1

PROJECT ON

“insurance sector in India”

Bachelor of Commerce-

Banking & Insurance
Semester VI

(2012-2013)


Submitted By

GEETA MEDI

Roll no- 19



GURU NANAK COLLEGE OF ARTS, SCIENCE, AND COMMERCE
G.T.B Nagar Sion (E), Mumbai -400037

Insurance sector of India.



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C E R T I F I C A T E

This is to certify that Miss. GEETA MEDI of B.Com - Banking &
Insurance Semester VI (2012-2013) has successfully completed
the project on “INSURANCE SECTOR IN INDIA”
under the guidance of SUDHA MAM


Project guide

Principal

Course Co-ordinator:


Internal Examiner:

External Examiner:

Insurance sector of India.



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Declaration



I GEETA MEDI student of B.Com – Banking & Insurance Semester
VI (2012-2013) hereby declare that I have completed the Project on
“INSURANCE SECTOR IN INDIA” The information submitted is true and
original to the best if my knowledge.



Signature of the student


Name of the student

Insurance sector of India.



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ACKNOWLEDGEMENT



I would like to thank a lot of people without whom this project would
not have been complete. first prof. Sudha mam she was of utmost
help in guiding me structures this project. She helped me throughout
and was always present to help me whenever I had a doubt.


A research can never be over without access to a good library and in
this case I was blessed as our college library, is very well stocked with
books. And the lending policy made life a lot easier. And not to forget
the unconditional support provided by my parents and friends.

Insurance sector of India.



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EXECUTIVE SUMMARY:

Insurance sector in INDIA is booming up but not to level
comparative with the developed economies such as Japan,
Singapore etc. Also with the opening of the insurance sector
to the private players have provided stiff competition
resulting into quality products. Also there is a need to
restructure the Indian Government owned “ Life insurance
Corporation of India “ so as to maximize revenue and in turn
profits. IRDA regulations and norms for the allocation of
funds need to have a comprehensive look. In the phase of
declining interest rates and rising inflation the funds need to
be applied in productive areas so as to generate high
returns. Also in terms of clients servicing areas such as
premium payments, after sales service, policy dispatch,
redressal of grievances has to be amended. In the current
scenario, LIC has to provide flexible products suited to the
customers requirements. Also a proper and systematic risk
management strategy needs to be adopted. After the
increase in terrorism and destructive events around the
global world such as September 11 attack on World Trade
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Centre, US – Taliban war, US – Iraq war etc.. an alternative
to reinsurance such as asset backed securities is emerging
out in the developed economies. A catastrophe bond is one
of the alternatives for reinsurance. Finally some policies
such as pure term and pension schemes needs to be
addressed massively at both the urban and the rural
segment so as to generate high premium income which will
help in the development and growth of the economy.











Insurance sector of India.



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INDEX


SR. NO CONTENTS PAGE NO.
1 INTRODUCTION 8
2 INSURANCE SECTOR - A PREVIEW 10
3 LIFE INSURANCE INDEX
(COUNTRYWISE )
13
4 PURPOSE OF OPEN UP THE INSURANCE
SECTOR
14
5 GOVERNMENT / RBI REGULATIONS 18
6 INDIAN PARTNER – FOREIGN TIE UP 23
7 LIBERALISE, MARKET STRUCTURE
& ROLE FOR THE REGULATOR

25
8 INVESTMENT AND CAPITAL NORMS 39
9 ROLE OF THE PORTFOLIO MANAGER 41
10 RESTRUCTURING OF LIC & GIC 48
11 POINTERS FOR THE INDIAN
POLICYMAKERS
51
12 SWOT 55
13 TOP 3 INDIAN INSURANCE COMPANIES 57
14 CURRENT SCENARIO 68
15 CONCLUSION 72
16 BIBLIOGRAPHY 73


Insurance sector of India.



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INTRODUCTION:

Insurance may be described as a social device to reduce or eliminate
risk of loss to life and property. Under the plan of insurance, a large number
of people associate themselves by sharing risks attached to individuals. The
risks which can be insured against, include fire, the perils of sea, death and
accidents and burglary. Any risk contingent upon these, may be insured
against at a premium commensurate with the risk involved. Thus collective
bearing of risk is insurance.

DEFINITION:
General definition:

In the words of John Magee, “Insurance is a plan by which large number of
people associate themselves and transfer to the shoulders of all, risks that
attach to individuals.”

Fundamental definition:
In the words of D.S. Hansell, “Insurance may be defined as a social device
providing financial compensation for the effects of misfortune, the
Insurance sector of India.



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payment being made from the accumulated contributions of all parties
participating in the scheme.”

Contractual definition:

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

Characteristics of insurance:

 Sharing of risks
 Cooperative device
 Evaluation of risk
 Payment on happening of a special event
 The amount of payment depends on the nature of losses
incurred.






Insurance sector of India.



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INSURANCE SECTOR – A PREVIEW :

The insurance sector in India dates back to 1818, when Oriental Life
Insurance Company was incorporated at Calcutta. Thereafter, few other
companies like Bombay Life Assurance Company, in 1823 and Triton
Insurance Company, for General Insurance, in 1850 were incorporated.
Insurance Act was passed in 1928 but it was subsequently reviewed and
comprehensive legislation was enacted in 1938. The nationalisation of life
insurance business took place in 1956 when 245 Indian and Foreign
Insurance provident societies were first merged and then nationalized. It
paved the way towards the establishment of Life Insurance Corporation
(LIC) and since then it has enjoyed a monopoly over the life insurance
business in India. General Insurance followed suit and in 1968, the
insurance act was amended to allow for social control over the general
insurance business. Subsequently in 1973, non-life insurance business was
nationalised and the General Insurance Business (Nationalisation) Act, 1972
was promulgated. The General Insurance Corporation (GIC) in its present
form was incorporated in 1972 and maintains a very strong hold over the
non-life insurance business in India. Due to concerns of
(a) Relatively low spread of insurance in the country.
Insurance sector of India.



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(b) The efficient and quality functioning of the Public Sector
insurance companies

(c) The untapped potential for mobilizing long-term contractual
savings funds for infrastructure the (Congress) government set up an
Insurance Reforms committee in April 1993.
The Committee submitted its report in January 1994, recommended a
phased program of liberalization, and called for private sector entry and
restructuring of the LIC and GIC. But now the parliament has given a nod to
the Insurance Regulatory and Development Authority (IRDA) bill with some
changes in the original structure.

How big is the insurance market?

Insurance is an Rs.400 billion business in India, and together with banking
services adds about 7% to India’s GDP. Gross premium collection is about
2% of GDP and has been growing by 15-20% per annum. India also has the
highest number of life insurance policies in force in the world, and total
investible funds with the LIC are almost 8% of GDP. Yet more than three-
fourths of India’s insurable population has no life insurance or pension
cover. Health insurance of any kind is negligible and other forms of non-life
insurance are much below international standards. To tap the vast
insurance potential and to mobilize long-term savings we need reforms
Insurance sector of India.



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which include revitalizing and restructuring of the public sector companies,
and opening up the sector to private players. A statutory body needs to be
made to regulate the market and promote a healthy market structure.
Insurance Regulatory Authority (IRA) is one such body, which checks on
these tendencies.

















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INDIVIDUAL LIFE INSURANCE COVERAGE INDEX, 1994

COUNTRY NO. OF POLICIES PER 100 PERSONS
Indonesia 2.0
Philippines 5.6
India 12.4
Thailand 14.7
Malaysia 35.5
Hong Kong 69.4
South Korea 70.5
Taiwan 75.2
Singapore 112.6
Japan 198.4

Source: Charted Financial Analyst May 1999. (Insurance in Asia: The
financial times, quoted from Tillinghast study)





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WHY OPEN UP THE INSURANCE INDUSTRY ?

