Risks and uncertainties are part of life's great adventure- accidents, illness, theft, Natural disasters- they are all built into working of the universe waiting to happen. So far that there is a solution - insurance and to provide with the knowledge of this insurance benefits to the customers, the Financial Consultant plays an important role in this field.
To overcome these risks and uncertainties this project describes about various Insurance companies. How these companies provide benefits to policy holders is well explained by the Financial Consultant. Now days a lot is being done to create awareness among the insuring Public about the need and importance of insurance in the field of human being.
In this direction IRDA has planned to create awareness through electronic and print media. Recruitment of Financial Consultants is done to ensure the smooth serving of insurance sector. The project deals with the procedure of recruitment of Financial Consultant.
With the largest number of life insurance policies in force in the world, Insurance happens to be a mega opportunity in India. It’s a business growing at the rate of 15-20 per cent annually and presently is of the order of Rs 450 billion (for the financial year 2004 – 2005). Together with banking services, it adds about 7% to the country’s Gross Domestic Product (GDP). The gross premium collection is nearly 2% of GDP and funds available with LIC for investments are 8% of the GDP. Even so nearly 80% of the Indian population is without life insurance cover while health insurance and non-life insurance continues to be below international standards. A large part of our population is also subject to weak social security and pension systems with hardly any old age income security. This in itself is an indicator that growth potential for the insurance sector in India is immense. A well-developed and evolved insurance sector is needed for economic development as it provides long term funds for infrastructure development and strengthens the risk taking ability of individuals. It is estimated that over the next ten years India would require investments of the order of one trillion US dollars. The Insurance sector, to some extent, can enable investments in infrastructure development to sustain the economic growth of the country. (Source: www.indiacore.com)
In India, insurance has a deep-rooted history. It finds mention in the writings of Manu ( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). The writings talk in terms of pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine. This was probably a pre-cursor to modern day insurance. Ancient Indian history has preserved the earliest traces of insurance in the form of marine trade loans and carriers’ contracts. Insurance in India has evolved over time heavily drawing from other countries, England in particular.
1818 saw the advent of life insurance business in India with the establishment of the Oriental Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the Madras Equitable had begun transacting life insurance business in the Madras Presidency. 1870 saw the enactment of the British Insurance Act and in the last three decades of the nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were started in the Bombay Residency. This era, however, was dominated by foreign insurance offices which did good business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard competition from the foreign companies.
In 1914, the Government of India started publishing returns of Insurance Companies in India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life business. In 1928, the Indian Insurance Companies Act was enacted to enable the Government to collect statistical information about both life and non-life business transacted in India by Indian and foreign insurers including provident insurance societies. In 1938, with a view to protecting the interest of the Insurance public, the earlier legislation was consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for effective control over the activities of insurers.
The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a large number of insurance companies and the level of competition was high. There were also allegations of unfair trade practices. The Government of India, therefore, decided to nationalize insurance business.
An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector.
The history of general insurance dates back to the Industrial Revolution in the west and the consequent growth of sea-faring trade and commerce in the 17th century. It came to India as a legacy of British occupation. General Insurance in India has its roots in the establishment of Triton Insurance Company Ltd., in the year 1850 in Calcutta by the British. In 1907, the Indian Mercantile Insurance Ltd, was set up. This was the first company to transact all classes of general insurance business. 1957 saw the formation of the General Insurance Council, a wing of the Insurance Associaton of India. The General Insurance Council framed a code of conduct for ensuring fair conduct and sound business practices.
In 1968, the Insurance Act was amended to regulate investments and set minimum solvency margins. The Tariff Advisory Committee was also set up then.
In 1972 with the passing of the General Insurance Business (Nationalisation) Act, general insurance business was nationalized with effect from 1st January, 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on January 1sst 1973.
This millennium has seen insurance come a full circle in a journey extending to nearly 200 years. The process of re-opening of the sector had begun in the early 1990s and the last decade and more has seen it been opened up substantially. In 1993, the Government set up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms in the insurance sector.The objective was to complement the reforms initiated in the financial sector. The committee submitted its report in 1994 wherein , among other things, it recommended that the private sector be permitted to enter the insurance industry. They stated that foreign companies be allowed to enter by floating Indian companies, preferably a joint venture with Indian partners.
Following the recommendations of the Malhotra Committee report, in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market.
The IRDA opened up the market in August 2000 with the invitation for application for registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the power to frame regulations under Section 114A of the Insurance Act, 1938 and has from 2000 onwards framed various regulations ranging from registration of companies for carrying on insurance business to protection of policyholders’ interests.
In December, 2000, the subsidiaries of the General Insurance Corporation of India were restructured as independent companies and at the same time GIC was converted into a national re-insurer. Parliament passed a bill de-linking the four subsidiaries from GIC in July, 2002.
Today there are 14 general insurance companies including the ECGC and Agriculture Insurance Corporation of India and 14 life insurance companies operating in the country.
The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together with banking services, insurance services add about 7% to the country’s GDP. A well-developed and evolved insurance sector is a boon for economic development as it provides long- term funds for infrastructure development at the same time strengthening the risk taking ability of the country.
1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business. 1928: The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and non-life insurance businesses. 1938: Earlier legislation consolidated and amended by the Insurance Act with the objective of protecting the interests of the insuring public. 1956: 245 Indian and foreign insurers along with provident societies were taken over by the central government and nationalized. LIC was formed by an Act of Parliament- LIC Act 1956- with a capital contribution of Rs. 5 crore from the Government of India.
In 1993, Malhotra Committee- headed by former Finance Secretary and RBI Governor R.N. Malhotra- was formed to evaluate the Indian insurance industry and recommend its future direction. The Malhotra committee was set up with the objective of complementing the reforms initiated in the financial sector. The reforms were aimed at creating a more efficient and competitive financial system suitable for the requirements of the economy keeping in mind the structural changes currently underway and recognizing that insurance is an important part of the overall financial system where it was necessary to address the need for similar reforms. In 1994, the committee submitted the report and some of the key recommendations included:
Government should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as independent corporations. All the insurance companies should be given greater freedom to operate.
Private Companies with a minimum paid up capital of Rs.1bn should be allowed to enter the sector. No Company should deal in both Life and General Insurance through a single entity. Foreign companies may be allowed to enter the industry in collaboration with the domestic companies. Postal Life Insurance should be allowed to operate in the rural market. Only one State Level Life Insurance Company should be allowed to operate in each state.
The Insurance Act should be changed. An Insurance Regulatory body should be set up. Controller of Insurance- a part of the Finance Ministry- should be made independent
Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%. GIC and its subsidiaries are not to hold more than 5% in any company (there current holdings to be brought down to this level over a period of time)
LIC should pay interest on delays in payments beyond 30 days. Insurance companies must be encouraged to set up unit linked pension plans. Computerization of operations and updating of technology to be carried out in the insurance industry
The committee emphasized that in order to improve the customer services and increase the coverage of insurance policies, industry should be opened up to competition. But at the same time, the committee felt the need to exercise caution as any failure on the part of new players could ruin the public confidence in the industry.
INSURANCE REGULATORY DEVELOPMENT AUTHORITY
The opening up of the sector has been long standing and with the passing of The Insurance Regulatory and Development Authority – IRDA bill a significant step has been taken.
