Potentiality of India’s insurance sector and emphasis on tapping India’s population not under...

SIT Journal of Management Vol. 3. No. 2: December 2013, Pp.636-653

Basu & Roy ISSN: 2278-9111

Potentiality of India’s insurance sector and emphasis on tapping India’s

population not under the cover of insurance- A study

Analjyoti Basu* & Chirodeep Roy**

Abstract:

Insurance is a form of Risk Management which hedge against risk of uncertain, unforeseen and

contingent loss. It can be taken as transfer of risk of loss, from one entity to another by means of

payment of money. Globally speaking (as per World Insurance Report, ”Swiss Re”) in 2010

global direct premium surged at 2.7 percent and premium in non-life insurance business grew by

1.9 percent. In terms of India (Report by IRDA upto 31st March 2010) only 57 Crores of

insurable people live in India, whereas India‟s population in that same year was 115 Crores

(source- www.indiaonlinepages.com). So, if considered against Indian population, just 49.57

percent were coming under insurance coverage. India is taking bold steps in economic front

(entrance FDI in insurance sector and Multi-Brand are some of them) and surging slowly and

boldly towards becoming global economic power through different economic reforms. So the

figure of 49.57 percent is not presenting any encouraging picture. This paper analyses India‟s

potentiality and performance in insurance sector. Insurance penetration and density along with

comparative study on basis of the world‟s scenario are some of the points of focus in this

analysis. Apart from that the paper also enlightens the potential parts of Insurance focused by

budget 2013, the new avenues lighted and nurtured by Insurance sector. The paper also places

some modular studies which could be helpful in boosting the insurance business.

Keywords: Indian insurance sector, potentiality, coverage, new possibility

*Analjyoti Basu, Assistant Professor, Surendra Institute of Business Management, Siliguri,

West Bengal India,Email - [email protected], M: +91-9434679226

**Chirodeep Roy, Assistant Professor, Surendra Institute of Business Management, Siliguri,

West Bengal India, Email - [email protected], M: +91-7864939243



Introduction

Insurance constitutes one of the major segments of the financial market. Insurance services play

predominant role in the process of financial intermediary. Today insurance industry is one of the

most growing sectors in India. There is lot of potential in the Indian Insurance Industry. There

are many issues, which require study. The scope of the study of insurance industry of India

would be very great as there are on-going developments in the industry after the opening of the

sector. The major issue right now is the hike in FDI (Foreign Direct Investment) limit from 26%

to 49% in the insurance sector. This would lead to more capital inflow by foreign partners.

Another major issue is the effects on LIC and GIC after the entry of private players in the

market. Though the market share of Public Insurance companies has been affected, but it has

improved in terms of efficiency. There are number of other important topics like penetration of

Health Insurance, Rural marketing of insurance, new distribution channels, new product ranges,

insurance brokers‟ regulation, incentive scheme of development officers of LIC etc. So it offers

lot of scopes for studying the insurance industry. Right now the insurance industry has great

opportunities in a country like India with such a huge population but the penetration of insurance

in India is very low in both life and non-life segment. So there is a huge market which needs to

be tabbed in recent future. This paper introduces some of the key models which can be adopted

to increase the penetration and density of the Indian Insurance industry for acquiring the steady

rate of growth.

Literature Review

Insurance Density and penetration are the two important aspects of study for specialist‟s

researches. Enz (2000) proposed the S-curve relation between per-capita income and insurance

penetration. Ma & Pope (2008) showed a positive relationship between international insurer

participation and increased insurance penetration and density. They have shown that, a strong

presence of international insurers may enhance the importance of the insurance industry and

increase the demand for insurance products within a given national market. Zheng et al. (2009),

came up with a new idea of „Benchmark Ratio of Insurance Penetration‟ (BRIP) for comparing

insurance growth across different countries, which not only takes into account the overall scale

of the insurance market of each country but also considers the population, economy and the

relationship between the insurance penetration and stage of economic development. Regarding



India, Badea & Novac (2008) believes that the continuous improvement of the insurance

premiums, the insurance density and the insurance penetration rate support the importance of this

sector of activity in the total economy. Danuletiu & Danuletiu (2006) inquired the evolution of

Romanian insurance market and highlighted trends that characterized it (such as density and

penetration ratio) .Sen & Madheswaran (2007) shows in their study that GDP and Per capita

GDP are often highly correlated with the proxy variables measuring insurance demand – density

and penetration.

