THE UNIVERSITY OF NOTTINGHAM

Centre for Risk & Insurance Studies

Privatization of the Insurance Market in India: From the British Raj to Monopoly Raj to Swaraj

Tapen Sinha
CRIS Discussion Paper Series 2002.X

Privatization of the Insurance Market in India: From the British Raj to Monopoly Raj to Swaraj
by Tapen Sinha, Ph.D. ING Comercial America Chair Professor Instituto Tecnolgico Autnomo de Mxico Mexico City, Mexico and Professor, School of Business University of Nottingham, UK tapen@itam.mx, tapen@nottingham.ac.uk Abstract We examine the institution of insurance in India. Over the past century, Indian insurance industry has gone through big changes. It started as a fully private system with no restriction on foreign participation. After the independence, the industry went to the other extreme. It became a state-owned monopoly. In 1991, when rapid changes took place in many parts of the Indian economy, nothing happened to the institutional structure of insurance: it remained a monopoly. Only in 1999, a new legislation came into effect signaling a change in the insurance industry structure. We examine what might happen in the future when the domestic private insurance companies are allowed to compete with some foreign participation. Because of the time dependence of insurance contracts, it is highly unlikely that these erstwhile monopolies are going to disappear.

Acknowledgement: I would like to thank Rebecca Benedict and Samik Dasgupta for their input in this article without implication. The views expressed here are personal. I alone am responsible for any error.

Introduction Insurance in India started without any regulation in the Nineteenth Century. It was a typical story of a colonial era: a few British insurance companies dominating the market serving mostly large urban centers. After the independence, it took a dramatic turn. Insurance was nationalized. First, the life insurance companies were nationalized in 1956, and then the general insurance business was nationalized in 1972. Only in 1999 private insurance companies have been allowed back into the business of insurance with a maximum of 26% of foreign holding. In what follows, we describe how and why of regulation and deregulation. The entry of the State Bank of India with its proposal of bancassurance brings a new dynamics in the game. We study the collective experience of the other countries in Asia already deregulated their markets and have allowed foreign companies to participate. If the experience of the other countries is any guide, the dominance of the Life Insurance Corporation and the General Insurance Corporation is not going to disappear any time soon. Insurance under the British Raj Life insurance in the modern form was first set up in India through a British company called the Oriental Life Insurance Company in 1818 followed by the Bombay Assurance Company in 1823 and the Madras Equitable Life Insurance Society in 1829. All of these companies operated in India but did not insure the lives of Indians. They were there insuring the lives of Europeans living in India. Some of the companies that started later did provide insurance for Indians. But, they were treated as "substandard" and therefore had to pay an extra premium of 20% or more. The first company that had

policies that could be bought by Indians with "fair value" was the Bombay Mutual Life Assurance Society starting in 1871. The first general insurance company, Triton Insurance Company Ltd., was established in 1850. It was owned and operated by the British. The first indigenous general insurance company was the Indian Mercantile Insurance Company Limited set up in Bombay in 1907. By 1938, the insurance market in India was buzzing with 176 companies (both life and non-life). However, the industry was plagued by fraud. Hence, a comprehensive set of regulations was put in place to stem this problem (see Table 1). By 1956, there were 154 Indian insurance companies, 16 non-Indian insurance companies and 75 provident societies that were issuing life insurance policies. Most of these policies were centered in the cities (especially around big cities like Bombay, Calcutta, Delhi and Madras). In 1956, the then finance minister S. D. Deshmukh announced nationalization of the life insurance business.

