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A MANAGEMENT RESEARCH PROJECT ON INSURANCE INDUSTRY
Strategic Analysis of Indian Life Insurance Industry
Objectives and scope of the project
The insurance industry is one of the basic service industries in Indian economy, whose prospect is reflective of the economic resilience of the economy. With the globalisation of the economy, India has become the playground of major global insurance players. As whole insurance industry is a very large field for research we have chosen life insurance industry of the booming segment of insurance industry, for research purpose. The major objectives of the study are as below: To find out how political, economical, socio-cultural, technological factors affecting this industry by PEST analysis. To find out how the market condition and what level of competition is there by five force analysis. To analyse driving forces and key success factors of the industry To analyze various threats and opportunities for the industry To focus on current trends and future of the industry.
Strategic Analysis of Indian Life Insurance Industry
We have done exploratory research and for that purpose we had used secondary data. We had collected this secondary data from various published materials like newspapers, magazines, books etc and from Internet web sites. From these various information and data we had done qualitative and quantitative analysis to find out impact of various forces, effect of macro environmental factors, major trends and future of the industry.
which decrease in value with passage of time. Unlike the physical assets. If the past experience indicates that 4 out of 1. life insurance is defined as follows: “Life insurance provides a some of money if the person who is insured dies whilst the policy is in effect”. It is natural think of insurance of physical assets such as motor car insurance or fire insurance but often we forget that creator of all these assets in the human being whose efforts have gone a long way in building up the assets. surly this is far too brief an explanation for a financial service that provides a very sophisticated range of savings and investment products. the individual becomes more experienced and more matured as he advances in age. However the basic principle is that loss should occur as a result of natural calamities or unexpected events.000. 50. which are beyond the human control. The losses to assets resulting from natural calamities like fire. accidents. (LOMA). Life Office Management Association Inc. This raises his earning capacity and the purpose of life insurance is to protect the income in the event of his premature death. Secondly insured person should not make any gain out of insurance. ‘Insurance’ is basically a sharing device. The individual himself also needs financial security for the old age or on his becoming permanently disabled when his income will stop. Anybody who has knowledge about life insurance will be tempted to say “yes BUT…” In other words. Insurance also has an element of savings in certain cases. In that sense. earthquake. Suppose there are 1000 persons all aged 35 years and healthy lives. as well as mere compensation for death. at this age are 4 . Each person is insured for Rs. flood. This contribution of many is used to pay the losses suffered by unfortunate few. etc. They are insured for one year against the risk of the death. human life is a unique image-generating asset.S. are mate out of the common pool contributed by large number of person who is exposed to similar risks.000 persons.Strategic Analysis of Indian Life Insurance Industry Insurance at a Glance What is Insurance and How Insurance Work? According to the U.
That's how old these concepts are. In 2100 BC. the Code of Hammurabi granted legal status to the practice. shipwrecks and the like. Since most of the trade took place by sea. Thus. Essentially. all the 1. While insurance cannot prevent accidents or premature death. The business of insurance company called insurer is to bring together persons who are exposed to similar risks. The story so far. it can help protect the family of the decreased against the loss of the death of the main breadwinner. in Genoa. sea routes and the consequent growth in trade. With the discovery of new lands. traders used to bear risk of the caravan trade by giving loans that had to be later repaid with interest when the goods arrived safely. really. Burial expenses and support in times of sickness and poverty were other services offered. In 1347.000 persons will come to Rs. That.000 persons share loss caused to the 4 unfortunate families. Almost 4. As European civilization progressed. In 2100 BC. European maritime nations entered into the earliest known insurance contract and decided to accept marine insurance as a practice. 00.such as premature death. all these revolved around the concept of insurance or risk coverage. was how insurance made its beginning. The contribution to be paid by each of the 1. in the ancient land of Babylonia. 200 per year. 996 persons who survived till one year have not lost anything as they have secured peace of mind and a feeling of security for their family. its social institutions and welfare practices also got more and more refined. 2. perhaps. perhaps. the Code of Hammurabi granted legal status to the practice. expected amount of death claim to be paid to the family of four persons would come to Rs. In return for specified payments. That. was how insurance made its beginning.500 years ago.Strategic Analysis of Indian Life Insurance Industry expected to die during the year. medieval guilds took it upon themselves to protect their member traders from loss on account of fire.000.. there was also the fear of pirates. collect contribution (premium) fro them on some equitable basis and pay the losses (claim) to the unfortunate few who suffer. 5 . .. So these guilds even offered ransom for members held captive by pirates. insurance will provide protection against the incidents of an uncertain event.
. By the end of the 18th century. 6 . In 1693... The year 1735 saw the birth of the first insurance company in the American colonies in Charleston.. In 1835. Two years later.. Lloyd's had brewed enough business to become one of the first modern insurance companies. ship-owners and underwriters met to discuss and transact business. In 1756. was devised specifically for such situations. linking premium rate to age. The 19th century saw huge developments in the field of insurance. The practice of reinsurance. where merchants. wherein the risks are spread among several companies. However. Joseph Dodson reworked the table. it began taking shape in 1688 at a rather interesting place called Lloyd's Coffee House in London. Back to the 17th century. astronomer Edmond Halley constructed the first mortality table to provide a link between the life insurance premium and the average life spans based on statistical laws of mortality and compound interest. The growing years. Insurance and Myth. the infamous New York fire drew people's attention to the need to provide for sudden and large losses. Enter companies. SC. with newer products being devised to meet the growing needs of urbanization and industrialization. The great Chicago fire of 1871 further emphasized how fires can cause huge losses in densely populated modern cities. the Presbyterian Synod of Philadelphia sponsored the first life insurance corporation in America for the benefit of ministers and their dependents. Massachusetts became the first state to require companies by law to maintain such reserves.. In fact. In 1759.Strategic Analysis of Indian Life Insurance Industry The first step… Insurance as we know it today owes its existence to 17th century England. The first stock companies to get into the business of insurance were chartered in England in 1720. it was after 1840 that life insurance really took off in a big way. The trigger: reducing opposition from religious groups.
such as death where as non life (or general insurance) is more commonly concerned with the provision for a specific event. which affects a property. ii. which made it mandatory for a company to insure its employees against industrial accidents. but sickness and accident benefits and old-age pensions. Classification of Insurance: Insurance business can be divided into two broad categories. i. For details. gained importance and acceptance? In the 19th century. Tariff Advisory Committee (TAC) lays down tariff rates for some of the general insurance products. 2001: of life insurers. life insurers have launched new products. such fraternal orders continue to provide insurance coverage to members as do most labs our organizations. such as fire. These include linked-products.Strategic Analysis of Indian Life Insurance Industry There were more offshoots of the process of industrialization. More than 80% of the life insurance business is from these products. while fraternal orders provided low-cost. Employees contribute a certain percentage of the premium for these policies. With the advent of the automobile. the British government passed the Workmen's Compensation Act. please visit the websites 7 . members-only insurance. Life. many societies were founded to insure the life and health of their members. public liability insurance. PRODUCTS:As for latest information get in touch with the current insurers – website information of insurers is provided at the web page for insurers: Life Insurance: Popular Products: Endowment Assurance (Participating) and Money Back (Participating). Many employers sponsor group insurance policies for their employees. In 1897. theft etc. and Non-life. Life insurance is concerned with making provision for a specific event happening to the individual. Even today. providing not just life insurance. which first made its appearance in the 1880s. flood.
followed by a detailed and amended Insurance Act of 1938 that looked into investments. there were around 170 insurance companies and 80 provident fund societies in the country's life insurance scene. scams and irregularities were almost a way of life at most of these companies. As these companies grew. Bombay Mutual Assurance Society. was formed in 1870. For instance. For years thereafter. Bharat and Empire of India were also set up in the 1870-90s. However. insurance remained a monopoly of the public sector. As a result. The Insurance Act was passed in 1912. The term suggests that a form of "community insurance" was prevalent around 1000 BC and practiced by the Aryans. in the absence of regulatory systems. the first Indian life assurance society. the government decided nationalizes the life assurance business in India. protect widows and children. It was only after seven years of deliberation and debate . the name of Life Insurance Corporation of India's corporate headquarters. It was during the swadeshi movement in the early 20th century that insurance witnessed a big boom in India with several more companies being set up. Other companies like Oriental. the government began to exercise control on them. expenditure and management of these companies' funds. is derived from the Rig Veda. By the mid-1950s. yogakshema.after the RN Malhotra Committee report of 1994 became the first serious document calling for the re- 8 .Strategic Analysis of Indian Life Insurance Industry INSURANCE IN INDIA Introduction: Insurance in India can be traced back to the Vedas. Burial societies of the kind found in ancient Rome were formed in the Buddhist period to help families build houses. The Life Insurance Corporation of India was set up in 1956 to take over around 250 life companies.
especially premature death. LIC Act. Originally. policies were to provide for short periods of time. 1956. The Insurance Regulatory & Development Authority. and intention of life insurance: i. basic. 1938: Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public. 1956: 245 Indian and foreign insurers and provident societies taken over by the central government and nationalized. 1928: The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and non-life insurance businesses. to provide for one’s family and perhaps others in the event of death. LIC formed by an Act of Parliament. Need for Life Insurance: The above definition captures the original.that the sector was finally opened up to private players in 2001.e.Strategic Analysis of Indian Life Insurance Industry opening up of the insurance sector to private players -. an autonomous insurance regulator set up in 2000. with a capital contribution of Rs. Milestone of indian life insurance industry:The business of life insurance in India in its existing form started in India in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. viz. Tracing the developments in the Indian insurance sector reveals the 360-degree turn witnessed over a period of almost two centuries. such as sea voyages. Some of the important milestones in the life insurance business in India are: 1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business. has extensive powers to oversee the insurance business and regulate in a manner that will safeguard the interests of the insured. covering temporary risk situations. 5 crore from the Government of India. The insurance sector in India has come a full circle from being an open competitive market to nationalization and back to a liberalized market again. As life insurance 9 .
Investment: Put simply. In the event of untimely death. especially in a changing culture and social environment. where the main earner has no life cover. We will discuss how to analyze the need for life cover and the value of life later in the course. A simple life insurance policy (term assurance) could have provided Mr. as a medium to long-term exercise (through a series of regular payment of premiums). iii. Retirement: Provision for one’s own later years become increasing necessary.Strategic Analysis of Indian Life Insurance Industry becomes more established. it was realized what a useful tool it was for a number of situation including: i. which will provide periodical payments in one’s old age. Temporary needs/ threats: The original purpose of life insurance remains an important element. namely providing for replacement of income on death etc. investment products are traditionally lump sum investments. the building up of savings while safeguarding it from the ravages of inflation. Benefits from Life Insurance: i. This has become more relevant in recent times as people seek financial independence from their family. of say the main earner in the family. 10 . This simple example illustrates the impact premature death can have on a family. where the individual makes a one-time payment. which is likely to be significant more than the total premiums paid. ii. iv. Unlike regular saving products. Atol’s family with a lump sum that could have been invested to provide an income equal to all or part of his income. With more traditional savings vehicles. It is superior to a traditional saving vehicles: As well as providing a secure vehicle to build up saving s etc. One can buy a suitable insurance policy. its provides peace of mind to the policyholder. the policy will pay out of the guaranteed sum assured. Regular Savings: Providing for one’s family and oneself.
In addition. the only return would be the amount invested plus any interest accrued. where the policy is written under trust. To overcome this. otherwise the policy will lapse.50. A loan.000 say Rs. iii. 2.Strategic Analysis of Indian Life Insurance Industry such as fixed deposits. Under the Married Women’s Property Act (M. it becomes compulsory for the insured to save regularly and spend wisely. some lending institutions will accept a life insurance policy as collateral for a personal or commercial loan.000 per month. 00. It encourages saving and forces thrift: Once an insurance contract has been entered into. can be taken for a temporary period to tide over the difficulty. 000 can be taken out as a lump sum and the balance paid out in smaller installments. if a policyholder is not in a position to pay the premium. say Rs. the insured has an obligation to continue paying premiums. ii. a claim under the life insurance contract can be settled easily. It provides easy settlement and protection against creditors: Once a person is appointed for receiving the benefits (nomination) or a transfer of rights is made (assignment). which creditors cannot claim on. until the end of the term of the policy. 5. In contrast savings held in a deposit account can be accessed or stopped easily.Act). v. the money available from the policy forms a kind of trust. the person taking the policy can instruct the insurer that the claim amount is given in installments. iv. For example. In other words. if the total amount to be received by the dependents is Rs.W. It can be enchased and facilitates borrowing: Some contracts may allow the policy can be surrendered for a cash amount. creditors have no rights to any monies paid out by the insurer. it is possible that they may spend the money unwisely or in a speculative way. against certain policies. 11 . It helps to achieve the purpose of the Life Assured: If someone receives a large sum of money.
Strategic Analysis of Indian Life Insurance Industry
vi. Tax Relief: The policyholders obtain Income Tax rebates by paying the insurance premium. The specified forms of saving which enjoy a tax rebate, under section 88 of the Income Tax Act, include Life Insurance Premiums and contributions to a recognized Provident Fund etc.
Comparison of life insurance to other saving instrument:1. Protection 2. Liquidity 3. Tax relief 4. Money when you need it. 1. Protection: Savings through life insurance guaranteed full protection against risk of the saver. In life insurance the full sum assured is payable with bonus whenever applicable whereas in other savings schemes, only the amount saved with interest is payable. 2. Liquidity: Saving can be made in a relatively “painless” manner because of the easy installment facility built into the scheme. 3. Tax relief: Tax relief in Life insurance is available to the insurer for amount paid by way of premium for life insurance subject to it rates in force. 4. Money when you need it: A suitable insurance plan a combination of different plans can be taken out of meet. Specific needs are likely to arise in future. Examples: • • • • Children’s education Start in life Marriage provision or Periodical needs for cash over a stretch of time.
Strategic Analysis of Indian Life Insurance Industry
Role of Life Insurance:
Risks and uncertainties are part of life's great adventure -- accident, illness, theft, natural disaster - they're all built into the working of the Universe, waiting to happen. Role 1: Life insurance as "Investment": Insurance is an attractive option for investment. While most people recognize the risk hedging and tax saving potential of insurance, many are not aware of its advantages as an investment option as well. Insurance products yield more compared to regular investment options, and this is besides the added incentives (read bonuses) offered by insurers. You cannot compare an insurance product with other investment schemes for the simple reason that it offers financial protection from risks, something that is missing in non-insurance products. In fact, the premium you pay for an insurance policy is an investment against risk. Thus, before comparing with other schemes, you must accept that a part of the total amount invested in life insurance goes towards providing for the risk cover, while the rest is used for savings. In life insurance, unlike non-life products, you get maturity benefits on survival at the end of the term. In other words, if you take a life insurance policy for 20 years and survive the term, the amount invested as premium in the policy will come back to you with added returns. In the unfortunate event of death within the tenure of the policy, the family of the deceased will receive the sum assured. Now, let us compare insurance as an investment options. If you invest Rs 10,000 in PPF, your money grows to Rs 10,950 at 9.5 per cent interest over a year. But in this case, the access to your funds will be limited. One can withdraw 50 per cent of the initial deposit only after 4 years. The same amount of Rs 10,000 can give you an insurance cover of up to approximately Rs 5-12 lakh (depending upon the plan, age and medical condition of the life insured, etc) and this amount can become immediately available to the nominee of the policyholder on death. Thus insurance is a unique investment avenue that delivers sound returns in addition to protection.