Objectives

Present study focuses on the following aspects-

To study the present scenario and potentiality of Indian Insurance Industry.

To analyze the possibilities of tapping new areas to increase the density and penetration.

Methodology and pathway followed for the study

The study mainly takes into count several case studies, secondary data and news published in

different national journals. Overall the pathway depicted in words is as follows:

A. Studying the present position of Indian insurance industry by the help of insurance

uncovered population of India, Insurance density and Insurance Penetration.

B. Studying the efforts placed by the Union Government to increase number of insurance

holders in India.

C. Placing some models which would be helpful in increasing the number of insurance

holders, insurance density and insurance penetration.

Present Scenario of Insurance Sector in India

To focus on the objectives present scenario of Indian insurance industry is important. As of now

there are fifty-two insurance companies operating in India (reference-www.gov.in); of which

twenty four are in the life insurance business and twenty-seven are in non-life insurance

business. In addition, General Insurance Corporation (GIC) is the sole national re insurer.

Following Table (Table 1) places the figures of Insurance Density and Penetration for Life, Non

Life Insurance and also taking the Industry‟s figure into count in the time-period 2001 to 2011.



YEARWISE INSURANCE PENETRATION AND DENSITY IN INDIA

year Life Non Life Industry

Density Penetration Density Penetration Density Penetration

2001 9.10 2.15 2.40 0.56 11.50 2.71

2002 11.70 2.59 3.00 0.67 14.70 3.26

2003 12.90 2.26 3.50 0.62 16.40 2.88

2004 15.70 2.53 4.00 0.64 19.70 3.17

2005 18.30 2.53 4.40 0.61 22.70 3.14

2006 33.20 4.10 5.20 0.70 38.40 4.80

2007 40.40 4.00 6.20 0.70 46.60 4.70

2008 41.20 4.00 6.20 0.60 47.40 4.60

2009 47.70 4.60 6.70 0.60 54.40 5.20

2010 55.70 4.40 8.70 0.71 64.40 5.11

2011 49.00 3.40 10.00 0.70 59.00 4.10

Table-1: Year Wise Penetration and Density

Fig-1: Line Graph representing Insurance Penetration in India (Source: irda.gov.in)



Fig-2: Line Graph representing Insurance Density in India (Source: irda.gov.in)

Interpretation of present scenario

A. From above figures

The life insurance industry recorded a premium income of 2, 87,072 crore during 2011-12 as

against 2, 91,639 crore in the previous financial year, registering a negative growth of 1.57 per

cent. While private sector insurers posted 4.52 per cent decline (11.08 per cent growth in

previous year) in their premium income, Life Insurance Corporation (LIC), the fully state owned

insurance company, recorded 0.29 per cent decline (9.35 per cent growth in previous year), in its

total premium underwritten.

In the non-life segment, the insurers underwrote gross direct premium of 52,876 crore in India

for the year 2011-12 as against 42,576 crore in 2010-11, registering a growth of 24.19 per cent as

against an increase of 22.98 per cent recorded in the previous year. The public sector insurers

exhibited growth in 2011-12 at 21.50 per cent; as against the previous year‟s growth rate of

21.84 per cent. The private sector general insurers registered a growth of 28.06 per cent, which is

higher than 24.67 percent achieved during previous year.

Reason-

The fall down in Insurance Penetration and Insurance Density in the year 2010-2011 is due to

global recession.



