An in depth analysis of Insurance Industry

Strategic Analysis of Indian Life Insurance Industry

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A

MANAGEMENT

RESEARCH PROJECT

ON

INSURANCE INDUSTRY


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The insurance industry is one of the basic service industries in Indian

economy, whose prospect is reflective of the economic resilience of the economy.

With the globalisation of the economy, India has become the playground of major

global insurance players.

As whole insurance industry is a very large field for research we have chosen

life insurance industry of the booming segment of insurance industry, for research

purpose.

The major objectives of the study are as below:

To find out how political, economical, socio-cultural, technological factors

affecting this industry by PEST analysis.

To find out how the market condition and what level of competition is there by

five force analysis.

To analyse driving forces and key success factors of the industry

To analyze various threats and opportunities for the industry

To focus on current trends and future of the industry.

Objectives and scope of the project


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We have done exploratory research and for that purpose we had used

secondary data.

We had collected this secondary data from various published materials like

newspapers, magazines, books etc and from Internet web sites. From these various

information and data we had done qualitative and quantitative analysis to find out

impact of various forces, effect of macro environmental factors, major trends and

future of the industry.

Research methodology


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What is Insurance and How Insurance Work?

According to the U.S. Life Office Management Association Inc. (LOMA), life

insurance is defined as follows: “Life insurance provides a some of money if the

person who is insured dies whilst the policy is in effect”.

Anybody who has knowledge about life insurance will be tempted to say “yes

BUT…” In other words, surly this is far too brief an explanation for a financial

service that provides a very sophisticated range of savings and investment products,

as well as mere compensation for death.

‘Insurance’ is basically a sharing device. The losses to assets resulting from

natural calamities like fire, flood, earthquake; accidents, etc. are mate out of the

common pool contributed by large number of person who is exposed to similar risks.

This contribution of many is used to pay the losses suffered by unfortunate few.

However the basic principle is that loss should occur as a result of natural calamities

or unexpected events, which are beyond the human control. Secondly insured person

should not make any gain out of insurance.

It is natural think of insurance of physical assets such as motor car insurance

or fire insurance but often we forget that creator of all these assets in the human being

whose efforts have gone a long way in building up the assets. In that sense, human life

is a unique image-generating asset. Unlike the physical assets, which decrease in

value with passage of time, the individual becomes more experienced and more

matured as he advances in age. This raises his earning capacity and the purpose of life

insurance is to protect the income in the event of his premature death. The individual

himself also needs financial security for the old age or on his becoming permanently

disabled when his income will stop. Insurance also has an element of savings in

certain cases.

Suppose there are 1000 persons all aged 35 years and healthy lives. They are

insured for one year against the risk of the death. Each person is insured for Rs.

50,000. If the past experience indicates that 4 out of 1,000 persons, at this age are

Insurance at a Glance


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expected to die during the year, expected amount of death claim to be paid to the

family of four persons would come to Rs. 2, 00,000. The contribution to be paid by

each of the 1,000 persons will come to Rs. 200 per year. Thus, all the 1,000 persons

share loss caused to the 4 unfortunate families. 996 persons who survived till one year

have not lost anything as they have secured peace of mind and a feeling of security for

their family. While insurance cannot prevent accidents or premature death, it can help

protect the family of the decreased against the loss of the death of the main

breadwinner. In return for specified payments, insurance will provide protection

against the incidents of an uncertain event- such as premature death.

The business of insurance company called insurer is to bring together persons

who are exposed to similar risks, collect contribution (premium) fro them on some

equitable basis and pay the losses (claim) to the unfortunate few who suffer.

The story so far...

Almost 4,500 years ago, in the ancient land of Babylonia, traders used to bear

risk of the caravan trade by giving loans that had to be later repaid with interest when

the goods arrived safely. In 2100 BC, the Code of Hammurabi granted legal status to

the practice. That, perhaps, was how insurance made its beginning. . In 2100 BC, the

Code of Hammurabi granted legal status to the practice. That, perhaps, was how

insurance made its beginning.

As European civilization progressed, its social institutions and welfare

practices also got more and more refined. With the discovery of new lands, sea routes

and the consequent growth in trade, medieval guilds took it upon themselves to

protect their member traders from loss on account of fire, shipwrecks and the like.

Since most of the trade took place by sea, there was also the fear of pirates. So

these guilds even offered ransom for members held captive by pirates. Burial

expenses and support in times of sickness and poverty were other services offered.

Essentially, all these revolved around the concept of insurance or risk coverage. That's

how old these concepts are, really.

In 1347, in Genoa, European maritime nations entered into the earliest known

insurance contract and decided to accept marine insurance as a practice.


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The first step…

Insurance as we know it today owes its existence to 17th century England. In

fact, it began taking shape in 1688 at a rather interesting place called Lloyd's Coffee

House in London, where merchants, ship-owners and underwriters met to discuss and

transact business. By the end of the 18th century, Lloyd's had brewed enough business

to become one of the first modern insurance companies.

Insurance and Myth...

Back to the 17th century. In 1693, astronomer Edmond Halley constructed the

first mortality table to provide a link between the life insurance premium and the

average life spans based on statistical laws of mortality and compound interest. In

1756, Joseph Dodson reworked the table, linking premium rate to age.

Enter companies...

The first stock companies to get into the business of insurance were chartered

in England in 1720. The year 1735 saw the birth of the first insurance company in the

American colonies in Charleston, SC. In 1759, the Presbyterian Synod of Philadelphia

sponsored the first life insurance corporation in America for the benefit of ministers

and their dependents. However, it was after 1840 that life insurance really took off in

a big way. The trigger: reducing opposition from religious groups.

The growing years...

The 19th century saw huge developments in the field of insurance, with newer

products being devised to meet the growing needs of urbanization and

industrialization.

In 1835, the infamous New York fire drew people's attention to the need to

provide for sudden and large losses. Two years later, Massachusetts became the first

state to require companies by law to maintain such reserves. The great Chicago fire of

1871 further emphasized how fires can cause huge losses in densely populated

modern cities. The practice of reinsurance, wherein the risks are spread among several

companies, was devised specifically for such situations.


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There were more offshoots of the process of industrialization. In 1897, the

British government passed the Workmen's Compensation Act, which made it

mandatory for a company to insure its employees against industrial accidents. With

the advent of the automobile, public liability insurance, which first made its

appearance in the 1880s, gained importance and acceptance?

In the 19th century, many societies were founded to insure the life and health

of their members, while fraternal orders provided low-cost, members-only insurance.

Even today, such fraternal orders continue to provide insurance coverage to members

as do most labs our organizations. Many employers sponsor group insurance policies

for their employees, providing not just life insurance, but sickness and accident

benefits and old-age pensions. Employees contribute a certain percentage of the

premium for these policies.

Classification of Insurance:

Insurance business can be divided into two broad categories,

i. Life, and

ii. Non-life.

Life insurance is concerned with making provision for a specific event

happening to the individual, such as death where as non life (or general

insurance) is more commonly concerned with the provision for a specific

event, which affects a property, such as fire, flood, theft etc.

PRODUCTS:-

As for latest information get in touch with the current insurers –

website information of insurers is provided at the web page for insurers:

Life Insurance: Popular Products: Endowment Assurance (Participating) and

Money Back (Participating). More than 80% of the life insurance business is

from these products.

Tariff Advisory Committee (TAC) lays down tariff rates for some of

the general insurance products. 2001: life insurers have launched new

products. These include linked-products. For details, please visit the websites

of life insurers.


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Introduction: Insurance in India can be traced back to the Vedas. For instance, yogakshema,

the name of Life Insurance Corporation of India's corporate headquarters, is derived

from the Rig Veda. The term suggests that a form of "community insurance" was

prevalent around 1000 BC and practiced by the Aryans.

Burial societies of the kind found in ancient Rome were formed in the

Buddhist period to help families build houses, protect widows and children. Bombay

Mutual Assurance Society, the first Indian life assurance society, was formed in 1870.

Other companies like Oriental, Bharat and Empire of India were also set up in the

1870-90s. It was during the swadeshi movement in the early 20th century that

insurance witnessed a big boom in India with several more companies being set up.

As these companies grew, the government began to exercise control on them.

The Insurance Act was passed in 1912, followed by a detailed and amended Insurance

Act of 1938 that looked into investments, expenditure and management of these

companies' funds.

By the mid-1950s, there were around 170 insurance companies and 80

provident fund societies in the country's life insurance scene. However, in the absence

of regulatory systems, scams and irregularities were almost a way of life at most of

these companies. As a result, the government decided nationalizes the life assurance

business in India. The Life Insurance Corporation of India was set up in 1956 to take

over around 250 life companies.

For years thereafter, insurance remained a monopoly of the public sector. It

was only after seven years of deliberation and debate - after the RN Malhotra

Committee report of 1994 became the first serious document calling for the re-

INSURANCE IN INDIA


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opening up of the insurance sector to private players -- that the sector was finally

opened up to private players in 2001.

The Insurance Regulatory & Development Authority, an autonomous

insurance regulator set up in 2000, has extensive powers to oversee the insurance

business and regulate in a manner that will safeguard the interests of the insured.

The insurance sector in India has come a full circle from being an open

competitive market to nationalization and back to a liberalized market again. Tracing

the developments in the Indian insurance sector reveals the 360-degree turn witnessed

over a period of almost two centuries.

Milestone of indian life insurance industry:-

The business of life insurance in India in its existing form started in India in

the year 1818 with the establishment of the Oriental Life Insurance Company in

Calcutta. Some of the important milestones in the life insurance business in India are:

1912: The Indian Life Assurance Companies Act enacted as the first statute to

regulate the life insurance business.

1928: The Indian Insurance Companies Act enacted to enable the government to

collect statistical information about both life and non-life insurance businesses.

1938: Earlier legislation consolidated and amended to by the Insurance Act with the

objective of protecting the interests of the insuring public.

1956: 245 Indian and foreign insurers and provident societies taken over by the

central government and nationalized. LIC formed by an Act of Parliament, viz. LIC

Act, 1956, with a capital contribution of Rs. 5 crore from the Government of India.

Need for Life Insurance:

The above definition captures the original, basic, and intention of life

insurance: i.e. to provide for one’s family and perhaps others in the event of death,

especially premature death. Originally, policies were to provide for short periods of

time, covering temporary risk situations, such as sea voyages. As life insurance


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becomes more established, it was realized what a useful tool it was for a number of

situation including:

i. Temporary needs/ threats:

The original purpose of life insurance remains an important element, namely

providing for replacement of income on death etc.

ii. Regular Savings:

Providing for one’s family and oneself, as a medium to long-term exercise

(through a series of regular payment of premiums). This has become more

relevant in recent times as people seek financial independence from their family.

iii. Investment:

Put simply, the building up of savings while safeguarding it from the ravages of

inflation. Unlike regular saving products, investment products are traditionally lump

sum investments, where the individual makes a one-time payment.

iv. Retirement:

Provision for one’s own later years become increasing necessary, especially in a

changing culture and social environment. One can buy a suitable insurance policy,

which will provide periodical payments in one’s old age. This simple example

illustrates the impact premature death can have on a family, where the main earner

has no life cover.

A simple life insurance policy (term assurance) could have provided Mr. Atol’s

family with a lump sum that could have been invested to provide an income equal to

all or part of his income. We will discuss how to analyze the need for life cover and

the value of life later in the course.

Benefits from Life Insurance:

i. It is superior to a traditional saving vehicles:

As well as providing a secure vehicle to build up saving s etc, its provides peace

of mind to the policyholder. In the event of untimely death, of say the main earner in

the family, the policy will pay out of the guaranteed sum assured, which is likely to be

significant more than the total premiums paid. With more traditional savings vehicles,


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such as fixed deposits, the only return would be the amount invested plus any interest

accrued.

ii. It encourages saving and forces thrift:

Once an insurance contract has been entered into, the insured has an obligation to

continue paying premiums, until the end of the term of the policy, otherwise the

policy will lapse. In other words, it becomes compulsory for the insured to save

regularly and spend wisely. In contrast savings held in a deposit account can be

accessed or stopped easily.

iii. It provides easy settlement and protection against creditors:

Once a person is appointed for receiving the benefits (nomination) or a transfer of

rights is made (assignment), a claim under the life insurance contract can be settled

easily. In addition, creditors have no rights to any monies paid out by the insurer,

where the policy is written under trust. Under the Married Women’s Property Act

(M.W.Act), the money available from the policy forms a kind of trust, which creditors

cannot claim on.

iv. It helps to achieve the purpose of the Life Assured:

If someone receives a large sum of money, it is possible that they may spend the

money unwisely or in a speculative way. To overcome this, the person taking the

policy can instruct the insurer that the claim amount is given in installments. For

example, if the total amount to be received by the dependents is Rs. 2, 00,000 say

Rs.50, 000 can be taken out as a lump sum and the balance paid out in smaller

installments, say Rs. 5,000 per month.

v. It can be enchased and facilitates borrowing:

Some contracts may allow the policy can be surrendered for a cash amount, if a

policyholder is not in a position to pay the premium. A loan, against certain policies,

can be taken for a temporary period to tide over the difficulty; some lending

institutions will accept a life insurance policy as collateral for a personal or

commercial loan.


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vi. Tax Relief:

The policyholders obtain Income Tax rebates by paying the insurance premium.

The specified forms of saving which enjoy a tax rebate, under section 88 of the

Income Tax Act, include Life Insurance Premiums and contributions to a recognized

Provident Fund etc.

Comparison of life insurance to other saving instrument:-

1. Protection

2. Liquidity

3. Tax relief

4. Money when you need it.

1. Protection:

Savings through life insurance guaranteed full protection against risk

of the saver. In life insurance the full sum assured is payable with bonus whenever

applicable whereas in other savings schemes, only the amount saved with interest

is payable.

2. Liquidity:

Saving can be made in a relatively “painless” manner because of the

easy installment facility built into the scheme.

3. Tax relief:

Tax relief in Life insurance is available to the insurer for amount paid

by way of premium for life insurance subject to it rates in force.

4. Money when you need it:

A suitable insurance plan a combination of different plans can be

taken out of meet. Specific needs are likely to arise in future.

Examples:

• Children’s education

• Start in life

• Marriage provision or

• Periodical needs for cash over a stretch of time.


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Role of Life Insurance:

Risks and uncertainties are part of life's great adventure -- accident, illness,

theft, natural disaster - they're all built into the working of the Universe, waiting to

happen.

Role 1: Life insurance as "Investment":

Insurance is an attractive option for investment. While most people recognize

the risk hedging and tax saving potential of insurance, many are not aware of its

advantages as an investment option as well. Insurance products yield more

compared to regular investment options, and this is besides the added incentives

(read bonuses) offered by insurers. You cannot compare an insurance product with

other investment schemes for the simple reason that it offers financial protection

from risks, something that is missing in non-insurance products.

In fact, the premium you pay for an insurance policy is an investment

against risk. Thus, before comparing with other schemes, you must accept that a

part of the total amount invested in life insurance goes towards providing for the

risk cover, while the rest is used for savings. In life insurance, unlike non-life

products, you get maturity benefits on survival at the end of the term. In other

words, if you take a life insurance policy for 20 years and survive the term, the

amount invested as premium in the policy will come back to you with added

returns. In the unfortunate event of death within the tenure of the policy, the

family of the deceased will receive the sum assured. Now, let us compare

insurance as an investment options. If you invest Rs 10,000 in PPF, your money

grows to Rs 10,950 at 9.5 per cent interest over a year. But in this case, the access

to your funds will be limited. One can withdraw 50 per cent of the initial deposit

only after 4 years. The same amount of Rs 10,000 can give you an insurance cover

of up to approximately Rs 5-12 lakh (depending upon the plan, age and medical

condition of the life insured, etc) and this amount can become immediately

available to the nominee of the policyholder on death. Thus insurance is a unique

investment avenue that delivers sound returns in addition to protection.


