GLOBALISATION, LIBERALISATION AND

PRIVATISATION OF INSURANCE

Presented By:

Habib Zafar Khan

LL.B (Rank 1); LL.M (International Trade and Business

Law- Rank 3)

Research Associate, Centre for Air and Space Law

NALSAR University of Law, Hyderabad

habib.nalsar@gmail.com

1

MEANING OF INSURANCE

Insurance is a policy from a financial institution that

offers a person, company, or other entity reimbursement

or financial protection against possible future losses or

damages.

Precautionary measure against future contingent losses.

2

MAIN BRANCHES OF INSURANCE

Accident Insurance,

Fire Insurance,

Holiday and Travel Insurance,

Household Insurance,

Liability Insurance,

Livestock and Bloodstock Insurance,

Marine insurance,

Motor insurance,

Pluvial insurance,

Private health insurance,

Property insurance

Reinsurance

Retrocession etc.3

CLASSIFICATION OF INSURANCE SERVICES

GATS and Insurance:

Financial services include all insurance and insurance-related services, and all banking and other financialservices (excluding insurance) . Financial services includethe following activities:

Insurance and insurance-related services

(i) Direct insurance (including co-insurance) :

(a) life

(b) non-life

(ii) Reinsurance and retrocession;

(iii) Insurance intermediation, such as brokerage andagency;

(iv) Services auxiliary to insurance, such as consultancy,actuarial, risk assessment and claim settlementservices.

4

GLOBALISATION: MEANING

Penguin Dictionary of Economics:

“Globalization Stresses the geographical dispersion of

industrial and service activities (for example research

and development, sourcing of inputs, production,

distribution) and the cross border networking of

companies (for example through joint ventures and the

sharing of assets.”

Globally economic integration and Interdependence i.e.

Single Market Economy. It includes Investment,

Unrestricted trade,Cross border economic activities,

Movement of capital, manpower, management, technology,

labour, consumption, services etc.5

HISTORY OF GLOBALISATION

1960 till now – Rapid Development

1991 Adopted by India, Finance Minister-Dr. Manmohan

Singh.

Besides free Trade, Capital flows, Investments,

Industrialization and commercialization, has taken place in

era of Globalisation.

Impact of Globalization

Economic Development

Productivity Enhancement,

Greater Innovation- Adaptability and utilisation of

Technology.

Resource mobility-reduced the cost of production and

distribution

boosted competition across the border6

DEREGULATION

Deregulation is the easing of regulation i.e. reduction of

existing limits on regulation such as for import, foreign

investment, trade, commerce etc.

Deregulation facilitates an increase in the levels of

competition.

Entry of reputed international insurers.

Expansion of the Insurance market.

Adoption of more innovative approaches to distribution and

product development. 7

LIBERALISATION

Liberalization results from the deregulation process.

The more profound deregulation on the market the wider

spread might be liberalization within certain economic

sectors.

Instruments of Liberalization:

Foreign investment including capital

Dismantling Entry barriers: tariff and non-tariff barriers

Licensing system

Simplifications of customs measures,

Reduction in physical restrictions on imports

Reforming financial system and opening up financial

market to private (domestic and foreign) players

Removing controls on foreign capital flow to the country 8

Local economyoMobilization of domestic savingsoImprovement in financialstabilityoFacilitation of production andtradeoImprovement in the efficiency ofcapital allocation

FOREIGN INSURERS

Capital inflowsKnowledge transferIncreased efficiency

Local insurance marketImprovement in service tocustomersImprovement in the efficiency of the insurance marketTransfer of knowledge in the areas of technology and management

Increase in the quality of

Regulation and Supervision

How does Liberalisation help?

9

PRIVATISATION

‘Privatization’ is the transfer of care, custody, and

control of government assets to the private sector to

perform the same or very similar functions the

government performs.

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GLOBALISATION OF INSURANCE MARKET

The globalization of the insurance markets due to

liberalization and deregulation.

Strong increase in the demand for insurance in the emerging

market.

In early 90s, Radical reforms in Latin America and Central

and Eastern Europe

In Asian countries the liberalization process gained

momentum following the Asian crisis (1997).

Process favoured and speeded up by multilateral

agreements, such as the WTO, EU and NAFTA.

1997 - an agreement of Liberalisation of financial services

following which 102 countries committed to remove entry

barriers and liberalise their markets.

