Professional Documents
Culture Documents
Venkata Ramanan A
TABLE OF CONTENTS
1. Introduction...........................................................................................3
2. Objective.................................................................................................3
3. Methodology............................................................................................3
4. Company overview......................................................................................3-5
5. Product profile...........................................................................................5-9
6. Financial Analysis..........................................................................................10
• Solvency Analysis...........................................................................11
• Glossary of terms...............................................................................42
7. Conclusion................................................................................................. 76
8. Bibliography............................................................................................... 77
2|Page
IGTC, 2009-11
Objective:
This study attempts to analyse the financials of private sector insurance firm, HDFC Standard Life
Insurance..
Methodology:
Secondary research is adopted from sources such as the website of HDFC SLIC and publications of
IRDA.
Company Overview:
HDFC Standard Life, one of India’s leading private life insurance companies, offers a range of
individual and group insurance solutions. It is a joint venture between Housing Development Finance
Corporation Limited (HDFC), India’s leading housing finance institution and Standard Life plc, the
HDFC Ltd. holds 72.43% and Standard Life (Mauritius Holding) Ltd. holds 26.00% of equity in the
joint venture, while the rest is held by others. HDFC Standard Life’s product portfolio comprises
solutions, which meet various customer needs such as Protection, Pension, Savings, Investment and
Health. Customers have the added advantage of customizing the plans, by adding optional benefits
called riders, at a nominal price. The company currently has 32 retail and 4 group products in its
portfolio, along with five optional rider benefits catering to the savings, investment, protection and
HDFC Standard Life continues to have one of the widest reaches among new insurance companies
with 568 branches servicing customer needs in over 700 cities and towns. The company has a strong
3|Page
IGTC, 2009-11
Vision:
The most successful and admired life insurance company, which mean that we are the most trusted
company, the easiest to deal with, offer the best value for money, and set the standards in the
Values:
• Integrity
• Innovation
• Customer centric
• Team work
Strengths:
• Financial Expertise
HDFC Standard Life Insurance has the financial expertise required to manage long- term
4|Page
IGTC, 2009-11
• Range of Solutions
HDFC Standard Life Insurance has a range of individual and group solutions, which can
be easily customized to specific needs. HDFC Standard Life Insurance’s group solutions have
been designed to offer a complete flexibility combined with a low charging structure to people.
• Track Record:
HDFC Standard Life Insurance’s cumulative premium income, including the first
year premiums and renewal premiums is Rs. 1532.21 Crores Apr-Mar 2005 - 06.
It has covered over 1.6 million individuals out of which over 5, 00,000 lives have been
HDFC Standard Life Insurance offers various insurance solutions to meet every ones need.
HDFC Standard Life Insurance offers various insurance solutions to individuals as well as to
Individual Products.
Group Products.
5|Page
IGTC, 2009-11
INDIVIDUAL PRODUCTS
1. Production plan
A pure risk cover plan, which gives you protection against the uncertainties of life. The Term
Assurance Plan is an insurance policy that is designed to help secure your family's financial needs.
An ideal way to cover your home loan or other loan liabilities. This Plan provides a lump sum
on the unfortunate death of the life assured within the policy term.
2. Investment plan
Our Single Premium Whole of Life plan is well suited to meet your long term investment
needs. We provide you with attractive long term returns through regular bonuses.
3. Pension plans
It provides a post retirement income in your golden years and gives you the flexibility to plan
your retirement date and Gives you tax benefits on your premiums. The plan receives simple
Reversionary Bonuses, which are usually added annually. At the end of the term an additional
Terminal Bonus may be paid depending on the performance of the underlying investment.
6|Page
IGTC, 2009-11
selected investments and post retirement income for life and also Flexibility to plan your retirement
date.
selected investments. Regular Loyalty Units to boost your fund value every year and post retirement
income for life and also Flexibility to plan your retirement date.
4. Savings plan
It's an ideal way to secure your long-term financial goals. Valuable protection to your family
by way of lump sum payment in case of your unfortunate demise within policy term and Lump sum
selected investments. Valuable protection to your family in case you are not around and Flexible
benefit combinations and payment options and also flexible additional benefit options such as critical
illness cover.
selected investments. Regular Loyalty Units to boost your fund value every year. Valuable protection
to your family in case you are not around and Flexible benefit combinations and payment options and
A proportion of the basic sum Assured as Cash lump sums at regular 5-year intervals within
the policy term an ideal way to secure your long- term as well as short-term financial goals and a
lump sum payment on survival up to maturity date. Valuable protection to your family by way of
lump sum payment in case of your unfortunate death within the policy term.
The Children's Plan is designed to secure your child's future by giving your child a guaranteed
lump sum, on maturity or in case of your unfortunate demise, early in the policy term. The premiums,
paid by you, are invested by the company to give you good long-term returns.
selected investments. Valuable protection to your child in case you are not around. Flexible benefit
combinations and payment options and also flexible additional benefit options such as critical illness.
selected investments. Regular Loyalty Units to boost your fund value every year and Valuable
protection to your child in case you are not around and Flexible benefit combinations and payment
options and also flexible additional benefit options such as critical illness cover.
GROUP PRODUCTS
8|Page
IGTC, 2009-11
The Group Term Insurance (GTI) plan meets this need and serves as an ideal way for
companies to reinforce their bond with their employees. The sort of needs, you, as an employer need
Employee benefits
A GTI cover for future service gratuity liability to be taken along with the Group Unit Linked
Plan
The Group Variable Term Insurance is a tailor made insurance policy for third party
institutions. HDFC Standard Life Insurance Company will offer life insurance to customer’s of one or
more of the third party’s specific products in order that in the event of their death, there will be a lump
sum available.
On death, will pay a lump sum known as a sum assured. The sum assured varies over time in
order that the customer receives the cover that they need.
Is a group policy.
Is simple to administer.
Financial Analysis:
9|Page
IGTC, 2009-11
The analysis will be conducted on the following dimensions for the years 2007-08 and 2008-09 and
2009-10..
Assets under management, solvency analysis, operating expenses and Equity Share Capital.
The assets under management (in Crores) as of 2008-09 and 2007-08 are calculated from the data as
presented below:
C Govt
State govt and Infrastructure Approved Other
securities
Other Approved Investments Investments Investments Total
Securities
2007-08
1095.10 84.22 364.77 625.79 50.28 2220.16
The assets under management have increased by 14.3 % which is a positive indicator.
Solvency Analysis:
10 | P a g e
IGTC, 2009-11
Put simply, it indicates how solvent a company is, or how prepared it is to meet unforeseen
exigencies. It is the extra capital that an insurance company is required to hold. As per the Irda
(Assets, Liabilities, and Solvency Margin of Insurers) Rules 2000, both life and general insurance
While all non-life insurers are required to follow the regulations, life insurance companies are
expected to maintain a 150% solvency margin.It is the ratio of the amount of Available Solvency
Margin to the amount of Required Solvency Margin. It is the key indicator of financial health of the
insurance company. The solvency margin is designed to take care of problems that are usually not
anticipated. It also provides elbow room to the managers of insurers to rectify problems and take
precautionary measures.
The table below shows the calculation of solvency margin as per IRDA guidelines.
No...
Deduct:
02 Liabilities
03 Other Liabilities
11 | P a g e
IGTC, 2009-11
Deduct:
06 Other Liabilities
09 Total RSM
Solvency ratio for the company in 2007-08 was 2.38 while in 2008-09 it was 2.58.There is an increase
Operating expenses as a % of 32 % 20 %
12 | P a g e
IGTC, 2009-11
premium
The operating expenses ratio has increased in 2008-09 indicating more operating expenses as well as
13 | P a g e
IGTC, 2009-11
New Business
The first year premium income increased by over 1,055.37 from Rs. 1,624.24 crores in the previous
year to Rs. 2,679.61 crores in the current year, recording a growth of 65%. The renewal premia
continued to reflect the quality of the book and grew from Rs 1207 crores in the previous year to
Rs. 2173.19 crores in the current year. The cumulative Sum Assured in respect of policies
issued increased from Rs. 67,192.97 crores as at 31st March, 2007 to Rs. 87,439.41 crores as at 31st
March, 2008.During the year, the company introduced new and improved versions of products
Replacing some of the existing versions. The company now has a portfolio of 19 retail and 6 group
products, along with five optional rider benefits catering to the savings, investment, protection and
retirement needs of the customer. Most retail products are offered on both, the conventional
The company’s focus on the retirement planning business continues to pay rich dividends. The first
year premium collected grew to Rs 1,327.13 crores During the year, the company issued over
Investments
14 | P a g e
IGTC, 2009-11
Investments of insurance companies are regulated under the IRDA (Investment) Regulations, 2000 as
amended from time to time.The company has complied with all the requirements under the said
Regulations. The total assets under management as on March 31,2008 is Rs. 8,916 crores as against
Rs. 4,976 crores in the previous year. Under the unit linked products, the company offers a choice of 7
funds ranging from growth to liquid funds to the retail policyholder and an additional fund for the
corporate customers.