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Role 2: Life insurance as "Risk cover:

First and foremost, insurance is about risk cover and protection - financial

protection, to be more precise - to help outlast life's unpredictable losses. Designed to

safeguard against losses suffered on account of any unforeseen event, insurance

provides you with that unique sense of security that no other form of investment

provides. By buying life insurance, you buy peace of mind and are prepared to face

any financial.

Role 3: Life insurance as "Tax planning":

Insurance serves as an excellent tax saving mechanism too. The Government

of India has offered tax incentives to life insurance products in order to facilitate the

flow of funds into productive assets. Under Section 88 of Income Tax Act 1961, an

individual is entitled to a rebate of 20 per cent on the annual premium payable on

his/her life and life of his/her children or adult children. The rebate I deductible from

tax payable by the individual or a Hindu Undivided Family. This rebate is can be

availed up to a maximum of Rs 12,000 on payment of yearly premium of Rs 60,000.

By paying Rs 60,000 a year, you can buy anything upwards of Rs 10 lakh in sum

assured. (Depending upon the age of the insured and term of the policy) This means

that you get an Rs 12,000 tax benefit. The rebate is deductible from the tax payable by

an individual or a Hindu Undivided Family.


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Insurance Regulatory and Development Authority (IRDA):

Reforms in the Insurance sector were initiated with the passage of the IRDA

Bill in Parliament in December 1999. The IRDA since its incorporation as a statutory

body in April 2000 has fastidiously stuck to its schedule of framing regulations and

registering the private sector insurance companies.

The other decisions taken simultaneously to provide the supporting systems to the

insurance sector and in particular the life insurance companies were the launch of the

IRDA’s online service for issue and renewal of licenses to agents.

The approval of institutions for imparting training to agents has also ensured that

the insurance companies would have a trained workforce of insurance agents in place

to sell their products, which are expected to be introduced by early next year.

Since being set up as an independent statutory body the IRDA has put in a

framework of globally compatible regulations. In the private sector 12 life insurance

and 6 general insurance companies have been registered.

Duties, Power and Functions of IRDA:

Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA.

1. Subject to the provisions of this Act and any other law for the time being

in force, the Authority shall have the duty to regulate, promote and ensure

orderly growth of the insurance business and re-insurance business.

2. Without prejudice to the generality of the provisions contained in sub

section.

The powers and functions of the Authority shall include.

a. Issue to the applicant a certificate of registration, renew, modify, withdraw,

suspend or cancel such registration;

EMERGENCE OF IRDA


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b. Protection of the interests of the policy holders in matters concerning assigning

of policy, nomination by policy holders, insurable interest, settlement of

insurance claim, surrender value of policy and other terms and conditions of

contracts of insurance;.

c. Specifying requisite qualifications, code of conduct and practical training for

intermediary or insurance intermediaries and agents.

d. Specifying the code of conduct for surveyors and loss assessors.

e. Promoting efficiency in the conduct of insurance business.

f. Promoting and regulating professional organizations connected with the

insurance and re-insurance business.

g. Levying fees and other charges for carrying out the purposes of this Act.

h. Calling for information from, undertaking inspection of, conducting enquiries

and investigations including audit of the insurers, intermediaries, insurance

intermediaries and other organizations connected with the insurance business;

i. Control and regulation of the rates, advantages, terms and conditions that may

be offered by insurers in respect of general insurance business not so controlled

and regulated by the Tariff Advisory Committee under section 64U of the

Insurance Act, 1938 (4 of 1938);

j. Specifying the form and manner in which books of account shall be maintained

and statement of accounts shall be rendered by insurers and other insurance

intermediaries;

k. Regulating investment of funds by insurance companies;

l. Adjudication of disputes between insurers and intermediaries or insurance

intermediaries;

m. Supervising the functioning of the Tariff Advisory Committee;

n. Specifying the percentage of premium income of the insurer to finance schemes

for promoting and regulating professional organizations referred to in clause (f);

o. Specifying the percentage of life insurance business and general insurance

business to be undertaken by the insurer in the rural or social sector; and

p. Exercising such other powers as may be prescribed.


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Insurance Regulatory and Development Authority (IRDA) Act:

The Insurance Regulatory and Development Authority Act was introduced to

end the monopoly of State-owned companies and to invest in the Insurance

Regulatory Authority power to control the insurance sector.

These powers inter aria are:

• Imposition of prudential norms such as solvency margins, capital

adequacy;

• Requirements and investment guidelines for insurance companies;

• Grant of licenses to new companies, and cancellation, suspension and

withdrawal of licenses given to insurance companies;

• Regulation of fund investment by insurance companies;

• Maintenance of solvency margins;

• Adjudication of disputes between insurers and intermediaries; and

• Tariff fixing.

As per the section 4 of IRDA Act' 1999, Insurance Regulatory and

Development Authority (IRDA, which was constituted by an act of parliament)

specify the composition of Authority the Authority is a ten member team consisting of

a. A Chairman;

b. Five whole-time members;

c. Four part-time members,

(All appointed by the Government of India)

Regulatory Issues:

The IRDA Bill lies down that the Indian promoter must dilute the stake in the

private insurance firms from 74 per cent to 26 per cent in ten years. The bill stipulates

tough solvency margins -- Rs 500 million for life insurance firms, Rs 500 million or a

sum equivalent to 20 per cent of net premium income for general insurance and Rs 1

billion for reinsurance business.


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The insurer has to maintain separate accounts relating to fund of shareholders

and policyholders. The funds of policyholders should be retained within the country

but does not cover repatriation of profits and dividends. Insurance companies under

the new regime will have to have exposure to rural and social sectors. Foreign

investment in insurance, the bill states, is crucial to financing infrastructure and better

insurance cover.

The key to success in opening up the insurance sector in India is regulation. An

example of how poor regulation can destroy a market is the mutual fund industry. A

combination of improper marketing practice has resulted in a loss of investor faith in

that industry. Incidentally, the insurance industry in India itself has gone through the

same phase.

One of the reasons for nationalization of the insurance industry (LIC in 1956

and GIC in 1973) was the mismanagement and malpractice of erstwhile private

players. But if the statements of IRA officials are anything to go by, the new

regulations are expected to be on the right track. N I Rangachary, chairman, IRA, has

already provided the timetable for the changes once the Bill is passed. The IRA has

already indicated that it will have tough norms for new participants.

This is the most compelling reason why private sector (and foreign) companies,

which will spread the insurance habit in the societal and consumer interest, are

urgently required in this vital sector of the economy.

With the nation's infrastructure in a state of imminent collapse, India couldn't

have afforded to be lumbered with sub-optimally performing monopoly insurance

companies and therefore the passage of the Insurance Regulatory & Development

Authority Bill on December 2, 1999 heralds an era of cautious optimism where stakes

are high for all parties concerned. For the Govt. of India, Foreign Direct Investment

(FDI) must pour in as anticipated; for foreign insurers, investments must start yielding

returns and for the domestic insurance industry - their market penetration should

remain intact. On the fringe, the customer is pondering whether all the hype created

on liberalization will actually benefit him.


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Insurance Sector Reforms in India:

In 1993, Malhotra Committee, headed by former Finance Secretary and RBI

Governor R. N. Malhotra, was formed to evaluate the Indian insurance industry and

recommend its future direction.

The Malhotra committee was set up with the objective of complementing the

reforms initiated in the financial sector.

The reforms were aimed at “creating a more efficient and competitive financial

system suitable for the requirements of the economy keeping in mind the structural

changes currently underway and recognizing that insurance is an important part of the

overall financial system where it was necessary to address the need for similar

reforms…”

In 1994, the committee submitted the report and some of the key

recommendations included:

Structure:

• Government stake in the insurance Companies to be brought down to 50%

• Government should take over the holdings of GIC and its subsidiaries so that

these subsidiaries can act as independent corporations

• All the insurance companies should be given greater freedom to operate

Competition:

• Private Companies with a minimum paid up capital of Rs.1bn should be

allowed to enter the industry

• No Company should deal in both Life and General Insurance through a single

entity

• Foreign companies may be allowed to enter the industry in collaboration with

the domestic companies

• Postal Life Insurance should be allowed to operate in the rural market

• Only one State Level Life Insurance Company should be allowed to operate in

each state


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Regulatory Body:

• The Insurance Act should be changed

• An Insurance Regulatory body should be set up

• Controller of Insurance (Currently a part from the Finance Ministry) should be

made independent

Investments:

• Mandatory Investments of LIC Life Fund in government securities to be

reduced from 75% to 50%

• GIC and its subsidiaries are not to hold more than 5% in any company (There

current holdings to be brought down to this level over a period of time)

Customer Service:

• LIC should pay interest on delays in payments beyond 30 days

• Insurance companies must be encouraged to set up unit linked pension plans

• Computerization of operations and updating of technology to be carried out in

the insurance industry

The committee emphasized that in order to improve the customer services and

increase the coverage of the insurance industry should be opened up to competition.

But at the same time, the committee felt the need to exercise caution as any failure on

the part of new players could run the public confidence in the industry.

Hence, it was decided to allow competition in a limited way by stipulating the

minimum capital requirement of Rs.100 crores. The committee felt the need to

provide greater autonomy to insurance companies in order to improve their

performance and enable them to act as independent companies with economic

motives. For this purpose, it had proposed setting up an independent regulatory body.


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Economic liberalizations in brief refers to the efforts taken by state toward

faster economic development by adopting changes in existing economic policy, rules

and Regulations and bringing flexibility in administrative control and procedures

economic liberalization encourage the use of new technology and improve knowledge

in the production process by global participation and marketing.

Need for Global Integration:

Recent economic liberalization started few years ago have started bringing in

new investments from global giants and the government was hard pressed to facilitate

global integration by lowering trade barriers for the free flow of technology,

intellectual and financial capital. Additionally, reforms are essential if the Indian

economy is to achieve and sustain a growth rate of 7 to 8 per cent per annum.

Reaching a faster growth path also implies attracting foreign direct investment

inflows of $ 10 Billion every year, up from the current level of $ 3 to $ 3.5 Billion.

Thus liberalization of insurance creates an environment for the generation of long-

term contractual funds for infrastructural investment. Report on Infrastructure says

that 85% of funds for infrastructure development have to come from the domestic

industry. It further says that India would need $ 100 Billion over the next five years to

meet its infrastructure needs. Given the rate of savings in India, there is much more

room to grow and one can expect an additional revenue of about $ 10 Billion a year

entering the market to enhance infrastructure. Insurance is definitely going to be one

area that will assist in mobilization of these funds.

Multinationals' interest:

Multinational insurers are indeed keenly interested in emerging insurance

because their home markets are saturated while emerging countries have low

insurance penetrations and high growth rates. International insurers often derive a

significant part of their business from multinational operations. As early as 1994,

ECONOMIC LIBERALIZATION


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many of the UK’s largest life and general insurers derived 40 per cent to 60 per cent

of their total premium from outside their home markets. The figure at Commercial

Union was 76 per cent in that year.

While the impact of global operations on their business may be large,

typically foreign insurers take only a small share of an individual country’s market.

In Taiwan for example, foreign companies took only a 3 per cent share even seven

years after opening up. In Korea, their share was 1 per cent after 20 years. In China,

a large and complex market like India, private insurers have not made much

headway.

Yet, new entrants find insurance attractive because even a small share of a

large and growing market can be profitable. The Korean insurance market for

example, was only the 30th largest market in the world by premium volume in 1971.

It moved up to 6th largest in 1996. In any case, in India multinational insurers will be

restricted to a minority shareholding in new companies. The new entrants will

therefore be private Indian companies.

The other reason why these large MNCs are interested in India is the

economies of the insurance market. Insurance companies survive on the principle of

spreading of risk. No matter what the size of each player, an insurer cannot afford to

operate in a niche market. Operating in a particular region would expose them to the

economic downtrends in the region and derail their profits.

Insurance companies, being long-term players, also have to avoid sudden dips

in earnings to inspire confidence among investors to invest long-term funds. This can

be achieved by spreading their operations over a wide geographical area. Moreover,

for them, big is not just beautiful, but essential for survival. Which brings us to the

avenues for growth?

According to the Sigma report on global insurance brought out by the world’s

second largest reinsurer Swiss Re - the international market is completely saturated.

In the developed world, the growth in life insurance premium has been a meager

1.5%. As compared to this, LIC despite all its handicaps has been growing at a

healthy clip of around 20%.


23

Privatization: Start Up Strategy:

Potential private entrants therefore expect to score in the areas of customer

service, speed and flexibility. They point out that their entry will mean better products

and choice for the consumer. Critics counter that the benefit will be slim, because new

players will concentrate on affluent, urban customers as foreign banks did until

recently.

This might seem a logical strategy from the point of view of new players.

Start-up costs-such as those of setting up a conventional distribution network-are

large and high-end niches offer better returns. However, in the long run 'middle-

market' offers the greatest potential as in terms of it is the second largest market in the

world. This may still be an urban market but goes beyond the affluent segment.

Insurance, even more than banking, is a volume game. A very exclusive

approach is unlikely to provide meaningful numbers. Therefore, private insurers

would be best served by a middle-market approach, targeting customer segments that

are currently untapped.

Repositioning by Nationalized Sector:

Floodgates of competition opened up by the privatization of insurance industry

did throw a challenge to the well-protected nationalized sector and it seems they have

picked up the gauntlet. LIC and GIC, both are trying to reposition themselves by

having re-engineering done on the structure and operations of their respective

organizations.

Life Insurance Corporation is at present going through presentations from top

management consultants. These consultants have been asked to narrate their

experiences in countries where the insurance sector has been opened up for private

competition so that the public sector player can draw lessons. Based on these, LIC

will appoint a consultant which can provide them broad terms of reference on what

changes are required to tackle the impending competition.


24

GIC has already identified the areas that need to be activated and given a shape

through the four subsidiary companies. Foremost is the area of providing health

insurance services. A change in the GIC Act will enable the corporation to float a

joint venture company for health insurance. Other areas that the GIC is looking at are

savings-linked insurance products and use of alternate distribution channels including

banc assurance. Also in progress is the co-ordination of all foreign operations of the

group.

Even state-owned entities, SBI and UTI have serious plans for insurance sector

as the banks have unsurpassed advantages over any other player. The intermediaries

are also getting more organized with a little nudging from the IRA. The Reinsurance

Consultants Association is planning to convert itself into the Insurance Brokers

Association of India in anticipation of the laws being amended to allow insurance

broking.

Cross Border Experience:

Cross-country experience shows that nowhere in the world have the entry of

foreign firms threatened the position of domestic companies. Whether it is Malaysia,

where the insurance sector has been open for more than 50 years and foreign

companies account for about 10 per cent of market penetration or it is Indonesia,

Thailand, China or the Philippines, where the market has been opened more recently,

the total market share of foreign companies is less than 10 per cent except in

Indonesia where it is about 20 per cent. Closer home, we have the experience of the

banking sector where despite the presence of 42 foreign banks, their share in total

banking assets is less than 10 per cent.

Today hardly 20 per cent of the population in India is insured and insurance

premium (life as well as non-life) account for just 2 per cent of GDP as against the G-

7 average of 9.2 per cent. Consequently, the fear that new companies will displace

public companies is misplaced. There is room for more for not only the existing

companies but also for any number of competitors.


