8729865 an in Depth Analysis of Insurance Industry

7/29/2019 8729865 an in Depth Analysis of Insurance Industry

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StrategicAnalysisofIndianLifeInsuranceIndustry

AMANAGEMENTRESEARCHPROJECTONINSURANCEINDUSTRY

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Objectivesandscopeoftheproject

TheinsuranceindustryisoneofthebasicserviceindustriesinIndianeconomy,whoseprospectisreflectiveoftheeconomicresilienceoftheeconomy.Withtheglobalisationoftheeconomy,Indiahasbecometheplaygroundofmajorglobalinsuranceplayers.Aswholeinsuranceindustryisaverylargefieldforresearchwehavechosenlifeinsuranceindustryoftheboomingsegmentofinsuranceindustry,forresearchpurpose.Themajorobjectivesofthestudyareasbelow:Tofindouthowpolitical,economical,socio-cultural,technologicalfactorsaffectingthisindustrybyPESTanalysis.Tofindouthowthemarketconditionandwhatlevelofcompetitionistherebyfiveforceanalysis.ToanalysedrivingforcesandkeysuccessfactorsoftheindustryToanalyzevariousthreatsandopportunitiesfortheindustryTofocusoncurrenttrendsandfutureoftheindustry.

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Researchmethodology

Wehavedoneexploratoryresearchandforthatpurposewehadusedsecondarydata.Wehadcollectedthissecondarydatafromvariouspublishedmaterialslikenewspapers,magazines,booksetcandfromInternetwebsites.Fromthesevariousinformationanddatawehaddonequalitativeandquantitativeanalysistofindoutimpactofvariousforces,effectofmacroenvironmentalfactors,majortrendsandfutureoftheindustry.

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InsuranceataGlance

WhatisInsuranceandHowInsuranceWork?AccordingtotheU.S.LifeOfficeManagementAssociationInc.(LOMA),lifeinsuranceisdefinedasfollows:Lifeinsuranceprovidesasomeofmoneyifthepersonwhoisinsureddieswhilstthepolicyisineffect.AnybodywhohasknowledgeaboutlifeinsurancewillbetemptedtosayyesBUTInotherwords,surlythisisfartoobriefanexplanationforafinancialservicethatprovidesaverysophisticatedrangeofsavingsandinvestmentproducts,aswellasmerecompensationfordeath.Insuranceisbasicallyasharingdevice.Thelossestoassetsresultingfromnaturalcalamitieslikefire,flood,earthquake;accidents,etc.aremateoutofthecommonpoolcontributedbylargenumberofpersonwhoisexposedtosimilarrisks.Thiscontributionofmanyisusedtopaythelossessufferedbyunfortunatefew.Howeverthebasicprincipleisthatlossshouldoccurasaresultofnaturalcalamitiesorunexpectedevents,whicharebeyondthehumancontrol.Secondlyinsuredpersonshouldnotmakeanygainoutofinsurance.Itisnaturalthinkofinsuranceofphysicalassetssuchasmotorcarinsuranceorfireinsurancebutoftenweforgetthatcreatorofalltheseassetsinthehumanbeingwhoseeffortshavegonealongwayinbuildinguptheassets.Inthatsense,humanlifeisauniqueimage-generatingasset.Unlikethephysicalassets,whichdecreaseinvaluewithpassageoftime,theindividualbecomesmoreexperiencedandmorematuredasheadvancesinage.Thisraiseshisearningcapacityandthepurposeoflifeinsuranceistoprotectthei

ncomeintheeventofhisprematuredeath.Theindividualhimselfalsoneedsfinancialsecurityfortheoldageoronhisbecomingpermanentlydisabledwhenhisincomewillstop.Insurancealsohasanelementofsavingsincertaincases.Supposethereare1000personsallaged35yearsandhealthylives.Theyareinsuredforoneyearagainsttheriskofthedeath.EachpersonisinsuredforRs.50,000.Ifthepastexperienceindicatesthat4outof1,000persons,atthisageare

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expectedtodieduringtheyear,expectedamountofdeathclaimtobepaidtothefamilyoffourpersonswouldcometoRs.2,00,000.Thecontributiontobepaidbyeachofthe1,000personswillcometoRs.200peryear.Thus,allthe1,000personssharelosscausedtothe4unfortunatefamilies.996personswhosurvivedtilloneyearhavenotlostanythingastheyhavesecuredpeaceofmindandafeelingofsecurityfortheirfamily.Whileinsurancecannotpreventaccidentsorprematuredeath,itcanhelpprotectthefamilyofthedecreasedagainstthelossofthedeathofthemainbreadwinner.Inreturnforspecifiedpayments,insurancewillprovideprotectionagainsttheincidentsofanuncertainevent-suchasprematuredeath.Thebusinessofinsurancecompanycalledinsureristobringtogetherpersonswhoareexposedtosimilarrisks,collectcontribution(premium)frothemonsomeequitablebasisandpaythelosses(claim)totheunfortunatefewwhosuffer.Thestorysofar...Almost4,500yearsago,intheancientlandofBabylonia,tradersusedtobearriskofthecaravantradebygivingloansthathadtobelaterrepaidwithinterestwhenthegoodsarrivedsafely.In2100BC,theCodeofHammurabigrantedlegalstatustothepractice.That,perhaps,washowinsurancemadeitsbeginning..In2100BC,theCodeofHammurabigrantedlegalstatustothepractice.That,perhaps,washowinsurancemadeitsbeginning.AsEuropeancivilizationprogressed,itssocialinstitutionsandwelfarepracticesalsogotmoreandmorerefined.Withthediscoveryofnewlands,searoutesandtheconsequentgrowthintrade,medievalguildstookituponthemselvestoprotecttheirmembertradersfromlossonaccountoffire,shipwrecksandth

elike.Sincemostofthetradetookplacebysea,therewasalsothefearofpirates.Sotheseguildsevenofferedransomformembersheldcaptivebypirates.Burialexpensesandsupportintimesofsicknessandpovertywereotherservicesoffered.Essentially,alltheserevolvedaroundtheconceptofinsuranceorriskcoverage.That showoldtheseconceptsare,really.In1347,inGenoa,Europeanmaritimenationsenteredintotheearliestknowninsurancecontractanddecidedtoacceptmarineinsuranceasapractice.

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ThefirststepInsuranceasweknowittodayowesitsexistenceto17thcenturyEngland.Infact,itbegantakingshapein1688ataratherinterestingplacecalledLloyd sCoffeeHouseinLondon,wheremerchants,ship-ownersandunderwritersmettodiscussandtransactbusiness.Bytheendofthe18thcentury,Lloyd

shadbrewedenoughbusinesstobecomeoneofthefirstmoderninsurancecompanies.InsuranceandMyth...Backtothe17thcentury.In1693,astronomerEdmondHalleyconstructedthefirstmortalitytabletoprovidealinkbetweenthelifeinsurancepremiumandtheaveragelifespansbasedonstatisticallawsofmortalityandcompoundinterest.In1756,JosephDodsonreworkedthetable,linkingpremiumratetoage.Entercompanies...ThefirststockcompaniestogetintothebusinessofinsurancewerecharteredinEnglandin1720.Theyear1735sawthebirthofthefirstinsurancecompanyintheAmericancoloniesinCharleston,SC.In1759,thePresbyterianSynodofPhiladelphiasponsoredthefirstlifeinsurancecorporationinAmericaforthebenefitofministersandtheirdependents.However,itwasafter1840thatlifeinsurancereallytookoffinabigway.Thetrigger:reducingoppositionfromreligiousgroups.Thegrowingyears...The19thcenturysawhugedevelopmentsinthefieldofinsurance,withnewerproductsbeingdevisedtomeetthegrowingneedsofurbanizationandindustrialization.In1835,theinfamousNewYorkfiredrewpeople sattentiontotheneedtoprovideforsuddenandlargelosses.Twoyearslater,Massachusettsbecamethefirststatetorequirecompaniesbylawtomaintainsuchreserves.ThegreatChicagofireof1871furtheremphasizedhowfirescancausehugelossesindenselypopulatedmod

erncities.Thepracticeofreinsurance,whereintherisksarespreadamongseveralcompanies,wasdevisedspecificallyforsuchsituations.

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Thereweremoreoffshootsoftheprocessofindustrialization.In1897,theBritishgovernmentpassedtheWorkmen sCompensationAct,whichmadeitmandatoryforacompanytoinsureitsemployeesagainstindustrialaccidents.Withtheadventoftheautomobile,publicliabilityinsurance,whichfirstmadeitsappearanceinthe1880s,gainedimportanceandacceptance?Inthe19thcentury,manysocietieswerefoundedtoinsurethelifeandhealthoftheirmembers,whilefraternalordersprovidedlow-cost,members-onlyinsurance.Eventoday,suchfraternalorderscontinuetoprovideinsurancecoveragetomembersasdomostlabsourorganizations.Manyemployerssponsorgroupinsurancepoliciesfortheiremployees,providingnotjustlifeinsurance,butsicknessandaccidentbenefitsandold-agepensions.Employeescontributeacertainpercentageofthepremiumforthesepolicies.ClassificationofInsurance:Insurancebusinesscanbedividedintotwobroadcategories,i.ii.Life,andNon-life.

Lifeinsuranceisconcernedwithmakingprovisionforaspecificeventhappeningtotheindividual,suchasdeathwhereasnonlife(orgeneralinsurance)ismorecommonlyconcernedwiththeprovisionforaspecificevent,whichaffectsaproperty,suchasfire,flood,theftetc.PRODUCTS:Asforlatestinformationgetintouchwiththecurrentinsurerswebsiteinformationofinsurersisprovidedatthewebpageforinsurers:LifeInsurance:PopularProducts:EndowmentAssurance(Participating)andMoneyBack(Participating).Morethan80%ofthelifeinsurancebusinessisfromtheseproducts.TariffAdvisoryCommittee(TAC)laysdow

ntariffratesforsomeofthegeneralinsuranceproducts.2001:oflifeinsurers.lifeinsurershavelaunchednewproducts.Theseincludelinked-products.Fordetails,pleasevisitthewebsites

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INSURANCEININDIA

Introduction:InsuranceinIndiacanbetracedbacktotheVedas.Forinstance,yogakshema,thenameofLifeInsuranceCorporationofIndia scorporateheadquarters,isderivedfromtheRigVeda.Thetermsuggeststhataformof"communityinsurance"wasprevalentaround1000BCandpracticedbytheAryans.BurialsocietiesofthekindfoundinancientRomewereformedintheBuddhistperiodtohelpfamiliesbuildhouses,protectwidowsandchildren.BombayMutualAssuranceSociety,thefirstIndianlifeassurancesociety,wasformedin1870.OthercompanieslikeOriental,BharatandEmpireofIndiawerealsosetupinthe1870-90s.Itwasduringtheswadeshimovementintheearly20thcenturythatinsurancewitnessedabigboominIndiawithseveralmorecompaniesbeingsetup.Asthesecompaniesgrew,thegovernmentbegantoexercisecontrolonthem.TheInsuranceActwaspassedin1912,followedbyadetailedandamendedInsuranceActof1938thatlookedintoinvestments,expenditureandmanagementofthesecompanies

funds.Bythemid-1950s,therewerearound170insurancecompaniesand80providentfundsocietiesinthecountry

slifeinsurancescene.However,intheabsenceofregulatorysystems,scamsandirregularitieswerealmostawayoflifeatmostofthesecompanies.Asaresult,thegovernmentdecidednationalizesthelifeassurancebusinessinIndia.TheLifeInsuranceCorporationofIndiawassetupin1956totakeoveraround250lifecompanies.Foryearsthereafter,insuranceremainedamono

polyofthepublicsector.Itwasonlyaftersevenyearsofdeliberationanddebate-aftertheRNMalhotraCommitteereportof1994becamethefirstseriousdocumentcallingforthere-

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openingupoftheinsurancesectortoprivateplayers--thatthesectorwasfinallyopeneduptoprivateplayersin2001.TheInsuranceRegulatory&DevelopmentAuthority,anautonomousinsuranceregulatorsetupin2000,hasextensivepowerstooverseetheinsurancebusinessandregulateinamannerthatwillsafeguardtheinterestsoftheinsured.TheinsurancesectorinIndiahascomeafullcirclefrombeinganopencompetitivemarkettonationalizationandbacktoaliberalizedmarketagain.TracingthedevelopmentsintheIndianinsurancesectorrevealsthe360-degreeturnwitnessedoveraperiodofalmosttwocenturies.

