Top-Rated Free Essay

Life Insurance sector in India

Good Essays
Life Insurance is a contract between two parties, an insurer and an insured, where the insurer agrees to pay a designated amount upon the death of the insured for a premium.
The history of life insurance industry dates back to year 1818, in which the first Indian Life Insurance company, Oriental Life Insurance Company was started. In 1928, the Government of India enacted the Indian Insurance Companies Act which was later modified in 1938 (Insurance Act, 1938) to protect the interest of the insured and control the activities of the insurer. The Life Insurance of India (LIC) was formed in 1956 by absorbing 245 insurers after the nationalisation of the sector and in year 2000, the sector was opened to private players with foreign investment cap of 26%. The Insurance Regulatory and Development Authority (IRDA), the regulator for the insurance sector was constituted in 1999 by an act known as IRDA Act 1999 following the recommendations of the Malhotra Committee. The objective of IRDA is to ensure the financial security of the market and protect the interests of the policyholders by enhancing customer satisfaction through increased customer choices and lower premiums.
Mortality rate is expressed as the number of deaths per 1000 individuals per year for a particular age group. Based on mortality rates, Life Insurance companies decide the number of death claims they are likely to receive in an age group in a year. Insurers use Life Year method, in which lives are observed from one birthday to succeeding birthday, to calculate mortality table.
The figure below shows the mortality curve for year 2006-08.
Mortality Curve

Underwriting is the process of evaluation of risk involved in an insurance proposal and deciding the premium based on the economic, health and social conditions of the customer. In India, the method of underwriting used is the Numerical Rating Method, in which extra premium is charged for extra risk to be covered. The ranges of extra mortality are arrived based on the following factors:
Family Medical History- Longevity of parents and siblings

Personal Medical History- Diseases, accidents and other injuries to the customer

Health- Present ailments of the customer, his height and weight

Occupation- Factors in occupation that enhance risk

Different mortality ratings are assigned to these factors and depending on the total rating, various mortality classes are formed and extra premium is levied for various ranges of extra mortality.
The performance of the insurance industry can be assessed with reference to two parameters, viz, insurance penetration and density. Penetration is defined as ratio of premium underwritten in a year to the GDP whereas density as ratio of premium underwritten in a year to total population.
Over the past two years, the penetration and density in the industry has been sliding owing to adverse economic conditions and increasing regulatory changes as evidenced in the exhibits.

Insurance Penetration (In Per Cent of GDP)

Insurance Density

The profitability of the industry has been increasing as more companies have posted profits over the years as shown below. Profitability of Sector

Based on penetration, the major players in the industry are:
The concentration of the industry can be measured by the Herfindahl-Hirschman Index (HHI). An HHI result of less than 1,000 is considered as a competitive marketplace; a result of 1,000 - 1,800 as a moderately concentrated marketplace; and a result of 1,800 or greater as a highly concentrated marketplace. The HHI value for the industry came out to be 4311.89, much greater than 1800 indicating a highly concentrated marketplace with LIC being the monopoly.
Market share of players in Life Insurance Industry

The below exhibits show the trends in the number of new policies issued, first year premium and total premium for the players in the industry. The decline of first year premium and total premium in 2008 and 2010 is attributed to global crisis and increased regulations.
Number of Individual New Policies Issued (in Lakhs)

First Year Life Insurance Premium (in Cr.)

Total Life Insurance Premium (in Cr)

Some of the different insurance products are:
LIC Jeevan Anand
LIC Amulya Jeevan
ICICI Prudential iProtect Term Plan
Kotak Life’s e-Term Plan
Unit-Linked Insurance Plan (ULIP)
Below is a comparative analysis of three such products for a 25 lakh policy.
LIC Amulya Jeevan
ICICI iProtect
Kotak e-Term
Annual Premium
Twice the sum assured paid to nominee in case of accidental death and is obtainable till the age of 70.
Sum assured paid to nominee in case of death but no amount paid if holder survives the policy term.
Online term payments available to increase the life cover. Sum assured paid in lump sum.