25

In China, insurance premium accounted for just over 1 per cent of China's GDP

in 1995 but in the four years since the market has been liberalized (albeit partially),

spending on insurance has grown at a compound annual rate of 33 per cent. It is not

just foreign companies alone that have grown but also the national PICC as well. The

story is no different in S Korea. There, the opening of the sector saw the Big Six

domestic players, who initially controlled the entire market, increase their business

from 7 to 37 trillion won by 1997. Meanwhile foreign companies were not able to

capture more than a miniscule 0.7 per cent of the market.

The various implications can group into as:

1) Positive implication

2) Negative implication.

1. Positive implication:-

The liberalization of life insurance will benefit the industry in the

following ways:

It helps transfer of technology in the field of life insurance. New techniques and

methods can be used for assessment of risk, fixation of reasonable premium and

provide new investment opportunities. This will help in expansion and

development of business.

It helps in adopting a flexible price policy on new life insurance policies

developed and introduce now onward. It will make available in all countries of the

world the service of efficient management and financial experts. It can help in

development of knowledge of insurance business. Many educational and training

institution stand fast functioning this lead to availability of professional managers.

It will enlarge the scope of insurance. It will help spread it in rural and small

villages also. The life insurance market will become global. The productivity as

well as the efficiency also increases. The international competition in the field

itself will play an important roll in this direction. Competing ability will increase

due to liberalization. All categories of employees serving in life insurance sector

will get more satisfaction through good opportunity for training, higher opening in

jobs and higher income.


26

The general public will also be benefited from liberalization of life insurance

sector:

They can get better choice of selection of policy and insurer.

When there is large number of insurer, the insurer is able to select such an insurer

whose premium rate is reasonable.

The insurers play more attention to the interest of insured. This way interest of the

insured is well protected.

There will be number of policies based on social security brought out by different

insurers. Such schemes include plan like pension scheme, gratuity scheme,

medical claim etc.

Good employment opportunity in the life insurance sector when a number of new

institutions are established in these fields.

The employee will also benefit from liberalization life insurance sector:

Better opportunity for training and development.

Knowledge can be gain about new method of functioning through education and

training.

The employee gets opportunity for job promotion and other financial non-

financial benefits. The productivity of employees shall develop due to education

and training facility.

Working with professional manager benefit the employee in learning the new

methods and technique in work situation. The employee will get motivation and

their moral will be higher.

2. Negative implication:-

Cut throat competition liberalization will create acute competition in the life

insurance market, which is not in the interest of the industry, customers or the

country. This type of acute competition may sometime leads to insolvency of life

insurance companies and thereby the policy holders may face serious

consequences. This seems far from truth, as the experience shows that nowhere

the competition has threatened anybody. The experience of banking sector in our


27

own country testifies to this effect that despite presence of 42 foreign banks, the

balance is not distributed. Total investment assets of the foreign banks are about

10 %. But the impact of the competition has increased the size of the market.

End of government monopoly: This liberalization of life insurance sector brings

an end to the government monopoly in life insurance sector and private companies

may exercise their domination.

Dominance of outside companies: foreign companies capture the life insurance

sectors as a whole under their dominance, because they possess more efficient

insurance techniques, knowledge. As such Indian companies cannot survive

before these foreign companies.

Shortage of funds for social cause: It is estimated that at present the LIC and GIC

invest a total of Rs 90,000 crores to the public/ social sector. This amount is

nearly 70-80 % of their total fund available. Although the government is making

rules for the private sector companies to invest certain percentages of their

premium income in the social sector, the availability of such huge fund is

doubtful.

Policies of heavy amount – the insurance companies issues policies of heavy

amount when at present a policy is available for an insured sum even below Rs.

1,00,007/- where the sum assured against a policy becomes very heavy,

economically backward people cannot benefit of insurance.

More attention towards profitable policies:- the private sector life insurance

companies develop and introduce only those policies that involve the minimum

risk burden and more profitable of them. They overlook the interest of the

common people. They want taken any special attention to insured the lives of

woman, physically handicapped etc. which involve more risk.

Neglect the rural lives:- the people who are against the concept of liberalization of

insurance sector believe that the domestic as well as foreign private companies

neglect the rural areas, by giving more attention in getting people insured from

urban areas. This because of the average cost incurred on policies is less in urban

areas.

Problem of exercising control over insurance companies: it becomes very

difficult to control Indian and foreign private insurance companies by the

government.


28

Speculative activities: it encourages for more speculative activities by private

sector companies. The development of new policies and premium rates are fixed

speculatively instead of considering realistic factors. This will promote the

attitude of earning larger short-term profits. On long run, the existence of such

companies becomes doubtful.

Liberalization based on outside pressure: The critics against the view of

liberalization have the view that our country because of pressure by World Trade

Organization has adopted the liberalization measures.

Liberalization to fill up budget deficit –the critics against the view of

Liberalization to fill up the budget deficit by disinvestment of more than 50% of

shares of LIC. The crores of rupees, thus to be received can be used for filling up

the budget deficit.

But this argument is proved to be incorrect in view of the fact that the government

has already announced its decision in parliament that it won’t reinvest share of LIC.

Difficulty in utilizing the physical resources completely –as a result of

privatization the business of LIC shall be affected negatively. As a result the vast

resources held these companies shall not be utilized fully.

Attraction for its employees from out side sources – there is a possibility of

drainage of expert employees from the two corporations to the private companies.

This is because the private companies offer more lucrative salaries and packages

to their employees.

Keeping this in mind, the IRDA has come out with regulations for high cadre

employees that they can’t leave the corporation easily, to join other places.

Lack of government guarantee on polices – the insurance policies issued by state

insurers carry Central Government’s guarantee whereas no such guarantee shall be

available to the policies issued by the private insurance companies. The insured

remain unsecured in this way.

No grants available on policies to poor: State insurers have kept provision for

certain amount of their profit as grant to policies issued to people in villages and

the poor. No such grant can be expected from the private companies.


29

Employees fear: employees of these insurance companies feel danger to their

employment due to process of liberalization measure. While implementing it,

these corporation can retrench certain number of employees who are exceeds in

need. But this is not tenable as the experience of the other countries shows it

otherwise. Public sector GIC and GIC are re-structuring themselves for better and

more deployment of staff in diversified companies.


30

Life insurance not plays an important role in national economy but also in

international economy. Marine cargo insurance provides risk coverage for shippers

and the banks, which finance international trades. This role becomes all the more

important in the context of an active government policy to encourage exports. Indian

life insurer operates in more than 30 countries through agencies, branches, associates

companies. These operations earn foreign exchange.

The insurance business is concerned with North America, Western Europe,

Japan and Oceania. Together these region’s accounts for about 91 % of the world

annul premium.

By region’s North America and western Europe are growing moderately while

oceanic, Latin America, eastern Europe and Africa display growth above lone –term

trends to a global context globalization of life insurance helps companies practices

underwriting discipline in one regions globalization of the insurance industry received

a big boost. Countries Insurance Penetration

(premium as a% of GDP)

Insurance Density (Per Capita

Premiums in USD)

United Kingdom 12.71 3028.5

Japan 8.70 3165.1

United States 4.48 1611.4

South Africa 14.04 392.9

Australia 6.04 1193.5

South Korea 9.89 935.6

India 1.77 7.6

China 1.12 9.5

Malaysia 2.13 86.4

Indonesia 0.54 4.0

Brazil 0.36 12.9

GLOBAL SCENARIO


31

India and the world market:

Unfortunately, the progress achieved by the life insurance industry in India, it

compares unfavorably not just with the developed countries. But also even with the

developing world. The global market for the life insurance is estimated to be around $

1412.3 billions.


32

About the various player of life insurance sector:

Since being set up as an independent statutory body the IRDA has put in a

framework of globally compatible regulations. In the private sector 12 life insurance

and 6 general insurance companies have been registered than after remaining

companies are registered.

Here we have described the private life insurance companies registered in

which year wise.

Private Player in Life Insurance industry:

Sr.

No.

Registration

Number

Date of

Reg.

Name of the Company

1 101 23.10.2000 HDFC Standard Life Insurance Company Ltd.

2 104 15.11.2000 Max New York Life Insurance Co. Ltd.

3 105 24.11.2000 ICICI Prudential Life Insurance Company Ltd.

4 107 10.01.2001 OM Kotak Mahindra Life Insurance Co. Ltd.

5 109 31.01.2001 Birla Sun Life Insurance Company Ltd.

6 110 12.02.2001 Tata AIG Life Insurance Company Ltd.

7 111 30.03.2001 SBI Life Insurance Company Limited.

8 114 02.08.2001 ING Vysya Life Insurance Company Private

Limited

9 116 03.08.2001 Allianz Bajaj Life Insurance Company Ltd.

10 117 06.08.2001 MetLife India Insurance Company Pvt. Ltd.

11 121 03.01.2002 AMP SANMAR Assurance Company Ltd.

12 122 14.05.2002 Aviva Life Insurance Co. India Pvt. Ltd.

13 127 06.02.2004 Sahara India Insurance Company Ltd.

MAJOR PLAYER IN LIFE INSURANCE


33

1. LIFE INSURANCE CORPORATIOMN INDIA:

VISION

"A trans-nationally competitive financial conglomerate of significance to societies

and Pride of India"

MISSION

"Explore and enhance the quality of life of people through financial security by

providing products and services of aspired attributes with competitive returns, and by

rendering resources for economic development."

2. ALLIANZ BAJAJ LIFE INSURANCE COMPANY LTD:

Allianz Bajaj life insurance company ltd with a capital base of RS.1.5 billions

is a joint venture between ALLIANZ AG and BAJAJ AUTO LTD. The company was

incorporated on MARCH 12, 2001 and received the IRDA certificate of registration

on august 3, 2001 to conduct life insurance business in India.

Bajaj auto ltd. The flagship company of Bajaj group is one of the largest two

and three- wheeler manufactures, and forth-largest manufacturer of two- wheelers in

the world, with annual turnover of RS. 42.16 billion. The company enjoys a very

strong brand image in this industry.

Founded in 1890, the Allianz Group is one of the world’s leading insurance

companies with over a 100 years’ experience in insurance and related services. With a

presence in over 70 countries, it is also the largest insurer in Europe. The key business

areas of Allianz group include General Insurance (property, engineering, marine,

motor, casualty and miscellaneous), reinsurance, risk management, life and health

insurance, asset management and pension funds management. Rated ‘AAA’ by

Standard & Poor, it has assets over 670 billion DM (Rs 17,160 billion) under its

management.


34

3. AVIVA LIFE INSURANCE COMPANY LTD. :

The Aviva Life Insurance Company, a joint venture between Dabur India and

CGU, a wholly owned subsidiary of Aviva Plc., is capitalized at Rs 1 billion.

Established in 1884, Dabur India Limited is one of India’s oldest groups of

companies, with interests in ayerdedic specialties, pharmaceuticals, personal care and

health-care products, the annual sales turnover of the group is over Rs 12 billion.

Aviva plc. is the largest life and general insurance group of the UK, and the

world’s seventh largest insurer with world-wide premium income and retail

investment sales of ₤28 billion and more than ₤200 billion in assets under

management. Aviva plc. is the holding company of the Aviva group of companies

which is involved in the life assurance business, log-term savings, all classes of

general insurance business and fund management.

4. BIRLA SUN LIFE INSURANCE COMPANY LTD. :

The Birla Sun Life Insurance Company, is a 74.26 joint venture between the

Aditya Birla Group and Sun Life Financial Services of Canada, and has an equity

capital of Rs 1.5 billion.

The Aditya Birla Group is one of India’s largest business houses, with a

turnover of over $4.75 billion and an asset base of $3.8 billion. The Group is a well-

diversified conglomerate spanning 40 companies spread across 17 countries.

Sun Life Assurance Co., of Canada, established in 1871, has a strong presence

in Canada, the USA, the Philippines, Hong Kong, and the UK. Its major lines of

business are life insurance, annuities and mutual fund and investment services. In

Canada, the company is especially strong in the corporate life and health insurance

and savings markets.


35

5. HDFC STANDARD LIFE INSURANCE COMPANY LTD. :

HDFC Standard Life Insurance Company Ltd. was incorporated o August 14,

2000. HDFC is the majority stakeholder with an 81.4 per cent stake. Standard Life

holds a stake of 18.6 per cent.

Incorporated in 1977 with a share capital of Rs 100 million, HDFC has since

emerged as the largest residential mortgage finance institution in the country, raising

its capital to Rs 1.19 billion and an asset base of Rs 150 billion. It operates through 75

locations throughout India, and has an international office in Dubai, UAE, with

service associates in Kuwait, Oman and Qatar.

Standard Life, which has been in the life insurance business for the past 175

years, is Europe’s largest mutual life assurance company. With an asset base of Rs

6000 billion, it has the distinction of being accorded the ‘AAA’ rating by Standard &

Poor for the past six years.

6. ICICI-PRUDENTIAL LIFE INSURANCE COMPANY LTD. :

The ICICI-Prudential Life Insurance Company ltd, with ICICI’ s share at 74

per cent and Prudential plc. UK’s share of 26 per cent was incorporated o July 20,

2000, with an authorized capital of Rs 2.3 billion. The paid up capital is Rs 1.9

billion. It commenced commercial operations on December 19, 2000, becoming one

of the first few private sector players to enter the liberalized arena.

The World Bank, the Government of India and the Indian Industry, to promote

industrial development in India by providing project and corporate finance to the

Indian industry, established ICICI LTD., in 1944. Since its inception, it has grown

from a development band to a financial conglomerate and has become one of the

largest public financial conglomerates and has become one of the largest public

financial institutions in India, financing all the major sectors of the economy.


36

Founded in 1848, Prudential plc. has grown to become one of the largest

providers of a wide range of savings products for the individual, including life

insurance, pensions, annuities, unit trusts and personal banking. It has a presence in

over 15 countries, and manages assets of over US $259 billion (approximately Rs 11,

3956 billion) as of December 31, 1999. in fact, Prudential’s first overseas operation

was in India, way back in 1923, to establish life and general insurance branch

agencies.

7. ING-VYSYA LIFE INSURANCE COMPANY PVT. LTD. :

As per the joint venture agreement, Vysya Bank holds 49 per cent, ING 26 per

cent, and the GMR Group, which has wide ranging interests in fields which as power

generation, infrastructure, manufacturing, software and banking, holds 25 per cent.

This joint venture is expected to be the first Banc assurance venture in the country.

The Vysya Bank, which has equity participation from Bank Brussels

Lamberts, is one of the largest private banks in India with 480 retail outlets, the bank,

given its significant branch penetration, has a high degree of retail focus.

The ING Group, with an asset base of over Rs 284.2 billion is a global

financial institution of Dutch origin, which is active in the field of banking, insurance

and asset management in over 60 countries. ING Insurance is the world’s second

largest life insurance company as per the latest Fortune rankings. It is the third largest

financial services company in Europe, and the tenth largest financial services

company in the world.

8. MAX NEW YORK LIFE INSURANCE COMPANY LTD. :

Max New York Life is a partnership between Max India Limited, one of

India’s leading multi-business corporations and New York Life. The paid-up capital

of the joint venture is Rs 2.5 billion.


37

Max India has significant presence in the most vital and fast growing sectors

of the Indian economy, viz., telecommunication services, Electronic components

distribution, specialty plastic films and bulk pharmaceuticals. It is also active in the

emerging knowledge-based areas of health care, financial services and IT.