Milestoneofindianlifeinsuranceindustry:ThebusinessoflifeinsuranceinIndiainitsexistingformstartedinIndiaintheyear1818withtheestablishmentoftheOrientalLifeInsuranceCompanyinCalcutta.SomeoftheimportantmilestonesinthelifeinsurancebusinessinIndiaare:1912:TheIndianLifeAssuranceCompaniesActenactedasthefirststatutetoregulatethelifeinsurancebusiness.1928:TheIndianInsuranceCompaniesActenactedtoenablethegovernmenttocollectstatisticalinformationaboutbothlifeandnon-lifeinsurancebusinesses.1938:EarlierlegislationconsolidatedandamendedtobytheInsuranceActwiththeobjectiveofprotectingtheinterestsoftheinsuringpublic.1956:245Indianandforeigninsurersandprovidentsocietiestakenoverbythecentralgovernmentandnationalized.LICformedbyanActofParliament,viz.LICAct,1956,withacapitalcontributionofRs.5crorefromtheGovernmentofIndia.

NeedforLifeInsurance:Theabovedefinitioncapturestheoriginal,basic,andintentionoflifeinsurance:i.e.toprovideforonesfamilyandperhapsothersintheeventofdeath,especiallyprematuredeath.Originally,policiesweretoprovideforshortperiodsoftime,coveringtemporaryrisksituations,suchasseavoyages.Aslifeinsurance

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becomesmoreestablished,itwasrealizedwhatausefultoolitwasforanumberofsituationincluding:i.Temporaryneeds/threats:Theoriginalpurposeoflifeinsuranceremainsanimportantelement,namelyprovidingforreplacementofincomeondeathetc.ii.RegularSavings:Providingforonesfamilyandoneself,asamediumtolong-termexercise(throughaseriesofregularpaymentofpremiums).Thishasbecomemorerelevantinrecenttimesaspeopleseekfinancialindependencefromtheirfamily.iii.Investment:Putsimply,thebuildingupofsavingswhilesafeguardingitfromtheravagesofinflation.Unlikeregularsavingproducts,investmentproductsaretraditionallylumpsuminvestments,wheretheindividualmakesaone-timepayment.iv.Retirement:Provisionforonesownlateryearsbecomeincreasingnecessary,especiallyinachangingcultureandsocialenvironment.Onecanbuyasuitableinsurancepolicy,whichwillprovideperiodicalpaymentsinonesoldage.Thissimpleexampleillustratestheimpactprematuredeathcanhaveonafamily,wherethemainearnerhasnolifecover.Asimplelifeinsurancepolicy(termassurance)couldhaveprovidedMr.Atolsfamilywithalumpsumthatcouldhavebeeninvestedtoprovideanincomeequaltoallorpartofhisincome.Wewilldiscusshowtoanalyzetheneedforlifecoverandthevalueoflifelaterinthecourse.

BenefitsfromLifeInsurance:i.Itissuperiortoatraditionalsavingvehicles:Aswellasprovidingasecurevehicletobuildupsavingsetc,itsprovidespeaceofmindtothepolicyhold

er.Intheeventofuntimelydeath,ofsaythemainearnerinthefamily,thepolicywillpayoutoftheguaranteedsumassured,whichislikelytobesignificantmorethanthetotalpremiumspaid.Withmoretraditionalsavingsvehicles,

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suchasfixeddeposits,theonlyreturnwouldbetheamountinvestedplusanyinterestaccrued.

ii.Itencouragessavingandforcesthrift:Onceaninsurancecontracthasbeenenteredinto,theinsuredhasanobligationtocontinuepayingpremiums,untiltheendofthetermofthepolicy,otherwisethepolicywilllapse.Inotherwords,itbecomescompulsoryfortheinsuredtosaveregularlyandspendwisely.Incontrastsavingsheldinadepositaccountcanbeaccessedorstoppedeasily.iii.Itprovideseasysettlementandprotectionagainstcreditors:Onceapersonisappointedforreceivingthebenefits(nomination)oratransferofrightsismade(assignment),aclaimunderthelifeinsurancecontractcanbesettledeasily.Inaddition,creditorshavenorightstoanymoniespaidoutbytheinsurer,wherethepolicyiswrittenundertrust.UndertheMarriedWomensPropertyAct(M.W.Act),themoneyavailablefromthepolicyformsakindoftrust,whichcreditorscannotclaimon.iv.IthelpstoachievethepurposeoftheLifeAssured:Ifsomeonereceivesalargesumofmoney,itispossiblethattheymayspendthemoneyunwiselyorinaspeculativeway.Toovercomethis,thepersontakingthepolicycaninstructtheinsurerthattheclaimamountisgivenininstallments.Forexample,ifthetotalamounttobereceivedbythedependentsisRs.2,00,000sayRs.50,000canbetakenoutasalumpsumandthebalancepaidoutinsmallerinstallments,sayRs.5,000permonth.v.Itcanbeenchasedandfacilitatesborrowing:Somecontractsmayallowthepolicycanbesurrenderedforacasham

ount,ifapolicyholderisnotinapositiontopaythepremium.Aloan,againstcertainpolicies,canbetakenforatemporaryperiodtotideoverthedifficulty;somelendinginstitutionswillacceptalifeinsurancepolicyascollateralforapersonalorcommercialloan.

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vi.TaxRelief:ThepolicyholdersobtainIncomeTaxrebatesbypayingtheinsurancepremium.Thespecifiedformsofsavingwhichenjoyataxrebate,undersection88oftheIncomeTaxAct,includeLifeInsurancePremiumsandcontributionstoarecognizedProvidentFundetc.

Comparisonoflifeinsurancetoothersavinginstrument:1.Protection2.Liquidity3.Taxrelief4.Moneywhenyouneedit.1.Protection:Savingsthroughlifeinsuranceguaranteedfullprotectionagainstriskofthesaver.Inlifeinsurancethefullsumassuredispayablewithbonuswheneverapplicablewhereasinothersavingsschemes,onlytheamountsavedwithinterestispayable.2.Liquidity:Savingcanbemadeinarelativelypainlessmannerbecauseoftheeasyinstallmentfacilitybuiltintothescheme.3.Taxrelief:TaxreliefinLifeinsuranceisavailabletotheinsurerforamountpaidbywayofpremiumforlifeinsurancesubjecttoitratesinforce.4.Moneywhenyouneedit:Asuitableinsuranceplanacombinationofdifferentplanscanbetakenoutofmeet.Specificneedsarelikelytoariseinfuture.Examples:ChildrenseducationStartinlifeMarriagrovisionorPeriodicalneedsforcashoverastretchoftime.

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RoleofLifeInsurance:Risksanduncertaintiesarepartoflife sgreatadventure--accident,illness,theft,naturaldisaster-they reallbuiltintotheworkingoftheUniverse,waitingtohappen.Role1:Lifeinsuranceas"Investment":Insuranceisanattractiveoptionforinvestment.Whilemostpeoplerecognizetheriskhedgingandtaxsavingpotentialofinsurance,manyarenotawareofitsadvantagesasaninvestmentoptionaswell.Insuranceproductsyieldmorecomparedtoregularinvestmentoptions,andthisisbesidestheaddedincentives(readbonuses)offeredbyinsurers.Youcannotcompareaninsuranceproductwithotherinvestmentschemesforthesimplereasonthatitoffersfinancialprotectionfromrisks,somethingthatismissinginnon-insuranceproducts.Infact,thepremiumyoupayforaninsurancepolicyisaninvestmentagainstrisk.Thus,beforecomparingwithotherschemes,youmustacceptthatapartofthetotalamountinvestedinlifeinsurancegoestowardsprovidingfortheriskcover,whiletherestisusedforsavings.Inlifeinsurance,unlikenon-lifeproducts,yougetmaturitybenefitsonsurvivalattheendoftheterm.Inotherwords,ifyoutakealifeinsurancepolicyfor20yearsandsurvivetheterm,theamountinvestedaspremiuminthepolicywillcomebacktoyouwithaddedreturns.Intheunfortunateeventofdeathwithinthetenureofthepolicy,thefamilyofthedeceasedwillreceivethesumassured.Now,letuscompareinsuranceasaninvestmentoptions.IfyouinvestRs10,000inPPF,yourmoneygrowstoRs10,950at9.5percentinterestoverayear.Butinthiscase,theaccesstoyourfundswillbelimited.Onecanwithdraw

50percentoftheinitialdepositonlyafter4years.ThesameamountofRs10,000cangiveyouaninsurancecoverofuptoapproximatelyRs5-12lakh(dependingupontheplan,ageandmedicalconditionofthelifeinsured,etc)andthisamountcanbecomeimmediatelyavailabletothenomineeofthepolicyholderondeath.Thusinsuranceisauniqueinvestmentavenuethatdeliverssoundreturnsinadditiontoprotection.

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Role2:Lifeinsuranceas"Riskcover:Firstandforemost,insuranceisaboutriskcoverandprotection-financialprotection,tobemoreprecise-tohelpoutlastlife sunpredictablelosses.Designedtosafeguardagainstlossessufferedonaccountofanyunforeseenevent,insuranceprovidesyouwiththatuniquesenseofsecuritythatnootherformofinvestmentprovides.Bybuyinglifeinsurance,youbuypeaceofmindandarepreparedtofaceanyfinancial.Role3:Lifeinsuranceas"Taxplanning":Insuranceservesasanexcellenttaxsavingmechanismtoo.TheGovernmentofIndiahasofferedtaxincentivestolifeinsuranceproductsinordertofacilitatetheflowoffundsintoproductiveassets.UnderSection88ofIncomeTaxAct1961,anindividualisentitledtoarebateof20percentontheannualpremiumpayableonhis/herlifeandlifeofhis/herchildrenoradultchildren.TherebateIdeductiblefromtaxpayablebytheindividualoraHinduUndividedFamily.ThisrebateiscanbeavaileduptoamaximumofRs12,000onpaymentofyearlypremiumofRs60,000.BypayingRs60,000ayear,youcanbuyanythingupwardsofRs10lakhinsumassured.(Dependingupontheageoftheinsuredandtermofthepolicy)ThismeansthatyougetanRs12,000taxbenefit.TherebateisdeductiblefromthetaxpayablebyanindividualoraHinduUndividedFamily.

