Belgian insurer's JV unit predicts annuities boom in India
The annuities business is set for a big boom in India over the next few decades, which could influence investing patterns of insurance companies, the chief executive of the Indian unit that is majority owned by a Belgian insurer told AsianInvestor.
The overall growth potential and positive regulatory environment could also attract more players to the Indian market, he said.
“The annuity business will explode over the next few decades, partly because the demographic dividend that India is enjoying currently will not last forever,” said Vighnesh Shahane, managing director and CEO of Ageas Federal Life Insurance.
Belgium-headquartered insurer Ageas has a 74% stake in the Indian unit, and was the first life insurer in India in 2022 to have a foreign partner with that level of ownership. The balance is held by India's Federal Bank.
Shahane noted that despite India becoming the most populous country in the world recently, the median age in the country is rising.
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"It was previously 21 years but is increasing by 5-6 years every decade. By the next decade, the median age will be 35-36 years and in the decade after that, it will be 43-44 years old,” he said.
In addition, the joint family system -- where multiple generations of families live under the same roof -- is also disintegrating in India, while nuclear families are growing, placing further economic pressures on ageing populations, he said.
“A huge amount of National Pension Service payments is also maturing over the next 5-10 years, which will all be invested in annuity,” Shahane added.
Under India’s state-run NPS, subscribers can withdraw up to 60% of their funds as a lumpsum on maturity. The balance of 40% has to be converted into annuities.
All these changes will require insurers -- and pension companies -- to create more innovative annuity products, which promise to pay a regular income in the future or immediately (if a lumpsum is withdrawn from a pension plan).
Other experts agree. “Given the demography of India – the working age population growing as well as ageing of population and retired or about to retire population growing –protection and annuities will be the key growth drivers for Indian life Insurance,” said Avinash Singh, senior research analyst of Indian securities firm Emkay Global.
“The incremental pool of retiring people from private sector employment or from the government and public sector who don’t have a defined benefit plan will be looking for annuities-based solution. This will be key driver for the annuities growth over medium to long term,” he told AsianInvestor.
For now, there are no tax incentives and a general lack of awareness about annuities and probably a lack of innovative products, said Shahane.
INVESTMENT IMPACT
The expected growth in annuities could also influence the investment profile of insurer portfolios.
“The liability profile of annuity funds is long-term. This gives insurance companies the opportunity to invest in long duration bonds and generate additional returns from term spreads. Similarly, equity as an asset class performs well over the long-term and annuity funds are suited to invest in equities,” noted Shahane.
Even alternative assets could become appealing when regulatory restrictions ease up on insurers and pension funds, enabling these asset owners to allocate capital to these assets, he said.
Insurers can currently invest only up to 3% of their investment portfolio in alternative assets, and these investments can only occur via vehicles known as alternative investment funds.
However, Emkay Global’s Singh noted that changes in investment pattern are more likely to be driven by regulations than market realities.
“In this context, if the Indian regulator moves to risk-based solvency framework and gives increased freedom to life insurers to invest, the risk-weighted capital charges could apply and then one can expect some move away from government securities,” he said.
MORE ENTRANTS EXPECTED
India’s insurance industry has undergone several regulatory changes in the past decade, which has intensified in a positive way in the past 12 months.
"The changing landscape will attract more entrants to the market,” said Shahane.
India’s insurance regulator is considering granting licenses to 20 new insurance entities, local media reports said in May.
The Insurance Regulatory and Development Authority of India earlier this year, approved the applications of two life insurance companies and one general insurance company.
Shahane noted that one of the priorities for the regulator is ensuring consumer access to insurance is widened as much as possible.
A government push to promote life insurance among low-income households, increasing reach of insurers via digital distribution channels, and growing financial literacy are helping as well.
It is also why he is bullish on the medium- to long-term prospects of the life insurance industry in India.
"Pre-COVID-19, people did not think much about having health or life insurance, and now there is much greater awareness and appreciation of having life and medical insurance,” he said.
The headline and para 1 of this story have been updated.