In 1998, New York Life International Inc., had total revenues amounting to

almost US $20 billion, and was rated the number one provider of new life insurance

policies in the USA. In the same year, New York Life was also the leader in insurance

sales to the growing Indian community in the USA.

9. MET LIFE INDIA INSURANCE COMPANY LTD.:

The Met Life India Insurance Company, joint venture between the US

insurance major Metropolitan Life Insurance Co., the Jammu and Kashmir Bank Ltd.,

the Pallonji Group and some high net worth individuals, was incorporated in India on

April 11, 2001. The company started its operation with an initial capital of Rs 1.25

billion.

The Metropolitan Life Insurance Co., established in 1867a, is a member of the

Metropolitan Life Group and is licenses in the USA, Canada and a few other

countries. Its major lines of business are individual and group life insurance. Pallonji

& Co. Pvt. Ltd., is primarily engaged in contracting and has under taken major

contract for power generating situation, chemical and fertilizer factories petroleum

refineries and gas platform. Ti has also diversified outside in their main life of

business in to the field of non- convention energy source.

10. OM KOTAK MAHINDRA LIFE INSURANCE COMPANY LTD.

The joint venture OM KOTAK MAHINDRA life insurance started off with an

initial capital of Rs. 1.5 billions, with a 74:26 stake between Kotak Mahindra life

insurance and old mutual plc.


38

Kotak Mahindra finance ltd is one of the India’s premier financial groups,

with a range of highly specialized products and services, and a very large client base

of Indian and international firms. Starting as are non-product company in the mid

eighties, it has evolved into a full service financial conglomerate, covering auto and

consumer finance, assets management, investment banking, securities trading and

equity research. It operates across 30 centers in India and in Dubai, London, New

York and Mauritius.

Old mutual plc. is a leading global financial services provider, providing a

broad range of financial services in the area of insurance, assets management and

banking. It is a leading life insurer in South Africa, with more than 30% market share.

11. SBI LIFE INSURANCE COMPANY LIMITED:

This joint venture has 74% capital participation from the state bank of India

(SBI), with Cardiff contributing 26% in the paid capital of Rs. 2.5 billion.

The SBI is the largest bank in the country with more than 9000 branches. It

has seven associate banks and together they have 30% of the Indian market share. It

net worth as on March 2000 stood at Rs. 121.46 billion, with a deposit base of Rs.

196.803 billion. The insurance venture, SBI life, is a step aimed at being a universal

bank as the SBI already as subsidiary for housing finance, merchant banking, mutual

fund and primary dealership in government papers and factoring businesses.

BNP paribus, which is one among the three largest banks in Europe, is the

holding company of Cardiff, its insurance arm. It was set up in 1973 and specialized

in long term savings, protection products and creditors insurance. In 1999, its

premium income stood at US $ 4 billion, with assets worth over US $ 23 billion under

its management. Based in France, it has the expertise for selling insurance products

through bank and as operation in over 20 countries.


39

12. TATA AIG LIFE INSURANCE COMPANY LIMITED:-

Tata AIG life insurance company ltd, is capitalized at Rs. 1.85 billion of which

74% has been brought in by Tata sons and 26% by the American partner.

Tata enterprise with 82 companies, spread over 7 sectors, have an annual

turnover exceeding US $ 8.8 billion. The Tata group has made pioneering

contribution in various fields including insurance, aviation, iron and steel. The group

has had a long association with India’s insurance sector, having set up the largest

insurance company viz. new Indian assurance company ltd. (1919), prior to the

nationalization of this sector.

The American insurance group (AIG) is the leading US based international

insurance and financial services organization and the largest underwriter of

commercial and industrial insurance in the USA. Its member companies write a wide

range of commercial and personal insurance products in over 130 countries and

jurisdiction throughout the world.


40

Life Insurance Industry is growing at the rate of 68 % respectively.

COMPANY MARKET SHARE( IN %)

2.0%0.4%

0.3%

82 .3%

1.8%1.3%5.6%0.5%0.9% 0 . 8 %2.6% 1.4%

0.2%

Bajaj AllianzING VysyaAMP SanmarSBI Life TATA AIG HDFC StandardICICI PrudentialBIRLA SunlifeAVIVAKotak MahindraMax New YorkMet LifeLIC

CURRENT SCENARIO


41

FIRST YEAR PREMIUM-AUGUST 2004

Premium u/w No. of policies/

Schemes

No. of lives

covered under

group schemes

Sr

N

O.

Company

AUGU

ST

UP

TO

AUGU

ST

% of

pre

miu

m

UP

TO

AUG

UST

AUGU

ST

UP

TO

AUG

UST

% of

no.

of

polic

ies

UP

TO

AUG

UST

AUGU

ST

UP TO

AUGUS

T

%of

lives

covered

under

group

schemes

UP TO

AUGUS

T

1. Baja Allianz 3957.4

1

14395.

73

2.03 17251 7023

7

0.92 3142 52,208 2.02

2. ING Vysya 762.05 2606.2

7

0.37 8125 3492

8

0.46 0 5898 0.23

3. AMP Sanmar 521.22 1823.2

5

0.26 2705 1232

1

0.16 3349 21305 0.82

4. SBI Life 4374.2

7

12768.

21

1.80 7613 3412

8

0.45 94848 264883 10.24

5. TATA AIG 1598.3

3

9150.0

7

1.29 15253 7967

3

1.04 16197 129927 5.02

6. HDFC

Standard

2011.4

5

9671.5

2

1.36 15459 5921

3

0.77 5318 57363 2.22

7. ICICI

Prudential

8803.5

8

39977.

55

5.63 38821 1816

35

2.23 25818 31965 1.24

8. BIRLA Sun

life

4561.8

6

18150.

60

2.56 11759 4802

2

0.63 5162 19335 0.75

9. AVIVA 1082.9

1

5623.2

0

0.79 5705 2952

1

0.39 11034 49047 1.90

10. Kotak

Mahindra

1089.9

3

3626.4

8

0.51 4567 1622

5

0.21 7812 35009 1.35

11. Max New

York

1459.3

4

6356.3

5

0.90 15379 6550

5

0.85 3810 34867 1.35


42

12. Met Life 348.36 1522.8

4

0.21 3164 1048

9

0.14 5618 84501 3.27

13. LIC 127451

.85

58447

1.09

82.4

0

153424

1

7023

186

91.6

3

60959

8

1799441 69.59

Total 158022

.55

71014

3.06

100 168004

2

7665

083

100 79170

6

2585751 100

PREMIUM U/W IN AUGUST 2OO4(Rs in Lakhs)

020000

400006000080000100000

120000140000

Bajaj A

llianz

ING Vysya

AMP Sanmar

SBI Life

TATA AIG

HDFC Standa

rd

ICICI Prud

entia

l

BIRLA SunlifeAVIVA

Kotak Mah

indra

Max New York

Met Life LIC

COMPANY

PREM

IUM

Series1

The life insurance industry underwrote new business premium of Rs.1,

86,605.46 lacks during the month of July 2004.


43

The life insurance industry underwrote new business premium of Rs.1, 86,605.46 lakh

during the month of July 2004, taking the cumulative premium underwritten during

the current year 2004-05 to Rs.5, 52,515.95 lakh. LIC underwrote premium of

Rs.4, 57,019.23 lakh i.e., a market share of 82.72 per cent, followed by ICICI

Prudential and Birla Sun Life with premium underwritten (market share) of Rs.31,

173.97 lakh (5.64 per cent) and Rs.13, 591.67 lakh (2.46 per cent) respectively.

While LIC’s market share declined from 90.12 per cent for the period ended

July 2003, all new life insurers increased their market share, over the corresponding

previous year numbers.

Cumulatively, the new players underwrote first year premium of Rs.95,

496.72 lakh. In terms of policies underwritten, the market share of the new players

and LIC was 8.30 per cent and 91.70 per cent as against 6.09 per cent and 93.91 per

cent respectively in the corresponding period in the year 2003-04.

The premium underwritten by the industry up to July, 2004, towards

individual single and non-single policies stood at Rs.81, 244.37 lakh and

Rs.3, 39,644.37 lakh respectively accounting for 1,85,806 and 57,95,219 policies. The

group single and non-single premium accounted for Rs.1, 21,352.74 lakh and Rs.10,

274.47lakh. The total Individual premium and Group premium underwritten was

Rs.4, 20,888.74 lakes and Rs.1,31,627.21 lakes respectively as against Rs.

2,66,468.62 lakes and Rs.62,636.22 lakes underwritten in the corresponding period of

the previous year. The number of lives covered by the industry under the various

group schemes was 17, 95,705 during the period ended July 2004. LIC covered

11,89,843 lives under the group schemes accounting for 66.26 per cent of the market,

followed by SBI Life with 1,70,035 lives (9.47 per cent), Tata-AIG with 1,13,730

lives (6.33 per cent) and MetLife with 78,883 lives (4.39 per cent).

The accompanying table does not include the numbers for Varishtha Pension

Bima Yojana. Premium underwritten by LIC under this pension scheme during the

period April - July 2004 was Rs.1, 07,264.83 lakh towards 54,740 policies.


44

Future Possibilities (Next 5-10 Years)

Job opportunities are likely to increase manifold. The number of people

working in the insurance sector in India is roughly the same as in the UK with a

population that is 1/7 India's; the US with a population 1/4 the size of India has

nearly 4 times the number. In the emerging markets, the picture is no less

encouraging. In S Korea, the no of full time employees more than doubled over a

ten-year period. Thailand added 50 per cent more jobs in four years.

The liberalization of the insurance sector promises several new jobs

opportunities for those employed in the finance sector that are equipped with

degrees in finance. Finance professionals who had witnessed a slump in the job

market would be a much-relieved lot to hear about the privatization of the

insurance sector.

Let us look into the type of jobs that will be created once the private players

come on the scene. Certainly, it won't be far different from the traditional streams

in any other industry. There will be demand for marketing specialists, finance

experts, human resource professionals, engineers from diverse streams like the

petrochemical and power sectors, systems professionals, statisticians and even

medical professionals. Apart from this, there will be high demand for

professionals in the streams like Underwriting and claims management and

actuarial sciences.

There could be a huge inflow of funds into the country. Given the industry's

huge requirement of start-up capital, the initial years after opening up are bound to

see a strong inflow of foreign capital. Moreover, given that the break-even,

typically, comes much later than in the case of other sectors, odds are that the first

remittance of dividend will not happen before a good 10-15 years.

In the areas of reinsurance, huge capacity is likely to be created with players

like Swiss Re and Munich Re keenly observing the unfolding saga of

liberalization of insurance industry in India. Not only the outward reinsurance will

reduce, it is bound to attract inward reinsurance from the neighboring countries

and regions. If the regulator is forward looking and legislature is supportive, this

trend may well lead to the creation of a Lloyds like market for the direct as well as

reinsurance businesses.


45

However, increased competition is very likely to result in rate reductions in

certain classes of business, but in those areas that have so far been cross-

subsidized an increase in rates may be possible. Overall, the rate reductions may

outweigh the increases, thus bringing down the re-insurance premium volume

available.

Apart from pure re-insurance activities, which is providing insurance

protection, a revolution will come in service related fields like training, seminars,

workshops, know-how transfer regarding risk assessment and rating, risk

inspections, risk management and devising new policy covers, etc. Also, with

more players in the market, there will be significant increase in advertising, brand

building, and keen pricing not ridiculous pricing and this will benefit whole lot of

ancillary industries.

Another effect of de-regulation will be that, projects, especially mega-projects

where one needs the capacities of the international re-insurance market, will get

exposed to international trends to an even greater extent than is the case today.

This will affect rates too. Areas like the personal lines segment, where we also

expect to see substantial growth as also new types of covers, would usually not be

affected by international trends in the same way as, there is much less need for

global re-insurance support.

Substantial shift in the distribution of LIFE insurance in India is likely to take

place. Many of these changes will echo international trends. Worldwide, insurance

products move along a continuum from pure service products to pure commodity

products. Initially, insurance is seen as a complex product with a high advice and

service component. Buyers prefer a face-to-face interaction and place a high

premium on brand names and reliability.

As products become simpler and awareness increases, they become off-the-

shelf, commodity products. Sellers move to remote channels such as the telephone

or direct mail. Various intermediaries, not necessarily insurance companies, sell

insurance. In the UK for example, retailer Marks & Spencer now sells insurance

products. In some countries like Netherlands and Japan, insurance is marketed

using post office's distribution channels. At this point, buyers look for low price.

Brand loyalty could shift from the insurer to the seller.


46

In other markets, notably Europe, this has resulted in bancassurance: banks

entering the insurance business. The Netherlands led with financial services firms

providing an entire range of products including bank accounts, motor, home and

life insurance, and pensions. Other European markets have followed suit. In

France over half of all life insurance sales are made through banks. In the UK,

almost 95% of banks and building societies are distributing insurance products

today.

In India too, banks hope to maximize expensive existing networks by selling a

range of products. Various seminars and conferences on banc assurance are taking

place and many bankers have clearly shown their inclination to enter insurance

market by leveraging their strengths in the areas of brand image, distribution

network, and face to face contact with the clients and telemarketing coupled with

advanced information technology systems. The mergers of Citibank with

Travelers in USA and of Winterthur, the largest Swiss Co. with Credit Suisse are

recent examples of the phenomenon likely to sweep India too.

Insurers in India should also explore distribution through non-financial

organizations. For example, insurance for consumer items such as refrigerators

can be offered at the point of sale. This piggybacks on an existing distribution

channel and increases the likelihood of insurance sales. Alliances with

manufacturers or retailers of consumer goods will be possible. With increasing

competition, they are wooing customers with various incentives, of which

insurance can be one.

Another potential channel that reduces the need for an owned distribution

network is worksite marketing. Insurers will be able to market pensions, health

insurance and even other general covers through employers to their employees.

These products may be purchased by the employer or simply marketed at the

workplace with the employer’s co-operation.

Worldwide interest in E-commerce and India's predominant position in

information technology and software development is also likely to be a major

factor in the marketing of insurance products in the immediate future. The Internet

account is increasing in arithmetic progression and the trend has already been set

by some of the leading insurers and insurance brokers worldwide.


47

Finally, some potential Indian entrants into insurance hope to ride their

existing distribution networks and customer bases. For example, financial

organizations like ICICI, HDFC or Kotak Mahindra intend to tap the thousands of

customers who already buy their deposits, consumer loans or housing finance.

Other hopeful entrants anticipate specific alliances such as with hospitals to

provide health cover.

Summery:

Over the past three years, around 40 companies have expressed interest in

entering the sector and many foreign and Indian companies have arranged

anticipatory alliances. The threat of new players taking over the market has been

overplayed. As is witnessed in other countries where liberalization took place in

recent years we can safely conclude that nationalized players will continue to hold

strong market share positions, but there will be enough business for new entrants

to be profitable.

Opening up the sector will certainly mean new products, better packaging and

improved customer service. Both new and existing players will have to explore

new distribution and marketing channels. Potential buyers for most of this

insurance lie in the middle class. New insurers must segment the market carefully

to arrive at appropriate products and pricing. Recognizing the potential, in the past

three years, the nationalized insurers have already begun to target niches like

pensions, women or children.


48

Distribution perspective (The key differentiator):

It has been over two years since the Indian insurance market has opened up,

and the new entrants in market have set up shop in every major city. The public sector

companies have already established themselves in the market. But there are multiple

challenges faced by these insurance companies, of which two are critical:

Designing of products suiting the market.

Using the right distribution channels to reach the customer.