TABLE 1 MILESTONES OF INSURANCE REGULATIONS IN THE 20TH CENTURY Year Significant Regulatory Event 1912 The Indian Life Insurance Company Act 1938 The Insurance Act: Comprehensive Act to regulate insurance business in India 1956 Nationalization of life insurance business in India 1972 Nationalization of general insurance business in India 1993 Setting up of Malhotra Committee 1994 Recommendations of Malhotra Committee 1995 Setting up of Mukherjee Committee 1996 Setting up of (interim) Insurance Regulatory Authority (IRA)Recommendations of the IRA 1997 Mukherjee Committee Report submitted but not made public 1997 The Government gives greater autonomy to LIC, GIC and its subsidiaries with regard to the restructuring of boards and flexibility in investment norms aimed at channeling funds to the infrastructure sector 1998 The cabinet decides to allow 40% foreign equity in private insurance companies-26% to foreign companies and 14% to NRIs, OCBs and FIIs 1999 The Standing Committee headed by Murali Deora decides that foreign equity in private insurance should be limited to 26%. The IRA bill is renamed the Insurance Regulatory and Development Authority (IRDA) Bill 1999 Cabinet clears IRDA Bill 2000 President gives Assent to the IRDA Bill Sources: Various Monopoly Raj The nationalization of life insurance was justified mainly on three counts. (1) It was perceived that private companies would not promote insurance in rural areas. (2) The Government would be in a better position to channel resources for saving and investment by taking over the business of life insurance. (3) Bankruptcies of life insurance companies had become a big problem (at the time of takeover, 25 insurance companies were already bankrupt and another 25 were on the verge of bankruptcy). The experience of the next four decades would temper these views.

Life Story of the Life Insurance Corporation The life insurance industry was nationalized under the Life Insurance Corporation (LIC) Act of India. In some ways, the LIC has become very successful. (1) Despite being a monopoly, it has some 60-70 million policyholders. Given that the Indian middle-class is around 250-300 million, the LIC has managed to capture some 30 odd percent of it. (2) The level of customer satisfaction is high for the LIC (one of the findings of the Malhotra Committee, see below). This is somewhat surprising given the frequent delays in claim settlement. (3) Market penetration in the rural areas has grown substantially. Around 48% of the customers of the LIC are from rural and semi-urban areas. This probably would not have happened had the charter of the LIC not specifically set out the goal of serving the rural areas. One exogenous factor has helped the LIC to grow rapidly in recent years: a high saving rate in India. Even though the saving rate is high in India (compared with other countries with a similar level of development), Indians exhibit high degree of risk aversion. Thus, nearly half of the investments are in physical assets (like property and gold). Around twenty three percent are in (low yielding but safe) bank deposits. In addition, some 1.3- percent of the GDP are in life insurance related savings vehicles. This figure has doubled between 1985 and 1995. Life Insurance in India: A World Perspective In many countries, insurance has been a form of savings. Table 2 shows that in many developed countries, a significant fraction of domestic saving is in the form of (endowment) insurance plans. This is not surprising. The prominence of some developing countries is more surprising. For example, South Africa features at the

number two spot. India is nestled between Chile and Italy. This is even more surprising given the levels of economic development in Chile and Italy. Thus, we can conclude that there is an insurance culture in India despite a low per capita income. This bodes well for future growth. Specifically, when the income level improves, insurance (especially life) is likely to grow rapidly. Table 2 LIFE INSURANCE PREMIUM AS PERCENTAGES OF THE GROSS DOMESTIC SAVING (GDS) AND THAT OF GROSS DOMESTIC PRODUCT (GDP) Rank Country % of GDS % of GDP 1. United Kingdom 52.50 7.31 2. South Africa 51.55 10.32 3. Japan 32.46 10.10 4. France 26.20 4.91 5. USA 25.20 3.63 6. South Korea 23.66 9.10 7. Finland 23.10 4.98 8. Switzerland 21.92 5.99 9. Netherlands 19.04 4.51 10. Israel 18.84 4.41 11. Sweden 17.88 3.51 12. Australia 17.78 3.48 13. Canada 17.05 3.04 14. Zimbabwe 15.88 6.27 15. Ireland 14.96 4.59 16. Greece 13.87 1.12 17. New Zealand 12.75 3.04 18. Taiwan 12.29 3.64 19. Denmark 12.00 2.71 20. Spain 11.68 2.23 21. Germany 11.40 2.80 22. Norway 9.57 2.33 23. Belgium 9.13 2.38 24. Portugal 8.76 1.65 25. Austria 6.96 2.10 26. Chile 6.96 1.95 27. India 5.95 1.29 28. Italy 5.60 1.13 29. Malaysia 5.35 2.30 30. Singapore 4.72 2.73 Source: Roy (1999). Figures for 1994.