Strategic Analysis of Indian Life Insurance Industry
Role 2: Life insurance as "Risk cover: First and foremost, insurance is about risk cover and protection - financial protection, to be more precise - to help outlast life's unpredictable losses. Designed to safeguard against losses suffered on account of any unforeseen event, insurance provides you with that unique sense of security that no other form of investment provides. By buying life insurance, you buy peace of mind and are prepared to face any financial. Role 3: Life insurance as "Tax planning": Insurance serves as an excellent tax saving mechanism too. The Government of India has offered tax incentives to life insurance products in order to facilitate the flow of funds into productive assets. Under Section 88 of Income Tax Act 1961, an individual is entitled to a rebate of 20 per cent on the annual premium payable on his/her life and life of his/her children or adult children. The rebate I deductible from tax payable by the individual or a Hindu Undivided Family. This rebate is can be availed up to a maximum of Rs 12,000 on payment of yearly premium of Rs 60,000. By paying Rs 60,000 a year, you can buy anything upwards of Rs 10 lakh in sum assured. (Depending upon the age of the insured and term of the policy) This means that you get an Rs 12,000 tax benefit. The rebate is deductible from the tax payable by an individual or a Hindu Undivided Family.
In the private sector 12 life insurance and 6 general insurance companies have been registered. Since being set up as an independent statutory body the IRDA has put in a framework of globally compatible regulations. The IRDA since its incorporation as a statutory body in April 2000 has fastidiously stuck to its schedule of framing regulations and registering the private sector insurance companies. 15 . renew. Issue to the applicant a certificate of registration. Without prejudice to the generality of the provisions contained in sub section. 1. powers and functions of IRDA. Power and Functions of IRDA: Section 14 of IRDA Act. promote and ensure orderly growth of the insurance business and re-insurance business. a. Subject to the provisions of this Act and any other law for the time being in force. which are expected to be introduced by early next year. 1999 lays down the duties. The powers and functions of the Authority shall include. withdraw. modify.Strategic Analysis of Indian Life Insurance Industry EMERGENCE OF IRDA Insurance Regulatory and Development Authority (IRDA): Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in Parliament in December 1999. the Authority shall have the duty to regulate. The other decisions taken simultaneously to provide the supporting systems to the insurance sector and in particular the life insurance companies were the launch of the IRDA’s online service for issue and renewal of licenses to agents. 2. The approval of institutions for imparting training to agents has also ensured that the insurance companies would have a trained workforce of insurance agents in place to sell their products. Duties. suspend or cancel such registration.
Specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries. n. insurable interest. m. insurance intermediaries and other organizations connected with the insurance business. Promoting efficiency in the conduct of insurance business. advantages. f. Specifying requisite qualifications. 1938 (4 of 1938). Specifying the code of conduct for surveyors and loss assessors. h. Levying fees and other charges for carrying out the purposes of this Act. nomination by policy holders. surrender value of policy and other terms and conditions of contracts of insurance. Promoting and regulating professional organizations connected with the insurance and re-insurance business. Protection of the interests of the policy holders in matters concerning assigning of policy. Regulating investment of funds by insurance companies. settlement of insurance claim. Calling for information from. Supervising the functioning of the Tariff Advisory Committee. e. conducting enquiries and investigations including audit of the insurers. code of conduct and practical training for intermediary or insurance intermediaries and agents. g. terms and conditions that may be offered by insurers in respect of general insurance business not so controlled and regulated by the Tariff Advisory Committee under section 64U of the Insurance Act. j. undertaking inspection of. i. Adjudication of disputes between insurers and intermediaries or insurance intermediaries. o. d. k. Specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organizations referred to in clause (f). 16 . c. l. and p.. Exercising such other powers as may be prescribed. Control and regulation of the rates. intermediaries.Strategic Analysis of Indian Life Insurance Industry b. Specifying the percentage of life insurance business and general insurance business to be undertaken by the insurer in the rural or social sector.
Regulation of fund investment by insurance companies. Maintenance of solvency margins. The bill stipulates tough solvency margins -. suspension and withdrawal of licenses given to insurance companies. 17 . capital adequacy. Five whole-time members. b. A Chairman. Insurance Regulatory and Development Authority (IRDA. Grant of licenses to new companies. which was constituted by an act of parliament) specify the composition of Authority the Authority is a ten member team consisting of a. and Tariff fixing. Four part-time members. Adjudication of disputes between insurers and intermediaries. and cancellation. Rs 500 million or a sum equivalent to 20 per cent of net premium income for general insurance and Rs 1 billion for reinsurance business.Rs 500 million for life insurance firms. These powers inter aria are: • • • • • • • Imposition of prudential norms such as solvency margins. c. (All appointed by the Government of India) Regulatory Issues: The IRDA Bill lies down that the Indian promoter must dilute the stake in the private insurance firms from 74 per cent to 26 per cent in ten years. As per the section 4 of IRDA Act' 1999. Requirements and investment guidelines for insurance companies.Strategic Analysis of Indian Life Insurance Industry Insurance Regulatory and Development Authority (IRDA) Act: The Insurance Regulatory and Development Authority Act was introduced to end the monopoly of State-owned companies and to invest in the Insurance Regulatory Authority power to control the insurance sector.
A combination of improper marketing practice has resulted in a loss of investor faith in that industry. Incidentally. N I Rangachary. the new regulations are expected to be on the right track. are urgently required in this vital sector of the economy. is crucial to financing infrastructure and better insurance cover. With the nation's infrastructure in a state of imminent collapse. The key to success in opening up the insurance sector in India is regulation. the bill states. of India. 18 .Strategic Analysis of Indian Life Insurance Industry The insurer has to maintain separate accounts relating to fund of shareholders and policyholders. 1999 heralds an era of cautious optimism where stakes are high for all parties concerned. chairman. investments must start yielding returns and for the domestic insurance industry . Foreign investment in insurance. Foreign Direct Investment (FDI) must pour in as anticipated. for foreign insurers. the customer is pondering whether all the hype created on liberalization will actually benefit him. which will spread the insurance habit in the societal and consumer interest. Insurance companies under the new regime will have to have exposure to rural and social sectors. The IRA has already indicated that it will have tough norms for new participants. An example of how poor regulation can destroy a market is the mutual fund industry. On the fringe. But if the statements of IRA officials are anything to go by. For the Govt. One of the reasons for nationalization of the insurance industry (LIC in 1956 and GIC in 1973) was the mismanagement and malpractice of erstwhile private players. This is the most compelling reason why private sector (and foreign) companies. the insurance industry in India itself has gone through the same phase. India couldn't have afforded to be lumbered with sub-optimally performing monopoly insurance companies and therefore the passage of the Insurance Regulatory & Development Authority Bill on December 2. The funds of policyholders should be retained within the country but does not cover repatriation of profits and dividends.their market penetration should remain intact. IRA. has already provided the timetable for the changes once the Bill is passed.
Malhotra Committee. headed by former Finance Secretary and RBI Governor R.Strategic Analysis of Indian Life Insurance Industry Insurance Sector Reforms in India: In 1993. N. was formed to evaluate the Indian insurance industry and recommend its future direction.1bn should be allowed to enter the industry No Company should deal in both Life and General Insurance through a single entity Foreign companies may be allowed to enter the industry in collaboration with the domestic companies Postal Life Insurance should be allowed to operate in the rural market Only one State Level Life Insurance Company should be allowed to operate in each state 19 . The reforms were aimed at “creating a more efficient and competitive financial system suitable for the requirements of the economy keeping in mind the structural changes currently underway and recognizing that insurance is an important part of the overall financial system where it was necessary to address the need for similar reforms…” In 1994. Malhotra. The Malhotra committee was set up with the objective of complementing the reforms initiated in the financial sector. the committee submitted the report and some of the key recommendations included: Structure: • • • Government stake in the insurance Companies to be brought down to 50% Government should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as independent corporations All the insurance companies should be given greater freedom to operate Competition: • • • • • Private Companies with a minimum paid up capital of Rs.
But at the same time. For this purpose. 20 . The committee felt the need to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives. it was decided to allow competition in a limited way by stipulating the minimum capital requirement of Rs.Strategic Analysis of Indian Life Insurance Industry Regulatory Body: • • • The Insurance Act should be changed An Insurance Regulatory body should be set up Controller of Insurance (Currently a part from the Finance Ministry) should be made independent Investments: • • Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50% GIC and its subsidiaries are not to hold more than 5% in any company (There current holdings to be brought down to this level over a period of time) Customer Service: • • • LIC should pay interest on delays in payments beyond 30 days Insurance companies must be encouraged to set up unit linked pension plans Computerization of operations and updating of technology to be carried out in the insurance industry The committee emphasized that in order to improve the customer services and increase the coverage of the insurance industry should be opened up to competition.100 crores. the committee felt the need to exercise caution as any failure on the part of new players could run the public confidence in the industry. Hence. it had proposed setting up an independent regulatory body.
Multinationals' interest: Multinational insurers are indeed keenly interested in emerging insurance because their home markets are saturated while emerging countries have low insurance penetrations and high growth rates. 21 . Thus liberalization of insurance creates an environment for the generation of longterm contractual funds for infrastructural investment. Given the rate of savings in India. Reaching a faster growth path also implies attracting foreign direct investment inflows of $ 10 Billion every year. Need for Global Integration: Recent economic liberalization started few years ago have started bringing in new investments from global giants and the government was hard pressed to facilitate global integration by lowering trade barriers for the free flow of technology. there is much more room to grow and one can expect an additional revenue of about $ 10 Billion a year entering the market to enhance infrastructure. As early as 1994. It further says that India would need $ 100 Billion over the next five years to meet its infrastructure needs. Report on Infrastructure says that 85% of funds for infrastructure development have to come from the domestic industry. reforms are essential if the Indian economy is to achieve and sustain a growth rate of 7 to 8 per cent per annum. intellectual and financial capital. Insurance is definitely going to be one area that will assist in mobilization of these funds. up from the current level of $ 3 to $ 3. rules and Regulations and bringing flexibility in administrative control and procedures economic liberalization encourage the use of new technology and improve knowledge in the production process by global participation and marketing.Strategic Analysis of Indian Life Insurance Industry ECONOMIC LIBERALIZATION Economic liberalizations in brief refers to the efforts taken by state toward faster economic development by adopting changes in existing economic policy. International insurers often derive a significant part of their business from multinational operations. Additionally.5 Billion.
an insurer cannot afford to operate in a niche market. In Taiwan for example. The figure at Commercial Union was 76 per cent in that year. LIC despite all its handicaps has been growing at a healthy clip of around 20%. As compared to this. Operating in a particular region would expose them to the economic downtrends in the region and derail their profits. The new entrants will therefore be private Indian companies.Strategic Analysis of Indian Life Insurance Industry many of the UK’s largest life and general insurers derived 40 per cent to 60 per cent of their total premium from outside their home markets. big is not just beautiful. was only the 30th largest market in the world by premium volume in 1971. in India multinational insurers will be restricted to a minority shareholding in new companies. foreign companies took only a 3 per cent share even seven years after opening up. The Korean insurance market for example. a large and complex market like India. In Korea. the growth in life insurance premium has been a meager 1. new entrants find insurance attractive because even a small share of a large and growing market can be profitable. for them. being long-term players. This can be achieved by spreading their operations over a wide geographical area.the international market is completely saturated. The other reason why these large MNCs are interested in India is the economies of the insurance market. also have to avoid sudden dips in earnings to inspire confidence among investors to invest long-term funds.5%. It moved up to 6th largest in 1996. No matter what the size of each player. their share was 1 per cent after 20 years. Which brings us to the avenues for growth? According to the Sigma report on global insurance brought out by the world’s second largest reinsurer Swiss Re . but essential for survival. Moreover. In the developed world. Insurance companies. 22 . typically foreign insurers take only a small share of an individual country’s market. In any case. While the impact of global operations on their business may be large. Yet. In China. Insurance companies survive on the principle of spreading of risk. private insurers have not made much headway.
even more than banking. LIC and GIC. both are trying to reposition themselves by having re-engineering done on the structure and operations of their respective organizations. This may still be an urban market but goes beyond the affluent segment. Life Insurance Corporation is at present going through presentations from top management consultants. Critics counter that the benefit will be slim. speed and flexibility. They point out that their entry will mean better products and choice for the consumer. because new players will concentrate on affluent. Therefore. Repositioning by Nationalized Sector: Floodgates of competition opened up by the privatization of insurance industry did throw a challenge to the well-protected nationalized sector and it seems they have picked up the gauntlet. is a volume game. urban customers as foreign banks did until recently. This might seem a logical strategy from the point of view of new players. targeting customer segments that are currently untapped. A very exclusive approach is unlikely to provide meaningful numbers. These consultants have been asked to narrate their experiences in countries where the insurance sector has been opened up for private competition so that the public sector player can draw lessons. in the long run 'middlemarket' offers the greatest potential as in terms of it is the second largest market in the world.Strategic Analysis of Indian Life Insurance Industry Privatization: Start Up Strategy: Potential private entrants therefore expect to score in the areas of customer service. LIC will appoint a consultant which can provide them broad terms of reference on what changes are required to tackle the impending competition. Insurance. Start-up costs-such as those of setting up a conventional distribution network-are large and high-end niches offer better returns. Based on these. However. private insurers would be best served by a middle-market approach. 23 .
the total market share of foreign companies is less than 10 per cent except in Indonesia where it is about 20 per cent. 24 . The intermediaries are also getting more organized with a little nudging from the IRA. Closer home. we have the experience of the banking sector where despite the presence of 42 foreign banks. A change in the GIC Act will enable the corporation to float a joint venture company for health insurance. their share in total banking assets is less than 10 per cent. Also in progress is the co-ordination of all foreign operations of the group. There is room for more for not only the existing companies but also for any number of competitors. Today hardly 20 per cent of the population in India is insured and insurance premium (life as well as non-life) account for just 2 per cent of GDP as against the G7 average of 9. Foremost is the area of providing health insurance services. Other areas that the GIC is looking at are savings-linked insurance products and use of alternate distribution channels including banc assurance. Whether it is Malaysia. Cross Border Experience: Cross-country experience shows that nowhere in the world have the entry of foreign firms threatened the position of domestic companies. The Reinsurance Consultants Association is planning to convert itself into the Insurance Brokers Association of India in anticipation of the laws being amended to allow insurance broking. Even state-owned entities. Consequently. where the market has been opened more recently. Thailand. where the insurance sector has been open for more than 50 years and foreign companies account for about 10 per cent of market penetration or it is Indonesia.Strategic Analysis of Indian Life Insurance Industry GIC has already identified the areas that need to be activated and given a shape through the four subsidiary companies.2 per cent. the fear that new companies will displace public companies is misplaced. China or the Philippines. SBI and UTI have serious plans for insurance sector as the banks have unsurpassed advantages over any other player.
who initially controlled the entire market. spending on insurance has grown at a compound annual rate of 33 per cent. The international competition in the field itself will play an important roll in this direction. New techniques and methods can be used for assessment of risk. It is not just foreign companies alone that have grown but also the national PICC as well. increase their business from 7 to 37 trillion won by 1997. Positive implication:The liberalization of life insurance will benefit the industry in the following ways: It helps transfer of technology in the field of life insurance. The various implications can group into as: 1) 2) Positive implication Negative implication. insurance premium accounted for just over 1 per cent of China's GDP in 1995 but in the four years since the market has been liberalized (albeit partially). 1. It will make available in all countries of the world the service of efficient management and financial experts. Meanwhile foreign companies were not able to capture more than a miniscule 0. fixation of reasonable premium and provide new investment opportunities. It helps in adopting a flexible price policy on new life insurance policies developed and introduce now onward. 25 . It can help in development of knowledge of insurance business. This will help in expansion and development of business. There. the opening of the sector saw the Big Six domestic players. higher opening in jobs and higher income. Competing ability will increase due to liberalization. Many educational and training institution stand fast functioning this lead to availability of professional managers.Strategic Analysis of Indian Life Insurance Industry In China. It will enlarge the scope of insurance. It will help spread it in rural and small villages also. The life insurance market will become global. All categories of employees serving in life insurance sector will get more satisfaction through good opportunity for training. The story is no different in S Korea. The productivity as well as the efficiency also increases.7 per cent of the market.
customers or the country. There will be number of policies based on social security brought out by different insurers. as the experience shows that nowhere the competition has threatened anybody. Knowledge can be gain about new method of functioning through education and training. Working with professional manager benefit the employee in learning the new methods and technique in work situation. the insurer is able to select such an insurer whose premium rate is reasonable. medical claim etc. This seems far from truth. 2. The employee will also benefit from liberalization life insurance sector: Better opportunity for training and development. The insurers play more attention to the interest of insured. The employee gets opportunity for job promotion and other financial nonfinancial benefits. The experience of banking sector in our 26 . gratuity scheme.Strategic Analysis of Indian Life Insurance Industry The general public will also be benefited from liberalization of life insurance sector: They can get better choice of selection of policy and insurer. Such schemes include plan like pension scheme. This way interest of the insured is well protected. Negative implication:Cut throat competition liberalization will create acute competition in the life insurance market. Good employment opportunity in the life insurance sector when a number of new institutions are established in these fields. which is not in the interest of the industry. The employee will get motivation and their moral will be higher. The productivity of employees shall develop due to education and training facility. This type of acute competition may sometime leads to insolvency of life insurance companies and thereby the policy holders may face serious consequences. When there is large number of insurer.