The company has a Risk Management Policy which details the mitigation measures in place to reduce
the risk levels in the functioning of the various parts and processes of the company.During the year,
the risk heat map was reviewed and recast with a view to rationalizing risks across the organization.
This process involved risk identification, impact evaluation and mitigant identification exercise.
New Business
The year 08-09 has been a difficult year for the financial sector and the impacts have been felt in the
Indian life insurance industry. Growth rate in the private sector have declined over the year on the
back of a much more cautious attitude adopted by individual customers. There have been changes in
asset allocation and preferences during the year. The company issued over 9.70 lakh policies
(including policies sold in rural areas) during the financial year. During the current year the first year
premium income amounted to Rs. 2,651.11 crores and renewal premium amounted to Rs. 2,913.58
crores in the current year. Total Premium collected during the year has increased from Rs. 4,858.56
crores in the previous year to Rs. 5,564.69 crores during the current year registering a positive growth
of 14.53%.The sum assured in force for the current year was Rs. 57,158 crores as compared to Rs.
15 | P a g e
IGTC, 2009-11
During the year, the company introduced new and improved versions of retail products replacing
some of the existing versions. The company now has a portfolio of 25 retail and 4 group products,
along with five optional rider benefits catering to the savings, investment protection and retirement
needs of the customer. Most retail products of HDFC Standard Life Insurance Company Limited are
offered on both, the conventional and unit linked platforms.The company launched its first products in
the health insurance market during the year – HDFC Critical Care Plan (to cover critical illnesses) and
HDFC Surgicare Plan (to cover surgical benefit and hospitalization cash). The company also reduced
premium rates on its term insurance plans and passed on a substantial benefit to customers.
The company continued to grow its business in the group pensions market. The company continues to
acquire new corporate customers who are interested in entrusting the company with management of
its gratuity and superannuation funds. The company maintained its brand presence through innovative
marketing campaigns. The launch of the company Brand Video & Album was well received in the
market.
Investments:
Investments of insurance companies are regulated under the IRDA (Investment) Regulations, 2000 as
amended from time to time. The total assets under management as on March 31, 2009 are Rs. 10,595
crores as against Rs. 8,916 crores in the previous year. Under the unit linked products, the company
offers a choice of 7 funds ranging from growth to liquid funds for the retail policyholder and an
additional fund for the corporate customers.In compliance with the regulations issued by the IRDA,
the company has terminated its understanding /arrangement with the HDFC Asset Management
Company for investment advice and research services with effect from January 1,2009. The entire
Dividend
16 | P a g e
IGTC, 2009-11
As the company has not earned profits, the directors do not recommend any dividend.
• Total premium grew by 25.9 percent to Rs. 70.1 bn. (2008-09: Rs. 55.6 bn.)
• New business received premium – including first year and single premiums – grew by 20.5
• First year regular premiums increased by 17.5 percent to Rs. 29.8 bn. (2008-09: Rs.25.4 bn.)
• Single premiums, including single premium top-ups, increased by 65.6 percent to Rs.
• Renewal premium constituted 53.5 percent of total premiums (2008-09: 51.4 percent) and
grew by 31.0 percent to Rs. 37.5 bn. (2008-09: Rs. 28.6 bn.)
• Our weighted received premium (10 percent weightage for single premium) growth during
the year at 27.5 percent was higher than the growth for the private sector (13.0 percent)
• Assets under management of Rs. 207.7 bn. as on March 31, 2010 nearly doubled from Rs.
Consolidation of the distribution network and the increasing share of Banc assurance
• The share of new business effective premium income (EPI) of the alternate channels of
distribution viz. banks, brokers and other corporate agents increased to 54.7 percent (2008-
• For our bank partners, brokers and other corporate agents EPI grew by 17.6 percent to Rs.
• For the tied agency channel EPI de-grew by 15.9 percent to Rs. 11.1 bn. (2008-09: 13.2 bn.)
• Operating expenses were lower by 15.0 percent at Rs. 13.8 bn. (2008-09: Rs. 16.2 bn.)
• Indian GAAP loss down to Rs. 2.8 bn. (2008-09: Rs. 5.0 bn.)
• The new business post tax profit based on loaded acquisition expenses was Rs. 6.6 bn.
• The new business profit translates to a new business margin of 25.8 percent pre acquisition
18 | P a g e
IGTC, 2009-11
• The market consistent embedded value (MCEV) as at March 31, 2010 was Rs. 33.8 bn. (March
31, 2009: 22.3 bn.); and comprised shareholder’s adjusted net worth of Rs. 6.7 bn. and value
• The paid up capital as on March 31, 2010 stood at Rs. 19.7 bn. with an infusion of Rs. 1.7 bn.
during the year (March 31, 2009: Rs. 18.0 bn., with an infusion of Rs. 5.3 bn.)
• With the objective of achieving higher capital efficiency our solvency ratio as on March 31,
2010 stood at 180 percent (March 31, 2009: 258 percent), which was above the minimum
In what was expected to be a challenging year for new business our three-fold strategic focus
was on:
19 | P a g e
IGTC, 2009-11
The year also witnessed regulatory changes that imposed a cap on the charges levied by unit
linked products. We responded to this requirement by re-launching our entire range of products
ensuring compliance with the changes from January 2010 onwards. The numbers reported are
The slowdown in new business growth that was experienced by the life insurance sector in the
aftermath of the global financial crisis in 2008-09 continued well into 2009-10. While customers
continued to be wary of investing in the stock markets, they were also reluctant to commit
funds for the long term. There was also a marked preference for government backed
institutions. The private sector turned the corner into positive growth territory only in December
In a year marked by consolidation and a consequent loss of market share for the private sector,
we ended the year with a strong growth of new business received premium, including individual
and group, of 20.5 percent i.e. from Rs. 27.0 bn. to Rs. 32.6 bn.
During the year we were successful in striking a balance between building operational efficiencies
and pursuing growth to retain our market share. We had a private sector received premium market
share of 8.5 percent in 2009-10. In terms of weighted received premium, our market share was 8.6
percent in the private sector in 2009-10 compared to 7.6 percent in 2008-09. onsequently, our WRP
ranking in the private sector improved to 5th in 2009-10 from 6th in 2008-09.
20 | P a g e
IGTC, 2009-11
2. Product trends
Our product mix covers all the life stage needs of our customers. At a broad level our major
“lines of business” catering to unique customer needs are life and pensions. We have since last
year introduced standalone health insurance products to add to our range of product offerings in
the life insurance space. We also re-launched 16 products in compliance with the unit linked cap
Amongst the key product trends during the year was the balance in our product mix between life
and pension products on one hand and unit linked and conventional products on the other. We
believe that this balance lends us an advantage in the private life insurance space which is
The life segment, which comprises products that cover the savings and protection needs of our
2008-09. Within this segment, the products that have been designed to cater to our customers’
need to save for their children’s future have retained their immense popularity.
Over the counter savings product, the Savings Assurance Plan (SAP) and the Suvidha range, also
The pensions segment, on the other hand, is largely deferred annuity with a small immediate
annuity component. We continue to be a significant player in the pension segment in the Indian
21 | P a g e
IGTC, 2009-11
market. In fact, we were the second largest private insurer in the pensions segment in 2008-09.
On an overall basis unit linked products contributed to 79 percent of effective premium income
2c. Protection
An important part of our product offering is our range of protection products within the life
segment which provide income protection for the family in the unfortunate event of death or
critical illness. These include our term assurance plans, home loan protection plans and health
plans besides the riders available with our savings products. The sum assured chart below shows
an increasing trend in the coverage offered by such plans over the years.
The total group business received premium (new business and renewals) during the year was Rs.
6.2 bn. During the year we received new business premium income from our corporate
customers of Rs. 5.0 bn. which constituted 15.5 percent of our total first year premiums during
the year. We offer different products for the varying needs of employers ranging from term
insurance plans for pure protection to voluntary plans such as superannuation and leave encashment.
Our corporate customers chose our group unit linked plan as investment solutions that provided them
a funding vehicle to manage corpuses with gratuity, defined benefit and defined contribution
superannuation and leave encashment schemes. These plans contributed Rs. 4.9 bn.
Our primary responsibility towards our customers in the Indian life insurance market is to ensure that
they have adequate life cover in the event of unforeseen circumstances. While our pure protection
products do that exclusively, our savings products also have a life cover built in.
The table below shows the in force sum assured and death benefit as on March, 31 2010 across
348.8 610.5
Total
14.1
0.8
Life
23 | P a g e
IGTC, 2009-11
349.6 639.1
Total
*Death benefit includes accidental death benefit sum assured and waiver of
future premium benefit on the Young star policies and the fund value for
pension
We ended the year with 568 distribution points across the country and through the network of
these offices our Financial Consultants, Corporate Agents and Brokers were able to service
customers in over approximately 700 cities and towns across the country.
