Issues & Challenges in Insurance-1

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Insurance: Issues & Challenges

INTRODUCTION TO INSURANCE

1.1 INTRODUCTION

Insurance is a tool by which fatalities of a small number are compensated out

of funds (premium payment) collected from plenteous. Insurance companies pay

back for financial losses arising out of occurrence of insured events, e.g. in personal

accident policy death due to accident, in fire policy the insured events are fire and

other allied perils like riot and strike, explosion, etc. Hence, insurance is safeguard

against uncertainties. It provides financial recompense for losses suffered due toincident of unanticipated events, insured within policy of insurance. Moreover,

through a number of Acts of Parliament, specific types of insurances are legally

enforced in our country, e.g. third party insurance under Motor Vehicles Act, public

liability insurance for handlers of hazardous substances under Environment

Protection Act, etc.

Insurance, essentially, is an arrangement where the losses experienced by a few are

extended over several who are exposed to similar risks. Insurance is a protection

against financial loss arising on the happening of an unexpected event. Insurance

companies collect premium to provide security for the purpose. As loss is paid out of

the premium collected from the insuring public and the insurance companies act as

trustees to the amount so collected. Insurance companies have standard proposal

forms, which are to be filed up giving the details of insurance required and presented

to insurance company. Depending upon the answers given in proposal form

insurance companies assess the risk and quote the premium. On payment of

premium and acceptance thereof by insurance company the insurance is affected.

Nonetheless, there is no insurance cover if premium is not paid.

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MEANING OF INSURANCE

2.1

It is a commonly acknowledged phenomenon that there are countless risks in

every sphere of life. For property, there are fire risks; for shipment of goods, there

are perils of sea; for human life there are risks of death or disability; and so on. The

chances of occurrences of the events causing losses are quite uncertain because

these majors may not take place. Therefore, with this view in mind, people facing

common risks come together and make their small/ contributions to the common

fund. While it may not be possible to tell in advance, which person will suffer the

losses, it is possible to work out how many persons on an average out of the group,

may suffer losses. When risk occurs, the loss is made good out of the common fund.

In this way, each and. everyone shares the, risk. In fact, they share the loss by

payment of premium, which is calculated on the likelihood of loss. In olden time, the

contribution by the persons was made at the time of loss. The following examples

make clear the above-stated notion of insurance.

Example I

In a town, there are 2000, persons who are all aged 60 and are healthy. It is

expected that of these 20 persons may die during the year. If the economic value of

the loss suffered by the family of each dying person were taken to be Rs. 50,000,

the total loss would work out to Rs. 10,00,000. If each person of the group

contributes Rs. 500 a year, the common fund would be Rs. 10,00,000. This would be

enough to pay Rs. 50,000 to the family of each of the' 20 dying persons. Thus, the

risks in cases of 20 persons are shared by 2000 persons.

Example 2

In a village, there are 250 houses, each valued at Rs. 2,00,000. Every year one

house gets burnt, resulting into a total loss of 2,00,000. If all the 250 owners come

together and contribute Rs. 800 each, the common fund would be Rs. 2,00,000. This

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is enough to pay Rs. 2,00,000 to the owner whose house got burnt. Thus, the risk of

one owner is spread over 250 house-owners of the village.

2.2 DEFINITION OF INSURANCE

Insurance companies bear risk in return for a fee called premium. Thus, insurance

companies are risk bearers. They accept or underwrite the risk in return for an

insurance premium. Accordingly, the term insurance may be defined as a co-

operative mechanism to spread the loss caused by a particular risk over a number of

persons who are exposed to it and who agree to ensure themselves against that

risk. Risk is, in fact, an uncertainty of a financial loss. Risk must not be confused with

loss itself that is the unintentional decline in or disappearance of value arising from a

contingency. The function of insurance includes providing certainty, protection, risk

sharing, prevention of loss and capital formation. Wherever there is uncertainty with

respect to a probable loss there is risk. The insurance is also defined as a social

apparatus to accumulate funds to meet the uncertain losses arising through a certain

hazard to a person insured for such hazard.

Insurance has been defined to be that in which a sum of money as a premium

is paid by the insured in consideration of the insurer's bearing the risk of paying a

large sum upon a given contingency. The insurance, thus, is a contract whereby:

(a) certain sum, termed as premium, is charged in consideration,

(b) against the said consideration, a large amount is guaranteed to be paid by

the insurer who received the premium,

(c) the compensation will be made in a certain definite sum, i.e., the loss or the

policy amount whichever may be, and

(d) the payment is made only upon a contingency.

More specifically, Insurance may be defined as a contract wherein one party

(the insurer) agrees to pay to the other party (the insured) or his beneficiary,

a certain sum upon a given contingency (the risk) against which insurance is

required.

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3. THE GROWTH AND DEVELOPMENT OF INDIAN

INSURANCE INDUSTRY

THERE has always been some form of insurance in India, though of an

informal nature. The formal insurance business as we know it today in both the life

as well as the non-life insurance sector was introduced in India by the British in the

beginning of the 19th century. Over a period of time, the business spread, though

not adequately. Since it also suffered from some malpractices, the life insurance

business was nationalized in 1956 and the general insurance business in 1973.

Despite several achievements to its credit after nationalization, in course of time, the

industry was beleaguered by certain shortcomings, which led the government to

liberalize it again. The legislative framework and important milestones in the two

sectors are briefly described below.

Life Insurance

In 1818, a British firm called the Oriental Life Insurance Company was formed

in Calcutta. This was followed by the establishment of the Bombay Life AssuranceCompany in 1823 in Bombay, the Madras Equitable Life Insurance Society in 1829

and the Oriental Government Security Life Assurance Company in 1874.

It is a telling comment on the British view of Indians that prior to 1871; Indian

lives were treated as sub-standard and attracted an extra premium of 15 to20

percent. The Bombay Mutual Life Assurance Society, an Indian insurer formed in

1871, was the first one to charge normal rates for Indian lives.

There were no specific regulations for the life insurance business until 1912,

when it came to be formally regulated under the provisions of the Indian Life

Assurance Companies Act, 1912. In 1928, the Indian Insurance Companies Act was

enacted, inter alias, to enable the government to collect statistical information about

both the life and the non-life insurance business, including the provident insurance

societies. All the earlier legislations were consolidated and amended by the

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Insurance Act, 1938 with comprehensive provisions for the detailed and effective

control over the insurers (both life and non-life) so as to protect the interest of the

insuring public.

For administering this legislation, the newly established insurance wing in the

Government of India was made administratively responsible for deciding policy

matters. The actuarial and operational matters were looked after first by the Actuary

to the Government of India, then by the Superintendent of insurance, an finally by

the Controller of Insurance. The amended Act of 1950 made far-reaching changes,

such as the requirement of equity capital for companies in the life insurance

business, ceilings on share holdings in such companies, stricter controls on

investments, submission of periodical returns relating to investments and such other

information as the Controller may call for. This amended Act even carried provisions

for the appointment of administrators for mismanaged companies and ceilings on

expenses of management and agency commissions. The Act was further

substantially amended in 1999 (effective since April 2000), and today remains the

main instrument of regulation of the insurance business in India.