An insurance policy protects the buyer at some cost against the
financial loss arising from a specified risk. Different situations and different
people require a different mix of risk-cost combinations. Insurance
companies provide these by offering schemes of different kinds.
Unfortunately the concept of insurance is not popular in our country. As
per the latest estimates, the total premium income generated by life and
general insurance in India is estimated at around a meagre 1.95% of GDP.
However India’s share of world insurance market has shown an increase of
10% from 0.31% in 1996-97 to 0.34% in 1997-98. India’s market share in
the life insurance business showed a real growth of 11% thereby
outperforming the global average of 7.7%. Non-life business grew by 3.1%
against global average of 0.20%. In India insurance spending per capita was
among the lowest in the world at $7.6 compared to $7 in the previous year.
Amongst the emerging economies, India is one of the least insured
countries but the potential for further growth is phenomenal, as a
significant portion of its population is in services and the life expectancy has
also increased over the years. The nationalized insurance industry has not
offered consumers a variety of products. Opening of the sector to private
firms will foster competition, innovation, and variety of products. It would
also generate greater awareness on the need for buying insurance as a
service and not merely for tax exemption, which is currently done. On the
demand side, a strong correlation between demand for insurance and per
Insurance sector of India.



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capita income level suggests that high economic growth can spur growth in
demand for insurance. Also there exists a strong correlation between
insurance density and social indicators such as literacy. With social
development, insurance demand will grow.

Future course of Insurance Business:

One of the main differences between the developed economies and the
emerging economies is that insurance products are bought in the former
while these are sold in latter. Focus of insurance industry is changing
towards providing a mix of protection / risk over and long-term investment
opportunities. Some of the major international players in the insurance
business, which might try to enter the Indian market, are – Sun Life of
Canada, Prudential of the United Kingdom, Standard Life, and Allianz etc.
Although the insurance sector is officially open to private players, they still
need a license from the IRDA, which will announce its guidelines in May
2000. Following might be the future strategies of insurance companies.
(1) The new entrants cannot compete with the state owned LIC on price
alone. Due to its size, LIC operates at very low costs and their
premia on policies that offer pure protection are on a par with
comparable schemes across the globe. What the new insurance
companies will probably offer is higher returns than the annualized
9-10% one can hope to earn from LIC’s policies. This will put
pressure on LIC to offer more attractive returns.
(2) Consumers can also expect product innovations. For instance,
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at present, LIC provides cover for permanent disability and what
the new companies could offer is temporary disability insurance as
well.
(3) Apart from the basic term insurance, most insurance products
worldwide are sold as long-term investment opportunities with the
protection component being clearly spelt out in the scheme.
(4) LIC’s policies are not flexible according to the customer’s needs.
New entrants have planned to offer universal life and variable life
insurance products that allow the holder flexibility in deciding how
his premia are split between protection and savings. New products
would also enable product combinations that allow greater
customisation.
(5) Private insurers would compete furiously on the service platform.
These would not only include faster claims settlement and other
after-sales service but there agents would be trained in pre-sales
interaction to usher in a customer-oriented approach. They would
be better qualified in assisting clients in financial planning.
(6) Foreign companies would also use superior software (like APEX) that
will give them an edge over the in-house LIC software. This
technology will help private insurers in product development and
customizing products to suit individual needs.
(7) The foreign players will probably introduce a lot of innovation and
competition on Surrender value. LIC pays surrender value only after
Insurance sector of India.



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three years but private insurance companies are likely to offer sops
by way of better and timely surrender value to clients.
(8) Access to insurance too will probably become more widespread. Role
of intermediaries would decrease and sale of insurance through
direct channels and banks would increase. Simple products like term
insurance might be sold through the telephone or direct mail to high
net worth clients.
(9) In reaction to foreign player’s strategies one might expect LIC to
react and drop its premia and upgrade its services.

















Insurance sector of India.



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BOTTLENECKS – GOVERNMENT / RBI REGULATIONS:

The IRDA bill proposes tough solvency margins for private insurance
firms, a 26% cap on foreign equity and a minimum capital of Rs.100 crores
for life and general insurers and Rs. 200 crores for reinsurance firms.
Section 27A of the Insurance Act stipulates that LIC is required to invest
75% of its accretions through a controlled fund in mandated government
securities. LIC may invest the remaining 25% in private corporate sector,
construction, and acquisition of immovable assets besides sanctioning of
loans to policyholders. These stipulations imposed on the insurance
companies had resulted in lack of flexibility in the optimisation of risk and
profit portfolio. If this inflexibility continues, the insurance companies will
have very little leverage to earn more on their investments and they might
not be able to offer as flexible products as offered abroad.
The government might provide more autonomy to insurance
companies by allowing them to invest 50 % of their funds as per their own
discretions. Recently RBI has issued stiff guidelines, which had dealt a
severe blow to the plans of banks and financial institutions to enter the
insurance sector. It says that non-performing assets (NPA) levels of the
prospective players will have to be 1% point lower than the industry
average (presently 7.5%). RBI has also stipulated that all prospective
entrants need to have a net worth of Rs. 500 crores. These guidelines have
made it virtually impossible for many banks to get into the insurance
Insurance sector of India.



19

business. Also banks and FI’s who are planning to enter the business cannot
float subsidiaries for insurance. RBI has taken too much caution to make
sure that the new sector does not experience the kind of ups and downs
that the non-bank financial sector has experienced in the recent past. They
had to rethink about these guidelines if India’s strong banks and financial
institutions have to enter the new business. The insurance employees’
union is offering stiff resistance to any private entry. Their objections are
(a) that there is no major untapped potential in insurance business
in India;
(b) that there would be massive retrenchment and job losses
due to computerization and modernization; and
(c) that private and foreign firm would indulge in reckless
profiteering and skim the ‘urban cream’ market, and ignore the
rural areas.
But all these fears are unfounded. The real reason behind the protests is
that the dismantling of government monopoly would provide a benchmark
to evaluate the government’s insurance services.



OPENING UP OF INSURANCE SECTOR :

Indian History: Time to turn the clock back-and open up insurance.
For two years, around 30 foreign insurers have eagerly explored the
nationalized Indian insurance market, preparing to leap in when private
Insurance sector of India.



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participation is allowed. But it seems they have an endless wait before the
sector is opened up. That's ironical: in 1947, many of these insurers were
firmly established here. BAT subsidiary Eagle Star, for example, opened
offices in Calcutta in 1894. By 1921, it was doing business with Brooke Bond
and the Birlas. Prudential's first Asia office was opened In India in 1923.
Fifty years ago, India had a bustling, if somewhat chaotic, entirely private
insurance industry. The year after Independence, 209 life Insurance
companies were doing business worth Rs712.76 crore (which grew to an
amazing Rs 295,758 crore in 1995-96). Foreign insurers had a large market
share 40 per cent for general insurance but there were also plenty of Indian
companies, many promoted by business houses like the Tatas and Dalmias.
The first Indian-owned life insurance company, the Bombay Mutual Life
Assurance Society, was set up in 1870 by six friends. It Insured Indian lives
at the normal rates instead of charging a premium of 15 to 20 percent as
foreign insurers did. Its general insurance counterpart, Indian Mercantile
Insurance Company Ltd., opened in Bombay in 1907. A plethora of
insufficiently regulated
players was a sure recipe for abuse, especially because there was no
separation between business houses and the insurance companies they
promoted. The Insurance Act, 1938, introduced state controls on
insurance, including mandatory investments in approved securities, but
regulation remained ineffective. In 1949, Purshottamdas Thakurdas,
chairman of the Oriental Assurance Company, admitted: "We cannot deny
Insurance sector of India.



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that, today, there is a tendency on the part of insurance companies in
general to make illicit gains.

