LIC in Health Insurance: Is It Time To Switch Policies?

Managing over ₹30 lakh crore in assets with a market capitalisation of ₹6.74 lakh crore, Life Insurance Corporation of India is taking the next step: entering the health insurance sector after dominating the life insurance one for decades.

The infographic above represents a clear picture of LIC’s top position. After lording over the 9th largest life insurance market in the world for 68 years, LIC is finally planning to upgrade into a private health insurer.

This announcement raises multiple questions, such as:

• Why did LIC suddenly decide to venture into health insurance?
• Why did LIC wait so long to enter the health sector?
• How will this decision impact the health insurance sector?
• How prepared is LIC to take such a major step?

And so on.

In this article, we will look for answers to these questions and also analyse LIC’s standing in the market and against its peers.

How is LIC Planning to Enter the Health Sector & Why?

Let’s start with the why!

What most people don't know is that health and life insurers need separate licences to provide insurance products. After all, different scenarios, prospects, and conditions need to be considered when providing both types of policies to applicants.

LIC, however, is predominantly licensed as a life insurer, which has restricted its presence in the health insurance market. Excluding occasional fixed benefit plans like Arogya Rakshak and Cancer Cover, the company's involvement in the health insurance market has been limited.

What’s interesting here is that India currently does not have a composite insurance licence system. This means regulations restrict insurance companies, making them unable to sell both life and general insurance products under a single licence.

This raises the ultimate question: if the regulation doesn’t allow it, how will LIC accomplish providing both health & life insurance?

One of the possibilities here would be LIC could acquire a controlling stake in any one of the 5 existing private health insurance companies. This would help the insurer company to utilise the acquired company's experience and infrastructure while entering the health insurance market. News reports suggest LIC might be exploring this “inorganic” option, as LIC Chairman Siddhartha Mohanty calls it.

Now, this roundabout method could have been simplified if India had the composite licence system in place. As it could lead to several…

Potential Benefits:

Composite licences offer several potential advantages for insurance companies in India, including:

a. Reduced Costs and Streamlined Operations:

Companies can benefit from economies of scale by managing life, non-life, and potentially health insurance under one roof. This could lead to lower administrative costs, shared resources, and more efficient use of capital.

Currently, complying with separate regulations for life and non-life insurance can be burdensome. A composite licence would streamline compliance processes, reducing administrative hassles.

b. Enhanced Product Development and Sales:

Composite licences allow companies to offer customers a wider range of products, catering to their diverse insurance needs. This could involve bundling life insurance with health coverage or property insurance.

Combining life and non-life products could open doors for innovative insurance solutions that better meet customer requirements.

c. Improved Market Reach and Customer Convenience:

Customers would benefit from the convenience of purchasing various insurance products from a single company. This would simplify the buying process and potentially improve customer satisfaction.    

With a broader product portfolio and potentially lower premiums due to economies of scale, composite licences could help insurance companies reach new customer segments and increase overall insurance penetration in India.

Now that LIC is planning to acquire one of the private health insurance companies to begin its journey in the sector, this milestone could’ve been accomplished even before. I believe this decision by LIC is 2-3 years late, as the COVID-19 pandemic has opened people’s eyes to the importance of prioritising health.

More and more individuals and families are taking insurance policies as they are now well aware of how uncertain life and health can be. However, the other aspects of this “inorganic” acquisition and its compliance with current governmental regulations are still unclear.

If you are interested to read about LIC's investments, click on the link to read about them.

Insurance Sector Overview

The industry has 57 insurance companies, 24 in life insurance and 34 in non-life insurance, with Life Insurance Corporation (LIC) being the sole public sector company.

India’s insurance industry is experiencing exponential growth, attributed to increasing awareness and growing incomes. The infographic below represents India’s standing amidst other nations.

In recent years, the insurance industry has experienced various changes, including new developments, revised regulations, proposed amendments, and growth. These changes have created new opportunities for industry growth and ensured that insurers remain relevant in the face of evolving trends and digital disruptions.

