Professional Documents
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THE INSURANCE MECHANISM . PRINCIPLES OF INSURANCE . INSURANCE TERMS . GROWTH OF EVOLUTION OF INSURANCE BUSINESS IN INDIA WITH SPECIFIC REFERENCE TO POST LIBERALIZATION . PLAYERS IN INSURANCE . TYPES OF ORGANIZATIONS . ORGANIZATION IN INDIA .
MECHANISM OF INSURANCE
Assets are insured, because they are likely to be destroyed or made non-functional before the expected life time, through accidental occurrences. Such possible occurrences are called perils. Fire, floods, breakdowns, lightning, earthquake, etc, are perils. If such peril can cause damage to the asset, we say that the asset is exposed to the risk. Perils are the events. Risks are the consequential losses or damages. The risk to a owner of a building, because of the peril of an earthquake, may be a few lakhs or a few crores of rupees, depending upon the cost of the building, the contents in it and the extent of damage. The risk only means that there is a possibility of loss or damage. The damage may or may not happen. The earthquake may occur, but the building may not have been affected at all. Insurance is done against the possibility that damage may happen. There has to be an uncertainty about the risk. The word possibility implies uncertainty. Insurance is relevant only if there are uncertainties. If there is no uncertainty about the occurrence of an event, it cannot be insured against. In the case of a human being, death is certain, but the time of the death is uncertain. The person is insured, because of the uncertainty about the time of his death. In the case of a person who is terminally ill, the time of the death is not uncertain, though not exactly known. It would be soon. He cannot be insured. Insurance does not protect the asset. Its does not prevent its loss due to the peril. The peril cannot be avoided through insurance. The risk can sometime be avoided, through better safety and damage control measures. Insurance only tries to reduce the impact of the risk on the owner of the asset and those who depend on the asset. They are the ones who benefit from the asset and therefore, would lose, when the asset is damaged. Insurance only compensates for the losses-and that too, not fully. Only economic consequences can be insured. If the loss is not financial, insurance may not be possible. Examples of non-economic losses are love and affection of parents, leadership of managers, sentimental attachments to family heirlooms, innovative and creative abilities, etc. Hence, the mechanism of insurance is very simple. People who are exposed to the same risks come together and agree that, if any one of them suffers a loss, the other will share the loss make good to the person who lost. All people who send goods by ships are exposed to the same risks, which are related to water damage. Sinking of the vessel, piracy, etc.Those owing factories are not exposed to these risks, but they are exposed to the different kind of risks like, fire, hailstorms, earthquakes, lightning, burglary, etc.Like this different kinds of risks can be identified and separate groups made, including those exposed to such risks. By this method, the heavy loss that any one of them in the group may suffer (all of them may not suffer such losses at the same time) is divided into bearable small losses by all the others in the group. In other
words, the risk is spread among the community and the likely big impact on one is reduced to smaller manageable impacts on all. Insurance helps to spread the costs or risks. There are certain principles, which make it possible for insurance to remain a preferred and fair arrangement. The first is that it is difficult for any one individual to bear the consequences of the risks that he is exposed to. It will become bearable when the community shares the burden. The second is that peril should occur in an accidental manner. Nobody should be in a position to make the risk happen. In other words, none in the group should set fire to his assets and ask others to share the loss. This would be taking unfair advantage of an arrangement put into the place to protect people from the accidental risks they are exposed to. The occurrence has to be random, accidental, and not the deliberate creation of the insured person. The manner in which the loss is shared can be determined beforehand. It can be equal among all. It can also be proportional to the risk that each person is exposed to. The trader who has sent Rs.100 lakhs worth of goods on a ship will bear double the loss to be borne by another trader who has got Rs.50 lakhs worth of goods on the same ship. Current practice is to make the sharing proportional to the exposure to risk. The share could be collected from the members after the loss has occurred or likely shares may be collected in advance, at the time of admission of the group.Insurance companies collect in advance and create a fund from which the losses are paid. The collection to be made from each person in advance is determined on the basis of assumption. While it may not be possible to tell beforehand, which person will suffer, it may be possible to tell, on the basis of past experiences, how many persons, on an average, may suffer losses. The following example will explain the above concept of insurance In a village, there are 400 houses, each valued at Rs.20, 000.Every year, on an average, 4 houses get burnt, resulting into a total loss of Rs.80, 000.If all the 400, owners come together and contribute Rs.200 each, the common fund would be Rs.80, 000.This would be enough to pay Rs.20, 000 to each of 4 owners whose houses got burnt. Thus the loss of Rs.20, 000 each of 4 owners is shared by 400 house-owners of the village, bearing Rs.200 each. This works out to 1% of the value of the house, which is the same as the probability of risk (4 out of 400 houses).