Can we overlook the cutthroat competition for acquiring business? And
still worse is the dishonest practice of adjusting of accounts." After a 1951
inquiry, the government was dismayed that companies had high expense
and premium rates, were speculating in shares, and giving loans regardless
of security. No wonder that between 1945 and 1955, 25 insurers went into
liquidation and 25 transferred their business to other companies. This
reckless record stoked the pro-nationalisation fires. The 1956 life insurance
Nationalisation was a top-secret intrigue; for fear that unscrupulous
insurers would siphon funds off if warned. The government resolved to first
take over the management of life insurance companies by ordinance, then
their ownership. The ordinance transferred control of 245 insurers to the
government. LIC, established eight months later, took over their ownership.
General Insurance had its turn in 1972, when 107 insurers were
amalgamated into four companies headquartered in the four metros, with
GIC as a holding company.Nationalization brought some benefits. Insurance
spread from an urban-oriented, high-end business to a mass one. Today, 48
per cent Of LIC's new business is rural. Net premium income in general
insurance grew from Rs.222 crore in 1973 to Rs.5,956 crore in 1995- 96.
Yet, rigid controls hamper operational flexibility and initiative so both
customers service and work culture today are dismal. The frontier spirit of
the early insurers has been lost. Insurance companies have also been timid
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in managing their investment portfolios. Competition between the four GIC
subsidiaries remains illusory.
















WHO’S GOING WITH WHOM?

Indian Company Foreign Partner
Kotak Mahindra Chubb, US
Tata Group AIG, US
Sundram Finance Winterthur, SWITZERLAND
Sanmar Group GIO of Australia
Insurance sector of India.



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M A Chidambaram MetLife
Bombay Dyeing General Accident, UK
DCM Shriram Royal Sum Alliance, UK
Dabur Group Liberty Mutual Fund, USA
Godrej J. Rothschild, UK
ITC Eagle star, UK
S K Modi Group Legal and General, Australia
CK Birla Group Zurich Insurance, Switzerland
Ranbaxy Cigna, US
Alpic Finance Allianz, GERMANY
20th Century Finance Canada Life
Vyasa Bank ING
Cholmandalam Guardian Royal Exchange, UK
SBI Alliance Capital
HDFC Standard Life, UK
ICICI Prudential, UK
IDBI Principal
Max India New York Life
The privatisation of the insurance sector would open up exciting new
career options and new jobs would be created. A few insurers estimated a
figure of 1lakh, after comparing the work forces in India and the UK. At
present, life products comprise a big chunk, or 98%, of LIC’s business.
Pension comprises a mere 2%. Now with increase in life expectancy rate,
people have to start planning their retirements. Hence pension business is
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expected to grow once the industry opens. The demand for healthcare is
growing due to population increase, greater urban migration and alarming
levels of pollution. Healthcare insurance is more important for families with
smaller savings because they would not be able to absorb the financial
impact of adverse events without insurance cover. Foreign insurance
companies like Aetna (world’s largest healthcare insurance provider) and
Cigna have been providing Managed Care services across the globe.
Managed Care integrates the financing and delivery of appropriate health
care services to covered individuals.













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WHY LIBERALIZE, WHAT MARKET STRUCTURE TO HAVE FINALLY,
WHAT ROLE FOR REGULATOR?

Introduction:

The decision to allow private companies to sell insurance products in
India rests with the lawmakers in Parliament. These are the passage of the
Insurance Regulatory Authority (IRA) Bill, which will make IRA a statutory
regulatory body, and amending the LIC and GIC Acts, which will end their
respective monopolies. In 1994 the government appointed a committee on
insurance sector reforms (which is known as the Malhotra Committee)
which recommended that insurance business be opened up to private
players and laid down several guidelines for orchestrating the transition. In
particular, we do not address many other related questions such as
whether foreign (and not just private) players should be allowed, what cap
should there be on foreign equity ownership, whether banks and other
financial institutions should be allowed to operate in the insurance
business, whether firms should be allowed to sell both life and -non-life
insurance, and so on.

The three questions that we address are
(a) Why should insurance be opened up to private players?
(b) If opened up, what should be the appropriate market structure?

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(many unregulated players or a few regulated players); and finally,
(c) What is the role of the regulator in insurance business?

Why allow entry to private players?

The choice between public and private might amount to choosing between
the lesser of two evils. An insurance contract is a "promise to pay"
contingent on a specified event. In the case of insurance and banking,
smooth functioning of business depends heavily on the continuation of the
trust and confidence that people place on the solvency of these financial
institutions. Insurance products are of little value to consumers if they
cannot trust the company to keep its promise. Furthermore, banking and
insurance sectors are vulnerable to the "bank run" syndrome, wherein even
one insolvency can trigger panic among consumers leading to a widespread
and complete breakdown. This implies the need for a public regulator, and
not public provision of insurance. Indeed in India, insurance was in the
private sector for a long time prior to independence. The Life Insurance
Corporation of India (LIC) was formed in 1956, when the Government of
India brought together over two hundred odd private life insurers and
provident societies, under one nationalized monopoly corporation, in the
wake of several bankruptcies and malpractice’s'. Another important
justification for Nationalisation was to raise the much-needed funds for
rapid industrialization and self-reliance in heavy industries, especially since
the country had chosen the path of state planning for development.
Insurance provided the means to mobilize household savings on a large
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scale. LIC's stated mission was of mobilizing savings for the development of
the country.
The non-life insurance business was nationalized in 1972 with the
formation of General Insurance Corporation (GIC). Thus the fact that
insurance is a state monopoly in India is an artifact of recent history the
rationale for which needs to be examined in the context of
liberalization of the financial sector. If traditional infrastructure and "semi-
public goods" industries such as banking, airlines, telecom, power, and
even postal services (courier) have significant, private sector presence,
continuing a state monopoly in provision of insurance is indefensible. This is
not to deny that there are some valid grounds for being cautious about
private sector entry. Some of these concerns are:
(a) That there would be a tendency of private companies to "skim" the
markets; thus private players would concentrate on the lucrative mainly
urban segment leaving the unprofitable segment to the incumbent LIC.
(b) That without adequate regulation, the funds generated may not be
deployed in sectors (which yield long-term social benefits), such as
infrastructure and public goods; similar without regulation, private firms
may renege on their social sector investment obligations. Meeting these
concerns requires a strong regulatory body. Another commonly expressed
fear is that there would be massive job losses in the industry as a whole
due to computerization. This however doesnot seem to be corroborated by
the countries' experience'. Moreover, apart from consideration based on
theoretical principles alone, there is sufficient evidence that suggests that
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28

introduction of private players in insurance can only lead to greater
benefits to consumers. This can be seen from the fact that the spread in
insurance in India is low compared to international benchmarks. The two
convention measures of the spread of insurance are penetration and
density. The former measure (premiums per unit) of GDP, and the latter,
premiums per capita. Less than 7% of the population in India has life
insurance cover. In Singapore, around 45 per cent of the people are
covered and in Japan, this is close to 100 per cent. In the US, over 81 per
cent the households have insurance cover. India has the biggest life
insurance sector in the world if we go by the number of policies sold, but
the number of policies sold per 10 persons is very low. The demand for
insurance is likely to increase with rising per-capita incomes, rising literacy
rates and increase of the service sector, as has been seen from the example
of several other developing countries. In fact, opening up of the insurance
sector is an integral part of the liberalization process being pursued by
many developing countries. After Korean and Taiwanese insurance sectors
were liberalized, the Korean market has grown three times faster than GDP
and in Taiwan the rate of growth has been almost 4 times that of its GDP.
Philippines opened up its insurance sector in 1992. There are several other
factors that call for private sector presence. Firstly, a state monopoly has
little incentive to innovate or offer a wider range of products. This can be
seen by a lack of certain products from LlC's portfolio, and lack of extensive
risk categorization in several GIC products, such as health insurance. In fact,
it seems reasonable to conclude that many people buy life insurance just
Insurance sector of India.