IRDA is formed as an authority to protest the interests of holders of insurance policies, to regulate promote, and ensure orderly growth of insurance industry and for matters connected therewith or incidental thereto. With the Insurance Regulatory and Development Act, the focus shifted to the following:
•The Insurance Regulatory and Development Authority (IRDA) should give priority to health insurance while issuing certificates of registration:
•Policyholders funds will be invested in the social sector and infrastructure. The percentage may be specified by the IRDA and such regulations will apply to all insurers opening in the country. •Insurers will be expected to undertake a certain percentage of business in the rural or social sector and provide policies to persons residing in rural areas, workers in the unorganized and informal economically basic;
•In case of the insurers fail to meet the social sector obligation a fine of Rs. 2.5 mn would be imposed the first time. Subsequent failures would result in cancellation of licenses. ]
POWERS & FUNCTIONS OF IRDA :
•issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration;
•protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance;
•specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents
•specifying the code of conduct for surveyors and loss assessors;
•promoting efficiency in the conduct of insurance business;
•promoting and regulating professional organisations connected with the insurance and re-insurance business;
•levying fees and other charges for carrying out the purposes of this Act;
•calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organisations connected with the insurance business;
•control and regulation of the rates, advantages, terms and conditions that may be offered by insurers in respect of general insurance business not so controlled and regulated by the Tariff Advisory Committee under section 64U of the Insurance Act, 1938 (4 of 1938);
•specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries;
•regulating investment of funds by insurance companies;
•regulating maintenance of margin of solvency;
•adjudication of disputes between insurers and intermediaries or insurance intermediaries;
•supervising the functioning of the Tariff Advisory Committee;
•specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organisations referred to in clause (f);
•specifying the percentage of life insurance business and general insurance business to be undertaken by the insurer in the rural or social sector; and
•exercising such other powers as may be prescribed
PROTECTION OF THE INTEREST OF POLICY HOLDERS:
IRDA has the responsibility of protecting the interest of insurance policyholders. Towards achieving this objective, the Authority has taken the following steps: •IRDA has notified Protection of Policyholders Interest Regulations 2001 to provide for: policy proposal documents in easily understandable language; claims procedure in both life and non-life; setting up of grievance redressal machinery; speedy settlement of claims; and policyholders’ servicing. The Regulation also provides for payment of interest by insurers for the delay in settlement of claim. •The insurers are required to maintain solvency margins so that they are in a position to meet their obligations towards policyholders with regard to payment of claims. •It is obligatory on the part of the insurance companies to disclose clearly the benefits, terms and conditions under the policy. The advertisements issued by the insurers should not mislead the insuring public. •The Authority takes up with the insurers any complaint received from the policyholders in connection with services provided by them under the insurance contract.
PLAYERS THAT IRDA GOVERNS
The table below is the list of the likely players in the Indian insurance sector, Apart from Reliance, who has applied for both Life and Non – life insurance license, all have gone in with a foreign partner. The idea is that the foreign partner will bring in expertise of global nature with products that are India specific. And the Indian partner will bring in the distribution network and more significantly the required 74% of the equity. IRDA has so far granted registration to 12 private life insurance companies and 9 general insurance companies. If the existing public sector insurance companies are included, there are currently 13 insurance companies in the life side and 13 companies operating in general insurance business. General Insurance Corporation has been approved as the "Indian reinsurer" for underwriting only reinsurance business. Particulars of the life insurance companies and general insurance companies including their web address is given below:
1. Life Insurance Corporation of Indiawww.licindia.com
2. Allianz Bajaj Life Insurance Company Limitedwww.allianzbajaj.co.in 3. Birla Sun-Life Insurance Company Limitedwww.birlasunlife.com 4. HDFC Standard Life Insurance Co. Limitedwww.hdfcinsurance.com
5. ICICI Prudential Life Insurance Co. Limitedwww.iciciprulife.com
6. ING Vysya Life Insurance Company Limitedwww.ingvysayalife.com
7. Max New York Life Insurance Co. Limitedwww.maxnewyorklife.com
8. MetLife Insurance Company Limitedwww.metlife.com
9. Om Kotak Mahindra Life Insurance Co. Ltd.www.omkotakmahnidra.com
10. SBI Life Insurance Company Limitedwww.sbilife.co.in
11. TATA AIG Life Insurance Company Limitedwww.tata-aig.com
12. AMP Sanmar Assurance Company Limitedwww.ampsanmar.com
13. Dabur CGU Life Insurance Co. Pvt. Limitedwww.avivaindia.com
1. National Insurance Company Limited www.nationalinsuranceindia.com
2. New India Assurance Company Limitedwww.niacl.com
3. Oriental Insurance Company Limitedwww.orientalinsurance.nic.in
4. United India Insurance Company Limitedwww.uiic.co.in
5. Bajaj Allianz General Insurance Co. Limitedwww.bajajallianz.co.in
6. ICICI Lombard General Insurance Co. Ltd.www.icicilombard.com
7. IFFCO-Tokio General Insurance Co. Ltd.www.itgi.co.in
8. Reliance General Insurance Co. Limitedwww.ril.com
9. Royal Sundaram Alliance Insurance Co. Ltd.www.royalsun.com
10. TATA AIG General Insurance Co. Limitedwww.tata-aig.com
11. Cholamandalam General Insurance Co. Ltd.www.cholainsurance.com
12. Export Credit Guarantee Corporationwww.ecgcindia.com
13. HDFC Chubb General Insurance Co. Ltd.
1. General Insurance Corporation of Indiawww.gicindia.com
LIFE INSURANCE : DEFINITION
DEFINITION IN FINANCIAL SENSE
Insurance is a financial arrangement, which redistributes the costs of unexpected losses among the members of the pool. The pool is a collection of people facing common risks. All members contribute a fixed amount towards a pool called premium. In exchange for the premium payment, theperson gets an assurance that a certain sum of money is to be paid to him onthe happening of the event insured against. The assurance is that his loss willbe made good. Thus, insurance involves the transfer of loss exposures to aninsurance pool and the redistribution of losses among the members of thepool.
DEFINITION IN LEGAL SENSE
Insurance can be defined as a contract between two parties by which one party undertakes to make good or indemnify any financial loss suffered by other party, in consideration of a sum of money, on the happening of a specified event e.g. fire, accident or death. We call the party agreeing to pay for the losses the insurer. We call the party whose loss makes the ‘insurer’ pay the claim the insured. We call the payment insured pays to the insurer the premium. We call the insurance contract a policy.
In the end we can sum up that insurance is a transfer of risk from the individual to the group and there is a sharing (pooling) of losses on some equitable basis such that fortuitous losses can be indemnified (paid).
Types of Insurance
The insurance can be divided from two angles:
•Business point of view
•Risk point of view.
Business Point of View
The insurance from business point of view can be categorised into:
Life Insurance is different from other insurance in the sense that the subject matter of insurance is life of human being. The insurer will pay the fixed amount ofinsurance at the death or at the expiry of certain period. At present, life insuranceenjoys maximum scope because each and every person requires the insurance.This insurance provides protection to the family at the premature death or gives adequate amount at the old age when earning capacities are reduced. Types of insurance plans offered in our country:
a.Whole life plans
b.Endowment assurance plans
c.Assurances for children
d.Family income policy
e.Life annuity Joint life assurance
g.Unit linked plan
h.Policy for maintenance of handicapped dependent
i.Endowment policies with health insurance benefits
The general insurance includes property insurance, liability insurance and otherforms of insurance. Fire and marine insurance comes under property insurance.Liability insurance includes motor, theft, fidelity and machine insurances to acertain extent. The strictest form of liability insurance is fidelity insurance whereby the insurer compensates the loss to the insured when he is under theliability of payment to the third party. Types of insurance policies available are:
- Health insurance
- Medi-claim policy
- Personal accident policy
- Group insurance policy
- Automobile insurance
- Worker’s compensation
- Liability insurance
- Aviation insurance
- Business insurance
- Fire insurance policy
- Travel insurance policy
The social insurance is to provide protection to the weaker sections of the society who are unable to pay the premium for adequate insurance. Pension plan,disability benefits, unemployment benefits, sickness insurance and industrial insurance are the various forms of social insurance.