PRINCIPLES OF INSURANCE
Human life is exposed to many risks, which may result in heavy financial losses. Insurance is one of the devices by which risks may be reduced or eliminated in exchange for premium. In words of Chief Justice Tindal, Insurance is a contract in which a sum of money is paid by the assured in consideration of the insurer's incurring the risk of paying larger sum upon a given contingency. In its legal aspects it is a contract whereby one person agrees to indemnify another against a loss which may happen or to pay a sum of money to him on the occurring of a particular event. All contracts of insurance (except marine insurance) may be verbal or in writing, but practically contracts of assurance are included in a document.
2. Insurable Interest
The insured must possess an insurable interest in the object insured. It may be defined as a financial interest in the subject matter of contract. The presence of insurable interest is a legal requirement. So an insurance contract without the existence of insurable interest is not legally valid and cannot be claimed in a Court. The object of this principle is to prevent insurance from becoming a gambling contract.
3. Principle of indemnity
All types of contracts except life and personal accident insurance are contract of indemnity. According to them, the insurer undertakes to indemnify the insured against a loss of the subject matter of insurance due to insured cause. In life assurance the question of loss and, therefore, of its indemnification does not rise. Because the loss of life cannot be estimated in term of money. The principles of indemnity is based on the idea that the assured in the case of loss only shall be compensated against the actual total loss. But if no event happens, the insured has not to receive any amount, so in this case the premiums paid by him becomes the profit of the Insurer.
4. Doctrine of subrogation
This principle applies to the contract of indemnity only i.e. marine and fire. It lays down a principle which is quite equitable. According to this doctrine, where a loss occurs and the insurer pays as for a total loss, he is entitled to all the rights and remedies which the insured
has against a third party in respect of loss so paid for. It prevents the insured being indemnified from two sources in respect of the same loss. For eg: Suppose A has damaged B is motor car negligently. If he pays B is loss in full. B cannot collect the same from the insurance company. On the other hand if B applied to his insurance company for indemnity under his policy, he will not be permitted to collect the damages from A. In the latter case the insurance company will be entitled to collect that amount.
6. Cancellation
Both parties have right to cancel the policy before its expiry date. The period of the policy comes to an end on the cancellation of policy. So the protection provided by the insurer to the insured stops from the date of such cancellation. The premium received by the insurance company is also returnable to the insured.
INSURANCE TERMS
1. Premium
This is the amount you pay to the insurance company to buy a policy. A single premium policy will need you to pay just one lump-sum amount. The annual premium policy will require you to pay every year. This will go on for a fixed period of time. The exact number of years will depend on the scheme in question.
If the policy holder passes away before the policy matures, the beneficiary gets Rs 2,00,000 along with the bonus too (if any). If he is alive when the policy matures, he will get Rs 2,00,000 as well as any bonuses declared during the tenure of the policy.
Let's say the bonuses amounted to Rs 1,00,000. His maturity value would be Rs 3,00,000 (sum assured + bonuses).
5. Endowment Insurance
You are given a life cover just like term insurance. If you die during this period, your beneficary will get whatever amount you are insured for. Unlike a term insurance cover, if you live, an amount will be paid to you on maturity of the plan. This kind of policy combines saving (because money is given to you on maturity) with some protection (your nominee gets an amount if you die).
6. Annuity
Annuities refer to the regular payments the insurance company will guarantee at some future date. So, say, after you cross 55, the insurance company will start giving you a monthly or quarterly return. This is known as an annuity (premium is what you pay them).This is often done to supplement income after retirement.
GROWTH OF EVOLUTION OF INSURANCE BUSINESS IN INDIA WITH SPECIFIC REFERENCE TO POST LIBERALIZATION.
Since its opening in 2001, insurance industry has come a long way in India. It has undergone perceptible structural changes. More than 40 private players are vying for space in the insurance market of India, once dominated by LIC and GIC. This has not only generated options for the common people, but has also provided them a viable tool of investment The journey of insurance liberalization process in India is now over seven years old. The first major milestone in this journey has been the passing of Insurance Regulatory and Development Authority Act, 1999. This along with amendments to the Insurance Act 1983, LIC and GIC Acts paves the way for the entry of private players and possibly the privatization of the hitherto public monopolies LIC and GIC. Opening up of insurance to private sector including foreign participation has resulted into various opportunities and challenges. India's insurance sector is zooming to show an unprecedented progressive growth of more than 200% by the period of 2009-12. The Associated Chambers of Commerce and Industry of India has clocked out the fact that during this period, private players in the industry will see a growth of about 140 per cent, owing to the adoption of the aggressive marketing techniques in comparison of the growth rate of 35 per cent-40 per cent achieved by the state owned insurance companies. The chamber is expected to poise the business of insurance to reach at Rs.2000 billions in coming 2 years from the present level of Rs. 500 billion. With the result of adoption of the intense marketing strategies by the private players, the declination has been witnessed in respect of the share of the state owned insurance companies captured in the market. The market share fallout has been noticed in context of such companies like GIC, LIC, which have come down to nearly 70 per cent in the past 4-5 years from the 97 per cent. The experts have fore casted the more severe competition in the insurance sector likely to be occurred in the near future. Till recently, insurance sector was majority driven by the government sector players but now many private sector multinational players have come into the picture. Like HDFC, ICICI, Kotak, Mahindra and Birla Sun life. Insurance sector has been characterized as the booming sector of the Indian arena, which has shown the growth rate of more than 15 per cent to 20 per cent. Insurance in India is put under the federal subject and is governed by the Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and General Insurance Business (Nationalization) Act, 1972, Insurance Regulatory and Development Authority (IRDA) Act, 1999 and by various other acts.