B. Derived

The derived information regarding co-relation between different criteria that are coming up from

Table 1 are shown below in Table 2.In Table 2 – Insurance Density is measured by Total

Insurance Premium divided by Total Population (i.e. - Total Insurance Premium ÷ Total

Population) whereas Insurance Penetration is measured by Total Insurance Premium divided by

GDP of the country(i.e.- Total Insurance Premium ÷ GDP of the country).So, Insurance Density

represents premium paid by single person while Insurance Penetration provides the measure that

how much Insurance Premium boosts up one Unit of GDP.

Table 2

No. Criteria(s) Co-efficient of

Correlation value(r)

Conclusion

1 Density and Penetration for Life

Insurance.

0.79 High Positive co-

relation.

2 Density and Penetration for Non-

Life Insurance.

0.58 Medium Positive

co-relation.

3 Density and Penetration for the

whole industry.

0.89 Very High Positive

co-relation.

4 Density of Life Insurance and

Industry.


co-relation.

5 Density of Non-Life Insurance and

Industry.


co-relation.

6 Penetration of Life Insurance and

Industry.

0.75 High Positive co-

relation.

7 Penetration of Non-Life Insurance

and Industry.


co-relation.

Inferences-

1. Insurance Density and Penetration for Life Insurance, Non-Life Insurance and the whole

industry are positively correlated, i.e. increase or decrease of one will ensure increase or



decrease of another. It means increase or decrease in premium each person will also have

increment or decrement effect on total unit paid for GDP.

2. Again Insurance Density for Life Insurance and Non-Life Insurance are positively co-

related with Insurance Density of the Insurance Industry which means with increase or

decrease of premium for each person in terms of Life Insurance and Non-Life Insurance

will also increase or decrease premium paid by each person for the total Insurance

Industry.

3. Lastly Insurance Penetration for Life Insurance and Non-Life Insurance are positively co-

related with Insurance Penetration of the Insurance Industry which means with increase

or decrease of premium for each unit of GDP for both Life Insurance and Non-Life

Insurance will also increase or decrease premium paid each unit of GDP for the total

Insurance Industry.

4. So inferences in 1 and 3 indicates that increase in insurance premium from Life or Non-

life insurance will certainly have some positive effects on GDP. But as data from 2010

indicates that only 49%(approximately) are covered by insurances so there is a need for

increasing the numbers of insurance holders (both Life-insurance and Non-life insurance)

and also amount of Insurance premium paid per year.

INSURANCE & ‘BUDGET 2013-14’ HIGHLIGHTS

To increase the number of insurance holder and insurance premium Union Government has

come up with several plans which the Government felt to boost up the sector.

Empowering Insurance companies to open up new branches in Tier-II cities and below

without prior approval of IRDA.

KYC of Banks to be sufficient to acquire insurance policies, Bank to be permitted to act

as Insurance brokers, banking correspondent allowed to sell micro-insurance products

and achieving the goal of having office of LIC and GIC in towns with population of

10,000 or more.

Rashtriya Swasthya Bima Yojana to be extended to other categories such as Rickshaw,

Auto Rickshaw and Taxi Drivers, sanitation workers, rag pickers and mine workers.



MODULAR SUGGESTIONS

Instead of placing suggestions couple of models are placed which might be helpful in boosting

up the Insurance sector in India. Before studying those models let us study the present model.

A. Present Model

Fig-3

Understanding Process and

Premium Calculation for Each

Individuals.

Varied Premium Collection

from the Insurance Holders.

Accident / Loss or Destruction

of Life or Property

Insured Amount Against Loss

Given to the Insurance Holders

Immediately After the Loss or

Destruction/Accident Happens.

