Contents

Sr. No. Subjects Covered Project Proposed Objective of the project Methodology Sampling Limitations Introduction Introduction to insurance Definition of insurance Pre liberalization of insurance Post liberalization of insurance Trends in Insurance Sector Indian Insurance in 21 Century Emerging Trend in Indian Insurance Sector Growth of Insurance Sector Present Scenario of Insurance Sector in India Pages

1. 1.1 1.2 1.3 1.4 2. 2.1 2.2 2.3

2.4 2.5 Technology Trend in Insurance Sector 2.6 Globalization of Life Insurance Market 3. Impact of Budget on Insurance Sector 3.1 Impact of Budget 2004 4. Private V/S Public Insurance Sector Comparison between private and Public Insurance sector In India 4.1 Conclusion

INSURANCE INDUSTRY: CLASSIFICATION

INSURANCE

LIFE INSURANCE

GENERAL INSURANCE

Fire insuranc e

Marine insurance

Mediclaim

Motor vehicle

Insurance = Collective bearing of Risk

Insurance is nothing but a system of spreading the risk of one onto the shoulders of many. While it becomes somewhat impossible for a man to bear by himself 100% loss to his own property or interest arising out of an unforeseen contingency, insurance is a method or process which distributes the burden of the loss on a number of persons within the group formed for this particular purpose. Basic Human trait is to be averse to the idea of risk taking. Insurance, whether life or non-life, provides people with a reasonable degree of security and assurance that they will be protected in the event of a calamity or failure of any sort. 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. Any risk contingent upon these, may be
3

insured against at a premium commensurate with the risk involved. Thus collective insurance. bearing of risk is

Insurance Indemnifies Assets & Income

Every Asset has a value and generates Income to its Owner. There is a normally expected Life-time for the Asset during which time it is expected to perform. If the Asset gets lost earlier, being destroyed or made Non-functional through an Accident or other unfortunate event the Owner is Prejudiced. Insurance helps to reduce CONSEQUENCES of such Adverse Circumstances which are called Risks

Insurance is the science of spreading of the risk

It is the system of spreading the losses of an Individual over a group of Individuals

Insurance

is

Method

of

sharing

of

financial losses
of a few from a common fund formed out of Contribution of the many who are equally exposed to the same loss What is uncertainty for an Individual becomes a certainty for a Group. This is the Insurance Operations. Thus uncertainties to certainty basis of All insurance convert

DEFINITIONS
The definition of insurance can be made from two points: Functional definition. Contractual definition.

Functional definition
Insurance is a co-operative device to spread the loss caused by a particular risk over a number of persons
5

who are exposed to it and who agree to insure themselves against the risk.

General Definition
Insurance has been defined to be that in which a sum of money as a premium is paid in consideration of the insurers incurring the risk of paying a large sum upon a given contingency. In the words of John Magee, Insurance is a plan by themselves which large number of people associate and transfer to the shoulders of all, risks that attach to individuals.

Fundamental Definition
In the words of D.S. Hansell, Insurance accumulated contributions scheme. of all parties participating in the

Contractual Definition

In the words of justice Tindall, Insurance is a contract in which a sum of money is paid to the assured as consideration of insurers incurring the risk of paying a large sum upon a given contingency.

Working of Insurance

Pre-Liberalization Scenario
Indian History: Time to turn the clock back-and open up insurance

Fifty years ago, India had a bustling, if somewhat chaotic, entirely private insurance industry. The year after Independence, 209 life Insurance companies were doing business worth Rs712.76 crore (which grew to an amazing Rs 295,758 crore in 1995-96). Foreign insurers had a large market share 40 per cent for general insurance but there were also plenty of Indian companies, many promoted by business houses like the Tatas and Dalmias. The first Indianowned life insurance company, the Bombay Mutual Life Assurance Society, was set up in 1870 by six friends. It Insured Indian lives at the normal rates instead of charging a premium of 15 to 20 percent as foreign insurers did. Its general insurance counterpart, Indian Mercantile Insurance Company Ltd., opened in Bombay in 1907. A plethora of insufficiently regulated players was a sure recipe for abuse, especially because there was no separation between business houses and the insurance companies they promoted. The Insurance Act, 1938, introduced state controls on insurance, including mandatory investments in approved securities, but regulation remained ineffective. In 1949, Purshottamdas Thakurdas, chairman of the Oriental Assurance Company, admitted: "We cannot deny that, today, there is a tendency on the part of
8