Liberalization of Insurance
The comprehensive regulation of insurance business in India was brought into effect with the enactment of the Insurance Act, 1983. It tried to create a strong and powerful supervision and regulatory authority in the Controller of Insurance with powers to direct, advise, investigate, register and liquidate insurance companies etc. However, consequent upon the nationalization of insurance business, most of the regulatory functions were taken away from the Controller of Insurance and vested in the insurers themselves. The Government of India in 1993 had set up a high powered committee by R.N.Malhotra, former Governor, Reserve Bank of India, to examine the structure of the insurance industry and recommend changes to make it more efficient and competitive keeping in view the structural changes in other parts of the financial system on the country.
1) Raising the capital base of LIC and GIC up to Rs. 200 crores, half retained by the government and rest sold to the public at large with suitable reservations for its employees. 2) Private sector is granted to enter insurance industry with a minimum paid up capital of Rs. 100 crores. 3) Foreign insurance be allowed to enter by floating an Indian company preferably a joint venture with Indian partners. 4) Steps are initiated to set up a strong and effective insurance regulatory in the form of a statutory autonomous board on the lines of SEBI. 5) Limited number of private companies to be allowed in the sector. But no firm is allowed in the sector. But no firm is allowed to operate in both lines of insurance (life or nonlife). 6) Tariff Advisory Committee (TAC) is delinked form GIC to function as a separate statuary body under necessary supervision by the insurance regulatory authority. 7) All insurance companies be treated on equal footing and governed by the provisions of insurance Act. No special dispensation is given to government companies. 8) Setting up of a strong and effective regulatory body with independent source for financing before allowing private companies into sector.
Preamble of IRDA Act 1999 reads 'An Act to provide for the establishment of an authority to protect the interests of holders of insurance policies, to regulate, to promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto. Section 14 of IRDA Act, lays the duties, powers and functions of the authority. The powers and functions of the authority. The powers and functions of the Authority shall include the following. 1) Issue to the applicant a certificate of registration, to renew, modify withdraw, suspend or cancel such registration. 2) To protect the interest of policy holders in all matters concerning nomination of policy, surrender value f policy, insurable interest, settlement of insurance claims, other terms and conditions of contract of insurance. 3) Specifying requisite qualification and practical training for insurance intermediates and agents. 4) Specifying code of conduct for surveyors and loss assessors. 5) Promoting efficiency in the conduct of insurance business 6) Promoting and regulating professional regulators connected with the insurance and reinsurance business. 7) Specifying the form and manner in which books of accounts will be maintained and statement of accounts rendered by insurers and insurance intermediaries. 8) Adjudication of disputes between insurers and intermediates. 9) Specifying the percentage of life insurance and general and general business to be undertaken by the insurers in rural or social sectors etc. Section 25 provides that Insurance Advisory Committee will be constituted and shall consist of not more than 25 members. Section 26 provides that Authority may in consultation with Insurance Advisory Committee make regulations consists with this Act and the rules made there under to carry the purpose of this Act .Section 29 seeks amendment in certain provisions of Insurance Act, 1938 in the manner as set out in First Schedule. The amendments to the Insurance Act are consequential in order to empower IRDA to effectively regulate, promote, and ensure orderly growth of the Insurance industry. Section 30 & 31seek to amend LIC Act 1956 and GIC Act 1972.
Case study : report by director of oriental insurance company What are the emerging trends in the insurance industry in terms of product innovations?