Our distribution mix witnessed a change in the share of new business EPI. The share of alternate
channels of distribution viz. banks, brokers and other corporate agents increased to 54.7 percent
from 46.7 percent in 2008-09. The alternate channel’s EPI grew by 17.6 percent to Rs. 14.0 bn.
from Rs. 11.9 bn. in 2008-09. The retail (tied agency) channel de-grew by 15.9 percent to Rs.
24 | P a g e
IGTC, 2009-11
Assets under management of Rs. 207.7 bn. as on Mar 31, 2010 increased by 97.3 percent from
Rs. 105.3 bn. from the previous year and contributed to covering our maintenance expenses.
Over the last five years, our assets under management have grown at a compounded annual
6. Operational efficiency
The operating expense ratio* was brought back on track to 19.7 percent during the year from
29.2 percent in the previous year. This decline was achieved by both a strong drive to improve
efficiencies during the year as well as an increase in total premiums. Operating expenses* were
brought down by 15.0 percent from Rs. 16.2 bn. in 2008-09 to Rs. 13.8bn. in 2009-10.
The following table highlights some of the key expense heads and change over
Percentage of total
25 | P a g e
IGTC, 2009-11
44.3 8.1
Employees' remuneration & welfare
benefits
24.2
4.9 21.5
7.5 -10.0
Others
18.5 16.0
Total
100.0 15.3
10.Some of the measures initiated in 2008-09 and continued during the current year that brought
26 | P a g e
IGTC, 2009-11
• Renegotiations of all major lease agreements related to office space to avail of better rates
• Active negotiation of all significant contracts with vendors and focus on bulk purchases to
process
The trend of a stabilized commission ratio (total commissions to total premiums) to a level
A break up of the commissions into first year, single and renewal commissions shows that:
• Our first year commission ratio (first year commissions to first year premium income) was at
• Single premium commission to single premium income ratio was 0.4 percent in 2009-10
27 | P a g e
IGTC, 2009-11
• Renewal commission to renewal premium income ratio was 2.0 percent in 2009-10 compared
With a share of 53.5 percent of total premiums for the year renewal premiums grew by 31.0
percent to Rs. 37.5 bn. from Rs. 28.6 bn. in 2008-09. Our individual business conservation ratio,
The dip in the conservation ratio in 2008-09 was due to the impact of the premium reduction
feature, which was built into our version 4 unit linked products and saw most customers opting
for it in the backdrop of turmoil in the stock markets during the period. While we discontinued
the product in 2008, its impact ran its course till the end of 2009 and as its effect wore off in
the last two quarters of 2009-10 our conservation ratio for the year improved. Excluding the
products with the premium reduction option, our individual business conservation ratio was 73.0
The other key decrements to our conservation ratio are lapses, surrenders and paid-ups. Lapses
occur within a 24 month period of policy conversion and we identify a policy as lapsed
immediately after the grace period for renewal premiums due is over. We have processes for
To prevent lapsation we make welcome calls to the customers to ensure that the customer
understands the product features and it suits his/her needs. We also run campaigns to revive
lapsed policies.
28 | P a g e
IGTC, 2009-11
The company undertook several measures to improve the management of our back book during the
year:
• Persistency vertical set up to improve customer retention – proactive, direct contact with
• Lapse prediction model developed to predict lapse propensity which is being used to run
• Products with a premium reduction option which impacted persistency were discontinued in
2008-09.
• Incentivized sales of lower frequency modes of premium payment – primarily annual mode
• First life insurer to introduce and continue with commission claw backs in the event of
lapsation
With the focus on operational efficiencies to reduce our acquisition cost, Indian GAAP loss was
brought down to Rs. 2.8 bn. during the year from a loss of Rs. 5.0 bn. in 2008-09.
The paid up capital as on March 31, 2010 was at Rs. 19.7 bn. with a lower infusion of Rs. 1.7 bn.
29 | P a g e
IGTC, 2009-11
With an available solvency margin of Rs. 6.0 bn. and a required solvency margin of Rs. 3.3 bn.,
our solvency ratio as on March 31, 2010 stood at 180 percent, which was well above the
10. MCEV, new business profitability and the analysis of movements in MCEV
The unaudited market consistent embedded value (MCEV) as at March 31, 2010 was Rs. 33.8 bn.
and comprised of shareholder adjusted net worth of Rs. 6.7 bn. and value of in force business of
The calculations of embedded value and new business profits have been done using a
market consistent embedded value (“MCEV”) approach. This approach differs from a
traditional EV approach primarily in respect of the way in which allowance for risk is
made. Within the traditional EV approach, allowance is made for risk through an
increase in the risk discount rate used to value future shareholder cash flows, whilst
within the MCEV calculation explicit separate allowances are made for risk.
i. Shareholder adjusted net worth - this component represents the market value of
assets attributable to shareholders. This amount is derived from the Indian GAAP
30 | P a g e
IGTC, 2009-11
balance sheet adjusted to allow for assets on a market value basis, elimination of
intangible assets and to allow for shareholder attributable assets residing within
ii. Value of inforce - this component represents the discounted value of after tax
date. No allowance is made for future new business. This amount has been
adjusted to deduct allowances for non hedgeable risk, frictional costs of required
capital and the time value associated with financial options and guarantees.
• This component has been calculated by discounting the projected future after tax
valuation date.
• The cashflows have been projected on a deterministic basis using the company’s best
returns and the risk discount rate have been set equal to the returns from the risk
31 | P a g e
IGTC, 2009-11
• A deduction from the PVFP is required in order to make appropriate allowance for
non hedgeable and non economic risks. Within a traditional EV calculation this would
be allowed for by an increase to the risk discount rate, but within MCEV an explicit
• The CNHR has been derived using a cost of capital approach whereby an annual
charge is applied to projected risk bearing capital associated with 99.5th percentile
stress events for non economic assumptions over a 1 year time horizon.
• 99.5th percentile stress events have been taken from the EU Solvency II, QIS 4
framework. In order to allow for the greater risks associated with emerging markets,
• The CNHR has been calculated as the discounted value of a 4%p.a. charge applied to
• The stress events, uplifts to NHR and annual charge are reviewed and modified if
• The MCEV incorporates an allowance for risks associated with asymmetric shareholder
returns associated with the Participating (“Par”) Funds by deducting a cost for the
TVFOG. This asymmetry primarily arises due to the fact that if in deficit the Par
Funds have to be funded 100% by the Shareholder Fund whereas if the funds have
surpluses only 10% of these are attributable to the Shareholder Fund. The PVFP is
32 | P a g e
IGTC, 2009-11
calculated using a deterministic basis and therefore does not capture the risk that in
• The TVFOG has been calculated by assessment of the shareholder attributable cash
flows (both transfers out of the funds and injections into the funds) on a large
• In each simulation the value of the shareholder attributable cash flows have been
discounted back to the balance sheet date with the TVFOG then being set equal to
the difference between the average of the discounted value of these cash flows and
progressively developed and refined. The key areas of approximation include the
• An allowance has been made within the MCEV for the frictional costs of holding
required capital (“FCRC”). Required capital has been set equal to the amount of
requirements. The FCRC has been calculated as the discounted value of investment
33 | P a g e
IGTC, 2009-11
costs and taxes on shareholder attributable assets backing the required capital over
• Economic: An MCEV approach is used – projected earned and discount rates are
equivalent and are based on the risk free (government bond) yield curve at the
relevant balance sheet date. No allowance for any illiquidity premia is made within
• Expenses: Maintenance expenses have been based on actual expense levels currently
being incurred and make no allowance for future productivity improvements. The
maintenance expenses are assumed to increase each year at an expense inflation rate
of 7.5%.
Acquisition expenses, for the purposes of new business profitability reporting have
been based on levels the company expects to achieve by FY2012-2013 based on its
business plan. Actual acquisition expenses are currently higher than these
assumptions and therefore any excess acquisition expense over the assumption is
34 | P a g e
IGTC, 2009-11
recognised in the period and the shareholder attributable component, net of tax,
• Persistency assumptions are set by product line, payment mode and duration inforce,
Due to the age of the industry, minimal experience exists on long-term persistency
assumptions and therefore these assumptions are reviewed on an active basis and
used.
appropriate supported by legal opinion.No allowance is made for future changes to taxation such as
the Direct Tax Code.These changes will be incorporated only once materially enacted.
• Mortality and morbidity assumptions are set by product line and are based on past
experience.