They overlook the interest of the common people. But the impact of the competition has increased the size of the market. This because of the average cost incurred on policies is less in urban areas. economically backward people cannot benefit of insurance. Although the government is making rules for the private sector companies to invest certain percentages of their premium income in the social sector. End of government monopoly: This liberalization of life insurance sector brings an end to the government monopoly in life insurance sector and private companies may exercise their domination.where the sum assured against a policy becomes very heavy. the availability of such huge fund is doubtful. Shortage of funds for social cause: It is estimated that at present the LIC and GIC invest a total of Rs 90. This amount is nearly 70-80 % of their total fund available.the people who are against the concept of liberalization of insurance sector believe that the domestic as well as foreign private companies neglect the rural areas.000 crores to the public/ social sector. More attention towards profitable policies:. the balance is not distributed.007/. 1. They want taken any special attention to insured the lives of woman. Dominance of outside companies: foreign companies capture the life insurance sectors as a whole under their dominance. As such Indian companies cannot survive before these foreign companies. Neglect the rural lives:. Total investment assets of the foreign banks are about 10 %. Policies of heavy amount – the insurance companies issues policies of heavy amount when at present a policy is available for an insured sum even below Rs. it becomes very difficult to control Indian and foreign private insurance companies by the 27 .00. which involve more risk. knowledge. Problem of exercising control over insurance companies: government. physically handicapped etc.the private sector life insurance companies develop and introduce only those policies that involve the minimum risk burden and more profitable of them. by giving more attention in getting people insured from urban areas. because they possess more efficient insurance techniques.Strategic Analysis of Indian Life Insurance Industry own country testifies to this effect that despite presence of 42 foreign banks.
Strategic Analysis of Indian Life Insurance Industry
Speculative activities: it encourages for more speculative activities by private sector companies. The development of new policies and premium rates are fixed speculatively instead of considering realistic factors. This will promote the attitude of earning larger short-term profits. On long run, the existence of such companies becomes doubtful. Liberalization based on outside pressure: The critics against the view of liberalization have the view that our country because of pressure by World Trade Organization has adopted the liberalization measures. Liberalization to fill up budget deficit –the critics against the view of Liberalization to fill up the budget deficit by disinvestment of more than 50% of shares of LIC. The crores of rupees, thus to be received can be used for filling up the budget deficit. But this argument is proved to be incorrect in view of the fact that the government has already announced its decision in parliament that it won’t reinvest share of LIC. Difficulty in utilizing the physical resources completely –as a result of privatization the business of LIC shall be affected negatively. As a result the vast resources held these companies shall not be utilized fully. Attraction for its employees from out side sources – there is a possibility of drainage of expert employees from the two corporations to the private companies. This is because the private companies offer more lucrative salaries and packages to their employees. Keeping this in mind, the IRDA has come out with regulations for high cadre employees that they can’t leave the corporation easily, to join other places. Lack of government guarantee on polices – the insurance policies issued by state insurers carry Central Government’s guarantee whereas no such guarantee shall be available to the policies issued by the private insurance companies. The insured remain unsecured in this way. No grants available on policies to poor: State insurers have kept provision for certain amount of their profit as grant to policies issued to people in villages and the poor. No such grant can be expected from the private companies.
Strategic Analysis of Indian Life Insurance Industry
Employees fear: employees of these insurance companies feel danger to their employment due to process of liberalization measure. While implementing it, these corporation can retrench certain number of employees who are exceeds in need. But this is not tenable as the experience of the other countries shows it otherwise. Public sector GIC and GIC are re-structuring themselves for better and more deployment of staff in diversified companies.
Strategic Analysis of Indian Life Insurance Industry
Life insurance not plays an important role in national economy but also in international economy. Marine cargo insurance provides risk coverage for shippers and the banks, which finance international trades. This role becomes all the more important in the context of an active government policy to encourage exports. Indian life insurer operates in more than 30 countries through agencies, branches, associates companies. These operations earn foreign exchange. The insurance business is concerned with North America, Western Europe, Japan and Oceania. Together these region’s accounts for about 91 % of the world annul premium. By region’s North America and western Europe are growing moderately while oceanic, Latin America, eastern Europe and Africa display growth above lone –term trends to a global context globalization of life insurance helps companies practices underwriting discipline in one regions globalization of the insurance industry received a big boost. Countries United Kingdom Japan United States South Africa Australia South Korea India China Malaysia Indonesia Brazil Insurance Penetration (premium as a% of GDP) 12.71 8.70 4.48 14.04 6.04 9.89 1.77 1.12 2.13 0.54 0.36 Insurance Density (Per Capita Premiums in USD) 3028.5 3165.1 1611.4 392.9 1193.5 935.6 7.6 9.5 86.4 4.0 12.9
the progress achieved by the life insurance industry in India.3 billions. But also even with the developing world.Strategic Analysis of Indian Life Insurance Industry India and the world market: Unfortunately. 31 . it compares unfavorably not just with the developed countries. The global market for the life insurance is estimated to be around $ 1412.
Ltd. Here we have described the private life insurance companies registered in which year wise. No.2004 HDFC Standard Life Insurance Company Ltd.2001 30.2000 15.11. India Pvt. Ltd.Strategic Analysis of Indian Life Insurance Industry MAJOR PLAYER IN LIFE INSURANCE About the various player of life insurance sector: Since being set up as an independent statutory body the IRDA has put in a framework of globally compatible regulations.08. MetLife India Insurance Company Pvt. Private Player in Life Insurance industry: Sr.02. Aviva Life Insurance Co.01.2002 14. Birla Sun Life Insurance Company Ltd. ING Vysya Life Insurance Company Private Limited Allianz Bajaj Life Insurance Company Ltd. 1 2 3 4 5 6 7 8 9 10 11 12 13 Registration Number 101 104 105 107 109 110 111 114 116 117 121 122 127 Date of Reg.2000 10. In the private sector 12 life insurance and 6 general insurance companies have been registered than after remaining companies are registered.2001 03.2002 06.2001 31. OM Kotak Mahindra Life Insurance Co.10. Ltd. Ltd.01. Name of the Company 32 .11. Max New York Life Insurance Co.03.05. 23. Sahara India Insurance Company Ltd.2000 24.02. SBI Life Insurance Company Limited.2001 02.08. ICICI Prudential Life Insurance Company Ltd.2001 06. Tata AIG Life Insurance Company Ltd. AMP SANMAR Assurance Company Ltd.08.2001 03.01.2001 12.
The company enjoys a very strong brand image in this industry. casualty and miscellaneous). ALLIANZ BAJAJ LIFE INSURANCE COMPANY LTD: Allianz Bajaj life insurance company ltd with a capital base of RS. with annual turnover of RS.16 billion. it is also the largest insurer in Europe. asset management and pension funds management. life and health insurance. 2001 to conduct life insurance business in India. the Allianz Group is one of the world’s leading insurance companies with over a 100 years’ experience in insurance and related services. reinsurance. engineering. marine. it has assets over 670 billion DM (Rs 17. Founded in 1890." 2.wheelers in the world. and by rendering resources for economic development. With a presence in over 70 countries.5 billions is a joint venture between ALLIANZ AG and BAJAJ AUTO LTD. The flagship company of Bajaj group is one of the largest two and three. 33 . and forth-largest manufacturer of two. The company was incorporated on MARCH 12.wheeler manufactures. LIFE INSURANCE CORPORATIOMN INDIA: VISION "A trans-nationally competitive financial conglomerate of significance to societies and Pride of India" MISSION "Explore and enhance the quality of life of people through financial security by providing products and services of aspired attributes with competitive returns.1. motor. 2001 and received the IRDA certificate of registration on august 3. Rated ‘AAA’ by Standard & Poor. risk management. 42.Strategic Analysis of Indian Life Insurance Industry 1. The key business areas of Allianz group include General Insurance (property.160 billion) under its management. Bajaj auto ltd.
. BIRLA SUN LIFE INSURANCE COMPANY LTD. The Aditya Birla Group is one of India’s largest business houses. with a turnover of over $4. Established in 1884. Dabur India Limited is one of India’s oldest groups of companies. all classes of general insurance business and fund management. and the world’s seventh largest insurer with world-wide premium income and retail investment sales of ₤28 billion and more than ₤200 billion in assets under management. log-term savings. the Philippines. is the largest life and general insurance group of the UK.5 billion. and the UK. is capitalized at Rs 1 billion. the annual sales turnover of the group is over Rs 12 billion. In Canada. of Canada. 4. Hong Kong. Aviva plc. the USA. Its major lines of business are life insurance. is a 74. a joint venture between Dabur India and CGU. annuities and mutual fund and investment services.26 joint venture between the Aditya Birla Group and Sun Life Financial Services of Canada.. : The Birla Sun Life Insurance Company. is the holding company of the Aviva group of companies which is involved in the life assurance business. pharmaceuticals.8 billion. AVIVA LIFE INSURANCE COMPANY LTD. Aviva plc. and has an equity capital of Rs 1.Strategic Analysis of Indian Life Insurance Industry 3. established in 1871. personal care and health-care products. a wholly owned subsidiary of Aviva Plc.75 billion and an asset base of $3. Sun Life Assurance Co. The Group is a welldiversified conglomerate spanning 40 companies spread across 17 countries. with interests in ayerdedic specialties. the company is especially strong in the corporate life and health insurance and savings markets. has a strong presence in Canada. 34 . : The Aviva Life Insurance Company.
The World Bank.Strategic Analysis of Indian Life Insurance Industry 5.4 per cent stake.. Since its inception. it has grown from a development band to a financial conglomerate and has become one of the largest public financial conglomerates and has become one of the largest public financial institutions in India. ICICI-PRUDENTIAL LIFE INSURANCE COMPANY LTD. was incorporated o August 14. and has an international office in Dubai. with an authorized capital of Rs 2. HDFC is the majority stakeholder with an 81.6 per cent. HDFC STANDARD LIFE INSURANCE COMPANY LTD. raising its capital to Rs 1. : HDFC Standard Life Insurance Company Ltd. financing all the major sectors of the economy. it has the distinction of being accorded the ‘AAA’ rating by Standard & Poor for the past six years. 35 .9 billion. 2000. Standard Life holds a stake of 18. UAE. It commenced commercial operations on December 19. 2000. is Europe’s largest mutual life assurance company. Incorporated in 1977 with a share capital of Rs 100 million. 6.3 billion. in 1944. to promote industrial development in India by providing project and corporate finance to the Indian industry. Standard Life. becoming one of the first few private sector players to enter the liberalized arena. Oman and Qatar. which has been in the life insurance business for the past 175 years. 2000. with service associates in Kuwait. The paid up capital is Rs 1. with ICICI’ s share at 74 per cent and Prudential plc. the Government of India and the Indian Industry. UK’s share of 26 per cent was incorporated o July 20. It operates through 75 locations throughout India. With an asset base of Rs 6000 billion. HDFC has since emerged as the largest residential mortgage finance institution in the country. : The ICICI-Prudential Life Insurance Company ltd.19 billion and an asset base of Rs 150 billion. established ICICI LTD.
Strategic Analysis of Indian Life Insurance Industry Founded in 1848. way back in 1923. which is active in the field of banking. The Vysya Bank. 3956 billion) as of December 31. infrastructure. one of India’s leading multi-business corporations and New York Life. in fact. with an asset base of over Rs 284. and the tenth largest financial services company in the world. Prudential plc. and manages assets of over US $259 billion (approximately Rs 11. : As per the joint venture agreement. LTD. which has wide ranging interests in fields which as power generation. 8. pensions. annuities. given its significant branch penetration. has a high degree of retail focus. manufacturing. Vysya Bank holds 49 per cent. and the GMR Group. insurance and asset management in over 60 countries. It is the third largest financial services company in Europe. This joint venture is expected to be the first Banc assurance venture in the country. MAX NEW YORK LIFE INSURANCE COMPANY LTD.2 billion is a global financial institution of Dutch origin. the bank. : Max New York Life is a partnership between Max India Limited. ING 26 per cent. 36 .5 billion. Prudential’s first overseas operation was in India. ING Insurance is the world’s second largest life insurance company as per the latest Fortune rankings. is one of the largest private banks in India with 480 retail outlets. software and banking. It has a presence in over 15 countries. including life insurance. has grown to become one of the largest providers of a wide range of savings products for the individual. ING-VYSYA LIFE INSURANCE COMPANY PVT. 7. holds 25 per cent. to establish life and general insurance branch agencies. The paid-up capital of the joint venture is Rs 2. 1999. The ING Group. unit trusts and personal banking. which has equity participation from Bank Brussels Lamberts.
established in 1867a.. is primarily engaged in contracting and has under taken major contract for power generating situation. In the same year. is a member of the Metropolitan Life Group and is licenses in the USA. Pallonji & Co. In 1998.Strategic Analysis of Indian Life Insurance Industry Max India has significant presence in the most vital and fast growing sectors of the Indian economy.. the Pallonji Group and some high net worth individuals.: The Met Life India Insurance Company. telecommunication services. joint venture between the US insurance major Metropolitan Life Insurance Co.. and was rated the number one provider of new life insurance policies in the USA. the Jammu and Kashmir Bank Ltd. specialty plastic films and bulk pharmaceuticals.convention energy source. The Metropolitan Life Insurance Co. chemical and fertilizer factories petroleum refineries and gas platform.. Ltd. Electronic components distribution. 2001. New York Life was also the leader in insurance sales to the growing Indian community in the USA. with a 74:26 stake between Kotak Mahindra life insurance and old mutual plc. was incorporated in India on April 11. New York Life International Inc. Ti has also diversified outside in their business in to the field of non. The company started its operation with an initial capital of Rs 1. Pvt. had total revenues amounting to almost US $20 billion. 10. viz.25 billion. OM KOTAK MAHINDRA LIFE INSURANCE COMPANY LTD.. 9. MET LIFE INDIA INSURANCE COMPANY LTD. financial services and IT. The joint venture OM KOTAK MAHINDRA life insurance started off with an initial capital of Rs.5 billions. Its major lines of business are individual and group life insurance. It is also active in the emerging knowledge-based areas of health care. main life of 37 . Canada and a few other countries. 1..