The General Insurance Corporation Although efforts were made to maintain an open market for the general insurance industry by amending the Insurance Act of 1938 from time to time, malpractice escalated beyond control. Thus, the general insurance industry was nationalized in 1972. The General Insurance Corporation (GIC) was set up as a holding company. It had four subsidiaries: New India, Oriental, United India and the National Insurance companies (collectively known as the NOUN). It was understood that these companies would compete with one another in the market. It did not happen. They were supposed to set up their own investment portfolios. That did not happen either. It began to happen after 29 years. The NOUN has kicked off an internal exercise to segregate the entire investment portfolio of the GIC (in 2001). The GIC has a quarter of a million agents. It has more than 2,500 branches, 30 million individual and group insurance policies and assets of about USD 1,800 million at market value (at the end of 1999). It has been suggested that the GIC should close 2025% of its nonviable branches (Patel, 2001). The GIC has so far been the holding company and re-insurer for the state-run insurers. It reinsured about 20% of their business. Two Committee Reports: One Known, One Unknown Although Indian markets were privatized and opened up to foreign companies in a number of sectors in 1991, insurance remained out of bounds on both counts. The government wanted to proceed with caution. With pressure from the opposition, the government (at the time, dominated by the Congress Party) decided to set up a committee headed by Mr. R. N. Malhotra (the then Governor of the Reserve Bank of India).

Malhotra Committee Liberalization of the Indian insurance market was recommended in a report released in 1994 by the Malhotra Committee, indicating that the market should be opened to private-sector competition, and ultimately, foreign private-sector competition. It also investigated the level of satisfaction of the customers of the LIC. Curiously, the level of customer satisfaction seemed to be high. The union of the LIC made political capital out of this finding (http://www.maoism.org/misc/india/rupe/aspects26_27/insurance.htm). The following are the purposes of the committee. (a) To suggest the structure of the insurance industry, to assess the strengths and weaknesses of insurance companies in terms of the objectives of creating an efficient and viable insurance industry, to have a wide coverage of insurance services, to have a variety of insurance products with a high quality service, and to develop an effective instrument for mobilization of financial resources for development. (b) To make recommendations for changing the structure of the insurance industry, for changing the general policy framework etc. (c) To take specific suggestions regarding LIC and GIC with a view to improve the functioning of LIC and GIC. (d) To make recommendations on regulation and supervision of the insurance sector in India. (e) To make recommendations on the role and functioning of surveyors, intermediaries like agents etc. in the insurance sector. (f) To make recommendations on any other matter which are relevant for development of the insurance industry in India. The committee made a number of important and far-reaching recommendations. (a) The LIC should be selective in the recruitment of LIC agents. Train these people after the identification of training needs. (b) The committee suggested that the Federation of

Insurance Institute, Mumbai should start new courses and diploma courses for intermediaries of the insurance sector. (c) The LIC should use an MBA specialized in Marketing (a similar suggestion for the GIC subsidiaries). (c) It suggested that settlement of claims were to be done within a specific time frame without delay. (d) The committee has several recommendations on product pricing, vigilance, systems and procedures, improving customer service and use of technology. (f) It also made a number of recommendations to alter the existing structure of the LIC and the GIC. (g) The committee insisted that the insurance companies should pay special attention to the rural insurance business. (h) In the case of liberalization of the insurance sector the committee made several recommendations, including entry to new players and the minimum capital level requirements for such new players should be Rs. 100 crores (about USD 24 million). However, a lower capital requirement could be considered for a co-operative sectors' entry in the insurance business. (i) The committee suggested some norms relating to promoters equity and equity capital by foreign companies, etc. Mukherjee Committee Immediately after the publication of the Malhotra Committee Report, a new committee (called the Mukherjee Committee) was set up to make concrete plans for the requirements of the newly formed insurance companies. Recommendations of the Mukherjee Committee were never made public. But, from the information that filtered out it became clear that the committee recommended the inclusion of certain ratios in insurance company balance sheets to ensure transparency in accounting. But the Finance Minister objected. He argued (probably on the advice of some of the potential entrants) that it could affect the prospects of a developing insurance company.