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EMERGENCEOFIRDA

InsuranceRegulatoryandDevelopmentAuthority(IRDA):ReformsintheInsurancesectorwereinitiatedwiththepassageoftheIRDABillinParliamentinDecember1999.TheIRDAsinceitsincorporationasastatutorybodyinApril2000hasfastidiouslystucktoitsscheduleofframingregulationsandregisteringtheprivatesectorinsurancecompanies.TheotherdecisionstakensimultaneouslytoprovidethesupportingsystemstotheinsurancesectorandinparticularthelifeinsurancecompanieswerethelaunchoftheIRDAsonlineserviceforissueandrenewaloflicensestoagents.Theapprovalofinstitutionsforimpartingtrainingtoagentshasalsoensuredthattheinsurancecompanieswouldhaveatrainedworkforceofinsuranceagentsinplacetoselltheirproducts,whichareexpectedtobeintroducedbyearlynextyear.SincebeingsetupasanindependentstatutorybodytheIRDAhasputinaframeworkofgloballycompatibleregulations.Intheprivatesector12lifeinsuranceand6generalinsurancecompanieshavebeenregistered.Duties,PowerandFunctionsofIRDA:Section14ofIRDAAct,1999laysdowntheduties,powersandfunctionsofIRDA.1.SubjecttotheprovisionsofthisActandanyotherlawforthetimebeinginforce,theAuthorityshallhavethedutytoregulate,promoteandensureorderlygrowthoftheinsurancebusinessandre-insurancebusiness.2.Withoutprejudicetothegeneralityoftheprovisionscontainedinsubsection.ThepowersandfunctionsoftheAuthorityshallinclude.a.Issuetotheapplicantacertificateofr

egistration,renew,modify,withdraw,suspendorcancelsuchregistration;

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b.Protectionoftheinterestsofthepolicyholdersinmattersconcerningassigningofpolicy,nominationbypolicyholders,insurableinterest,settlementofinsuranceclaim,surrendervalueofpolicyandothertermsandconditionsofcontractsofinsurance;.c.Specifyingrequisitequalifications,codeofconductandpracticaltrainingforintermediaryorinsuranceintermediariesandagents.d.Specifyingthecodeofconductforsurveyorsandlossassessors.e.Promotingefficiencyintheconductofinsurancebusiness.f.Promotingandregulatingprofessionalorganizationsconnectedwiththeinsuranceandre-insurancebusiness.g.LevyingfeesandotherchargesforcarryingoutthepurposesofthisAct.h.Callingforinformationfrom,undertakinginspectionof,conductingenquiriesandinvestigationsincludingauditoftheinsurers,intermediaries,insuranceintermediariesandotherorganizationsconnectedwiththeinsurancebusiness;i.Controlandregulationoftherates,advantages,termsandconditionsthatmaybeofferedbyinsurersinrespectofgeneralinsurancebusinessnotsocontrolledandregulatedbytheTariffAdvisoryCommitteeundersection64UoftheInsuranceAct,1938(4of1938);j.Specifyingtheformandmannerinwhichbooksofaccountshallbemaintainedandstatementofaccountsshallberenderedbyinsurersandotherinsuranceintermediaries;k.Regulatinginvestmentoffundsbyinsurancecompanies;l.Adjudicationofdisputesbetweeninsurersandintermediariesorinsuranceintermediaries;m.SupervisingthefunctioningoftheTariffAdvisoryCommittee;n.Specifyingthepercentageofpremiumincomeoftheinsurertofinanceschemesforpromotingandregulatingprofessionalorganizationsreferredtoi

nclause(f);o.Specifyingthepercentageoflifeinsurancebusinessandgeneralinsurancebusinesstobeundertakenbytheinsurerintheruralorsocialsector;andp.Exercisingsuchotherpowersasmaybeprescribed.

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InsuranceRegulatoryandDevelopmentAuthority(IRDA)Act:TheInsuranceRegulatoryandDevelopmentAuthorityActwasintroducedtoendthemonopolyofState-ownedcompaniesandtoinvestintheInsuranceRegulatoryAuthoritypowertocontroltheinsurancesector.Thesepowersinterariaare:itionofprudentialnormssuchassolvencymargins,capitaladequacy;Requirementsandinvestmentguidelinesforinsurancecompanies;Grantoflicensestonewcompanies,andcancellation,suspensionandwithdrawaloflicensesgiventoinsurancecompanies;Regulationoffundinvestmentbyinsurancecompanies;Maintenanceofsolvencymargins;Adjudicationofdisputesbetweeninsurersandintermediaries;andTarifffixing.

Asperthesection4ofIRDAAct

1999,InsuranceRegulatoryandDevelopmentAuthority(IRDA,whichwasconstitutedbyanactofparliament)specifythecompositionofAuthoritytheAuthorityisatenmemberteamconsistingofa.AChairman;b.Fivewhole-timemembers;c.Fourpart-timemembers,(AllappointedbytheGovernmentofIndia)

RegulatoryIssues:TheIRDABillliesdownthattheIndianpromotermustdilutethestakeintheprivateinsurancefirmsfrom74percentto26percentintenyears.Thebillstipulatestoughsolvencymargins--Rs500millionforlifeinsurancefirms,Rs500millionorasumequivalentto20percentofnetpremiumincomeforgenerali

nsuranceandRs1billionforreinsurancebusiness.

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Theinsurerhastomaintainseparateaccountsrelatingtofundofshareholdersandpolicyholders.Thefundsofpolicyholdersshouldberetainedwithinthecountrybutdoesnotcoverrepatriationofprofitsanddividends.Insurancecompaniesunderthenewregimewillhavetohaveexposuretoruralandsocialsectors.Foreigninvestmentininsurance,thebillstates,iscrucialtofinancinginfrastructureandbetterinsurancecover.ThekeytosuccessinopeninguptheinsurancesectorinIndiaisregulation.Anexampleofhowpoorregulationcandestroyamarketisthemutualfundindustry.Acombinationofimpropermarketingpracticehasresultedinalossofinvestorfaithinthatindustry.Incidentally,theinsuranceindustryinIndiaitselfhasgonethroughthesamephase.Oneofthereasonsfornationalizationoftheinsuranceindustry(LICin1956andGICin1973)wasthemismanagementandmalpracticeoferstwhileprivateplayers.ButifthestatementsofIRAofficialsareanythingtogoby,thenewregulationsareexpectedtobeontherighttrack.NIRangachary,chairman,IRA,hasalreadyprovidedthetimetableforthechangesoncetheBillispassed.TheIRAhasalreadyindicatedthatitwillhavetoughnormsfornewparticipants.Thisisthemostcompellingreasonwhyprivatesector(andforeign)companies,whichwillspreadtheinsurancehabitinthesocietalandconsumerinterest,areurgentlyrequiredinthisvitalsectoroftheeconomy.Withthenation sinfrastructureinastateofimminentcollapse,Indiacouldn

thaveaffordedtobelumberedwithsub-optimallyperformingmonopolyinsurancecompaniesandthereforethepassageoftheInsuranceRegulatory&DevelopmentAuthorityBillonDecember2,1999heraldsaner

aofcautiousoptimismwherestakesarehighforallpartiesconcerned.FortheGovt.ofIndia,ForeignDirectInvestment(FDI)mustpourinasanticipated;forforeigninsurers,investmentsmuststartyieldingreturnsandforthedomesticinsuranceindustry-theirmarketpenetrationshouldremainintact.Onthefringe,thecustomerisponderingwhetherallthehypecreatedonliberalizationwillactuallybenefithim.

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InsuranceSectorReformsinIndia:In1993,MalhotraCommittee,headedbyformerFinanceSecretaryandRBIGovernorR.N.Malhotra,wasformedtoevaluatetheIndianinsuranceindustryandrecommenditsfuturedirection.TheMalhotracommitteewassetupwiththeobjectiveofcomplementingthereformsinitiatedinthefinancialsector.ThereformswereaimedatcreatingamoreefficientandcompetitivefinancialsystemsuitablefortherequirementsoftheeconomykeepinginmindthestructuralchangescurrentlyunderwayandrecognizingthatinsuranceisanimportantpartoftheoverallfinancialsystemwhereitwasnecessarytoaddresstheneedforsimilarreformsIn1994,thecommitteesubmittedthereportandsomeofthekeyrecommendationsincluded:Structure:GovernmentstakeintheinsuranceCompaniestobebroughtdownto50%GovernmentshouldtakeovertheholdingsofGICanditssubsidiariessothatthesesubsidiariescanactasindependentcorporationsAlltheinsurancecompaniesshouldbegivengreaterfreedomtooperate

Competition:PrivateCompanieswithaminimumpaidupcapitalofRs.1bnshouallowedtoentertheindustryNoCompanyshoulddealinbothLifeandGeneralInsurancethroughasingleentityForeigncompaniesmaybeallowedtoentertheindustryincollaborationwiththedomesticcompaniesPostalLifeInsuranceshouldbeallowedtooperateintheruralmarketOnlyoneStateLevelLifeInsuranceCompanyshouldbeallowedtooperateineachstate

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RegulatoryBody:TheInsuranceActshouldbechangedAnInsuranceRegulatorybodshouldbesetupControllerofInsurance(CurrentlyapartfromtheFinanceMinistry)shouldbemadeindependentInvestments:MandatoryInvestmentsofLICLifeFundingovernmentsecuritiestobereducedfrom75%to50%GICanditssubsidiariesarenottoholdmorethan5%inanycompany(Therecurrentholdingstobebroughtdowntothisleveloveraperiodoftime)CustomerService:LICshouldpyinterestondelaysinpaymentsbeyond30daysInsurancecompaniesmustbeencouragedtosetupunitlinkedpensionplansComputerizationofoperationsandupdatingoftechnologytobecarriedoutintheinsuranceindustryThecommitteeemphasizedthatinordertoimprovethecustomerservicesandincreasethecoverageoftheinsuranceindustryshouldbeopeneduptocompetition.Butatthesametime,thecommitteefelttheneedtoexercisecautionasanyfailureonthepartofnewplayerscouldrunthepublicconfidenceintheindustry.Hence,itwasdecidedtoallowcompetitioninalimitedwaybystipulatingtheminimumcapitalrequirementofRs.100crores.Thecommitteefelttheneedtoprovidegreaterautonomytoinsurancecompaniesinordertoimprovetheirperformanceandenablethemtoactasindependentcompanieswitheconomicmotives.Forthispurpose,ithadproposedsettingupanindependentregulatorybody.

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ECONOMICLIBERALIZATION

Economicliberalizationsinbriefreferstotheeffortstakenbystatetowardfastereconomicdevelopmentbyadoptingchangesinexistingeconomicpolicy,rulesandRegulationsandbringingflexibilityinadministrativecontrolandprocedureseconomicliberalizationencouragetheuseofnewtechnologyandimproveknowledgeintheproductionprocessbyglobalparticipationandmarketing.

NeedforGlobalIntegration:Recenteconomicliberalizationstartedfewyearsagohavestartedbringinginnewinvestmentsfromglobalgiantsandthegovernmentwashardpressedtofacilitateglobalintegrationbyloweringtradebarriersforthefreeflowoftechnology,intellectualandfinancialcapital.Additionally,reformsareessentialiftheIndianeconomyistoachieveandsustainagrowthrateof7to8percentperannum.Reachingafastergrowthpathalsoimpliesattractingforeigndirectinvestmentinflowsof$10Billioneveryyear,upfromthecurrentlevelof$3to$3.5Billion.Thusliberalizationofinsurancecreatesanenvironmentforthegenerationoflongtermcontractualfundsforinfrastructuralinvestment.ReportonInfrastructuresaysthat85%offundsforinfrastructuredevelopmenthavetocomefromthedomesticindustry.ItfurthersaysthatIndiawouldneed$100Billionoverthenextfiveyearstomeetitsinfrastructureneeds.GiventherateofsavingsinIndia,thereismuchmoreroomtogrowandonecanexpectanadditiona

lrevenueofabout$10Billionayearenteringthemarkettoenhanceinfrastructure.Insuranceisdefinitelygoingtobeoneareathatwillassistinmobilizationofthesefunds.

Multinationals interest:Multinationalinsurersareindeedkeenlyinterestedinemerginginsurancebecausetheirhomemarketsaresaturatedwhileemergingcountrieshavelowinsurancepenetrationsandhighgrowthrates.Internationalinsurersoftenderiveasignificantpartoftheirbusinessfrommultinationaloperations.Asearlyas1994,

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Privatization:StartUpStrategy:Potentialprivateentrantsthereforeexpecttoscoreintheareasofcustomerservice,speedandflexibility.Theypointoutthattheirentrywillmeanbetterproductsandchoicefortheconsumer.Criticscounterthatthebenefitwillbeslim,becausenewplayerswillconcentrateonaffluent,urbancustomersasforeignbanksdiduntilrecently.Thismightseemalogicalstrategyfromthepointofviewofnewplayers.Start-upcosts-suchasthoseofsettingupaconventionaldistributionnetwork-arelargeandhigh-endnichesofferbetterreturns.However,inthelongrun middlemarket offersthegreatestpotentialasintermsofitisthesecondlargestmarketintheworld.Thismaystillbeanurbanmarketbutgoesbeyondtheaffluentsegment.Insurance,evenmorethanbanking,isavolumegame.Averyexclusiveapproachisunlikelytoprovidemeaningfulnumbers.Therefore,privateinsurerswouldbebestservedbyamiddle-marketapproach,targetingcustomersegmentsthatarecurrentlyuntapped.

RepositioningbyNationalizedSector:Floodgatesofcompetitionopenedupbytheprivatizationofinsuranceindustrydidthrowachallengetothewell-protectednationalizedsectoranditseemstheyhavepickedupthegauntlet.LICandGIC,botharetryingtorepositionthemselvesbyhavingre-engineeringdoneonthestructureandoperationsoftheirrespectiveorganizations.LifeInsuranceCorporationisatpresentgoingthroughpresentationsfromtopmanagementconsultants.Theseconsultantshavebeenaskedto

narratetheirexperiencesincountrieswheretheinsurancesectorhasbeenopenedupforprivatecompetitionsothatthepublicsectorplayercandrawlessons.Basedonthese,LICwillappointaconsultantwhichcanprovidethembroadtermsofreferenceonwhatchangesarerequiredtotackletheimpendingcompetition.