The GATS agreement offers legal security and protection to

global insurance players.

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DRIVING FORCES OF INSURANCE MARKET GLOBALIZATION

Why foreign Insurance Company in Domestic Market?

“Push factors” Insurance Companies move out to emerging

markets due to Increasing Global Trade , Growing Direct

Investment , Potential Future Growth in Emerging Markets ,

Saturation in industrialized countries and Strong growth in

emerging countries and expected Efficiency Gains through

Diversification , Economics of scale etc.

“Pull factors” are the motives behind allowing the foreign

companies to operate in local market. Emerging Markets have

Strong Economic growth and Trade, and there are substantial

requirements of capital in Emerging Markets to cover major risks.

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BENEFIT FOR HOST COUNTRY

Economy related benefits to the local country

Improves the financial Stability, Trade and Production.

Paces the mobilization of savings, capital and resources.

Insurance market related benefits

Capital structure, Management efficiency of entire insurance industry improves

because foreign companies bring fresh capital with them.

Market efficiency improves due to information dissemination, global operating

knowledge and increased competition.

Range of available products increases because foreign companies bring with

them a wide range of products and product development expertise.

Customers’ service improves.

Increased competition, technology led service, and cost competition finally

benefits the consumers.

Globalisation also improves Regulatory and Governance system.

It also improves market conduct and Ethical Business Standard. 13

PROBLEMS FOR INSURANCE PLAYERS

Small number of global players(20 to 30) -UNEP (2002).

National operation rather than a global.

Another 70 companies operate significantly in more than

one continent through branches.

Only 1.2% of global insurance premium comes from

across border business.

Complying with increasing regulations

Anti–money laundering

Stricter corporate governance standards

Intensifying competition

Leading Global Companies are:

AXA,Allianz,Generali,AIG,ING,Aviva,Prudential,CNP. 14

INSURANCE IN EU AND US

EU - Three Directives

First Generation of Insurance Directives: the freedom of establishment

limited by the Host Country Control

Non-life directive (1973)

Life directive (1979)

Second generation : the freedom of movement of services.

Non-life directive (1988)

Third Generations: the Single European License and the Home

Country Control

Non-life directive (1992)

Life directive (1992)

Note: The introduction of Euro in 1999 also profoundly changed the

economic landscape for financial services firms in the European

market 15

ALLIANCES IN INDUSTRY

Maximum mergers and acquisitions in the insurance sector

have taken place in the USA followed by UK.

From 1990 to 2003 – 606 M&A’s took place in US alone

followed by UK at 217.

In EU – After the 3rd Directive i.e. during 1990 to 2002 -

2,595 M&As involving European insurance companies all

over the world.

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HISTORY OF INSURANCE INDUSTRY IN INDIA

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YEAR EVENT

1912 The Indian Life Insurance Company Act

1938 The Insurance Act: Comprehensive Act to regulate insurance

business in India

1956 Nationalization of life insurance business in India

1972 Nationalization of general insurance business in India

1993 Setting up of Malhotra Committee

1994 Recommendations of Malhotra Committee

1995 Setting up of Mukherjee Committee

1996 Setting up of (interim) Insurance Regulatory Authority

(IRA)Recommendations of the IRA

1997 Mukherjee Committee Report submitted but not made public

CONTD…

YEAR EVENT

1997 The Government gives greater autonomy to LIC, GIC and its

subsidiaries with regard to the restructuring of boards and flexibility in

investment norms aimed at channeling funds to the infrastructure

sector

1998 The cabinet decides to allow 40% foreign equity in private insurance

companies-26% to foreign companies and 14% to NRI’s, OCB’s and

FII’s

1999 The Standing Committee headed by Murali Deora decides that foreign

equity in private insurance should be limited to 26%. The IRA bill is

renamed the Insurance Regulatory and Development Authority (IRDA)

Bill

1999 Cabinet clears IRDA Bill

2000 President gives Assent to the IRDA Bill18

INDIA AND INSURANCE SECTOR

IRDA Act of 1999 ended the monopoly power previously held bythe state-owned insurers.

IRDA has so far issued 29 licenses (both life and non-life) to newprivate Indian insurance companies, most of which have globalinsurance companies as partners.

FDI cap is 49% under the automatic route subject to obtaininglicense from IRDA.

In the case of auxiliary services like consultancy, actuarial andrisk assessment, foreign equity up to 51 per cent has beenallowed.