insurance companies in general to make illicit gains. Can we overlook the cutthroat competition for acquiring business? And still worse is the dishonest practice of adjusting of accounts." After a 1951 inquiry, were the government in was dismayed giving that loans companies had high expense and premium rates, speculating shares, and regardless of security. No wonder that between 1945 and 1955, 25 insurers went into liquidation and 25 transferred their business to other companies. This reckless record stoked the pro-nationalization fires. The 1956 life insurance Nationalization was a top-secret government management minister C.D. intrigue; resolved of life for to fear first that unscrupulous over the by insurers would siphon funds off if warned. The take insurance later companies wrote:

ordinance, then their ownership. The then finance Deshmukh 'Seth Ramakrishna Dalmias extraction of Rs.225 crore (misappropriation by the Bharat Insurance Company) was a heaven-sent opportunity. We were ready to nationalize, with every detail worked out." On 19 January 1956, the news was announced on the radio, though even the director- general of AIR was not shown the speech. The next morning, at 9 am, while executives were frantically seeking details over the
9

trunk

telephone, our

says

Deshmukh walked

in into

his the

autobiography,

officers

respective insurance offices, showed their authority and then took over the business. I believe this will be regarded as one of the best kept secrets of the Government of India in all times to come." The ordinance transferred control of 245 insurers to the government. LIC, established eight months later, took over their ownership. General Insurance had its turn in 1972, when 107 insurers were amalgamated into four companies headquartered in the four metros, with GIC as a holding company. Nationalization brought some benefits. Insurance spread from an urban-oriented, high-end business to a mass one. Today, 48 per cent Of LIC's new business is rural. Net premium income in general insurance grew from Rs222 crore in 1973 to Rs 5,956 crore in 1995- 96. Yet, rigid controls hamper operational flexibility and initiative so both customers service and work culture today are dismal. The frontier spirit of the early insurers has been lost. Insurance companies have also been timid in managing between their the investment four GIC portfolios. Competition

subsidiaries remains illusory. If Nationalization ever had a purpose, it has been served. It's now time to turn back the clock in some respects, and open up the

10

sector again. The government already intends to insist on large minimum capital requirements, a strong regulator, and a healthy distance between insurers and industry. To ensure that history doesn't repeat itself

Post Liberalization Scenario

While no aspect of the reform process in India has gone smoothly since its inception in 1991, no individual initiative has stirred the proverbial hornets' nest as much as the proposal to liberalize the country's insurance industry. However, the political debate that followed the submission of the report by the Malhotra Committee has presumably come to an

11

end with the ratification of the Insurance Regulatory Authority (IRA) Bill both by the central Cabinet and the standing committee on finance. This section traces the evolution of the life insurance companies in the US from firms underwriting plain vanilla insurance contracts to those selling sophisticated investment contracts bundled with insurance products. In this context, it brings into focus the importance of portfolio management in the insurance business and the nature and impact of portfolio related the regulations on the asset quality of of the insurance companies. It also provides a rationale for increased autornatisation insurance companies, and the increased emphasis on agentindependent marketing strategies for their products. If politicized, regulations have potential to adversely affect the pricing of risks, especially in the non-life industry, and hence the viability of the insurance companies. Finally, the backdrop of US experience provides some pointers for Indian policymakers

12

Chapter 2

Trends in Insurance Sector

13

INDIAN INSURANCE IN 21ST CENTURY:

2000: IRDA starts giving licenses to private insurers: ICICI prudential and HDFC Standard Life insurance first private insurers to sell a policy 2001: Royal Sundaram Alliance first non life insurer

to sell a policy 2002: Banks allowed selling insurance plans. As TPAs enter the scene, insurers start setting non-life claims in the cashless mode 2007: First Online Insurance portal, https:/// set up by an Indian Insurance Broker, Bonsai Insurance Broking Pvt Ltd. The Government of India liberalized the insurance sector in March 2000 with the passage of the Insurance Regulatory and Development Authority

(IRDA) Bill, lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign ownership.

14

Minimum capital requirement for direct life and Nonlife Insurance company is INR1000 million and that for reinsurance company is INR 2000 million. In the 200405 budgets, the Government proposed for increasing the foreign equity stake to 49%, this is yet to be effected. Under the current guidelines, there is a 26 percent equity cap for foreign partners in direct insurance and reinsurance Company.

