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Indian Insurance Broking: The Billion Dollar "Facilitator" Hidden In Plain Sight


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By AltG Research On Behalf Of Poornima Vardhan And Taponeel Mukherjee

India is taking the business world by storm, as evidenced by industry giants like Tim Cook of Apple and Pret-A-Manger launching their first stores in Mumbai. Boasting a growth rate of 5.9% this year that outperforms all other economies, India is on track to surpass Germany and Japan and become the third-largest economy in the world by the end of the decade. As investors and capital allocators scramble to identify sectors with the greatest potential for returns, one hidden opportunity stands out: The Insurance Broking Industry.


What Does The Indian Insurance Broking Industry Look Like Today?

With rising healthcare costs, consumers are looking for ways to manage their expenses, and insurance brokers can help by offering affordable insurance options and providing guidance on coverage.


With Insurance penetration rates of 3.2% in life and 1% in Non-Life for a total penetration of 4.2% compared with a global average of 7%, the insurance sector is ripe for growth as Indian per capita income zooms past the $2000 level. However, in a country as dense as India, distribution is king! While insurers stand to do well, the insurance broking businesses have what John Malone would call the "Wholesale Transfer Pricing Of Power" and, therefore, the potential to earn an exceptional return on invested capital.


Insurance Broking is the ultimate Pick-And-Shovel play as both retail consumers and smaller businesses embrace insurance adoption. The broking industry will drive growth and adoption across India.


Why Is The Insurance Brokering Play Attractive?

Low Penetration of Insurance

India's insurance sector has been the subject of much discussion regarding its low insurance penetration rate of only 4.2% in FY 2021. However, the insurance broking industry facilitates this growth via building awareness, sales and servicing clients to build trust.


Massively Fragmented Industry

Despite the Samara Capital acquisition of Aditya Birla Capital's insurance broking arm garnering some attention, the insurance broking industry in India remains largely fragmented, with over 300 brokers.


Favourable Tailwinds

Insurance in the US grew as the industry grew, and the population's affluence rose post World War II. By 1965, total life insurance contracts were nearly three times higher than their 1945 levels. Property and casualty increased elevenfold in the 25 years following World War II; life, health, and annuities multiplied eightfold. With rising income and growth in the Indian economy, today is an inflexion point for adopting insurance by businesses (MSMEs) and individuals.


How Does One Invest In India Insurance Broking?

The three-word answer is via "Roll-Up Platforms". The fragmented nature of the industry, attractive EBITDA margins ranging from mid-teens to mid-twenties and growth make a roll-up platform an attractive vehicle to buy multiple insurance broking businesses and generate growth (Growth Arbitrage), cut costs (Cost Arbitrage), finance (Capital Structure Arbitrage) more efficiently and get a multiple re-rating on the higher-quality cash flows of the platform (Multiple Arbitrage).


However, it is crucial to note that understanding local market dynamics is the difference between roll-up platforms achieving success and failing. Local market dynamics here is having the "Local Market Entrepreneurial Expertise" to identify the right targets and segments for growth within the insurance industry, allocate capital to the right sales strategies, and effectively align organisational incentives. The ability to understand each micro market in India while riding the larger macro tailwinds will be the crucial factor in investors generating Multi-Billion Dollar investment returns.


This trend aligns with the insurance brokering businesses in the United States and China, with multi-billion-dollar companies like Aon, Gallagher, and Mercer leading the way. As India's economy grows over the next few decades, the insurance sector will experience significant expansion, making innovative capital financing a crucial component, thereby presenting a golden opportunity for investors and capital allocators.


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