It has seven associate banks and together they have 30% of the Indian market share. New York and Mauritius. is a step aimed at being a universal bank as the SBI already as subsidiary for housing finance. It is a leading life insurer in South Africa. it has evolved into a full service financial conglomerate. In 1999. Old mutual plc. with more than 30% market share. is a leading global financial services provider. protection products and creditors insurance. BNP paribus. it has the expertise for selling insurance products through bank and as operation in over 20 countries. 121. investment banking. with Cardiff contributing 26% in the paid capital of Rs. 11. assets management and banking. with a range of highly specialized products and services.5 billion. The insurance venture. Based in France. SBI LIFE INSURANCE COMPANY LIMITED: This joint venture has 74% capital participation from the state bank of India (SBI). 196. is the holding company of Cardiff. its premium income stood at US $ 4 billion. mutual fund and primary dealership in government papers and factoring businesses. securities trading and equity research. The SBI is the largest bank in the country with more than 9000 branches. providing a broad range of financial services in the area of insurance. merchant banking. which is one among the three largest banks in Europe. London. covering auto and consumer finance. It operates across 30 centers in India and in Dubai. 38 . 2.803 billion. with assets worth over US $ 23 billion under its management. with a deposit base of Rs. It was set up in 1973 and specialized in long term savings. It net worth as on March 2000 stood at Rs. Starting as are non-product company in the mid eighties.Strategic Analysis of Indian Life Insurance Industry Kotak Mahindra finance ltd is one of the India’s premier financial groups.46 billion. its insurance arm. and a very large client base of Indian and international firms. SBI life. assets management.
Strategic Analysis of Indian Life Insurance Industry 12. have an annual turnover exceeding US $ 8. Its member companies write a wide range of commercial and personal insurance products in over 130 countries and jurisdiction throughout the world. having set up the largest insurance company viz. aviation. prior to the nationalization of this sector. new Indian assurance company ltd. spread over 7 sectors. The American insurance group (AIG) is the leading US based international insurance and financial services organization and the largest underwriter of commercial and industrial insurance in the USA. Tata enterprise with 82 companies.8 billion. (1919). The Tata group has made pioneering contribution in various fields including insurance.85 billion of which 74% has been brought in by Tata sons and 26% by the American partner. 1. TATA AIG LIFE INSURANCE COMPANY LIMITED:Tata AIG life insurance company ltd. The group has had a long association with India’s insurance sector. 39 . iron and steel. is capitalized at Rs.
5% 2.0% 0.2% 0.3% Bajaj Allianz ING Vysya AMP Sanmar SBI Life TATA AIG HDFC Standard ICICI Prudential BIRLA Sunlife AVIVA Kotak Mahindra Max New York Met Life LIC 0. COM PANY M ARKET SHARE( IN %) 82 .4%1.3% 1.4% 1. 0 40 .6% 2.9% 0.6% 5.8% 0.3% % 8 .Strategic Analysis of Indian Life Insurance Industry CURRENT SCENARIO Life Insurance Industry is growing at the rate of 68 % respectively.
37 7 1823.5 8 Sun 4561.26 5 12768. 8.82 0. of lives no.2 0. 7.24 0.04 16197 129927 5.3 0.4 1 762. 4.51 8 6356.90 5 15379 4567 5705 11759 38821 15459 15253 7613 2705 8125 17251 7023 7 3492 8 1232 1 3412 8 7967 3 5921 3 1816 35 4802 2 2952 1 1622 5 6550 5 0.92 3142 52. Kotak Mahindra 11. Max York 1089. 5.21 7812 35009 1. 2.4 5 8803.9 1 10. AUGU ST UP TO ST Company Premium u/w % of No.22 4374.8 6 1082. Baja Allianz ING Vysya AMP Sanmar SBI Life TATA AIG HDFC Standard ICICI Prudential BIRLA life AVIVA 3957.3 3 2011.35 0.29 7 9671. 5.02 polic AUGU UP TO under AUGU TO 41 .79 0 3626.36 2 39977.2 0. 6.03 73 2606.63 55 18150.75 2.24 0.Strategic Analysis of Indian Life Insurance Industry FIRST YEAR PREMIUM-AUGUST 2004 Sr N O. 2. 9. of ies UP TO AUG UST 0.208 covered under group schemes ST AUGUS T %of lives covered group schemes UP TO AUGUS T 2.5 1.90 0.05 521.46 0 5898 0.63 5162 19335 0.0 1.3 4 14395.80 21 9150. of policies/ pre miu m UP AUG UST 1.56 60 5623.23 AUGU ST UP TO AUG UST Schemes % of No.16 3349 21305 0.23 25818 31965 1. 1.85 3810 34867 1.77 5318 57363 2.22 1.4 0. 3.02 0.2 7 1598.9 3 New 1459.45 94848 264883 10.39 11034 49047 1.35 0.2 0. 2.
42 LI C .1.21 4 58447 1. Met Life 13.4 0 100 3164 153424 1 168004 2 1048 9 7023 186 7665 083 0.8 0.14 91. 86.46 lacks during the month of July 2004.Strategic Analysis of Indian Life Insurance Industry 12.6 3 100 5618 60959 8 79170 6 84501 3.06 82.605.85 158022 .09 71014 3. LIC Total 348.27 1799441 69.55 1522.36 127451 .59 2585751 100 PREM IUM U/W IN AUGUST 2OO4(Rs in Lakhs) Series1 140000 120000 PREMIUM 100000 80000 60000 40000 20000 0 lli an z IN G Vy A M sy P a Sa nm ar SB IL TA ife H TA D FC A IG St IC an IC da IP rd ru de B nt IR LA ial Su nl ife K ot A ak VI V M A ah in M dr ax a Ne w Y or k M et Li fe B aj aj A COMPANY The life insurance industry underwrote new business premium of Rs.
followed by ICICI Prudential and Birla Sun Life with premium underwritten (market share) of Rs. the new players underwrote first year premium of Rs. LIC underwrote premium of Rs.352. The group single and non-single premium accounted for Rs.72 per cent.627. 43 . towards individual single and non-single policies stood at Rs.22 lakes underwritten in the corresponding period of the previous year. all new life insurers increased their market share.264.83 lakh towards 54.33 per cent) and MetLife with 78. LIC covered 11.09 per cent and 93. Cumulatively. taking the cumulative premium underwritten during the current year 2004-05 to Rs.10.85. 244.97 lakh (5.1. 95.21 lakes respectively as against Rs. 18.104.22.168.843 lives under the group schemes accounting for 66.91 per cent respectively in the corresponding period in the year 2003-04.705 during the period ended July 2004.730 lives (6.81.74 lakes and Rs. 07.1.70. While LIC’s market share declined from 90.5.468. over the corresponding previous year numbers.July 2004 was Rs. a market share of 82. 52. 21.019.1.26 per cent of the market.035 lives (9. The total Individual premium and Group premium underwritten was Rs.64 per cent) and Rs. 20. The accompanying table does not include the numbers for Varishtha Pension Bima Yojana.888. 57. followed by SBI Life with 1.72 lakh.806 and 57. 2.30 per cent and 91. Tata-AIG with 1.3.37 lakh respectively accounting for 1.46 per cent) respectively. The number of lives covered by the industry under the various group schemes was 17.70 per cent as against 6.740 policies.47 per cent).e.31.883 lives (4.39 per cent).636.67 lakh (2.. the market share of the new players and LIC was 8. Premium underwritten by LIC under this pension scheme during the period April . 39. 591.515.219 policies.22.214.171.124 lakh i.Strategic Analysis of Indian Life Insurance Industry The life insurance industry underwrote new business premium of Rs.95. 2004.89.12 per cent for the period ended July 2003.74 lakh and Rs.1. 274.37 lakh and Rs. In terms of policies underwritten.644. The premium underwritten by the industry up to July.95 lakh.95.46 lakh during the month of July 2004. 496.47lakh.31.605. 173.62 lakes and Rs.
Let us look into the type of jobs that will be created once the private players come on the scene. In S Korea. Given the industry's huge requirement of start-up capital. comes much later than in the case of other sectors. Finance professionals who had witnessed a slump in the job market would be a much-relieved lot to hear about the privatization of the insurance sector. it won't be far different from the traditional streams in any other industry. 44 . it is bound to attract inward reinsurance from the neighboring countries and regions. engineers from diverse streams like the petrochemical and power sectors. human resource professionals.Strategic Analysis of Indian Life Insurance Industry Future Possibilities (Next 5-10 Years) Job opportunities are likely to increase manifold. The liberalization of the insurance sector promises several new jobs opportunities for those employed in the finance sector that are equipped with degrees in finance. Thailand added 50 per cent more jobs in four years. Moreover. statisticians and even medical professionals. Certainly. typically. systems professionals. the initial years after opening up are bound to see a strong inflow of foreign capital. Apart from this. the picture is no less encouraging. There could be a huge inflow of funds into the country. In the emerging markets. There will be demand for marketing specialists. the US with a population 1/4 the size of India has nearly 4 times the number. this trend may well lead to the creation of a Lloyds like market for the direct as well as reinsurance businesses. given that the break-even. The number of people working in the insurance sector in India is roughly the same as in the UK with a population that is 1/7 India's. huge capacity is likely to be created with players like Swiss Re and Munich Re keenly observing the unfolding saga of liberalization of insurance industry in India. the no of full time employees more than doubled over a ten-year period. If the regulator is forward looking and legislature is supportive. there will be high demand for professionals in the streams like Underwriting and claims management and actuarial sciences. odds are that the first remittance of dividend will not happen before a good 10-15 years. finance experts. In the areas of reinsurance. Not only the outward reinsurance will reduce.
Sellers move to remote channels such as the telephone or direct mail. Substantial shift in the distribution of LIFE insurance in India is likely to take place. especially mega-projects where one needs the capacities of the international re-insurance market. not necessarily insurance companies. the rate reductions may outweigh the increases. Another effect of de-regulation will be that. which is providing insurance protection. insurance is seen as a complex product with a high advice and service component. projects. Brand loyalty could shift from the insurer to the seller. In some countries like Netherlands and Japan. brand building. risk inspections. thus bringing down the re-insurance premium volume available. Worldwide. know-how transfer regarding risk assessment and rating. would usually not be affected by international trends in the same way as. seminars. there will be significant increase in advertising. but in those areas that have so far been crosssubsidized an increase in rates may be possible. sell insurance. workshops. buyers look for low price. and keen pricing not ridiculous pricing and this will benefit whole lot of ancillary industries. Various intermediaries. commodity products. Initially. At this point. insurance is marketed using post office's distribution channels. As products become simpler and awareness increases. increased competition is very likely to result in rate reductions in certain classes of business. there is much less need for global re-insurance support. Many of these changes will echo international trends. Buyers prefer a face-to-face interaction and place a high premium on brand names and reliability. This will affect rates too. Overall.Strategic Analysis of Indian Life Insurance Industry However. will get exposed to international trends to an even greater extent than is the case today. Areas like the personal lines segment. where we also expect to see substantial growth as also new types of covers. risk management and devising new policy covers. with more players in the market. a revolution will come in service related fields like training. In the UK for example. etc. insurance products move along a continuum from pure service products to pure commodity products. Also. they become off-theshelf. Apart from pure re-insurance activities. retailer Marks & Spencer now sells insurance products. 45 .
almost 95% of banks and building societies are distributing insurance products today. For example. This piggybacks on an existing distribution channel and increases the likelihood of insurance sales. In the UK. the largest Swiss Co. and pensions. Various seminars and conferences on banc assurance are taking place and many bankers have clearly shown their inclination to enter insurance market by leveraging their strengths in the areas of brand image. The Netherlands led with financial services firms providing an entire range of products including bank accounts. In India too. Other European markets have followed suit. distribution network. home and life insurance. health insurance and even other general covers through employers to their employees. banks hope to maximize expensive existing networks by selling a range of products. motor. 46 . These products may be purchased by the employer or simply marketed at the workplace with the employer’s co-operation. of which insurance can be one. Another potential channel that reduces the need for an owned distribution network is worksite marketing. In France over half of all life insurance sales are made through banks. Worldwide interest in E-commerce and India's predominant position in information technology and software development is also likely to be a major factor in the marketing of insurance products in the immediate future. The Internet account is increasing in arithmetic progression and the trend has already been set by some of the leading insurers and insurance brokers worldwide.Strategic Analysis of Indian Life Insurance Industry In other markets. they are wooing customers with various incentives. Insurers will be able to market pensions. Insurers in India should also explore distribution through non-financial organizations. and face to face contact with the clients and telemarketing coupled with advanced information technology systems. The mergers of Citibank with Travelers in USA and of Winterthur. insurance for consumer items such as refrigerators can be offered at the point of sale. With increasing competition. with Credit Suisse are recent examples of the phenomenon likely to sweep India too. this has resulted in bancassurance: banks entering the insurance business. Alliances with manufacturers or retailers of consumer goods will be possible. notably Europe.
For example. As is witnessed in other countries where liberalization took place in recent years we can safely conclude that nationalized players will continue to hold strong market share positions. Summery: Over the past three years. in the past three years.Strategic Analysis of Indian Life Insurance Industry Finally. around 40 companies have expressed interest in entering the sector and many foreign and Indian companies have arranged anticipatory alliances. New insurers must segment the market carefully to arrive at appropriate products and pricing. Other hopeful entrants anticipate specific alliances such as with hospitals to provide health cover. Opening up the sector will certainly mean new products. some potential Indian entrants into insurance hope to ride their existing distribution networks and customer bases. the nationalized insurers have already begun to target niches like pensions. women or children. but there will be enough business for new entrants to be profitable. consumer loans or housing finance. HDFC or Kotak Mahindra intend to tap the thousands of customers who already buy their deposits. 47 . Recognizing the potential. Both new and existing players will have to explore new distribution and marketing channels. financial organizations like ICICI. The threat of new players taking over the market has been overplayed. Potential buyers for most of this insurance lie in the middle class. better packaging and improved customer service.