Emerging Trend in Indian Insurance Sector

Market by 2015, particularly in countries like India and China. The IRDA is the major body, which is providing better opportunities for the private player in India. GIC & LIC's monopoly market approach is no more prevalent in India. The new market scenario for insurance is growing; no doubt it is a flying bird. Change is the eternal law of nature. Everything is changing according to the need of the time. Economic growth and social development in present scenario is due to sudden change in industrial policy and economic planning. Globalization has been the basic mantra after 1991, so every one thinks of being

15

global. Liberalization, privatization and globalization is the basic concept of success in all aspect of development. economy, things regulations and for Competition is tough think now about due to globalization. Business has positioned the entire industrialists There are making any making rules house or or global. no stringent business

industry. Government gives more emphasis on export and entrepreneurship. This is a changing world. Everyone has to compete for better success. Marketing is the major concept for developing any type of business. After globalization, marketing has taken a new dimension and it is the most challenging task now. The new horizon of marketing in the field of finance and insurance in present scenario is a good sign of development.

Globalization - "The Dynamic Force"

Many people consider globalization nothing new societies have been interconnected for years. The world has never experienced globalization at this level of intensity before, or the speed at which it is transforming and integrating societies.

16

Herman E. Daly, an analyst of Global Policy Forum, characterizes globalization as, "Global integration of many former national economies into global economy, mainly by free trade and free mobility, but also by easy or uncontrolled economic purposes." He further clarifies that globalization is not internationalization globalization brings about a single, integrated, global economy, while internationalization is a federation of nations cooperating as sovereign units to advance the national interest of all members. Though globalization has become a broad heading for a multitude of global interactions, ranging from the expansion of cultural influences across borders to the enlargement of economic and business relations throughout the world, it has different dynamic force for different person. For the economist, globalization is essentially the emergence of a global market. For a historian, it is an epoch dominated by global capitalism. Sociologists see globalization as the celebration of diversity and the convergence of social preferences in matters of life style and social values. To the political scientist, it represents the gradual erosion of state sovereignty. But discipline specific studies explain only a part of the phenomenon. From a multi-disciplinary angle, globalization may be treated as a phenomenon,
17

philosophy

and

process, which affects human beings as profoundly as any previous event. Several factors have been responsible for this phenomenon. This study confines its attention to four growth-enhancing facets of globalization that have been among its key drivers, namely trade, finance, communication and transport.

MNCs - "The New Path Maker"

After globalization, so many MNCs are the major path maker for economic growth. The world-class MNCs constantly pursued their strategy of gaining access to every promising market world over, which had sound growth network potentialities, and control in order the to expand their local over respective

economies. The consequence was that some of the markets, particularly in developing countries like China and India, adopted some by sort in of selfto protectionist deliberate mechanisms imposing certain order

politico-legal

restrictions

restrict the entry of capital goods of these MNCs into their markets. Insurance being an integral part of financial service could not claim immunity to the impact of the globalization process and opened up to private and global players world over, including India. So many

18

MNCs are now entering into the insurance sector which is now a booming sector.

New Horizons of Insurance Market after Globalization

After 1970, insurance sector has become more

prosperous. For a long time, the two most important insurance players were LIC & GIC. Now so many MNCs have entered into the same sector like Bajaj Allianz, Aviva, Birla Sunlife, ICICI Prudential, etc. Insurance is now acting on two dimensions, i.e., the element of investment and the element of protection. The Economic Value Addition (EVA) has taken the major concern of the same business.

Marketing become:

after

globalization

has

More customer oriented Mostly better service oriented More competitive

Better satisfaction, more value addition and strategic development can help any insurance sector to sustain in the present era.
19

New Market Scenario & Insurance

Insurance market in present scenario though is a booming sector, but the market has changed from simpler to complex, less challenging to more challenging. Going domestic to international is a very difficult task. Understanding market synergy and cognisation of perception of customer in the insurance field is very difficult. The Regulatory Board like 'IRDA' is playing a very crucial role for the benefit of the insurance holder. The premium and interest rate can't be violated market for is better profit and development. gradually. The becoming tougher

Globalization of Insurance Market

Historically, insurance has been an integral part of financial services system and recognized as a cornerstone of a country's financial health and symbol of progress. Insurance provides for the financial security of citizens and their families. It offers valuable investment advice and serves as an effective step towards stability. both individual and national financial