It is a market linked investment where the policyholders are allocated units at their NAV that is declared on a daily basis. A pool of funds is created and part of the premium is invested in debt and equity. Major players in this field are LIC, SBI Life and Canara.
In the Life Insurance – Reinsurance Regulations issued in the official gazette in February 2013, the IRDA has mandated life insurance companies to reinsure a percentage of sum assured on each policy with domestic reinsurers. This percentage will be notified by the regulator and will not exceed 30 per cent of the sum assured.
Broadly, the retention limit ranges from INR3 lakhs to INR30 lakhs, based on the age of the insurer / year in which risk is introduced and the type of the product.
The IRDA has also asked insurers to have maximum retention within the country and enter into reinsurance arrangements with only those foreign companies having a minimum credit rating of BBB (with S&P) over the past five years. 2. Investment in private equity& debt funds

IRDA has allowed insurance companies to invest in private equity and debt funds. Insurers are permitted to invest in Category I AIFs which includes infrastructure funds, SME funds, venture capital funds and social venture funds & Category II AIFs (Alternative Investment Funds) which comprises private equity funds and debt funds

IRDA said in Category II, at least 51 per cent of the funds of such AIFs should be invested in infrastructure entities, SME entities, venture capital undertakings or social venture entities. Insurers, however, are not permitted to invest in AIFs that have the nature of funds of funds and leverage funds.

The regulator said the overall exposure to venture funds and AIFs put together should not exceed 3 per cent of the respective fund in the case of a life insurance company and 5 per cent in the case of a general insurance company. Exposure to a single AIF or venture fund should not be more than 10 per cent of the fund size.

3. Amalgamation of life insurance business

The IRDA has released regulations on scheme of amalgamation and transfer of life insurance business. The regulations specify the disclosure and valuation requirements to obtain approval of the regulator for any life insurance mergers or acquisitions.

4. Cap on Commission
IRDA has also capped the maximum commission that can be paid to agents at 15 per cent in the first year, 7.5 per cent in the second year and 5 per cent from the third year onwards

Number of Individual Agents of Life Insurers

Linked Premium of Life Insurers (in Cr)

IRDA has recently made a cap of 3% on the net yield that can be charged from 1st Oct- 2013 onwards. Minimum lock-in period has been revised from 3 to 5 years. Minimum premium paying term has been increased to 5 years. Because of the new regulations, share of ULIPs in the total life insurance has dwindled sharply in the last fiscal. Also agent’s commissions and sundry fees has been curtailed. These factors combined have affected the growth of ULIPs in India.


Future Prospects and Recommendations
The Indian life Insurance market is highly polarized even now, with LIC leading by huge margin owing to its special “state owned” status and impecable business model. To fuel the growth of the industry, private players should grow by innovating and adopting a model that is sustainable, considering high operational costs. IRDA should play a critical role in making the market highly efficient, transparent and financially secure in order to change the market structure from being highly monopolistic to competitive.
A few pointers that can play crucial role in future:
1. Technological Prowess (for improving penetration in Urban Market)
2. Distribution Network enhancement (FDI may be the way for Capital for Expansionn and global competitive practices)
3. Greater Financial Inclusion by improving focus on rural and tier-3 cities market (An innovative model with focus on Micro-isurance penetration; Tweaking of Taxation laws may act as catalyst)
Indian Insurance sector has now seen a cycle of high growth followed by period of morderation. In order to ensure that the Industry grows from strength to strength, its necessary to keep the essence of Life Insurance intact. The inevitable realization that Life Inurance market shows the value of a person’s life in that country will have to come at some point of time. We would like to support this argument based on a the findings of a simple linear regression model with the following equation.
No. of Individual New policies issued = a + b*Health Index

R2 of 82.09%, shows that there is a good fit and as more and more people are provided with better health facilities, they are valuing their lives more and hence opting for new policies.

You May Also Find These Documents Helpful

  • Powerful Essays

    Insurance Sector in India

    • 6361 Words
    • 26 Pages

    Discuss Insurance sector from different angles and discuss entry and exit of firms in insurance sector Discuss Insurance sector from different angles • TERM INSURANCE: Insurance may be described as a social device to reduce or eliminate risk of loss to life and property. Under the plan of insurance, a large number of people associate themselves by sharing risks attached to individuals. The risks which can be insured against include fire, the perils of sea, death and accidents and burglary…

    • 6361 Words
    • 26 Pages
    Powerful Essays
  • Powerful Essays

    Insurance Sector of India

    • 12947 Words
    • 52 Pages

    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…

    • 12947 Words
    • 52 Pages
    Powerful Essays
  • Powerful Essays

    Implications of FDI in Insurance To study the impact of FDI in insurance we first look at the how the Indian insurance sector has evolved over the years. Indian insurance sector has experienced different phases from being an open competitive market to being nationalized and back to deregulation. The Indian insurance story began in India in the year 1818 with the establishment of the Oriental Life Insurance Company in Kolkata. In the year 1912 the Indian Life Insurance Companies Act came into existence…