10b. Analysis of change in MCEV and post tax new business profits
The analysis of change in MCEV identifies the main drivers that have caused the MCEV to move
over the financial year. The value of new business written in the year is normally the most
Rs( Bn)
35 | P a g e
IGTC, 2009-11
The new business margin after expense overruns was 16.2 percent. This included the impact of
acquisition expense overrun of Rs. 2.5 bn. incurred during FY ending Mar 31, 2010. The
acquisition expense overrun is expected to reduce significantly in the current financial year and
be eliminated by 2012-13. The reduction will be driven through cost containment and continued
In presenting the analysis of change, the following approach has been adopted:
The impacts from updates to assumptions and methodology are allowed for as follows:
• Updates to non economic assumptions and methodology are made at the start of the
period, and the subsequent analysis of change calculated using these revisions
for the TVFOG calculation are made at the end of period and incorporated as a
closing adjustment.
36 | P a g e
IGTC, 2009-11
• The impact on the MCEV from variations between the assumptions and actual
experience are determined and recognised in the period for non economic
• The impact on the variations for non economic assumptions are separately attributed
• New business profits are calculated as at end of period, using the opening (i.e. 31st
March 2009) yield curve and incorporate allowance for variations on non economic
• The TVFOG associated with new business written during the year has been
approximated by apportioning the overall closing TVFOG (before changes to the end
period economic assumptions) on the basis of guaranteed benefits associated with the
new and inforce business. This TVFOG is incorporated as a deduction from the new
business profits.
• The new business profits are calculated before and after acquisition expense
overruns.
iv) EV profits
• EV profits are calculated as the movement in EV during the period less capital
injections.
37 | P a g e
IGTC, 2009-11
less capital injections and the impact of economic variances and economic
assumption changes.
• The EVOP represents the impact on the MCEV from performance that is considered
We continued to set the standards in the industry on underwriting best practices. Our claims
repudiation ratio was the lowest in the industry in 2008-09 at 4.8 percent of total number of
Financial year 2008-09 was the second consecutive year that our ratios were the lowest in the
industry. We continued with our “profitability with values” approach to growth during the year.
Total claims benefit amount (Rs. Bn.) Source: IRDA Annual Report.
The year also witnessed recognition from consumers of our ability to innovate and create
38 | P a g e
IGTC, 2009-11
Our children’s plan YoungStar Super was voted ‘Product of the Year 2010’ in the 'Insurance'
category by more than 30,000 consumers nationwide across 36 markets. The consumer study on
internationally recognized standard that celebrates and rewards the best innovations in
A key initiative during the year was the implementation of SAP ERP for the Financial Accounting
& Controls (FICO) and Human Resources (HR) modules to adopt global best practices in
Some of the awards that we received during the year relating to our technology initiatives were:
• CIO ‘Ingenious 100 - 2009 Award,’ for our workflow system ATLAS (Agency Training Licensing
• CIO 100 ‘Security Award 2009’ for pioneering LANDesk Management and Security Suite
security implementation and taking its security to a higher level of technological excellence.
We received the CIO 100 Award for the third consecutive year
• Diamond EDGE Award 2009 for our mobile workforce portal - Consultant Corner
39 | P a g e
IGTC, 2009-11
Glossary of terms
1. Total premiums – Total received premiums during the year including first year, single and
2. First year premiums – Regular premiums received during the year for all modes of payments
chosen by the customer which are still in the first year. For e.g. for a monthly mode policy sold
in March 2009 the first installment would fall into first year premiums for 2008-09 and the
remaining 11 installments in the first year would be first year premiums in 2009-10.
3. New business received premium – The sum of first year premium and single premium.
4. Weighted received premium – The sum of first year premium and 10 percent weighted single
5. Renewal premiums – Regular recurring premiums received after the first year.
6. Effective premium income (EPI) - 10 percent weight-age for single premiums and annualized
7. Commission ratio – Ratio of total commissions paid out on first year, single and renewal
40 | P a g e
IGTC, 2009-11
8. Operating expense ratio – Ratio of operating expenses excluding service tax to total premiums.
9. Conservation ratio – Ratio of current year renewal premiums to previous year’s renewal
10. Claims repudiation ratio – Ratio of claims paid to total claims received during the period
Introduction
The business of insurance started with marine business. Traders, who used to gather in the Lloyd’s
coffee house in London, agreed to share the losses to their goods while being carried by ships. The
losses used to occur because of pirates who robbed on the high seas or because of bad weather
spoiling the goods or sinking the ship. The first insurance policy was issued in 1583 in England. In
India, insurance began in 1870 with life insurance being transacted by an English company, the
European and the Albert. The first Indian insurance company was the Bombay Mutual Assurance
Society Ltd, formed in 1870. This was followed by the Oriental Life Assurance Co. in 1874, the
Later, the Hindustan Cooperative was formed in Calcutta, the United India in Madras, the
Bombay life in Bombay, the National in Calcutta, the New India in Bombay, the Jupiter in Bombay
and the Lakshmi in New Delhi. These were all Indian companies, started as a result of the swadeshi
movement in the early 1900s. By the year 1956, when the life insurance was nationalized and the
Life Insurance Corporation of India (LIC) was formed on 1st September 1956, there were 170
companies and 75 provident fund societies transacting life insurance business in India. After the
amendments to the relevant laws in 1999, the L.I.C. did not have the exclusive privilege of doing life
41 | P a g e
IGTC, 2009-11
insurance business in India. By 31.3.2002, eleven new insurers had been registered and has begun to
Need of Insurance
Assets are insured, because they are likely to be destroyed, through accidental occurrences.
Such possible occurrences are called perils. Fire, floods, breakdowns, lightning, earthquakes, etc, are
perils. If such perils can cause damage to the asset, we say that the asset is exposed to that risk.
Perils are the events. Risks are the consequential losses or damages. The risk to an owner of a
building, because of the peril of an earthquake, may be a few lakhs or a few crores of rupees,
The risk only means that there is a possibility of loss or damage. The damage may or may not
happen. Insurance is done against the contingency that it may happen. There has to be an uncertainty
about the risk. Insurance is relevant only if there are uncertainties. If there is no uncertainty about the
occurrence of an event, it cannot be insured against. In the case of a human being, death is certain,
but the time of death is uncertain. In the case of a person who is terminally ill, the time of death is not
Insurance does not protect the asset. It does not prevent its loss due to the peril. The peril
cannot be avoided through insurance. The peril can sometimes be avoided, through better safety and
damage control management. Insurance only tries to reduce the impact of the risk on the owner of the
asset and those who depend on that asset. It only compensates the losses – and that too, not fully.
Only economic consequences can be insured. If the loss is not financial, insurance may not
be possible. Examples of non-economic losses are love and affection of parents, leadership of
managers, sentimental attachments to family heirlooms, innovate and creative abilities, etc.
Types of insurance
Automobile insurance
42 | P a g e
IGTC, 2009-11
Aviation insurance
Boiler insurance
Casualty insurance
Disability insurance
Liability insurance
Purchase insurance
Credit insurance
Crime insurance
Crop insurance
Property insurance
Terrorism insurance
Title insurance
Travel insurance
Workers’ compensation
Life insurance
Marine insurance
Health insurance
Pet insurance
43 | P a g e
IGTC, 2009-11
Indian insurance is a flourishing industry with several national and international players competing
and growing at a rapid rate. Thanks to reforms and the easing of policy regulations, the Indian
insurance sector been allowed to flourish and as Indians become more familiar with different
insurance products, this growth can only increase, with the period from 2010 - 2015 projected to be
the 'Golden Age' for the industry. However, with this projected growth, the industry is also facing a
number of challenges like high operating costs, need for new distribution channels, product
development, high claim ratio etc.Seeing the growth combined with the multiple challenges of the
insurance sector in India, the theme of the conference was decided and this theme paper deals with the
present scenario of insurance industry in the country and the way forward.
Over the past two years, most sectors have been working toward only one objective—survival. In fact,
the financial services sector, the world over, has been one of the hardest-hit due to the economic
upheaval.At the beginning of the downturn, there were many differences among the insurers but the
disparity has increased today. Those who had the right mechanism in place to protect their assets have
Market opportunities have made it possible for the insurance companies to emerge stronger from the
downturn and now they can extend their market reach, increase the product’s range and take the
Insurance industry seems to surpass the tough times in U.S with the help of support provided by
government. The insurance sector in the US seems to be emerging through difficult times, with
significant support from the government .The policymakers and regulators of US have started
strengthing the regulations on the basis of the learning from the financial crisis. The European market
is facing new threats although its fight with the old ones still continues. At the same time, emerging
economies has taken new initiatives to safeguard their financial services sector learning from the
The insurance industry in India seems to have come out of the de growth during the economic crisis
“Life Insurance companies have witnessed a 70 percent jump in new premium collection during the
44 | P a g e
IGTC, 2009-11
first five months of the financial year. The increase comes in a period that saw the insurers trying to
push sales ahead of the change in the norms of unit-linked insurance plans (ULIPs).” (Business
According to the data released by Insurance Regulatory Development Authority (IRDA), insurance
companies garnered Rs 52,749 crore in new business premium in the April-August 2010 period as
As per the LIC Chairman, Mr. TS Vijayan quoted in the newspaper Business Standard “The industry
will record a 20 percent increase in new business premium. There will be a knee-jerk reaction to the
During the initial phase of privatization of Insurance sector in India, the penetration was very low.