Several private players have ventured into the insurance industry since last four years and the growth of the industry has been averaging around 15%. In the first year it was 100% but now it has gradually tapered down to 15%. On an average it is around 10% to 15% per annum. The life insurance industry has led the growth in the insurance sector. There the growth is mainly due to unit linked products which are very akin to mutual funds product. They are looked upon
as investment returns. So, they involve a very small element of risk coverage. Perhaps that is the reason they have picked up fast. In General insurance growth has come in the form of personalized business like health insurance and the motor insurance. More innovations have come in segments like overseas travel insurance policies. The procedures have been simplified. Similarly in health several products have come up and many modifications have been introduced. Some companies have packaged some of the policies and they are giving extended coverage. The main bottleneck to innovation is that even today 70% of the market is tariffed. So you cannot issue a policy other than what is specified in the tariff. More innovations will come once the entire market is detariffed. Only then different products can be introduced. For example, more innovative health insurance products can be introduced to suit the common people and different age groups.
The insurance penetration in India is very low. So can bancassurance improve the situation?
Bancassurance is one mode which can definitely improve the insurance reach especially in the rural areas. For a new insurance company, setting up a large reach is quite expensive.
Bancassurance is an automatic way of getting the reach at least cost. This is a very strong model suggested for penetration. But till today in Asia, as per statistics, 91% of the insurance is done through agents. This is because people here still believe in face to face interaction rather than on paperless interaction. As an alternative to the face to face interaction, banks would be able to sell insurance products better. Bancassurance has a good potential to grow in India. They have been quite successful with life insurance products the world over as compared to the general insurance products. This is because life is more akin to investment. The customer is likely to pick it up faster than non returnable non-life insurance. Reach can come through the brokers also. The broker institution has come to India only three years back. I feel the brokers can have more work when the markets get de-tariffed. They can appoint more sub-brokers, which is another way to increase penetration.
Dont you feel that insurance companies are targeting metropolitan cities rather than rural India and this is one of the reasons of low penetration?
No, this is not very true because each PSU has got 900 offices. We have got an office in almost every district. But selling insurance in rural areas is not an easy job. First you have to market a low priced product to suit the rural people. When it is low priced the agency would not get a high commission. The agents because of low commission may not be inclined to sell such policies. So there is a mismatch between the price and the policy as far as individual sales is concerned. Therefore, the only method suited for rural, semi-urban sales is group sales. For instance, group mediclaim, group personal accidental insurance, group farmer insurance and
so on. We have to reach them through institutions like NGOs and self help groups to market these products. It is the only way to spread it to the rural areas until all of them become semi urban and the paying capacity improves. Its tough and perhaps it may take a little longer time. There has been a lot of discussion in the recent past to raise the cap on FDI which is 26% at present. What are your views regarding this? If you allow an outsider to come and play in the Indian market, naturally you must allow them to have full capital say in that. It is not unfair to allow them to have 100% equity if they want. Today, even though the local partner has got 74% share, the entire management is in control of the foreign insurance market. So when he wants to put in the money, I think he should be allowed to do so. It has been estimated that close to 6 lakh new jobs have been created in the insurance sector in the post-liberalization era. What are the qualifications and qualities required by the aspirants who want to make it big in the insurance sector? Selling insurance policy is all about general knowledge. So a person who is just a graduate with a good aptitude towards sales and marketing can join the insurance industry. I feel that the person should have the right aptitude and then interest in the insurance field. Though you can qualify through some of the insurance examinations, even a simple graduate has scope for promotion in the insurance field. PSU insurance companies have already been overloaded with more people. We have not been recruiting trained people off late. Perhaps we will recruit specialized people in actuarial sciences. Sometimes IT professionals are also recruited. Other than insurance companies as such, there are several auxiliary services that will crop up as the insurance world expands, for example, risk management institutes, risk management companies and brokers. Moreover, there are various allied services such as third party administrators to service the clients and there could be some clients management officers too. Many new players have come into the insurance sector and each of them has opened up a number of offices. So they need to employ many people to man the offices. Apart from that, companies are also focusing on the recruitment of large number of agents. When you work as agent the remuneration is in your hands. The more policies you sell the more commission you can earn. Once you are a successful agent there are chances that the same company would appoint you as its permanent employee. Even we advertise every month for agents. Apart from that several insurance jobs, like policy issuance, are being outsourced to India from the countries like the U.K. and the U.S. If I have to issue a policy it costs about 5 to 7 pounds in U.K. While it costs much less, about 1/10 th of the entire amount, in India. So all the policies to be issued can be transferred to India and be issued from here. It can also be generated online. In short, most of the routine jobs are being outsourced here including some of the legal works.
I have an appeal for the people who want to join the insurance sector, including those having simple graduation. You must get into the insurance subject and learn more about it through several insurance books available in the market. There are several institutes offering insurance courses, for example the U.K. Chartered Insurance Group. If you have an interest for insurance, educate yourself more to have an edge.
The past 5-6 years have seen a boom in the number of insurance companies in the private sector. How has the competition affected the insurance industry? Has the increase in the number of companies affected the insurance penetration in India?