20

After the terrorist attack on the World Trade Center in September 2001, the momentum of growth of world economy suffered some temporary setback. According to 3rd Annual Globalization Index Report of World Watch Institute, the growth rate fell sharply from 4% in 2000 to 1.3% in 2001. But the world had become stabilized after that and the economic growth was back with entry of so many MNCs and insurances. Triggered by the sound fundamentals in global

economy and internationalization of world markets, several countries turned towards free market regimes in banking and insurance, putting an end to several decade-old state-owned controlled markets. The insurance market in China & India is brighter. The leading reinsurance company like Swiss Re & Munich Re has projected 20-25% growth in life and health insurance market by 2015, particularly in countries like India & China

Growth of Insurance
GROWTH OF LIFE INSURANCE SOME FACTS (MAY 2008):

21

HOW THEY STACK UP

Premium income of life insurers in Rs crore

April - June LIC ICICI Prudential Bajaj Allianz SBI Life HDFC Standard Max New York Reliance Life Birla Sun Life Total Private Total Market 2007 8580.84 1056.45 731.85 426.39 355.93 289.74 204.10 174.63 3930.95 12511.80 2008 7524.56 1,590.27 829.24 1,148.67 490.40 501.16 557.33 501.53 6,795.64 14,320.20

Growth % -12 51 13 169 38 73 173 187 73 14

Total Share (%) 52.55 11.11 5.79 8.02 3.42 3.50 3.89 3.50 47.45 100.00

Global Industry Statistics

Emerging Markets (Total Premium, figures in $billion) Taiwan 17.3 China 13.4 India 7.2 Hong Kong 6.1 Israel 5.8 Singapore 5.0

22

Present Scenario of the Insurance Sector in India

As per the findings of a survey carried out in 2003-04, the Indian insurance market ranked 5th in the Asian continent after Japan, South Korea, China & Taiwan, and 19th In India, the process of liberalization and opening of insurance sector to private and foreign players started taking shape as part of the series of financial and economic reforms brought in by the Government in the late 1990s, in accordance with the recommendations made by R. N. Malhotra Committee constituted by the Government in April 1993. By amending the relevant provisions of the Insurance Act, 1938, and passing the IRDA Act, 1999, by an Act of Parliament, Insurance Regulatory and Development Authority (IRDA) was established in the year 2000, which marked the opening act of the insurance sector to private participation and foreign investment.

GDP & Insurance

Though potentially insurance is more than Rs. 500 Billion business in India, and together with banking, it
23

adds slightly more than 7.5% to the GDP, of the country, the gross premium collection has been hardly 2% of the GDP, not withstanding its growth between 15-20% annually, during the decade preceding the opening up of insurance market for private and foreign players in the year 2000. As the insurance premium database of various developed and developing countries for the year 1999 indicates, the per capita premium of India was just around $ 8 as against the same having been very high in the developed countries. In other words, and in terms of percentage of GDP, it was 14% for Japan, 12% for Korea and 9% for UK as against the same staggering below 2% for India for the fiscal year 2000-2001. In the new economic reality in globalization,

insurance companies in 21st century face a dynamic global business environment. Radical changes are taking place owing to the internationalization of activities. The appearance of new risks, new types of cover to match with new risk situation, unconventional and innovative ideas on customer service, low growth rates in developed markets, changing customer needs and the uncertain economic conditions in the developing world are exerting pressure on insurers resources while testing their ability to survive. The existing insurers are facing
24

difficulties from non-traditional competitors that are entering the retail market with new approaches and through provide new the channels. developing for the The basic premise with trade of new and globalization is opening up of new service markets to countries of opportunities expansion

economic growth. The rapidly changing economic scene, the political attitude, patterns, other social values and in IT structures, have are cultural developments of the transformed witnessing of banc

lifestyles in urban and rural areas. Developments in parts world, in which of sweeping financial financial on changes and terms convergence through

insurance

markets of

assurance, replacement of reinsurance contracts by instruments, Insurance sale insurance through long mergers and acquisitions will also have their impact Indian Industry.During the monopoly regime, the government attempted minor changes in the procedures without going into the root cause. The deregulation requires comprehensive changes in the character and basic policies of the industry. Till the year 2000, the insurance industry was a government monopoly and is now experiencing cut-

25

throat competition because a number of players have entered into the Indian market in the form of Joint ventures with Indian private sector partners. Consequently, Indian Insurance Industry has closely integrated with world economy thereby making crucial for insurance companies to operate outside national boundaries. India Insurance sector after globalization has brighter future. The economic status of people is changing. So many new government policies and economic reforms are impetus for insurance sector. The firmament of economic growth is vast and never ending but the insurance as a bird have to fly. No doubt insurance market after globalization is "A flying bird"!