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4. FACTOS LEADING TO NATIONALISATION

By 1956, as many as 154 Indian insurers, 16 non Indian insurers and 75

provident societies (in all, 245 entities) had entered the life insurance business in

India. However, the geographical spread and the number of lives covered were

rather small. In fact, insurance companies, by and large, were governed by short-

term considerations and consequently, the business was confined mainly to cities

and the more affluent segments of society .Offering insurance policies to people with

small incomes, to suit their income and financial position had not even been

attempted.,

During this period a number of malpractices occurred in the industry causing

loss to the unsuspecting public. There were also some instances of mismanagement

and misutilization of the funds collected. An objectionable and harmful development

was that the business houses which promoted these companies were, in fact,

diverting large funds for their other concerns, with no consideration for prudence of

doing so. Often, such large diversions of funds led to a situation where the insurance

companies were not in a position to honour their commitment to their own custom-

ers. Winding up of companies was also not totally unknown. This process gathered

momentum especially after the First World War, and between 1914 and 1920, many

insurance companies were closed down causing large losses for the small investors.

The Industry was not playing the role expected of insurance in a modem state and

efforts at improving the standard by further legislation we felt were unlikely to be

more successful than in the past. The concept of trusteeship which should be the

corner stone of life insurance seemed entirely lacking. Indeed, most management

had no appreciation of the clear and vital distinction that exists between trust

moneys and those which belong to joint stock companies.

In the light of these developments, the demand for stricter government control

of the industry gathered momentum and called for nationalization of the insurance

business-which almost became a foregone conclusion. Again, quoting Dr. CD.

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Deshmukh, 'Misuse of power, position and privilege that we have reasons to believe

occurs under existing 'conditions is one of the most compelling reasons that have

influenced us in deciding to nationalize life insurance'.

Although that was the immediate cause of nationalization, Dr. CD. Deshmukh

argued that the principal point about nationalization was that the state did not have

to make out a case that the private sector had failed. Nationalization is justified on

many other grounds of ideology, philosophy and the objective of a welfare state. It

was necessary in order that the interest of the insuring public and the industry could

be safeguarded, the country's economy promoted and more funds provided for

economic development. These were the considerations which persuaded the

Government of India to opt for nationalization of this industry.

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5. NATIONALISATION OF LIFE INSURANCE

When the Congress party at its Avadi session of 1955, formally included in itsmanifesto the concept of the socialist pattern of society, it also urged the

nationalization of the life assurance business. In January 1956, the All India Con-

gress Committee formally resolved that the life insurance business should be

nationalized. This demand was presed more vigorously in the context of the Dalmia

affair. Accordingly, as a first step, on January 19,1956, the management of the life

insurance business of 245 Indian and foreign insurers and provident societies, then

operating in India was taken over by the central government through he Life

Insurance (Emergency Provisions) Ordinance, l956. The Ordinance was replaced by

an Act of Parliament known as the Life Insurance (Emergency) Provisions Act,

1956.The Bill to provide for nationalization of the life insurance business was

introduced in the Lok Sabha in February,1956, and the same became an Act on July

1, 1956.

In fact, prior to this Dr. CD. Deshmukh had thought of the idea of

nationalization for some time,and even asked one of his officers, H.M. Patel, to do

some preliminary exploration in this regard. The detailed plan that was prepared

included the action to be taken by officers to takeover various life insurance units as

soon as an Ordinance for nationalization was issued. This Ordinance had also been

kept ready for the President of India's signature and when the insurance business

was actually nationalized on September I, 1956, it caught many people by surprise,

and was, perhaps, one of the best kept secrets of the government. During the

Parliamentary debate Dr. CD. Deshmukh, who later became known as the architect

of nationalizatison, also said 'I imagine that if the history of the first decade after

India attained independence is correctly written ,my name may be mentioned as that

of the Finance Minister of India who nationalized the life insurance business, when

everything else is forgotten.

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6. PROGRESS SINCE NATIONALISATION

The following is a brief account of the several developments that took placeafter the life insurance business was nationalized. The positive as well as the

negative points are highlighted so as to serve as a backdrop to the current dis-

cussion on the subject, especially the one relating to reforms in this sector.

The task before the LIC immediately after nationalization was formidable,

since even as it dealt with a multitude of problems, it was called upon to build an

imposing edifice on the foundations recently laid. The task had to be completed very

carefully and after the Mundhra scandal(another well known scandal where Haridas

Mundra sold fictitious shares worth12.5 million in 6 of his companies to the LIC.), the

Parliament was also watching its performance with great vigil. The LIC had to chalk

up policies on different fronts simultaneously. As was to be expected, the first five

years of its existence were devoted to integration and consolidation work. Of these,

the first few years were devoted to the framing of rules and regulations, setting up

other administrative procedures and streamlining the accounting procedures.

Concurrently, there was a vast expansion of its network during this period. In

addition to the structural reorganization and decentralization, human resource

development was an important item in working out a new strategy, in which training

was organized on a large scale.

In the period immediately after nationalization, unfortunately, new business

was actually adversely affected and saw some fall in terms of the number of policies

and the sum assured. This arose mainly on account of the fact that the process of

restructuring the divisional and branch offices had not been completed and there

were inadequate technical and experienced staff. Some of the branch offices did not

even have the full complement of personnel assigned for them. The agents had not

yet become accustomed to the new set up, the procedures and methods of the

corporation. In addition to this, there had also been a substantial reduction in

premium rates in 1954.

A particularly difficult year was 1957, during which the money position in the

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economy was tight, investors were shy and the common man was affected because

of a steady rise in the cost of living. Agriculture was also affected by famine

conditions. In these adverse circumstances, LICs performance during that period

should be considered as reasonably good.

After this initial difficult period, LIC, over the years, made commendable

progress. At the time of nationalization, the total new business of the 245 erstwhile

insurance companies was around two billion rupees of sum assured. From a 'new'

business of Rs 3.2808 billion sum assured under 0.932million policies procured in

India during the period of 16months between September I, 1956 to December 31,

1957,

LIC progressed to a business of Rs 1,927.8496 billion sum assured under

22,491,304 policies on individual lives, in 2001-2002. The first year premium

received during 2001-2002 reached Rs 99.6554 billion from Rs 130.6 million in the

16-month period ending December 31, 1957.

Similarly it has grown from a level of Rs 137.5 million sum assured under 5.4

million policies to Rs 8,110.17 billion under 12.5876 million policies as on March 31,

2002.The total premium, written, which represents LIC's annual mobilization of funds

and which was Rs 820 million in 1957, now exceeds Rs 424.3344 billion. Groupinsurance business written in India, which was 50 million rupees sum assured and

Rs 2.1 million annuity per annum at the time of nationalization, has, as on March 31,

2002, grown to 93,836 schemes in force, on 24.719 million lives which carry an

insurance cover of Rs 1,005.9764 billion. In addition, there are 6109 superannuation

schemes in force on 0.980 million lives with annuities payable amounting to Rs

12.7194 billion per annum.

The number of new lives covered during 2001-2002 under the 40 approved

occupations pertaining to the Social Security Group Insurance Scheme was 663,351

and the total till date was as large as 5,009,741.

The total income of LIC during 2002 was a substantial Rs 727.6991 billion, in

which income from investments was as large as Rs 226.9542 billion.

The life insurance business has thus seen a rising curve of growth. Its growth rate in

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2001-2002 was the best in the decade in all respects, such as policy growth rate,

sum assured, premium growth rate, and investment income. The total life fund

increased from Rs 871.760 billion in 1997, to Rs 2,270.0898 billion, as on March 31,

2002, which translates into a healthy 22.03 per cent growth rate. It thus more than

doubled during this period.