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GIChasalreadyidentifiedtheareasthatneedtobeactivatedandgivenashapethroughthefoursubsidiarycompanies.Foremostistheareaofprovidinghealthinsuranceservices.AchangeintheGICActwillenablethecorporationtofloatajointventurecompanyforhealthinsurance.OtherareasthattheGICislookingataresavings-linkedinsuranceproductsanduseofalternatedistributionchannelsincludingbancassurance.Alsoinprogressistheco-ordinationofallforeignoperationsofthegroup.Evenstate-ownedentities,SBIandUTIhaveseriousplansforinsurancesectorasthebankshaveunsurpassedadvantagesoveranyotherplayer.TheintermediariesarealsogettingmoreorganizedwithalittlenudgingfromtheIRA.TheReinsuranceConsultantsAssociationisplanningtoconvertitselfintotheInsuranceBrokersAssociationofIndiainanticipationofthelawsbeingamendedtoallowinsurancebroking.

CrossBorderExperience:Cross-countryexperienceshowsthatnowhereintheworldhavetheentryofforeignfirmsthreatenedthepositionofdomesticcompanies.WhetheritisMalaysia,wheretheinsurancesectorhasbeenopenformorethan50yearsandforeigncompaniesaccountforabout10percentofmarketpenetrationoritisIndonesia,Thailand,ChinaorthePhilippines,wherethemarkethasbeenopenedmorerecently,thetotalmarketshareofforeigncompaniesislessthan10percentexceptinIndonesiawhereitisabout20percent.Closerhome,wehavetheexperienceofthebankingsectorwheredespitethepresenceof42foreignbanks,theirshare

intotalbankingassetsislessthan10percent.Todayhardly20percentofthepopulationinIndiaisinsuredandinsurancepremium(lifeaswellasnon-life)accountforjust2percentofGDPasagainsttheG7averageof9.2percent.Consequently,thefearthatnewcompanieswilldisplacepubliccompaniesismisplaced.Thereisroomformorefornotonlytheexistingcompaniesbutalsoforanynumberofcompetitors.

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InChina,insurancepremiumaccountedforjustover1percentofChina sGDPin1995butinthefouryearssincethemarkethasbeenliberalized(albeitpartially),spendingoninsurancehasgrownatacompoundannualrateof33percent.ItisnotjustforeigncompaniesalonethathavegrownbutalsothenationalPICCaswell.ThestoryisnodifferentinSKorea.There,theopeningofthesectorsawtheBigSixdomesticplayers,whoinitiallycontrolledtheentiremarket,increasetheirbusinessfrom7to37trillionwonby1997.Meanwhileforeigncompanieswerenotabletocapturemorethanaminiscule0.7percentofthemarket.Thevariousimplicationscangroupintoas:1)2)PositiveimplicationNegativeimplication.

1.Positiveimplication:Theliberalizationoflifeinsurancewillbenefittheindustryinthefollowingways:Ithelpstransferoftechnologyinthefieldoflifeinsurance.Newtechniquesandmethodscanbeusedforassessmentofrisk,fixationofreasonablepremiumandprovidenewinvestmentopportunities.Thiswillhelpinexpansionanddevelopmentofbusiness.Ithelpsinadoptingaflexiblepricepolicyonnewlifeinsurancepoliciesdevelopedandintroducenowonward.Itwillmakeavailableinallcountriesoftheworldtheserviceofefficientmanagementandfinancialexperts.Itcanhelpindevelopmentofknowledgeofinsurancebusiness.Manyeducationalandtraininginstitutionstandfastfunctioningthisleadtoavailabilityofprofessionalmanagers.Itwillenlargethescopeofinsurance.Itwillhelpspreaditinruralandsmallvillagesalso.Thelifeins

urancemarketwillbecomeglobal.Theproductivityaswellastheefficiencyalsoincreases.Theinternationalcompetitioninthefielditselfwillplayanimportantrollinthisdirection.Competingabilitywillincreaseduetoliberalization.Allcategoriesofemployeesservinginlifeinsurancesectorwillgetmoresatisfactionthroughgoodopportunityfortraining,higheropeninginjobsandhigherincome.25


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Thegeneralpublicwillalsobebenefitedfromliberalizationoflifeinsurancesector:Theycangetbetterchoiceofselectionofpolicyandinsurer.Whenthereislargenumberofinsurer,theinsurerisabletoselectsuchaninsurerwhosepremiumrateisreasonable.Theinsurersplaymoreattentiontotheinterestofinsured.Thiswayinterestoftheinsurediswellprotected.Therewillbenumberofpoliciesbasedonsocialsecuritybroughtoutbydifferentinsurers.Suchschemesincludeplanlikepensionscheme,gratuityscheme,medicalclaimetc.Goodemploymentopportunityinthelifeinsurancesectorwhenanumberofnewinstitutionsareestablishedinthesefields.Theemployeewillalsobenefitfromliberalizationlifeinsurancesector:Betteropportunityfortraininganddevelopment.Knowledgecanbegainaboutnewmethodoffunctioningthrougheducationandtraining.Theemployeegetsopportunityforjobpromotionandotherfinancialnonfinancialbenefits.Theproductivityofemployeesshalldevelopduetoeducationandtrainingfacility.Workingwithprofessionalmanagerbenefittheemployeeinlearningthenewmethodsandtechniqueinworksituation.Theemployeewillgetmotivationandtheirmoralwillbehigher.2.Negativeimplication:Cutthroatcompetitionliberalizationwillcreateacutecompetitioninthelifeinsurancemarket,whichisnotintheinterestoftheindustry,customersorthecountry.Thistypeofacutecompetitionmaysometimeleadstoinsolvencyoflifeinsurancecompaniesandtherebythepolicyholdersmayfaceseriousconsequences.Thisseemsfarfromtruth,astheexperienceshowsthatnowherethecompetitionhasthreatenedanybody.Theexperienceofbankingsectorinour

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owncountrytestifiestothiseffectthatdespitepresenceof42foreignbanks,thebalanceisnotdistributed.Totalinvestmentassetsoftheforeignbanksareabout10%.Buttheimpactofthecompetitionhasincreasedthesizeofthemarket.Endofgovernmentmonopoly:Thisliberalizationoflifeinsurancesectorbringsanendtothegovernmentmonopolyinlifeinsurancesectorandprivatecompaniesmayexercisetheirdomination.Dominanceofoutsidecompanies:foreigncompaniescapturethelifeinsurancesectorsasawholeundertheirdominance,becausetheypossessmoreefficientinsurancetechniques,knowledge.AssuchIndiancompaniescannotsurvivebeforetheseforeigncompanies.Shortageoffundsforsocialcause:ItisestimatedthatatpresenttheLICandGICinvestatotalofRs90,000crorestothepublic/socialsector.Thisamountisnearly70-80%oftheirtotalfundavailable.Althoughthegovernmentismakingrulesfortheprivatesectorcompaniestoinvestcertainpercentagesoftheirpremiumincomeinthesocialsector,theavailabilityofsuchhugefundisdoubtful.PoliciesofheavyamounttheinsurancecompaniesissuespoliciesofheavyamountwhenatpresentapolicyisavailableforaninsuredsumevenbelowRs.1,00,007/-wherethesumassuredagainstapolicybecomesveryheavy,economicallybackwardpeoplecannotbenefitofinsurance.Moreattentiontowardsprofitablepolicies:-theprivatesectorlifeinsurancecompaniesdevelopandintroduceonlythosepoliciesthatinvolvetheminimumriskburdenandmoreprofitableofthem.Theyoverlooktheinterestofthecommonpeople.Theywanttakenanyspecialattentiontoinsuredthelivesofwoman,physicallyhandicappedetc.whichinvolvemorerisk.Neglect

therurallives:-thepeoplewhoareagainsttheconceptofliberalizationofinsurancesectorbelievethatthedomesticaswellasforeignprivatecompaniesneglecttheruralareas,bygivingmoreattentioningettingpeopleinsuredfromurbanareas.Thisbecauseoftheaveragecostincurredonpoliciesislessinurbanareas.Problemofexercisingcontroloverinsurancecompanies:government.itbecomesverydifficulttocontrolIndianandforeignprivateinsurancecompaniesbythe

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Speculativeactivities:itencouragesformorespeculativeactivitiesbyprivatesectorcompanies.Thedevelopmentofnewpoliciesandpremiumratesarefixedspeculativelyinsteadofconsideringrealisticfactors.Thiswillpromotetheattitudeofearninglargershort-termprofits.Onlongrun,theexistenceofsuchcompaniesbecomesdoubtful.Liberalizationbasedonoutsidepressure:ThecriticsagainsttheviewofliberalizationhavetheviewthatourcountrybecauseofpressurebyWorldTradeOrganizationhasadoptedtheliberalizationmeasures.LiberalizationtofillupbudgetdeficitthecriticsagainsttheviewofLiberalizationtofillupthebudgetdeficitbydisinvestmentofmorethan50%ofsharesofLIC.Thecroresofrupees,thustobereceivedcanbeusedforfillingupthebudgetdeficit.ButthisargumentisprovedtobeincorrectinviewofthefactthatthegovernmenthasalreadyannounceditsdecisioninparliamentthatitwontreinvestshareofLIC.DifficultyinutilizingthephysicalresourcescompletelyasaresultofprivatizationthebusinessofLICshallbeaffectednegatively.Asaresultthevastresourcesheldthesecompaniesshallnotbeutilizedfully.Attractionforitsemployeesfromoutsidesourcesthereisapossibilityofdrainageofexpertemployeesfromthetwocorporationstotheprivatecompanies.Thisisbecausetheprivatecompaniesoffermorelucrativesalariesandpackagestotheiremployees.Keepingthisinmind,theIRDAhascomeoutwithregulationsforhighcadreemployeesthattheycantleavethecorporationeasily,tojoinotherplaces.LackofgovernmentguaranteeonpolicestheinsurancepoliciesissuedbystateinsurerscarryCentralGovernmentsguaranteewhereasnosuchguarantees

hallbeavailabletothepoliciesissuedbytheprivateinsurancecompanies.Theinsuredremainunsecuredinthisway.Nograntsavailableonpoliciestopoor:Stateinsurershavekeptprovisionforcertainamountoftheirprofitasgranttopoliciesissuedtopeopleinvillagesandthepoor.Nosuchgrantcanbeexpectedfromtheprivatecompanies.

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Employeesfear:employeesoftheseinsurancecompaniesfeeldangertotheiremploymentduetoprocessofliberalizationmeasure.Whileimplementingit,thesecorporationcanretrenchcertainnumberofemployeeswhoareexceedsinneed.Butthisisnottenableastheexperienceoftheothercountriesshowsitotherwise.PublicsectorGICandGICarere-structuringthemselvesforbetterandmoredeploymentofstaffindiversifiedcompanies.

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GLOBALSCENARIO

Lifeinsurancenotplaysanimportantroleinnationaleconomybutalsoininternationaleconomy.Marinecargoinsuranceprovidesriskcoverageforshippersandthebanks,whichfinanceinternationaltrades.Thisrolebecomesallthemoreimportantinthecontextofanactivegovernmentpolicytoencourageexports.Indianlifeinsureroperatesinmorethan30countriesthroughagencies,branches,associatescompanies.Theseoperationsearnforeignexchange.TheinsurancebusinessisconcernedwithNorthAmerica,WesternEurope,JapanandOceania.Togethertheseregionsaccountsforabout91%oftheworldannulpremium.ByregionsNorthAmericaandwesternEuropearegrowingmoderatelywhileoceanic,LatinAmerica,easternEuropeandAfricadisplaygrowthabovelonetermtrendstoaglobalcontextglobalizationoflifeinsurancehelpscompaniespracticesunderwritingdisciplineinoneregionsglobalizationoftheinsuranceindustryreceivedabigboost.CountriesUnitedKingdomJapanUnitedStatesSouthAfricaAustraliaSouthKoreaIndiaChinaMalaysiaIndonesiaBrazilInsurancePenetration(premiumasa%ofGDP)12.718.704.4814.046.049.891.771.122.130.540.36InsuranceDensity(PerCapitaPremiumsinUSD)3028.53165.11611.4392.91193.5935.67.69.586.44.012.9

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Indiaandtheworldmarket:Unfortunately,theprogressachievedbythelifeinsuranceindustryinIndia,itcomparesunfavorablynotjustwiththedevelopedcountries.Butalsoevenwiththedevelopingworld.Theglobalmarketforthelifeinsuranceisestimatedtobearound$1412.3billions.