Return to the Investor After

Definite Maturity Period or

Nothing as Such

Discussion-

Present Model(Fig-3) presents simplified view of calculating insurance. In it various things are

checked for would be customers. Age, if the customer is having any sorts of diseases, if

pregnant (for female candidate) are checked and on the basis of the information provided the

premium on yearly/half yearly/quarter yearly(as per the insurance policy selected by the

customer) are calculated. Next accumulated funds from the premium paid by the customers are

settled up. If any accident or health hazards happens to the customer(s) stipulated and promised

amount is returned to the customer. If accident or any health hazards do not happen in that case



after a certain period on basis of return statement a definite amount is returned to the customers

(in some plans the money is not refunded to the customer).Next models are developed on the

basis of above concept where main emphasis is given to the premium paying part.

Savings Account Model

Fig-4

Savings Account Holders

Deposit Definite Amount in

Their Account

AQB/AAB/AHYB of Rs. X*

maintained for Y** years.

Options given to the Savings Account

Holder to Convert Z*** % of X as

Insurance

Customer Saying

Yes

Customer Saying

No

1. Convert Z% part of X as

Premium of Insurance Taking the

Beginning of Y+1 year as the

Beginning of Insurance Period.

2. Calculating Present Value and

Future Value on the Deposit and

presenting him the Slab Concept

and Adjoining Annual amount to

be accumulated.

3. Which Insurance will be Chosen

Will Depend upon Customer’s Choice

i.e. Life Insurance/General

Insurance?

*X is Definite Amount Fixed by IRDA

or Equivalent Regulatory Authority.

** Y is the Number of Years Fixed By

IRDA or Equivalence Regulatory

Authority.

*** Z will be Fixed on the Basic of

Option Put Down By the Account

Holder and Fixed on Present Market

Rate.

Discussion –



1. Above model(Fig-4) could be represented with help of example and it is applicable for

those personals who are holding Savings Accounts. Here three Layers of the part of the

model where “Customer Saying Yes” is taken into count.

LAYER 1

Suppose the Regulatory authorities have defined following four slabs-

Slab 1- Customers having 100 units1 to 199 units as Average Quarterly Balance(AQB)/Average

Half Yearly Balance/Average Annual Balance for 3 years(as stipulated by the regulatory

authority) will deposit 20 units or 10% of the deposited amount (as per the choice of the

customer) converted to premium of Insurance.

Slab 2- Customers having 200 units to 299 units as Average Quarterly Balance(AQB)/Average

Half Yearly Balance/Average Annual Balance for 3 years (as stipulated by the regulatory

authority) will deposit 30 units or 10% of the deposited amount (as per the choice of the

customer) converted to premium of Insurance.

Or

Customers of this definite slab may deposit 20 units as per his/her choice (as per Slab 1)

Slab 3- Customers having 300 units to 399 units as Average Quarterly Balance(AQB)/Average

Half Yearly Balance/Average Annual Balance for 3 years (as stipulated by the regulatory

authority)will deposit 40 units or 10% of the deposited amount (as per the choice of the

customer) converted to premium of Insurance. Units represents currencies like Indian Rupees.

Or

Customers of this definite slab may deposit 20 units or 30 Units as per his/her choice (as per Slab

1 or Slab 2).

Slab 4- Customers having 400 units to 499 units or above as Average Quarterly

Balance(AQB)/Average Half Yearly Balance/Average Annual Balance for 3 years (as stipulated

by the regulatory authority) will deposit 50 units or 10% of the deposited amount (as per the

choice of the customer) converted to premium of Insurance.

Or



Customers of this definite slab may deposit 20 units or 30 units or 40 units as per his/her choice

(as per Slab 1 or Slab 2 or Slab 3).

Important point In all the cases the privilege will be given to the customer that for how many

years the customer wants the part of his money to be taken as premium but it should not be less

than 10 years or time stipulated by the regulatory authority.

Example of Layer 1

Suppose there are four customers A, B, C and D with deposited amount of 158 units, 268 units

,368 units and 468 units respectively. Now as per the discussions carried out in Layer1 The

following Table, i.e, Table 2 represents the options present in front of A,B,C and D.