Risk point of view
Insurance can be divided into :
•other forms of insurance.
Under the property insurance property of a person is insured against a certain specified risks. The risk may be fire or marine perils, theft of property or goods,damage to property at accident. Examples of this are:
- Home insurance
- Business insurance
- Commercial insurance
Marine insurance provides protection against loss of marine perils. The marine perils are collision with rock, or ship attacks by enemies, fire and capture by pirates etc. These perils cause damage, destruction or disappearance of the ship and cargo and non-payment of freight. So, marine insurance insures ship (Hull), cargo and freight. Types of policies are:
Fire insurance covers risks of fire. In the absence of fire insurance, the fire waste will increase not only to the individual but to the society as well. With the help of fire insurance, the losses, arising due to fire are compensated and the society is not losing much. The individual is protected from such losses and his property or business or industry will remain in the same position in which it was before the loss. The fire insurance does not protect only losses but it provides certain consequential losses also. Policies available in this insurance are:
•Consequential loss policy
The property, goods, machine, furniture, automobile, valuable goods etc., can be insured against the damage or destruction due to accident or disappearance due to theft. There are different forms of insurances for each type of the said property whereby not only property insurance exists but liability insurance and personal injuries are also insured. Miscellaneous insurance covers:
•Engineering and aviation risks
•Burglary and theft insurance
•All risks insurance
The general insurance also includes liability insurance whereby the insurer is liable to pay the damage of property or to compensate the loss of personal injury or death. The examples of this type of insurance are fidelity insurance, automobile insurance and machine insurance. Examples are:
•Third party insurance
Besides the property and liability insurances, there are certain other insurances, which are included under general insurance. The examples of such insures are export credit insurances, state employees insurance, etc. whereby the insurer guarantees to pay certain amount at the happening of certain events. Examples are:
PURPOSE AND NEED
Beside things mentioned by you, let’s discuss in detail the purpose and need of insurance. As we all know life is full of uncertainties and insurance is based on uncertainties and if there are no uncertainties about the occurrence of a disaster, the concept of insurance will cease to exist. If we all are able to predict the future dangers correctly then we can take a safeguard action to move out of the danger but problem is that we cannot predict death, disaster and danger. All individuals as well as their tangible and intangible assets are exposed to all types of unforeseen risks. Thus insurance is done against such possible contingencies to save the owner and his family from all sorts of sufferings by making good the losses of the unfortunate few, through the help of the fortunate many, who were exposed to the same risk, but saved from the misfortune.
As insurance is a system of sharing risk that seems to be too great to be borne by one individual we can list out the benefits derived by individual and society from the insurance.
Insurance restores people to their former financial position as if no loss had occurred. It helps them to remain financially secure without running into debt after a loss. It also helps business firms to carry on their normal business operations without interruption even after the loss occurs.
Reduces worry and fear
Insurance helps in reducing anxiety and fear before and after the loss occurs, as it is known that the insurance company will compensate the loss.
Makes available funds for investment
Investments are the base of an economic development and mostly these investments are the result of savings. An insurance company is a major instrument for the mobilisation of the savings of people, which are thereafter canalised into investment for economic growth. Insurance provides the continuity in trade and commerce, by covering the risks that could retard the economy and thereby indirectly helps the economy to grow.
Provides employment to a large number of people
Insurance industry offers regular full time employment to a large number of people in the country. Besides them a number of agents, professionals etc. are also engaged by the industry to render professional services.
Educates people about loss prevention
Insurance companies also engage themselves in educating people about loss prevention. In our country the GIC has created the loss prevention association of India to promote and propagate loss prevention.
Insurance enhances credit worthiness
Insurance policies are often offered as collateral security for credit as well.
Above all we derive social benefits when people with peaceful minds carry on their operations properly and in a better way. Thus insurance’s contribution to the economy as a whole is valuable as it avoids economic hardships to people.
FUNCTIONS OF INSURANCE
The functions of Insurance can be bifurcated into two parts: 1. Primary Functions
2. Secondary Functions
3. Other Functions
The primary functions of insurance include the following:
Provide Protection - The primary function of insurance is to provide protection against future risk, accidents and uncertainty. Insurance cannot check the happening of the risk, but can certainly provide for the losses of risk. Insurance is actually a protection against economic loss, by sharing risk with others.
Collective bearing of risk - Insurance is a device to share the financial loss of few among many others. Insurance is a mean by which few losses are shared among larger number of people. All the insured contribute the premiums towards a fund and out of which the persons exposed to a particular risk is paid.
Assessment of risk - Insurance determines the probable volume of risk by evaluating various factors that give rise to risk. Risk is the basis for determining the premium rate also
Provide Certainty - Insurance is a device, which helps to change from uncertainty to certainty. Insurance is device whereby the uncertain risks may be made more certain.
The secondary functions of insurance include the following:
Prevention of Losses - Insurance cautions individuals and businessmen to adopt suitable device to prevent unfortunate consequences of risk by observing safety instructions; installation of automatic sparkler or alarm systems, etc. Prevention of losses cause lesser payment to the assured by the insurer and this will encourage for more savings by way of premium. Reduced rate of premiums stimulate for more business and better protection to the insured.
Small capital to cover larger risks - Insurance relieves the businessmen from security investments, by paying small amount of premium against larger risks and uncertainty.
Contributes towards the development of larger industries - Insurance provides development opportunity to those larger industries having more risks in their setting up. Even the financial institutions may be prepared to give credit to sick industrial units which have insured their assets including plant and machinery.
The other functions of insurance include the following:
Means of savings and investment - Insurance serves as savings and investment, insurance is a compulsory way of savings and it restricts the unnecessary expenses by the insured's For the purpose of availing income-tax exemptions also, people invest in insurance.
Source of earning foreign exchange - Insurance is an international business. The country can earn foreign exchange by way of issue of marine insurance policies and various other ways.
Risk Free trade - Insurance promotes exports insurance, which makes the foreign trade risk free with the help of different types of policies under marine insurance cover.
INSURANCE PLAYERS IN INDIA
Non –Life Insurers
Bajaj Allianz General Insurance Company Limited
It is a joint venture between Bajaj Auto Limited and Allianz AG of Germany. The company registered on May 2, 2001 to conduct General Insurance business (including Health Insurance business) in India. The company has an authorised and paid up capital of Rs.110 Crores and has a network of 31 offices across the country.
ICICI Lombard General Insurance Company Limited
It is a joint venture between ICICI Bank Limited India’s second largest bank and Lombard Canada Limited, one of the oldest property and casualty insurance companies in Canada. ICICI Lombard offers a wide range of retail and corporate general insurance customised products. The company has over 100 branches across the country.
IFFCO-TOKIO General Insurance Company Limited
It is a joint venture between IFFCO and The Tokio Marine and Fire Insurance Company Limited, Japan Krishak Bharati Cooperative Limited (KRIBHCO), and Indian Potash contributing 49 percent, 26 percent and 5 percent respectively to its Rs.100 Crores capital. After getting the licence the company started operations and is a leading private General Insurance Company in India in launching innovative insurance cover for farmers called the “Sankat Haran Policy” It is operating from 20 cities in India.