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MAJORPLAYERINLIFEINSURANCE

Aboutthevariousplayeroflifeinsurancesector:SincebeingsetupasanindependentstatutorybodytheIRDAhasputinaframeworkofgloballycompatibleregulations.Intheprivatesector12lifeinsuranceand6generalinsurancecompanieshavebeenregisteredthanafterremainingcompaniesareregistered.Herewehavedescribedtheprivatelifeinsurancecompaniesregisteredinwhichyearwise.

PrivatePlayerinLifeInsuranceindustry:Sr.No.12345678910111213RegistrationNumber101104105107109110111114116117121122127DateofReg.23.10.200015.11.200024.11.200010.01.200131.01.200112.02.200130.03.200102.08.200103.08.200106.08.200103.01.200214.05.200206.02.2004HDFCStandardLifeInsuranceCompanyLtd.MaxNewYorkLifeInsuranceCo.Ltd.ICICIPrudentialLifeInsuranceCompanyLtd.OMKotakMahindraLifeInsuranceCo.Ltd.BirlaSunLifeInsuranceCompanyLtd.TataAIGLifeInsuranceCompanyLtd.SBILifeInsuranceCompanyLimited.INGVysyaLifeInsuranceCompanyPrivateLimitedAllianzBajajLifeInsuranceCompanyLtd.MetLifeIndiaInsuranceCompanyPvt.Ltd.AMPSANMARAssuranceCompanyLtd.AvivaLifeInsuranceCo.IndiaPvt.Ltd.SaharaIndiaInsuranceCompanyLtd.NameoftheCompany

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1.LIFEINSURANCECORPORATIOMNINDIA:VISION"Atrans-nationallycompetitivefinancialconglomerateofsignificancetosocietiesandPrideofIndia"MISSION"Exploreandenhancethequalityoflifeofpeoplethroughfinancialsecuritybyprovidingproductsandservicesofaspiredattributeswithcompetitivereturns,andbyrenderingresourcesforeconomicdevelopment."2.ALLIANZBAJAJLIFEINSURANCECOMPANYLTD:AllianzBajajlifeinsurancecompanyltdwithacapitalbaseofRS.1.5billionsisajointventurebetweenALLIANZAGandBAJAJAUTOLTD.ThecompanywasincorporatedonMARCH12,2001andreceivedtheIRDAcertificateofregistrationonaugust3,2001toconductlifeinsurancebusinessinIndia.Bajajautoltd.TheflagshipcompanyofBajajgroupisoneofthelargesttwoandthree-wheelermanufactures,andforth-largestmanufactureroftwo-wheelersintheworld,withannualturnoverofRS.42.16billion.Thecompanyenjoysaverystrongbrandimageinthisindustry.Foundedin1890,theAllianzGroupisoneoftheworldsleadinginsurancecompanieswithovera100yearsexperienceininsuranceandrelatedservices.Withapresenceinover70countries,itisalsothelargestinsurerinEurope.ThekeybusinessareasofAllianzgroupincludeGeneralInsurance(property,engineering,marine,motor,casualtyandmiscellaneous),reinsurance,riskmanagement,lifeandhealthinsurance,assetmanagementandpensionfundsmanagement.RatedAAAbyStandard&Poor,ithasassetsover670billionDM(Rs17,160billion)underitsmanagement.

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3.AVIVALIFEINSURANCECOMPANYLTD.:TheAvivaLifeInsuranceCompany,ajointventurebetweenDaburIndiaandCGU,awhollyownedsubsidiaryofAvivaPlc.,iscapitalizedatRs1billion.Establishedin1884,DaburIndiaLimitedisoneofIndiasoldestgroupsofcompanies,withinterestsinayerdedicspecialties,pharmaceuticals,personalcareandhealth-careproducts,theannualsalesturnoverofthegroupisoverRs12billion.Avivaplc.isthelargestlifeandgeneralinsurancegroupoftheUK,andtheworldsseventhlargestinsurerwithworld-widepremiumincomeandretailinvestmentsalesof28billionandmorethan200billioninassetsundermanagement.Avivaplc.istheholdingcompanyoftheAvivagroupofcompanieswhichisinvolvedinthelifeassurancebusiness,log-termsavings,allclassesofgeneralinsurancebusinessandfundmanagement.4.BIRLASUNLIFEINSURANCECOMPANYLTD.:TheBirlaSunLifeInsuranceCompany,isa74.26jointventurebetweentheAdityaBirlaGroupandSunLifeFinancialServicesofCanada,andhasanequitycapitalofRs1.5billion.TheAdityaBirlaGroupisoneofIndiaslargestbusinesshouses,withaturnoverofover$4.75billionandanassetbaseof$3.8billion.TheGroupisawelldiversifiedconglomeratespanning40companiesspreadacross17countries.SunLifeAssuranceCo.,ofCanada,establishedin1871,hasastrongpresenceinCanada,theUSA,thePhilippines,HongKong,andtheUK.Itsmajorlinesofbusinessarelifeinsurance,annuitiesandmutualfundandinvestmentservices.InCanada,thecompanyisespeciallystronginthecorporatelifeandhealthinsuranceandsavingsmarkets.

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5.HDFCSTANDARDLIFEINSURANCECOMPANYLTD.:HDFCStandardLifeInsuranceCompanyLtd.wasincorporatedoAugust14,2000.HDFCisthemajoritystakeholderwithan81.4percentstake.StandardLifeholdsastakeof18.6percent.Incorporatedin1977withasharecapitalofRs100million,HDFChassinceemergedasthelargestresidentialmortgagefinanceinstitutioninthecountry,raisingitscapitaltoRs1.19billionandanassetbaseofRs150billion.Itoperatesthrough75locationsthroughoutIndia,andhasaninternationalofficeinDubai,UAE,withserviceassociatesinKuwait,OmanandQatar.StandardLife,whichhasbeeninthelifeinsurancebusinessforthepast175years,isEuropeslargestmutuallifeassurancecompany.WithanassetbaseofRs6000billion,ithasthedistinctionofbeingaccordedtheAAAratingbyStandard&Poorforthepastsixyears.6.ICICI-PRUDENTIALLIFEINSURANCECOMPANYLTD.:TheICICI-PrudentialLifeInsuranceCompanyltd,withICICIsshareat74percentandPrudentialplc.UKsshareof26percentwasincorporatedoJuly20,2000,withanauthorizedcapitalofRs2.3billion.ThepaidupcapitalisRs1.9billion.ItcommencedcommercialoperationsonDecember19,2000,becomingoneofthefirstfewprivatesectorplayerstoentertheliberalizedarena.TheWorldBank,theGovernmentofIndiaandtheIndianIndustry,topromoteindustrialdevelopmentinIndiabyprovidingprojectandcorporatefinancetotheIndianindustry,establishedICICILTD.,in1944.Sinceitsinception,ithasgrownfromadevelopmentbandtoafinancialconglomerateandhasbecomeoneofthelargestpublicfinancialconglomeratesandhasbecomeoneofthelargestpublicfinancialinstitutionsinIndia,financ

ingallthemajorsectorsoftheeconomy.

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Foundedin1848,Prudentialplc.hasgrowntobecomeoneofthelargestprovidersofawiderangeofsavingsproductsfortheindividual,includinglifeinsurance,pensions,annuities,unittrustsandpersonalbanking.Ithasapresenceinover15countries,andmanagesassetsofoverUS$259billion(approximatelyRs11,3956billion)asofDecember31,1999.infact,PrudentialsfirstoverseasoperationwasinIndia,waybackin1923,toestablishlifeandgeneralinsurancebranchagencies.7.ING-VYSYALIFEINSURANCECOMPANYPVT.LTD.:Asperthejointventureagreement,VysyaBankholds49percent,ING26percent,andtheGMRGroup,whichhaswideranginginterestsinfieldswhichaspowergeneration,infrastructure,manufacturing,softwareandbanking,holds25percent.ThisjointventureisexpectedtobethefirstBancassuranceventureinthecountry.TheVysyaBank,whichhasequityparticipationfromBankBrusselsLamberts,isoneofthelargestprivatebanksinIndiawith480retailoutlets,thebank,givenitssignificantbranchpenetration,hasahighdegreeofretailfocus.TheINGGroup,withanassetbaseofoverRs284.2billionisaglobalfinancialinstitutionofDutchorigin,whichisactiveinthefieldofbanking,insuranceandassetmanagementinover60countries.INGInsuranceistheworldssecondlargestlifeinsurancecompanyasperthelatestFortunerankings.ItisthethirdlargestfinancialservicescompanyinEurope,andthetenthlargestfinancialservicescompanyintheworld.8.MAXNEWYORKLIFEINSURANCECOMPANYLTD.:MaxNewYorkLifeisapartnershipbetweenMaxIndiaLimited,oneofIndiasleadingmulti-businesscorporationsandNewYorkLife.Thepaid-upcapitalofthejointventureisRs

2.5billion.

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MaxIndiahassignificantpresenceinthemostvitalandfastgrowingsectorsoftheIndianeconomy,viz.,telecommunicationservices,Electroniccomponentsdistribution,specialtyplasticfilmsandbulkpharmaceuticals.Itisalsoactiveintheemergingknowledge-basedareasofhealthcare,financialservicesandIT.In1998,NewYorkLifeInternationalInc.,hadtotalrevenuesamountingtoalmostUS$20billion,andwasratedthenumberoneproviderofnewlifeinsurancepoliciesintheUSA.Inthesameyear,NewYorkLifewasalsotheleaderininsurancesalestothegrowingIndiancommunityintheUSA.9.METLIFEINDIAINSURANCECOMPANYLTD.:TheMetLifeIndiaInsuranceCompany,jointventurebetweentheUSinsurancemajorMetropolitanLifeInsuranceCo.,theJammuandKashmirBankLtd.,thePallonjiGroupandsomehighnetworthindividuals,wasincorporatedinIndiaonApril11,2001.ThecompanystarteditsoperationwithaninitialcapitalofRs1.25billion.TheMetropolitanLifeInsuranceCo.,establishedin1867a,isamemberoftheMetropolitanLifeGroupandislicensesintheUSA,Canadaandafewothercountries.Itsmajorlinesofbusinessareindividualandgrouplifeinsurance.Pallonji&Co.Pvt.Ltd.,isprimarilyengagedincontractingandhasundertakenmajorcontractforpowergeneratingsituation,chemicalandfertilizerfactoriespetroleumrefineriesandgasplatform.Tihasalsodiversifiedoutsideintheirbusinessintothefieldofnon-conventionenergysource.10.OMKOTAKMAHINDRALIFEINSURANCECOMPANYLTD.ThejointventureOMKOTAKMAHINDRAlifeinsurancestartedoffwithaninitialcapitalofRs.1.5billions,witha74:26stakebetweenKotakMahindralifeinsuranceandoldmutualplc.mainl

ifeof

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KotakMahindrafinanceltdisoneoftheIndiaspremierfinancialgroups,witharangeofhighlyspecializedproductsandservices,andaverylargeclientbaseofIndianandinternationalfirms.Startingasarenon-productcompanyinthemideighties,ithasevolvedintoafullservicefinancialconglomerate,coveringautoandconsumerfinance,assetsmanagement,investmentbanking,securitiestradingandequityresearch.Itoperatesacross30centersinIndiaandinDubai,London,NewYorkandMauritius.Oldmutualplc.isaleadingglobalfinancialservicesprovider,providingabroadrangeoffinancialservicesintheareaofinsurance,assetsmanagementandbanking.ItisaleadinglifeinsurerinSouthAfrica,withmorethan30%marketshare.11.SBILIFEINSURANCECOMPANYLIMITED:Thisjointventurehas74%capitalparticipationfromthestatebankofIndia(SBI),withCardiffcontributing26%inthepaidcapitalofRs.2.5billion.TheSBIisthelargestbankinthecountrywithmorethan9000branches.Ithassevenassociatebanksandtogethertheyhave30%oftheIndianmarketshare.ItnetworthasonMarch2000stoodatRs.121.46billion,withadepositbaseofRs.196.803billion.Theinsuranceventure,SBIlife,isastepaimedatbeingauniversalbankastheSBIalreadyassubsidiaryforhousingfinance,merchantbanking,mutualfundandprimarydealershipingovernmentpapersandfactoringbusinesses.BNPparibus,whichisoneamongthethreelargestbanksinEurope,istheholdingcompanyofCardiff,itsinsurancearm.Itwassetupin1973andspecializedinlongtermsavings,protectionproductsandcreditorsinsurance.In1999,itspremiumincomestoodatUS$4billion,withassetsworthoverUS$23billion

underitsmanagement.BasedinFrance,ithastheexpertiseforsellinginsuranceproductsthroughbankandasoperationinover20countries.