The 'valuation surplus' and consequently, the bonus to policyholders (95 per

cent of the surplus) and the central government's share (being 5 per cent of

valuation surplus in terms of Section 28 of the Life Insurance Corporation Act, 1956),

have been steadily increasing over the years. The 31st valuation of the corporation's

business as on March 31, 2001, excluding foreign business, showed a surplus of Rs

75.8529 billion. For the year 2000-2001, the central government's share of the

valuation surplus amounted to Rs 3.8066 billion.

In recent years, LIC has also acquired a significant presence in the rural

sector. For instance, 1,200 out of its 2,048 branches are situated in mofussilareas.

The rural new business in 2001-2002 amounted to sum assured of Rs 254.6194

billion under 3,701,444 policies, representing 16.94 per cent of total business in

terms of policies and 13.65 per cent in terms of sum assured. These figures are interms of the definition of the rural! social sector, as approved by the IRDA.

The Rural Group Life Insurance Scheme (RGLIS) was introduced with effect

from 15 August 1995. This scheme is for the rural masses and is administered

through the Intermediate Level Panchayats (ILP). Any person living in the jurisdiction

of the ILPs can become a member of such schemes. Under the subsidized scheme,

where 50 per cent of the premium is shared by the central and state governments in

equal proportions, only one person belonging to the family living below the poverty

line is eligible to join. During 1999-2000, as many as 103,619 new lives were

covered.

In its effort to include more people under the umbrella of life insurance, LIC

has endeavoured to provide insurance coverage to a larger number of individuals

who have no previous insurance on their lives. During 2001-2002, 16.230 million

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individuals were insured for the first time for a sum assured of Rs 1,198.5973 billion

as against 14.430 million individuals for a sum assured of Rs 843.2079 billion in the

previous year. The ratio of first insurance to the total business completed for the

year comes to 74.29 per cent in respect of policies and 64.23 per cent in terms of

sum assured.

Through its vast network of 2,048 branches, a 100 divisions and seven zonal

offices spread over the country; its marketing force of 19,074 development officers

and 792,645 full-time and part-time agents (of which 744,003 were active agents);

LIC has reached various corners of the country and provides sales and service of life

insurance to the Indian public at their doorsteps. LIC has also been able to reach

illiterate people, those living in interior rural areas, and even people in the marginal

income group or below the poverty line. Side by side, as seen above, group

insurance activities have been expanded through an increasing number of pensions

and group superannuation units. They not only cover the organized sector under

various group schemes but also, through some group insurance schemes, cover the

unorganized sector. Although, LIC's reach should be considered in the background

of the poverty level, literacy problems, lack of insurance awareness, prevailing social

customs and problems of communication to the deep rural areas, the fact remains

that a lot of ground is yet to be covered.

At this stage, it is worth noting that although LIC has virtually a monopoly over the

life insurance business, there are some other very small players viz. Postal Life

Insurance, Army Group Insurance Fund and Naval and Air Force Life Insurance

Funds. Some of the state governments also have insurance schemes for their

employees. A few pension funds are also in operation though reliable data about

these small businesses are not easily available. Additionally, 18 new players have

entered the market since October 2000, but naturally, they have yet to gather

substantial enough business.

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7. BENEFITS OF GLOBALISATION

In this age of global integration, no country can operate in isolation because

in every economic, social and political activity, there is considerable

interdependence between countries. A greater integration of the market with the rest

of the world is accelerated by the breakdown of geographical barriers to the

movement of capital across countries. Each country, therefore, operating in the

international market, has to follow international norms and behaviour.

Essentially, globalization brings benefits to all participating countries. The host

country becomes a recipient of large foreign investments and foreign investors

secure access to new and developing markets. Several benefits then flow in either

direction in terms of expanding markets, improved products and services, new

marketing and production technologies, and newer concepts of management.

So far, our participation in the global market in virtually all sectors of the

financial services sector has been only at the margin and our insurance institutions

in particular have been relatively insulated from world markets. Now, due to theadvantages of opening up that could accrue to India, business has to operate

beyond the national boundaries.

In the main, globalization will secure for India larger inflows of foreign capital

needed to sustain our GDP growth. In addition, new entrants with a professional

approach and state-of-the-art technology will revolutionize the market by bringing

about tremendous improvement in service. Moreover, global competitors will help in

building expertize with their best global practices.

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8. CHALLENGES

8.1 Major Challenges in the Insurance Sector

The process of opening up is forcing a radical change in the structure of the

nationalized insurance industry. This change is becoming even more pronounced

with the entry of foreign companies into the Indian market in the form of joint

ventures with Indian private sector partners. Consequent to

this, the integration of the Indian insurance industry

more closely with the world economy has also

become inevitable. It has become clear that insurance

companies can no longer operate within given

national boundaries. Companies from developing

countries must, therefore, align their work culture and their policies and

procedures with those of the participating companies from developed countries.

In the past, whenever there was talk of restructuring or reforms in the public

sector companies, the changes actually effected were mostly of a cosmetic nature.

The situation now compels significant changes in areas such as their role and their

ownership pattern. The depth of restructuring now goes much beyond minor

changes in inconsequential areas and is forced on them by competition.

The private sector companies, on the other hand, had to adopt a different

approach right from the beginning, because with their large investments, they have

entered the market for conducting a profitable business. They are trying to evolve

structures which will be most suitable for carrying on business in India. Of course, intheir case, there is no question of change on the lines of the public sector, but in the

sense of moving away from or improving upon the practices established by the

nationalized sector. It also involves the question of redesigning strategies and

policies appropriate for an open regime.

. Apparently, changes will not be and cannot be limited to only some areas, but will

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8.3 CHANGE IN THE MINDSET

The most difficult part of change is the change of attitude. No effective change

can be imposed or mandated by an outside party or from above, like the

international institutions (in relation to a national government) or the government (in

the case of the public sector). It has to spring from within and can be effectively

introduced only when there is willingness on the part of the concerned parties to do

so. If it is based on internal commitment, its depth, reach and quality will be far

better.

The most important change that is required is in the mindset of the players vis-a.-vis

the customer. Experience has already shown that quality of service is the influencing

factor in the market and in fact, only those units will survive which offer to the

customer what he wants, and to his satisfaction. For the old, established, public

sector entities, it is a question of revolutionizing the very approach to the business.

For the new players also, it means an attitudinal change, because they have to

depart

from the systems, procedures and attitudes of the public sector so that the

customer will be better served.In the restrictive mould adopted by India for almost 50 years, all the important

sectors of the economy were more or less working in a sellers' market. That 'take it

or leave it' attitude has now to give way to being more concerned with the customer

and the service offered to him. Even the new units, which had no opportunity to

operate in the insurance market in this country, can make room for themselves in the

market mainly by paying greater attention to this aspect.

Insurance is a business in which the financial stakes of both the consumer

and the seller are high and have to be based on mutual trust. The relationship does

not end with the conclusion of the transaction, but has to be durable and of a long-

term nature.

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8.4 Adequacy of Capital

Capital adequacy is a matter of special attention in view of the nature of the

insurance business, where in case a contingency arises, the insurer should be in a

position to meet its long-term contractual obligations and pay up the dues or claims.

In that sense, 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.l billion for any entity wanting to enter the

Insurance business.