29

for the tax benefits, since almost 35 per cent of the life insurance business
is in March, the month of financial closing. This suggests that insurance
needs to be sold more vigorously. More competition in this business will
spur firms to offer several new products, and more complex and extensive
risk categorization. The system of selling insurance through commission
agents needs a better incentive structure, which a state monopoly tends to
stifle. For example LIC pays out only 5 per cent of its income as
commissions, whereas this share in Singapore is 16 per cent, and in
Malaysia it is close to 20 percent. Private sector presence will also mean
that the current investment norms, which tie up almost 75 per cent of
insurance funds in low yielding government securities, will have to go. This
will result in more proactive and market oriented investment of funds. This
needs to be tempered by prudential regulation to ensure solvency'. Of
course, this also implies that cross-subsidizing across policyholders of
different types that is seen both in life and non-life insurance will diminish.
Since public sector firms are required to sell subsidized insurance to weaker
sections of society, a separate subsidy mechanism will have to be designed.
The India Infrastructure Report (GOI, 1996) estimates that the funds
required in the next two decades are more than Rupees 4000 billion.
Finally, private sector entry into insurance might be simply a fiscal
necessity. Since large scale funds form long term contractual savings need
to be mobilized, especially for investment in infrastructures the option of
not having more (private) players in the insurance sector is too costly.
Insurance sector of India.



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WHAT SHOULD BE THE MARKET STRUCTURE ?

Individuals buying an insurance contract pay a price (called the
"premium") to the insurance company and the insurance company in turn
provides compensation if a specified event occurs. By making such
contractual arrangements with a large number of individuals and
organizations the insurance company can spread the risk. This gives
insurance its "social" character in the sense that it entails pooling of
individual risks. The price of insurance i.e., the premium is based on
average risk. This premium is too high for people who perceive themselves
to be in a low risk category. If the insurer cannot accurately determine the
risk category of every customer and prices insurance on the basis of
average risk, he stands to lose all the low risk customers. This in turn
increases the average risk, which means premia have to be revised
upwards, which in turn drives away even more customers and so on. This is
known as the problem of "adverse selection". Adverse selection problem
arises when a seller of insurance cannot distinguish between the buyer's
type i.e., whether the buyer is a low risk or a high type. In the extreme case,
it may lead to the complete breakdown of insurance market. Another
phenomenon, the problem of "moral hazard" in selling insurance, arises
when the unobservable action of buyer aggravates the risk for which
insurance is bought. For example, when an insured car driver exercises
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31

less caution in driving, compared to how he would have driven in the
absence of insurance, it exemplifies moral hazard. Given
these problems, unbridled competition among large number of firms is
considered detrimental for the insurance industry. Furthermore, even the
limited competition in insurance needs to be regulated. Insurance
companies can differentiate among various risk types if there is a wide
difference in risk profile of the buyers insuring against the strong insurers. It
also called for keeping life insurance separate from the general insurance. It
suggested the regulation of insurance intermediaries by IRDA and the
introduction of brokers for better ‘professionalisation'.

THE ROLE OF IRDA :

(a) The protection of consumers’ interest,
(b) To ensure financial soundness of the insurance industry and
(c) To ensure healthy growth of the insurance market.
These objectives must be achieved with minimum government involvement
and cost. IRDA’s functioning can be financed by levying a small fee on the
premium income of the insurers thus putting zero cost on the government
and giving itself autonomy.




Insurance sector of India.



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( a ) Protection of Customer Interests :
IRDA’s first brief is to protect consumer interests. This means
ensuring proper disclosure, keeping prices affordable but also insisting on
some mandatory products, and most importantly making sure that
consumers get paid by insurers. Ensuring proper disclosure is called
Disclosure Regulation. Insurance contracts are basically contingency
agreements. They can be full of inscrutable jargon and escape clauses. An
average consumer is likely to be confused by them. IRDA must require
insurers to frame transparent contracts. Consumers should not have to
wake up to unpleasant surprises, finding that certain contingencies are not
covered. The IRDA also has to ensure that prices of products stay
reasonable and certain mandatory products are sold. The job of keeping
prices reasonable is relatively easy, since competition among insurers will
not allow any one company to charge exorbitant rates. The danger often is
that prices may be too low and might take the insurer dangerously close to
bankruptcy. As for mandatory products, those that involve common and
well-known risks, certain standardization can be enforced. Furthermore,
IRDA can insist that for such products the prices also be standardized. From
the consumer’s point of view the most important function of IRDA is
ensuring claim settlement. Quick settlement without unnecessary litigation
should be the norm. For example, in motor vehicle insurance, adopting no-
fault principle can speed up many settlements. Currently, LIC in India has a
claims settlement ratio of 97%, an impressive number by any standards.
Insurance sector of India.



33

However, it hides the fact that this settlement is plagued by long delays,
which reduce the value of settlement itself. If consumers have a complaint
against an insurer they can go to a body formed by association of insurers.
The decision of such a body would be binding on the insurers, but not on
the complainant. If complainants are not satisfied, they can go to court.
Some countries such as Singapore have such a system in place. This system
offers a first and quicker choice of settling out of court. IRDA can encourage
the insurers to have such a grievance redressal mechanism. This system can
serve the function of adjudication, arbitration and conciliation. The second
area of IRDA’s activity concerns monitoring insurer behavior to ensure
fairness. It is especially here that IRDA’s choice of being a bloodhound or a
watchdog would have different implications. We think that an initial tough
stance should give way to a more forbearing and prudential approach in
regulating insurance firms. When the industry has a few firms there is some
chance of collusion. IRDA must be alert to collusive tendencies and make
sure that prices charged remain reasonable. However, some cooperation
among the insurance companies could be considered desirable. This is
especially in lines where claim experience of any one company is not
sufficient to make accurate forecasts. Collusion among companies on
information sharing and rate setting is considered “fair’. IRDA must have
severe penalties in case of fraud or mismanagement. Since insurance
business involves managing trust money, in some countries the
appointment of senior managers and “key personnel” has to be approved
by the insurance regulatory agency.
Insurance sector of India.



34


( b ) Ensuring Solvency of Insurers :
There are basically four ways of ensuring enough solvencies.
First is the policy of a price floor.
Second is the restriction on capital and reserves, i.e., on what kind of
investments and speculative activities firms can make.
Third is putting in place entry barriers to restrict the number of
competitors.
Fourth is the creation of an industry financed guarantee fund to bail out
firms hit by unexpectedly high liabilities. Entry restrictions of the IRDA are
implemented through a licensing requirement, which involves
capital adequacy among other things. Since there are economies of scale
and scope in insurance operations it might be better to have only a few
large firms. There is however no magic number regarding the optimal
number of firms. Restricting competition provides a scope for higher profits
to the companies thereby strengthening their solvency position. After
qualifying, the entrants are continuously subjected to restrictions on
reserves and investments, which ensure ongoing solvency. Additionally, a
guarantee fund, created by mandatory contributions from all insurance
companies is used to bail out any insurance company, which might be in
financial trouble. This guarantee fund does not imply that firms can charge
whatever they wish to their consumers. All insurance companies would
have an incentive to monitor the activities of their rival peer firms. This is
because insolvency of any insurance company would entail a price, which
Insurance sector of India.



35

all the insurance companies would have to shoulder. Peer review of
accounts can also be institutionalized.
IRDA can have several ways for early detection of a potential
insolvency. For example, in the USA there is an Insurance Regulatory
Information System (IRIS) that regularly computes certain key financial
ratios from financial statements of firms. If some of these ratios fall outside
given limits the company is asked to take corrective action. Insolvency can
also arise out of reinsures abandoning insurance companies in the lurch, as
witnessed in the USA in 1980’s. Reinsurance is a bigger business dominated
by large international reinsurers. Such litigation between reinsurer and
insurance companies involves cross boundary legalities and can drag on for
years. IRA must evolve a set of operational guidelines to deal with
reinsurance matters.
Insurance intermediaries such as agents, brokers, consultants and
surveyors are also under IRDA’s jurisdiction. IRDA has to evolve guidelines
on the entry and functioning of such intermediaries. Licensing of agents
and brokers should be required to check against their indulging in activities
such as twisting, rebating, fraudulent practices, and misappropriation of
funds. IRDA can also consider allowing banks to act as agents (as opposed
to underwriters) of insurers in mass base types of products. Given their
wide network of branches and their customer base, the banks can access
this market for insurance products and also earn commission income. The
incremental cost of providing such insurance products would be much
lower.
Insurance sector of India.