Insurance Regulatory Act (1999) After the report of the Malhotra Committee came out, changes in the insurance industry appeared imminent. Unfortunately, instability in Central Government, changes in insurance regulation could not pass through the parliament. The dramatic climax came in 1999. On March 16, 1999, the Indian Cabinet approved an Insurance Regulatory Authority (IRA) Bill that was designed to liberalize the insurance sector. The bill was awaiting ratification by the Indian Parliament. However, the BJP Government fell in April 1999. The deregulation was put on hold once again. An election was held in late 1999. A new BJP-led government came to power. On December 7, 1999, the new government passed the Insurance Regulatory and Development Authority (IRDA) Act. This Act repealed the monopoly conferred to the Life Insurance Corporation in 1956 and to the General Insurance Corporation in 1972. The authority created by the Act is now called IRDA. It has ten members. New licenses are being given to private companies (see below). IRDA has separated out life, non-life and reinsurance insurance businesses. Therefore, a company has to have separate licenses for each line of business. Each license has its own capital requirements (around USD24 million for life or non-life and USD48 million for reinsurance). Some Details of the IRDA Bill On July 14, 2000, the Chairman of the IRDA, Mr. N. Rangachari set forth a set of regulations in an extraordinary issue of the Indian Gazette that details of the regulation. Regulations

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The first covers the Insurance Advisory Committee that sets out the rules and regulation. The second stipulates that the "Appointed Actuary" has to be a Fellow of the Actuarial Society of India. Given that there has been a dearth of actuaries in India with the qualification of a Fellow of the Actuarial Society of India, this becomes a requirement of tall order. As a result, some companies have not been able to attract a qualified Appointed Actuary (Dasgupta, 2001). The IRDA is also in the process of replacing the Actuarial Society of India by a newly formed institution to be called the Chartered Institute of Indian Actuaries (modeled after the Institute of Actuaries of London). Curiously, for life insurers the Appointed Actuary has to be an internal company employee, but he or she may be an external consultant if the company happens to be a non-life insurance company. Third, the Appointed Actuary would be responsible for reporting to the IRDA a detailed account of the company. Fourth, insurance agents should have at least a high school diploma along with training of 100 hours from a recognized institution. More than a dozen institutions have been recognized by the IRDA for training insurance agents (the list appears online at http://www.irdaonline.org/press.asp). Fifth, the IRDA has set up strict guidelines on asset and liability management of the insurance companies along with solvency margin requirements. Initial margins are set high (compared with developed countries). The margins vary with the lines of business (for example, fire insurance has a lower margin than aviation insurance).

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Sixth, the disclosure requirements have been kept rather vague. This has been done despite the recommendations to the contrary by the Mukherjee Committee recommendations. Seventh, all the insurers are forced to provide some coverage for the rural sector. (1) In respect of a life insurer, (a) five percent in the first financial year; (b) seven percent in the second financial year; (c) ten percent in the third financial year; (d) twelve percent in the fourth financial year; (e) fifteen percent in the fifth year (of total policies written direct in that year). (2) In respect of a general insurer, (a) two percent in the first financial year; (b) three percent in the second financial year; (c) five percent thereafter (of total gross premium income written direct in that year). New Entry Immediately after the passage of the Act, a number of companies announced that they would seek foreign partnership. In mid-2000, the following companies made public statements that they already were in the process of setting up insurance business with foreign partnerships (see Table 3). However, not all the partnerships panned out in the end (see below).