But there are multiple challenges faced by these insurance companies. and the new entrants in market have set up shop in every major city. and the role played by them in insurance market is critical. While the companies have been quite successful in dealing with the first of these challenges using and technical know how of the partners. Using the right distribution channels to reach the customer. learning to be taken up.Strategic Analysis of Indian Life Insurance Industry MARKETING PERSPECTIVE Distribution perspective (The key differentiator): It has been over two years since the Indian insurance market has opened up. die authors believes that the basic existential problems being faced by the channels in this market need to be looked in to first. the discussion veers to: technology and its impact on distribution. This paper discuss the distribution channel from the prospective of the sociocultural Ethos of the market and channels fit into it. of which two are critical: Designing of products suiting the market. training. 48 . and the Asian market is to no exception. Insurance has to be sold the world ever. Whenever any debate arises about the intermediaries and distribution channels. However. tools. and then the queans of enablers-technology. The public sector companies have already established themselves in the market. The Touch point with the ultimate customer is the distributors or the producers. along with where the various companies face challenges and bottlenecks. most are still grappling with the right channel mix for the reaching potential customers.
telemarketing. Direct response distribution systems are the method whereby the client purchases the insurance directly. which utilizes various media such as the internet. is just beginning to grow. 88% of the life insurance executives responding identified agents as the primary channel of distribution. the challenge to insurers and intermediaries is two pronged: • • Building faith about the company in the mind of the client. in the developed markets. insurance companies must move from selling insurance to marketing an essential financial product. servicing of policy post sale and settlement of claims. these conditions will play a major role in shaping the distribution channels and their effectiveness. For example. In the Asian markets. According to a Forrester survey. This segment. This calls for leveraging multiple distribution channels in a cost effective and customer friendly manner. tied agents have been the primary channels for insurance distribution in the Indian market. etc. call centers. with their distinct cultural and social ethos. banc assurance. and work site marketing. Traditionally. Distribution Scenario in the Indian Market: In today’s Indian life insurance market. The distinction of channels in the developed markets is: personal distribution systems include all channels like agencies of different models and brokerages.Strategic Analysis of Indian Life Insurance Industry It is the distributor who makes the difference in terms of the quality of advice for choice of product. Intermediaries being able to build personal credibility with the clients. while the web as a complementary channel is catching up slowly. producers form the major channels of distribution.. the public sector insurance companies have their 49 . direct mail. In today’s scenario. The distributors have to become trusted financial advisors for the clients and trusted business associates for the insurance companies.
On one hand. as is the case in most market. The beliefs that all these channels will grow and seamlessly integrate to bring in business seem a fallacy. But none of this has changed the fundamental character of the market. and may not have sold the best possible product to the client. and global practices and ideas being tested. This arrangement worked adequately in the absence of completion. there is great excitement in the industry over the impending broker’s regulations. for brokerages and banc 50 . In today’s scenario agents continue as the prime channel for insurance distribution in India. However. almost all the new players follow this model primarily because the regulation for other channels are yet to be put in place. In addition. Nonetheless. the customer trusted the agent and company.Strategic Analysis of Indian Life Insurance Industry branches in almost all parts of the country and have attracted local people to become their agents. the traditional models in the markets. which we believe will take more time than expected. Summary: The current state of insurance distribution in India is still in flux. The agents are from various segments in society and collectively cover the entire spectrum of society. A person who has lived in the locality for many years sells the products of the insurance company with a local branch nearby. What have emerged are a much more difficult and evolving market scene with exiting players. insurer are awaiting regulations to be approved assurance to be truly Launched on the other hand they are trying the corporate models of intermediaries. and companies are planning possible channels in their enthusiasm to increase volumes. This ensures the last mile touch point being closer to the customer. more new players coming in. Of course. the profile of the people who acted as agents suggests they may not have been sufficiently knowledgeable about the different products offered. supported by call centers to a small extent.
Strategic Analysis of Indian Life Insurance Industry There is no right and wrong in all this. training and development tools and technology enablers. The success of marketing insurance depends on understanding the social and cultural needs of the target population. and different age and gender. Insurance companies have to face and deal with competition not only in terms of investments performance but also customer service. Brokers stretching from corporate to NGO ARE to milk co-operative. These intermediaries need to be empowered with the right learning. All intermediaries cannot sell all lines of business profitability in all market. as the public sector property $ casually companies are giving discounts in lieu of agency commission. 51 . social strata. The channel composition should not be homogeneous but should reflect the larger society. But with the entry of private sector insurance companies the scene will change and competition among various insurance companies will become the name of the game. In addition. Coupled with the right product mix. this will help the insurers to survive and flourish in this competitive market. Client should also receive price differentials for using different channels. There should be clear demarcation in the marketing strategies of the company from this perspective. For example: Agents from different economic. VALUE CHAIN ANALYSIS: Competitive advantage of insurance companies: The LIFE insurance industry has witnessed limited competition till now. and matching the market segment with the suitable intermediary segment. a major segment of the Indian population has low disposable income. This not a new concept. meaning that every penny won will be obtained after a lot of persuasion and the expected value for money is high.
Firm infrastructure Human Resource Management Technology Development Procurements In Bound Logistic Operations Out bound logistic Marketing and sales Services MARGINS 52 . an authority on competitive strategy and competitive advantage. a firm is able to create for its buyer that exceeds the cost of creating it. Value chain-the valuable ingredients: Value chain of a firm as proposed in general has five generic categories of primary activities for a firm involved in competition in any industry. its strategy for the future. The concept developed by Michel porter is ‘value chain’ which represents graphically the activities of the firm and their interlink ages. but different among competitors. “competitive advantage stems from many discrete activities can contribute to a firm’s relative cost position and creates a basis for differentiation. Value chain –the competitive advantages of a firm: Michael porter. argues that competitive advantage grows fundamentally out of the value.Strategic Analysis of Indian Life Insurance Industry Hence an aggressive competitive strategy is the need of the day for the insurance companies in order to gain a competitive niche. To be successful in one’s area of business in the presence of competitive forces the following model may adopt to fulfill the purpose. approach to which it belongs. A systematic way is necessary for analyzing the source of competitive advantages. survive and proliferate in the insurance industry. Differences among competitors are key source of competitive advantages. These categories can be represented in the diagram. According to him. The value chain reflects the history of the firm. The value chain may be similar across firm in the same industry.
Information explosion and unanticipated volatility in financial markets. let us examine the import types of risks. which has been traditionally used by Life Insurance Corporation (LIC) to discount the impact of risks. impact on financial services of rapid globalization. there is a search for a new model methodology and Management strategies to face the challenges of various types of risks that are being confronted by life insurance companies. As we proceed to discuss strategy. The world changes so fast that neither information systems nor management practices are able to capture the potential trend and the direction of the change. credit. 53 . has become nearly redundant and therefore. the major focuses of risks of insurance business are related to macro-economic factors.Strategic Analysis of Indian Life Insurance Industry Risk Management in Life Insurance Sources of risk: Designing any strategy to manage future risks of any organization need the understanding of the risk and their Origin and direction – linked to our environment. claims. Types of risks: It is virtually impossible to provide a list of risks in life insurance operation basically due to the fact that risks are associated with multidimensional changes associated with the factors mentioned above. However. spreads. pricing. The major changes that have been noticed are: changes in demographic structure – mortality. This leads to uncertainty and inability to initiate proactive measures. life style. which is quite dynamic. These changes have made the Law of Averages. killer diseases (like AIDS and SARS) impacting the demographic composition. and investment risks which can be classified in two ways: one from the actuarial point of view and the other from the financial market point of view.
malpractices at operational level and inefficiency in management practices. lack of accountability and fiduciary responsibility. claims.Strategic Analysis of Indian Life Insurance Industry Actuarial view of risks is basically classified as: 1. Financial view of risks: The actuarial concept of risks as mentioned above can however be broaden and decomposed into six generic types from the financial sector economist’s view these risks are: 1) Actuarial Risks: Associated with issuance of insurance policies and related liabilities. inflation causing changes in value of assets and liabilities. investment and real estate. 5. 54 . leakages. higher underwriting losses than projected etc. These risks arise due to higher cost of raising funds. Asset Risks: Arising from default of borrowers causing or decline in market value of investment assets. 4. Pricing Risks: Arising from uncertainty in mortality. inflation etc. management expenses and income from premium. Miscellaneous Risks: Arising from changes in regulatory regime and requirements. Asset – Liability Risks: Arising from mismatch between assets and liability of a life insurance company due to fluctuation in interest rates. 3. taxation. arising out of changes in interest rate. 2) Systematic or Mack risks: Associated with asset liability mismatch. 2.
violation of regulation etc. calls for risk identification and risk measures. while stress testing is conducted by using scenario to find out extraordinary losses arising out of a particular widely used to examine the whether asset in matching the liabilities of a portfolio. Measuring Risk: Risk management however. A number of methods have been in use to measure the risks in an insurance company. frauds. Under CFT analysis. Most widely used measures in life insurance companies are: Actual and Expected Experience Monitoring Risk Based Capital (RBC)/Ratios/ Target Scenario Analysis Stress Testing Cash Flow Testing (CFT) Cash Flow Matching (CFM) Duration and Convexity Analysis Performance Attribution/Exchanges by Source In A/E ratio analysis actual experience to budget plan and pricing is monitored to see to what extent liability Assumptions are met. 4) Liquidity Risks: Associated with funding crisis arising out of unforeseen demand for funds to meet obligations. 5) Legal Risks: associated with financial contracts.Strategic Analysis of Indian Life Insurance Industry 3) Credit Risks: Associated with default of borrowers of funds. basic 55 . which is widely used for banking industry. though there is no single best measure yet like VaR (Value at Risk). In RBC analysis ‘the ratio of RBC to adjusted statutory surplus is used as the standard for Surplus adequacy related to risk’. In scenario analysis liabilities and assets of a portfolio is examined under different Macro-economic assumption.
Investment guidelines and strategies – to exercise control over desired asset liability mismatch. Underwriting Authority and Limit . Another risk factor is the incentives to agents and marketing staff. top 56 . In the areas of systematic risks.Strategic Analysis of Indian Life Insurance Industry asset/liability analyses are undertaken to verify that sufficient reserves are maintained particularly for generated income controls (GICs) and annuity products. through pricing system. and all these increase the overall risks for the company. in duration analysis price sensitivity of portfolio or security is examined in return to change in interest rates. solvency margin etc. Risk management practices Like Risk management methods there are a variety of techniques used by the life insurance companies to manage risks. Incentive Scheme – to relate compensation to risk and earnings. Since there is no uniform technique to manage the entire gamut of risks inline insurance company there are several methods and developed practices to manage actuarial risks.To exercise internal control on managers. There are many other measures to monitor the portfolio risks – and normally a company simultaneously uses a set of measures.’ Standards and Reports – setting up underwriting risk classification and review standards and standardization of financial reporting system. replace old polices. While in convexity analysis the price sensitivity of duration to a change in the interest rate is monitored. According to Babbel and Santomero of Wharton School. Performance attribution test is conducted to find out the risk factors Causing losses by comparing the actual performance with pre-designed performance. However. while under CFM liabilities are matched with cash flows. which encourages them to sell more new policies. recent developments indicate that ‘static assumptions regarding loss distribution failed to manage risks arising out of interest rate volatility. ‘it appears that a common practice has Evolved such that four elements have become key steps to implementing broad based risk management system.
Diversification of assets minimizes the impact of unsystematic risks on the portfolio while diversification of liabilities is achieved by offering diverse products. to strengthen the risk management practices. Further. of Risk Management Practices of US Life Insurance companies shows that more than 75 per cent of the companies indicated that they use the following Risk Management practices: Risk Insurance: Diversification of Assets Diversification of Liabilities Selective underwriting Continual Process Improvement Hedging via Capital Market Stochastic Pricing Risk Adjusted Pricing Targets. It may be mentioned here that insurance supervision. forward trading. ALM is used to manage product specific risks as well as companywide risks. the risk based capital laws now in effect in all states require commissioners to take specified actions when a firms’ risk based capital ratio. Risk limits set the maximum exposure to risk factors and risk tolerance of the Management. 57 .Strategic Analysis of Indian Life Insurance Industry on the list of risk management technique is the Asset Liability Management (ALM) because it not only covers interest rate volatility but also non-interest risks arising out of embed options in the policy. options and swaps. Milliman USA. focuses more and more on the capital of an insurance company against the benchmark of assured risks in addition to the statutory solvency margin. futures. defined as the ratio of actual ratio to risk based capital. risk bearing business will be linked to more risk capital. falls below a certain threshold (Cumming. Hedging in capital markets is aimed at reducing the adverse impact of interest rate fluctuation achieved through derivatives. A survey of global consulting firm. In the US. the solvency project is centered on the risk based capital model: In a capital based solvency system. Even in Europe. Reinsurance allows risk transfer to another party through a reinsurance agreement. Philips and Smith 1997).
the following steps are urgently required. The risk management prevailing in Indian companies is of a very rudimentary type. very scanty attention has been given to risk management in life insurance companies. responsibilities of various entities. have increased the risk exposure. Risk standards: A uniform practice of risk management needs to be introduced through the life insurance industry. Risk Management must include the fiduciary responsibility of board and managers. particularly during the post-liberalized era have witnessed significant understanding. It is therefore necessary to create awareness about the necessity of risk management as well as to develop expertise in this discipline. Neither is any systematic and structured risk management practice followed in insurance companies nor have any specific guidelines on risk standards.Strategic Analysis of Indian Life Insurance Industry Risk management scenario in India: So far in India. time and shortterm losses due to rigid implementation of risk policies. Risk management has its cost also and they include the cost of professional training. However managements should be willing to bear this cost in their own long term interest. However. Global intervention. Liabilities and Solvency margin of insurers indirectly deal with Risk Management. technology. risk management objectives. Of course IRDA guidelines on Investment Management and Asset. 58 . Management may also consider introducing certain incentives and disincentives – incentives for maximizing policyholders’ return through risk management and disincentives for non-implementation of risk management which adversely affect asset value and policyholders’ benefits. Indian financial markets. changes in interest rate etc. checks and balances. risk management practices can be successfully implemented through institutionalization of the risk management culture and creating a necessity for adopting it. techniques and risk management been developed. In view of the poor state of the risk management practices in India. This calls for introduction of Insurance Industry Risk Standard (IIRS) incorporating the entire gamut of risk management and risk oversight.
ALM. If required. strategies. analyze investment strategy in relation to portfolio objectives and predetermine risk limits. RMC would be a high power committee report directly to the board on quarterly basis. top management. Institutionalizing Risk Management: Separating Risk Monitoring (RM) from operational functions can institutionalize risk management practices. This review should include analyzing policy compliance. there is need for adequate education and training. which also may preferably be uniform industry wide. Risk governance can be established either through ‘risk control’ or through ‘risk reward’. Risk Limit. Many organizations appoint a Chief Risk Officer (CRO) who is a reasonably senior level executive reporting to the chief executive of the organization. and evaluation of investment models. risk limits. In either of these models. for better coordination and monitoring a risk management committee (RMC) can be set up which would be assisted by the CRO. due diligence. monitoring investment guidelines. Risk Governance : The risk management system to protect assets from depletion may be made stronger through implementation of risk governance. However. measures. yet there is a necessity for independent monitoring through designated person. Though implementation will be reviewed by the primary fiduciary like board. revision redesigning of models. risk limits may be done within the overall guidelines and parameters of the regulator. For these. RMC would monitor implementation of Risk Standard. risk information and 59 . there is a necessity for improving risk knowledge. Monitoring should be entrusted to the entity not involved in operational matters. investment strategies.Strategic Analysis of Indian Life Insurance Industry independent risk oversights. Oversight: Independent review of risk management practices and risk measurements are required at frequent interval by the primary fiduciary and manager fiduciary.
60 . but an integral part of strategy and way of corporate life. the goal of risk governance can be achieved if the top management and board are truly interested and sincere. However. Genuine risk reporting and starting of risk information will strengthen risk governance.Strategic Analysis of Indian Life Insurance Industry competitive risk Practices. Risk management should not be thought and the regulatory requirement.