In order to spread their operations further, and to be able to face competition,

the public sector insurance industry also needed an infusion of additional capital for

improving the existing very low capital base. With that in mind, the Malhotra

Committee suggested that LIC's capital base be increased from a mere Rs 50 million

to 2 billion. This is yet to be done. In the same manner, the Insurance Act requires

every reinsurer to have a capital base of Rs 2 billion. After the LIC is able to comply

with the new stipulation, another Rs 2 billion will be added to the capital base of thenationalized insurance sector.

After initial resistance on the ground that the size of capital prescribed was too

high and the business of insurance did not require it, all the new entrants have not

only complied with the requirement, but have actually contributed larger figures-

some even double the amount prescribed. Although the legal stipulation now is for a

capital of Rs 1 billion, which can be considered quite

adequate for ,setting up a new company, the new players find that as their

business grows, they actually need much larger capital infusions in order to satisfy

solvency margin requirements.

The Insurance Institute of India (March 2001), mentions that the minimum

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capital base stipulated as the starting point: will not be appropriate for measuring

capital adequacy of an established insurer. Hence, the current trend is to relate the

amount of paid-up share capital to the risks inherent ,in an insurer's operations and

the insurer hould be adequately capitalized to deliver on his promises. The risk

factors will include the lines of business underwritten, rate of expansion and quality

of investments. The relevant concepts are referred to as Minimum Continuing

Capital and Surplus Requirements (MCCSR.) in Canada and Risk-based

capitalization (RBC) in the USA. The position that will obtain in India is not yet clear.

Normally, the capital market should enable the raising of finance if the

performance of the units seeking funds from the capital market is considered

satisfactory by the market-but there are difficulties in tapping this source. On the one

hand, the capital of domestic insurers will need to be augmented before they

approach the capital market; and on the other, it will be increasingly difficult to

maintain the required level of retum-on-capital to attract additional capital, because

under competition, the profit margins will be under pressure.

India has a strong savings culture with the rate of savings staying around 22

per cent of the GDP, Insurance could be a good investment avenue if it is made

attractive enough, Exploiting this opportunity is going to be particularly essential for

the public sector since it is not only expected to reduce its dependence on thegovernment, but is expected to contribute to the government treasury by stepping up

its savings.

As seen above, there is now a greater appreciation of and insistence on

adequacy of capital of insurers. However, insurance demands vision,

entrepreneurship and dynamism, which is not a function of just massive capital only.

Quality of Personnel-Recruitment and Training

The insurance industry in India is serviced by a big complement of

experienced staff. Thus, LIC has a large force of 792,645 agents, supervised by

19,074 development officers, spread across the country. Similarly, the general insur-

ance industry's sales force consists of more than 500,000 agents (not many of whom

are active and hence it is difficult to pinpoint their exact number) and 12,047

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development officers. .

.

The total strength of employees in the insurance public sector is just around

200,000. However, the general perception is that even this number is excessive in

relation to the requirement and thus impinges on the performance of the nationalized

industry. The new players have started off. with an advantage in this regard in that

they do not have to carry the load of an unduly large workforce and are managing

with a smaller number.

Human resources constitute the most vital segment of any organization and

great care is needed in recruitment training, deployment, and developmental aspects

like growth and career opportunities, retention of talent and weeding out deadwood.The insurance business demands personnel of high quality, with a different range of

skills and an emphasis on greater professionalism. Of course, although there was

some dissatisfaction about the quality of service from the existing entities, the

industry does have some personnel with fairly good technical skills and professional

talent.

However, the crucial stage is the recruitment process and high standards and

qualifications have to be set at the stage of induction of new staff. Insurers have to

attract, retain and develop people who are open to change, are creative, value

teamwork, and have passion for service and delivering value in their output. In fact,

experience in the insurance business by itself now perhaps counts for less than the

qualities mentioned above. Many recruits, therefore, especially at the middle and

senior levels in the new companies are from other services and often without any

background in insurance.

At the same time, in a sense, the new players, just because they are

recruiting afresh, do not necessarily derive any special advantage in recruitment,

because their recruits especially for middle level and senior positions are also drawn

from the same stock as that from which the present industry sourced them. They do

bring with them the legacy of their public sector culture. A further difficulty is that the

otherwise properly qualified potential candidates do not rank the insurance industry

very high on such issues as pay (not really a constraint any more) and prestige and

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are not, therefore, attracted easily to it. So the industry has to take special pains to

find the right type of people to work with them and then train them further to suit their

needs and culture.

The ultimate cost of not recruiting persons with proper qualifications, or of not

systematically training their own personnel to match expected standards, could be

very heavy at a time of rapidly increasing competition and consumer expectations.

Looking to the surplus staff already with the public sector, the urgent need is

to improve the quality of the existing personnel, rather than new recruitment. The

public sector must immediately identify whether and on what scale, at least in

respect of certain jobs, it is saddled with underqualified

staff unable to respond to the demand on them, and accordingly must

undertake a heavy exercise of training, retraining and redeployment.

Since training helps the companies upgrade the attitude and skills of their

workforce for maintaining standards and quality, it is an inseparable component of

any growing business. Insurance is a business where even the lowest operating and

sales levels need to be up-to-date on their products. They have to master thenuances of the products, particularly because they are offering a large range of simi-

lar products and have to help the customer to make an intelligent choice. .

The industry has taken steps to empower its staff in terms of job knowledge as

well as customer service by organizing relevant training for them. Already, large

sums are being spent on this activity in the insurance sector, but Its focus needs to

be reoriented to make it more relevant to the needs of the industry. The future

demands a different range of skills than what was needed and available until now.

Of particular relevance would be training in actuarial Science, management,

marketing and technical subjects. For all these reasons, training facilities need to be

substantially expanded and upgraded.

All the companies are not outsourcing training. Many have set up their own

training facilities for intensive coaching. In order to meet the demand on a large

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enough scale, there 18 a need to build a cadre of professional trainers within the

organizations as well as to tap the market for expertize and other facilities. However,

total dependence on in-house training arrangements may not suffice and hence

some outsourcing becomes essential. To combine quantity and quality, companies

have their own training modules added on to the IRDA-stipulated minimum 100

hours of training. They are mostly company-specific programmes. Their agents are

being trained more as financial advisors.

Insurance training in India is at present organized through: (a) the National

Insurance Academy, Pune, which caters to the requirements of senior level

executives of both LIC and general insurance companies; (b) the Insurance Institute

of India and its College of Insurance; (c) LIC's Management Development Centre, its

seven Zonal Training Centres and 27 Sales Training Centres and around a 100

Divisional Training Centres; and (d) training centres of each general insurance

company. The Corporate Training Centre of individual companies focus on intensive

training of direct recruit officers and specialist and functional training programmes,

while their Regional Training Centres impart induction training. In a few cases, the

LIC arranges for the training of agents through some approved branch offices.

Many countries, -in recognition of the importance of training, require all

insurers to spend a prescribed percentage of their income or gross salary cost ontraining of human resources.

The insurance iTIdustry in India has a system under which each company provides a

budgetary allocation of around 1 per cent of the net premium income every year.

However, there is no compulsion in this regard and there is no guarantee that the

sums provided are actually spent. The UK has adopted a system of Continuous

Professional Development which requires a professional to update himself with

developments in techniques with the help of programmes such as seminars. The

Indian industry too will have to think of such programmes.