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12.TATAAIGLIFEINSURANCECOMPANYLIMITED:TataAIGlifeinsurancecompanyltd,iscapitalizedatRs.1.85billionofwhich74%hasbeenbroughtinbyTatasonsand26%bytheAmericanpartner.Tataenterprisewith82companies,spreadover7sectors,haveanannualturnoverexceedingUS$8.8billion.TheTatagrouphasmadepioneeringcontributioninvariousfieldsincludinginsurance,aviation,ironandsteel.ThegrouphashadalongassociationwithIndiasinsurancesector,havingsetupthelargestinsurancecompanyviz.newIndianassurancecompanyltd.(1919),priortothenationalizationofthissector.TheAmericaninsurancegroup(AIG)istheleadingUSbasedinternationalinsuranceandfinancialservicesorganizationandthelargestunderwriterofcommercialandindustrialinsuranceintheUSA.Itsmembercompanieswriteawiderangeofcommercialandpersonalinsuranceproductsinover130countriesandjurisdictionthroughouttheworld.

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CURRENTSCENARIO

LifeInsuranceIndustryisgrowingattherateof68%respectively.

COMPANYMARKETSHARE(IN%)82.3%BajajAllianzINGVysyaAMPSanmarSBILifeTATAAIGHDFCStandardICICIPrudentialBIRLASunlifeAVIVAKotakMahindraMaxNewYorkMetLifeLIC

0.2%

0.9%

0.5%

2.6%

5.6%

2.0%0.4%1.4%1.3%1.8%0.3%

%8.0

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FIRSTYEARPREMIUM-AUGUST2004SrNO.AUGUSTUPTOSTCompanyPremiumu/w%ofNo.ofpolicies/premiumUPAUGUST1.2.3.4.5.6.7.8.9.BajaAllianzINGVysyaAMPSanmarSBILifeTATAAIGHDFCStandardICICIPrudentialBIRLAlifeAVIVA3957.41762.05521.224374.271598.332011.458803.58Sun4561.861082.9110.KotakMahindra11.MaxYork1089.93New1459.3414395.2.03732606.20.3771823.20.26512768.1.80219150.01.2979671.51.36239977.5.635518150.2.56605623.20.7903626.40.5186356.30.90515379456757051175938821154591525376132705812517251702373492812321341287967359213181635480222952116225655050.853810348671.350.217812350091.350.3911034490471.900.635162193350.752.2325818319651.240.775318573632.221.04161971299275.020.459484826488310.240.163349213050.820.46058980.23AUGUSTUPTOAUGUSTSchemes%ofNo.oflivesno.ofiesUPTOAUGUST0.92314252,208coveredundergroupschemesSTAUGUST%oflivescoveredgroupschemesUPTOAUGUST2.02

policAUGUUPTOunder

AUGUTO

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12.MetLife13.LICTotal

348.36127451.85158022.55

1522.80.214584471.09710143.0682.40100

316415342411680042

1048970231867665083

0.1491.63100

5618609598791706

84501

3.27

179944169.592585751100

PREMIUMU/WINAUGUST2OO4(RsinLakhs)Series1

140000120000

PREMIUM

100000800006000040000200000

llianzINGVyAMsyPaSanmarSBILTAifeHTADFCAIGStICanICdaIPrdrudeBntIRLAialSunlifeKotAakVIVMAahinMdraxaNewYorkMetLife

B

ajaj

A

COMPANY

ThelifeinsuranceindustryunderwrotenewbusinesspremiumofRs.1,86,605.46lacksduringthemonthofJuly2004.

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ThelifeinsuranceindustryunderwrotenewbusinesspremiumofRs.1,86,605.46lakhduringthemonthofJuly2004,takingthecumulativepremiumunderwrittenduringthecurrentyear2004-05toRs.5,52,515.95lakh.LICunderwrotepremiumofRs.4,57,019.23lakhi.e.,amarketshareof82.72percent,followedbyICICIPrudentialandBirlaSunLifewithpremiumunderwritten(marketshare)ofRs.31,173.97lakh(5.64percent)andRs.13,591.67lakh(2.46percent)respectively.WhileLICsmarketsharedeclinedfrom90.12percentfortheperiodendedJuly2003,allnewlifeinsurersincreasedtheirmarketshare,overthecorrespondingpreviousyearnumbers.Cumulatively,thenewplayersunderwrotefirstyearpremiumofRs.95,496.72lakh.Intermsofpoliciesunderwritten,themarketshareofthenewplayersandLICwas8.30percentand91.70percentasagainst6.09percentand93.91percentrespectivelyinthecorrespondingperiodintheyear2003-04.ThepremiumunderwrittenbytheindustryuptoJuly,2004,towardsindividualsingleandnon-singlepoliciesstoodatRs.81,244.37lakhandRs.3,39,644.37lakhrespectivelyaccountingfor1,85,806and57,95,219policies.Thegroupsingleandnon-singlepremiumaccountedforRs.1,21,352.74lakhandRs.10,274.47lakh.ThetotalIndividualpremiumandGrouppremiumunderwrittenwasRs.4,20,888.74lakesandRs.1,31,627.21lakesrespectivelyasagainstRs.2,66,468.62lakesandRs.62,636.22lakesunderwritteninthecorrespondingperiodofthepreviousyear.Thenumberoflivescoveredbytheindustryunderthevariousgroupschemeswas17,95,705duringtheperiodendedJuly2004.LICcovered11,89,843livesunderthegroupschemesaccountingfor66.26percentofthemarket,foll

owedbySBILifewith1,70,035lives(9.47percent),Tata-AIGwith1,13,730lives(6.33percent)andMetLifewith78,883lives(4.39percent).TheaccompanyingtabledoesnotincludethenumbersforVarishthaPensionBimaYojana.PremiumunderwrittenbyLICunderthispensionschemeduringtheperiodApril-July2004wasRs.1,07,264.83lakhtowards54,740policies.

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FuturePossibilities(Next5-10Years)Jobopportunitiesarelikelytoincreasemanifold.ThenumberofpeopleworkingintheinsurancesectorinIndiaisroughlythesameasintheUKwithapopulationthatis1/7India

s;theUSwithapopulation1/4thesizeofIndiahasnearly4timesthenumber.Intheemergingmarkets,thepictureisnolessencouraging.InSKorea,thenooffulltimeemployeesmorethandoubledoveraten-yearperiod.Thailandadded50percentmorejobsinfouryears.Theliberalizationoftheinsurancesectorpromisesseveralnewjobsopportunitiesforthoseemployedinthefinancesectorthatareequippedwithdegreesinfinance.Financeprofessionalswhohadwitnessedaslumpinthejobmarketwouldbeamuch-relievedlottohearabouttheprivatizationoftheinsurancesector.Letuslookintothetypeofjobsthatwillbecreatedoncetheprivateplayerscomeonthescene.Certainly,itwon tbefardifferentfromthetraditionalstreamsinanyotherindustry.Therewillbedemandformarketingspecialists,financeexperts,humanresourceprofessionals,engineersfromdiversestreamslikethepetrochemicalandpowersectors,systemsprofessionals,statisticiansandevenmedicalprofessionals.Apartfromthis,therewillbehighdemandforprofessionalsinthestreamslikeUnderwritingandclaimsmanagementandactuarialsciences.Therecouldbeahugeinflowoffundsintothecountry.Giventheindustry shugerequirementofstart-upcapital,theinitialyearsafteropeningupareboundtoseeastronginflowofforeigncapital.Moreover,giventhatthebreak-even,typically,comesmuchlaterthaninthecaseofothersectors,oddsarethatthefirstremittanc

eofdividendwillnothappenbeforeagood10-15years.Intheareasofreinsurance,hugecapacityislikelytobecreatedwithplayerslikeSwissReandMunichRekeenlyobservingtheunfoldingsagaofliberalizationofinsuranceindustryinIndia.Notonlytheoutwardreinsurancewillreduce,itisboundtoattractinwardreinsurancefromtheneighboringcountriesandregions.Iftheregulatorisforwardlookingandlegislatureissupportive,thistrendmaywellleadtothecreationofaLloydslikemarketforthedirectaswellasreinsurancebusinesses.

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However,increasedcompetitionisverylikelytoresultinratereductionsincertainclassesofbusiness,butinthoseareasthathavesofarbeencrosssubsidizedanincreaseinratesmaybepossible.Overall,theratereductionsmayoutweightheincreases,thusbringingdownthere-insurancepremiumvolumeavailable.Apartfrompurere-insuranceactivities,whichisprovidinginsuranceprotection,arevolutionwillcomeinservicerelatedfieldsliketraining,seminars,workshops,know-howtransferregardingriskassessmentandrating,riskinspections,riskmanagementanddevisingnewpolicycovers,etc.Also,withmoreplayersinthemarket,therewillbesignificantincreaseinadvertising,brandbuilding,andkeenpricingnotridiculouspricingandthiswillbenefitwholelotofancillaryindustries.Anothereffectofde-regulationwillbethat,projects,especiallymega-projectswhereoneneedsthecapacitiesoftheinternationalre-insurancemarket,willgetexposedtointernationaltrendstoanevengreaterextentthanisthecasetoday.Thiswillaffectratestoo.Areaslikethepersonallinessegment,wherewealsoexpecttoseesubstantialgrowthasalsonewtypesofcovers,wouldusuallynotbeaffectedbyinternationaltrendsinthesamewayas,thereismuchlessneedforglobalre-insurancesupport.SubstantialshiftinthedistributionofLIFEinsuranceinIndiaislikelytotakeplace.Manyofthesechangeswillechointernationaltrends.Worldwide,insuranceproductsmovealongacontinuumfrompureserviceproductstopurecommodityproducts.Initially,insuranceisseenasacomplexproductwithahighadviceandservicecomponent.Buyerspreferaface-to-faceinteractionandplaceahighpremiumonbrandname

sandreliability.Asproductsbecomesimplerandawarenessincreases,theybecomeoff-theshelf,commodityproducts.Sellersmovetoremotechannelssuchasthetelephoneordirectmail.Variousintermediaries,notnecessarilyinsurancecompanies,sellinsurance.IntheUKforexample,retailerMarks&Spencernowsellsinsuranceproducts.InsomecountrieslikeNetherlandsandJapan,insuranceismarketedusingpostoffice sdistributionchannels.Atthispoint,buyerslookforlowprice.Brandloyaltycouldshiftfromtheinsurertotheseller.

