Submitted by: Group A06 Aditi Parikh 2011005 Ashish Kapil 2011012 Dheeraj Jain 2011016 Dikshit Jain

2011018 Mondit Moyur Mahanta 2011032 Prakhar Saikia 2011041

 Objective To determine the relationship between development of the insurance market and economic growth within the context of various economic factors prevailing in the Indian economy. Motivation The Indian insurance market happens to be a mega opportunity with annual growth rate of around 15-20 per cent. The key changes in regulations and macroeconomic variables are affecting the growth of the sector.
10.0 8.0 6.0 4.0 2.0 0.0

Life Non-life Total

Asia India World The figure represents the real growth in premium during 2010-11

Aspect of economic environment/policy measure to be examined Two important measures of development of insurance sector are:
Insurance Penetration: measured as the percentage of insurance premium to GDP Insurance Density: calculated as the ratio of premium to population (per capita premium)

Economic environment: GDP growth, interest rates, inflation Policy measures: Regulations imposed by IRDA and Insurance act Investment rules, regulations on price tariffs and solvency margins.

Insurance market Life insurance (24) Private (23)

Market Structure

General insurance (24)

Reinsurance (GIC)

Public (1)

Public (6)

Private (18)

What needs to be added:

Major players market shares Market concentration and foreign shares Mix of life/non-life business Key catalysts driving non-life business rising household income and risk awareness Demand for health, motor and private insurance Contribution of each segment for non-life Trend Products offered before and after deregulation

Focus: The study only focuses on various variables (economic, demographic, policy) within the context of Indian Economy The period of study is 1993-2010, in order to establish a comparison of pre and post liberalization of insurance sector Selection of variables - Based upon secondary research and group discussions , we selected the below variables for our study Variable Insurance Premium GDP per capita Gross Savings per capita Inflation Interest Rate Type Dependent Independent, Economic Independent, Economic Independent, Economic Independent, Economic Reason for selection (Hypothetical relation) Indicator of spending on insurance products This variable represents the household income (+) This variable represents the household savings (+) Affects household savings decision (-) Affects household savings decision (+)

Life Expectancy at Independent, Affects insurance consumption over the years Birth Collection: The data is predominantly collected from World Bank - World Development Data Demographic (+) Indicators Dummy variable: There is one institutional/market structure variable which represents the affect of opening up of Indian insurance sector for private players. This happened in year 1999, hence, Dummy variable is assigned value 0 and 1 accordingly. Method - Multiple regression analysis method with the use of dummy variable to determine the extent and validity of the relationship. Limitation This model does not take into consideration the supply side determinants of insurance market, e.g. distribution of insurance products, agents or Bancassurance channels.

After performing the series of regression and transforming some of the variables mentioned in the above slides, we observed that there are four most significant variables displayed below explained 98.9 percentage of penetratio in Insurance Premium. The regression model is significant as p value is 0. The final Regression Equation stand Total Insurance Premium = -11083 + 2.43 GDP per Capita + 153 Life Expectancy at as: Birth+ 74 Inflation (GDP Deflator) + 344 log (Real Interest Rate)

Dummy variable is introduced to verify the categorical effect due to liberalization in 2000 that may be expected to shift the outcome. We observed that the estimated slope coefficient of dummy variable is not significant as its p value is 26.5 %.

 Initiation of Reforms: Formation of Malhotra committee in 1993 to assess the functionality of the sector and take charge of recommendations for future path. It ultimately led to formation of Insurance Regulatory and Development Authority (IRDA) in 2000* Some of the key functions of IRDA Registration of Insurers Regulation on insurance agents Solvency Margin Re-insurance Obligation of Insurers to Rural and Social sector Investment and Accounting Procedure Protection of policy holders' interest Entry of private players in insurance market with FDI up to 26% With growth of banking in India, Bancassurance becoming the primary distribution channel of insurance products. Establishment of Insurance Ombudsman in 2005 to handle complaints of aggrieved insured customers. Detarrification of all insurance products in 2007 where in premiums will be risk based instead of tariff based. Micro insurance regulation in 2005 to expand the reach of insurance at affordable cost to Bottom of pyramid.

* This was a major reform, hence, represented by dummy variable in our regression

The study of development of Indian insurance market with the help of regression analysis and tracking policy measures led to following key observations: GDP per capita is the major indicator of development of insurance sector in the context of Indian Economy. This represents the household income, hence, a pattern of increased insurance consumption can be seen with rise in the income. The growth of insurance market has been significant post-liberalization of insurance sector i.e. year 2000. However, this cannot be explained by the regression analysis.

Insurance Premium (Rs. Cr.)

4000 3500 3000 2500 2000 1500 1000 500 0

The rapid growth of insurance sector can be attributed to key regulations changes which constantly aimed at sustaining the growth of the sector. The other variables such as interest rates, inflation, life expectancy rates are not much significant in context of Indian economy.

Political
Regulator/Government has been proactive in its policies towards insurance sector Private insurers can tap the IPO market, Introduction of health insurance portability, scrapping of common pool (Indian motor third party pool system), bancassurance draft reforms DTC impact

Economical
With increase in economic growth ,the level of disposable income has increase ,resulting in higher rate of insurance growth Infrastructure bottlenecks crippling investment

Social
High population growth rate(1.3%) and age distribution (demographics )contributing to a large pool of prospective customers Increasing level of literacy leading to insurance awareness The customers view insurance more as an investment tool than risk coverage Rural insurance

Technology
Automation of insurance leading to personalized facilities to the customers Mobile application to compare insurance products and premium rates Use of technology for paperless insurance

 Defining the scope and method of study should be the primary step for doing an environmental analysis as there can be multiple ways to do it. Review of literature for empirical relationships can be a good starting point for selecting the environmental variables. Identification of key policy measures and mapping their impact on performance of the sector is one of the most difficult and significant task in doing the environment analysis.