In view of the constraint of time and in the absence of any formal training

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courses available in the country, it is difficult for newcomers to build up a large and

qualified cadre by creating and augmenting their own in-house facilities. Therefore,

in addition to training organized through special training establishments set up by the

industry itself, there is a need for introducing formal university education with

specialized courses for insurance or insurance-related matters. Unfortunately, in the

country at present, there is no university which offers any insurance-specific course

at any level, leading towards a diploma or a degree.

Some of the management institutes have recently started offering courses on

a limited scale in this area. This puts severe limitations on the availability of

candidates with a basic knowledge of insurance. Therefore, their training has to start

off with these basic inputs. The introduction of formal courses will widen employment

opportunities, not just in Indian companies, but also with foreign insurers wanting to

operate in this country.

upgradation of Organizational and Technical Skills

The insurance business requires organizational and insurance-related

technical skills. Organizational skills refer to the functions of marketing, distribution

systems, customer service, and expense management. These functions are, of

course, common to all businesses. However, they have not received the attention

they deserved in the public sector operating under monopolistic conditions. Sincethe new players are ahead of others in this regard, the existing insurers must devote

special efforts for the same.

Insurance skills refer to the functions of underwriting, claims processing/

adjudication, fraud control, funds management and reinsurance. Being a service

provider, insurance companies must pay attention to product innovation, appropriate

pricing, and speedy settlement of claims. However, because of its public sector

character, the insurance industry in India never felt the urge to improve itself in

these areas. These aspects now deserve closer attention if it wants to maintain its

strong position in the market.

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The public sector insurers are now making modest efforts to inculcate these

skills at different levels; but an additional channel could be the joint ventures with

established and reputed foreign partners, because these qualities cannot be taught

in the conventional sense, but have to be absorbed on the job itself. This exposure

in a real-life situation can be very effective:

8.5 Training of Specialists

Since the insurance industry has to identify and train people across different

professions, the emphasis has now to shift from training only in insurance subjects,

to several other disciplines relevant for introducing professionalism in the industry.

The disciplines likely to be covered are indicated below.

The insurance sector needs a greater involvement of other professionally

qualified experts as well, either as employees or as consultants. This' includes

doctors, veterinarians, engineers, environmental specialists, accountants, and

financial experts. Their expertise is very relevant for drawing up plans for new

products, for scrutinizing some claims, for settlement of certain disputes and for

some policy decisions. Similarly, insurers draw up policy contracts, which are

necessarily quite complex. They need to be drafted carefully and demand special

skills, and, therefore, legal matters is another area in which training will have to bearranged. Simultaneously, some insurance-related training for these experts is also

in order because the professionals will need to be given exposure to the working and

problems of the insurance industry to enable them to respond to special problems

arising therein.

As technologies advance, the process of loss measurement and assessment

becomes more complicated, requiring a greater degree and variety of expertize

which will have to be specifically built up through tailor-made courses.

Actuarial science is the very basis of insurance and it is unthinkable to carry

on the insurance business without deploying actuarial and forecasting techniques on

an increasing scale- Actuaries are particularly required for purposes such as

estimating the long-term implications of changing mortality' rates, trends in

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investment earnings and expenses incurred, for interpreting the effects of changing

market conditions, for product development, and most importantly, for calculating the

surplus that results from operations and determining the solvency margin.

The actuary plays an essential role in life insurance business, particularly in product

development, determination of premium rates, study of mortality experience and

construction of mortality tables, laying down underwriting standards, valuation of

liabilities and distribution of surplus. The actuary can also be useful in investment

management.

These actuarial tasks cannot be achieved merely by prescribing and insisting on

adherence to certain accounting practices. They have to be completed only by

qualified actuaries.

8.6 Market-related policies

Marketing, which was very low key in the nationalized life sector and virtually

did not exist in the nationalized non-life insurance companies, will be the most

crucial function in the new conditions. Hence a host of changes are called for.

Marketing functions encompass expanding existing markets or tapping new markets

and the industry needs to undertake measures which will be conducive to both these

objectives. The main thrust would be on bringing the customer to the centre-stage,

improvement of service and designing new products, There has to also be a shift

from the idea of just creating sheer volumes to rendering better quality of service

and making the unit profitable.

Most of our present policies, procedures, and practices pertaining to writing

of policies, sales and claims settlement are borrowed from the West, but in the days

ahead, the Indian industry will be compelled to develop its own models, innovative

practices and flexibility in decision making. Suitable changes can be contemplated in

the following areas-marketing practices; brand building, customer segmentation;

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product design/packaging; fixation premium rates; claims settlement; accounting

practices; consortia arrangements; adoption of new technologies; automation; and

the use of IT.

8.7 Cost Consciousness

At the stage of entry into the market, the insurance companies may not be

ready with totally new products and services. Naturally, initial competition will be

more in the form of prices charged, as all companies, public and private, fight for

gaining or retaining a share of the market already developed. The companies must,

therefore, adopt appropriate cost control measures, Cost leadership implies tight

control systems, minimization of overhead costs, and pursuit of economies of scale.

The two important areas where costs can be reduced or controlled would be

administration and claims.

Controlling administration and establishment costs is the most difficult and yet

an essential task that any organization must undertake. These costs can be kept

within limits by exercising care in the initial recruitment and subsequent deploymentof staff as also the emoluments made to them. In the case of the public sector, which

is known to be over-staffed, costs can be brought down by down-sizing,

accompanied by better utilization of the workforce-both extremely difficult in the

public sector mould-but there are no options for doing so.

Cost reduction cannot be attempted solely by the traditional across the

board cost-cutting methods. Efforts have to be made on several fronts

simultaneously. Thus, on the operational side, it would pay if non-value-added

activities are curtailed to avoid waste of effort and excess cost in the business. Re-

engineering to simplify work-flows and automating manual tasks are the other two

cost reduction strategies that need to be pursued.

Claims costs can be controlled through two methods: claims minimization and

fraud control. In the first category, the aim would be to minimize the number of

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claims lodged with the insurer, of course, not by declining to accept them, but by

persuading the customer to take adequate precautionary measures, Claims

minimization can be best explained by referring to health insurance. The company

can analyze its claims data to determine those medical service providers who

provide low-cost treatment. It can then provide financial incentives to its customers

to make use of their services. Or alternatively, the company can either negotiate

lower rates with high-cost service providers, or discourage its customers from using

their services. With the discouraging experience of the government companies in the

health insurance, cost control needs to be attended to with even greater vigil by the

new entrants.

Deepak Satawalekar, Managing Director and CEO of HDFC Standard Life

Insurance (2001), stressed the importance of cost control when he averred, 'Our

focus is on good investment performance and keeping a tight control on costs so as

to generate good long-term maturity valuefor the customers'.

Claims minimization can also occur if the importance risk management is

impressed on the customer. In the long run, with the adoption of proper preventive

measures the number of claims and their amounts can be reasonably controlled,

which is really in the interest of the insurer because it reduces its liability in claims

should such an occasion arise.There are certain fraud-prone areas in every business, and even more so in

insurance, where the element of subjective judgement is more present. These relate

primarily to: fraudulently obtaining cover after the loss; exaggeration of the loss;

attendant falsification of documentation; submitting

false claims and the like. The LIC too is not free from such malpractices. In

the past few years, for instance, the incidence of early death claims, (death of

policyholders within two years from the commencement of the policies), has been on

the rise and is causing concern for LIC. It is as high as around 27 per cent of the

total death claims. Looking to the high rate of deaths due to accidents and heart

disease, there is room for suspicion of fraudulent claims.