In FY24 (until September 2023), non-life insurers saw a 14.86% year-over-year increase in premium income, amounting to ₹1,43,802 crore ($17.29 billion), driven by strong demand for health, motor, and crop insurance. Furthermore, the private life insurance industry experienced a robust 35% year-on-year premium growth in March 2023 and a 20% growth for FY23.

The Indian insurance industry has experienced significant growth over the last two decades, primarily due to increased private sector involvement, enhanced distribution capabilities, and improved operational efficiencies. Other than that, these factors have played a major role:

a. Expanding Middle Class: A growing middle class with rising disposable income is a key driver for increased insurance demand.

b. Government Initiatives: Government programs promoting financial inclusion, such as Pradhan Mantri Jeevan Jyoti Bima Yojana, Atal Pension Plan, etc., are pushing insurance penetration in rural areas.

c. Product Innovation: Insurance companies are introducing new and innovative products to cater to diverse customer needs.

LIC's Financials & Peer Comparison

As aforementioned, LIC is the leading life insurer in India, boasting a significant market share and a large customer base. This translates to a steady stream of premium income.

As soon as the news of LIC planning to make a health sector debut hit the market, LIC’s stock price started readily jumping.

Beyond the stock market charm lies a financial giant with an impressive track record. Let's delve into some interesting facts and figures that showcase LIC's dominance:

a. Sheer Scale: LIC boasts a staggering number of over 204.5 lakh policies currently in force.

b. Market Leader by a Mile: With a market share of over 71.76% in first-year premium income, LIC reigns supreme in the Indian life insurance sector. It won’t be wrong to say that LIC is setting the pace for the entire industry.

c. Financial Powerhouse: LIC's total assets stand at a whopping ₹45,50,571.73 crore. That's enough to make your head spin! This financial muscle allows it to offer competitive rates and a wide range of products.

The above image represents LIC's Profit & Loss Statement. To access in-depth financials, click on this link.

d. Revenue Giant: LIC generates a premium income of a phenomenal ₹2,31,899.17 crore. That's a testament to the trust millions of Indians place in LIC for their financial security.

Peer Comparison for LIC's Health Debut

LIC will likely face competition from a variety of health insurance companies upon entering the health sector.

1. Star Health and Allied Insurance: A leading standalone health insurer known for its extensive network of hospitals, comprehensive coverage options, and focus on customer service.

2. The New India Assurance Company Limited: A public sector general insurance company offering a range of health insurance products, including individual and family plans, critical illness covers, and hospitalisation cash benefits.

3. ICICI Lombard General Insurance Company Limited: A leading private general insurer offering a variety of health insurance products, known for its cashless claim settlement process and focus on digital services.

4. Health Insurance arms of Life Insurance Companies:

If the government introduces composite licences, these competitors could become the biggest roadblock for LIC.

a. HDFC Health Insurance Limited: A subsidiary of HDFC Life, known for its comprehensive health insurance plans and focus on preventive healthcare initiatives.

b. Max Bupa Health Insurance Limited: A joint venture between Max India Limited and Bupa Plc., offering a range of health insurance products with a focus on customer-centricity and innovation.

The Bottom Line

LIC has been gaining the trust and confidence of Indian citizens for a while now, and from what I can tell, many people are looking forward to LIC’s next chapter. The insurance sector is in itself increasingly growing, but is it enough?

Despite growth, India's insurance penetration rate, i.e., the ratio of insurance premium to GDP, remains below 5%, indicating significant untapped potential. Factors like financial illiteracy, the rural-urban divide, and low insurance penetration need to be addressed to further achieve the dream of providing every citizen with a secure future and health.

It looks like it's time for RBI to seriously consider the benefits of a composite license system for the betterment of the nation.

*Disclaimer: The stocks and companies discussed above aren't a recommendation from Finology Insider and shall not be construed as a replacement for professional advice. Consult a professional or conduct the necessary research before making investment decisions.