    • 1574 Words
    • 7 Pages
    Powerful Essays
  • Powerful Essays

    Insurance Sector

    • 1801 Words
    • 8 Pages

    Basics of Insurance 2 Contents:- * Life insurance * General insurance * Insurance market scenario * Emerging trends in insurance 3 Learning Insurance * What Is Insurance Insurance is concerned with protection of economic value of assets.Tangible assets are human beings, house, furniture, motor cycle etc.Intangible assets are liabilities 4 History of Insurance * It…

    • 1801 Words
    • 8 Pages
    Powerful Essays
  • Powerful Essays

    Insurance Sector

    • 8154 Words
    • 33 Pages

    INDEX * EXCECUTIVE SUMMARY OF INSURANCE SECTOR * INTRODUCTION * HISTORY OF INSURANCE SECTOR * TYPES OF INSURANCE * PRINCIPLES OF INSURANCE SECTOR * STRATEGIC MANAGER * ROLE OF INSURANCE SECTOR * CONCLUSION * BIBLOGRAPHY. EXECUTIVE SUMMARY ON INSURANCE SECTOR : Insurance sector in India is one of the booming sectors of the economy and is growing at the rate of 15-20 per cent annum. Together with banking services, it contributes to about 7…

    • 8154 Words
    • 33 Pages
    Powerful Essays
  • Better Essays

    Insurance Sector

    • 3818 Words
    • 16 Pages

    Time Indian Insurance Sector Innovate Now Or Stagnate fasfdor December 2011 Contents Indian Insurance sector poised for its next stage of growth The puzzle of untapped potential Redefining Customer Value Proposition Improving Operational Performance Key challenges in leveraging Innovation Improving the Innovation Quotient Conclusion Contacts 1 2 3 6 7 8 12 13 Indian Insurance sector poised for its next stage of growth The insurance sector in India has grown at…

    • 3818 Words
    • 16 Pages
    Better Essays
  • Powerful Essays

    INTRODUCTION The new millennium has exposed the insurance sector to new challenges of competition and struggle for survival. The era of liberalization, privatization and globalisation has ended the monopolistic tendency in this sector. It has been over four years since the Indian insurance market has opened up and the new entrants into the market have set up their shops throughout the country. Until the late nineties, the Indian insurance industry was under State control with no private participation…

    • 3284 Words
    • 14 Pages
    Powerful Essays
  • Powerful Essays

    A Comprehensive Project ON “Impact of Foreign Direct Investment in life Insurance Industry” Submitted to Gujarat Technological University IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF THE AWARD FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION UNDER THE GUIDANCE OF Prof. Himanshu Chauhan Submitted by Pratik Panchal Enrollment No.:117010592053 Ajay vaja Enrollment No.:117010592077 YEAR: 2011-2013 MBA SEMESTER III Affiliated to Gujarat Technological…

    • 12553 Words
    • 51 Pages
    Powerful Essays
  • Powerful Essays

    Roll No. 09BAL052 Nirma University Institute of Law VII Semester B.A.LL.B. (Hons.)Course Synopsis on the subject of “Banking and Insurance Law” For the academic year 2012-13 On the Topic: “HEALTH INSURANCE SECTOR IN INDIA: CURRENT SCENARIO” Prepared & Submitted By Rajat Tandon (09BAL052) Chapter-1 Introduction and Research Methodology: 1.1 Introduction: Health and health care need to be distinguished from each other for no better reason than that the former is often…

    • 3558 Words
    • 15 Pages
    Powerful Essays
  • Satisfactory Essays

    Challenges and Opportunities in Insurance Sector "Emerging markets are the workshops of the world, supplying cheap goods, services and raw materials to the developed world" (Mark, n.d.). In recent years, China, India, Russia, and Brazil became most dominant economies country all over the world. "Goldman Sachs ingenious named them BRIC which these countries occupy a significant percentage of world's land coverage, 30% of the world's population and amount of a combined GDP (PPP) of US$12.4 trillion"(Davia…

    • 283 Words
    • 1 Page
    Satisfactory Essays