26

TECHNOLOGY TREND IN INSURANCE MARKET ARE AS FOLLOWS

Computerization:

Initially, companies

in used

the Unit

late

1950s

the

insurance (Electro

Record

Machines

Magnetic Machines) to process data punched into cards. Computers were introduces in the mid 1960s and by the 1980s the Unit Phased Machines were phased out and the entire process was computerized. This brought about greater efficiency and quick service delivery

Internet:
Today, the internet has completely changed the service delivery process. Internet is today used to even sell insurance policies. Internet is, in fact, proving to be one of the widely used distribution networks for selling insurance policies. Also internet

27

is used for sending premium notices to policy holders through e-mails Companies like LIC (www.licindia.com), all have websites ICICI from (www.iciciprudential.com)

which people can get the information about their products, prices, various schemes, and lots of other information. People can also purchase the product through this website.

Electronic Clearance Service (ECS):

Almost all the big organizations today provide the ECS facility to its customers. A policy holder having an account in any bank which is a member of the local clearing house can opt for ECS debit to pay premiums. The advantage here is that once the option is exercised, the policy holder need not visit a branch for paying the premium or collecting the receipts. On the day indicated by the policy holder, the premium amount will be directly debited to the bank account of the policyholder and the receipt will be issued by the designated branch office.

Call Centres and SMS services:

28

Almost all the insurance companies have their own call centres which cater to the phone based queries of the policyholders. This service is 24x7 and they have the Interactive Voice Response (IVR) systems at all the branches

Globalization of Life Insurance Market

SOME GENERAL INFORMATION ABOUT LIFE INSURANCE IN INDIA

29

Significant channel for household savings into capital formation GDP penetration of 4.1% Statutory requirements to provide reach to rural areas 2nd largest financial service in India after banking Total number of lives insured and on books as on March 31, 200822 Crs

Life Insurance

Total Assets Under Management of Life Insurance Cos. as on March 31, 2008- Rs. 8,50,000 crores

The

Life

Insurance

market

in

India

is

an

underdeveloped market that was only tapped by the state owned LIC till the entry of private insurers. The penetration of life insurance products was 19 percent of the total 400 million of the insurable population. The state owned LIC sold insurance as a tax instrument, not as a product giving protection. Most customers were under- insured with no flexibility or transparency in the products. With the entry of the private insurers the rules of the game have changed.

30

The 12 private insurers in the life insurance market have already grabbed nearly 9 percent of the market in terms of premium income. The new business premium of the 12 private players has tripled to Rs 1000 crore in 2002- 03 over last year. Meanwhile, state owned LIC's new premium business has fallen. Innovative combination products, has smart marketing fledgling and

aggressive distribution. That's the triple whammy that enabled private insurance companies to sign up Indian customers faster than anyone ever expected. Indians, who have always seen life insurance as a tax saving device, are now suddenly turning to the private sector and snapping up the new innovative products on offer. The growing popularity of the private insurers shows in other ways. They are coining money in new niches that they have introduced. The state owned companies still dominate segments like endowments and money back policies. But in the annuity or pension products business, the private insurers have already wrested over 33 percent of the market. And in the popular unit-linked insurance schemes they

31

have a virtual monopoly, with over 90 percent of the customers. The private insurers also seem to be scoring big in other ways- they are persuading people to take out bigger policies. For instance, the average size of a life insurance policy before privatisation was around Rs 50,000. That has risen to about Rs 80,000. But the private insurers are ahead in this game and the average size of their policies is around Rs 1.1 lakh to Rs 1.2 lakh- way bigger than the industry average. Buoyed by their quicker than expected success, nearly all private insurers are fast- forwarding the second phase of their expansion plans. No doubt the aggressive stance of private insurers is already paying rich dividends. But a rejuvenated LIC is also trying to fight back to woo new customers