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TABLE 3 INDIAN COMPANIES WITH FOREIGN PARTNERSHIP Indian Partner International Partner Alpic Finance Allianz Holding, Germany Tata American Int. Group, US CK Birla Group Zurich Insurance, Switzerland ICICI Prudential, UK Sundaram Finance Winterthur Insurance, Switzerland Hindustan Times Commercial Union, UK Ranbaxy Cigna, US HDFC Standard Life, UK Bombay Dyeing General Accident, UK DCM Shriram Royal Sun Alliance, UK Dabur Group Allstate, US Kotak Mahindra Chubb, US Godrej J Rothschild, UK Sanmar Group Gio, Australia Cholamandalam Guardian Royal Exchange, UK SK Modi Group Legal & General, Australia 20th Century Finance Canada Life M A Chidambaram Met Life Vysya Bank ING Source: U.S. Department of State FY 2001 Country Commercial Guide: India

Three days before the deadline that the IRDA had set upon itself (October 25, 2000), it issued three companies with license papers: (1) HDFC Standard Life. This will be jointly set up by India's Housing Development Finance Company - the largest housing finance company in India and the Scotland based Standard Life. (2) Sundaram Royal Alliance Insurance Company. It is a partnership created by Sundaram Finance and three other companies of the TVS Group of Chennai (Madras) and the London based Royal & SunAlliance. (3) Reliance General Insurance. This company is fully owned by Mumbai based Reliance Industries which has operations in textile, petrochemicals, power and finance industries.

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There are three other companies with "in principal" approvals: (1) Max New York Life. It is a partnership between Delhi based pharmaceutical company Max India and New York Life, the New York based life insurance company. (2) ICICI Prudential Life Insurance Company. This is a joint venture between Mumbai based Industrial Credit & Investment Corporation and the London based Prudential PLC. (3) IFFCO Tokio General Insurance Company. It is a joint venture between Indian Farmers' Fertiliser Cooperative and Tokio Marine and Fire of Japan. To date (end of April 2001), the following companies have thus been granted licenses: ICICI -Prudential, Reliance General, Reliance Life, Tata-AIG General, HDFCStandard Life, Royal-Sundaram, Max-New York Life, IFFCO-Tokio Marine, BirlaSunLife, Bajaj-Allianz General, Tata-AIG Life, ING-Vyasa, Bajaj-Allianz Life, SBICardiff Life. Note that all of these companies are either in the life insurance business or in the non-life insurance business. No license has been granted for reinsurance business so far (the size of the reinsurance business can be 10-20% of the total revenue). No stand-alone health insurance company has been granted license so far. Enter the Dragon On December 28, 2000, the State Bank of India (SBI) announced a joint venture partnership with Cardif SA (the insurance arm of BNP Paribas Bank). This partnership won over several others (with Fortis and with GE Capital). The entry of the SBI has been awaited by many. It is well known that the SBI has long harbored plans to become a universal bank (a universal bank has business in banking, insurance and in security). For

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a bank with more than 13,000 branches all over India, this would be a natural expansion. In the first round of license issue, the SBI was absent. There were several reasons for this delay. First, the SBI was seeking a foreign partner to help with new product design. Second, it did not want the partner to become dominant in the long run (when the 26% foreign investment cap is eventually lifted). It wanted to retain its own brand name. Third, it wanted a partner that is well versed in the universal banking business. This ruled out an American partner (where underwriting insurance business by banks have been strictly forbidden by law). Cardif is the third largest insurance company in France. More than 60% of life insurance policies in France are sold through the banks. Fourth, the Reserve Bank of India (RBI) needed to clear participation by the SBI because in India banks are allowed to enter other businesses on a "case by case" basis. Over the course of the next twelve months, the SBI will sell insurance in 100 branches. Over a period of 2-3 years it will expand operation in 500 branches. Initially it will hold 74% ownership of the joint venture company with Cardif. Over time, it will dilute its holding to 50-60%. The SBI entry is groundbreaking for several reasons. This was the first for a bank to enter the insurance market. This kind of synergy between a bank and an insurance company is extremely rare in many parts of the world. In Continental Europe, it is called bancassurance (in France) or allfinanz (in Germany). Second, even though the regulators have said that banks would not (generally) be allowed to hold more than 50% of an insurance company, the SBI was allowed to do so (with a promise that its share would be eventually diluted).