It has certainly affected the existing PSU insurance companies and our market share has come down. The private companies have taken about 26% of the market share. All the PSUs put together have already lost around 74% of the market share. This means that the cake has not expanded as expected. But the existing cake is being shared and the companies are eating into existing fellows market share which is not a welcome step. Except for health insurance, the market has hardly expanded about 5%. But the companies are very young; only about four years old. Hopefully, the market will expand with increasing experience. Though I am convinced that owing to absolute freedom to price and devise own product, detariffed market is set to expand. LIC is the oldest and the most experienced player in the market. How have the new players affected LIC or how has LIC affected the new players? As per data the growth of LIC has been quite substantial in the past year -- around 48% despite the presence of new players. But one worrying factor was that the number of policies sold and the number of lives covered has come down compared to the previous years. LIC has a very big advantage of being the leader of the insurance sector. It has huge investment and financial strength. Owing to its bigger size it has the best advantage of pricing as well as getting the better investment returns which can subsidise its original insurance product. Therefore, like SBI continues to be the market leader despite of so many private banks coming, LIC will continue to play a very big role and it is not easy to destabilize it. It has lakhs of agents and has an enormous size and is less likely to be affected. But of course it is being challenged and has been put on its toes.
Impact of Liberalization
While nationalized insurance companies have done a commendable job in extending volume of the business opening up of insurance sector to private players was a necessity in the context of liberalization of financial sector. If traditional infrastructural and semipublic goods industries such as banking, airlines, telecom, power etc. have significant private sector presence, continuing state monopoly in provision of insurance was indefensible and therefore, the
privatization of insurance has been done as discussed earlier. Its impact has to be seen in the form of creating various opportunities and challenges.
Opportunities
1. Privatization if Insurance was eliminated the monopolistic business of Life Insurance Corporation of India. It may help to cover the wide range of risk in general insurance and also in life insurance. It helps to introduce new range of products. 2. It would also result in better customer services and help improve the variety and price of insurance products. 3. The entry of new player would speed up the spread of both life and general insurance. It will increase the insurance penetration and measure of density. 4. Entry of private players will ensure the mobilization of funds that can be utilized for the purpose of infrastructure development. 5. Allowing of commercial banks into insurance business will help to mobilization of funds from the rural areas because of the availability of vast branches of the banks. 6. Most important not the least tremendous employment opportunities will be created in the field of insurance which is a burning problem of the presence day today issues.
Current Scenario
After opening up of insurance in private sector, various leading private companies including joint ventures have entered the fields of insurance both life and non-life business. Tata - AIG, Birla Sun life, HDFC standard life Insurance, Reliance General Insurance, Royal Sundaram Alliance Insurance, Bajaj Auto Alliance, IFFCO Tokio General Insurance, INA Vysya Life Insurance, SBI Life Insurance, Dabur CJU Life Insurance and Max New York Life. SBI Life insurance has launched three products Sanjeevan, Sukhjeevan and Young Sanjeevan so far and it has already sold 320 policies under its plan.
Conclusion
From the above discussion we can conclude that the entry of private players in insurance business needful and justifiable in order to enhance the efficiency of operations, achieving greater density and insurance coverage in the country and for a greater mobilization of long term savings for long gestation infrastructure prefects. New players should not be treat as
rivalries to government companies, but they can supplement in achieving the objective of growth of insurance business in india.
GROWTH OF EVOLUTION OF INSURANCE BUSINESS IN INDIA WITH SPECIFIC REFERENCE TO POST LIBERALIZATION.
Since its opening in 2001, insurance industry has come a long way in India. It has undergone perceptible structural changes. More than 40 private players are vying for space in the insurance market of India, once dominated by LIC and GIC. This has not only generated options for the common people, but has also provided them a viable tool of investment The journey of insurance liberalization process in India is now over seven years old. The first major milestone in this journey has been the passing of Insurance Regulatory and Development Authority Act, 1999. This along with amendments to the Insurance Act 1983, LIC and GIC Acts paves the way for the entry of private players and possibly the privatization of the hitherto public monopolies LIC and GIC. Opening up of insurance to private sector including foreign participation has resulted into various opportunities and challenges. India's insurance sector is zooming to show an unprecedented progressive growth of more than 200% by the period of 2009-12. The Associated Chambers of Commerce and Industry of India has clocked out the fact that during this period, private players in the industry will see a growth of about 140 per cent, owing to the adoption of the aggressive marketing techniques in comparison of the growth rate of 35 per cent-40 per cent achieved by the state owned insurance companies. The chamber is expected to poise the business of insurance to reach at Rs.2000 billions in coming 2 years from the present level of Rs. 500 billion. With the result of adoption of the intense marketing strategies by the private players, the declination has been witnessed in respect of the share of the state owned insurance companies captured in the market. The market share fallout has been noticed in context of such companies like GIC, LIC, which have come down to nearly 70 per cent in the past 4-5 years from the 97 per cent. The experts have fore casted the more severe competition in the insurance sector likely to be occurred in the near future. Till recently, insurance sector was majority driven by the government sector players but now many private sector multinational players have come into the picture. Like HDFC, ICICI, Kotak, Mahindra and Birla Sun life. Insurance sector has been characterized as the booming sector of the Indian arena, which has shown the growth rate of more than 15 per cent to 20 per cent. Insurance in India is put under the federal subject and is governed by the Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and General Insurance Business (Nationalization) Act, 1972, Insurance Regulatory and Development Authority (IRDA) Act, 1999 and by various other acts.