While the companies have been quite successful in dealing with the first of these

challenges using and technical know how of the partners, most are still grappling with

the right channel mix for the reaching potential customers.

This paper discuss the distribution channel from the prospective of the socio-

cultural

Ethos of the market and channels fit into it, along with where the various

companies face challenges and bottlenecks. Whenever any debate arises about the

intermediaries and distribution channels, the discussion veers to: technology and its

impact on distribution. However, die authors believes that the basic existential

problems being faced by the channels in this market need to be looked in to first, and

then the queans of enablers-technology, tools, training, learning to be taken up.

Insurance has to be sold the world ever, and the Asian market is to no exception.

The Touch point with the ultimate customer is the distributors or the producers, and

the role played by them in insurance market is critical.

MARKETING PERSPECTIVE


49

It is the distributor who makes the difference in terms of the quality of advice for

choice of product, servicing of policy post sale and settlement of claims. In the Asian

markets, with their distinct cultural and social ethos, these conditions will play a

major role in shaping the distribution channels and their effectiveness.

In today’s scenario, insurance companies must move from selling insurance to

marketing an essential financial product. The distributors have to become trusted

financial advisors for the clients and trusted business associates for the insurance

companies.

This calls for leveraging multiple distribution channels in a cost effective and

customer friendly manner. For example, in the developed markets, producers form the

major channels of distribution, while the web as a complementary channel is catching

up slowly. According to a Forrester survey, 88% of the life insurance executives

responding identified agents as the primary channel of distribution.

The distinction of channels in the developed markets is: personal distribution

systems include all channels like agencies of different models and brokerages, banc

assurance, and work site marketing. Direct response distribution systems are the

method whereby the client purchases the insurance directly. This segment, which

utilizes various media such as the internet, telemarketing, direct mail, call centers,

etc., is just beginning to grow.

Distribution Scenario in the Indian Market:

In today’s Indian life insurance market, the challenge to insurers and

intermediaries is two pronged:

• Building faith about the company in the mind of the client.

• Intermediaries being able to build personal credibility with the clients.

Traditionally, tied agents have been the primary channels for insurance

distribution in the Indian market; the public sector insurance companies have their


50

branches in almost all parts of the country and have attracted local people to become

their agents. The agents are from various segments in society and collectively cover

the entire spectrum of society. A person who has lived in the locality for many years

sells the products of the insurance company with a local branch nearby. This ensures

the last mile touch point being closer to the customer. Of course, the profile of the

people who acted as agents suggests they may not have been sufficiently

knowledgeable about the different products offered, and may not have sold the best

possible product to the client. Nonetheless, the customer trusted the agent and

company. This arrangement worked adequately in the absence of completion.

In today’s scenario agents continue as the prime channel for insurance distribution

in India, as is the case in most market, supported by call centers to a small extent.

almost all the new players follow this model primarily because the regulation for

other channels are yet to be put in place.

However, there is great excitement in the industry over the impending broker’s

regulations, and companies are planning possible channels in their enthusiasm to

increase volumes. The beliefs that all these channels will grow and seamlessly

integrate to bring in business seem a fallacy.

What have emerged are a much more difficult and evolving market scene with

exiting players, more new players coming in, and global practices and ideas being

tested. But none of this has changed the fundamental character of the market, which

we believe will take more time than expected.

Summary:

The current state of insurance distribution in India is still in flux. On one

hand, insurer are awaiting regulations to be approved for brokerages and banc

assurance to be truly

Launched on the other hand they are trying the corporate models of

intermediaries. In addition, the traditional models in the markets.


51

There is no right and wrong in all this. The success of marketing insurance

depends on understanding the social and cultural needs of the target population, and

matching the market segment with the suitable intermediary segment.

In addition, a major segment of the Indian population has low disposable

income, meaning that every penny won will be obtained after a lot of persuasion and

the expected value for money is high.

All intermediaries cannot sell all lines of business profitability in all market. There

should be clear demarcation in the marketing strategies of the company from this

perspective. Client should also receive price differentials for using different channels.

This not a new concept, as the public sector property $ casually companies are giving

discounts in lieu of agency commission. The channel composition should not be

homogeneous but should reflect the larger society. For example:

Agents from different economic, social strata, and different age and gender.

Brokers stretching from corporate to NGO ARE to milk co-operative.

These intermediaries need to be empowered with the right learning, training and

development tools and technology enablers. Coupled with the right product mix, this

will help the insurers to survive and flourish in this competitive market.

VALUE CHAIN ANALYSIS:

Competitive advantage of insurance companies:

The LIFE insurance industry has witnessed limited competition till now. But

with the entry of private sector insurance companies the scene will change and

competition among various insurance companies will become the name of the game.

Insurance companies have to face and deal with competition not only in terms of

investments performance but also customer service.


52

Hence an aggressive competitive strategy is the need of the day for the

insurance companies in order to gain a competitive niche, survive and proliferate in

the insurance industry. To be successful in one’s area of business in the presence of

competitive forces the following model may adopt to fulfill the purpose.

Value chain –the competitive advantages of a firm:

Michael porter, an authority on competitive strategy and competitive

advantage, argues that competitive advantage grows fundamentally out of the value; a

firm is able to create for its buyer that exceeds the cost of creating it. According to

him, “competitive advantage stems from many discrete activities can contribute to a

firm’s relative cost position and creates a basis for differentiation. A systematic way is

necessary for analyzing the source of competitive advantages.

The concept developed by Michel porter is ‘value chain’ which represents

graphically the activities of the firm and their interlink ages. The value chain reflects

the history of the firm, its strategy for the future, approach to which it belongs. The

value chain may be similar across firm in the same industry, but different among

competitors. Differences among competitors are key source of competitive

advantages.

Value chain-the valuable ingredients:

Value chain of a firm as proposed in general has five generic categories of

primary activities for a firm involved in competition in any industry. These categories

can be represented in the diagram.

Firm infrastructure

Human Resource Management

Technology Development

Procurements

In

Bound

Logistic

Operations Out

bound

logistic

Marketing

and sales

Services

MARGINS


53

Sources of risk:

Designing any strategy to manage future risks of any organization need the

understanding of the risk and their Origin and direction – linked to our environment,

which is quite dynamic. The world changes so fast that neither information systems

nor management practices are able to capture the potential trend and the direction of

the change. This leads to uncertainty and inability to initiate proactive measures. The

major changes that have been noticed are: changes in demographic structure –

mortality, life style, killer diseases (like AIDS and SARS) impacting the demographic

composition; impact on financial services of rapid globalization, Information

explosion and unanticipated volatility in financial markets. These changes have made

the Law of Averages, which has been traditionally used by Life Insurance

Corporation (LIC) to discount the impact of risks, has become nearly redundant and

therefore, there is a search for a new model methodology and Management strategies

to face the challenges of various types of risks that are being confronted by life

insurance companies. As we proceed to discuss strategy, let us examine the import

types of risks.

Types of risks:

It is virtually impossible to provide a list of risks in life insurance operation

basically due to the fact that risks are associated with multidimensional changes

associated with the factors mentioned above. However, the major focuses of risks of

insurance business are related to macro-economic factors, pricing, claims, credit,

spreads, and investment risks which can be classified in two ways: one from the

actuarial point of view and the other from the financial market point of view.

Risk Management in Life Insurance


54

Actuarial view of risks is basically classified as:

1. Asset – Liability Risks:

Arising from mismatch between assets and liability of a life insurance

company due to fluctuation in interest rates, inflation causing changes in value of

assets and liabilities.

2. Asset Risks:

Arising from default of borrowers causing or decline in market value of

investment assets.

3. Pricing Risks:

Arising from uncertainty in mortality, claims, leakages, management expenses

and income from premium, investment and real estate.

4. Miscellaneous Risks:

Arising from changes in regulatory regime and requirements, taxation,

malpractices at operational level and inefficiency in management practices, lack of

accountability and fiduciary responsibility.

5. Financial view of risks:

The actuarial concept of risks as mentioned above can however be broaden

and decomposed into six generic types from the financial sector economist’s view

these risks are:

1) Actuarial Risks:

Associated with issuance of insurance policies and related liabilities. These

risks arise due to higher cost of raising funds, higher underwriting losses than

projected etc.

2) Systematic or Mack risks:

Associated with asset liability mismatch, arising out of changes in interest

rate, inflation etc.


55

3) Credit Risks:

Associated with default of borrowers of funds.

4) Liquidity Risks:

Associated with funding crisis arising out of unforeseen demand for funds to

meet obligations.

5) Legal Risks: associated with financial contracts, frauds, violation of

regulation etc.

Measuring Risk:

Risk management however, calls for risk identification and risk measures. A

number of methods have been in use to measure the risks in an insurance company,

though there is no single best measure yet like VaR (Value at Risk), which is widely

used for banking industry. Most widely used measures in life insurance companies

are:

Actual and Expected Experience Monitoring

Risk Based Capital (RBC)/Ratios/ Target

Scenario Analysis

Stress Testing

Cash Flow Testing (CFT)

Cash Flow Matching (CFM)

Duration and Convexity Analysis

Performance Attribution/Exchanges by Source

In A/E ratio analysis actual experience to budget plan and pricing is monitored to

see to what extent liability Assumptions are met. In RBC analysis ‘the ratio of RBC to

adjusted statutory surplus is used as the standard for Surplus adequacy related to risk’.

In scenario analysis liabilities and assets of a portfolio is examined under different

Macro-economic assumption, while stress testing is conducted by using scenario to

find out extraordinary losses arising out of a particular widely used to examine the

whether asset in matching the liabilities of a portfolio. Under CFT analysis, basic


56

asset/liability analyses are undertaken to verify that sufficient reserves are maintained

particularly for generated income controls (GICs) and annuity products, while under

CFM liabilities are matched with cash flows. There are many other measures to

monitor the portfolio risks – and normally a company simultaneously uses a set of

measures. While in convexity analysis the price sensitivity of duration to a change in

the interest rate is monitored, in duration analysis price sensitivity of portfolio or

security is examined in return to change in interest rates. Performance attribution test

is conducted to find out the risk factors

Causing losses by comparing the actual performance with pre-designed performance.

Risk management practices

Like Risk management methods there are a variety of techniques used by the life

insurance companies to manage risks. According to Babbel and Santomero of

Wharton School, ‘it appears that a common practice has Evolved such that four

elements have become key steps to implementing broad based risk management

system.’

Standards and Reports – setting up underwriting risk classification and review

standards and standardization of financial reporting system.

Underwriting Authority and Limit - To exercise internal control on managers.

Investment guidelines and strategies – to exercise control over desired asset liability

mismatch.

Incentive Scheme – to relate compensation to risk and earnings. Since there is

no uniform technique to manage the entire gamut of risks inline insurance company

there are several methods and developed practices to manage actuarial risks, through

pricing system, solvency margin etc. However, recent developments indicate that

‘static assumptions regarding loss distribution failed to manage risks arising out of

interest rate volatility. Another risk factor is the incentives to agents and marketing

staff, which encourages them to sell more new policies, replace old polices, and all

these increase the overall risks for the company. In the areas of systematic risks, top


57

on the list of risk management technique is the Asset Liability Management (ALM)

because it not only covers interest rate volatility but also non-interest risks arising out

of embed options in the policy. Further, ALM is used to manage product specific risks

as well as companywide risks. A survey of global consulting firm, Milliman USA, of

Risk Management Practices of US Life Insurance companies shows that more than 75

per cent of the companies indicated that they use the following Risk Management

practices:

Risk Insurance:

Diversification of Assets

Diversification of Liabilities

Selective underwriting

Continual Process Improvement

Hedging via Capital Market

Stochastic Pricing

Risk Adjusted Pricing Targets.

Risk limits set the maximum exposure to risk factors and risk tolerance of the

Management. Reinsurance allows risk transfer to another party through a reinsurance

agreement. Diversification of assets minimizes the impact of unsystematic risks on the

portfolio while diversification of liabilities is achieved by offering diverse products.

Hedging in capital markets is aimed at reducing the adverse impact of interest rate

fluctuation achieved through derivatives, futures, forward trading, options and swaps.

It may be mentioned here that insurance supervision, to strengthen the risk

management practices, focuses more and more on the capital of an insurance

company against the benchmark of assured risks in addition to the statutory solvency

margin. In the US, the risk based capital laws now in effect in all states require

commissioners to take specified actions when a firms’ risk based capital ratio, defined

as the ratio of actual ratio to risk based capital, falls below a certain threshold

(Cumming, Philips and Smith 1997). Even in Europe, the solvency project is centered

on the risk based capital model: In a capital based solvency system, risk bearing

business will be linked to more risk capital.


58

Risk management scenario in India:

So far in India, very scanty attention has been given to risk management in life

insurance companies. Neither is any systematic and structured risk management

practice followed in insurance companies nor have any specific guidelines on risk

standards, techniques and risk management been developed. Of course IRDA

guidelines on Investment Management and Asset, Liabilities and Solvency margin of

insurers indirectly deal with Risk Management. The risk management prevailing in

Indian companies is of a very rudimentary type. Indian financial markets, particularly

during the post-liberalized era have witnessed significant understanding. Global

intervention, changes in interest rate etc. have increased the risk exposure. It is

therefore necessary to create awareness about the necessity of risk management as

well as to develop expertise in this discipline.

However, risk management practices can be successfully implemented through

institutionalization of the risk management culture and creating a necessity for

adopting it. Management may also consider introducing certain incentives and

disincentives – incentives for maximizing policyholders’ return through risk

management and disincentives for non-implementation of risk management which

adversely affect asset value and policyholders’ benefits. Risk management has its cost

also and they include the cost of professional training, technology, time and short-

term losses due to rigid implementation of risk policies. However managements

should be willing to bear this cost in their own long term interest. In view of the poor

state of the risk management practices in India, the following steps are urgently

required.

Risk standards:

A uniform practice of risk management needs to be introduced through the life

insurance industry. This calls for introduction of Insurance Industry Risk Standard

(IIRS) incorporating the entire gamut of risk management and risk oversight. Risk

Management must include the fiduciary responsibility of board and managers, risk

management objectives, responsibilities of various entities, checks and balances,


59

independent risk oversights. For these, there is need for adequate education and

training, which also may preferably be uniform industry wide.

Oversight:

Independent review of risk management practices and risk measurements are

required at frequent interval by the primary fiduciary and manager fiduciary. This

review should include analyzing policy compliance, due diligence, monitoring

investment guidelines, investment strategies, risk limits, and evaluation of investment

models. If required, revision redesigning of models, strategies, risk limits may be

done within the overall guidelines and parameters of the regulator.

Institutionalizing Risk Management:

Separating Risk Monitoring (RM) from operational functions can institutionalize

risk management practices. Monitoring should be entrusted to the entity not involved

in operational matters. Though implementation will be reviewed by the primary

fiduciary like board, top management, yet there is a necessity for independent

monitoring through designated person. Many organizations appoint a Chief Risk

Officer (CRO) who is a reasonably senior level executive reporting to the chief

executive of the organization. However, for better coordination and monitoring a risk

management committee (RMC) can be set up which would be assisted by the CRO.

RMC would be a high power committee report directly to the board on quarterly

basis. RMC would monitor implementation of Risk Standard, Risk Limit, ALM,

measures, analyze investment strategy in relation to portfolio objectives and

predetermine risk limits.

Risk Governance :

The risk management system to protect assets from depletion may be made

stronger through implementation of risk governance. Risk governance can be

established either through ‘risk control’ or through ‘risk reward’. In either of these

models, there is a necessity for improving risk knowledge, risk information and


60

competitive risk Practices. Genuine risk reporting and starting of risk information will

strengthen risk governance. However, the goal of risk governance can be achieved if

the top management and board are truly interested and sincere. Risk management

should not be thought and the regulatory requirement, but an integral part of strategy

and way of corporate life.


