Why there are no ‘Niche players’ in insurance industry?

Its heartening to see a statement from the New Chairman of IRDAI about seeking to remove the entry cap of Rs 100 Crore for new entrants into insurance market. It was welcomed by many in the industry. It can facilitate the entry of niche players into the market. However, is capital the real issue that’s discouraging new entrants into the market?

In the last 20 years, the private insurers who entered Indian insurance market are largely pan-india players focusing on all types of products. You need huge capital for such a company structure. In fact, 100 Cr is not enough. There is no insurer currently in the market who survived with the minimum required capital of Rs 100 Cr. They had to inject lot more capital than 100 Cr. While there is no restriction on entry of niche players focusing on any specialized product or market segment, there was no attempt to enter any niche market with less capital by any player so far.

Is there any need for niche players in the market? In my opinion, yes, there is a need. Small players with focus on a specific niche market can be beneficial to those (prospective) policyholders in that segment. There is a possibility to come up with some innovative products. This can help reaching out to the hither-to untapped or under-tapped market. The specialist insurers can focus on micro insurance or non-smoker term products or critical illness or disability. I am only giving few easy examples, but if you leave it to the market, you may see players in completely new and unimaginable market. This specialization with proper risk management can prove to be profitable for those small players. It can be a win-win situation for both parties.

In my view, there has never been any serious attempt to get into niche market by any player. The reason probably is, it’s a small market. You can’t expect the same level of sales as the existing insurance players. Obviously, the cost structure also can’t be the same. It requires a completely different strategy. You need to have specialist but small teams for pricing, underwriting and operations. You also need to adopt a different strategy for sales. If you can get it right, it can be a small but highly profitable market. There are multiple reasons why this segment was not explored so far. They probably got carried away by the current multi-product structure of an insurance company. Current capital requirement is another reason. With such a huge capital at stake, they need to generate enough revenue to justify the capital. Therefore, they can’t spend their resources on small niche market. For example, focusing on covering only ‘sub-standard lives’ or ‘diabetes lives’ is not viable for them. It’s a very small niche market with limited business opportunity.

I think it’s the right time to encourage niche players with lower capital requirement into the market. There are some apprehensions about their ability to withstand major fluctuations in claims experience. Those apprehensions are not baseless. Obviously, the risk management framework has to be robust. Pricing, underwriting, reinsurance, operational efficiency etc need to be appropriate for the risk and size of the company. The capital requirement also should be prescribed accordingly, based on the risk framework. New players should come forward to explore this market and the same should be facilitated by regulator and government. If all stakeholders work together, this can bring refreshingly specialized products and distribution into the insurance market.