Liberalization of Insurance
The comprehensive regulation of insurance business in India was brought into effect with the enactment of the Insurance Act, 1983. It tried to create a strong and powerful supervision and regulatory authority in the Controller of Insurance with powers to direct, advise, investigate, register and liquidate insurance companies etc. However, consequent upon the nationalization of insurance business, most of the regulatory functions were taken away from the Controller of Insurance and vested in the insurers themselves. The Government of India in 1993 had set up a high powered committee by R.N.Malhotra, former Governor, Reserve Bank of India, to examine the structure of the insurance industry and recommend changes to make it more efficient and competitive keeping in view the structural changes in other parts of the financial system on the country.
9) Raising the capital base of LIC and GIC up to Rs. 200 crores, half retained by the government and rest sold to the public at large with suitable reservations for its employees. 10) Private sector is granted to enter insurance industry with a minimum paid up capital of Rs. 100 crores. 11) Foreign insurance be allowed to enter by floating an Indian company preferably a joint venture with Indian partners. 12) Steps are initiated to set up a strong and effective insurance regulatory in the form of a statutory autonomous board on the lines of SEBI. 13) Limited number of private companies to be allowed in the sector. But no firm is allowed in the sector. But no firm is allowed to operate in both lines of insurance (life or non-life). 14) Tariff Advisory Committee (TAC) is delinked form GIC to function as a separate statuary body under necessary supervision by the insurance regulatory authority. 15) All insurance companies be treated on equal footing and governed by the provisions of insurance Act. No special dispensation is given to government companies. 16) Setting up of a strong and effective regulatory body with independent source for financing before allowing private companies into sector.
Case study : report by director of oriental insurance company What are the emerging trends in the insurance industry in terms of product innovations?
Several private players have ventured into the insurance industry since last four years and the growth of the industry has been averaging around 15%. In the first year it was 100% but now it has gradually tapered down to 15%. On an average it is around 10% to 15% per annum. The life insurance industry has led the growth in the insurance sector. There the growth is mainly
due to unit linked products which are very akin to mutual funds product. They are looked upon as investment returns. So, they involve a very small element of risk coverage. Perhaps that is the reason they have picked up fast. In General insurance growth has come in the form of personalized business like health insurance and the motor insurance. More innovations have come in segments like overseas travel insurance policies. The procedures have been simplified. Similarly in health several products have come up and many modifications have been introduced. Some companies have packaged some of the policies and they are giving extended coverage. The main bottleneck to innovation is that even today 70% of the market is tariffed. So you cannot issue a policy other than what is specified in the tariff. More innovations will come once the entire market is detariffed. Only then different products can be introduced. For example, more innovative health insurance products can be introduced to suit the common people and different age groups.
The insurance penetration in India is very low. So can bancassurance improve the situation?
Bancassurance is one mode which can definitely improve the insurance reach especially in the rural areas. For a new insurance company, setting up a large reach is quite expensive. Bancassurance is an automatic way of getting the reach at least cost. This is a very strong model suggested for penetration. But till today in Asia, as per statistics, 91% of the insurance is done through agents. This is because people here still believe in face to face interaction rather than on paperless interaction. As an alternative to the face to face interaction, banks would be able to sell insurance products better. Bancassurance has a good potential to grow in India. They have been quite successful with life insurance products the world over as compared to the general insurance products. This is because life is more akin to investment. The customer is likely to pick it up faster than non returnable non-life insurance. Reach can come through the brokers also. The broker institution has come to India only three years back. I feel the brokers can have more work when the markets get de-tariffed. They can appoint more sub-brokers, which is another way to increase penetration.
Dont you feel that insurance companies are targeting metropolitan cities rather than rural India and this is one of the reasons of low penetration?