National Insurance Company Limited
It was incorporated in 1906 to carry out general insurance business and nationalised in 1972.In the same year, 22 foreign and 11 Indian Insurance Companies were amalgamated with National Insurance Company Limited, as a subsidiary company of General Insurance Corporation of India. In 2002 with the passage of Insurance amendment Bill (2002), National Insurance Company has been delinked from GIC and has been functioning as an independent company. Apart from domestic insurance business the company also undertakes reinsurance and foreign operations2.
New India Assurance Company Limited
The New India Assurance Company was incorporated on July 23, 1919 and commenced business from October 14, 1919. In 1972 the Government of India took over the management of the company along with all other non-life insurers in the country. New India Assurance was subsequently reconstituted taking over 23 companies. In2002, with the passage of Insurance amendment Bill, New India Assurance Company Limited has been delinked from GIC and has been functioning as an independent company.
Oriental Insurance Company Limited
The Oriental Insurance Company Limited is a public sector company and is one of the four subsidiary companies of the General Insurance Corporation of India. In 1956, Oriental became a subsidiary of the Life Insurance Corporation of India. On May 13, 1971 Government of India took over the management of all general insurance companies in India and nationalised the Oriental Fire and General Insurance Company under the General Insurance Corporation of India as one of the four subsidiaries. In 2002, with the passage of Insurance amendment Bill, the Oriental Insurance Company Limited has been delinked from GIC and has been functioning as an independent company.
United India Insurance Company Limited
United India Insurance is one of the four subsidiaries of the General Insurance Company carrying on general insurance business in India. In 2002, with the passage of Insurance amendment Bill (2002), United India Insurance has been delinked from GIC and has been functioning as an independent company.
Tata AIG General Insurance Company Limited
Tata AIG General Insurance Company Ltd. And Tata AIG Life Insurance Company Ltd. (collectively “Tata AIG”) are joint venture companies between the Tata group and American International Group Inc. (AIG), the leading U.S. based international insurance and financial services organisation. It has a capital of Rs.125 Crores out of which 74 percent has been brought in by Tata Sons and the remaining 26 percent by American partner. Tata AIG General Insurance Company Limited claims to be the first Indian insurance company to offer a comprehensive policy to cover various risks in the IT sector.
Royal Sundaram General Insurance Company Limited
The joint venture between Royal and Sun Alliance Insurance and Sundaram Finance Limited started its operation from March 2001. Royal and Sun Alliance is one of the world’s leading international insurance companies. The Sun was established in 1710 and is the oldest insurance company in existence still trading under its original name. The Alliance was founded in 1824 and the Royal in 1845.
Cholamandalam General Insurance Company Limited
It is promoted by Chennai based Murugappa Group. The company is founded with Rs.105 Crores out of which 75 percent is being held by Tube Investment, a Murugappa group company. While Cholamandalam investment and Finance Company Limited holds 15 percent stake and the rest is by other privately held Murugappa companies with 5 percent stake each.
Reliance General Insurance Company Limited
Reliance group has announced its plans to enter the Indian insurance sector both in the life and general insurance businesses. Reliance Industries plans to bring in around Rs.300 Crores into its insurance venture through its financial arm Reliance Capital Limited. The two companies will have an initial authorised capital of Rs.200 Crores each. This is the first Indian company without a foreign tie-up.
Export Credit Guarantee Corporation of India Limited
It was established in the year 1957 by the Government of India to strengthen the export promotion drive by covering the risk of exporting on credit. Being an export promotion organisation, it functions under the administrative control of the Ministry of Commerce, Government of India. It is the fifth largest credit insurer of the world in terms of coverage of national exports. The paid –up capital of the company is Rs.390 Crores.
HDFC Chubb General Insurance Limited
HDFC, India’s premier financial services company and Chubb Corporation, leading global non-life insurer, entered into a joint venture agreement for non-life insurance in 2002. HDFC holds 74 percent and Chubb 26 percent in the joint venture company, HDFC Chubb General Insurance Limited with initial capital of Rs.100 Crores.
Alliance Bajaj Life Insurance Company Limited
Alliance Bajaj Life Insurance Company Limited is a joint venture between Alliance AG and Bajaj Auto Limited. The company was incorporated on March 12, 2001. The company received the IRDA certificate of registration on August 3, 2001 to conduct Life Insurance business in India.
Birla Sun Life Insurance Company Limited
It is a joint venture between Birla Group and Sun Life Corporation of U.S. The products of Birla Sun Life Insurance Company (BSLI) are distributed through a fully owned subsidiary – BSDL Insurance Advisory Services Limited (BSDL IAS) BSDL. The company claims to have unique products, presenting a powerful combination of returns, liquidity, safety, tax benefits, transparency and convenience.
HDFC Standard Life Insurance Company Limited
HDFC and Standard Life was the first joint venture to enter the life insurance market, in January 1995. In October 1998, the joint venture agreement was renewed and Standard Life purchased 2 percent of Infrastructure Development Finance Company Limited (IDFC). The company as such, was incorporated on August 14, 2000 under the name of HDFC Standard Life Insurance Company Limited. HDFC are the main shareholders in HDFC Standard Life, with 81.4 percent, while Standard Life owns 18.6 percent. HDFC and Standard Life have a long and close relationship built upon shared values and trust.
ICICI Prudential Life Insurance Company Limited
The company was incorporated on July 20, 2000, with an authorised capital of Rs.230 Crores (paid up Rs.190 Crores). It is a joint venture of ICICI (74%) and Prudential plc U.K (26%). The company is on the top of the list of competitors to LIC. The company was granted certificate of incorporation on 26-11-2000 and it started its operations on 19-12-2000.
Life Insurance Corporation of India Limited
LIC was established in 1956 and is the dominant leader in life insurance in India. It has 7 zonal offices, over 100 divisional offices and 204 branches in India with over 6.50 lakhs agents.
Tata AIG Life Insurance Company Limited
It is capitalised at Rs.185 Crores of which 74 percent has been brought in by Tata Sons and the American partner brings in the remaining 26 percent. American Insurance Group (AIG) is the leading U.S. based international insurance and financial services organisation and the largest underwriter of commercial and industrial insurance in the United States. AIG’s global businesses also include financial services and asset management. Including aircraft leasing, financial products, trading and market making, consumer finance, institutional, retail and direct investment fund asset management etc.
SBI Life Insurance Company Limited
India’s largest bank SBI and Cardiff S.A. a leading insurer in France have firmed SBI Life. It is a 74: 24 venture; with Cardiff the foreign partner contributing 24 percent paid capital of Rs.250 Crores. SBI plans to market the insurance products through select branches of SBI and its seven associate banks.
OM Kotak Mahindra Insurance Company Limited
The joint venture OM Kotak Mahindra Life Insurance started off with an initial net worth of Rs.150 Crores, with 74: 26 stake between KMFL and OM. Kotak Mahindra is one of India’s premier financial services groups, with a range of over two dozen highly specialised products and services. Starting as a one-product company in the mid 80’s, they have evolved into a full service financial conglomerate. Old Mutual pic. Is a leading financial services provider in the world, providing a broad range of financial services in the area of insurance, asset management and banking. It is a leading life insurer in South Africa, with more than 30 percent market share. The partnership with Old Mutual plc. provides the Kotak Mahindra group with an international perspective and expertise in the life insurance business.