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Broken Marriages Several partnerships broke down during the year 2000. Probably the most dramatic breakdown took place between Hindustan Times (a newspaper group) and the Commercial Union of the UK. The management of Hindustan Times realized that they are heavily reliant on a steady daily cash flow (Kumari, 2001). Insurance is a completely different business. Their shareholders would revolt if they faced large one-time losses (common in insurance business). Similarly, by the end of July 2000, Kotak-Mahindra and Chubb declared their divorce. Dabur Group and Allstate also parted company. Allianz and Alpic broke their partnership. Re-pairing of Partners A curious trend has developed by the end of 2000. Several divorced partners have come back to the field to tie knots to some other partners. Dabur has decided to tie the knot with another divorcee - Commercial Union. Allianz has announced a new partnership with the giant Indian scooter-maker Bajaj. Back to the Future: Mostly Swaraj with a Foreign Twist At present, 312 million middle class consumers in India have enough financial resources to purchase insurance products like pension, health care, accident benefit, life, property and auto insurance. Only 2.5 per cent of this insurable population, however, have insurance coverage in any form. The potential premium income is estimated at around US $80 billion. This will place India as the sixth largest market in the world (after the US, Japan, Germany, UK and France).

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Lessons from China China is the most populous country in the world (at 1.2 billion); India is a close second (just over a billion). Both have followed the path of deregulation and privatization - China started it in 1979 and India in 1991. Comparisons of these processes are described in Sinha and Sinha (1997). In this section, I will concentrate only on the insurance industry in the two countries. The insurance business in India has a premium volume of $8.3 billion in 1999 whereas in China the premium volume is $16.8 billion in 1999. However, premium per capita is not all that dissimilar: $13.7 per person in China and $8.5 in India in 1999. As a percent of GDP, insurance is 1.93% in India and 1.63% in China in 1999 (all data from Sigma, 2000). In China, the People's Insurance Company of China (PICC) had a monopoly between 1949 and 1959. In 1959, insurance business was deemed capitalistic and all forms of insurance were suspended (and the insurance business was taken over by the Peoples Bank of China). The insurance business reopened in 1979, the PICC reassumed its old role as the monopoly. There are many differences in the way China and India have handled deregulation. First, in China, the China Insurance Regulatory Commission (CIRC) was set up in November 1998, well after the first Insurance Law was promulgated in 1995. In India, the IRDA was launched first with the authority to issue licenses. It took almost a year before it issued licenses for the first set of private insurance companies. Second, in China, foreign insurers need to have a representative office for three years before they can submit a proposal for operation (in practice, this has been reduced to two years in some cases). In India, there is no such requirement. Third, foreign insurers can only own

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25% of the total value of the market (although, in reality, it has been much less than that in Shanghai). In India, the limit is set at 26% per company. In China, there is no limit at the company level. Thus, a foreign company can own 100% of an approved insurance company in China. Fourth, in India, the licenses are national. A company with a license can operate in any part of the country. In China, on the other hand, foreign companies are restricted to operation in two metropolitan areas: Shanghai and Guangzhou. Fifth, the IRDA is a law-implementing body. It can only interpret the laws that have been passed by the Indian Parliament. On the other hand, it seems that the CIRC has been a lawmaking body, it is setting up rules as it sees fit. Sixth, China seems to have been forced to issue insurance licenses to a host of foreign companies by the end of 2000 simply because it wanted an assured entry into the World Trade Organization (WTO). In India, there is no such pressure as India is already a part of the WTO. Quo Vadis, Insurance? In this section, we gaze into the future of the insurance industry in India. A number of trends are already emerging. Convergence In many other regions around the world, one sure sign is emerging in the insurance business. Different parts of the financial sectors are converging. This happened first in European Union (with the so-called Third Directive). It is now happening in the United States with the effective repealing of the Glass-Steagall Act of 1933. In India, it will surely come. Not everybody in India, however, believes so. For example, the Insurance Regulatory Development Authority (IRDA) chairman N.