32

Market Share of Private Sector life Insurance Companies

33

Chapter 3

Impact of Budget on Insurance Sector

34

IMPACT OF BUDGET 2004

The finance ministers reform to strengthen risk management in banking The Finance Bill has some brilliant promises to offer and yet there are adverse to the financial service sector. The decision to permit 49 per cent foreign direct investment (FDI) in insurance is welcome. The industry will agree that there is an acute need for it to grow and to write more business. If one were to analyze the growth of some new private sector insurance players the underlying strength seems to be their ability to get more capital and meet the solvency requirement perform, write more business and grow faster. Lets not forget that these insurance companies will be able to tap the capital market in two to three years. The best performer in the sector have also expanded their capital to about Rs. 700 to 800 crore. A look at the non performers suggests that they do not have adequate capital to grow. Hence the increase in the FDI limit would help. More importantly, this will give greater control to the foreign partners in areas of management control and governance. They will now be more willing to bring in their expertise in product

35

development, practices.

technology,

and

implement

best

The striking future of the Finance Bill is that the government has accepted defined contribution as the way forward for pension reforms, particularly for new government employees. One could have expected some clarity on the subject of multiple regulators for pension. Though there be some benefits having a separate pension regulator, one supposes that there would be a strong case for just one regulator both the pension and insurance sectors. The government must examine the confusion that may arise on account of having multiple regulators. Banking and insurance companies are significant players in the securities market today. Midsize public sector banks may have made a turnover of about Rs. 40,000 crore on securities trade and larger banks would have made two to three times the number. The transaction tax of a 0.15 per cent would certainly eat away a good part of banks profits. Likewise, all services rendered by banks (except the fund based assistances) would attract service tax. Banks would be able to conveniently pass on some of these costs to the customers. So, each time an

36

individual goes and gets a demand draft or pay order, they will end up paying much more than the existing rates. However, if competition becomes acute, banks would have to bear it, which is bad news for the banking companies.

Chapter 4

37

Private V/S Public Insurance Sector

PRIVATE V/S PUBLIC INSURANCE SECTOR

Private players in the life insurance business are growing at a scorching pace. Within three years of

38

their inception, they have seized about 14 per cent of the market. Compare this to new generation private-sector banks, which took nine years for 20 per cent share in the Indian banking industry. And after seven years in the industry, in 2000, private mutual funds accounted for just 9 per cent of a market that had been dominated by the Unit Trust of India. There's another dimension to the insurance numbers game. While the private insurance companies have attained 13 to 14 per cent share of the overall insurance market, their share in the key metros (Mumbai and Delhi) is as high as 30 to 40 per cent. "We have to struggle to complete a deal in the metros now, because policyholders are comparing products and asking for better deals," says S B Mathur, chairman of the Life Insurance Corporation of India. Private insurance companies are essentially joint ventures with global insurance companies holding a maximum of 26 per cent stake. The foreign partners are investing heavily in the Indian market and, thereby, region. driving sales, because they see India emerging as one of the biggest markets in the Asian

39

"India will become the biggest market for us in the next three to four years," predicts Dan Bardin, Prudential Corporation Asia managing director south Asia and greater China. Private players have certainly done their bit to increase the penetration levels of insurance, mainly by creating alternative distribution channels--such as associations agents. "Our bancassurance channel--with tie-ups with four banks--contributes almost 70 per cent of our total sales," says Aviva CEO Stuart Purdy. OM Kotak Mahindra Life, which is ranked eighth among private players, is also leaning towards alternative distribution channels that will contribute to 45 per cent of total sales, in line with the contribution from its tied agency force. In sharp contrast, most of the LIC's policies continue to be sold through its tied-agency network. The state life corporation acknowledges that it is unable to maintain its lead in some metros: penetration by the private-sector insurers has come of age and they are giving the LIC a run for its money. with banks, brokers and corporate

40

The

multi-channel

approach

adopted

by

private

insurance companies has proved to be a boon in terms of costing and their ability to capture business. Earlier, most private insurance companies focused their energies on the top 20 cities. Today they are moving to smaller cities. "The potential in smaller cities is increasing and companies are moving to smaller cities and towns because these are increasingly becoming more prosperous with a rise in agricultural income. With the increase in buying power, this has fuelled growth opportunities for us," says Max New York Life CEO Anuroop Tony Singh. AMP Sanmar, another private player, has tied up with various chit funds and transport finance companies in the country, where it is selling life policies on the back of fixed deposits and bonds. A senior company official cites the example of Vijaywada where a significant portion of the income is derived from farming activities. "The rural populace is managing their money well and no longer keeping it under their beds. They have mobile phones and have opened bank accounts. They are not very different from their urban counterparts