Max New York Life Insurance Company Limited
It is a partnership between Max India Limited, one of India’s leading multi business corporations and New York Life, a Fortune 100 company. The paid up capital of the joint venture is Rs.250 Crores. Max India Ltd. is building businesses in the emerging knowledge based areas of Healthcare, Financial Services and Information Technology.
ING Vyasya Life Insurance Company Ltd.
It is a joint venture between ING, Vyasya Bank, one of India’s leading private sector banks and GMR group. As per the joint venture agreement, Vyasya Bank holds 49 percent stake, ING 26 percent, and the GMR Group would hold 25 percent. The paid up capital of the joint venture is Rs.110 Crores. Vyasya Bank has a very high degree of retail focus with good customer service. ING Group, with an asset base of over Rs.28, 42,000 Crores is a global financial institution of Dutch origin, which is active in the field of banking, insurance and asset management in more than 60 countries.
Aviva Life Insurance Company Ltd.
It is a joint venture between Dabur India and CGU, a wholly owned subsidiary of Aviva Pic, is capitalised at Rs.110 Crores. Aviva Pic is the largest life and general insurance group of UK and the world’s largest insurer with worldwide premium income and retail investment sales of £28 billion. Aviva Life has tied up with ABN Amro, Canara Bank, Laxmi Vilas Bank and American Express for distribution of its products.
AMP Sanmar Assurance Company Ltd.
It is a joint venture between AMP having a stake of 26 percent and the Sanmar Group holding 74 percent. The Sanmar group is one of the largest industrial groups in South India. AMP Limited is one of the world’s leading financial services businesses.
PRESENT STATE OF INSURANCE INDUSTRY
The insurance industry in India can be discussed in two ways – its historical background and its present state. Insurance in India is nothing new. It had its origins in the early 19thcentury with the arrival of British enterprise in India. Insurance, particularly non-life remained an urban oriented activity of the Insurance companies operating through their agencies.
Life Insurance Corporation of India -The insurance sector in India dates back to 1818 when first insurance company, The Oriental Life Insurance Company, was established, at Calcutta. Thereafter, Bombay Life Assurance Company in 1823 and Madras Equitable Life Assurance Society in 1829 were established. In 1912, the Indian Life Assurance Companies Act was enacted as the first statute to regulate the life insurance business. In 1928, the Indian Insurance Companies Act was enacted to enable the Government to collect statistical information about both life and non-life insurance businesses. The Insurance Act was subsequently reviewed and a comprehensive legislation was enacted called the Insurance Act, 1938. The nationalisation of life insurance business took place in 1956 when 245 Indian and foreign insurance and provident societies were first amalgamated and then nationalised. The Life Insurance Corporation of India (LIC) came into existence by an Act of Parliament, viz. LIC act, 1956, with a capital contribution of Rs.5 Crores from the Government of India General Insurance Corporation Of India - The General insurance business in India started with the establishment of Triton Insurance Company Limited in 1850 at Calcutta .In 1907, the first company, The Mercantile Insurance Ltd. Was set up to transact all classes of general insurance business. General Insurance Council, a wing of the Insurance Association of India in 1957, framed a code of conduct for ensuring fair conduct and sound business practices. In 1968 the Insurance Act was amended to regulate investments and to set minimum solvency margins. In the same year the Tariff Advisory Committee was also set up. In 1972, The General Insurance Business (Nationalisation) Act was passed to nationalise the general insurance business in India with effect from 1st January 1973. For these 107 insurers was amalgamated and grouped into four company’s viz., the National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. And the United India Insurance Company Ltd. General Insurance Corporation of India was incorporated as a company.
In new economic policies formulated since 1991, globalisation, privatisation and liberalisation have become new buzzwords. Under new economic policies, many economic and financial reforms took place. Like liberalising licensing policy, attracting FDI, allowing foreign equity in public sector undertakings. The financial reforms restructured banking sector by allowing entry of new private and foreign banks. They also allowed private sector and commercial banks in mutual funds investment business, rationalising the EXIM policy and so on.
INSURANCE SECTOR REFORMS
After the nationalisation of the life insurance industry in 1956 and the general insurance industry in 1972, the insurance industry confined only to the operations of LIC, GIC and its four subsidiaries viz. The National Insurance Company Limited, New India Assurance Company Limited, Oriental Fire and General Insurance Company Limited and United India Fire and General Insurance Company Limited. Over the years this state monopoly resulted in complacency, use of outdated technologies, inefficient and insufficient customer services and non-coverage of the potential market. Recognising this, the Government set-up a high-powered committee headed by Mr. R. N. Malhotra. Malhotra Committee Purpose In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor, was formed to evaluate the Indian Insurance Industry and recommend its future direction. The committee was set up with an objective of complementing the reforms in the Indian Financial sector. The reforms were aimed at “creating a more efficient and competitive financial system suitable for the equirements of the economy keeping in mind the structural changes currently underway and recognising that insurance is an important part of the overall financial system where it was necessary to address the need for similar reforms.” Besides this, the Malhotra committee was asked to make recommendations for changing the structure of insurance industry, to make specific suggestions about how to improve the functioning of LIC and GIC and to recommend on regulation and supervision of the insurance sector in India. Besides this, the committee was asked to assess the strengths and weaknesses of the existing insurance industry and to make recommendations for changes in its functioning and the general policy framework keeping in mind the reforms under way in other parts of the financial sector. Recommendations In 1994, the committee submitted the report and gave the following ecommendations:
Government stake in the insurance companies to be brought down to 50%
Government should take over the holdings of GIC and its subsidiaries can act as independent corporations
All the insurance companies should be given greater freedom to operate.
•Entry of private sector companies within well defined parameters of nature of business.
•Private Companies with a minimum paid up capital of Rs.1 billion shuld be alowed to enter the industry
•No Company should deal in both Life and General Insurance through a single entity
•Selective entry of foreign insurance companies preferably through joint ventures.
•Postal Life Insurance should be allowed to operate in the rural market
•Only one State Level Life Insurance Company should be allowed to
•Controller of Insurance should be made independent
•Establishment of a strong and effective Insurance Regulatory Authority (IRA) as a statutory autonomous board.
•Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%
•GIC and its subsidiaries are not to hold more than 5% in any company
•LIC should pay interest on delays in payments beyond 30 days
•Insurance companies must be encouraged to set up unit linked pension plans
•Computerisation of operations and updating of technology to be carried out in the insurance industry
Overall, the committee strongly felt that in order to improve the customer services and increase the coverage of the insurance industry should be opened up to competition. But at the same time, the committee felt the need to exercise caution as any failure on the part of new players could ruin the public confidence in the industry. The recommendations of the committee were discussed at different forums. The recommendations to set up an autonomous IRA found wide support. Since enacting legislation for creating the statutory IRA was to take time, the then government constituted an interim IRA, pending the enactment of comprehensive legislation.
It was on the basis of this report that the then Finance Minister P. Chidambaram proposed the opening up of insurance to the private sector, including multinational companies.
The IRDA Bill was drafted keeping the Malhotra Committee
recommendations in view and hence the government has ruled out privatisation of public sector insurance companies, LIC and GIC. The bill did not provide for any dilution of 100 percent government equity in the two premier companies.