Indian as well as foreign companies reaped the benefits of a low base and have reported high rate of
growths in the last decade. But times have changed now and the way forward is going to be tough.
They have to start focusing on the different strategies like customer retention strategy, operational
discipline, regulatory developments and opportunities for innovation to drive sustainable growth and
profitability.
INSURANCE IN INDIA
About 154 Indian insurance companies, 16 non-Indian companies and 75 provident were
operating in India at the time of nationalization. Nationalization was accomplished in two stages;
initially the management of the companies was taken over by means of an Ordinance, and later, the
ownership too by means of a comprehensive bill. The Parliament of India passed the Life Insurance
Corporation Act on the 19th of June 1956, and the Life Insurance Corporation of India was created on
1st September, 1956, with the objective of spreading life insurance much more widely and in
45 | P a g e
IGTC, 2009-11
particular to the rural areas with a view to reach all insurable persons in the country, providing them
LIC had 5 zonal offices, 33 divisional offices and 212 branch offices, apart from its corporate
office in the year 1956. Since life insurance contracts are long term contracts and during the currency
of the policy it requires a variety of services need was felt in the later years to expand the operations
and place a branch office at each district headquarter. re-organization of LIC took place and large
numbers of new branch offices were opened. As a result of re-organization servicing functions were
transferred to the branches, and branches were made accounting units. It worked wonders with the
performance of the corporation. It may be seen that from about 200.00 crores of New Business in
1957 the corporation crossed 1000.00 crores only in the year 1969-70, and it took another 10 years for
LIC to cross 2000.00 crore mark of new business. But with re-organization happening in the early
eighties, by 1985-86 LIC had already crossed 7000.00 crore Sum Assured on new policies
Today LIC functions with 2048 fully computerized branch offices, 100 divisional offices, 7
zonal offices and the Corporate office. LIC’s Wide Area Network covers 100 divisional offices and
connects all the branches through a Metro Area Network. LIC has tied up with some Banks and
Service providers to offer on-line premium collection facility in selected cities. LIC’s ECS and ATM
premium payment facility is an addition to customer convenience. Apart from on-line Kiosks and
IVRS, Info Centres have been commissioned at Mumbai, Ahmedabad, Bangalore, Chennai,
With a vision of providing easy access to its policyholders, LIC has launched its
SATELLITE SAMPARK offices. The satellite offices are smaller, leaner and closer to the customer.
The digitalized records of the satellite offices will facilitate anywhere servicing and many other
46 | P a g e
IGTC, 2009-11
LIC continues to be the dominant life insurer even in the liberalized scenario of Indian
insurance and is moving fast on a new growth trajectory surpassing its own past records. LIC has
issued over one crore policies during the current year. It has crossed the milestone of issuing
1,01,32,955 new policies by 15th Oct, 2005, posting a healthy growth rate of 16.67% over the
1818: Oriental Life Insurance Company, the first life insurance company on Indian soil started
functioning.
1870: Bombay Mutual Life Assurance Society, the first Indian life insurance company started its
business.
1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the life
insurance business.
1928: The Indian Insurance Companies Act enacted to enable the government to collect statistical
1938: Earlier legislation consolidated and amended to by the Insurance Act with the objective of
1956: 245 Indian and foreign insurers and provident societies are taken over by the central
government and nationalized. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital
The mechanism of insurance is very simple. People who are exposed to the same risks come
together and agree that, if any one of them suffers loss, the others will share the loss and make good to
the person who lost. All people who send goods by ship are exposed to same risks, which are related
to water damage, ship sinking, piracy, etc. Those owning factories are not exposed to these risks, but
47 | P a g e
IGTC, 2009-11
they are exposed to different kinds of risks like, firer, hailstorms, earthquakes, lightning, burglary, etc.
Like this, different kinds of risks can be identified and separate groups made, including those exposed
to such risks. By this method, the heavy loss that any one of them may suffer is divided into bearable
small losses by all. In other words, the risk is spread among the community and the likely big impact
The United Nations Declaration of Human Rights 1948 provides that “Everyone has a right to
standard of living adequate for the health and well being of himself and his family, including food,
clothing, and housing and medical care and necessary social service and the right to security in the
event of unemployment, sickness, disability. Life insurance provides such an alternate arrangement.
If this did not happen, another family will be pushed into the lower strata of society. The lower strata
create a cost on society. Life insurance tends to reduce such a cost. In this sense, the life insurance
In a capitalist society provision of security is largely left to the individual. Insurance is one of
For economic development investments are necessary. Investments are made out of savings.
A life insurance is a major instrument for the mobilization of savings, particularly from the middle
and lower income groups. This savings are channeled into investments for economic growth.
Presently there are 15 Life insurance companies in the country. There is only one public
sector company LIC and the rest 14 are private sector. Although LIC has been dominating the Life
Insurance business since past few years the private players have now started to build up momentum.
HDFC Standard is a 74:26 joint venture between HDFC and Standard Life. It is a private
Birla Sun Life Insurance Company is a 74:26 joint venture between Birla group and Sun Life
Financial. It is a private sector company. The market share for FY 2005-06 was 1.89%.
ICICI Prudential Life is a 74:26 joint venture between ICICI and Prudential. It is a private
Life Insurance Corporation of India is a 100% government held Public Sector Company.
Being the first to be established LIC is the forerunner in the Life Insurance sector. The market share
Kotak Mahindra OLD Mutual is a 74:26 joint venture between Kotak Mahindra bank and Old
Mutual. It is a private sector company. The market share for FY 2005-06 was 1.11%.
Max New York Life is a 74:26 joint venture between J & Bank, Pallonji & Co and MetLife. It
is a private sector company. The market share for FY 2005-06 was 1.23%.
49 | P a g e
IGTC, 2009-11
Aviva Life insurance is a 74:26 joint venture between Aviva and Dabur. It is a private sector
ING Vysya Life Insurance is joint venture between Exide (50%), Gujarat Cements (14.87%),
Enam (9.13%) and ING (26 %). It is a private sector company. The market share for FY 2005-06 is
0.79%.
MetLife India
MetLife India is a 74:26 joint venture between J & K Bank, Pallonji & Co and MetLife. It is a
private sector company. The market share for FY 2005-06 was 0.40%.
Bajaj Allianz Life Insurance Company is a 74:26 joint venture between Bajaj Auto limited
and Allianz AIG. The market share for FY 2005-06 was 7.56%.
SBI Life Insurance Company is a 74:26 joint venture between SBI and Cardiff S.A. It is a
private sector company. The market share for FY 2005-06 was 2.31%.
TATA AIG group is a 74:26 joint venture between Tata Group and AIG. It belongs to the
50 | P a g e
IGTC, 2009-11
First Wholly Indian Owned Private Life Insurance Company. The market share for FY 2005-
06 was 0.06 %.
Shriram Life is a recent entrant into the life insurance sector It is a 74:26 joint venture
between the Shriram group through its Shriram Financial Holdings and Sanlam Life Insurance
passed by Indian Parliament in 1993. Its main aim was to activate an insurance regulatory apparatus
essential for proper monitoring and control of the Insurance industry. Due to this Act several Indian
private companies have entered into the insurance market, and some companies have joined with
foreign partners. In economic reform process, the Insurance Companies has given boost to the socio-
economic development process. The huge amount of funds that are at the disposal of Insurance
Companies are directed as desired avenues like housing, safe drinking water, electricity, primary
education and infrastructure. Above all the policyholders gets better pricing of products from
Liberalization
The opening up of Insurance sector was a part of the ongoing liberalization in the financial sector of
India. The domain of State-run insurance companies was thrown open to private enterprise on
December 7, 1999, with the introduction of the Insurance Regulatory and Development Authority
(IRDA) Bill. The opening up of the sector gave way to the world known names in the industry to
51 | P a g e
IGTC, 2009-11
enter the Indian market through tie-ups with the eminent business houses. What was once a quiet
Post liberalization
The changing face of financial sector and the entry of several companies in the field of Life Insurance
segment are one of the key results of these liberalization efforts. Insurance business by way of
generating premium income adds significantly to the GDP. Despite the fact that the market is vast in
India for the Insurance business, the coverage is far less compared with the international standards.