• • In the interest of the policyholders.A / 27 B. particularly due to problems arising out of foreign legal jurisdiction. it may be noted that export credit insurance has evolved out of uncertainties relating to international trade. The only area where Indian insurers consider giving cover is with regard to customs duty change under certain conditions. it expected that the insurance companies might consider offering political risk coverage also. 61 . Certain type of political risk at the international level has serious implications for exporters. manner and other conditions of investment by insurer.Strategic Analysis of Indian Life Insurance Industry PEST ANALYSIS POLITICAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY: Within India political ambitions and rise of communalism. Manner and conditions of investment: Subject to the above provisions contained in Section 27 -/ 27. Therefore. fissiparous tendencies are on the rise and may well continue for quite some time to time. but risks in the course of international transactions. the IRDA may. Give specific directions applicable to all insurers for the time. specify the time. In this connection. manner and other conditions subject to which the policyholder’s funds should be invested in the infrastructure and social sectors. Prohibition for Investment: The funds of policyholders are prohibited from being directly / indirectly invested outside India as per section 27 – C. political changes and currency exchange difficulties faced by many developing countries. The term ‘political risk’ has a wider connotation than commonly understood or assumed. It covers events arising not just from politics.
but not less than Rs 50000 for each class of business as per Section 3-A. Requirements as to Capital: The minimum paid up equity capital. Renewal of registration: An insurer. 62 . excluding required deposits with the RBI and any preliminary expenses in the formation of the country. who has been granted a certificate of registration. in the rural social sector as specified by the IRDA. They should discharge their obligations to providing life insurance policies to persons residing in the rural sector. The application for renewal should be accompanied by a fee as determined by IRDA regulations. not exceeding one forth of one percent of the total gross premium income in India in the preceding year or Rs 5 Crores or whichever is less. including insurance for crops.Strategic Analysis of Indian Life Insurance Industry • After taking into account the nature of business and to protect the interest of the policyholders. workers in the unorganized sector or to economically vulnerable classes of society and other categories of persons as specified by the IRDA. should have the registration renewed annually with each year ending on March 31 after the commencement of the IRDA Act. Insurance business in rural / social sector: All insurers are required to undertake such percentage of their insurance business. requirement of an insurer would be Rs 100 crore to carry on life insurance business and Rs 200 crore to exclusively do reinsurance business as per Section 6. manner and other conditions of the investments provided the latter are given a reasonable opportunity of being heard. Capital requirement: The paid up equity of an insurance company applying for registration to carry on life insurance business should be Rs 100 Crores. issue directions to insurers relating to time.
. Post office saving. hence it is highly regulated by government. at any time. NSC all are tax exempted saving. Power to investigation or inspection: The IRDA may. House rent allowances. Agricultural income is tax exempted. • • • • • • • • • • Health insurance rebate.F. On March 16.P. 63 . every insurer would have to undertake such percentage of life insurance business in the rural sector as may be specified by the IRDA in this behalf. P. order in writing a person as investigating authority to investigate the affairs of any insurer and report to it. 1999.P. All life insurance policy are tax exempted saving . Pension saving rebate..Strategic Analysis of Indian Life Insurance Industry Investment of funds outside India: Insurers outside India as per Section 27-C cannot invest the funds of policyholders.F. the Indian cabinet approved on Insurance Regulatory Authority Bills that was designed to liberalize the insurance sector. 1999. Role of the government: As insurance is an important service sector. Since 1956 insurance sector was highly regulated by government of India. Insurance business in Rural Sector: After the commencement of the IRDA Act. E. Expenses on dreaded diseases are tax exempted. Government has power to change the tax policy against life insurance industry. Recently there is issue to increase FDI level from 26% to 49%. Mede claim premium rebate. It is mandatory for the new companies to meet the obligations relating to the rural and unorganized sector as per section 32-B.
Postal life insurance should be allowed to operate in the rural market. 2. cannot materialize if the insurance sector is not opened up. Vajpayee as gone ahead to announce the liberalization of this sector announcement was made in November 1998. 5. To provide better coverage to the Indian citizens. 4. No company should deal in both life and general insurance through a single entity.5 billion India needs for infrastructure development in the five years from 1997-98. But the government of A.Strategic Analysis of Indian Life Insurance Industry Two governments in India have fallen over the issue of liberalization of the insurance sector (which was nationalized in 1971). 4. 6. 2. Foreign companies may be allowed to enter the industry in collaboration with the domestic companies. 64 . Private companies with a minimum paid-up capital of Rs. 3.B. Government’s objectives for liberalization of insurance: The main objective of opening of insurance sector to the private insurers is as under: 1. Government will prevail on grounds that the Rs. To augment the flow of long-term financial resources to finance the growth of infrastructure. Foreign investors can invest up to 26% of the equity of their joint venture with Indian firms. Only one state level life insurance company should be allowed to operate in each state. Important government guidelines for private players for entering into Indian life insurance market: 1. 1bn should be allowed to enter the industry.
TAC: Tariff Advisory Committee. 1 bn capital stipulations for new insurance companies. as entry will be in phases. IRA: Insurance Regulatory Authority: The IRA. 1. 3. 65 . 2. The IRA is also preparing an internal rating system to screen all applications. surveyors and actuaries). The joint venture status of life insurance companies (with majority holding of the domestic partner) is likely to be approved by the parliament.Strategic Analysis of Indian Life Insurance Industry BODIES THAT REGULATE THE SECTOR: For better regulation purpose of the insurance sector the government has established following bodies. The IRA has stipulated a minimum rural presence for all companies. The current India monopoly companies were required to bring down their equity holding to 26% within a period of 10 years. agents. was set-up in January 1996. Feature of IRA: 1. 1. The exhaustive guidelines have been issued for the appointment of intermediaries (brokers. Comprehensive legislation aimed at reviewing the insurance Act of 1938 and repealing the life insurance corporation Act of 1956 have to be passed. IRDA: Insurance Regulatory and Development Authority. IRA: Insurance Regulatory Authority. The Bill allowed for up to 26% foreign equity participation in the insurance sector. 2. the IRA Bill has to be passed by parliament to make the IRA a statutory body. Consensus also seems to be emerging on the minimum of Rs. under the chairmanship of Rangachary.
The current Indian monopolies companies are required to bring down their equity holding to 26% within a period of 10 years. Trafficking of licenses not to be permitted. 5. provide for the establishment of an authority to protect the interest policyholders. 4. earning prospects for the insurers and that the interests of the general public will be served if registration is granted to the insurer. 66 . IRA allowed for up to 26% foreign equity participation in the life insurance sector. constituted under the IRDA Act.e. which will be responsible for awarding of. the general character of management. the capital structure. IRA to vet top management appointments. to regulate. IRA to seek business plan with 5-year protection for all applicants. 2. New player should start their business within 15-18 months. 4. 2. 3. No composite license for life insurance business. IRA proposals: 1. the volume of business. No restriction on the number of licenses. Business Requirement:A company will not be issued a license unless the IRDA is satisfied with the sound financial condition. IRA will be sole Authority. 2. 3. Licensing to be only on national basis (no city by city approach) 5. 6. little or no government or political interference in licensing process. promote and ensure orderly growth of the life insurance industry. licenses i. 1999.Strategic Analysis of Indian Life Insurance Industry Government pronouncement: 1. A system of direct brokers to be introduced. IRDA: Insurance Regulatory and Development Authority:The Insurance Regulatory and Development Authority.
which include various debt instruments on which dividend on its ordinary shared for the five years immediately preceding or for at least five out of the six or seven years immediately preceding have been paid and which have priority in payment over ordinary shares of the company in winding up. 10 crores. The IRDA may in the interest of the policyholder’s directions relation the time. Further. Investment of Assets:Every insurer is required to invest. manner and other conditions and investments of assets to be held by an insurer. 67 . as per directions issued by the IRDA. if it sees the investments to be unsuitable or undesirable. indicating a plan of action to correct the deficiency within three months. he is required to submit a financial plan. Every life insurer shall deposit with the reserve bank of India one percent of the total gross premium written in India in any financial year. and keep invested.Strategic Analysis of Indian Life Insurance Industry Foreign insurance companies have been allowed to have a maximum 26% share holding. No life insurance company can be registered under the Act unless they have a paid up capital of Rs. If at any time an insurer does not maintain the required solvency margin. 50 crores in the case of an insurer carrying of life insurance business. not exceeding Rs. This amount would not be susceptible to any assignment or charge nor would it be available for the discharge of any liabilities other than liabilities arising out of policies issued. so long as any such liabilities remain undercharged. 100 crores. The Act prohibits an insurer from directly or indirectly investing policyholder funds outside India. (b) a least 25% of the said sum in government securities or other approved securities and (c) the balance in any approved investment rated as “very stron” or more by reputed rating agencies. The IRDA may also direct the insurer to realize the investment. every insurer has to always maintain an excess of the value of his assets over the amount of his liabilities of not less than Rs. assets equivalent to not less than the net liabilities as follows: (a) 25 % in government securities.
the Act provides that an insurer who does not comply with the aforesaid provisions may be deemed to be insolvent and may be would up by the court. as their interests would at all times be a priority and that in the event that the company acts in the manner prejudicial to their interests. IRDA is empowered to investigate into the affairs of the company. if the IRDA has reason to believe that a company is doing business in a manner likely to be prejudicial to the interest of policyholders. appoint an administrator to manage the affairs of the company. In order to maintain transparency in its dealings. insurers would have to keep separate account relating to funds of shareholders and policyholders. Consequences of non-compliance: A company failing to comply with the act shall be liable for panel action. Also. The central government may base on the report. This would act as a further assurance to the consumers.Strategic Analysis of Indian Life Insurance Industry In order to ensure that the company does not risk the money of the policyholder’s. Further. Insurers are required to get an actuary to investigate the financial conditions of the life insurance business including a valuation of liabilities every year in order to ensure continual compliance. than an administrator would be appointed to serve their needs. The court may also wind up the company if it fails to deposit or keep deposits as per the requirements of the act or if the continuance of the company is prejudicial to the interest of the policyholders or public interest. except for the purpose of affecting an amalgamation or a 68 . it is required to report to the central government. But an insurance company cannot be wound up voluntarily or on the grounds that by reasons o its liabilities it cannot continue its business. Failure to comply with the directions may lead to cancellation of the license for the company.
are as under: 1. The tax reforms in India are such that it encourages the citizens to invest in the insurance sector. Subsequent failures would result in cancellation of licenses. a fine of Rs. and etc. 4. Policyholder’s fund will be invested in the social sector and infrastructure. terms. is the tax policy. which affects the insurance sector. In the event of insurers failing to fulfill the social sector obligations. The percent may be specified by the IRDA and such regulations will apply to all insurers operating in the country. Insurers will be expected to undertake a certain percent of business in rural areas. Every insurer is required to make payment to the TAC of the prescribed annual fees. 25 lakh would be imposed the first time. made in the life insurance Bill by the Lok Sabha. 3. The Insurance Regulatory and Development Authority should give priority to health insurance.Strategic Analysis of Indian Life Insurance Industry reconstruction of the company. a company after issuing a policy cannot escape liability by seeking voluntary winding up. 69 . that may be offered by insurers in respect of any risk or of any category of risks. and cover workers in the unorganized and informal sectors and economically backward classes. amending or modifying such rates etc. 3.TARIFF ADVISORY COMMITTEE: The tariff advisory committee established under the Act is empowered to control and regulate the rates. The four amendments. It is provided that in fixing. 2. the committee shall try to ensure as far as possible that there is no unfair discrimination between risk of essentially the same hazard and also that consideration is given to past and prospective loss experience. Therefore. TAX POLICY AND INSURANCE SECTOR: Another factor.
In western countries the gain from the proceeds of a life insurance policy is paid free of tax. These are the factors. investment decisions and high rates of taxation will discourage the desire to save. 1938. the pattern was. which affect the insurance industry. Such tax breaks are available in many countries and have helped in the development of their life sector. 70 . but have been mandated to hand over a portion of their funds to the state for investment in infrastructure and for social development through government bonds and securities. Taxation of returns on investment influences. This was not in the form of guidelines. prescribed in great detail by the government. accordingly. Provided the policy satisfies certain qualifying conditions. The other factors. but as a legal obligation under the insurance Act. are the employment law. and government stability. Therefore tax incentives play a vital role in determining the attractiveness of such policies. As many of the social welfare measures companies are not just regulated. INVESTMENT DECISIONS MANDATED BY GOVERNMENT: Insurers are required to fulfill certain social commitments as well. though higher rate taxpayers may still have to pay tax on the gain. Already in India there are complaints that the rates of return on life policies are not what they could be. The insurance companies can use such tax concessions to design products for different categories of taxpayers. In India. which affect the insurance sector. although at a reduced rate.Strategic Analysis of Indian Life Insurance Industry The tax policy of the government is particular relevant for life insurance which is a long-term contract and inculcates among the policyholders the habit of saving. Non-qualifying policies get basic rate tax relief. The insurance companies can use such tax concessions rate.
Strategic Analysis of Indian Life Insurance Industry Pattern of investment specified for life insurance: Type of investment (1) Government Securities (2) Government securities or approved securities (3) Approved investments Percentage 25% other Not less than 50% (a) Infrastructure and social Not less than 15% sector (b) Other govern by exposure norms Not exceeding 35% 71 .
So minimum start up amounts and long running capital adequacy norms are absolutely essential. Infant mortality rate and maternity mortality rate are also affecting to life insurance. because people always attract by higher return. so the life insurance companies have to pay claim against policy. Monsoon. Therefore. life insurance is a capital-intensive business and must be backed by an adequate capital base on the part of the owners and the companies should not be running their business purely on other people’s money. Unemployment also affects insurance industry. aviation insurance cover will be on an increasing scale in view of the need for more frequent 72 . For example. because the unemployment people will not have earning.F variation very much affect to life insurance industry. Adequacy of capital: Capital adequacy is a matter of attention in view of the nature of the life insurance business. they do not prefer lower return policy. The increase in the growth rate in various sectors accompanied by the growth in trade in the context of fulfilling of commitments to the WTO will signal a growth in the demand for insurance covers of new types. sooner or later there will be an upswing. the insurers should be in a position to meet its long-term contractual obligations and pay up the dues or claims. so that they prefer installment or annuity (EMI). the Malhotra committee suggested and subsequently the IRDA stipulated a minimum capital base of Rs 1 bn for any entity wanting to enter the life insurance business. In that sense. so saving also affect to life insurance sector Life insurance industry will directly affected by Earthquake. where in the case a contingency arises. Increased Economical Activity: Although economic activity has slowed down since 1996. Typical Indian want luxurious product against low income. in consideration of this. and Natural calamity.Strategic Analysis of Indian Life Insurance Industry ECONOMICAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY Interest rate at bank and interest rate of P. Because of these events turns into lots of death. so that they may not have extra saving to invest in life insurance.