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With a critically balanced profitability, fraud control is extremely critical for any

insurer. Controlling these pove difficult because of various factors, viz. difficulty in

obtaining evidence of fraud, difficulty in convincing the authorities about a fraud, and

most importantly, some amount of connivance or even collusion on the part of the

supervisors.

It is really difficult to eliminate fraud; but modern technology can help in

detecting and minimizing the risk of fraud to some extent. This will become possible

by building up a database for monitoring and checking possible frauds. Most claims

follow a certain pattern and technology can be used for identifying those that deviate

from the pattern and decide whether they are fraudulently made.

The techniques used to deal with frauds by insurers abroad include

background searches and cross-checks. For example, it is possible for an insurer to

check if an individual filing a work-related disability claim has ever filed a similar

claim in the past. It is possible that an individual with a history of such claims is

faking the disability. Such types of practices where reliability can be ensured, need

to be developed for the Indian market.

Of course, claims in such categories must be analyzed over a fairly long

period to accurately detect fraud. For instance, in a health insurance claim, a claim

for a particular surgery simply cannot be filed twice. Once such measures are inplace, they can substantially reduce costs and enable companies to lower their

prices which would give them a competitive edge.

From a statistical angle, high volumes in this business assume importance,

since they help spread risks wider, allowing a lowering of rates and raising of profits.

With a wider base, the probabilities become more predictable, and with system-wide

risks balanced out, there is a possibility of improving profits. Thus, increasing the

volume of business is an important measure of bringing down per unit costs.

The Indian market insists on advance payment of premiums. It is at times

suggested that this system of premium collection should be changed in order to

increase market access. However, there is really no case for issuance of policies on

credit for unlimited periods, i.e., for issuance of contracts

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without receipt of due consideration. Advance payment helps insurers to

honour their claims promptly and avoid the uncertainties of the recovery of

outstanding premiums. It also helps in the enhancement of investment returns.

Hence there is every reason to continue the present practice. The collection of

premium on time is of the utmost importance because no insurer can assume risk

unless the premium is received in advance.

There is a gross imbalance between fixed management expenses and the

cost of procuring business. The statute prescribes a permissible limit of cost to the

insurance companies at approximately 19.5 per cent of their Gross Direct Premium.

This includes the cost of intermediaries. All the existing insurers are working at costs

slightly exceeding this limit, but they will be compelled to work within the stipulated

cost limits within a given timeframe. Although the existing players will find it difficult

to bring down their fixed costs primarily through rationalization of manpower, there is

no escape from it. This issue is becoming complicated because even as the costs

need to be brought down, there will be an increase in costs as an increase in the

commission levels is inevitable when the industry tries to attract the right kind of

people in a bid to build up a professional agency force. This is bound to putadditional pressure on the already high-cost ratio. . .

8.8 Maintaining/Acquiring a Competitive Edge

In order to be able to acquire and maintain a competitive edge in the market,

it is important to follow the concept of competitive market intelligence and to

anticipate the pattern of operations and the game-plan the new entrants are likely to

follow. In particular, it is necessary to find out what new products and policies others

are likely to offer and then suitably design their own strategies. The basic prereq-

uisite for the government companies (which virtually never faced any competition)

would be to cover their flanks by examining where private entrants will hit and then

be prepared for it when competition actually materializes.

The new players have not entered an entirely virgin area but in an area

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dominated by a well-entrenched set-up in the public sector. The challenge for them

is, therefore, to offer, in addition to the established products, something new and

innovative.

Making their operations cost effective through leaner establishments, more

efficient procedures, and greater and more focused use of technology are going to

be chief factors for the nationalized companies in acquiring a competitive strength.

Computerization is going to be of particular relevance in this context.

In the context of global competition, it is sometimes argued that the labour-

intensive nature of a service like insurance, particularly in respect of distribution,

should give India, with its abundance of low-cost labour resources, a competitive

edge. However, with the present productivity of this asset, the above premise is

questionable. The provision of insurance services requires high technical skill and

competence in such areas as risk assessment, risk control,loss assessment, and

actuarial science, which can only be acquired by investing in professional education

and proper training. Since obviously, such a professional cadre will demand and

secure a high level of compensation, it will no longer remain particularly cheaper inrelation to the wage levels in other countries. All the same, the industry cannot shy

away from professionalizing its staff since it has to be less concerned with absolute

figures of wages, and more with lowering of the per unit cost of production.

. .

8.9 Technological Upgradation

Technology has led to dramatic changes in India financial landscape and this

wave has also had an impact on the insurance industry though the level of

technology currently in use is still quite low. Therefore, it can no longer afford to

postpone upgrading its technologies to the levels prevalent in other countries. The

trend towards its greater use is just emerging though there are still problems to be

overcome, mainly the mind set of the potential users. Fortunately, resort to

automation by even one entity exerts a wholesome pressure on others to adopt the

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same, thereby raising the general level of technology in the industry.

The insurance industry stands to benefit immensely from technological

advance which has an impact on how business is managed and transacted. The

main benefit would obviously be in terms of increased efficiency levels, higher

customer satisfaction, leaner establishments, cost-effective operations, handling of

tremendous volumes of work, cost-effective channels of distribution and on the

whole, a modem work culture, which is the need of the hour. Technology is critical

not only in day-to-day management of the business, but also in areas such as

product development, cost control and marketing.

The three most important segments of technology relate to computerization,

automation and information technology. Computerization in particular, is very

important because of the large data which the insurers must generate and handle for

product development and pricing, apart from the need for prompt and effective

customer service.

For designing new products and services, a tremendous database comprising

demographic data, income level and distribution, regional disparities and

peculiarities, products, customer profile, demand pattern, inclinations, andpreferences needs to be built up. Demographic data related to age and sex

composition, health, birth and death longevity, incidence of disease, etc., has to be

carefully documented, stored, retrieved and processed speedily which is just not

possible without high powered computers. Computerization does not mean just

collection and storing of data, but interpretation and meaningful organization of it to

present it in the form of information. Computer networking facilitates the exchange

of business information between companies, and access to each other's database

and communication via electronic mail systems. This also provides access to

information at the international level. These functions call for a more effective use of

communication technology.

Sophisticated computer programmes will also assist underwriters, agents,

brokers and financial planners. Thus, whereas today, for writing insurance, the

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customer has to be approached personally, in future the interface with him could be

through computers rather than face-to-face. The agent, who, through automation

can be in constant communication with his company's files, will have an obvious

competitive edge in the marketplace.

In addition to front-line computerization, there is also some behind the scene

automation to take care of-functions such as dispensing of forms, folding and

stacking of papers, franking, and reconciliation. These also increase the overall

efficiency of the system.

Computers with expert systems could be used increasingly for such tasks as

insurance underwriting and claims adjusting , medical reports, and investment

performance. Expert systems is a kind of software that collects together a large

amount of data on a given subject and organizes it in a way that enables a

computer to analyze problems and suggest decisions by a process of elimination,

using programmed criteria

The IT capabilities of a service sector like insurance need tremendous

strengthening because it relies heavily on it. Information technology encompasses

computers, telecommunication, multimedia, relational database management

systems (RDBMS) and image technology. Some of the important applications of IT

are data processing, and Management Information Systems (MIS).Customer Activated Terminal (CAT) also called a Kiosk, is an interactive

multimedia display unit-free standing or housed in a small enclosure-in which the

customer gets the benefit of one-stop shopping at a convenient location while being

able to draw upon the full range of services.