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Inothermarkets,notablyEurope,thishasresultedinbancassurance:banksenteringtheinsurancebusiness.TheNetherlandsledwithfinancialservicesfirmsprovidinganentirerangeofproductsincludingbankaccounts,motor,homeandlifeinsurance,andpensions.OtherEuropeanmarketshavefollowedsuit.InFranceoverhalfofalllifeinsurancesalesaremadethroughbanks.IntheUK,almost95%ofbanksandbuildingsocietiesaredistributinginsuranceproductstoday.InIndiatoo,bankshopetomaximizeexpensiveexistingnetworksbysellingarangeofproducts.Variousseminarsandconferencesonbancassurancearetakingplaceandmanybankershaveclearlyshowntheirinclinationtoenterinsurancemarketbyleveragingtheirstrengthsintheareasofbrandimage,distributionnetwork,andfacetofacecontactwiththeclientsandtelemarketingcoupledwithadvancedinformationtechnologysystems.ThemergersofCitibankwithTravelersinUSAandofWinterthur,thelargestSwissCo.withCreditSuissearerecentexamplesofthephenomenonlikelytosweepIndiatoo.InsurersinIndiashouldalsoexploredistributionthroughnon-financialorganizations.Forexample,insuranceforconsumeritemssuchasrefrigeratorscanbeofferedatthepointofsale.Thispiggybacksonanexistingdistributionchannelandincreasesthelikelihoodofinsurancesales.Allianceswithmanufacturersorretailersofconsumergoodswillbepossible.Withincreasingcompetition,theyarewooingcustomerswithvariousincentives,ofwhichinsurancecanbeone.Anotherpotentialchannelthatreducestheneedforanowneddistributionnetworkisworksitemarketing.Insurerswillbeabletomarketpensions,healthinsuranceandevenothergeneralcov

ersthroughemployerstotheiremployees.Theseproductsmaybepurchasedbytheemployerorsimplymarketedattheworkplacewiththeemployersco-operation.WorldwideinterestinE-commerceandIndia spredominantpositionininformationtechnologyandsoftwaredevelopmentisalsolikelytobeamajorfactorinthemarketingofinsuranceproductsintheimmediatefuture.TheInternetaccountisincreasinginarithmeticprogressionandthetrendhasalreadybeensetbysomeoftheleadinginsurersandinsurancebrokersworldwide.

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Finally,somepotentialIndianentrantsintoinsurancehopetoridetheirexistingdistributionnetworksandcustomerbases.Forexample,financialorganizationslikeICICI,HDFCorKotakMahindraintendtotapthethousandsofcustomerswhoalreadybuytheirdeposits,consumerloansorhousingfinance.Otherhopefulentrantsanticipatespecificalliancessuchaswithhospitalstoprovidehealthcover.

Summery:Overthepastthreeyears,around40companieshaveexpressedinterestinenteringthesectorandmanyforeignandIndiancompanieshavearrangedanticipatoryalliances.Thethreatofnewplayerstakingoverthemarkethasbeenoverplayed.Asiswitnessedinothercountrieswhereliberalizationtookplaceinrecentyearswecansafelyconcludethatnationalizedplayerswillcontinuetoholdstrongmarketsharepositions,buttherewillbeenoughbusinessfornewentrantstobeprofitable.Openingupthesectorwillcertainlymeannewproducts,betterpackagingandimprovedcustomerservice.Bothnewandexistingplayerswillhavetoexplorenewdistributionandmarketingchannels.Potentialbuyersformostofthisinsurancelieinthemiddleclass.Newinsurersmustsegmentthemarketcarefullytoarriveatappropriateproductsandpricing.Recognizingthepotential,inthepastthreeyears,thenationalizedinsurershavealreadybeguntotargetnicheslikepensions,womenorchildren.

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MARKETINGPERSPECTIVE

Distributionperspective(Thekeydifferentiator):IthasbeenovertwoyearssincetheIndianinsurancemarkethasopenedup,andthenewentrantsinmarkethavesetupshopineverymajorcity.Thepublicsectorcompanieshavealreadyestablishedthemselvesinthemarket.Buttherearemultiplechallengesfacedbytheseinsurancecompanies,ofwhichtwoarecritical:Designingofproductssuitingthemarket.Usingtherightdistributionchannelstoreachthecustomer.Whilethecompanieshavebeenquitesuccessfulindealingwiththefirstofthesechallengesusingandtechnicalknowhowofthepartners,mostarestillgrapplingwiththerightchannelmixforthereachingpotentialcustomers.ThispaperdiscussthedistributionchannelfromtheprospectiveofthesocioculturalEthosofthemarketandchannelsfitintoit,alongwithwherethevariouscompaniesfacechallengesandbottlenecks.Wheneveranydebatearisesabouttheintermediariesanddistributionchannels,thediscussionveersto:technologyanditsimpactondistribution.However,dieauthorsbelievesthatthebasicexistentialproblemsbeingfacedbythechannelsinthismarketneedtobelookedintofirst,andthenthequeansofenablers-technology,tools,training,learningtobetakenup.Insurancehastobesoldtheworldever,andtheAsianmarketistonoexception.TheTouchpointwiththeultimatecustomeristhedistributorsortheproducers,andtheroleplayedbythemininsurancemarketiscritical.

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Itisthedistributorwhomakesthedifferenceintermsofthequalityofadviceforchoiceofproduct,servicingofpolicypostsaleandsettlementofclaims.IntheAsianmarkets,withtheirdistinctculturalandsocialethos,theseconditionswillplayamajorroleinshapingthedistributionchannelsandtheireffectiveness.Intodaysscenario,insurancecompaniesmustmovefromsellinginsurancetomarketinganessentialfinancialproduct.Thedistributorshavetobecometrustedfinancialadvisorsfortheclientsandtrustedbusinessassociatesfortheinsurancecompanies.Thiscallsforleveragingmultipledistributionchannelsinacosteffectiveandcustomerfriendlymanner.Forexample,inthedevelopedmarkets,producersformthemajorchannelsofdistribution,whilethewebasacomplementarychanneliscatchingupslowly.AccordingtoaForrestersurvey,88%ofthelifeinsuranceexecutivesrespondingidentifiedagentsastheprimarychannelofdistribution.Thedistinctionofchannelsinthedevelopedmarketsis:personaldistributionsystemsincludeallchannelslikeagenciesofdifferentmodelsandbrokerages,bancassurance,andworksitemarketing.Directresponsedistributionsystemsarethemethodwherebytheclientpurchasestheinsurancedirectly.Thissegment,whichutilizesvariousmediasuchastheinternet,telemarketing,directmail,callcenters,etc.,isjustbeginningtogrow.DistributionScenariointheIndianMarket:IntodaysIndianlifeinsurancemarket,thechallengetoinsurersandintermediariesistwopronged:Buildingfaithaboutthecompanyinthemindoftheclient.Intermediariesbeingabletobuildpersonalcredibilitywiththeclients.

Traditionally,tiedagentshavebeentheprimarychannelsforinsurancedistributionintheIndianmarket;thepublicsectorinsurancecompanieshavetheir

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branchesinalmostallpartsofthecountryandhaveattractedlocalpeopletobecometheiragents.Theagentsarefromvarioussegmentsinsocietyandcollectivelycovertheentirespectrumofsociety.Apersonwhohaslivedinthelocalityformanyyearssellstheproductsoftheinsurancecompanywithalocalbranchnearby.Thisensuresthelastmiletouchpointbeingclosertothecustomer.Ofcourse,theprofileofthepeoplewhoactedasagentssuggeststheymaynothavebeensufficientlyknowledgeableaboutthedifferentproductsoffered,andmaynothavesoldthebestpossibleproducttotheclient.Nonetheless,thecustomertrustedtheagentandcompany.Thisarrangementworkedadequatelyintheabsenceofcompletion.IntodaysscenarioagentscontinueastheprimechannelforinsurancedistributioninIndia,asisthecaseinmostmarket,supportedbycallcenterstoasmallextent.almostallthenewplayersfollowthismodelprimarilybecausetheregulationforotherchannelsareyettobeputinplace.However,thereisgreatexcitementintheindustryovertheimpendingbrokers

regulations,andcompaniesareplanningpossiblechannelsintheirenthusiasmtoincreasevolumes.Thebeliefsthatallthesechannelswillgrowandseamlesslyintegratetobringinbusinessseemafallacy.Whathaveemergedareamuchmoredifficultandevolvingmarketscenewithexitingplayers,morenewplayerscomingin,andglobalpracticesandideasbeingtested.Butnoneofthishaschangedthefundamentalcharacterofthemarket,whichwebelievewilltakemoretimethanexpected.

Summary:ThecurrentstateofinsurancedistributioninIndiaisstillinflux.Ononehand,insurerareawaitingregulationstobeapprovedassurancetobetrulyLaunchedontheotherhandtheyaretryingthecorporatemodelsofintermediaries.Inaddition,thetraditionalmodelsinthemarkets.forbrokeragesandbanc

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Thereisnorightandwronginallthis.Thesuccessofmarketinginsurancedependsonunderstandingthesocialandculturalneedsofthetargetpopulation,andmatchingthemarketsegmentwiththesuitableintermediarysegment.Inaddition,amajorsegmentoftheIndianpopulationhaslowdisposableincome,meaningthateverypennywonwillbeobtainedafteralotofpersuasionandtheexpectedvalueformoneyishigh.Allintermediariescannotsellalllinesofbusinessprofitabilityinallmarket.Thereshouldbecleardemarcationinthemarketingstrategiesofthecompanyfromthisperspective.Clientshouldalsoreceivepricedifferentialsforusingdifferentchannels.Thisnotanewconcept,asthepublicsectorproperty$casuallycompaniesaregivingdiscountsinlieuofagencycommission.Thechannelcompositionshouldnotbehomogeneousbutshouldreflectthelargersociety.Forexample:Agentsfromdifferenteconomic,socialstrata,anddifferentageandgender.BrokersstretchingfromcorporatetoNGOAREtomilkco-operative.Theseintermediariesneedtobeempoweredwiththerightlearning,traininganddevelopmenttoolsandtechnologyenablers.Coupledwiththerightproductmix,thiswillhelptheinsurerstosurviveandflourishinthiscompetitivemarket.

VALUECHAINANALYSIS:Competitiveadvantageofinsurancecompanies:

TheLIFEinsuranceindustryhaswitnessedlimitedcompetitiontillnow.Butwiththeentryofprivatesectorinsurancecompaniesthescenewillchangeandcompe

titionamongvariousinsurancecompanieswillbecomethenameofthegame.Insurancecompanieshavetofaceanddealwithcompetitionnotonlyintermsofinvestmentsperformancebutalsocustomerservice.

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Henceanaggressivecompetitivestrategyistheneedofthedayfortheinsurancecompaniesinordertogainacompetitiveniche,surviveandproliferateintheinsuranceindustry.Tobesuccessfulinonesareaofbusinessinthepresenceofcompetitiveforcesthefollowingmodelmayadopttofulfillthepurpose.Valuechainthecompetitiveadvantagesofafirm:Michaelporter,anauthorityoncompetitivestrategyandcompetitiveadvantage,arguesthatcompetitiveadvantagegrowsfundamentallyoutofthevalue;afirmisabletocreateforitsbuyerthatexceedsthecostofcreatingit.Accordingtohim,competitiveadvantagestemsfrommanydiscreteactivitiescancontributetoafirmsrelativecostpositionandcreatesabasisfordifferentiation.Asystematicwayisnecessaryforanalyzingthesourceofcompetitiveadvantages.TheconceptdevelopedbyMichelporterisvaluechainwhichrepresentsgraphicallytheactivitiesofthefirmandtheirinterlinkages.Thevaluechainreflectsthehistoryofthefirm,itsstrategyforthefuture,approachtowhichitbelongs.Thevaluechainmaybesimilaracrossfirminthesameindustry,butdifferentamongcompetitors.Differencesamongcompetitorsarekeysourceofcompetitiveadvantages.Valuechain-thevaluableingredients:Valuechainofafirmasproposedingeneralhasfivegenericcategoriesofprimaryactivitiesforafirminvolvedincompetitioninanyindustry.Thesecategoriescanberepresentedinthediagram.FirminfrastructureHumanResourceManagementTechnologyDevelopmentProcurementsInBoundLogisticOperationsOutboundlogisticMarketingandsalesServicesMARGINS

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RiskManagementinLifeInsurance

Sourcesofrisk:DesigninganystrategytomanagefuturerisksofanyorganizationneedtheunderstandingoftheriskandtheirOriginanddirectionlinkedtoourenvironment,whichisquitedynamic.Theworldchangessofastthatneitherinformationsystemsnormanagementpracticesareabletocapturethepotentialtrendandthedirectionofthechange.Thisleadstouncertaintyandinabilitytoinitiateproactivemeasures.Themajorchangesthathavebeennoticedare:changesindemographicstructuremortality,lifestyle,killerdiseases(likeAIDSandSARS)impactingthedemographiccomposition;impactonfinancialservicesofrapidglobalization,Informationexplosionandunanticipatedvolatilityinfinancialmarkets.ThesechangeshavemadetheLawofAverages,whichhasbeentraditionallyusedbyLifeInsuranceCorporation(LIC)todiscounttheimpactofrisks,hasbecomenearlyredundantandtherefore,thereisasearchforanewmodelmethodologyandManagementstrategiestofacethechallengesofvarioustypesofrisksthatarebeingconfrontedbylifeinsurancecompanies.Asweproceedtodiscussstrategy,letusexaminetheimporttypesofrisks.Typesofrisks:Itisvirtuallyimpossibletoprovidealistofrisksinlifeinsuranceoperationbasicallyduetothefactthatrisksareassociatedwithmultidimensionalchangesassociatedwiththefactorsmentionedabove.However,themajorfocusesofrisksofinsurancebusinessarerelatedtomacro-economicfactors,pricing,claims,credit,spreads,andinvestmentriskswhichcanbeclassifiedintwoways:onefrom

theactuarialpointofviewandtheotherfromthefinancialmarketpointofview.