36

( c ) Promoting Growth in the Insurance Industry :
A society experiences many benefits from the spread of insurance
business. Insurance contributes to economic growth by enabling people to
undertake risky but productive activity. In the past,
growth of trade has been facilitated by the development of insurance
services. One only needs to look at the history of insurance to see how
evolution of insurance helped trade flows along various trade routes.
Promotion of insurance also provides for long-term funds, which are
utilized to fund big infrastructure projects. These projects typically have
positive externalities, which benefit society at large. IRDA can ensure
growth of insurance business with better education and protection to
consumers, and by making the insurance business a level playing field. They
can also support Indian insurance companies in the international field. IRDA
thus has to frame the rules, design procedures for enforcement and also
make operational guidelines. All this with virtually no relevant historical
data makes the task very difficult. An initial conservative approach (the
bloodhound) is justified since there is no prior experience to fall back on,
and it would be prudent to err by regulating more’ rather than less. As
experience accumulates, the IRDA can relax its initial harsh stance and
adopt a more accommodating stance (the watchdog). Regulation is always
an evolutionary process and experience constantly has to feed into policy
making. Care must be taken so that this process does not slow down and
cause regulatory lags. IRDA can also consider allowing banks to act as
agents (as opposed to underwriters of insurers in mass base types of
Insurance sector of India.



37

products. Given there wide network of branches their customer base, the
banks can access this market for insurance products and also commission
income. The incremental cost of providing such insurance products would
be much lower. Such a move of allowing banks to operate insurance
business and vice versa is consistent with a worldwide trend of greater
integration of banking and insurance. The major insurance markets in
South and East Asia are in varying degrees opposite. This range from
comparative free markets of Hong Kong and Singapore to increasingly more
liberal markets of South Korea and Taiwan to more densely regular
insurance sectors of Thailand and Malaysia.

LIBERALISATION OF INSURANCE INDUSTRY :

While no aspect of the reform process in India has gone smoothly
since its inception in 1991, no individual initiative has stirred the proverbial
hornets' nest as much as the proposal to liberalise the country's insurance
industry. However, the political debate that followed the submission of the
report by the Malhotra Committee has presumably come to an end with
the ratification of the Insurance Regulatory Authority (IRA) Bill both by the
central Cabinet and the standing committee on finance. This section traces
the evolution of the life insurance companies in the US from firms
underwriting plain vanilla insurance contracts to those selling sophisticated
investment contracts bundled with insurance products. In this context, it
brings into focus the importance of portfolio management in the insurance
business and the nature and impact of portfolio related regulations on
Insurance sector of India.



38

the asset quality of the insurance companies. It also provides a rationale for
the increased autornatisation of insurance companies, and the increased
emphasis on agent independent marketing strategies for their products. If
politicized, regulations have potential to adversely affect the pricing of
risks, especially in the non-life industry, and hence the viability of the
insurance companies. Finally, the backdrop of US experience provides some
pointers for Indian policymakers.

















Insurance sector of India.



39


INVESTMENT OF INSURANCE FUNDS :

Any reform of the insurance sector must necessarily consider aspects
related to the investment of insurance funds. Under sec 27A of the
insurance act and its application in the LIC act, the manner in which LIC can
deploy its funds is stated. Under the current guidelines, the LIC is required
to invest 75% of the accretions through a controlled fund in certain
approved investments. 25% of accretions may be invested by LIC for
investments in private corporate sectors, loans to policyholders,
construction and acquisition of immovable assets. These stipulations have
resulted in the lack of flexibility in the optimization of its risk and profit
portfolio.
It has been reported that the government is planning to offer greater
autonomy to LIC through the following:
It is proposed that the deployment of the balance of 50% of the funds will
be left to discretion of LIC. Similarly, it is proposed that the GIC will be
subject to the following guidelines:

CAPITAL NORMS FOR NEW INSURANCE COMPANIES :
One of the contentious issues raised by foreign companies seeking an entry
into the insurance sector in India is the minimum paid up capital
requirements. The Malhotra committee (1994) recommended

Insurance sector of India.



40

Rs 100 crores as the norm. The multilateral insurance working group (an
industry forum representing most of the interested foreign and Indian
companies seeking an entry into the insurance sector) has recommended
Rs. 50 crore. The IRA is also reported to considering a
graded pattern for capitalization of the companies keeping in mind the
volume of business likely to be handled by them.

The Insurance Potential :

The main reason why the leading insurance companies in the world
and the leading corporate group in India have shown a keen interest in the
insurance sector, is the vast potential for future business. Restricted, as the
market has been, through the operations of the two monopolies (LIC and
GIC), it is generally felt that the sector can grow exponentially if it is opened
up. The decade 1987-97 has witnessed a compounded growth rate of
marginally more than 10% in life insurance business. LIC predicts for itself
that its business has potential to grow by 16.27% p.a. in a decade 1997-
2007 (LIC, 1997).
If we take a look at insurance coverage index for the age group of 20-59
years a considerable gap between India and other countries in Asia can be
observed. In this scenario, naturally insurance companies see a vast
potential.


Insurance sector of India.



41

THE ROLE OF PORTFOLIO MANAGEMENT :

Portfolio and asset liability management are important for both life
and property liability insurance companies. However, the latter face the
problem that their liabilities are far more unpredictable than the liabilities
of the life insurance companies. For example, given a stable mortality table
and other historical data, it is easier to predict the approximate number of
death claims, than the approximate number of claims on account of car
accidents and fire. As a consequence of such uncertainty, and perhaps also
moral hazard stemming from reinsurance facilities, asset liability manage-
ment of property liability companies in the US has left much to be desired.
Hence, a meaningful discussion about the changing nature and role of
portfolio management for US's insurance companies is possible only in the
context of the experience of its life insurance companies. Although the role
of an insurance policy is significantly different from that of investments,
economic agents like households have increasingly viewed insurance
contracts as a part of their investment portfolio. This change in perception
has not affected much the status of the property liability or non life
insurance policies, which are still viewed as plain vanilla insurance contracts
that can be used to hedge against unforeseen calamities. However, the
perception about life insurance contracts has perhaps been irrevocably
altered, and it has changed the nature of fund management of insurance
companies significantly, forcing them to move away from passive portfolio

Insurance sector of India.



42

management to active asset liability management. The change in
perception of the households became apparent during the 1950s, when
stock prices rose sharply in the US. Given the steep increase in the
opportunity cost of funds, households shied away from whole life insurance
products and opted for term life insurance policies! During the earlier part
of a policyholder's life, the premium for a term insurance policy is lower
than the premium for a whole life policy. Hence it was in a (young)
household's interest to opt for term insurance, and invest the difference
between the whole life premium and term life premium in the equity
market. As a consequence, the life insurance companies were forced to
think about development of new products that could give the investors
returns commensurate with the pins in the stock market. The immediate
impact of the financial volatility on portfolio or asset liability management
came by way of a change in the design of the life insurance products. The
insurance companies started offering universal life, variable life, and
flexible premium variable life products. These policies bundled insurance
coverage with investment opportunities, and allowed policy holders to
choose the amount of their annual premium and/ or the nature of the
portfolio into which the premium would be invested. Most of these
contracts carried guaranteed Minim urn death benefits, but returns over
and above that were determined by the inflow of premia and the
subsequent investment experience. Some of the policies could also be
forced into expiration if the afore mentioned inflow and experience fell
below some critical minimum levels.
Insurance sector of India.



43


Further, policy loans were offered only at variable rates of interest. In other
words, the policyholders were increasingly co-opted into sharing market
and interest rate risks with the insurance companies. As a consequence of
these changes, which brought about a bundling of insurance and
investment products, portfolio management of life insurance companies
today is similar to that of a bank or non bank financial company. They have
to,
(i) look out for arbitrage opportunities in the market place both
across markets and over time,
(ii) use value at risk modeling to ensure that their reserves are
adequate to absorb market related shocks,
(iii) ensure that there is no mismatch of duration between their assets
and liabilities, and
(iv) ensure that the risk return trade off of their portfolios remain at
an acceptable level.
During the 1980s, the life insurance companies gradually reduced the
duration of the fixed income securities in their portfolio, thereby ensuring
greater liquidity for their assets. They also moved away from long term and
privately placed debt instruments and increasingly invested in exchange
traded financial paper, including mortgage backed securities. However,
while the increased liquidity of their portfolios reduced their risk profiles,
they also required active management of these portfolios in accordance
with the changing liability structures and market conditions. Today, while
Insurance sector of India.