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Rangachari said that India is not yet ready for the convergence of all financial sectors under one supervisory authority as suggested by the banking division of the finance ministry. The RBI (Reserve Bank of India) has erected a firewall between banks and insurance companies to protect investor interests. With the insurance sector transforming from total regulation to being opened up after 35 years, fears have been expressed on how it would move. However, the convergence is already happening on the ground in a curious way as 10 out of 12 insurance proposals received for license by the IRDA have come in from companies who are in the pure or applied finance sector. It may appear curious, but clearly the companies who want to enter the insurance sector see some kind of a synergy between their existing business and insurance. Monitor Group Report How would the insurance market be divided up between the incumbent Life Insurance Corporation and the newcomers? The Monitor Group (from Boston) has published a study at the end of 1999 (reported in Business Today, 2000). It estimates that the $5 billion market of life insurance in India (figure for 1998) will become a $23 billion market by 2008. The report estimates that the LIC will have some 70-80% of the market whereas the new companies will share some 20-30%. The bright prognostics for the LIC come from several key observations. (1) The LIC has a vast distribution network in the rural and semi-urban areas. This would be hard to duplicate. (2) The LIC has had a real annual growth rate of 8% over the last decade. This is much larger than industrial growth. Therefore, the LIC has a head start. (3) As life insurance benefits accrue over

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time, it becomes more expensive to switch - because switching would mean a loss of accrued benefits. The general insurance business is expected to grow from USD 1.8 billion (1998) to 12 billion in 2008. The Monitor Group Report predicts that the private companies would have an easier access to the general insurance business. The market share of the newcomers will be 40-50% of the total market. The cause for better market penetration for the new companies come from the fact that it makes no difference for the insured to switch companies. Unlike life insurance, it is not expensive to switch insurers. However, the lack of good data would hamper the newcomers (see below). Reinsurance The GIC has decided to spin off its reinsurance business as a separate company to be called Indian Reinsurer. The insurance business in India is less than USD $1 billion at present (2000). In the near term (three to five years), it is expected to double in size for two simple reasons. (1) Under the new regime, the reinsurance requirements are higher (as a percentage of total insurance business). (2) Privately run non-life insurance companies have a higher reinsurance requirement in the early years. Aftermath of the Gujarat Earthquake On January 26, 2001, an earthquake measuring 6.9 on the Richter scale hit parts of Gujarat. Many buildings toppled. An estimated 20,000 persons were killed - most of them in Bhuj district of Gujarat (around 18,000). Estimated damage was in the order of magnitude of USD 5 billion - most of it uninsured.

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The disaster was once in a lifetime event. In a curious way, it will help the new entrants in the insurance industry in India. It is well known in the psychology literature that disasters make people more aware of their insurance needs. Given what happened in Gujarat, most Indians will now have a higher awareness about buying an insurance policy than they would have otherwise. No amount of advertisement by the insurance companies (both life and general) could have achieved this. Ironically, India's national insurance companies began to exclude earthquake cover in the new policy forms adopted from 1 April 2000 and began to offer the protection as a buy-back on the recommendation of the Tariff Advisory Committee (TAC) report. Many policyholders were unaware of the change and so the relatively few individuals and companies that have been prudent enough to buy insurance may discover that, in the case of the Gujarat event, they are uninsured. Some Areas of Future Growth

Life Insurance The traditional life insurance business for the LIC has been a little more than a savings policy. Term life (where the insurance company pays a predetermined amount if the policyholder dies within a given time but it pays nothing if the policyholder does not die) has accounted for less than 2% of the insurance premium of the LIC (Mitra and Nayak, 2001). For the new life insurance companies, term life policies would be the main line of business.