The IRDA bill sought to give a statutory status to the interim Insurance Regulatory Authority and amend the 1938 Insurance Act, the 1956 Life Insurance Corporation Act and the 1972 General Insurance Business (Nationalisation) Act to open up the sector. It provides for a ninemember regulatory body with statutory powers. The bill also fixed minimum capital requirement for life and general insurance at Rs.100 Crores and for reinsurance firms at Rs.200 Crores. The Malhotra Committee Report justified the entry of foreign insurance companies by arguing that if it is permitted, it should be done on selective basis peferably through joint venture with Indian partner. In 1999, the bill was finally passed and IRDA was formed to regulate and promote insurance business in India. The IRDA Act bestows the authority with powers to frame varies regulations, issue licenses, set capital requirements and solvency margins, prepare investment norms and inspect the books of private insurers independent of the government.
LIBERALISATION OF INSURANCE
Liberalisation of Insurance involves transformation of the industry from a Government monopoly to a competitive environment. Free markets allow for better resource allocation and creation of wealth and prosperity of people and the country. It enables development of health care, education and infrastructure of the country. In a liberalised insurance market, consumers are able to choose from different insurance providers having a wide range of products. Isurance market is one in which the market determines who should be allowed to sell insurance, what, how and the prices at which these insurance products should be sold. The issues like market access and equality of competitive opportunity and national treatment will decide who will be allowed to sell insurance. Second and fourth items commonly deal with issues such as product, price and market conduct regulation.
There are certain pre-conditions to make liberalisation of
Sound competition law
Efficient and reliable regulation
Consistency and impartiality between competitors
Optimum quantum of regulation
Efficient disclose and dissemination of information to the society.
Insurance markets in India possess certain imperfections justifying the need for competition as well as regulation.
Private and Foreign entrants in the Insurance Industry made others difficult to retain their market. Higher customer aspirations lead to new expectations and compel him to move towards the insurer who provides him the best service in time. It becomes less viable for them even to maintain the functional networks or competitive standards and services. To survive in the Industry they analyse, providing essential services and introducing novel products. Thereby they become niche specialists, who provide the right service to the right person in right time.
In 2005, the private players in the life insurance business have increased their market share to 23.93 per cent. Among them ICICI prudential is ranked first in capturing the market followed by Bajaj Allianz and HDFC Standard. In the General Insurance sector the private players have captured 27.35 per cent. Among them ICICI-Lombard is ranked first, followed by Bajaj Allianz and IFFCO-Tokio.
The healthy competition in the sector enabled the State owned insurers of our mother country to reduce its market share to 76.07 per cent and 72.65 percent in life and non-life business respectively. Moreover, private insurers have planned to increase their market share in the next five years. The public insurers have to enrich its approach to withhold its share.
Insurers are the earlier adopters of technology. Because of the Information revolution, customers are free to choose from a wide range of new and innovative products. The Insurance companies are utilizing the Information technology applications for better customer service, cost reduction, new product design and development and many more.
New technology gives the policyholders / insureds better, wider and faster access to products and services. The impact of Information Technology in Insurance business is being felt at an accelerating pace. In the initial years IT was used more to execute back office functions like maintenance of accounts, reconciling broker accounts, client processing etc. With the advent of “database concepts”, these functions are better integrated in an administrative efficiency. The real evolution is however emerged out of Internet boom. The Internet has provided brand new distribution channels to the Insurers. The technology has enabled the Insurer to innovate new products, provide better customer service and deeper and wider insurance coverage to them. At present, Insurance companies are giving customers a distinct claim id to track claims on-line, entertaining on-line enrollment, eligibility review, financial reporting, billing and electronic fund transfer to its benefit clan customers.
Insurers are continuously innovating new products based on forward-looking models. They have developed new products addressing the new challenges in society and products to address the hazards from new environmental issues. Companies will need to constantly innovate in terms of product development to meet ever-changing consumer needs. Understanding the customer better will enable Insurance companies to design appropriate products, determine price correctly and to increase profitability. Since a single policy cannot meet all the Insurance objectives, one should have a portfolio of policies covering all the needs. Product development is made possible by integrating actuarial, rating, claims and illustration systems. At present, the Life Insurers are concentrating on the pension schemes and the Non-Life Insurers on many innovative schemes of various realms and thereby enriching their market share. Moreover, with increased commoditization of insurance products, brand building is going to play a vital role.
While companies have been successful in product innovation, most of them are still grapping with right mix of Distribution Channels for capturing maximum market share to build brand equity, building strong and effective customer relationships and cost effective customer service. While the traditional channel of tied up advisors or agents would be the chief distribution channel, insurer should innovate and find new methods of delivering the products to customers. Corporate agency, brokerage, Bancassurance, e-insurance, cooperative societies and panchayats are some of the channels, which can be tapped by the insurers to reach the appropriate market segments. Now days, the urban masses are tapped with the new techniques provided by Information Technology through Internet. Rural masses are attracted by the consultative approach adopted by the Insurers. Moreover, they attract the customers through telephone and mobile also.
Customer Education and Services
Insurance is a unique service industry. The key industry drivers are related to life style issues in terms of perceiving insurance as a savings instrument rather than for risk cover, need based selling, quality of service and customers awareness. In the present competitive scenario, a key differentiator is the professional customer service in terms of quality of advice on product choice along with policy servicing. Servicing focus is on enhancing the customer’s experience and maximizing his convenience. This calls the effective CRM system, which eventually creates sustainable competitive advantage and enables to build long lasting relationship
MARKET SHARES OF LIFE INSURANCE COMPANIES DURING FINANCIAL YEAR 2008
Max New York2.4%
Bharti Axa Life0.2%
CHALLENGES OF INSURANCE SECTOR IN INDIA
Challenges are mounting for insurers. Increased pressure for profitability translates into a hard look at cost reduction and top-line revenue growth. Profitability is linked to the ability to accurately assess risk and manage customer relationships over time to achieve financial success. Insurers recognize that in order to respond to these pressures, they need to eliminate inefficient back-office processing functions. Another priority is improving the quality of service to the distribution channel. As agents have more choice in choosing carriers, they are looking to align with an organization that makes it easy to conduct business, pays commission on a timely basis and reduces the time to process business.
Growing need for insurance
In India, insurance is traditionally considered an instrument of savings. The potential of insurance products as risk-compensators has always been underemphasised. Consider these findings of an LIC survey: as many as 40 per cent of insurance buyers consider insurance products avenues for compulsory savings. Only 26 per cent see insurance as old age pension while just about 18 per cent consider insurance a provision for risks and uncertainties. This trend might be in for a change soon. Says Abhaya Jain, country chief of Aetna, "Customers prefer to have more options. They want not just basic insurance products, but investment-based insurance products, pension products and health care products as well". Factors such as increasing life expectancy, disintegration of the traditional joint-family system, and the rising cost of health care are bound to make the market clamour for a variety of insurance products with need-based features. Life expectancy, which was just 32 years during the Fifties, moved up to an average of 61 years during 1996-97. The result: a long retired life. Naturally, there is an increasing need for pension-driven insurance products.
Can the Indian insurance industry offer a wide array of insurance products? That would primarily depend on the growth of the industry. The insurance industry has been growing at 20 per cent, but it lags far behind its global counterparts when it comes to insurance penetration. Not just that, most Indian insurance products are not customer-friendly. Says an industry analyst: "Insurance companies create products and go out to find customers. They do not create products that the market wants." There are other hurdles as well. Insurance awareness is low, term insurance plans are not promoted, unit-linked assurances are not available, insurance covers are expensive, returns from insurance products are low and there is a dearth of innovative and buyer-friendly insurance products. The consequences are there for all to see. Insurance penetration is low, insurance products are not designed to suit the needs of the market, insurance companies are not responsive enough to insurance-buyers' needs, the marketing network is weak, turnover of agents is very high, and training of agents is woefully inadequate. The tragedy is that development officers are myopic and are more interested in incentives than in training agents, which could yield tangible results in the long run.