44

life insurance companies compete for market share by changing the nature
and structure of their products, their viability is critically dependent on the
quality of their portfolio and asset liability management.

IMPLICATIONS OF COST MANAGEMENT :

As is the case with most competitive industries, profitability and
viability of a firm in the insurance industry significantly depends on its
market share, and its ability to minimise its cost of operations without
compromising the quality of its service and risk management. Perhaps the
easiest way to reduce cost is to reduce the cost of processing and
underwriting policy applications. In the US, the average cost of processing
and underwriting an application has been estimated to be in excess of US
$250. As a consequence, insurance companies have increasingly resorted to
replacement of personnel by computer based "expert" systems which apply
the vetting models used by the companies' (human) experts to a wide
range of problems." However, the US companies have found it more
difficult to reduce their cost of marketing and distribution. A significant part
of these expenses accrue on account of the commissions paid to exclusive
and/or independent agents, the usual rate of commission being 15 to 30
per cent, depending on the line of business. As such, independent agents
have greater bargaining power than the exclusive agents because they
"own" the insurance contracts held by the policyholders, and can switch
from one insurance company to another at will. These agents also benefit
Insurance sector of India.



45

from the perception that, as outsiders having bargaining power vis a vis the
insurance companies, they will be able to ensure better service for the
policyholders. In order to mitigate the cost related problem, insurance
companies in the US are increasingly looking at alternative ways to market
and distribute their products. Direct marketing has gained popularity, as
has marketing by way of selling insurance products through other financial
organizations like banks and brokers. These actions might lead to significant
reduction of cost of operations of insurance companies, but it is not
obvious as yet as to how the small policyholders will fare in the absence of
powerful intermediaries with bargaining power vis a vis the insurance
companies.

The Impact of Regulation :

While portfolio and cost management are important determinants of the
viability of insurance companies, the US experience indicates that the
nature and extent of regulation too plays a key role in determining the
viability of these companies. The insurance industry in the US has histori-
cally been one of the most regulated financial industries. The nature of
regulation of life insurance companies, however, has differed significantly
from the nature of regulation of property liability companies. Regulation of
the former has typically emphasized asset quality, while the regulation of
the latter has largely concerned itself with policyholder's "welfare." The
regulations had impact on the quality of bonds held by the life insurance
companies. New York's insurance regulatory laws require that life insurance
Insurance sector of India.



46

companies ensure that, for all bonds purchased by them, the companies
issuing the bonds have had enough earnings to meet debt obligations for
the previous five years. The bond issuing companies are also required to
have net earnings 25 per cent in excess of the annual fixed charges, and
they should not be in default with respect to either principal or interest
payments. Further, regulation of various states impose quantitative
restrictions on the amount of "risky" bonds that can be purchased by the
insurance companies. Finally, regulations of all states are subject to the life
insurance asset portfolios to the Mandatory Security Valuation Reserve
(MSVR) requirement. According to this requirement, which came into effect
in June 1990, life insurance companies are required to make mandatory
provisions for all corporate securities. The minimum provisioning, for A
rated and higher quality bonds, is 0.1 per cent of par value, and the
maximum provisioning of 5 per cent is required for Caa rated (or
equivalent) and lower quality bonds. If the issuer of a bond goes into
default, the relevant loss is adjusted against the MSVR account rather than
against the company's surplus.
Further, the non life industry has suffered significantly as a conse-
quence of changing legal ethos. In the recent past, the US courts have
retroactively granted citizen policyholders coverage against hazards, like
those from use of asbestos, that were not factored into the actual
insurance contract. As a consequence, the premia actually earned by the
property liability companies fell short of the "fair" prices of these contracts,
and hence these companies had to bear huge losses on account of these
Insurance sector of India.



47

policies. However, while politics and changing ethos might together have
dealt an unfair blow to the non life insurance companies, the importance of
regulation cannot be overemphasized. The cyclical nature of the firms’
profitability requires that they be monitored/regulated such that they are
not in default during the unfavorable phases of the cycle. The property
liability cycle is typically initiated by an exogenous shock which increases
the industry's profits. The higher profits enable the companies to
underwrite more policies at a lower price. During this phase, the insurance
market is believed to be "soft." The decrease in price during the soft phase,
in turn, reduces the profitability of the companies, and initiates the
downturn in the cycle leading to the "hard" phase. Hard markets are
characterized by higher prices and reduced volumes. Once the higher prices
restore the industry's profitability, the market softens again and the cycle
starts again.










Insurance sector of India.



48

RESTRUCTURING OF LIC AND GIC :

In the insurance sector as of today and in all probabilities for a long time to
come, LIC and GIC will form a very significant part. The reasons for these
are many.
Firstly, they have been in business for a long time and therefore, are in
position to know business conditions better than any new entrant.
Secondly, the network of branches and agents is large, deep and
penetrating, which will take a long time for any other entrant to replicate.
Thirdly, (especially the LIC), has a kind of government backing which instills
faith in all would-be policy holders, much more than a private company can
hope to generate. The envisaged private sector participation in the
insurance sector is unlikely to take this advantage away from LIC and GIC. In
the short run atleast. LIC and GIC will continue to command a very high
market presence and in the long run it will take a very good market player
to dislodge LIC and GIC from their prime positions. This also means that the
reform in insurance sector will necessarily mean the reform of LIC and GIC.







Insurance sector of India.



49

THE PRESENT STATE OF AFFAIRS :

YEAR S.A. NO OF POL. P.INCOME INVEST. L.FUND
(Rs.Crore) (Lacs) (Rs.Crore) (Rs.Crore) (Rs.Crore)

1992-93 178120 566.79 7146.24 20545 21511
1993-94 208619 608.73 8758.19 24631 25455
1994-95 254572 655.29 10384.91 45287 48789
1995-96 295758 709.60 12093.63 65254 68542
1996-97 344619 777.50 14499.50 85236 95255
1997-98 406583 845.29 20582.35 105000 110255
1998-99 459201 917.26 25478.32 120445 127390
1999-00 536450 1013.89 30545.65 146364 154040
2000-01 645041 1131.11 34207.78 175491 186024
2001-02 811011 1258.76 48963.60 216883 227008








Insurance sector of India.



50


GENERAL INSURANCE BUSINESS :

 Under Tariff ,Outside Tariff
 Fire Insurance, Burglary and Housebreaking
 Consequential Loss (fire policy) all Risk: Jewelry and Valuables
 Marine, Cargo and Hull insurance ,Television Insurance
 Motor Vehicle Insurance, Baggage Insurance
 Personal Accident (Individuals and group up to 500 persons)
Mediclaims
 Personal Accident (Air travel), Overseas Mediclaims
 Engineering Compensation Personal Accident (group over 500
people)
 Bankers’ Indemnity Policy - Bhavishya Arogya
 Carrier's Legal Liability
 Public Liability Act Policy







Insurance sector of India.



51

POINTERS FOR INDIAN POLICYMAKERS:

A significant part of the activities of the insurance industry of an
economy entails mobilization of domestic savings and its subsequent
disbursal to investors. At the same time, however, they guaranty minimum
payoffs to both individuals and companies by way of the put like insurance
contracts. As discussed above, these contracts can significantly affect
behavior of economic agents and, in general, are perceived to lead to
better outcomes for economies. Herein lies the importance of the viability
of insurance companies: insolvency/bankruptcy of an insurance company
can be fast transformed into a systemic problem in two different ways. The
part of the systemic crisis that can be attributed to the quasi bank like
function of a section of the insurance industry is easily understood.
However, even if an insurance company does not default on its credit and
investment related obligations, and merely reneges on its insurance obliga-
tions, the adverse impact of such default on the economy and the society at
large can be quite devastating. For example, it is not difficult to imagine the
closure of a company that had not made provisions for damages on account
of (say) product related liability because it had believed that it was pro-
tected from such damages by an insurance policy." The consequent
insolvency of the company can affect a number of banks and other
companies adversely, and a systemic problem will be precipitated. In other
words, the insurance industry in any country should be subjected to

Insurance sector of India.