Another benefit of IT is that it not only helps in better customer service, but

also provides better control mechanisms.

10.9 The Importance of Government policies

The government's approach to this question is of critical importance, because

its policy will decide the ease with which technology can be imported. Since the

compatibility of technologies and systems imported will govern the spread of

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technology, it would be better if the users are given the freedom to decide which

technology should be imported and from where, within given parameters.

Since no private company in India desiring to enter the insurance business has

had the opportunity to participate in the insurance sector, it is not likely to be

thoroughly acquainted with technology used in this sector. In order, therefore, not to

remain behind in the race, technological know-how is being acquired from foreign

insurers with whom they have collaborated. For those who have no joint venture

arrangements, the latest technology would still have to be imported, possibly through

technology tie-ups. Whether. this should be in the form of a joint venture or whether.

lt should just be bought is a decision that will vary from unit to unit.

The adoption and spread of technology are also dependent on the

infrastructure provided which is almost entirely controlled by the government.

Without adequate good quality infrastructure (primarily power and

telecommunications) the efforts of the industry would be hampered. In fact, these

are problems that already acutely plagued the entire economy, posing serious

difficulties for the trade and industry. There is no good reason why infrastructure

supply should remain a prerogative only of the government. Therefore, in the true

spirit of liberalization and deregulation, it is incumbent on the government to open up

infrastructure also to the private sector so that not only will the availability improve,but its quality as well.

It is difficult to predict a specific time frame for technological changes in

insurance, which earlier, as public sector entities, had not been under very heavy

pressure to change. Even otherwise, the initial adoption of such a technology

anywhere in the world is always slow and gains momentum only after it reaches a

certain critical mass. However, at this juncture in India, there is just no time to waste

and action on this front must commence as early as possible,

8. 10 Implications of Technology for Insurance

The introduction of technology inputs in the working of the insurance industry

has certain implications for it. For instance, the mere installation of hardware or just

automating manual work is not what is implied by the increased use of technology.

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The adoption of new technology demands radical changes in the work culture itself

and means organizational restructuring and streamlining,

and a review of the existing systems and procedures (in other words,

business process re-engineering). Such sophistication will produce certain other

consequences such as on employment for recruitment, replacement, training and

retraining at

various levels.

Recruitment at various levels will, hereafter, strictly be from amongst

technically qualified persons, and in some cases even under-qualified or non-

qualified people may be replaced. Those who are otherwise promising could be

moulded for the jobs by training, and those who have some technical skills could be

upgraded through the process of re training. All the same, it could certainly mean

unemployment for some. Yet, in the long-term, it will open up new opportunities

thereby augmenting employment.

Technological advance in other sectors can also produce an indirect benefit

for insurance. For instance, the strengthening of materials used in construction and

the extension of life resulting from medical advances may mean lower losses for

insurers in the long run.On the darker side, computerization also implies a certain risk in terms of

security and integrity of data. The confidentiality of information, prevention of data

corruption and prevention of fraud are matters of concern and need to kept in mind

while deciding upon the area in which it is to be put to use.

Computers support competent people to perform their functions more

effectively and efficiently. Initial efforts, therefore, will have to be to improve the skill

level so as to assimilate these technologies. For achieving this, the industry will have

to arrange computer-related training on a large scale. Fortunately, all the public

sector insurance outfits have already undertaken such programmes on a fairly large

scale.However,with the increased and effective use of information technology, the

personalized touch in insurance services will diminish because technology, cannot

replace the personal touch in providing professional service. This is of particular

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relevance in a country like India where the consumer would feel morecomfortable in

a face-to-face interaction.

8.11 ACCOUNTING PRACTICES:

The necessity oftransparency in the accounts ofinsurance companies cannot

be overstated. The regulations laid down by the IRDA insist on sound accounting

standards and disclosure practices, so that the true financial position of the

insurance companies is reflected in the accounts, The likely reliance oftheinsurers

on financial institutions and the capital market for raising funds in the future will

further enforce such transparency and discipline in operations, thereby putting the

customer in a better position tochoose between one insurer and another.

Fortunately, the accounts in the public sector insurance industry in India are

considered tobe much more transparent than in many other countries and hence

there should not be any difficulty in meeting the transparency and disclosure

standards.

8.12 Scale of Operations

Being a game of big numbers, the insurance business requires a very large capitalbase and substantial financial resources. Its profitability is heavily influenced by its

size and in advanced countries, efforts are oftenmade to create as large units as

possible. In this context, the United Nations Conference on Trade and Development

(UNCTAD) observed two trends, not necessarily contradictory to each other, in

different parts ofthe world. On the one hand, monopolistic and oligopolistic market

structures are being broken up in view oftheir unwieldy size. On the other, a view is

gaining ground that fragmented markets, in which a multitude ofsmall companies

operate, often under conditions of cut-throat competition, cannot provide the high

quality and reliable services required by a modem economy. A higher degree of

concentration may, therefore increase their efficiency, It may thus be in the interest

ofthe customers to have fewer but stronger companies, notleast because the latter

would have a better longer term financial viability,

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Ofcourse, it is noteasy forcompanies to reach a large enough size on their

own and in the routine course, in view of the economic barriers to organic growth.

Therefore, besides the usual method ofrevising the capital structure upwards, in the

developed countries, acquisitions and mergers are also considered seriously and

many organizations are beginning to gear up their internal machinery to manage

them. As a result, in many countries, consolidation has almost become a way of life

in the industry.

. Other factors inducing mergers and acquisitions include the following-a desire

to capture an increased market share; acquire improved width and depth ofproduct

range; expand distribution channels; increase cross-selling Opportunities, and

diversify from product lines and geographical markets with limited growth potential;

achieve spread of development risk; obtain access to new markets; reach

economies ofscale; and achieve reduced expense ratio. Alliances can take different

forms. Some experts believe that alliances related to distribution rather than to

products or technology will prove mostvaluable in the long run.

8.13 Global Integration

Dramatic changes are taking place in international markets owing to the

internationalization of activities, the appearance of new risks, new types of covers to

match with new risk situations, and unconventional ideas on customer service. In

differing ways, depending upon their history, culture, and structure of their economy,

countries are contending with increasing globalization of the world economy.

India's participation in the global market so far has been only at the margin and

its financial institutions have been relatively insulated from the international markets.

Their greater integration with the rest of the world as a logical step has already

started and is accelerated by the breakdown of geographical barriers to the

movement of capital across countries. The industry is sure to benefit immensely

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from this interaction and exposure. Such integration will call for some changes in the

structure and policies of the Indian companies especially because of the need for

compliance with international standards and practices.1t also has to prepare itself to

face competition in the global arena by making its operations efficient and cost

effective.

Of course, at the same time, as a result of this interdependence, there are

some attendant risks also, since any adverse developments in any major financial

market can be transmitted to the linked markets very quickly. The sensitive stock

markets in the world have experienced this often in recent times. The September 11,

attacks on targets in the USA also caused many ripple effects which spread to

virtually all the markets in world, including the insurance business.

Therefore, while welcoming global integration, one has also to be aware of

the danger to the stability of the system, for which preventive measures will be

needed.

.