61

POLITICAL FACTORS AFFECTING LIFE INSURANCE

INDUSTRY:

Within India political ambitions and rise of communalism, fissiparous

tendencies are on the rise and may well continue for quite some time to time.

Therefore, it expected that the insurance companies might consider offering political

risk coverage also. The only area where Indian insurers consider giving cover is with

regard to customs duty change under certain conditions.

Certain type of political risk at the international level has serious implications

for exporters. The term ‘political risk’ has a wider connotation than commonly

understood or assumed. It covers events arising not just from politics, but risks in the

course of international transactions. In this connection, it may be noted that export

credit insurance has evolved out of uncertainties relating to international trade,

particularly due to problems arising out of foreign legal jurisdiction, political changes

and currency exchange difficulties faced by many developing countries.

Prohibition for Investment: -

The funds of policyholders are prohibited from being directly / indirectly invested

outside India as per section 27 – C.

Manner and conditions of investment: -

Subject to the above provisions contained in Section 27 -/ 27- A / 27 B, the

IRDA may,

• In the interest of the policyholders, specify the time, manner and other

conditions of investment by insurer.

• Give specific directions applicable to all insurers for the time, manner and

other conditions subject to which the policyholder’s funds should be

invested in the infrastructure and social sectors.

PEST ANALYSIS


62

• After taking into account the nature of business and to protect the interest

of the policyholders, issue directions to insurers relating to time, manner

and other conditions of the investments provided the latter are given a

reasonable opportunity of being heard.

Insurance business in rural / social sector: -

All insurers are required to undertake such percentage of their insurance business,

including insurance for crops, in the rural social sector as specified by the IRDA.

They should discharge their obligations to providing life insurance policies to persons

residing in the rural sector, workers in the unorganized sector or to economically

vulnerable classes of society and other categories of persons as specified by the

IRDA.

Capital requirement: -

The paid up equity of an insurance company applying for registration to carry

on life insurance business should be Rs 100 Crores.

Renewal of registration: -

An insurer, who has been granted a certificate of registration, should have the

registration renewed annually with each year ending on March 31 after the

commencement of the IRDA Act. The application for renewal should be accompanied

by a fee as determined by IRDA regulations, not exceeding one forth of one percent

of the total gross premium income in India in the preceding year or Rs 5 Crores or

whichever is less, but not less than Rs 50000 for each class of business as per Section

3-A.

Requirements as to Capital: -

The minimum paid up equity capital, excluding required deposits with the RBI

and any preliminary expenses in the formation of the country, requirement of an

insurer would be Rs 100 crore to carry on life insurance business and Rs 200 crore to

exclusively do reinsurance business as per Section 6.


63

Investment of funds outside India: -

Insurers outside India as per Section 27-C cannot invest the funds of

policyholders.

Insurance business in Rural Sector: -

After the commencement of the IRDA Act, 1999, every insurer would have to

undertake such percentage of life insurance business in the rural sector as may be

specified by the IRDA in this behalf. It is mandatory for the new companies to meet

the obligations relating to the rural and unorganized sector as per section 32-B.

Power to investigation or inspection: -

The IRDA may, at any time, order in writing a person as investigating

authority to investigate the affairs of any insurer and report to it.

Government has power to change the tax policy against life insurance

industry.

• Health insurance rebate,

• Pension saving rebate,

• Mede claim premium rebate,

• P.P.F., E.P.F., NSC all are tax exempted saving,

• All life insurance policy are tax exempted saving ,

• Agricultural income is tax exempted,

• House rent allowances,

• Post office saving,

• Expenses on dreaded diseases are tax exempted.

• Recently there is issue to increase FDI level from 26% to 49%.

Role of the government: -

As insurance is an important service sector, hence it is highly regulated by

government. Since 1956 insurance sector was highly regulated by government of

India. On March 16, 1999, the Indian cabinet approved on Insurance Regulatory

Authority Bills that was designed to liberalize the insurance sector.


64

Two governments in India have fallen over the issue of liberalization of the

insurance sector (which was nationalized in 1971). But the government of A.B.

Vajpayee as gone ahead to announce the liberalization of this sector announcement

was made in November 1998.

Government’s objectives for liberalization of insurance: -

The main objective of opening of insurance sector to the private insurers is as

under:

1. To provide better coverage to the Indian citizens.

2. To augment the flow of long-term financial resources to finance the

growth of infrastructure.

Important government guidelines for private players for entering into Indian life

insurance market:

1. Private companies with a minimum paid-up capital of Rs. 1bn should be

allowed to enter the industry.

2. No company should deal in both life and general insurance through a single

entity.

3. Foreign companies may be allowed to enter the industry in collaboration with

the domestic companies.

4. Postal life insurance should be allowed to operate in the rural market.

5. Only one state level life insurance company should be allowed to operate in

each state.

6. Foreign investors can invest up to 26% of the equity of their joint venture with

Indian firms.

Government will prevail on grounds that the Rs. 4.5 billion India needs for

infrastructure development in the five years from 1997-98, cannot materialize if the

insurance sector is not opened up.


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BODIES THAT REGULATE THE SECTOR:

For better regulation purpose of the insurance sector the government has

established following bodies;

1. IRA: Insurance Regulatory Authority.

2. IRDA: Insurance Regulatory and Development Authority.

3. TAC: Tariff Advisory Committee.

1. IRA: Insurance Regulatory Authority:

The IRA, under the chairmanship of Rangachary, was set-up in January 1996. the

IRA Bill has to be passed by parliament to make the IRA a statutory body.

Comprehensive legislation aimed at reviewing the insurance Act of 1938 and

repealing the life insurance corporation Act of 1956 have to be passed.

The IRA is also preparing an internal rating system to screen all applications,

as entry will be in phases. The joint venture status of life insurance companies

(with majority holding of the domestic partner) is likely to be approved by the

parliament. Consensus also seems to be emerging on the minimum of Rs. 1 bn

capital stipulations for new insurance companies.

The IRA has stipulated a minimum rural presence for all companies. The

exhaustive guidelines have been issued for the appointment of intermediaries

(brokers, agents, surveyors and actuaries).

Feature of IRA:

1. The Bill allowed for up to 26% foreign equity participation in the insurance

sector.

2. The current India monopoly companies were required to bring down their

equity holding to 26% within a period of 10 years.


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Government pronouncement:

1. IRA will be sole Authority, which will be responsible for awarding of, licenses

i.e. little or no government or political interference in licensing process.

2. No restriction on the number of licenses.

3. No composite license for life insurance business.

4. Licensing to be only on national basis (no city by city approach)

5. IRA allowed for up to 26% foreign equity participation in the life insurance

sector.

6. The current Indian monopolies companies are required to bring down their

equity holding to 26% within a period of 10 years.

IRA proposals:

1. New player should start their business within 15-18 months.

2. Trafficking of licenses not to be permitted.

3. IRA to seek business plan with 5-year protection for all applicants.

4. A system of direct brokers to be introduced.

5. IRA to vet top management appointments.

2. IRDA: Insurance Regulatory and Development Authority:-

The Insurance Regulatory and Development Authority, constituted under the

IRDA Act, 1999, provide for the establishment of an authority to protect the interest

policyholders, to regulate, promote and ensure orderly growth of the life insurance

industry.

Business Requirement:-

A company will not be issued a license unless the IRDA is satisfied with the

sound financial condition, the general character of management, the volume of

business, the capital structure, earning prospects for the insurers and that the interests

of the general public will be served if registration is granted to the insurer.


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Foreign insurance companies have been allowed to have a maximum 26% share

holding. No life insurance company can be registered under the Act unless they have

a paid up capital of Rs. 100 crores. Every life insurer shall deposit with the reserve

bank of India one percent of the total gross premium written in India in any financial

year, not exceeding Rs. 10 crores.

This amount would not be susceptible to any assignment or charge nor would

it be available for the discharge of any liabilities other than liabilities arising out of

policies issued, so long as any such liabilities remain undercharged.

Investment of Assets:-

Every insurer is required to invest, and keep invested, assets equivalent to not

less than the net liabilities as follows: (a) 25 % in government securities, (b) a least

25% of the said sum in government securities or other approved securities and (c) the

balance in any approved investment rated as “very stron” or more by reputed rating

agencies, which include various debt instruments on which dividend on its ordinary

shared for the five years immediately preceding or for at least five out of the six or

seven years immediately preceding have been paid and which have priority in

payment over ordinary shares of the company in winding up.

The IRDA may in the interest of the policyholder’s directions relation the

time, manner and other conditions and investments of assets to be held by an insurer.

The IRDA may also direct the insurer to realize the investment, if it sees the

investments to be unsuitable or undesirable. The Act prohibits an insurer from directly

or indirectly investing policyholder funds outside India.

Further, every insurer has to always maintain an excess of the value of his

assets over the amount of his liabilities of not less than Rs. 50 crores in the case of an

insurer carrying of life insurance business. If at any time an insurer does not maintain

the required solvency margin, he is required to submit a financial plan, as per

directions issued by the IRDA, indicating a plan of action to correct the deficiency

within three months.


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In order to ensure that the company does not risk the money of the

policyholder’s, the Act provides that an insurer who does not comply with the

aforesaid provisions may be deemed to be insolvent and may be would up by the

court.

Insurers are required to get an actuary to investigate the financial conditions of

the life insurance business including a valuation of liabilities every year in order to

ensure continual compliance.

In order to maintain transparency in its dealings, insurers would have to keep

separate account relating to funds of shareholders and policyholders.

Consequences of non-compliance: -

A company failing to comply with the act shall be liable for panel action.

Further, IRDA is empowered to investigate into the affairs of the company. Failure to

comply with the directions may lead to cancellation of the license for the company.

Also, if the IRDA has reason to believe that a company is doing business in a manner

likely to be prejudicial to the interest of policyholders, it is required to report to the

central government.

The central government may base on the report, appoint an administrator to

manage the affairs of the company. This would act as a further assurance to the

consumers, as their interests would at all times be a priority and that in the event that

the company acts in the manner prejudicial to their interests, than an administrator

would be appointed to serve their needs.

The court may also wind up the company if it fails to deposit or keep deposits

as per the requirements of the act or if the continuance of the company is prejudicial

to the interest of the policyholders or public interest. But an insurance company

cannot be wound up voluntarily or on the grounds that by reasons o its liabilities it

cannot continue its business, except for the purpose of affecting an amalgamation or a


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reconstruction of the company. Therefore, a company after issuing a policy cannot

escape liability by seeking voluntary winding up.

The four amendments, made in the life insurance Bill by the Lok Sabha, are as

under:

1. The Insurance Regulatory and Development Authority should give priority

to health insurance.

2. Policyholder’s fund will be invested in the social sector and infrastructure.

The percent may be specified by the IRDA and such regulations will apply

to all insurers operating in the country.

3. Insurers will be expected to undertake a certain percent of business in rural

areas, and cover workers in the unorganized and informal sectors and

economically backward classes.

4. In the event of insurers failing to fulfill the social sector obligations, a fine

of Rs. 25 lakh would be imposed the first time. Subsequent failures would

result in cancellation of licenses.

3.TARIFF ADVISORY COMMITTEE:

The tariff advisory committee established under the Act is empowered to control

and regulate the rates, terms, and etc. that may be offered by insurers in respect of any

risk or of any category of risks. It is provided that in fixing, amending or modifying

such rates etc. the committee shall try to ensure as far as possible that there is no

unfair discrimination between risk of essentially the same hazard and also that

consideration is given to past and prospective loss experience. Every insurer is

required to make payment to the TAC of the prescribed annual fees.

TAX POLICY AND INSURANCE SECTOR:

Another factor, which affects the insurance sector, is the tax policy. The tax reforms

in India are such that it encourages the citizens to invest in the insurance sector.


70

The tax policy of the government is particular relevant for life insurance which

is a long-term contract and inculcates among the policyholders the habit of saving.

Taxation of returns on investment influences, investment decisions and high rates of

taxation will discourage the desire to save. Already in India there are complaints that

the rates of return on life policies are not what they could be. Therefore tax incentives

play a vital role in determining the attractiveness of such policies. Such tax breaks are

available in many countries and have helped in the development of their life sector. In

western countries the gain from the proceeds of a life insurance policy is paid free of

tax. Provided the policy satisfies certain qualifying conditions. Non-qualifying

policies get basic rate tax relief, though higher rate taxpayers may still have to pay tax

on the gain, although at a reduced rate. The insurance companies can use such tax

concessions rate. The insurance companies can use such tax concessions to design

products for different categories of taxpayers.

The other factors, which affect the insurance sector, are the employment law, and

government stability. These are the factors, which affect the insurance industry.

INVESTMENT DECISIONS MANDATED BY GOVERNMENT:

Insurers are required to fulfill certain social commitments as well. As many of

the social welfare measures companies are not just regulated, but have been mandated

to hand over a portion of their funds to the state for investment in infrastructure and

for social development through government bonds and securities. In India, the pattern

was, accordingly, prescribed in great detail by the government. This was not in the

form of guidelines, but as a legal obligation under the insurance Act, 1938.


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Pattern of investment specified for life insurance:

Type of investment Percentage

(1) Government Securities 25%

(2) Government securities or other

approved securities

Not less than 50%

(3) Approved investments

(a) Infrastructure and social

sector

(b) Other govern by exposure

norms

Not less than 15%

Not exceeding 35%


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ECONOMICAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY

Interest rate at bank and interest rate of P.F variation very much affect to life

insurance industry, because people always attract by higher return. Therefore, they do

not prefer lower return policy. Unemployment also affects insurance industry, because

the unemployment people will not have earning, so saving also affect to life insurance

sector Life insurance industry will directly affected by Earthquake, Monsoon, and

Natural calamity. Because of these events turns into lots of death, so the life insurance

companies have to pay claim against policy. Infant mortality rate and maternity

mortality rate are also affecting to life insurance. Typical Indian want luxurious

product against low income, so that they prefer installment or annuity (EMI), so that

they may not have extra saving to invest in life insurance.

Adequacy of capital:

Capital adequacy is a matter of attention in view of the nature of the life insurance

business, where in the case a contingency arises, the insurers should be in a position

to meet its long-term contractual obligations and pay up the dues or claims. In that

sense, life insurance is a capital-intensive business and must be backed by an adequate

capital base on the part of the owners and the companies should not be running their

business purely on other people’s money. So minimum start up amounts and long

running capital adequacy norms are absolutely essential, in consideration of this, the

Malhotra committee suggested and subsequently the IRDA stipulated a minimum

capital base of Rs 1 bn for any entity wanting to enter the life insurance business.

Increased Economical Activity:

Although economic activity has slowed down since 1996, sooner or later there will be

an upswing. The increase in the growth rate in various sectors accompanied by the

growth in trade in the context of fulfilling of commitments to the WTO will signal a

growth in the demand for insurance covers of new types. For example, aviation

insurance cover will be on an increasing scale in view of the need for more frequent


73

air travel for men and for transporting materials. This would necessitate substantial

property, liability and personal insurance.

As far as cover against business interruption is concerned, the pace of business

and of change today is so fast that even the most careful assessment of exposure time,

and the most liberal coverage cannot protect the insured adequate in the event of a

loss be on the increase and insurance companies cannot afford to ignore the vast

potential in this business.

Interest Rates: -

During the last years the government has rationalized interest rate creates better

business opportunities for the life insurance sector because the substitute products are

graded lower by the customers. On the other hand the value of the holdings of the

insurance companies will increase.