No, this is not very true because each PSU has got 900 offices. We have got an office in almost every district. But selling insurance in rural areas is not an easy job. First you have to market a low priced product to suit the rural people. When it is low priced the agency would not get a high commission. The agents because of low commission may not be inclined to sell such policies. So there is a mismatch between the price and the policy as far as individual sales is
concerned. Therefore, the only method suited for rural, semi-urban sales is group sales. For instance, group mediclaim, group personal accidental insurance, group farmer insurance and so on. We have to reach them through institutions like NGOs and self help groups to market these products. It is the only way to spread it to the rural areas until all of them become semi urban and the paying capacity improves. Its tough and perhaps it may take a little longer time. There has been a lot of discussion in the recent past to raise the cap on FDI which is 26% at present. What are your views regarding this? If you allow an outsider to come and play in the Indian market, naturally you must allow them to have full capital say in that. It is not unfair to allow them to have 100% equity if they want. Today, even though the local partner has got 74% share, the entire management is in control of the foreign insurance market. So when he wants to put in the money, I think he should be allowed to do so. It has been estimated that close to 6 lakh new jobs have been created in the insurance sector in the post-liberalization era. What are the qualifications and qualities required by the aspirants who want to make it big in the insurance sector? Selling insurance policy is all about general knowledge. So a person who is just a graduate with a good aptitude towards sales and marketing can join the insurance industry. I feel that the person should have the right aptitude and then interest in the insurance field. Though you can qualify through some of the insurance examinations, even a simple graduate has scope for promotion in the insurance field. PSU insurance companies have already been overloaded with more people. We have not been recruiting trained people off late. Perhaps we will recruit specialized people in actuarial sciences. Sometimes IT professionals are also recruited. Other than insurance companies as such, there are several auxiliary services that will crop up as the insurance world expands, for example, risk management institutes, risk management companies and brokers. Moreover, there are various allied services such as third party administrators to service the clients and there could be some clients management officers too. Many new players have come into the insurance sector and each of them has opened up a number of offices. So they need to employ many people to man the offices. Apart from that, companies are also focusing on the recruitment of large number of agents. When you work as agent the remuneration is in your hands. The more policies you sell the more commission you can earn. Once you are a successful agent there are chances that the same company would appoint you as its permanent employee. Even we advertise every month for agents. Apart from that several insurance jobs, like policy issuance, are being outsourced to India from the countries like the U.K. and the U.S. If I have to issue a policy it costs about 5 to 7 pounds in U.K. While it costs much less, about 1/10 th of the entire amount, in India. So all the policies to
be issued can be transferred to India and be issued from here. It can also be generated online. In short, most of the routine jobs are being outsourced here including some of the legal works. I have an appeal for the people who want to join the insurance sector, including those having simple graduation. You must get into the insurance subject and learn more about it through several insurance books available in the market. There are several institutes offering insurance courses, for example the U.K. Chartered Insurance Group. If you have an interest for insurance, educate yourself more to have an edge.
The past 5-6 years have seen a boom in the number of insurance companies in the private sector. How has the competition affected the insurance industry? Has the increase in the number of companies affected the insurance penetration in India?
It has certainly affected the existing PSU insurance companies and our market share has come down. The private companies have taken about 26% of the market share. All the PSUs put together have already lost around 74% of the market share. This means that the cake has not expanded as expected. But the existing cake is being shared and the companies are eating into existing fellows market share which is not a welcome step. Except for health insurance, the market has hardly expanded about 5%. But the companies are very young; only about four years old. Hopefully, the market will expand with increasing experience. Though I am convinced that owing to absolute freedom to price and devise own product, detariffed market is set to expand. LIC is the oldest and the most experienced player in the market. How have the new players affected LIC or how has LIC affected the new players? As per data the growth of LIC has been quite substantial in the past year -- around 48% despite the presence of new players. But one worrying factor was that the number of policies sold and the number of lives covered has come down compared to the previous years. LIC has a very big advantage of being the leader of the insurance sector. It has huge investment and financial strength. Owing to its bigger size it has the best advantage of pricing as well as getting the better investment returns which can subsidise its original insurance product. Therefore, like SBI continues to be the market leader despite of so many private banks coming, LIC will continue to play a very big role and it is not easy to destabilize it. It has lakhs of agents and has an enormous size and is less likely to be affected. But of course it is being challenged and has been put on its toes.
Impact of Liberalization
While nationalized insurance companies have done a commendable job in extending the business opening up of insurance sector to private players was a necessity in the liberalization of financial sector. If traditional infrastructural and semipublic goods such as banking, airlines, telecom, power etc. have significant private sector volume of context of industries presence,
continuing state monopoly in provision of insurance was indefensible and therefore, the privatization of insurance has been done as discussed earlier. Its impact has to be seen in the form of creating various opportunities and challenges.
Opportunities
1. Privatization if Insurance was eliminated the monopolistic business of Life Insurance Corporation of India. It may help to cover the wide range of risk in general insurance and also in life insurance. It helps to introduce new range of products. 2. It would also result in better customer services and help improve the variety and price of insurance products. 3. The entry of new player would speed up the spread of both life and general insurance. It will increase the insurance penetration and measure of density. 4. Entry of private players will ensure the mobilization of funds that can be utilized for the purpose of infrastructure development. 5. Allowing of commercial banks into insurance business will help to mobilization of funds from the rural areas because of the availability of vast branches of the banks. 6. Most important not the least tremendous employment opportunities will be created in the field of insurance which is a burning problem of the presence day today issues.