52

regulations that are at least as stringent as, and perhaps more stringent
than those governing the activities of other financial organizations.
It is evident from the above discussion that decisions about what
constitutes acceptable portfolio quality and the extent of price regulation
hold the key to insurance regulation in a post liberalisation insurance
market. As the US experience suggests, insurance companies are usually
subjected to stringent asset quality norms. Indeed, while a part of their
portfolio might comprise of equity, mortgages and other relatively risky
securities, much of their portfolio is made up of bonds and. liquid (and
highly rated) mortgage backed securities. An Indian insurance company, on
,the other hand, is constrained by the fact that the market for fixed income
securities is very illiquid such that only gilts and AAA and AA+ rated
corporate bonds have liquid markets. At the same time, absence of a
market for liquid mortgage backed securities denies these companies the
opportunity to enhance the yield on their investment without significantly
adding to portfolio risk. This might not pose a problem in the absence of
competition, especially if the government helps to increase the returns to
the policyholders by way of tax breaks, but might pose a serious problem if
liberalization leads to "price" competition among a large number of
insurance companies It might be argued that if the insurance and pension
fund industries are liberalised, and if the fund managers of all these
companies indulge in active portfolio management, the liquidity of the
bond market will increase significantly. Such increase in liquidity across the
board would enable the fund managers to invest in investment grade bonds
Insurance sector of India.



53

of lower rating and thereby add to the average yield of their investment
without adding significantly to their portfolio risk. The problem, however, is
that till the imperfect character of the bond market is removed to a
significant extent, the insurance companies might either have to operate
with thinner margins or remain exposed to unacceptably high levels of
liquidity risk. It might, therefore, be prudent for the policymakers to impose
stringent capital and reserve norms on the insurance companies, in order
to ensure their viability in the short to medium run." Subsequent to
liberalization, the Indian insurance industry might also be at the receiving
end of regulations governing insurance prices / premia. Specifically, there
might be highly politicized interventions in the markets for workers'
compensation and medical insurance. The government might also be under
pressure to "regulate" the prices of infrastructure related lines like freight
and marine insurance. In principle, the risks associated with such liability
insurance policies may be hedged by way of reinsurance. But if the
reinsurers price the risks' accurately and the Indian insurance companies
are forced to underprice the risks, the margins of the insurance companies
will be affected adversely, thereby reducing their long term viability. In
view of these political and financial realities, it might be better to subsidies
the policyholders of politically sensitive lines directly or indirectly through
tax benefits, if at all, rather than distort the pricing of the risks themselves.
At the end of the day, it has to be realised that while competition enhances
the efficiency of market participants, the process of "creative destruction,"
Insurance sector of India.



54

This ensures the sustenance and enhancement of efficiency, is not strictly
applicable to the financial markets. Hence, while exit is perhaps the most
efficient option for insolvent firms in many markets, insolvency of financial
intermediaries’ calls for government action and usually affects the
governments' budgetary positions adversely. At the same time, other things
remaining the same, the risk of insolvency is perhaps higher for insurance
companies than for other financial intermediaries because of the option
like nature of their liabilities. Therefore, competition in the insurance
industry has to be tempered with appropriate prudential norms, regular
monitoring and other regulations, thereby making the robustness of the
industry critically dependent on the efficiency of and regulatory powers
accorded to the proposed Insurance Regulatory Authority.











Insurance sector of India.



55

SWOT ANALYSIS














Strength



Insurance having currently good market.



Risk protection is provided by this sector only.
Weakness
Unable to convince people about the products.
Insurance companies instability
Limited working capital
Products or services similar to competitors.
Opportunities
Technology is improving paperless transaction are available.
Busy life, customer need flexible and customizable policies.
Like mobile banking mobile insurance could be a hit.


Tax exemption.
Insurance sector of India.



56






















Weather cycles.
Threats
New substitute product emerging.
Increasing expenses and lower profit margins with hard on the smaller
agencies and companies.

Government regulations on issues like health care terrorism can quickly
change the direction on insurance.
Insurance sector of India.



57


Top three players in the Indian Insurance companies

1. Life Insurance Corporation of India
2. ICICI Prudential Life Insurance Co Ltd
3. Bajaj Allianz Life Insurance Co Ltd

1. Life Insurance Corporation of India

LIC still remains the largest life insurance company accounting for 64%
market share. Its share, however, has dropped from 74% a year before,
mainly owing to entry of private players with innovative products and
better sales force.

LIC experienced growth of only 5% during 2007-08 in new business
premium. It had an estimated 1.1 million licensed agents, with the private
insurers adding another 900,000.

LIC witnessed decline in sales by 24% for new business premium for the
first four months for the current financial year.

Total sales stood at Rs 10,797.1 crore during April-July as against new sales
of Rs 14,186.04 crore in the corresponding period last financial year.
Insurance sector of India.



58


This is was mainly due to slowdown in economy and crash of stock market.
Also, private companies are eating the share of LIC by introducing
innovative products.

Products in different market segment:
1. Insurance Plans:
As individuals it is inherent to differ. Each individuals insurance needs and
requirements are different from that of the others. LICs Insurance Plans are
policies that talk to you individually and give you the most suitable options
that can fit your requirement.

Children plan




Jeevan Anurag

Komal Jeevan

CDA Endowment Vesting At 21

Marriage Endowment Or
Educational Annuity Plan

CDA Endowment Vesting At 18

Jeevan Kishore

Jeevan Chhaya

Child Career Plan

Child Future Plan

Child Fortune Plus






Insurance sector of India.



59


Plans for handicapped dependents

Jeevan Aadhar

Jeevan Vishwas

Endowment assurance plans










The Endowment Assurance Policy

The Endowment Assurance Policy-Limited Payment

Jeevan Mitra(Double Cover Endowment Plan)

Jeevan Mitra(Triple Cover Endowment Plan)

Jeevan Anand

New Janaraksha Plan

Jeevan Amrit

Plans for high worth individual

Jeevan Shree-I

Jeevan Pramukh

Insurance sector of India.



60


Money back plans



Jeevan Bharati – I


Whole life plan



The Whole Life Policy

The Whole Life Policy- Limited Payment

The Whole Life Policy- Single Premium

Jeevan Anand

Jeevan Tarang





The Money Back Policy-20 Years

The Money Back Policy-25 Years

Jeevan Surabhi-15 Years

Jeevan Surabhi-20 Years

Jeevan Surabhi-25 Years

Bima Bachat

Special money back plan for women
Insurance sector of India.



61

Term assurance plan





Two Year Temporary Assurance Policy

The Convertible Term Assurance Policy

Anmol Jeevan-I

Amulya Jeevan-I

Joint life plan




Jeevan Saathi Plus

Jeevan Saathi


2. Pension Plans:

Pension Plans are Individual Plans that gaze into your future and foresee
financial stability during your old age. These policies are most suited for
senior citizens and those planning a secure future, so that you never give up
on the best things in life.