Rationalized of the interest rates is still expected, and it is an opportunity for the

company.

Low interested rates mean low investment return for reinsures causing negative

impact on their overall net profitability as pricing is to a certain extent sensitive to

interest rate fluctuations. The negative impact therefore, lead to higher pricing level

for reinsures in order to sustain their profitability. But, in reinsurance market, which is

characterized by over capitalization a resulting intense competition. The opportunity

for such rate increases practically remains very slim and even non-existent. As a

result, reinsures are under tremendous pressure to cut their operational cost to

safeguard profitability. Furthermore, low interest rates discourage and even prevent

any outflow of capital from reinsurance business to capital markets, causing current

over capitalization in reinsurance market to continue. A positive outcome is that low

inflation rates, if sustained for a considerable period, usually bring some relief to

reinsures from the resulting lower than forecast claims payment. Also, this can lead

stability to reinsures administrative cost.


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As interest rates fall, bond value rise, and insurers feel richer. On the liability side,

reserves are not explicitly discounted so lower interest rates do not increase reserves,

lower inflation means lower expected future claims payments which lowers required

reserves. This in turn increase surplus, again allowing insurers to feel richer.

Therefore, low interest rates and low inflation result in higher assets, lower liabilities,

hence greater surplus and greater risk capacity resulting in less demand for, and

greater surplus of reinsurance.

Low interest rates and low inflation reduce the ability of reinsures to off set

technical losses by using financial products and should, as a consequences, force

market competition downloads. However, this will also serve to weaken the balance

sheets of insurers and create an increase in the demand for balance sheet protections.

Lastly, these conditions move risk from the liability side of the balance sheet to the

asset side while actually generating new needs for cover.

Inflation rate: -

Inflation can also be one of the causes to change the scenario of the insurance

sector. High inflation for instance, would tend to reduce the insurance business,

particularly life, because the real value of the money paid back to the policyholder on

maturity of the policy would go down and would, therefore, lose its attraction for the

investor. At the most, the insuring public may prefer pure risk plans (terms insurance),

which have a low premium outlay.

The response to an inflationary situation will depend on what benefit the insured

is looking for. In a situation of high inflation, clients would prefer policies where the

savings portion is periodically returned while the risk portion is maintain for the

duration of the contract. Those who prefer risk protection are likely to opt for long

term policies, which may also be preferred because they are likely to be low premium

policies. A flexible system, under which the sum insured, is increased from time to

time so that the real value of the cover is maintained, and could give a boost to the

market under conditions of high inflation. Fortunately, the rate of inflation in India


75

has been contained to less than 5 percent for a fairly long time and unless it goes out

of hand, it is not likely to dampen the market.

Market related factors:

These are the factors, which governs the entire life insurance sector. This includes

internal as well as the external factors. We have seen the various factors like

technological, economical and will see the political and government factors,

environmental factors and competitive analysis of insurance sector in the next session.

These all factors have changed the trend of life insurance sector, which is shown

in the following figure.

Stage 1

Stage 2 Stage 3 Stage 4

Closed market,

Entry is controlled

by state.

Barriers to entry

are high expertise

to operate is

essential, license

can be obtained.

Barriers to entry

reduced systems

expertise can be

brought.

Entry costs are low

and capital

requirements are

same for all.

→ → → →

From the above figure we can see that now day’s strength of brand is very

important aspect for the success in this sector. Of course you should have strong

distribution channel without which growth is not possible.

Scarce resource is Permission from state

Scarce resource is expertise

Scarce resource is capital

Scarce resource is brand


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Customer satisfaction: -

Since the customer is the focus of any service industry, every such industry

continuously strives for greater variety and better quality of products, improvement in

its delivery system, cost effectiveness, easy access, and quick response to perceived

needs – in short qualitatively superior service. Indian life insurance companies already

have a sizable line up of the products. The difference between them and the foreign

operators perhaps lies in the service provided, because there is still not enough

concern on the part of the Indian companies, with customer satisfaction, on time

renewals, claims settlements, etc. if high standards have been achieved else where, it

is not impossible to attain the same in India too.

The concept of “sales” is now redefined as a long – standing relationship. The

relationship does not end with the conclusion of the transaction, but has to be durable

and of a long term nature. Hence, improved in performance of the company will not

be synonymous with only basic cost reduction or larger business, but the new measure

of performance will be set in terms of service to the customer. One can anticipate

greater insistence from pressure groups like customer forums to keep customer

satisfaction at the top of the list of priorities of the insurers.


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SOCIO-CULTURAL FACTORS AFFECTING LIFE

INSURANCE INDUSTRY:

The basic social factors that affect the life insurance sector are as under: -

Population

Life style

Educational level

Level of earning

Societal benefits

These are the major social factors, which affect the life insurance sector. We will

discuss all of them in brief>

Population:

Growth in the population is a major factor pushing up the demand. It is also going

to exert a special influence on the life insurance market in other ways. Apart from

exerting pressure on demand for goods and services, and through that, ill effects of

uncontrolled growth of population also could spur the growth of demand. For

example, overcrowding in public places of entertainment, public support, or too many

vehicles on the road can result in hazards like stampedes and pollution, which require

covers and still are not sold on a large scale today. Thus the positive as well as the

negative aspects of population growth are going to spur demand.

Life style:

The peculiar lifestyle of a country or an age also influences the insurance

business. Change therein produces different demands for life insurance. For e.g. All

over the world, family size is shrinking and the fact that in decades to come, both

presents are more frequently likely to work outside the home will mean that there

could be a greater possibility of property loss. Similarly, a larger number of vehicles


78

on the roads for people commuting to their jobs or business would mean larger

incidence of accidents. This will increase the demand for life insurance products.

Of course, there is also the other possibility that wherever it is possible, some

people will try to spend a part of their time working at home either because they

would like to be with their families or because they find it more convenient. Activities

like life insurance and financial services are particularly well suited for such

arrangements.

With time becoming scarcer for most people who pack in a full day, there is a

higher demand for convenience and service. Companies will respond by trying to

shorten the transaction time for the delivery of products and services and creating

distribution systems that can reach clients wherever they are and whenever they want

to use them, so as to ensure convenient access to service providers.

In recent times, there has been a surge in the high end business of the LIC. For

instance, as against 90 policies each worth more than Rs 10 million in 1999-2000, the

number was as high as 900 policies in the next year. Or again, the number of jeevan

shri policies jumped from 88,000 to a total of 2,33,000 policies in the same period.

However, consumers’ behavior cannot be adequately and accurately predicted.

The younger generation is overwhelmingly influenced by consumerism. If this trend

continues or increases with increasing income, there will be fewer propensities to save

or insure, as a result of which the increasing purchasing poser may not be reflected in

the life insurance market.

Crumbling social values, the deteriorating law and order situation, the growing

incidence of crime, extortion, abduction, etc., are posing a new category of risks

which need to be covered through suitably designed policies.

Thus these are how changing life style of the citizens is affecting the life insurance

industry.


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Level of education:

India is one of the developing countries: the level of education is very low here.

The literacy rate is very poor. More than 50% of the population is still uneducated or

more or less not educated. Thus the people are not able to understand the concept of

the life insurance. Among the educated people the quality of the education is still a

big question mark. Thus the awareness is not created and it has become a big

challenge for the industry. Thus one of the factors, which affect the life insurance

sector, is low level of education.

Level of earning:

Another factor, which affects the life insurance sector, is the level of earning. In

India the rule of 80-20 is working. The 80% of the total population is having the 20%

of the wealth and the 20% of the total population is having 80% of total wealth. Thus

the richer are richer and poorer are poorer. Due to this the life insurance sector is

affected very much.

Societal benefits:

In view of the fact that large sections of India have inadequate life insurance

cover, an important social responsibility of the government relates to spreading it far

and wide. In addition, the government attempts to extent life insurance with certain

social obligations in view in both urban and the rural areas through such means

special schemes for the weaker sections, and by tilting of the life insurance

companies’ investments in favour of social developments.

The social changes emerging in the country provide opportunities for insurers to

sell financial services products such as family health care programmed, retirement

plans disability insurance, long-term care for senior citizens and different employee

benefit plans.

It is not the total population but the insurable population which is material for the

conclusion of potential. Apart from the usual demographic and other well known


80

factors such as age group, income level, sex-wise distribution, and literacy level, a

realistic assessment of this potential has to be based on several other relevant factors.

Many invisible factors like religious faiths and social values too need to be

considered. As such, there is considerable difficulty in accurately estimating the

potential and crude estimates can be misleading. The estimate will also vary

according to the criteria used to measure if.

In principal, every individual is a potential candidate for life insurance. In reality,

financial status limits this potential, not only because of the practical consideration of

the insurable worth of a person to the insurer in financial terms, but more so due to the

prospect’s capacity to pay life insurance premium after meeting other pressing needs.

Again, there are many practical factor affecting ‘ insurability” such as old age, past

and present illness, and physical and mental impairments.

In addition, the cost of reaching out to a very large number of customers, if they

are dispersed, becomes important. In that sense, the cost and profitability of exploiting

the potential, which is otherwise attractive, limit the opportunity. The sheer size of the

numbers, there fore is not crucial itself.

For assessing the practical business potential of life insurance, the eligible

population needs to be “Qualified” in relation to other factors including those

mentioned above. Thus, in the opinion of some experts, out of the population in the

insurable age group,

Only the main workers (i.e., excluding marginal workers) with adequate income

may be considered as the actual insurable population.

The population in the age group 15-55 is usually regarded as the insurable

population, since this can be considered as the main “active” age group ( in the sense

of working, earning. And supporting others), and beyond this range life risk may be

considered to be not worth insuring.


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There is one opinion, which suggests that in our country the age group 15-55 as

the base is not totally suitable. Due to various factors including the unemployment

problem, real earning starts from around the age of 25 for salaried persons. For others,

particularly small entrepreneurs, traders and businessman, the starting age is a little

higher. Only in the affluent sector of society life insurance can be taken before

personal earning starts. Thus, number wise life insurance below the age of 25 is not so

significant (although amount wise it need not be so). On the other hand, people over

the age of 50 rarely apply for fresh life insurance, mainly because in India the normal

retirement age is around 60 years. Also, a high percentage of the population in the

lower income group does not remain “insurable” after the age of 50. thus, in our

country the practical age range for insurable population actually narrows down to 25

to 50.


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TECNOLOGICAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY:

Internet as an intermediary in the current Indian market customer is not aware

about the intrinsic value of insurance. He thinks of insurance only in the mount of

March as a tax saving measure. The security provide by an insurance cover is rarely

thought about. In such a scenario Internet can be an effective medium for educating

the consumers about insurance. It serves as a single window for disseminating

product, process and procedural information to the consumers.

Product development and target marketing through the Internet: with increase in

the number of insurance companies there will be a need for market segmentation and

subsequently product designed for each of them. In such a scenario Internet can be a

effective channel for pushing product specific information to a particular market

segment. Consumer feedback about a particular product as well as suggestions for

different types or covers can also be generated through the Internet.

Retail marketing is a commonly expected concept and the providers of the retail

products and service will try out for larger market and market share. There would be

cut through competition and the real benefit would be to the customers in terms of

better products, distribution, pricing, post transaction service and technology.

Technology will perhaps be the single largest driver of the retail thrust. The entire

strategy will evolve around the absolute ability of the organization. The customer will

demand for greater convenience of excess to the product/ service and all at low cost of

delivery. There fore the use of technology and specifically the Internet with realigned

strategies would be one of the key factors to success. Constraints of locations, timing

and accessibility would not be a hurdle for either customers or businesses.

Maintaining the database

The most important facto that is affecting the insurance industry is the marinating

the database of the customers. The insurance industry having a huge list of the

customers.


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In order to maintain it in manual format it is really the work of stupidity. With the

change in time the computers has taken the work of this things. Thus with the

development of the technology it has becoming possible to maintain such huge

database very easily. A person can switch over to the computer and get the details of

the customer very easily. Thus maintaining the database has really become easy due

to the development in technology.

E-business insurance in India: -

The Internet has played a vital role in transforming the business of the 21st

century. Computers are now being used extensively for creating a storing data,

information with the help of complex and sophisticated technological tools in every

kind of business. This change having been widely accepted, the advantages are

numerous such as fast processing improved. Efficiency, cost reduction among several

other benefits. However, with every positive change, there is an evil attached and

technology is no exception. In technical is an evil attached and technology is no

exception. In technical terms, increased sophistications of technology brings with it,

an increased factor of risk involved. The risk can be of various attributes, for example,

the risk of data being lost due to a virus attack, the theft of important and confidential

information and so on, which ultimately results in losses for the business entity. With

this change in the business process, insurers have to devise new methods for

assessing, underwriting and servicing claims for the so-called e-business insurance.

Insurers face challenges to ascertain risks, in order to quantify them because such

risks don’t have any past data, which makes it all the more difficult for actuaries.

Moreover, what financial impact a particular risk can have is very difficult to be

determined. For example, if some hackers obtain credit card information of few

customers, it’s a loss for banks, their credibility, customers and also their brand. Will

an insurance policy cover all of this is million dollar question hence; the difficulty is

to design a cover first of all, which really answers the needs of customers. But even

after designing and pricing such products with difficulty, the challenge to underwrite

and handle claims for such policies remains existent.


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Impact on distribution channels: -

Distribution channels are the most important part of the insurance industry. The

scenario is continuously changing in this industry. In future the customers are

expected to be more technology – oriented, better informed, more knowledgeable and

more demanding. The insurers will have to offer all types of channel to customer and

it is the customer who will have the right to choose the channel suiting him/ her. Dual

income families with young children, singles with long working days and flexi-timers

all demand high level of sophistication and ease when it comes to service. Hence the

companies have to be very careful and cautious in catering to the needs of these

customers who provides a good amount of business to the insurers.

Thanks to the technological advancement and increased de regulation and

sophistication, the carriers and producers can now reach the customers in different

ways as has been proved in the US market and other developed nations the web is

extensively used for the access of information but when it comes to the purchase of

policy, the offline mode is preferred. The private players in India seems to have

identified this and have put substantial information on there websites regarding

policies, quotes and contact information among other routine stuff.


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One important component of industry and competitive analysis involves

delving into the industry’s competitive process to discover what the main sources of

competitive pressure are and how strong each competitive force is. This analytical

step is essential because managers cannot devise a successful strategy without in-

depth understanding of the industry’s competitive character.

Even though competitive pressures in various industries are never precisely

the same, the competitive process works similarly enough to use a common analytical

framework in gauging the nature and intensity of competitive forces.

The state of competition in an industry is a composite of five competitive

forces.

1. The rivalry among competing sellers in the industry.

2. The potential entry of new competitors.

3. The market attempts of companies in other industries to win customers over to

their own substitute products.

4. The competitive pressures stemming from supplier-seller collaboration and

bargaining.

5. The competitive pressures stemming from seller-buyer collaboration and

bargaining.

PORTER FIVE-FORCE ANALYSIS


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Figure shows porter’s five-forces model of competition.

Firms in other industry offering

substitute products

Suppliers Of

Raw-materials, inputs

Firms in other industries offering substitute products

Buyers

Rivalry among

competing sellers

The five-force model developed by porter in 1980, guides the analysis of an

organization’s, Environment and attractiveness of the life insurance industry. The

nature and degree of competition in an industry hinge on five forces, which include

the threat of substitute, bargaining power of buyers, the bargaining power of

suppliers, the threat of new entrants and degree of rivalry between the existing

competitors.