Current Scenario
After opening up of insurance in private sector, various leading private companies including joint ventures have entered the fields of insurance both life and non-life business. Tata - AIG, Birla Sun life, HDFC standard life Insurance, Reliance General Insurance, Royal Sundaram Alliance Insurance, Bajaj Auto Alliance, IFFCO Tokio General Insurance, INA Vysya Life Insurance, SBI Life Insurance, Dabur CJU Life Insurance and Max New York Life. SBI Life insurance has launched three products Sanjeevan, Sukhjeevan and Young Sanjeevan so far and it has already sold 320 policies under its plan.
Conclusion
From the above discussion we can conclude that the entry of private players in insurance business needful and justifiable in order to enhance the efficiency of operations, achieving greater density and insurance coverage in the country and for a greater mobilization of long term savings for long gestation infrastructure prefects. New players should not be treat as
rivalries to government companies, but they can supplement in achieving the objective of growth of insurance business in india.
1. Departmental organization:
The central and the state government has insurance facilities in their different departments. The postal department has its own system of insurance under which the employees of the post offices are insured. The state government of different states has provided life insurance to their respective employees. Apart from this the state government have also provided sickness, maternity, disability ,medical and pension insurances to their employees.
2.Corporations:
In india in order to deal with the insurance business two corporations are established under separate acts. a. the LIC act 1956:this act has provide for life insurance legislations for life insurance business.it started its functions since September 1956 and owns all the life insurance business in india. b. under general insurance corporation of india act 1972,the general insurance corporation of india was established.
It formed into four distinct categories: 1. National insurance companies Ltd. 2. New india insurance companies Ltd.
3. Oriental and general insurance companies Ltd. 4. United india fire general insurance companies Ltd. These companies would work separately maintaining their features but they are enrolled and guide by general insurance corporation of inida.these companies are the subsidiary if GIC.
5.Government companies:
The government established their companies according to the provisions of Indian Companies act .In order to secure export risks, THE EXPORT RISK INSURANCE CORPORATION was established in 1957. In 1964 it was renamed as Export Credit Guarantee Corporation ( ECGC ).
2.individual insurer:
Individual insurance organisation has been very rare in the field of insurance. An individual can perform the business of insurer provided he has sufficient resources and talent of insurance.
3.partnership:
A partnership firm can also carry on the business of insurance for earning profit. in the early period before the advent of joint stock companies many insurance undertakings were partnership or unincorporated companies. They were constituted by the partnership deed which regulated the business. with the advent of joint stock companies the partnershipform completely disappeared.
5. Mutual companies:
The mutual companies were a type of cooperative association formed for the purpose of effecting insurance on the propriety of its members. the shareholders of the company were the policyholders themselves. Each member was an insurer as well as insured.they participated in the management of the company.
These organizations are incorporated and registered under the Indian cooperative societies act. They are also called as co-operative insurance societies.These societies like mutual companies are non-profit organizations.their main objective is to provide insurance protection to its members at the lowest reasonable cost. The Indian insurance act,1983 had made special provisions for the co-operative insurance societies but after nationalisation the societies have been ceased.
7.LIoyds association:
LIoyds association is one of the greatest insurance institution in the world.In 1871,LIoyds act was incorporating the members of the association in to a single corporate body with a perpetual succession and a corporate seal. The powers of LIoyds corporation was extended from the business of marine insurance to other insurances and gurantees business. They are also termed as SYNDICATES or NAMES.the business of the association is effected by the insurers called underwriters or syndicater.the underwriter assumes liability for himself and not for other. LIoyds as a corporation is never liable on a policy.it does supervise the conditions under which its members may issue policies.it undertakes to provide collective protection for the commercial and maritime interest of its members.
8. State insurance:
State insurance is defined as that insurance ehich is undertaken by public sectior or when the government has taken over the llife insurance business. In 1946,france nationalized larger insurance companies.in brazil,japan and mexico,,the insurance sector is largely nationalized. In india, the life insurance business was nationalized in 1956 and general assurance was nationalized in 1971. Today in india, the life insurance business is under the control and ownership of the central government. privatisation and reform in the insurance sector is a big challenge.
As per the section 4 of IRDA Act' 1999, Insurance Regulatory and Development Authority (IRDA, which was constituted by an act of parliament) specify the composition of Authority The Authority is a ten member team consisting of (a) a Chairman; (b) five whole-time members; (c) four part-time members, (all appointed by the Government of India)
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