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Health Insurance Health insurance expenditure in India is roughly 6% of GDP, much higher than most other countries with the same level of economic development. Of that, 4.7% is private and the rest is public. What is even more striking is that 4.5% are out of pocket expenditure (Berman, 1996). There has been an almost total failure of the public health care system in India. This creates an opportunity for the new insurance companies. Thus, private insurance companies will be able to sell health insurance to a vast number of families who would like to have health care cover but do not have it. Pension The pension system in India is in its infancy. There are generally three forms of plans: provident funds, gratuities and pension funds. Most of the pension schemes are confined to government employees (and some large companies). The vast majority of workers are in the informal sector. As a result, most workers do not have any retirement benefits to fall back on after retirement. Total assets of all the pension plans in India amount to less than USD 40 billion. Therefore, there is a huge scope for the development of pension funds in India. The finance minister of India has repeatedly asserted that a Latin American style reform of the privatized pension system in India would be welcome (Roy, 1997). Given all the pros and cons, it is not clear whether such a wholesale privatization would really benefit India or not (Sinha, 2000).

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Other Non-Life Insurance The flurry of activities of the new companies in the life insurance market has not been repeated in other types of insurance. The reason is basic: lack of data. Unless the new companies have access to reliable data on accidents of different kinds under Indian conditions, it would be hard to offer a competitive menu of policies. Conclusions It seems unlikely that the LIC and the GIC will shrivel up and die within the next decade or two. The IRDA has taken a "slowly slowly" approach. It has been very cautious in granting licenses. It has set up fairly strict standards for all aspects of the insurance business (with the probable exception of the disclosure requirements). The regulators always walk a fine line. Too many regulations kill the incentive for the newcomers; too relaxed regulations may induce failure and fraud that led to nationalization in the first place. India is not unique among the developing countries where the insurance business has been opened up to foreign competitors. From Table 4, we observe that the openness of the market did not mean a takeover by foreign companies even in a decade. Thus, it is unlikely that the same will happen in India, especially when the foreign insurers cannot have a majority shareholding in any company.

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TABLE 4 RESULTS OF OPENNESS AND FOREIGN PENETRATION OF INSURANCE IN ASIA Country Years Years Market Open Foreign Penetration 0-5 6-10 11+ 0-10% 11-20% China X (partial) X Malaysia X X Taiwan X X Korea X X Indonesia X X Japan X X Source: Speech by Lawrence P. Moews, CEO, Allstate International, International Insurance Society Conference, Sydney, Australia, 1997.

The insurance business is at a critical stage in India. Over the next couple of decades we are likely to witness high growth in the insurance sector for two reasons. Financial deregulation always speeds up the development of the insurance sector. Growth in per capita GDP also helps the insurance business to grow.

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References Berman, Peter. "Rethinking Health Care Systems: Private Health Care Provision in India." Harvard School of Public Health Working Paper, November 1996. Business Today. "The Monitory Group Study on Insurance I and II." March 22 and April 7, 2000. Dasgupta, Samik. "RSA, Iffco-Tokio yet to appoint actuaries," Economic Times, January 23, 2001. Kumari, Vaswati, "India Insurers Seek Perfect Partners." National Underwriters, March 5, 2001, 38-39. Mitra, Sumit and Nayak, Shilpa. "Coming to Life." India Today, May 7, 2001. Patel, Freny. "Centre wants GIC to merge unviable outfits before recast." Business Standard, April 13, 2001. Roy, Abhijit. "Pension fund business in India." The Hindu, July 16, 1997, p. 25. Roy, Samit. "Insurance Sector: India." Industry Sector Analysis, National Trade and Development Board, US Department of State, Washington, DC, December 1999. Sigma. "World Insurance in 1999." No. 9/2000. Published by SwissRe. Available at www.swissre.com. Sinha, Tapen. Pension Reform in Latin America and Its Implications for International Policymakers. Boston, USA, Huebner Series Volume No. 23, Kluwer Academic Publishers, 2000. Sinha, Tapen and Sinha, Dipendra. "A Comparison of Development Prospects in India and China." Asian Economies, Vol. 27(2), June 1997, 5-31. U.S. Department of State FY 2001 Country Commercial Guide: India. Commercial Guide for India was prepared by U.S. Embassy New Delhi and released by the Bureau of Economic and Business in July 2000 for Fiscal Year 2001.

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