41

when it comes to purchasing life insurance covers," he points out. And that's making the private sector optimistic about its future in the Indian insurance market. "We [private insurers] are becoming an alternative to LIC. If a customer has already bought an LIC plan, his second policy is likely to be bought by the private insurance sector on account of various reasons--more specifically flexibility and transparency," says OM Kotak Mahindra Life CEO Shivaji Dam. Perhaps this partly explains why the LIC has

increased its advertising spend multifold since the insurance sector was privatized. Its ad spend more than doubled to Rs 81 crore (Rs 810 million) in fiscal 2003, against Rs 37 crore (Rs 370 million) in 19992000, prior to the industry being privatized. Of course, the private insurance sector has also been steadily increasing its ad spend, from Rs 29 crore (Rs 290 million) in fiscal 2001 when the industry opened up, to Rs 92 crore (Rs 920 million) the following year. In fiscal 2003, private insurers spent Rs 143 crore (Rs 1.43 billion) on advertising. But it's not the increased spend on advertising alone that has helped private players in grabbing market

42

share. One of the key differential factors responsible for their growing market is the 150,000-odd life insurance companies. "The private insurance agents sell better than their counterparts at the LIC. Life insurance advisors of private sector insurance companies adopt the needbased selling approach, unlike the LIC's agency force that pushes the number of policies," says Dam. This also gets reflected in the average sum assured by private insurance companies being higher than that of the LIC. Policies sold by the private players tend to be of a higher value. For instance, Birla Sun Life's average premium stands at Rs 24,500, while that of OM Kotak Mahindra Life is equally high at Rs 20,400. Against this is the LIC's average premium of Rs 3,200. Of course, there's also a difference in the target client of the private and the state-run insurance companies. While the private players are targeting the upper middle-class and high net-worth individuals, the LIC aims for the masses through its 2,048 branches spread across semi-rural and rural towns. advisors of the private insurance

43

Meanwhile,

private

insurance

companies

are

capitalizing on global relationships. "Business deals are often a call away since we capitalize on AIG's global relationship with multinational companies such as GE and Kodak," says Tata AIG Life Ian Watts. OM Kotak has gone a step further and tied up with Swiss Life International so that it can capitalize on the latter's relationship with 300 multinational subsidiaries and affiliates. But it's not as if LIC has lost out on group insurance. The insurance major's group business reached new heights in fiscal 2004, recording a 119 per cent growth in new premium income and 50 per cent increase in the number of lives covered. Still, new business income for private companies has grown at 146 per cent in fiscal 2004, compared to the 18 per cent average industry growth in new premium income for the same period. "The key in product sales lies in offering unbundled and transparent products that give customer value," points out Dam. The biggest draw in insurance in fiscal 2004 was unitlinked plans. Ninety-five per cent of the policies sold

44

by Birla Sun Life and over 80 per cent of the 436,000 policies sold by ICICI Prudential were unit-linked plans. And even though the LIC was late (January 2004) in pushing its unit-linked product "Bima Plus", it managed to mop up a premium income of Rs 373 crore (Rs billion) with the sale of just under 1.7-lakh unit-linked policies, the highest sales figure in the industry. The advantage with unit-linked plans is that they offer policyholders transparency in terms of costs, annual returns and bonus calculations. With many companies guaranteeing the capital investment (some like Birla Sun Life even guarantee 3 per cent assured returns on its unit-linked plans), the interest in unit-linked plans only increased. And the switch from traditional products to unitlinked plans gained momentum as the Sensex climbed higher: the returns on such policies are linked to the equity market. "The stock market has helped to a certain extent and has contributed to our growth and performance," agrees Birla Sun Life CEO Nani Javeri.

45

Aviva has shown a compounded aggregate growth rate of 36 per cent since the inception of its fund. Returns on OM Kotak's balanced and growth funds stand at 31.79 to 43.25 per cent respectively. Dam claims that OM Kotak has sold several policies of Rs 25-50 lakh (Rs 2.5-5 million) since the "savvy investor thinks it best to invest in unit-linked products." He adds: "Growth is coming faster in insurance companies with unit-linked plans."

Chapter 5

46