details. Even if mobile number is shared, the insurer can do a CIBIL pull…
25/ ...and fetch the credit report along with getting other alternative data via partnerships - which can have a material impact on the underwriting efficacy and in turn the claim ratio.
26/ OEM’s also exercise their market power, and provide no discounts to the insurer for labour cost and part cost involved in claims. To contrast this with insurer’s non-OEM partnerships, they get 30-40% discount on labour cost…
27/ ...and a material discount on parts (depends from part to part). Overall, insurers sees >25% higher claim value for OEM versus a non-OEM - for the same claim. Unfortunately for them, 75-80% of the claims are serviced by OEM garages.
28/ OEM’s also tend to inflate the claim value by replacing parts which can be repaired. The difference in claim value can increase multi-fold because of this perverse practice of OEM garages.
29/ This practice is more prevalent where the customer has a zero depreciation cover. And >35% have that. Then customers also prefers part replacement when asked, as he doesn’t have a financial bearing owing to zero dep cover.
30/ Customer gets a new part. OEM garage gets an inflated claim. And it’s the poor insurer that suffers and pays for it.
31/ Only weapon that insurer has for above is surveyor audit. However, surveyor comes in the picture much later. Often, garages damage the part before that. And sometimes, there is corruption in surveyors and they get some kick back.
32/ To summarise key industry issues include: 1) OEMs setting new car insurance price instead of insurer; 2) high renewal commission for a commodity product; 3) primitive underwriting...
33/ ...4) no power with insurer to negotiate discounts on parts and labour; 5) perverse practice by OEM of replacing parts which can be repaired.
34/ I think there are enough opportunities for startups to solve the above pain points, and some are already attempting it. If you’re solving any of the above - would love to meet. Please drop a DM here on Twitter.
35/ Data sources for above include:
1) IRDA annual reports
2) Alvarez & Marshall report
3) Primary interviews with 3 private motor insurers, 2 leading insurance brokers, 2 OEM dealerships and attached garages, 50 car owners.
1) IRDA annual reports
2) Alvarez & Marshall report
3) Primary interviews with 3 private motor insurers, 2 leading insurance brokers, 2 OEM dealerships and attached garages, 50 car owners.