In fact, these hurdles are opportunities for the new players. Potential for growth is huge in the Indian insurance industry. Consider the following statistics: the middle-income segment of the Indian population, which is a goldmine for prospective insurance sellers, is 312 million strong. Against this, LIC services less than 100 million policies. Only 65 million Indians have been introduced to insurance. All these figures work out to an average of 1.5 policies per person, which is a penetration of just six per cent. Says R N Jha, a management consultant and a former executive director of LIC, in his book Insurance in India: "Insurance coverage has been extended only to about 25 per cent of the insurable population in 40 years." An indicator of low insurance penetration is here: insurance premia as a percentage of domestic savings is low in India. Currently, LIC and GIC collect just about 8.5 per cent of the domestic savings through selling insurance products. Researchers in the Pune-based National Insurance Academy have established that only 9 per cent of the live stock in India is insured and only 2 per cent of agricultural pumps are insured. Sadly, most general insurance transactions are generated by banks and financial institutions, which have a lien on assets of their borrowers. The story of motor insurance is no different. Only about 60 per cent of motor vehicles and only 46 per cent of two-wheelers are insured. All these are sure indicators of the untapped potential in the Indian insurance industry. The huge rural segment is another instance of untapped potential. Rural India's contribution is just about 54.7 per cent of total LIC policies and 47 per cent of LIC's total sum assured during 1998-99. This when the rural population constitutes 74.3 per cent of the country's population. Says J Rajagopal, managing director of KPMG India: "The reason why LIC prefers the urban segment is this: cost of procuring rural business is high."
There are a host of factors that have caused the insurance potential to remain untapped. High insurance premia is one of them. Indian insurance companies are too slow in revising their premia. Currently, LIC premia are determined by macro inputs related to the years between 1991 and 1996. The last time LIC revised its premia, was after a gap of 12 years. Ditto for general insurance. There is no proper research on claims and thus premia are not scientifically determined. Despite high premia, general insurance companies struggle to make profits. During 1996-97, the Indian general insurance companies paid 76 per cent of premia collected as claims. Management expenses accounted for as much as 28 per cent of the premia collections. Five per cent was set aside for unexpired risks reserve. That adds up to 109 per cent, which means an underwriting loss of Rs 6.28 billion. Consider the example of GIC. It is making profits in fire and marine insurance and incurring losses in motor insurance. This means there is cross-subsidisation: GIC is charging lower premia for motor insurance and charging higher premia for fire and marine insurance. Motor insurance premia was revised upwards only during 1997, but the cross-subsidy still continues. However, there are signs to indicate that this is changing. LIC has already taken the initiative by revising its premia downwards. LIC reduced premia for its without-profit plans between one and 33 per cent from May 1998. For endowment plans, premia reduction was between 22 per cent and 38 per cent. For whole life plans, premia reduction was between 23 per cent and 26 per cent.
Low investment yield
Inefficient asset management and low investment yield are also responsible for the high premia charged by Indian insurance companies. On an average LIC could generate a yield of just 12.37 per cent on its investments during 1997-98. During 1998-99, the figure was still lower at 11.96 per cent. Investment restrictions have been responsible for low yields. LIC has to invest not less than 20 per cent of its life fund in central government securities, a minimum of 5 per cent in the National Housing Bank, not less than 25 per cent in state government securities including government-guaranteed marketable securities, and a minimum of 25 per cent in the social sector. The remaining 25 per cent can be invested in private sector and in loans to policyholders. GIC has its own restrictions on investments. It has to invest a minimum of 25 per cent in central government securities, a minimum of 10 per cent in state government and PSU securities, a minimum of 35 per cent in loans to state governments, HUDCO and DDA, for housing projects and the remaining 30 per cent can be invested in equities, term loans and debentures. No doubt, investment restrictions are there. But, LIC and GIC can enhance investment yields within the ambit of these restrictions by being more proactive in managing their investments. What they do is invest and then sit back. They do not trade in the securities they have invested in. Poor customer service
Most agents and development officers are interested only in procuring new business. Servicing existing customers satisfactorily has not been a priority for them. Reason: incentives are based on new business generation and not on satisfactory servicing of existing customers. Moreover, LIC and GIC have no tied agents. Even existing agents are not buyer-friendly. They are always desperate to fulfill their quota of business and have little time to explain policy features to prospective customers. Little surprise that more than 10 per cent of LIC policies are surrendered or get lapsed every year. There is no market research worth the name and computerisation is woefully inadequate.
A note of discord
Opening up the Indian insurance industry promises a drop in premia, improved service, deeper penetration of insurance, and lower administrative overheads. Not everyone is convinced, however. Some influential politicians, bureaucrats, and labour unions are crying foul over the entry of private sector players. The trade unions are raising the spectre of loss of jobs, and politicians are playing to that gallery. One argument against insurance sector reforms is that the new breed of private sector players might not pay attention to the fund-starved social sector. These fears are being fuelled by the speculation that insurance profits might be taken out of the country and would not be available for reinvestment in the Indian insurance industry.
FUTURE OF INSURANCE INDUSTRY OF INDIA
The Indian insurance industry has traveled a long way ever since businesses were regulated tightly & concentrated by few insurers of the public sector. Ever since the IRDA (Insurance Regulatory and Development Authority) Act came into force in 1999, India gave freedom to public sector insurance industry, making it an immensely competitive industry.
The insurance industry lost its exclusivity. The launch of new developments in the insurance industry saw many new international insurers entering the market. It also gave way to propagation of innovative goods & channels for distribution & the supervisory values rising.
Indian per capita revenue is likely to grow up to more than 6% in coming 10 years & with developing awareness, the Indian insurance rate is estimated to rise at a striking rate in India.
Till recently, only 20% of the Indian population is covered by different schemes of life insurance. It is also seen that the healthcare penetration rate as well as schemes of non-life insurance in Indian insurance market are well under the worldwide levels. These aspects show vast potential of the Indian insurance industry.
Smart marketing, new products & persistent circulation have enabled hatchling private insurance companies to approach Indian consumers much sooner than expected. People of India, who had always seen life insurance as a tax saving tool nowadays are unexpectedly moving towards the private insurance agencies & snapping up innovative products which are on offer.
An overall growth has taken place in the Indian insurance market. All this is becoming possible by large amounts of advertising campaigns being made by insurance players. The expansion scope is considered to be almost unlimited as most players are focusing on big towns and cities - excluding Life Insurance Corporation (LIC) where attempts are being made to tap rural markets too.
Areas of Future Growth
The traditional life insurance business for the LIC has been a little more than a savings policy. Term life (where the insurance company pays a predetermined amount if the policyholder dies within a given time but it pays nothing if the policyholder does not die) has accounted for less than 2% of the insurance premium of the LIC (Mitra and Nayak, 2001). For the new life insurance companies, term life policies would be the main line of business.
Health insurance expenditure in India is roughly 6% of GDP, much higher than most other countries with the same level of economic development. Of that, 4.7% is private and the rest is public. What is even more striking is that 4.5% are out of pocket expenditure (Berman, 1996). There has been an almost total failure of the public health care system in India. This creates an opportunity for the new insurance companies. Thus, private insurance companies will be able to sell health insurance to a vast number of families who would like to have health care cover but do not have it.