Number of insurers - 44 (End-March 2009)

22 insurers (1 in public sector and 21 in private sector) inlife insurance business

21 insurers (6 in public and 15 in private sector) in non-life insurance business

1 re-insurance company viz., General InsuranceCorporation of India in the public sector.

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19 out of 21 life insurance companies set up in the private

sector since 2000, are in joint venture with foreign partners.

14 out of 15 new private insurers in the non-life segment,

have been opened in collaboration with the foreign

partners.

Total– 33 having FCs

Practical Aspect:

Indian Insurance company opening branch in foreign

http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearLi

st.aspx?DF=RL&mid=4.2

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FOREIGN PLAYERS IN

INDIAN LIFE

INSURANCE MARKET

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INSURERS FOREIGN PARTNERS

HDFC Standard Life Insurance Co. Ltd. Standard Life Assurance, UK

Max New York Life Insurance Co. Ltd. New York Life, USA

ICICI-Prudential Life Insurance Co. Ltd. Prudential , UK

Om Kotak Life Insurance Co. Ltd. Old Mutual, South Africa

Birla Sun Life Insurance Co. Ltd. Sun Life, Canada

Tata-AIG Life Insurance Co. Ltd. American International Assurance Co.,

USA

SBI Life Insurance Co. Ltd. BNP Paribas Assurance SA, France

ING Vysya Life Insurance Co. Ltd. ING Insurance International B.V.,

Netherlands

Allianz Bajaj Life Insurance Co. Ltd. Allianz, Germany

Metlife India Insurance Co. Ltd. Metlife International Holdings Ltd., USA

22

INSURERS FOREIGN PARTNERS

Reliance Life Insurance Co. Ltd. (Earlier

AMP Sanmar Life Insurance Company

from 3.1.02 to 29.9.05)

---

AVIVA Aviva International Holdings Ltd., UK

Sahara Life Insurance Co. Ltd. ---

Shriram Life Insurance Co. Ltd. Sanlam, South Africa

Bharti AXA Life Insurance Co. Ltd. AXA Holdings, France

Future Generali India Life Insurance

Company Ltd.

Pantaloon Retail Ltd.; Sain Marketing

Network Pvt. Ltd. (SMNPL),

IDBI Fortis Life Insurance Company Ltd. Fortis, Netherlands

Canara HSBC OBC Life Insurance

Company Ltd.

HSBC, UK

Aegon Religare Life Insurance Company

Ltd.

Religare, Netherlands

DLF Pramerica Life Insurance Co. Ltd. Prudential of America, USA23

FOREIGN PLAYERS IN NON-LIFE SECTOR

Royal Sun Alliance, UK

Millea Asia Pte. Ltd., Japan

American International Assurance

Co., USA

Allianz, Germany

Mitsui Sumitomo, Japan

Fairfax through its affiliates,

Canada

ERGO, Germany

Individual Promoters, UAE

Apollo Hospital Enterprises Ltd.;

Apollo Energy Company Ltd.; PCR

Investments Ltd. & DKV, Germany

(August 3, 2007)

Pantaloon Retail Ltd.; Shendra

Infrastructure Development Ltd.

(SIDL); Participatie Maatschapij

Graafsschap Holland NV,

Netherlands (“Generali”)

Sompo, Japan

Santam, South Africa

AXA Holdings, France

QBE, Australia

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INDIAN NON-LIFE INSURANCE COS.

New India Assurance Co. Ltd.

National Insurance Co. Ltd.

The Oriental Insurance Co. Ltd.

United India Insurance Co. Ltd.

Export Credit Guarantee Corporation Ltd.

Agriculture Insurance Co. of India Ltd. 25

LATEST NEWS

Insurance Laws (Amendment) Bill, 2008 and Life

Insurance Corporation (Amendment) Bill, 2008 introduced

in Parliament

ET news report- 18 Sep 2009

IRDA, is in the process of finalising guidelines for

mergers and acquisitions in the insurance sector.

Also that the FDI cap may be increased from 49% to 76%

or even upto 100%

Can Foreign Insurance Companies / Banks set up Liaison

Office in India?

Ans. Foreign Insurance companies can establish Liaison Offices

in India only after obtaining approval from the Insurance

Regulatory and Development Authority (IRDA). 26

“If a child, a spouse, a life partner, or a parent depends on you and your income, you need life insurance.”

Thank you!!

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