As a result.Strategic Analysis of Indian Life Insurance Industry air travel for men and for transporting materials. Low interested rates mean low investment return for reinsures causing negative impact on their overall net profitability as pricing is to a certain extent sensitive to interest rate fluctuations. 73 . But. The opportunity for such rate increases practically remains very slim and even non-existent. low interest rates discourage and even prevent any outflow of capital from reinsurance business to capital markets. causing current over capitalization in reinsurance market to continue. and it is an opportunity for the company. if sustained for a considerable period. this can lead stability to reinsures administrative cost. which is characterized by over capitalization a resulting intense competition. liability and personal insurance. usually bring some relief to reinsures from the resulting lower than forecast claims payment. A positive outcome is that low inflation rates. the pace of business and of change today is so fast that even the most careful assessment of exposure time. As far as cover against business interruption is concerned. lead to higher pricing level for reinsures in order to sustain their profitability. On the other hand the value of the holdings of the insurance companies will increase. and the most liberal coverage cannot protect the insured adequate in the event of a loss be on the increase and insurance companies cannot afford to ignore the vast potential in this business. in reinsurance market. Furthermore. This would necessitate substantial property. Interest Rates: During the last years the government has rationalized interest rate creates better business opportunities for the life insurance sector because the substitute products are graded lower by the customers. Rationalized of the interest rates is still expected. Also. The negative impact therefore. reinsures are under tremendous pressure to cut their operational cost to safeguard profitability.
Therefore. low interest rates and low inflation result in higher assets. clients would prefer policies where the savings portion is periodically returned while the risk portion is maintain for the duration of the contract. A flexible system. lower liabilities. the insuring public may prefer pure risk plans (terms insurance). reserves are not explicitly discounted so lower interest rates do not increase reserves. This in turn increase surplus. Fortunately. Those who prefer risk protection are likely to opt for long term policies. is increased from time to time so that the real value of the cover is maintained. Low interest rates and low inflation reduce the ability of reinsures to off set technical losses by using financial products and should. lower inflation means lower expected future claims payments which lowers required reserves. particularly life. as a consequences. this will also serve to weaken the balance sheets of insurers and create an increase in the demand for balance sheet protections. However. hence greater surplus and greater risk capacity resulting in less demand for. the rate of inflation in India 74 . which may also be preferred because they are likely to be low premium policies. lose its attraction for the investor. again allowing insurers to feel richer. would tend to reduce the insurance business. these conditions move risk from the liability side of the balance sheet to the asset side while actually generating new needs for cover. The response to an inflationary situation will depend on what benefit the insured is looking for. under which the sum insured. therefore. High inflation for instance. and insurers feel richer. and greater surplus of reinsurance. Lastly.Strategic Analysis of Indian Life Insurance Industry As interest rates fall. At the most. On the liability side. force market competition downloads. bond value rise. which have a low premium outlay. and could give a boost to the market under conditions of high inflation. because the real value of the money paid back to the policyholder on maturity of the policy would go down and would. Inflation rate: Inflation can also be one of the causes to change the scenario of the insurance sector. In a situation of high inflation.
it is not likely to dampen the market. These all factors have changed the trend of life insurance sector.Strategic Analysis of Indian Life Insurance Industry has been contained to less than 5 percent for a fairly long time and unless it goes out of hand. economical and will see the political and government factors. We have seen the various factors like technological. 75 . capital are Entry is controlled are high expertise Scarce resource is → Permission from state → Scarce resource is expertise → Scarce resource is capital → Scarce resource is brand From the above figure we can see that now day’s strength of brand is very important aspect for the success in this sector. systems and can be requirements same for all. which is shown in the following figure. Stage 1 Closed market. Of course you should have strong distribution channel without which growth is not possible. which governs the entire life insurance sector. environmental factors and competitive analysis of insurance sector in the next session. This includes internal as well as the external factors. by state. Stage 2 Barriers to entry to operate is essential. Market related factors: These are the factors. Stage 3 Stage 4 Barriers to entry Entry costs are low reduced expertise brought. license can be obtained.
76 . if high standards have been achieved else where. etc. on time renewals. it is not impossible to attain the same in India too. Hence. claims settlements. with customer satisfaction. improved in performance of the company will not be synonymous with only basic cost reduction or larger business. because there is still not enough concern on the part of the Indian companies. and quick response to perceived needs – in short qualitatively superior service. improvement in its delivery system. The concept of “sales” is now redefined as a long – standing relationship. but has to be durable and of a long term nature. One can anticipate greater insistence from pressure groups like customer forums to keep customer satisfaction at the top of the list of priorities of the insurers. The difference between them and the foreign operators perhaps lies in the service provided.Strategic Analysis of Indian Life Insurance Industry Customer satisfaction: Since the customer is the focus of any service industry. every such industry continuously strives for greater variety and better quality of products. cost effectiveness. The relationship does not end with the conclusion of the transaction. easy access. but the new measure of performance will be set in terms of service to the customer. Indian life insurance companies already have a sizable line up of the products.
which require covers and still are not sold on a large scale today. family size is shrinking and the fact that in decades to come.g. or too many vehicles on the road can result in hazards like stampedes and pollution. Change therein produces different demands for life insurance.Strategic Analysis of Indian Life Insurance Industry SOCIO-CULTURAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY: The basic social factors that affect the life insurance sector are as under: Population Life style Educational level Level of earning Societal benefits These are the major social factors. It is also going to exert a special influence on the life insurance market in other ways. We will discuss all of them in brief> Population: Growth in the population is a major factor pushing up the demand. a larger number of vehicles 77 . and through that. which affect the life insurance sector. All over the world. Similarly. For e. Thus the positive as well as the negative aspects of population growth are going to spur demand. ill effects of uncontrolled growth of population also could spur the growth of demand. public support. overcrowding in public places of entertainment. both presents are more frequently likely to work outside the home will mean that there could be a greater possibility of property loss. Apart from exerting pressure on demand for goods and services. For example. Life style: The peculiar lifestyle of a country or an age also influences the insurance business.
Activities like life insurance and financial services are particularly well suited for such arrangements.000 to a total of 2. In recent times. the deteriorating law and order situation. Crumbling social values. If this trend continues or increases with increasing income. the number was as high as 900 policies in the next year. However. Companies will respond by trying to shorten the transaction time for the delivery of products and services and creating distribution systems that can reach clients wherever they are and whenever they want to use them. consumers’ behavior cannot be adequately and accurately predicted. The younger generation is overwhelmingly influenced by consumerism.. there will be fewer propensities to save or insure. This will increase the demand for life insurance products.Strategic Analysis of Indian Life Insurance Industry on the roads for people commuting to their jobs or business would mean larger incidence of accidents. extortion. Or again. Of course. the number of jeevan shri policies jumped from 88. there has been a surge in the high end business of the LIC.33. etc. abduction. as against 90 policies each worth more than Rs 10 million in 1999-2000. there is a higher demand for convenience and service. With time becoming scarcer for most people who pack in a full day. are posing a new category of risks which need to be covered through suitably designed policies.000 policies in the same period. the growing incidence of crime. For instance. some people will try to spend a part of their time working at home either because they would like to be with their families or because they find it more convenient. 78 . Thus these are how changing life style of the citizens is affecting the life insurance industry. so as to ensure convenient access to service providers. as a result of which the increasing purchasing poser may not be reflected in the life insurance market. there is also the other possibility that wherever it is possible.
is the level of earning. and by tilting of the life insurance companies’ investments in favour of social developments. The literacy rate is very poor. More than 50% of the population is still uneducated or more or less not educated. Level of earning: Another factor. long-term care for senior citizens and different employee benefit plans. Thus the people are not able to understand the concept of the life insurance. retirement plans disability insurance.Strategic Analysis of Indian Life Insurance Industry Level of education: India is one of the developing countries: the level of education is very low here. In addition. It is not the total population but the insurable population which is material for the conclusion of potential. the government attempts to extent life insurance with certain social obligations in view in both urban and the rural areas through such means special schemes for the weaker sections. Thus one of the factors. Societal benefits: In view of the fact that large sections of India have inadequate life insurance cover. The 80% of the total population is having the 20% of the wealth and the 20% of the total population is having 80% of total wealth. The social changes emerging in the country provide opportunities for insurers to sell financial services products such as family health care programmed. Thus the awareness is not created and it has become a big challenge for the industry. which affect the life insurance sector. which affects the life insurance sector. an important social responsibility of the government relates to spreading it far and wide. Among the educated people the quality of the education is still a big question mark. Thus the richer are richer and poorer are poorer. is low level of education. Due to this the life insurance sector is affected very much. Apart from the usual demographic and other well known 79 . In India the rule of 80-20 is working.
every individual is a potential candidate for life insurance. Only the main workers (i. financial status limits this potential. which is otherwise attractive. Thus. out of the population in the insurable age group.Strategic Analysis of Indian Life Insurance Industry factors such as age group. the cost of reaching out to a very large number of customers. earning. but more so due to the prospect’s capacity to pay life insurance premium after meeting other pressing needs. In reality. In principal. Many invisible factors like religious faiths and social values too need to be considered. and beyond this range life risk may be considered to be not worth insuring. And supporting others). a realistic assessment of this potential has to be based on several other relevant factors. there are many practical factor affecting ‘ insurability” such as old age. limit the opportunity. and literacy level. sex-wise distribution. In that sense. there is considerable difficulty in accurately estimating the potential and crude estimates can be misleading. For assessing the practical business potential of life insurance. in the opinion of some experts. Again. if they are dispersed. the eligible population needs to be “Qualified” in relation to other factors including those mentioned above. excluding marginal workers) with adequate income may be considered as the actual insurable population. becomes important.. 80 . and physical and mental impairments. the cost and profitability of exploiting the potential. The estimate will also vary according to the criteria used to measure if. The sheer size of the numbers. past and present illness.e. since this can be considered as the main “active” age group ( in the sense of working. The population in the age group 15-55 is usually regarded as the insurable population. In addition. not only because of the practical consideration of the insurable worth of a person to the insurer in financial terms. there fore is not crucial itself. income level. As such.
the starting age is a little higher. thus. mainly because in India the normal retirement age is around 60 years. Only in the affluent sector of society life insurance can be taken before personal earning starts. Also. a high percentage of the population in the lower income group does not remain “insurable” after the age of 50. 81 . in our country the practical age range for insurable population actually narrows down to 25 to 50. number wise life insurance below the age of 25 is not so significant (although amount wise it need not be so). particularly small entrepreneurs. Due to various factors including the unemployment problem. people over the age of 50 rarely apply for fresh life insurance. On the other hand. Thus.Strategic Analysis of Indian Life Insurance Industry There is one opinion. which suggests that in our country the age group 15-55 as the base is not totally suitable. For others. traders and businessman. real earning starts from around the age of 25 for salaried persons.
The customer will demand for greater convenience of excess to the product/ service and all at low cost of delivery. timing and accessibility would not be a hurdle for either customers or businesses. post transaction service and technology. distribution. The insurance industry having a huge list of the customers. pricing. Technology will perhaps be the single largest driver of the retail thrust. Constraints of locations.Strategic Analysis of Indian Life Insurance Industry TECNOLOGICAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY: Internet as an intermediary in the current Indian market customer is not aware about the intrinsic value of insurance. Maintaining the database The most important facto that is affecting the insurance industry is the marinating the database of the customers. In such a scenario Internet can be an effective medium for educating the consumers about insurance. There would be cut through competition and the real benefit would be to the customers in terms of better products. Retail marketing is a commonly expected concept and the providers of the retail products and service will try out for larger market and market share. In such a scenario Internet can be a effective channel for pushing product specific information to a particular market segment. Consumer feedback about a particular product as well as suggestions for different types or covers can also be generated through the Internet. He thinks of insurance only in the mount of March as a tax saving measure. Product development and target marketing through the Internet: with increase in the number of insurance companies there will be a need for market segmentation and subsequently product designed for each of them. The entire strategy will evolve around the absolute ability of the organization. There fore the use of technology and specifically the Internet with realigned strategies would be one of the key factors to success. The security provide by an insurance cover is rarely thought about. It serves as a single window for disseminating product. 82 . process and procedural information to the consumers.
cost reduction among several other benefits. their credibility. if some hackers obtain credit card information of few customers. in order to quantify them because such risks don’t have any past data.Strategic Analysis of Indian Life Insurance Industry In order to maintain it in manual format it is really the work of stupidity. Moreover. The risk can be of various attributes. Thus maintaining the database has really become easy due to the development in technology. Insurers face challenges to ascertain risks. for example. E-business insurance in India: The Internet has played a vital role in transforming the business of the 21st century. the theft of important and confidential information and so on. insurers have to devise new methods for assessing. 83 . In technical terms. Efficiency. an increased factor of risk involved. with every positive change. In technical is an evil attached and technology is no exception. which ultimately results in losses for the business entity. This change having been widely accepted. information with the help of complex and sophisticated technological tools in every kind of business. Will an insurance policy cover all of this is million dollar question hence. For example. increased sophistications of technology brings with it. the difficulty is to design a cover first of all. With this change in the business process. what financial impact a particular risk can have is very difficult to be determined. the advantages are numerous such as fast processing improved. the challenge to underwrite and handle claims for such policies remains existent. A person can switch over to the computer and get the details of the customer very easily. it’s a loss for banks. Computers are now being used extensively for creating a storing data. there is an evil attached and technology is no exception. which really answers the needs of customers. underwriting and servicing claims for the so-called e-business insurance. Thus with the development of the technology it has becoming possible to maintain such huge database very easily. which makes it all the more difficult for actuaries. the risk of data being lost due to a virus attack. But even after designing and pricing such products with difficulty. With the change in time the computers has taken the work of this things. However. customers and also their brand.
the offline mode is preferred. 84 . Dual income families with young children. Hence the companies have to be very careful and cautious in catering to the needs of these customers who provides a good amount of business to the insurers. Thanks to the technological advancement and increased de regulation and sophistication. The insurers will have to offer all types of channel to customer and it is the customer who will have the right to choose the channel suiting him/ her. singles with long working days and flexi-timers all demand high level of sophistication and ease when it comes to service. better informed. The scenario is continuously changing in this industry. The private players in India seems to have identified this and have put substantial information on there websites regarding policies.Strategic Analysis of Indian Life Insurance Industry Impact on distribution channels: Distribution channels are the most important part of the insurance industry. In future the customers are expected to be more technology – oriented. quotes and contact information among other routine stuff. the carriers and producers can now reach the customers in different ways as has been proved in the US market and other developed nations the web is extensively used for the access of information but when it comes to the purchase of policy. more knowledgeable and more demanding.
The market attempts of companies in other industries to win customers over to their own substitute products.Strategic Analysis of Indian Life Insurance Industry PORTER FIVE-FORCE ANALYSIS One important component of industry and competitive analysis involves delving into the industry’s competitive process to discover what the main sources of competitive pressure are and how strong each competitive force is. 1. Even though competitive pressures in various industries are never precisely the same. The state of competition in an industry is a composite of five competitive forces. 2. The rivalry among competing sellers in the industry. 5. This analytical step is essential because managers cannot devise a successful strategy without indepth understanding of the industry’s competitive character. The potential entry of new competitors. 85 . The competitive pressures stemming from seller-buyer collaboration and bargaining. the competitive process works similarly enough to use a common analytical framework in gauging the nature and intensity of competitive forces. The competitive pressures stemming from supplier-seller collaboration and bargaining. 4. 3.