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Pension plan


Market Plus I

Jeevan Nidhi

Jeevan Akshay-VI

New Jeevan Dhara-I

New Jeevan Suraksha-I



4. Unit Plans:

Unit plans are investment plans for those who realise the worth of hard-
earned money. These plans help you see your savings yield rich benefits and
help you save tax even if you don't have consistent income.
Unit plan


Market Plus I

Profit Plus

Money Plus-I

Child Fortune Plus

Jeevan Saathi Plus

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5. Pension Plan
LIC’s Special Plans are not plans but opportunities that knock on your door
once in a lifetime. These plans are a perfect blend of insurance, investment and
a lifetime of happiness!
Golden jubilee plan health plan


New Bima Gold



Health Protection Plus

Special plan micro insurance plan


Bima Nivesh 2005

Jeevan Saral




Jeevan
Madhur


6. Group Scheme:
Group Insurance Scheme is life insurance protection to groups of people. This
scheme is ideal for employers, associations, societies etc. and allows you to
enjoy group benefits at really low costs.
Group scheme


Group LIC's Superannuation Plus

Group Term Insurance Schemes
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Group Insurance Scheme in Lieu Of EDLI

Group Gratuity Scheme

Group Super Annuation Scheme


Group Savings Linked Insurance Scheme

Group Leave Encashment Scheme

Group Mortgage Redemption Assurance Scheme

Gratuity Plus

Group Critical Illness Rider

Social security scheme




JanaShree Bima Yojana (JBY)

Shiksha Sahayog Yojana

Aam Admi Bima Yojana

7. Withdrawn Plans:


Jeevan Nischay


Wealth Plus


Jeevan Aastha


Jeevan Varsha

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65


Fortune Plus


Health Plus



2.ICICI Prudential Life Insurance Co Ltd

ICICI Pru is the biggest private life insurance company in India. It
experienced growth of 58% in new business premium, accounting for
increase in market share to 8.93% in 2007-08 from 6.97% in 2006-07. Total
premium collected increased to Rs 8,305.80 crore from Rs 5,254.64 in 2006-
07. Total number of policies sold went up by 49%, from 1,960,034 to
2,913,606 in 2007-08, with a market share of 5.73%. Renewal premium had
gone up by 101% to Rs.5,526 crore from Rs 2,751 crore. The company has
950 urban and 1,000 non-urban branches across the country. For the first
four months of current financial year, it reported growth of 45.3%.

Products in different market segment:

Life Insurance Plans:

Education Solutions
Wealth Creation plans
Protection Plans

Retirement Plans

Health Insurance Products

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Health saver
HealthAssure
Hospital Care II
Crisis Cover
3.Bajaj Allianz Life Insurance Co Ltd

Total new business premium collected by Bajaj Insurance was Rs 6,491crore
in 2007-08. The company reported a growth of 52% and its market share
went up to 6.98% in 2007-08 form 5.66% in 2006-07. The company ranked
second (after LIC) in number of policies sold in 2007-08, with total market
share of 7.36%. For the period of April – July 2008, total amount of new
insurance premium sold was Rs 1,197.95 crore as against Rs 1,075.93 in the
same period last year, experiencing a growth of 11.35%. Number of policies
sold dropped by around 3%. Bajaj Allianz Life has a strong distribution
network across the country with over 1000 branches spread over 950
towns. It plans to raise its capital base by infusing Rs 500 crore in next few
months to support its expansion plans.










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67






Products offered in different market segments:





UNIT LINKED


Regular Premium

New UnitGain II

Assured Gain



Single Premium

Shield Plus

Wealth Gain



PENSION


Annuity


Retirement

Retirement
Advantage RP

Future Income
Generator


TRADITIONAL


Endowment

Life Time Care

Super Saver



Money Back

CashGain



TERM
PLANS


New
Risk
Care

Term
Care



WOMEN
INSURANCE


House Wives

HEALTH


Family
CareFirst

Health Care

CHILDREN PLAN


ChildGain

YoungCare II

JUST
LAUNCH
ED


Invest
Plus
Premier

Group
Secure
Life

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THE CURRENT SCENARIO: EFFECTS ON POLICY HOLDERS :

The primary reasons for buying an insurance policy, whether life or
non-life is to protect us from vagaries of life. We do not invest in insurance
for returns; rather we invest in it for regrettable necessities. Though a large
proportion of policies available in the country provides for returns, but
nobody is looking for returns to the inflation rate. Some people do look for
tax concessions, but lots of things have changed now.
First, tax rates are not so high as they used to be.
Secondly, concessions are still limited to a 20% tax shield.
Finally, other tax saving schemes, like public provident fund offers better
returns. So what does insurance offer, perhaps peace of mind, but even
that takes time, due to poor claim performance. In India insurance is sold
and not bought. Life Insurance Corporation has nearly eighty products, but
investors know only about a handful. That’s because the agents of LIC push
policies with the highest premium to pocket a higher premium. Same is the
case with General insurance. Companies offering General insurance
products-like medical, housing, motor and industrial insurance- have more
than 150 products to sell. But awareness is even lower than life insurance
products. It becomes obvious that GIC lacks the marketing results.
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Change whether public sector companies like it or not change is the around
the corner. General insurance sector will soon be opened up to private and
foreign competition. The potential for the new entrants is immense; life
and non-life premiums add up to around 2% of the GDP, where as the
global average stands at 8%. Indians as such have a high savings rate and
bridging the existing gap points at immense potential.

What does this mean for the consumer?

Insurance companies will introduce more term policies. These
policies provide protection for a specified time period, and do not offer any
returns. These will cover simple requirements of the insurance for the
investor. In effect term policies translates into low premium outgo, which
frees the capital for investment into other investment vehicles, which offer
better returns. Currently term policies constitute only1% of the total
number of policies issued by LIC, while the global average is 15-20 per cent.
Apart from the plain vanilla policies, new entrants will also offer consumers
a choice of products with low premiums. Endowment policies will change
too. The insurer, in line with his precise risk appetite, will be able to invest
in a variety of indices or sector specific where in the returns would be
higher. Instead of current fixed returns schemes insurance companies will
issue unit linked schemes, indexed funds, or even real estate funds.
Another opportunity is offered by a pension contract. Here the options
offered could be indexed annuity, immediate annuity or a deferred annuity.
Insurance sector of India.



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The scope of new products is also immense in the non-life segment.
Companies would offer products for niche segment, like disability products,
workers compensation insurance, renter’s coverage and employment
practices liability insurance. The general insurance industry is expected to
grow at the rate of 25% per annum. Scared of new entries in the insurance
sector, GIC has started offering new policies like Raj Rajeshwari. It covers
disability from accidents, the accidental death of the spouse and legal
expenses resulting from the divorce. At present some of the good policies
offered to consumer with their respective benefits are.

PRODUCTS BENEFITS :

Pure term insurance (pure life without insurance policy.) Very low
premiums and effective risk coverage.
Disability policy Covers disability to a longer tenure to life time disability.
First to die policy Beneficial for a couple and low premium outgo.
Replacement policy Saves the customer the trouble of making claims and
repurchasing the products.
Flexibility in Home insurance policy Policyholder has the flexibility of
choosing one of the risk covers instead of the entire package.

CHANNELS :

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Insurance companies will also get savvy in distribution. Enhanced
marketing thus will be crucial. Already many companies have full operation
capabilities over a 12-hour period. Facilities such as customer service center
are already into 24-hour mode. These will provide services such as motor
vehicle recovery. Technology will also play a important role on the market.
Effects of technologies are discussed in another section.

RURAL AREAS :

According to Malhotra committee report the penetration of
insurance in India is around 22%. This indicates that a vast majority of rural
population is not covered. Though GIC offers many products for this
segment like, crop policy, silk worm policy etc, But due to poverty majority
of the population cannot offered to get insured. Despite this, new entrants
are hopeful of covering the vast tracts of rural masses.









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CONCLUSION

Insurance industry in India has now been through a cycle involving high
growth and more recent moderation. The next wave of growth will be of
different nature and complexity, led by players who change the market
dynamics through innovation. With a decade of experience and learning
about customer behavior and business economics, Indian insurers are well-
placed to select and diffuse innovative ideas. However, this would require
that insurers bring about fundamental difference in mindset on how they
perceive the role of innovation in achieving profitable growth. The insurers
will need to align the people strategies to create a culture of generating
new ideas and implementing those using optimal resources. Insurers have
the choice of adopting innovation and leap ahead or lag behind.






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BIBLIOGRAPHY

 www.irda.com
 http://www.bajajallianzlife.co.in/
 www.economywatch.com
 http://economictimes.indiatimes.com/Personal-Finance/Insurance
 www.licindia.com.
 The Insurance Sector: ICFAI (Institute of Charter Financial
Analyst of India.
 www.thehindubusinessline.com