The pension system in India is in its infancy. There are generally three forms of plans: provident funds, gratuities and pension funds. Most of the pension schemes are confined to government employees (and some large companies). The vast majority of workers are in the informal sector. As a result, most workers do not have any retirement benefits to fall back on after retirement. Total assets of all the pension plans in India amount to less than USD 40 billion. Therefore, there is a huge scope for the development of pension funds in India. The finance minister of India has repeatedly asserted that a Latin American style reform of the privatized pension system in India would be welcome (Roy, 1997). Given all the pros and cons, it is not clear whether such a wholesale privatization would really benefit India or not (Sinha, 2000).
Other Non-Life Insurance
The flurry of activities of the new companies in the life insurance market has not been repeated in other types of insurance. The reason is basic: lack of data. Unless the new companies have access to reliable data on accidents of different kinds under Indian conditions, it would be hard to offer a competitive menu of policies.
The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has projected a 500% increase in the size of current Indian insurance business from US$ 10 billion to US$ 60 billion by 2010 particularly in view of contribution that the rural and semi-urban insurance will make to it.
Rural and Semi-Urban Life Insurance business is expected to touch US$ 20 billion figure in next 4 years from current level of less than US$ 5 billion now as rural and semi-urban folk will want themselves to ensure them for better future and their rising purchasing power will motivate them to move towards insurance sector.
In view of Assocham, the non-life insurance will rise to US$ 15 billion by 2010 from its negligible size now and in Urban areas, life insurance businesses are anticipated to reach US$ 15 billion and that of non-life insurance US$ 10 billion, according to Chamber Paper on Insurance Sector : Its Future Perspective.
Assocham has revealed that rural and semi-urban India shall contribute US $35 billion to the Indian insurance industry by 2010, including US $20 billion by way of life insurance and the rest US $15 billion through non-life insurance schemes. A large part of rural India is still untapped due to poor distribution, large distances and high costs relative to returns. Urban sector insurance is estimated to reach US $25 billion by 2010, life insurance US $15 billion and non-life insurance US $10 billion.
Estimating the potential of the Indian insurance market from the perspective of macro-economic variables such as the ratio of premium to GDP, Assocham Papers reveals that India’s life insurance premium, as a percentage of GDP is 1.8% against 5.2% in the US, 6.5% in the UK or 8% in South Korea.
Assocham findings further reveals that in the coming years the corporate segment, as a whole will not be a big growth area for insurance companies. This is because penetration is already good and companies receive good services. In both volumes and profitability therefore, the scope for expansion is modest. Survey suggested that insurer’s strategy should be to stimulate demand in areas that are currently not served at all. Insurance companies mostly focus on manufacturing sector, however, the services sector is taking a large and growing share of India’s GDP. This offers immense opportunities for expansion opportunities.
Being an agrarian economy again there are immense opportunities for the insurance companies to provide the liability and risks associated in this sector. The Paper found that the rural markets are still virgin territories to a great extent and offer exciting opportunities for insurance companies. To understand the prospects for insurance companies in rural India, it is very important to understand the requirements of India's villagers, their daily lives, their peculiar needs and their occupational structures. There are farmers, craftsmen, milkmen, weavers, casual labourers, construction workers and shopkeepers and so on. More often than not, they are into more than one profession.
The rural market offers tremendous growth opportunities for insurance companies and insurers should develop viable and cost-effective distribution channels; build consumer awareness and confidence. The Paper found that there are a total 124 million rural households. Nearly 20% of all farmers in rural India own a Kissan Credit cards. The 25 million credit cards used till date offer a huge data base and opportunity for insurance companies. An extensive rural agent network for sale of insurance products could be established. The agent can play a major role in creating awareness, motivating purchase and rendering insurance services.
There should be nothing to stop insurance companies from trying to pursue their own unique policies and target whatever needs that they want to target in rural India. Assocham suggests that insurance needs to be packaged in such a form that it appears as an acceptable investment to the rural people. In the near future, when we’ll see more innovations in agriculture in the form of corporatization or a more professional approach from the farmers’ side, insurance will definitely be one option that the rural Indian is going to accept.
India's insurance sector is poised for 500 per cent growth over the next four years and is likely to become a 60- billion-dollar industry by 2010, said a study released Sunday. Most of India's more than one billion people are uninsured, so that insurance companies would have to pay special attention to the rural and semi-urban segments, the study by the Associated Chambers of Commerce and Industry (Assocham) said. 'A large part of rural India is still untapped due to poor distribution, large distances and high costs relative to returns,' said Assocham president Anil K Agarwal while releasing the study titled: Paper on Insurance Sector: Its Future Perspective. He said the study had revealed that rural and semi-urban India would contribute 35 billion dollars to the Indian insurance industry by 2010.
There were immense opportunities for insurance companies to provide cover for the risks associated with a primarily agrarian economy, the study said. But the insurance companies would have to understand the requirements of India's villagers, their peculiar needs and occupational structures, it added. The insurance needed to be packaged in such a way that it appeared an acceptable and affordable investment to the rural people. The study added that the urban sector insurance was estimated to reach 25 billion dollars by 2010, life insurance 15 billion and non- life insurance 10 billion dollars. India has a cap of 26 per cent on foreign direct investment in the insurance sector. In a recent interview in the German business newspaper Handelsblatt, Indian Prime Minister Manmohan Singh said his government intends to raise the cap to 49 per cent and allow 'greater role' to foreign banks step-by-step. But he acknowledged that the Left parties, extending crucial support to his United Progressive Alliance government, were against the move and it would take time to convince them.
OVERVIEW OF THE INSURANCE INDUSTRY
FIGURES IN THE INDUSTRY:
The insurance Regulatory and Development bill is now an Act, With this India is now the cynosure of all the global insurance players. Numerous players, both Indian and foreign, have announced their intention to start their insurance shops in India. IRDA, under the chairmanship of Mr. Rangachary, opened the window for applying licenses in India on the 16th of August. Dabur – Allstate the Prudential – ICICI were the first of the block to apply on the very first day. But before any one starts to talk about the insurance sector in India, it is important to know the figures that entice each and every body in the sector.
FIGURES IN THE SECTOR:
Table No. 1 Source: Indiainfoline. Com and NCAER
Life Insurance Statistics
Indian population 1bn
GDP as on 2002 ($ bn)480 bn
Gross domestic savings as a % of GDP23%
NCAER estimate of insurable population.240mn
Estimated market by 2005. 650mn
India has an enormous middle – class that can afford to buy life, health, and disability and pension plan products. The low level of penetration of life insurance in India compared to other developed nations can be judged by a comparison of per capita life premium.
Table No. 2 Source: Various Newspapers
Country Life premium per Capita US $ in 1994
Clearly, there is considerable scope to raise per capita life premium if the market is effectively tapped. India has traditionally been a high savings oriented country – often described as being on par with the thrifty Japan. Insurance sector in the US of A is as big in size as the banking industry there. This gives us an ideal of how important the sector is. Insurance sector canalizes the savings of the people to long – term investments. This has made the sector the hottest one in India after IT.
In the global era, Insurance companies are increasingly willing to spend more on the customer satisfaction and brand building exercises. Though it is one of the highly regulated industries, it still provides lot of scope for creativity and innovations. As our industry is predominantly dominated by personal selling and personalized services many a time the service standards vary based on the intermediary involved in the process. In order to achieve the competitive edge over others standardize the process and bring about quality improvement and get feed back from the customers regarding the quality of services rendered. This will result in customer satisfaction, customer retention, customer acquisition, employee retention and cost reduction. This paper focuses on the marketing approach adopted by the modern insurers to withhold their existing customers and attract new ones