86 . bargaining power of buyers. inputs Rivalry among competing sellers Buyers Firms in othe r industries offering substitute products The five-force model developed by porter in 1980. Firms in othe r industry offe ring substitute products Suppliers Of Raw-materials. the threat of new entrants and degree of rivalry between the existing competitors. Environment and attractiveness of the life insurance industry. the bargaining power of suppliers.Strategic Analysis of Indian Life Insurance Industry Figure shows porter’s five-forces model of competition. which include the threat of substitute. guides the analysis of an organization’s. The nature and degree of competition in an industry hinge on five forces.
it attracts new entrants. High level of competition in life insurance industry become giant player came into the market.Strategic Analysis of Indian Life Insurance Industry 1. High profit in life insurance industry act as a magnet to firms outside the industry motivating potential entrants to commit the resources needed to hurdle entry barriers. which attract more companies to invest in. it is difficult to introduce new brand. 100 crores. beside several Indian players. private giants and international player try to enter in to the market in the large scale with their proper homework with customized and products too. they shall divest the excess shares in the phased manner within a period of ten year. An Indian private are well – developed and has capacity to face challenges. 87 . Tax exemption structure makes the industry attractive. As far as life insurance industry there would be fewer entries due to more specialized firm with lower expenses ratios and better capitalization. In case promoters hold more than 26% of the paid up equity capital. foreign companies foresee good prospects for new business by alliances and partnership with domestic outfits . But again due to potential market. thereby increasing the number of competitors. The capital requirement in life insurance is Rs. Threat new entrants: The future of life insurance market scenario will be marked by the active presence of many international players. In life insurance industry entry barriers is moderate so that it becomes profitable. promoters. Registration: Every insurer is required to obtain a certificate of registration from the controller of insurance. Threat of entry is determine by the entry barriers which act to prevents firms from entering the industry. can hold paid up equity capital up to 26% in an Indian insurance company. The acceptability of new brand is also very low. The registration is required to be renewed after a period of three years. The Indian market is highly brand oriented.
Market is highly segmented. and with the control of IRDA and the government’s attitude to serve to the needs of the people with social objectives. If buyers buy insurance then switching cost become high. The switching cost of buyer over brand or close substitute products: The life insurance industry has the uniqueness of providing risk protection. the multinationals may face breathing and developmental problems. service or other terms of sale. Bargaining power of Suppliers: - Policy designer tend to have less leverage to bargain over premium and other terms of sale when the company they are supplying a major customer. which does have any substitute. As far as the substitute products are concerned they are providing the service of saving and tax benefits but still they lag in the risk coverage factor. and as a competition in the market increase the bargaining power of the buyer will get increase. Buyers have a strong competitive force when they are able to exercise bargaining leverage over premium. With the tariff advisory committee to control the rates. Bargaining power of buyer: Now a day competition is increasing in the each and every sector. 3. Buyers in this industry are very return oriented and it switches easily. Suppliers bargaining power increase if reduced administrative cost and also reduced claim procedure time. 88 . rules and regulation. Thus the switching cost has no place.Strategic Analysis of Indian Life Insurance Industry Economies of scale: Economies of scale is difficult to find in the initial stage of entry into the market because of experience as evidence by the theory of experience curve. Insurance is tax exempted so that suppliers bargaining power increases. So buyers bargaining power is high. High switching cost creates buyers lock in and makes a buyer’s bargaining power. 2. Legislation or government action: special permission is required from the government to enter in the insurance sector.
SAVING: As far as saving are concerned. They are saving. post deposit. 4.Strategic Analysis of Indian Life Insurance Industry Suppliers then have a big incentive to protect and enhance their customer’s competitiveness via reasonable premium. risk and tax benefit. Existences of a large number are saving through PPF. Government debenture etc. 89 .a. Most of customer saving their money in bank. The substitute products for the industry are as follow: Term deposits in bank (5. Brand identity: there is certainty among the minds of people in relation to existence and payment of claims from the existing players whereas the solvency of private players is not certain. EPF. for developing country like India) There is threat of increasing market potential of NSC. purchase Gold & Silver also.25-8 %) Investment in government securities. Supplier’s ability to integrate forward: the private players can integrate forward to increase the volumes of business by providing customized and tailor-made policies whereas existing players whereas lack on this point. If investments in insurance policies are made with the objective of tax benefits then there are other investment avenues. better service and on going advances in the technology of the item supplied. which offer similar benefits. (4-5%) Money market investment (for corporate) Capital market (around 13% p. Many customers invest their money in share market. Threat from Substitutes:- Life insurance sector can be featured in three factors.
The risk protection is provided by this sector only. TAX BENEFIT: There are various substitute of this feature of life insurance. there is no close substitute of the products. INVESTMENT IN THE MUTIAL FUND. As per the study conducted by the monitor group. Some of the substitute which provides tax benefit is: • • • • • PPF NSE POST OFFICE SECURITIES. There is cut.10000 crores in 2001. which no other sector can provide. There are mainly 13 private organizations and one public organization in life insurance competition. All the insurance companies deal in identical policies. Hence. there is no product differentiation.Strategic Analysis of Indian Life Insurance Industry RISK COVERAGE: For risk coverage. The annual growth rate is expected to be 15%. The insurance sector is showing high market growth rate. No other instrument provides assurance against risk. which enables the insurance companies to achieve its own market growth through the growth in market place. Thus these are the substitute of the life insurance industry. But the core competency of this sector is the risk protection providing capacity. as service levels offered are similar. Rivalry among the exiting player: As a result of privatization competitive conditions will prevail in which entry of companies buyers will exercise control. 5. Post- 90 . OTHER TAX SAVING INSTRUMENT.thought competitions among rivals in life insurance industry. the size of the Indian general insurance market was of the order rs.
91 . there are less chances of exit. Nationalized players have negligible computerization and use of management information system (MIS). Private players will make extensive use of MIS as well as will have more or less a paperless office. post privatization there will be less chances of exit. Hence. as the ministry of finance and insurance regulatory and development authority1999 will govern the insurance companies.Strategic Analysis of Indian Life Insurance Industry privatization. Also. Although they are planning to implement software developed by CMC for fulfilling the MIS requirements across various levels of offices. Ministry of finance controls all the insurance companies that are in the industry at present. product and service differentiation exist between public company-private companies.
2% in US . So. No doubt lots of marketing and promotional efforts have to be done for trapping the uncovered portion of the huge market.5%in UK. The growth in the GDP shows the opportunity for this industry. India is the 23rd largest insurance market in the world. Therefore they prefer life insurance. development in the shipping industry.6. financial or specific area based avenues of absorbing improved system are also now more easily available. Technological. This is the opportunity for the life insurance sector.5%. that insurance companies working efficiently and fast service. Uncovered market: The Indian insurance market is the one of the least markets in the world. India’s insurance has long way to catch up with the rest of the world. Easy accesses to development in the more advance market provide further opportunity to upgrade their working. Thus there lies a big opportunity for the life insurance industry. Increased economic activities: increase in the economic activity has become the opportunity for the life insurance sector. the ratio’s of premium to GDP for India stands at only 3% against 5.Strategic Analysis of Indian Life Insurance Industry OT ANALYSIS OT. India has a population 1044.analysis of the industry shows opportunity and threat the industry is likely to face.4% of the global insurance market which is very low. so they prefer protection against the risk. India accounts for just 0. Almost 300 million people in the country can afford to buy life insurance but of this only 20 % have an insurance cover. The activity such as development in the automobile industry.15 million out of which only 77. OT analysis of Indian life insurance industry shows the comparative strengths and weakness of Indian life insurance industry with rest of the world and also major opportunities and threats the Indian life insurance industry is facing. So this is also one of the opportunities for the life insurance sector. According to the institute of charted financial analyst of India. 92 .7 million have a life insurance policy. Opportunities: Today’s human life becomes full uncertain. The growth rate expected this year 7-7.
Now a day role of government has changed. Thus there is great opportunity for those who can trap it. for companies to create Synergy. easily. Liberalized government policy toward insurance sector: the government has liberalized the government policy in the life insurance sector. if the insurance market is properly tapped. 93 . Also the companies can cut down the cost of operation up to considerable level. Because of natural calamities like earthquake. flood.7%) is very high. it has become an opportunity for the life insurance industry.Strategic Analysis of Indian Life Insurance Industry To enter into rural market where customer awareness about insurance is low by effective and efficient marketing strategies. To use Internet and e-commerce technologies to dramatically cut the costs and/or to pursue new sales-growth opportunities. It is said that one Australia is added in our country every year. Thus through a calamity it has become a considerably big opportunity for the industry. With the help of technology it has become easy for the companies to reach the customer quickly. and cyclone people have become conscious about benefits and need of insurance. it is possible to raise life insurance premium as a percentage of GDP from its existing level. it has become an opportunity for the life insurance industry. Thus. Thus technology has thrown lots of opportunity for the company. value as well as competitive capabilities for the firms. India has traditionally been a highly savings oriented country. The lack of comprehensive social security system combined with a willingness to save means that Indian people demand for pension products will be large. Needless to say. Natural calamities: natural calamities taking place now days have created a concern for life insurance among the public. To sell insurance products through electronic Medias. Growing population: the growth in the population (approximately 1. Due to liberalized policy of government the country is benefited in earning foreign inflows: the domestic company can also collaborate with foreign country and can create synergy. Exist the option of joint venture& alliance etc. Thus. efficiently and in a better way. Thus potential customers for the life insurance industry. It has become an opportunity for the life insurance industry.
They could face a peculiar problem that although paper and in terms of legal definition they would not be public sector units. Due to possible negative impact on the rise for some time to come. Fluctuation in the bank rate makes big difference for the life insurance industry. Fraud in insurance sector: the major problem fraud. they may not be fully free from government interference. One very serious danger that the government on units is likely to face is that even if at some point of time. The flight of talent to new entrants is already in evidence. the government does decide to disinvest a portion of its equity. It has become threats for the life insurance industry. Interest rate of P. In effects. The new units. equipped with state of arts equipment and innovative procedure would have an in-built edge over the erstwhile public sector units. This could be genuine threats since they would be competing with units which are free from such artificial and unnecessary restrictions. which until recently had no such opportunity and incentives. These new entrants succeeded in eating share of the existing entities. it is only because the education level is only 62 %( in which only 10% are well educated). As at present the awareness level is not much. which affects the life insurance sector. their working could be no different from what it was before their ownership pattern change. new products and flexibility.F and bank saving create threat to insurance sector. Consumer’s education. This creates threat among rival firms itself. and could be considerable challenges for existing companies. All other saving is obviously the threat for life insurance sector. They are targeting the bigger corporate the other clients in the well established metropolitan center. Increasing intensity of competition among industry rivals-may cause squeeze (fall) on profit margins. Retaining qualified and competent executives will be 94 .Strategic Analysis of Indian Life Insurance Industry Threats: Private entrants are naturally targeting the profitable and more lucrative segments. by providing better service. Decreased in bank rate: the decreased bank rate is the biggest threat for the life insurance sector.consumers are more and more confused because the market players are offering large number of product range.
95 . there were no serious efforts at updating technology and equipment.Strategic Analysis of Indian Life Insurance Industry on employment. The resultant inadequate investment in infrastructure could lead to their lagging behind in the race.
by customized combination of coverage. would involve a heavy investment in developing relationships with policyholders. Under this approach. Following are the general strategies. which will instill confidence in minds of the customers that they would be offered best product from out of the several available products. The other approach. Strategies are very important for any of the business. which can be used singly or in combination: overall cost leadership is clearly under stable. One approach is to focus upon product quality. May be the lowest cycle time for settling a claim under say. The third approach is of greater market segmentation under which the population should be divided into several homogeneous groups and product. a company seeks a differentiation target. while in differentiation focus. one can expect a range of products and services designed to give the customer what he specially desires. and convenient quick claim handling. a company seeks to be unique in its industry along some dimensions that are widely valuable by the customer. In a differentiation strategy. and services would be targeted towards such selected markets. risk management advice. easy payment plan. a med claim policy could be differentiating factor. 96 . Porter Generic Strategies: One of the expert Michel porters has identified three internally consistent generic strategies.Strategic Analysis of Indian Life Insurance Industry KEY STRATEGY TO SUCCESS In order to succeed in any of the business it is very necessary to make and follow the strategies. is to focus on the customers need. In a cost focus. which are recommending to the insurance sector. The effort would be to “tie” clients to their company. a company seeks a cost advantage in its target segment.
There is vast potential for insurance growth in the rural sector. left unexploited by the public sector companies. direct contact with their ultimate customers. designing new channel of distribution. which can offer protection against a number of losses.Strategic Analysis of Indian Life Insurance Industry Marginal Different Product: Another strategy would be for the companies to design products that will make comparison-shopping difficult. and front line employee empowerment. The new comers. They must. data says that rural market is still uncovered by this sector. concentrating on strengthening existing points of service. Given the combination policy. therefore. Rural people find security in groups. If the consumer is offered a unique policy. 97 . Designing New Strategies: The existing insurance companies cannot be satisfied with concentrating on the consolidation of their existing markets. the consumer will find comparison even more difficult. The survey reveals that There is distinct hierarchy of needs in rural areas. he will have no alternative coverage with which can be compared. Move towards Rural Market: It is one of the most important suggestions. A recent survey by foundation for research. whose terms and conditions are difficult to compare for consumers who may not have sufficient experience in purchasing insurance and who would find it difficult to make a clear choice. Insurance penetration can be achieved by tapping the neglected Rural Markets. We believe that the sector should move towards tie rural market. on the other hand give priority to tapping the market. but have to achieve further growth and penetration. They could offer a wide variety of covers with marginal differences and varying prices. training and Education in insurance (FORTE) suggests that insurance can be sold profitably to rural communities in India. They also need to refresh their marketing set up.
Rural buyers of insurance prefer a half yearly mode of premium payment to coincide with the time of the harvest. which is significant. Consider a contrast within the contest ‘for.500 annually. 98 . Average saving across the most important socio-economic strata comes to 30-35% of annual income or Rs. a significant percentage does not save through formal financial modes or institutions. Hold sales contests in the forth quarter. One should be sure to build in networking times for agents during the program-in addition to entertainment and education.top-tier producers. Building relationship is real perk. Thus there are very much chances for any of the companies to work over this scenario. So we believe and suggest all the players to move towards the rural areas. 13. such as air and guest room upgrades. Web should be frequently used for creating gift ideas. 51% of these who own life insurance would like to buy more. It is the best times ti motivates agents who wants to qualify for a trip. There is high level of awareness about life insurance and fairly high-level about 36% already own life insurance. Amongst the savers. The following strategies are recommending.Strategic Analysis of Indian Life Insurance Industry The saving habit is very strong in rural areas. MOTIVATION OF SALES FORCE: A life insurance company should constantly be involved in the process of motivating the sales force in the turbulent times. additional rewards for additional milestones that are met.
The technological advancement is such that force the companies to take such steps. Appointing of proper and efficient agent as well as effective direct marketing could do this. the company could reduce management expense to a large extent. 99 . which is a major problem in the company. Still the full-fledged use of Internet is not done in our country. Company should concentrate on the quality of the premium received this will help the companies to reduce its underwriting losses. which is the mission of the company. At the time it can improve the quality of service to its customers.Strategic Analysis of Indian Life Insurance Industry Use of Internet: The present scenario is such that the products sold with the help of Internet. As suggestion earlier the Internet based life insurance will help the companies to reduce the transaction cost and time. By way of training the excessive staff.
licindia. Response books-2003 Insurance 4th edition CIB Puplicaion-2002 Magazine Life insurance vol 1 ICFAI PRESS 2002 Life insurance vol 2 ICFAI PRESS 2002 Insurance industry Emerging Trends ICFAI PRESS 2002 Insurance law and regulation vol 1ICFAI PRESS 2002 Web site: www. Insurance in India.gov.com www.incometaxindia.com www.iciciprulife.Strategic Analysis of Indian Life Insurance Industry BIBLIOGRAPHY Planed P.org www.com www.irdaindia.S.in Newspaper: Economic times Times of India Business standard 100 .S and Shah R.equitymaster.
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