Estimates show that a meager 35-40 million, out of a population of 950 million, have come so far
under the umbrella of the insurance industry. The potential market is so huge that it can grow by 15 to
17 per cent per annum. With the entry of private players, the Indian Insurance Market may finally be
able to make deeper penetration in to newer segments and expand the market size manifold. The
quality of service will also improve and there will be wide The Life insurance market in India is likely
to be risky in the initial stages, but this will improve in the next three to five years Therefore, it may
be advantageous to be a second-round entrant. In the Life insurance market the need risk assessment
systems and data that are the key to success in the Life insurance market are significantly
Trends
Insurance industry is facing the unique regulatory challenges today .Mr. J Hari Narayan, the IRDA
chairman, is transforming the organization. To start with, he has tightened the norms for unit-linked
insurance policies or Ulips. This may in the short term affect the growth but the hope is that the better
There are several important issues on which IRDA is working on. Firstly, the convergence of the
Indian accounting standards with the IFRS , the settlement of norms which will relate to the issuance
52 | P a g e
IGTC, 2009-11
of IPOs (initial public offers) and M&As (mergers and acquisitions), the establishment of a more
robust system to collect and disseminate appropriate insurance related data and several other
initiatives.
As per the chairman of IRDA, “A decade has passed since IRDA was formed and the insurance
industry has moved from its infancy towards the beginning of maturity and the regulatory architecture
will respond to these changes. In the new decade, I expect the insurance industry to grow at a slower
though a healthy rate. I would expect a greater building of trust between purchasers of insurance
products and the industry and on the whole I would expect the decade to see the building of a truly
Other than this, many companies are also facing pressures because of claim inflation. There is
therefore a promising opportunity for a well-prepared claims function to play a pivotal role in creating
The economic crisis has taught many new lessons to the insurance industry and now it is entering a
new and changing world. Executives, who show ingenuity, have the courage to take tough decisions
and demonstrate their foresight to apply lessons from change will guide their companies to success in
the insurance sector. They will be the leaders, who establish the foundation upon which the new
After privatization, insurance industry has seen significant growth. Due to low penetration and huge
potential, many foreign and domestic players have entered the sector. Moreover, several reforms and
policy measures have provided a favorable environment for insurance companies to flourish in the
country.
The insurance sector in India is primarily divided into life and non-life, apart from a very small
segment comprising re-insurance. Both the life and non-life insurance segments, which were
53 | P a g e
IGTC, 2009-11
process in 2000. After the reforms, the number of players has increased from one in life insurance and
four in non-life insurance in 2000 to 23 players in each segment till May 2010 (including one re-
The reasons for the strong foundation for insurance services in India are: growing middle class
segment, rising incomes, increasing awareness of insurance, as well as investments and infrastructure
spending. The total premium earned by the insurance industry has grown at a CAGR of 24.6%
Strong economic growth of India has led to increased penetration of insurance in the country.
Premium income as a percentage of GDP has increased from 3.3% in FY03 to 7.6% in FY09.
However, the penetration level is still low as compared to other developed and developing economies.
Many foreign companies have shown an interest in investing in Indian insurance companies, in spite
of the FDI limit, which is fixed at 26% for the life and non-life sectors.
54 | P a g e
IGTC, 2009-11
The Life Insurance Council has projected 18% growth in total premium income for the life insurance
Although final figures, released by the Insurance Regulatory Development Authority, are being
compiled, Life Insurance Council secretary general SB Mathur told The Economic Times in April
2010 in an interview: “During 2008-09, the life insurance segment had mopped up a first premium
income of Rs 88,000 crore while in 2009-10, there was an approximately 10-12% growth, which
means that first premium income in the year just gone by is expected to be around Rs 1 lakh crore”.
Mr Mathur also said that the industry is estimated to have garnered a total premium income of Rs 2.6
lakh crore at the end of 2009-10, against Rs 2.2 lakh crore in the previous fiscal, which means an 18%
growth. The Life Insurance Corporation (LIC) is expected to have earned a total premium income of
Rs 1.76 lakh crore in this FY10 under review, against Rs 1.53 lakh crore in the previous financial
year.
On the entire sector turning profitable, Mr Mathur said it is expected to take another 2-3 years before
almost all companies turn profitable. As of now, almost all private sector companies, barring a few,
According to data released by the Insurance Regulatory Development Authority for 2008-09, total
accumulated losses stood at Rs 14,421 crore while the total equity infused by all companies put
55 | P a g e
IGTC, 2009-11
Growth of life insurance in terms of CAGR is 25.8% between FY03 and FY09. Premium of life
insurance as a percentage of India’s GDP increased from 2.7% to 6.7% and life insurance premium
per capita grew from INR528.4 to INR1, 921.9 during the period. The number of policies issued
As of May 2010, there were 23 players in the sector (1 public and 22 private). Life Insurance
Corporation of India (LIC) is the only public sector player, and held almost 65% of the market share
in FY10.
Many private sector players have entered the market to provide the highly customized products and
the prompt service to the customers. A larger number of Indian customers have started purchasing
insurance because of the aggressive marketing, innovative and customized products as well as
effective distribution channel strategies of the new private players. Insurance industry’s growth is
56 | P a g e
IGTC, 2009-11
However, in a fragmented industry, new players are giving high competition to the private players.
Existing small players are planning aggressively for the network expansion as their foreign partners
57 | P a g e
IGTC, 2009-11
ICICI Prudential, Bajaj Allianz and SBI Life hold almost 50% of the market in the private life
insurance segment. Seeing the potential of the industry, many banks have also entered in the sector.
In order to keep the track of the solvency of life insurance companies, the regulator mandates that all
insurance companies file their solvency position on a quarterly basis. This stipulation helps insurance
companies to lay down their business plans and be in a position to meet their capital requirements in a
timely manner. The life insurance market strongly emphasizes the move from the current solvency
regime of keeping aside a 150% margin over insured liabilities to risk-based capital.
Individual Life Insurance constitutes almost 80 % of the business whereas group life insurance
products form a very small segment. Unit-linked Insurance Products (ULIPs) are preferred the most
by the customers but the new regulation as well as the economic slowdown has shifted the focus from
The non-life insurance sector grew at a CAGR of 17.6% between FY03 and FY09. Non-life insurance
premium, as a percentage of the segment’s GDP, has increased from 0.6% to 0.9% and per capita
premium income has risen from INR109.4 to INR265.2 during this period. The intense competition
following de-tariffication and pricing deregulation (initiated in FY07) resulted in the growth
58 | P a g e
IGTC, 2009-11
Auto and health insurance have been observed as the main focus of the insurers. Out of the total non-
life insurance premiums during April–February 2010, auto insurance accounted for 39.4% of the
market. The highest growth has been shown by the health insurance segment, with its share in the
total non-life insurance portfolio increasing from 12.8% in FY07 to 21.7% for the period April–
February 2010. The share of these two sectors is expected to increase many fold in the coming years.
Seeing the growth prospectus of these two sectors, many more players are expected to enter the
sector. Standalone companies for health insurance like Star Union Alliance and Apollo Munich and
59 | P a g e
IGTC, 2009-11
In the last decade (2000-10), it was observed that aggressive growth strategies and capitalizing on
their distribution networks have helped the insurance companies to achieve the growth in the retail
segment. It has also been clearly demonstrated that although the products provided by the private and
public sector players are similar, the service provided by the private sector players is what
Exponential growth of household savings, purchasing power, the middle class and the country’s
working population are the factors which will influence the demand of insurance products. The
working population (25–60 years) is expected to increase from 675.8 million in 2006 to 795.5 million
in 2026.Financial services sector, specifically insurance sector can tap this increased disposable
60 | P a g e
IGTC, 2009-11
The Insurance Regulatory and Development Authority (IRDA) has taken the following initiatives to
• De-tariffication except for auto third party liability has been introduced and now the insurers can
underwrite the type of risks which they want to underwrite at their own desirable rates.
• Number of years after which companies can raise capital via an Initial Public Offering (IPO) has
Furthermore, the IRDA and the Government are in the process of making the following regulatory
reforms:
• With private players completing nearly a decade in Indian insurance sector, the industry is looking at
new ways to meet its capital needs. Many a times, proposals have come to increase the share of FDI
• The IRDA is in the process of drafting mandatory disclosure of insurers’ financial statements and
investment portfolios at regular intervals, as well as their financial and operating ratios, actual
solvency margins, policy lapse ratio, current financial position, risk management architecture, etc.
• Policy and draft documents are being published in regional languages for people to understand them
• In the 2010–11 budget, the Finance Minister, Mr. Pranab Mukherjee, decided to roll back the
61 | P a g e
IGTC, 2009-11
Demand for health insurance has been increased due to the increase in the demand for better health
care services and the new medical technology. The following regulatory initiatives have been initiated
• IRDA has given the recommendation to the Government to change the capital requirements from
INR1, 000 million to INR500 million for standalone health insurance companies.