Table 2

Customer Deposited

Amount(units)

Options

A 158 This person is coming under Slab 1 and the option in

front of him-

1. Deposit 20 units as premium for the 4th year.

2. Deposit 15.8 units as premium for the 4th year.

B 268 This person is coming under Slab 2 and the option in

front of him-



3. Deposit 20 units as premium for the 4th

year.(stipulated for Slab 1)

.

C 368 This person is coming under Slab 3 and the option in

front of him-






year

(stipulated for Slab 1).


year(stipulated for Slab 2)

CONTINUATION OF TABLE-1

D 468 This person is coming under Slab 4 and the option in

front of him-




year



year(stipulated for Slab 2).



LAYER 2

This layer discusses about escalation from lower level to the higher level. That is to say from

Slab 1 to Slab 2 or Slab 3, Slab 3 to Slab 4 and so on.

Discussion with Example-

Suppose a person is placed in Slab 1 as per his maintenance of Average Quarterly

Balance(AQB) for 3 years (let AQB be the standard stipulated by the regulatory authority).For

this definite premium amount is being deducted but for the next three years it is seen that after

paying his premium the amount accumulated in his Savings Account is having higher Average

Quarterly Balance(AQB) for 3 years (as stipulated by the regulatory authority) than stipulated



amount of Slab 1(i.e more than the range of 100 to 199 units) and he is falling under the ambit of

Slab 2.

In this case the person may be offered with Slab 2. If he accepts the request than he may be

escalated to the higher Slab with calculation of Present value of his money deposited on the basis

of his Annual Deposited Amount and Current Interest Rate applicable in the market will be

functional.

Here the future value of maturity if any accident does not happens or any health hazard does not

happens will be calculated on the basis of years of maturity fixed by the customer himself(as

discussed above under important point of Layer 1), calculated present value and market rate

applicable at that time.

LAYER 3

This layer will again start operating if the customer comes under any of the above mentioned

Slab of Layer 1 and at the same time the customer is ready to opt for the option of Insurance.

In this case the choice may be provided to the customer that – Which type of insurance

the customer would like to opt for, i.e. Life Insurance (non-maturity plan), Property Insurance or

Vehicle Insurance. For example- If his AQB is 258 units than as per Layer 1 he falls under Slab

2 and say the option amounts of 30 units, 20 units or 25.8 units(i.e.- 10% of 258) could be

deposited by him. These premiums may fetch different amount coverage for different insurances

which will be placed to the customer at the time of giving proposal.

Let us further discuss the above example with the following hypothetical table where market

rates are applicable (Table 3).

Table 3

Life Insurance cover Property Insurance Vehicle Insurance

30 units X1 X2 X3



20 units Y1 Y2 Y3

25.8 units Z1 Z2 Z3

Here X1, X2 and X3 the covers when premium of 30 units are deposited for Life, Property and

Vehicle Insurance respectively. Same is followed for other units like 20 units and 25.8 units. On

basis of choices given the customer may opt for a definite proposal.

2. Layers are immaterial in case the Savings Account Holder says that –Though his/her account

maintains Average Quarterly Balance(AQB)/Average Half Yearly Balance/Average Annual

Balance for three years(as stipulated by the regulatory authority) he/she is not interested in

converting the Savings Account part into Insurance.

Advantages of the model

1. Customers do not have to go for extra investment as a part of the investment in the

Savings Account is automatically converted to Insurance.

2. Customers have the options for two parallel investment benefits with single investment.

3. The customers are getting choice of choosing most suitable insurance for them. For

example- Life insurance, Property Insurance, Vehicle Insurance.

4. Starting from a lower slab the customers are having options to shift to higher slabs.(refer

to Discussion in Layer 2).

5. It should be beneficial for both Banks and Insurance companies as the offer may fetch

more Savings Account Holder for the banks and also more people will come under the

cover of insurance which will increase the ratio of insurance covered people in India.