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9. ISSUES

CONTEMPORARY ISSUES IN INSURANCE

9.1. Increased Pension Coverage

A few years back FICCI conducted a study on

Pension as a social security scheme. It concluded that

the lack of comprehensive social security system in the

country, coupled with willingness to save, means that India, demand for pension

products would be very large. However, unfortunate the present penetration of

pension coverage is poor. By March 1988, the Life Insurance Corporation of India's

(LIC) pension premium was only Rs. 100 crore. The study further concluded that

making pension products into attractive saving instruments would require only

simple innovations which is already common in some other markets.

The fact is that in the Indian context, building of retirement benefits in a

structured manner remained confined to only the employed sector, and the socialsecurity benefit in a small measure is available only to the destitute above 65 years

of age. Currently, pension benefits are available to employees in organised sectors

like the government and private. At present, there is no pension benefit for self-

employed and Agricultural workers in the unorganised sector.

In India at present about 89% of population, that is, the informal sector workers

have been kept out of the pension schemes so far. The Social Security measures till

now are state controlled by and large in this country and Insurance has very less

role to play bearing a few schemes.

THE BRITISH GOVERNMENT, states that the State takes care of its citizen

from cradle to the grave. They have the National Health Scheme which underwrites

the health of the members of the public and they have also got pension scheme

which takes care of the widows, orphans and the old.

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In India, there is no such system of social security exists. India has the highest

number of people above 60 years of age among the 14 countries in the World. The

main reason being the coverage of pension plan in India covers only 8% of the

working population.

The Insurance Regulatory and Development Authority (IRDA) has recently

recommended a new, voluntary pension regime for everyone, including the

unorganised sector, according to the Dave Committee implementation report. The

report submitted now by IRDA to the Finance Ministry, suggests wide-ranging

reforms for this sector. The report, however, does not mandate any minimum annual

contribution or the spacing of contribution across time. In short, an individual will be

able to access the collection points at any time and will have complete freedom to

transfer a part or the full asset from one scheme to another with the same or

different provider company. .

The Scheme's basic purpose is to bring this class under the purview of

pensions. There are four areas under the present system:

(a) Contribution collection;

(b) Record-keeping;(c) Assets Management; and

(d) Annuity Payment.

There has been a pressing need for a funded retirement plan defined contribution

to be implemented in India. It will address the long pending need for a strong

pension system for the country. The private sector players in the insurance sector

are now in the process of studying the potential of the pension market. The scope of

pension funds if enlarged by the Government, will definitely provide a real

competition in the Insurance Sector.

Present Position

The Insurance Regulatory Development Authority in its pension report has

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projected an exponential growth in the post-reforms pension sector with the

aggregate market size estimated to touch Rs. 4,06,500 crore in year 2025. The

market, currently, stands at Rs. 56,100 crore. The IRDA had said that the aggregate

pension market would grow to Rs. 1,16,600 crore in 2005, Rs. 1,56,900 crore

(2010), Rs. 2,15,400 crore (2015) and Rs. 2,98,600 crore (2020). The pension

market includes the Employees' Provident Fund (EPF), Employees' Pension

Scheme (EPS), Government Provident Fund (GPF), Public Provident Fund (PPF)

and the Voluntary Contributions through the future schemes in the individual and

group pension categories. The regulator also suggested setting up a single

integrated domestic pension system by October 2001. While suggesting stripping of

regulatory powers of the existing Employees' Provident Fund Office, it recommended

that IRDA monitor this sector as well.

The report had also not laid any restrictions on the number of players and said

that foreign equity should be allowed in the sector. It had also suggested that

minimum returns must be linked in the bank rate initially and payouts should be

exclusive preserve of Life Insurance Companies.

9.2. Convergence of Insurance and Banking Industry

It was the evolution of banks entering into the Insurance Sector and Selling

Products across the counter that saw an increasing reach into the rural areas. Many

new players were hesitant of such possibilities, stating that the rural India reflected

huge numbers in terms of lives to be insured, business volumes would be negligible.

It was not until some insurers decided to tap Micro-Insurance possibilities. and came

out with special products for the rural masses, that insurance penetration to rural

India actually took. .

Bancassurance is equally a major factor and plus point for spreading insuranceto rural areas. Even state or public sector entities, which till then had depended

solely on the tied agents, capitalised on the branch network of public sector banks.

Insurance spread across the country as banks offered to cross sell products. The

concept of Universal Banking is now taking a shape in Indian Financial Sector and

the very scope of Insurance business will be widened. For example, SBI Life

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Insurance Company Ltd. and other Banks with their Joint Venturers have started

making a dent into rural business. This was not much possible earlier and is the

result of entry of private players into the Insurance Sector.

Thus, the State owned Insurance Sector could not earlier make much use of

bank branch network in the country for insurance business, which has now become

possible. This contemporary issue of participation of banks in marketing/selling of

insurance products in the country is of much significance. The Insurance business

had the less number of insured due to the above reasons which is going to be

increased now manifold and that too with qualitative products and services" Many of

the banks are now entering into MOU with Insurance Companies to sell their

insurance products through network of their bank branches.

Bancassurance.

Public Sector banks in India can emerge as leading players in the distribution

of Insurance products across all parts of the country. With their net work of 60000

branches two-thirds of which are in rural areas and their 117 million customer

accounts, insurance companies would be well advised to use them as a channel for

their products,

Bancassurance in India has a great future. Funds generated through theBancassurance model will play a pivotal role in mobilising savings particularly in

rural areas and short and long-term funds mobilised could, in turn, be used for

developmental activities. PSU banks, will however, have to gear themselves

adequately to undertake this task as it would entail adequate training in well

designed products. With the emergence of Private banks, PSU banks have realized

that customers' expectations have risen dramatically in the past few years.

9.3. Alternate Channels of Distribution

Nowadays there is a thinking in the Insurance Sector about alternative

channels of distribution like Internet and Bancassurance. Many insurers are willing to

take advantage of these changes. As far as the Internet is concerned, most people

are using the net for information, to see whether the number quoted by the agent are

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accurate. For the purchase they turn to the agent as there is no price difference for

the buyer. It is a fact now that all companies are looking at the Internet and banks.

But Life Insurance is a personal decision. In banks, staff is changed occasionally

and when you visit the bank branch again, the earlier person is not there and the

new person has no idea why one has purchased the policy in the first instance.

Multiple distribution channels help insurers reach out to different sectors of

society, with Trade Unions or post offices being focal points of sale. Many

companies in the private sector have now tied up with the trade unions of railways,

and have provided them with customized products to suit the needs of the

employees.

Thus, new channels of distribution and marketing have seen the emergence of

customization of Insurance covers tailored out to meet the various needs of specific

groups. Even nowadays sugar co-operatives have also become a high selling point

of products

especially among the farmers and farm labourers. The distribution channels

have, therefore, to playa vital role in increasing the quantum of Insurance business.

It is one of the important factor of internal environment for any Insurance Company

as more and innovative channels of distributions will always have an edge overothers.

Intermediaries and Distribution Channels

In the light of one of the important contemporary issues of Insurance Sector,

the modern set-up of Intermediaries and distribution channel now comprises the

following.

(i) Direct Response: includes telephone, off the page, mail and TV.,etc.

(ii) High Street: includes bank branches, finance houses, kiosks, retail

. stores, etc.

(iii) Electronic: includes Internet, interactive TV., etc.

(iv)Agency: includes Issues, conduct, quality, demand for exclusivity,

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cost, etc.

(v) Financial Advisors: includes among others, independent financial

advisors, s

Issues & Challenges in Insurance-1

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