• The Government has raised budgetary support for the health sector during the Eleventh Five Year
The Insurance regulator IRDA has made many changes in the ULIP plans like capping of the
charges, increased lock-in period and a minimum guarantee for such plans, which are hybrid products
Effect of ULIP Changes: “The minimum ticket size of new ULIPs could be slightly higher than the
old ones, but a larger portion of the premium payment would go towards investment under the new
rules, benefiting customers. Policyholders will get most of their money back even if they exit
prematurely, unlike in the old ULIPs regime when charges for the early surrender of a policy could be
Customers will no longer be required to pay agent commissions of up to 40% in the first year of the
Though the new rules will benefit policyholders, reduce the first-year agent commission and help in
curbing rampant mis-selling, insurance firms will be required to underwrite more losses, infuse more
“The industry is grappling with the task of motivating agents to sell ULIPs with relatively lower
commissions, compared with the pre-September 2010 period. Generally, the agents' commission has
1
See “New Ulips to change industry, Irda image” published in the Mint dt 31 August 2010
62 | P a g e
IGTC, 2009-11
come down by over 2 per cent on an average, on sale of new ULIPs (from 7-8 per cent to 5-6 per cent)
in September, Mr Mallik (Chief Marketing Officer, Future Generali India Life Insurance) said.-It is a
volume game now. Our agents have sold more products last month than earlier. That way, they will
According to IRDA data, the first year premium of all 23 life insurers registered 75 per cent growth in
the first quarter of the current fiscal year at Rs 25,521 crore, compared with Rs 14,456 crore in the
year ago-period.
While LIC's new business premium grew 108 per cent to Rs 18,740 crore, the private sector clocked a
25-per cent growth in its new business to Rs 6,781 crore. Over 65 per cent of this growth came from
ULIPs”.2
“There are a number of positives from the regulatory changes. One of them is the higher minimum
premium. We have increased our minimum premium to Rs 20,000. Risk premium collection will be
Another positive is the lock-in period of policies which is an in-built dissuasion of surrender. In case a
policy holder surrenders, he will not get money back immediately. The money will go to a fund and
In the in-force policy, there is an option of switching between funds. You will lose this benefit if you
do not pay this premium on time. This will encourage buying if you are serious. This will improve
persistency levels.”3
Many innovative and customized products have been launched after the liberalization of the sector.
While ULIPs were an innovative concept in earlier years, they soon caught the fancy of consumers
and distributors alike, to become their mainstay. The last years have seen that capital guarantee
products and premium guaranteed plans — primarily in response to the changing scenario in capital
markets. Also the combi products having the combination of Unit Linked Health Plans that collate
health insurance and investment have been introduced. New products like “Pay As You Motor
Insurance (PAYM)” has been launched in the general insurance market by Future Generali General
Insurance. Many more innovative products are expected to come seeing the customer preferences.
• Rising demand for auto insurance with increasing passenger car sales
Increase in the disposable incomes of the customers has led to the increase in the number of
passenger’s cars; auto sector has seen a CAGR of 15.6 % during FY03–FY10. Auto Insurance has
seen a growth of 21.4 % in the last three years; (FY06–FY09).It had the largest share in the non-life
insurance market in April–February 2010 (39.4%). However, the industry is struggling with the rising
claim ratio of Motor Third Party Pool. An affirmative action to bring down the claims ratio and
improve the performance would go a long way in achieving the espoused objective of the creation of
the pool.
• Emergence of new distribution channels such as bancassurance, brokers and e -channels, with
enhanced reach
Industry has seen the emergence of new distribution channels like bancassurance, direct selling
agents, brokers, online distribution, corporate agents such as nonbanking financial companies
(NBFCs) and tie-ups of para-banking companies with local corporate agencies, e.g., NGOs, in remote
areas.
• Need to raise foreign direct investment (FDI) in insurance from 26% to 49%
64 | P a g e
IGTC, 2009-11
Joint venture with the foreign partner gives easy access to capital to the domestic partners. But
today, the FDI in the insurance sector is restricted to 26% which is a huge deterrent to growth in the
industry. It is more difficult for the smaller players to expand their business which require significant
capital.
Many economists have spoken about the importance of FDI in the insurance sector in India at many
forums over the last decade. The sector is highly capital-intensive, since its development period is
long. It requires capital infusion at regular intervals, especially in an insurance market where there is a
high growth potential, such as in India. Fixed costs are also high due to India’s the vast geographic
spread.
Many players, especially the smaller ones with limited access to capital, do not have adequate
funds to make such large investments in their businesses at the regular intervals.
An increase in FDI will help weaker players (looking for more capital to grow their businesses)
as the foreign partners will invest the capital so that they can tap the highly potential insurance sector
of India. It can be seen as the win-win joint venture as the domestic partner will get the required
capital and the technical expertise of the foreign partner , and the foreign partner would be able to
Expense ratio is very high in the insurance sector, especially for the private players. In FY09, the
private sector life insurance segment had an expense ratio (operating expense and commission
expense) of 30.6%, while the non-life insurance sector registered 30.1%. Since, public sector
companies have been in existence for a couple of decades, and hence, have managed to reduce their
The ratio should be around 10-15 % from a long-term sustainability and profitability perspective. A
high expense ratio directly impacts profitability. Since the insurance industry is still at a nascent stage,
65 | P a g e
IGTC, 2009-11
many companies are yet to break even and rising expenses can further delay this process.
Furthermore, low sales are making the task of covering costs a challenge for companies.
Although, the life insurance sector has shown rapid growth over the last few years, low-margin
single-premium products and potentially volatile ULIPs have accounted for most of the growth. These
products are proven to be easily sold, but merely focusing on these could weaken the growth and
long-term profitability for India’s life insurers. Single-premium policies doubled their share of overall
industry new business premium (NBP) from 24 per cent in 2005 to 48 per cent in 2007. With low
Unit-linked policies accounted for as much as 49 per cent of NBP in 2007, a substantial increase
from 9 per cent in 2004. The total non unit-linked (and hence long-term) investible asset base of the
Indian life insurance industry as a percentage of GDP is only 16 per cent, against 40 to 70 per cent in
developed European markets such as the United Kingdom and France. Life insurers should learn from
the example of more developed markets, where, as customer awareness increased, tax advantages
eroded or stock market conditions turned unfavorable, life insurance premiums moved into other,
more cost-effective or better managed, investment classes. For example, in the United States, the
insurance industry’s market share of life and pension assets under 401(k) plans fell by 34 percentage
points (from 44 to 10 per cent) between 1998 and 2004, with asset managers grabbing the bulk of
66 | P a g e
IGTC, 2009-11
As in many markets, the agency channel accounts for the 85 per cent of new business premiums.
The agency force in India has grown rapidly from approximately 1 million in 2000 to close to 1.9
million in 2007. But the overall inactivity and attrition rates are quite high which are estimated to be
50 to 55 per cent, significantly higher than global benchmarks of about 25 per cent. With recruitment
Proprietary survey conducted by the consultancy firm, Mckinsey of Indian life insurance agents in
eight cities indicates that proper strategies are not implemented while selecting the agency force in a
life insurance market. It shows, about 20 per cent of agents recruited fail certification and/or leave
immediately after initial training, without selling a single policy. Most of the agents, approximately,
more than two- thirds of agents, part-time and full-time, have had no selling experience before
becoming agents. As a result, their success depends heavily on the training provided to them by the
life insurance companies. While many agents, about 70 to 80 per cent, say they undergo sales and
product- related training, this does not seem to translate into superior sales skills. Even the result
suggests, agents with two and three years’ experience are not more productive than agents who are
just one year into the job. This is because unit managers usually focus only on tenured and higher
performing agents. Only 30 per cent of agents surveyed felt that their unit manager motivates them to
perform better.
Customers prefer bancassurance channel (after the agency channel) as compared to the other channels
like non-bank finance companies, brokers, or direct channels such as the telephone or internet. Given
the high penetration of banking products, bancassurance could be the single most important channel
for insurers to rapidly acquire new customers. However, cross-sell rates in Indian banking are
significantly lower than those in developed markets. In developed economies like Spain, Italy and
France, between 12 and 24 per cent of a bank’s customers would have bought insurance through the
bank. In India, this number is estimated to be less than 0.5 per cent for public-sector banks, 1 to 2 per
cent for private-sector banks and 2 to 4 per cent for foreign banks. Indian bancassurance faces several
challenges. Bank employees have high variance in selling skills, and banks in the public-sector
67 | P a g e
IGTC, 2009-11
typically face low operating flexibility in creating a true sales culture. Insurers usually do not invest in
systematic training, a problem compounded by product complexity. In many cases, low technological
Break-even point is achieved in the insurance industry when the new business premium is equal to the
renewal premium. However, as the Indian industry is growing, the volume of new premiums is much
more than the renewal premiums. Globally, life insurance companies break-even in six to eight years
but in India , it has not been achieved and it may take another one or two years due to the recent
Other reasons for delayed break-even are the high operating expenses like management costs, real
estate prices, salaries, distribution cost and technology expenses, which are higher than what was
accounted for in the original business plans of insurers. Moreover, the capital-intensive nature of the
High claim ratio in the health insurance industry in India is really a bottleneck for the non life
insurance industry. High healthcare costs,, fraudulent claims, inefficient claims management
processes, etc. are the factors which lead to the high claim ratio of the sector. The claims ratio in FY
09 was approximately 105.9%, as compared to 107% in FY08. When viewed in isolation, the claims
ratio was 116.6% in the public sector as compared to 85.3% in the private sector. This is impacting
68 | P a g e
IGTC, 2009-11
Rise in household savings, a growing middle class, as well as an increasing working population, and
consequently, higher purchasing power are the factors which will lead to the higher demand of life
insurance. Since more than two-thirds of India’s population lives in rural areas, micro-insurance and
micro health insurance is seen as the most suitable means of reaching the socially disadvantaged
sections of society.