6. Lastly as the plan is not mandatory for the Savings Account Holder to convert it to

Insurance so surely they can run singly with Savings Account itself.

Insurance convertibility Model

Discussion- This model (as represented by Fig-5) mainly focuses on conversion of one sort of

insurance to another type of insurance. For example- conversion of part of life insurance to child

education or daughter marriage plan provided-



1. The premium amount paid periodically should be quite high enough.

2. The insurance should have a long period for maturity.

Example- Let the premium paid per year by Mr. X for a definite Life Insurance is 50 units and

the maturity period is 20 years. Now say after 3 years Mr. X decides that along with the life

insurance he wants to get the facility of child education plan and decides to pay 20 units each

year for education plan. So the equation stands as –

a. 20 units for child education plan.

b. 30 units for life insurance.

Fig-5



Interpretation - Conversion of Life insurance from 50 to 30 units mean conversion of premium

from Slab 4 to Slab 2(as per Savings Account Model) .

So in these case the calculations needed are-

a. Future worth of 50 units and 30 units deposited for 3 years with market rate in present

market rate will be applicable(say x%).

b. Adjusting the balance between 50 and 30 units (that occurred for 5 years) and adjusting

the extra 20 units from the 4th year.

c. Now if x% and y% rate is applicable for life insurance and child education plan

respectively. Than the calculation will include 30 units for 15 years with x% interest and

20 units for 15 years with y% interest with adjustment suggested on b.

Point to note- In this case if extra small premium amount is to be paid Mr. X will be

requested to pay that because double benefit is achieved from same premium.

Advantages of the model

1. There is an option of converting to two plans from a single Life insurance plan.

2. Another important point is interconvertibility of two plans.

3. No extra or small extra premium is being charged.

Conclusion

Quite sizeable insurance sector with high potentiality of growth always boosts the economy of

the country by facilitating long-term fund circulation for infrastructure development and

strengthens country‟s risk taking ability. Effective distribution channel, focus on overall financial

inclusion, consumer needs and preferences are some factors for the growth of the sector. The

story of India is also not different. Though 49 percent of India‟s population is covered under

insurance but India is heading to make great progress in the coming years. Investment of various

foreign companies in the insurance sector favors the fact. But as India predicting over 630

million Indians to have health insurance coverage by 2015(August 31, 2013, Business Standard)

significant efforts should be taken to pull up the sector. The models discussed in form of Savings



Account Model and Convertibility Model are some of the steps in the way. More models of same

form could be developed keeping in consideration to increase density, penetration of insurance

and also number of holders of insurance.

References

Sinha, Tapen,‟ An Analysis of the Evolution of Insurance in India‟, Huebner International Series

on Risk, Insurance and Economic Security, Handbook of International Insurance, Volume 26,

2007, pp 641-678

Annual reports of IRDA (2001-2011),

Annual report of LIC (2001-2011)

Handbook of Indian Insurance Statistics-2012

Websites visited

www.irdaindia.gov.in

www.bimadeals.com/life-insurance-india

www.insuringindia.com

www.nasscom.in

www.economictimes.com

www.indiatoday.com

http://trak.in/tags/business/2011/11/30/insurance-growth-indians-numbers-statistics/

http://www.business-standard.com/article/pf/over-630-mn-indians-to-have-health-insurance-

coverage

http://www.ibef.org/industry/insurance-sector-india.aspx



http://money.howstuffworks.com/personal-finance/financial-planning/life-insurance.htm

http://www.iiminfo.org/CONSUMERS/HowInsuranceWorks/tabid/1714/Default.aspx

http://www.insurancecouncil.com.au/for-consumers/how-insurance-works

http://economictimes.indiatimes.com/personal-finance/insurance/insurance-news/budget-

http://business.mapsofindia.com/insurance/policies/types.html

http://www.indiaonlinepages.com/population/india-population.html

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