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1. Threat new entrants: -

The future of life insurance market scenario will be marked by the active

presence of many international players, beside several Indian players. As far as

life insurance industry there would be fewer entries due to more specialized firm

with lower expenses ratios and better capitalization.

Threat of entry is determine by the entry barriers which act to prevents firms

from entering the industry. In life insurance industry entry barriers is moderate

so that it becomes profitable, it attracts new entrants, thereby increasing the

number of competitors.

The Indian market is highly brand oriented, it is difficult to introduce new brand.

The acceptability of new brand is also very low.

The capital requirement in life insurance is Rs. 100 crores, which attract more

companies to invest in. promoters, can hold paid up equity capital up to 26% in

an Indian insurance company. In case promoters hold more than 26% of the paid

up equity capital, they shall divest the excess shares in the phased manner within

a period of ten year.

Tax exemption structure makes the industry attractive.

High level of competition in life insurance industry become giant player came

into the market.

High profit in life insurance industry act as a magnet to firms outside the

industry motivating potential entrants to commit the resources needed to hurdle

entry barriers.

But again due to potential market, private giants and international player try to

enter in to the market in the large scale with their proper homework with

customized and products too. An Indian private are well – developed and has

capacity to face challenges, foreign companies foresee good prospects for new

business by alliances and partnership with domestic outfits .

Registration: Every insurer is required to obtain a certificate of registration from

the controller of insurance. The registration is required to be renewed after a

period of three years.


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Economies of scale: Economies of scale is difficult to find in the initial stage of

entry into the market because of experience as evidence by the theory of

experience curve.

Legislation or government action: special permission is required from the

government to enter in the insurance sector. With the tariff advisory committee

to control the rates, rules and regulation, and with the control of IRDA and the

government’s attitude to serve to the needs of the people with social objectives,

the multinationals may face breathing and developmental problems.

2. Bargaining power of buyer: - Now a day competition is increasing in the each and every sector, and as a

competition in the market increase the bargaining power of the buyer will get

increase. So buyers bargaining power is high.

Market is highly segmented.

Buyers in this industry are very return oriented and it switches easily.

The switching cost of buyer over brand or close substitute products: The life

insurance industry has the uniqueness of providing risk protection, which does

have any substitute. Thus the switching cost has no place. As far as the

substitute products are concerned they are providing the service of saving and

tax benefits but still they lag in the risk coverage factor.

If buyers buy insurance then switching cost become high. High switching cost

creates buyers lock in and makes a buyer’s bargaining power.

Buyers have a strong competitive force when they are able to exercise

bargaining leverage over premium, service or other terms of sale.

3. Bargaining power of Suppliers: -

Policy designer tend to have less leverage to bargain over premium and other

terms of sale when the company they are supplying a major customer.

Suppliers bargaining power increase if reduced administrative cost and also

reduced claim procedure time.

Insurance is tax exempted so that suppliers bargaining power increases.


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Suppliers then have a big incentive to protect and enhance their customer’s

competitiveness via reasonable premium, better service and on going advances

in the technology of the item supplied.

Supplier’s ability to integrate forward: the private players can integrate forward

to increase the volumes of business by providing customized and tailor-made

policies whereas existing players whereas lack on this point.

Brand identity: there is certainty among the minds of people in relation to

existence and payment of claims from the existing players whereas the solvency

of private players is not certain.

4. Threat from Substitutes:-

Life insurance sector can be featured in three factors. They are saving, risk and

tax benefit.

SAVING:

As far as saving are concerned, Existences of a large number are saving through

PPF, EPF. Most of customer saving their money in bank, post deposit. Many

customers invest their money in share market, purchase Gold & Silver also.

The substitute products for the industry are as follow:

Term deposits in bank (5.25-8 %)

Investment in government securities. (4-5%)

Money market investment (for corporate)

Capital market (around 13% p.a. for developing country like India)

There is threat of increasing market potential of NSC, Government

debenture etc.

If investments in insurance policies are made with the objective of tax

benefits then there are other investment avenues, which offer similar

benefits.


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RISK COVERAGE:

For risk coverage, there is no close substitute of the products. The risk

protection is provided by this sector only. No other instrument provides

assurance against risk.

TAX BENEFIT:

There are various substitute of this feature of life insurance. Some of the

substitute which provides tax benefit is:

• PPF

• NSE

• POST OFFICE SECURITIES.

• INVESTMENT IN THE MUTIAL FUND.

• OTHER TAX SAVING INSTRUMENT.

Thus these are the substitute of the life insurance industry. But the core

competency of this sector is the risk protection providing capacity, which no

other sector can provide.

5. Rivalry among the exiting player:

As a result of privatization competitive conditions will prevail in which entry of

companies buyers will exercise control.

There is cut- thought competitions among rivals in life insurance industry.

There are mainly 13 private organizations and one public organization in life

insurance competition.

The insurance sector is showing high market growth rate, which enables the

insurance companies to achieve its own market growth through the growth

in market place. As per the study conducted by the monitor group, the size

of the Indian general insurance market was of the order rs.10000 crores in

2001. The annual growth rate is expected to be 15%.

All the insurance companies deal in identical policies, as service levels

offered are similar. Hence, there is no product differentiation. Post-


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privatization, product and service differentiation exist between public

company-private companies.

Ministry of finance controls all the insurance companies that are in the

industry at present. Hence, there are less chances of exit. Also, post

privatization there will be less chances of exit, as the ministry of finance and

insurance regulatory and development authority1999 will govern the

insurance companies.

Nationalized players have negligible computerization and use of

management information system (MIS). Although they are planning to

implement software developed by CMC for fulfilling the MIS requirements

across various levels of offices. Private players will make extensive use of

MIS as well as will have more or less a paperless office.


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OT- analysis of the industry shows opportunity and threat the industry is likely

to face. OT analysis of Indian life insurance industry shows the comparative strengths

and weakness of Indian life insurance industry with rest of the world and also major

opportunities and threats the Indian life insurance industry is facing.

Opportunities:

Today’s human life becomes full uncertain, so they prefer protection against the

risk. Therefore they prefer life insurance. This is the opportunity for the life

insurance sector.

Easy accesses to development in the more advance market provide further

opportunity to upgrade their working. Technological, financial or specific area

based avenues of absorbing improved system are also now more easily available.

So, that insurance companies working efficiently and fast service.

Increased economic activities: increase in the economic activity has become the

opportunity for the life insurance sector. The activity such as development in the

automobile industry, development in the shipping industry. The growth in the

GDP shows the opportunity for this industry. The growth rate expected this year

7-7.5%. So this is also one of the opportunities for the life insurance sector.

Uncovered market:

The Indian insurance market is the one of the least markets in the world. India

has a population 1044.15 million out of which only 77.7 million have a life insurance

policy. Almost 300 million people in the country can afford to buy life insurance but

of this only 20 % have an insurance cover. Thus there lies a big opportunity for the

life insurance industry. No doubt lots of marketing and promotional efforts have to be

done for trapping the uncovered portion of the huge market. India’s insurance has

long way to catch up with the rest of the world. According to the institute of charted

financial analyst of India. India is the 23rd largest insurance market in the world. India

accounts for just 0.4% of the global insurance market which is very low. the ratio’s of

premium to GDP for India stands at only 3% against 5.2% in US ,6.5%in UK.

OT ANALYSIS


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To enter into rural market where customer awareness about insurance is low by

effective and efficient marketing strategies.

To sell insurance products through electronic Medias.

Natural calamities: natural calamities taking place now days have created a

concern for life insurance among the public. Because of natural calamities like

earthquake, flood, and cyclone people have become conscious about benefits

and need of insurance. Thus through a calamity it has become a considerably big

opportunity for the industry.

Growing population: the growth in the population (approximately 1.7%) is very

high. It is said that one Australia is added in our country every year. Thus

potential customers for the life insurance industry. It has become an opportunity

for the life insurance industry.

The lack of comprehensive social security system combined with a willingness

to save means that Indian people demand for pension products will be large.

Thus, it has become an opportunity for the life insurance industry.

India has traditionally been a highly savings oriented country. Needless to say, if

the insurance market is properly tapped, it is possible to raise life insurance

premium as a percentage of GDP from its existing level. Thus, it has become an

opportunity for the life insurance industry.

To use Internet and e-commerce technologies to dramatically cut the costs

and/or to pursue new sales-growth opportunities. With the help of technology it

has become easy for the companies to reach the customer quickly, easily,

efficiently and in a better way. Also the companies can cut down the cost of

operation up to considerable level. Thus technology has thrown lots of

opportunity for the company.

Liberalized government policy toward insurance sector: the government has

liberalized the government policy in the life insurance sector. Now a day role of

government has changed. Due to liberalized policy of government the country is

benefited in earning foreign inflows: the domestic company can also collaborate

with foreign country and can create synergy. Thus there is great opportunity for

those who can trap it. Exist the option of joint venture& alliance etc. for

companies to create Synergy, value as well as competitive capabilities for the

firms.


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Threats:

Private entrants are naturally targeting the profitable and more lucrative segments,

by providing better service, new products and flexibility. They are targeting the

bigger corporate the other clients in the well established metropolitan center.

These new entrants succeeded in eating share of the existing entities. This creates

threat among rival firms itself.

Decreased in bank rate: the decreased bank rate is the biggest threat for the life

insurance sector. Fluctuation in the bank rate makes big difference for the life

insurance industry. It has become threats for the life insurance industry.

Interest rate of P.F and bank saving create threat to insurance sector. All other

saving is obviously the threat for life insurance sector.

Increasing intensity of competition among industry rivals-may cause squeeze

(fall) on profit margins. Consumer’s education- consumers are more and more

confused because the market players are offering large number of product range.

As at present the awareness level is not much, it is only because the education

level is only 62 %( in which only 10% are well educated).

Fraud in insurance sector: the major problem fraud, which affects the life

insurance sector.

The flight of talent to new entrants is already in evidence, and could be on the

rise for some time to come. Retaining qualified and competent executives will be

considerable challenges for existing companies.

One very serious danger that the government on units is likely to face is that even

if at some point of time, the government does decide to disinvest a portion of its

equity; they may not be fully free from government interference. They could face

a peculiar problem that although paper and in terms of legal definition they would

not be public sector units. In effects, their working could be no different from

what it was before their ownership pattern change. This could be genuine threats

since they would be competing with units which are free from such artificial and

unnecessary restrictions.

The new units, equipped with state of arts equipment and innovative procedure

would have an in-built edge over the erstwhile public sector units, which until

recently had no such opportunity and incentives. Due to possible negative impact


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on employment, there were no serious efforts at updating technology and

equipment. The resultant inadequate investment in infrastructure could lead to

their lagging behind in the race.


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In order to succeed in any of the business it is very necessary to make and

follow the strategies. Strategies are very important for any of the business. Following

are the general strategies, which are recommending to the insurance sector.

One approach is to focus upon product quality, which will instill confidence in minds

of the customers that they would be offered best product from out of the several

available products.

The other approach, is to focus on the customers need, would involve a heavy

investment in developing relationships with policyholders. Under this approach, one

can expect a range of products and services designed to give the customer what he

specially desires.

The third approach is of greater market segmentation under which the

population should be divided into several homogeneous groups and product, and

services would be targeted towards such selected markets. The effort would be to

“tie” clients to their company- by customized combination of coverage, easy payment

plan, risk management advice, and convenient quick claim handling.

Porter Generic Strategies:

One of the expert Michel porters has identified three internally consistent

generic strategies, which can be used singly or in combination: overall cost leadership

is clearly under stable. In a differentiation strategy, a company seeks to be unique in

its industry along some dimensions that are widely valuable by the customer. May be

the lowest cycle time for settling a claim under say, a med claim policy could be

differentiating factor. In a cost focus, a company seeks a cost advantage in its target

segment, while in differentiation focus; a company seeks a differentiation target.

KEY STRATEGY TO SUCCESS


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Marginal Different Product:

Another strategy would be for the companies to design products that will make

comparison-shopping difficult. They could offer a wide variety of covers with

marginal differences and varying prices, whose terms and conditions are difficult to

compare for consumers who may not have sufficient experience in purchasing

insurance and who would find it difficult to make a clear choice. If the consumer is

offered a unique policy, he will have no alternative coverage with which can be

compared. Given the combination policy, which can offer protection against a number

of losses, the consumer will find comparison even more difficult.

Designing New Strategies:

The existing insurance companies cannot be satisfied with concentrating on

the consolidation of their existing markets, but have to achieve further growth and

penetration. They must, therefore, concentrating on strengthening existing points of

service, designing new channel of distribution, direct contact with their ultimate

customers, and front line employee empowerment. They also need to refresh their

marketing set up. The new comers, on the other hand give priority to tapping the

market, left unexploited by the public sector companies.

Move towards Rural Market:

It is one of the most important suggestions; data says that rural market is still

uncovered by this sector. We believe that the sector should move towards tie rural

market. Insurance penetration can be achieved by tapping the neglected Rural

Markets. There is vast potential for insurance growth in the rural sector. A recent

survey by foundation for research, training and Education in insurance (FORTE)

suggests that insurance can be sold profitably to rural communities in India. The

survey reveals that

There is distinct hierarchy of needs in rural areas.

Rural people find security in groups.


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The saving habit is very strong in rural areas.

Average saving across the most important socio-economic strata comes to

30-35% of annual income or Rs. 13,500 annually, which is significant.

There is high level of awareness about life insurance and fairly high-level

about 36% already own life insurance.

51% of these who own life insurance would like to buy more.

Amongst the savers, a significant percentage does not save through formal

financial modes or institutions.

Rural buyers of insurance prefer a half yearly mode of premium payment to

coincide with the time of the harvest.

Thus there are very much chances for any of the companies to work over this

scenario. So we believe and suggest all the players to move towards the rural areas.

MOTIVATION OF SALES FORCE:

A life insurance company should constantly be involved in the process of

motivating the sales force in the turbulent times. The following strategies are

recommending;

Building relationship is real perk. One should be sure to build in networking

times for agents during the program-in addition to entertainment and

education.

Web should be frequently used for creating gift ideas.

Hold sales contests in the forth quarter. It is the best times ti motivates agents

who wants to qualify for a trip.

Consider a contrast within the contest ‘for- top-tier producers; additional

rewards for additional milestones that are met, such as air and guest room

upgrades.


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Use of Internet:

The present scenario is such that the products sold with the help of Internet.

The technological advancement is such that force the companies to take such steps.

Still the full-fledged use of Internet is not done in our country. As suggestion earlier

the Internet based life insurance will help the companies to reduce the transaction cost

and time. At the time it can improve the quality of service to its customers, which is

the mission of the company.

Company should concentrate on the quality of the premium received this will

help the companies to reduce its underwriting losses. Appointing of proper and

efficient agent as well as effective direct marketing could do this.

By way of training the excessive staff, which is a major problem in the

company, the company could reduce management expense to a large extent.


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Planed P.S and Shah R.S; Insurance in India, Response books-2003

Insurance 4th edition CIB Puplicaion-2002

Magazine

Life insurance vol 1 ICFAI PRESS 2002

Life insurance vol 2 ICFAI PRESS 2002

Insurance industry Emerging Trends ICFAI PRESS 2002

Insurance law and regulation vol 1ICFAI PRESS 2002

Web site: -

www.irdaindia.org

www.equitymaster.com

www.licindia.com

www.iciciprulife.com

www.incometaxindia.gov.in

Newspaper: -

Economic times

Times of India

Business standard

BIBLIOGRAPHY

An in depth analysis of Insurance Industry

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