Low awareness of insurance products, high transaction costs, as well as inadequate regulations and
understanding of client needs and expectations has restricted the demand for micro-insurance
products. However, with the development of rural health insurance regulations and growing
awareness about micro insurance products, the focus of many private players has shifted to these
areas.
The “aspirers” (annual household income of Rs. 90,000 to Rs2 lacs) will comprise 46 per cent of the
population or 107.7 million households by 2012, representing a formidable emerging bankable class.
Insurance is seen as long term savings instrument by this segment of the society providing higher
return at low risk, given the lack of alternative investment options. Key challenges in this segment are
managing profitability due to low ticket sizes and high underwriting risk.
• Rising Affluents
The number of the affluent “global” (annual household income greater than Rs.10 lacs) will be 2.3
million households strong by 2012 and will earn almost 12 per cent of the country’s aggregate
disposable income. Going forward to 2025, this segment will swell to 9.5 million households earning
22 per cent of total disposable income. This segment has a relatively low need for risk protection,
Insurance is viewed primarily as an investment vehicle and an estate management tool. Primary
influencers for this segment are wealth or relationship managers, rather than insurance agents, as the
former also provide third-party investment products, brokerage, and other advisory services.
69 | P a g e
IGTC, 2009-11
The health insurance sector is one of the booming sectors of the insurance industry as people are
becoming more aware about the health insurance and their health care so taking advantage of this,
private sector insurers are more aggressive in this segment. Life insurance companies are likely to
primarily target the young population to amortize the risk over the policy term.
After the recent financial crisis, insurance companies want to reduce their costs and outsourcing some
of the non core processes like claims processing, policy management, etc., can help them to reduce
their costs and focus on the core processes. India is seen as one of the favorable partners for the
outsourcing business. Services such as analytics and decision support are likely to be the higher-end,
billing rate-based services that will drive value growth for BPO organizations.
The industry is expected to obtain more business from the European market — from 24% of the total
global business in FY07 to 36% by FY10. Employment is also expected to more than double — from
According to the Old Age Social and Income Security (OASIS Report, 1999), there will be 113
million Indians over 60 years of age by 2016 and 179 million by 2026. On the one hand, this is good
news as the life expectancy has increased but on the other hand, it has also increased the risk that
people will outlive their savings. Indians will have an expected life span of 80 years, i.e., live a full 20
non-earning years. Healthcare costs have also increased many folds eroding retirees’ purchasing
power.
Savings and investment risks are intensifying, with rising inflation or steep market declines.
Social security provided by the Government of India is very limited; in fact that less than 4% of the
population is covered under any social security scheme. Only Government employees are entitled to
70 | P a g e
IGTC, 2009-11
pension benefits after retirement. Opening up of the pension sector and the establishment of a new
pension regulator have made this segment highly attractive. Hence, insurance products are being
To facilitate insurance and social security cover for the economically weaker sections of society, the
Pension Fund Regulatory and Development Authority (PFRDA) has launched a low-cost pension
scheme, since April 2010, for rickshaw-pullers, barbers, daily wage laborers etc
The transition from Solvency I norms to Solvency II norms by 2012 is likely to increase the demand
for actuaries and risk management professionals. The regulator has also asked insurance companies to
get their risk management systems and processes audited every three years by an external auditor to
ensure the solvency of private sector companies. Hence, the need for professionals is expected to rise.
Furthermore, insurance companies will now be able to calculate risk better, bringing enhanced
Way forward
The life insurance segment is a major attraction for private and foreign players — the fi---rst year
premiums collected by life insurance companies declined from INR929.8 billion in FY08 to
INR871.1 billion in FY09, only to grow back to INR 1,092.9 billion in FY10.
Insurance companies are in the process of establishing their niche distribution channels. Till, most
large players rely heavily on the agency channel, primarily because of ease of scalability, easy access
to the micro insurance segment of society as well as the complexity of the life insurance products.
Most bank-backed insurers have been building bancassurance as their primary channel of distribution
to penetrate banks’ customer bases in the most-cost effective manner. Other models of distribution
71 | P a g e
IGTC, 2009-11
including direct marketing and the internet have been in vogue, but none of them have achieved a
After de-tarrification, the non-life insurance sector has witnessed a slowdown in premium
growth. As witnessed in other countries, the industry is likely to grow at a stable rate during the
next three or four years. The health and auto insurance sectors are both highly promising and are
The insurance industry is going through an interesting phase in its lifecycle. The IRDA is
finalizing its norms for IPOs and some companies are likely to come up with their IPOs this year.
Companies are also likely to focus on consolidation to sustain them in this competitive environment.
The reinsurance industry is likely to increase its pricing rates in the light of increasing claims
and a fall in the value of investment income after the financial crisis. Opening up of the market as a
whole, and the insurance sector in particular, has created the potential for Indian companies to secure
additional funds to support other capital –intensive sectors. The market needs to ensure that domestic
companies increase their own capacities and introduce strict guidelines as firsthand risk carriers.
Insurance companies need to establish business relations with their reinsures to prevent the worldwide
re insurance cycle from affecting their capacity and stability. Furthermore, it is reported that foreign
“The recently released data on industrial output are significant in two ways. During July,
industrial growth accelerated to 13.8 per cent from 7.2 per cent in the corresponding month last year.
Secondly, and perhaps more relevant in a contextual sense, the Index of Industrial Production
reinforces the optimism that characterised the Central Statistics Office's estimate of 8.8 per cent GDP
growth during the first quarter of 2010-11. The growth drivers of the first quarter have continued into
July. During the first quarter (April-June 2010) industry as a whole grew by 11.4 per cent and
manufacturing by 12.4.The corresponding figures for 2009-10 were 4.6 per cent and 3.8 per cent
respectively. The IIP figures have been boosted by the spectacular performance of capital goods and
72 | P a g e
IGTC, 2009-11
consumer durables sectors, which expanded by 63 per cent and 22.1 per cent respectively” 4 As the
figures denote a strong economic growth, non life insurance sector can be expected to grow at a very
good rate.
price, products, underwriting and innovative sales methods. The abolition of market barriers will
permit the entry of specialist suppliers, banks and foreign insurers. Poorly managed companies, with a
weak capital base, are expected to either drop out of the market or become uncompetitive on premium
rates and profits. For insurance companies, profit from innovation will be the key to success, and
technology will help private insurers to develop and customize products to suit individual needs.
The recently introduced regulatory change in the ULIPs and other matter by IRDA has been
interpreted differently by stakeholders. The buyers would be entitled to better; more cost efficient
products and now have better rights. This should increase the demand in the future. The increase in
the sum assured provision will push up the ticket size of the average size of the ULIP product sold.
The same beneficial effect can be expected from more generous surrender provisions and cap in
expenses, the most prominent one being in clipping of the agency commission rates in ULIPs. The
agent will have to produce more to maintain the past earning level. The boom in the housing sector
will generate a larger number of mortgage linked life policies. The expected surge in the GDP and the
industrial growth in particular will drive group life and non-life product sales. The boom in the micro-
lending sector will also boost rural life insurance sales. “The coming boom” is thus a distinct
possibility.
Conclusion:
4
See the article “ Economic growth gets stronger, real” , The Hindu dt 14 September 2010
73 | P a g e
IGTC, 2009-11
The financials of the company have improved in 2008-09 as compared with those of 2007-08.The
Bibliography:
news/Life-insurers-see-18-growth-in-total-premium-income-in-09-
2. “Economic growth gets stronger, real” published in The Hindu on 14 September 2010
3. “Insurance Industry Retrospection and opportunities” –A report by Earnest & Young and CII-
June 2010
4. “India Life Insurance 2012: FORTUNE FAVOURS THE BOLD A Summary by Mckinsey
and Company”
5. Interview with Mr. J Hari Narayan published in the Mint dt 1st September 2010 “Insurance
7.“New Ulips to change industry, IRDA image” published in the newspaper Mint on 31 August
2010
8.“Reliance Life expects to break even this year”, article published in the Business Line on 08
October 2010
9. “ULIP sales under new norms yet to gain pace” published in the Business Line
on 08 October 2010
10. www.economywatch.com/indianeconomy/india-insurance-sector
75 | P a g e