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Actuarialviewofrisksisbasicallyclassifiedas:1.AssetLiabilityRisks:Arisingfrommismatchbetweenassetsandliabilityofalifeinsurancecompanyduetofluctuationininterestrates,inflationcausingchangesinvalueofassetsandliabilities.2.AssetRisks:Arisingfromdefaultofborrowerscausingordeclineinmarketvalueofinvestmentassets.3.PricingRisks:Arisingfromuncertaintyinmortality,claims,leakages,managementexpensesandincomefrompremium,investmentandrealestate.4.MiscellaneousRisks:Arisingfromchangesinregulatoryregimeandrequirements,taxation,malpracticesatoperationallevelandinefficiencyinmanagementpractices,lackofaccountabilityandfiduciaryresponsibility.5.Financialviewofrisks:Theactuarialconceptofrisksasmentionedabovecanhoweverbebroadenanddecomposedintosixgenerictypesfromthefinancialsectoreconomistsviewtheserisksare:1)ActuarialRisks:Associatedwithissuanceofinsurancepoliciesandrelatedliabilities.Theserisksariseduetohighercostofraisingfunds,higherunderwritinglossesthanprojectedetc.2)SystematicorMackrisks:Associatedwithassetliabilitymismatch,arisingoutofchangesininterestrate,inflationetc.

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3)CreditRisks:Associatedwithdefaultofborrowersoffunds.4)LiquidityRisks:Associatedwithfundingcrisisarisingoutofunforeseendemandforfundstomeetobligations.5)LegalRisks:associatedwithfinancialcontracts,frauds,violationofregulationetc.

MeasuringRisk:Riskmanagementhowever,callsforriskidentificationandriskmeasures.Anumberofmethodshavebeeninusetomeasuretherisksinaninsurancecompany,thoughthereisnosinglebestmeasureyetlikeVaR(ValueatRisk),whichiswidelyusedforbankingindustry.Mostwidelyusedmeasuresinlifeinsurancecompaniesare:ActualandExpectedExperienceMonitoringRiskBasedCapital(RBC)/Ratios/TargetScenarioAnalysisStressTestingCashFlowTesting(CFT)CashFlowMatching(CFM)DurationandConvexityAnalysisPerformanceAttribution/ExchangesbySourceInA/EratioanalysisactualexperiencetobudgetplanandpricingismonitoredtoseetowhatextentliabilityAssumptionsaremet.InRBCanalysistheratioofRBCtoadjustedstatutorysurplusisusedasthestandardforSurplusadequacyrelatedtorisk.InscenarioanalysisliabilitiesandassetsofaportfolioisexaminedunderdifferentMacro-economicassumption,whilestresstestingisconductedbyusingscenariotofindoutextraordinarylossesarisingoutofaparticularwidelyusedtoexaminethewhetherassetinmatchingtheliabilitiesofaportfolio.UnderCFTanalysis,basic

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asset/liabilityanalysesareundertakentoverifythatsufficientreservesaremaintainedparticularlyforgeneratedincomecontrols(GICs)andannuityproducts,whileunderCFMliabilitiesarematchedwithcashflows.Therearemanyothermeasurestomonitortheportfoliorisksandnormallyacompanysimultaneouslyusesasetofmeasures.Whileinconvexityanalysisthepricesensitivityofdurationtoachangeintheinterestrateismonitored,indurationanalysispricesensitivityofportfolioorsecurityisexaminedinreturntochangeininterestrates.PerformanceattributiontestisconductedtofindouttheriskfactorsCausinglossesbycomparingtheactualperformancewithpre-designedperformance.RiskmanagementpracticesLikeRiskmanagementmethodsthereareavarietyoftechniquesusedbythelifeinsurancecompaniestomanagerisks.AccordingtoBabbelandSantomeroofWhartonSchool,itappearsthatacommonpracticehasEvolvedsuchthatfourelementshavebecomekeystepstoimplementingbroadbasedriskmanagementsystem.StandardsandReportssettingupunderwritingriskclassificationandreviewstandardsandstandardizationoffinancialreportingsystem.UnderwritingAuthorityandLimit-Toexerciseinternalcontrolonmanagers.Investmentguidelinesandstrategiestoexercisecontroloverdesiredassetliabilitymismatch.IncentiveSchemetorelatecompensationtoriskandearnings.Sincethereisnouniformtechniquetomanagetheentiregamutofrisksinlineinsurancecompanythereareseveralmethodsanddevelopedpracticestomanageactuarialrisks,throughpricingsystem,solvencymarginetc.However,recentdevelopmentsindicatethatstaticassumptionsregardinglossdistributionfailedtomanagerisks

arisingoutofinterestratevolatility.Anotherriskfactoristheincentivestoagentsandmarketingstaff,whichencouragesthemtosellmorenewpolicies,replaceoldpolices,andalltheseincreasetheoverallrisksforthecompany.Intheareasofsystematicrisks,top

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onthelistofriskmanagementtechniqueistheAssetLiabilityManagement(ALM)becauseitnotonlycoversinterestratevolatilitybutalsonon-interestrisksarisingoutofembedoptionsinthepolicy.Further,ALMisusedtomanageproductspecificrisksaswellascompanywiderisks.Asurveyofglobalconsultingfirm,MillimanUSA,ofRiskManagementPracticesofUSLifeInsurancecompaniesshowsthatmorethan75percentofthecompaniesindicatedthattheyusethefollowingRiskManagementpractices:RiskInsurance:DiversificationofAssetsDiversificationofLiabilitiesSelectiveunderwritingContinualProcessImprovementHedgingviaCapitalMarketStochasticPricingRiskAdjustedPricingTargets.RisklimitssetthemaximumexposuretoriskfactorsandrisktoleranceoftheManagement.Reinsuranceallowsrisktransfertoanotherpartythroughareinsuranceagreement.Diversificationofassetsminimizestheimpactofunsystematicrisksontheportfoliowhilediversificationofliabilitiesisachievedbyofferingdiverseproducts.Hedgingincapitalmarketsisaimedatreducingtheadverseimpactofinterestratefluctuationachievedthroughderivatives,futures,forwardtrading,optionsandswaps.Itmaybementionedherethatinsurancesupervision,tostrengthentheriskmanagementpractices,focusesmoreandmoreonthecapitalofaninsurancecompanyagainstthebenchmarkofassuredrisksinadditiontothestatutorysolvencymargin.IntheUS,theriskbasedcapitallawsnowineffectinallstatesrequirecommissionerstotakespecifiedactionswhenafirmsriskbasedcapitalratio,definedastheratioofactualratiotoriskbasedcapital,fallsbelowacertainthreshold(Cumming,PhilipsandSmith1997).EveninE

urope,thesolvencyprojectiscenteredontheriskbasedcapitalmodel:Inacapitalbasedsolvencysystem,riskbearingbusinesswillbelinkedtomoreriskcapital.

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RiskmanagementscenarioinIndia:SofarinIndia,veryscantyattentionhasbeengiventoriskmanagementinlifeinsurancecompanies.Neitherisanysystematicandstructuredriskmanagementpracticefollowedininsurancecompaniesnorhaveanyspecificguidelinesonriskstandards,techniquesandriskmanagementbeendeveloped.OfcourseIRDAguidelinesonInvestmentManagementandAsset,LiabilitiesandSolvencymarginofinsurersindirectlydealwithRiskManagement.TheriskmanagementprevailinginIndiancompaniesisofaveryrudimentarytype.Indianfinancialmarkets,particularlyduringthepost-liberalizederahavewitnessedsignificantunderstanding.Globalintervention,changesininterestrateetc.haveincreasedtheriskexposure.Itisthereforenecessarytocreateawarenessaboutthenecessityofriskmanagementaswellastodevelopexpertiseinthisdiscipline.However,riskmanagementpracticescanbesuccessfullyimplementedthroughinstitutionalizationoftheriskmanagementcultureandcreatinganecessityforadoptingit.Managementmayalsoconsiderintroducingcertainincentivesanddisincentivesincentivesformaximizingpolicyholdersreturnthroughriskmanagementanddisincentivesfornon-implementationofriskmanagementwhichadverselyaffectassetvalueandpolicyholdersbenefits.Riskmanagementhasitscostalsoandtheyincludethecostofprofessionaltraining,technology,timeandshorttermlossesduetorigidimplementationofriskpolicies.Howevermanagementsshouldbewillingtobearthiscostintheirownlongterminterest.InviewofthepoorstateoftheriskmanagementpracticesinIndia,thefollowingstepsareurgentlyrequired.Riskstandards:Auniformpracticeofriskmanagementn

eedstobeintroducedthroughthelifeinsuranceindustry.ThiscallsforintroductionofInsuranceIndustryRiskStandard(IIRS)incorporatingtheentiregamutofriskmanagementandriskoversight.RiskManagementmustincludethefiduciaryresponsibilityofboardandmanagers,riskmanagementobjectives,responsibilitiesofvariousentities,checksandbalances,

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independentriskoversights.Forthese,thereisneedforadequateeducationandtraining,whichalsomaypreferablybeuniformindustrywide.Oversight:Independentreviewofriskmanagementpracticesandriskmeasurementsarerequiredatfrequentintervalbytheprimaryfiduciaryandmanagerfiduciary.Thisreviewshouldincludeanalyzingpolicycompliance,duediligence,monitoringinvestmentguidelines,investmentstrategies,risklimits,andevaluationofinvestmentmodels.Ifrequired,revisionredesigningofmodels,strategies,risklimitsmaybedonewithintheoverallguidelinesandparametersoftheregulator.InstitutionalizingRiskManagement:SeparatingRiskMonitoring(RM)fromoperationalfunctionscaninstitutionalizeriskmanagementpractices.Monitoringshouldbeentrustedtotheentitynotinvolvedinoperationalmatters.Thoughimplementationwillbereviewedbytheprimaryfiduciarylikeboard,topmanagement,yetthereisanecessityforindependentmonitoringthroughdesignatedperson.ManyorganizationsappointaChiefRiskOfficer(CRO)whoisareasonablyseniorlevelexecutivereportingtothechiefexecutiveoftheorganization.However,forbettercoordinationandmonitoringariskmanagementcommittee(RMC)canbesetupwhichwouldbeassistedbytheCRO.RMCwouldbeahighpowercommitteereportdirectlytotheboardonquarterlybasis.RMCwouldmonitorimplementationofRiskStandard,RiskLimit,ALM,measures,analyzeinvestmentstrategyinrelationtoportfolioobjectivesandpredeterminerisklimits.RiskGovernance:Theriskmanagementsystemtoprotectassetsfromdepletionmaybemadestrongerthroughimplementationofriskgovernance.Riskgovernancecanbeestablishedeitherthroughrisk

controlorthroughriskreward.Ineitherofthesemodels,thereisanecessityforimprovingriskknowledge,riskinformationand

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competitiveriskPractices.Genuineriskreportingandstartingofriskinformationwillstrengthenriskgovernance.However,thegoalofriskgovernancecanbeachievedifthetopmanagementandboardaretrulyinterestedandsincere.Riskmanagementshouldnotbethoughtandtheregulatoryrequirement,butanintegralpartofstrategyandwayofcorporatelife.

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StrategicAnalysisofIndianLif

8729865 an in Depth Analysis of Insurance Industry

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