Service sector in recent years – with special reference to Insurance services

and its welcoming effects on Foreign Direct Investments

Abstract

An efficient financial sector is an engine for economic growth. It converts the fuel of savings into
kinetic energy for the economy. The Insurance industry which is at the core of the financial sector
must take the lead hand in hand with banking sector. The reform process started in the 90's has given
the industry a great opportunity. With very few Greenfield industries on the financial horizon there is
an urgent need to look at new sectors. One such is the services sector.

As a part of its WTO obligations, India has opened up the insurance, banking, accounting and legal
services sectors by 1st January, 2005 to global competition. The banking and accountancy sector
opened up without much to-do. The insurance business had been completely controlled by the state
through the LIC and the GIC, till August, 2000, when the market opened up.

Immense potential - Opening up insurance will impact the economy in many ways. India has an
estimated insurable population of 425 million, but just five million life insurance policyholders and two
million health insurance policyholders. The penetration in industrial and general insurance is at similar
low levels. The insurance sector tends to grow twice - initially, thrice - as fast as GDP. So once the
new companies start operations, it could be boom time for the economy.

This brings us to the theme of this paper. Service sector in recent years – with special reference
to Insurance services and its welcoming effects on Foreign Direct Investments.

A brief study based on the inputs taken from various sources including IRDA website is enumerated
below about the potential opportunities involved and what are the benefits can be arrived out of the
changes happening in the field.

Prepared and Presented by:

Mr. E.P. Venkatesh,
Faculty, Department of Commerce,
Sri Bhagawan Mahaveer Jain College,
School of Graduate Studies, J.C.Road, Bangalore

Service sector in recent years - EPV Page 1 of 13

INTRODUCTION

The Indian Insurance Industry which has passed through momentous times in the last few years, is
now poised at a critical point. How it reacts to today's challenges will have far reaching
consequences. Asian manufacturers excelled in the last century by learning and improving
manufacturing methods of industrialized economies, Asian financial systems must learn to do the
same with financial services. This is particularly true of India's Insurance system. Our IT industry has
proved that it can provide services and products which can attract business purely on the basis of
efficiencies of price and performance. The power of our country's intellectual capital is demonstrated
by this and our financial sector need not lag behind.

Challenges and Opportunities in the days ahead

Today, our financial system is rapidly changing. Some of the features of this change are:

 Increasing sophistication of capital markets

 Emergence of global investments
 Industry consolidation
 Proliferation of new players entering the market

India's financial savings rate compares favourably with those of other emerging market economies :
Argentina 81%, Mexico 68% India 93%. However, private credit to GDP in our country is only 36%
whereas it is 130% in China and Korea and 145% in Malaysia.

An efficient financial sector is an engine for economic growth. It converts the fuel of savings into
kinetic energy for the economy. The Insurance industry which is at the core of the financial sector
must take the lead hand in hand with banking sector. The reform process started in the 90's has given
the industry a great opportunity. Not only must the sector become more efficient it must also identify
sectors having growth opportunities and devise strategies to move savings into these sectors. With
very few Greenfield industries on the financial horizon there is an urgent need to look at new sectors.
One such is the services sector.

This brings us to the theme of this paper. Service sector in recent years – with special reference
to Insurance services and its welcoming effects on Foreign Direct Investments
In exploring this theme, we shall cover

 An exploration of the opportunities in the service sector in India.

 A look at the potential involved in Insurance sector in India.
 ‘New economy’ investment opportunities
 Major reforms in Insurance sector and IRDA
 What does it mean to us?

The Services Sector – An overview

According to the World Development Indicators 2004 released by the World Bank, India's services
sector registered an average 7.8% growth per annum between 1990 and 2003 against 6.9% between
1980 and 1990 beating the global rate of 3.1%. India's services sector has emerged among the top
five fastest growing in the world during 1990- 2001.

Services Sector Statistics

The Services Sector constitutes a large part of the Indian economy both in terms of employment
potential and its contribution to national income. The Sector covers a wide range of activities from the
most sophisticated in the field of Information and Communication Technology to simple services
pursued by the informal sector workers, for example, vegetable sellers, hawkers, rickshaw pullers,
etc. The following broad grouping of activities can be considered to form part of the Services Sector:

Service sector in recent years - EPV Page 2 of 13

 Activities Comprising the Services Sector

(a) Trade

(b) Hotels and restaurants

(c) Transport including tourist assistance activities as well as activities of travel agencies and
tour operators

(d) Storage and communication

(e) Banking and insurance

(f) Real estate and ownership of dwellings

(g) Business services including accounting; software development; data processing services;
business and management consultancy; architectural, engineering and other technical consultancy;
advertisement and other business services

(h) Public administration and defence

(i) Other services including education, medical and health, religious and other community services,
legal services, recreation and entertainment services

(j) Personal services and activities of extra-territorial organisations and bodies

The Services Sector has been the most dynamic sector of the Indian economy, especially over the
last ten years. Table 7.1 shows the changes that have been taking place in the Services Sector over
the last few decades.

From a low level of 27.52 per cent of GDP in 1950-51, the share of services increased to 47.88 per
cent in 1999-2000. Between 1950-51 and 1990-91, the share of Services Sector in GDP rose by only
13.07 percentage points, which is an increase of about 0.33 percentage points per annum. However,
between 1990-91 and 1999-2000, the share had increased by 7.29 percentage points, which is an
increase of 0.81 percentage points per annum. Clearly, the rate of growth is significantly higher in the
1990s.

Sectoral Shares in GDP (in per cent)

Year Agriculture # Manufacturing Y Services*

1950-51 59.19 13.29 27.52
1960-61 54.74 16.61 28.65
1970-71 48.12 19.91 31.97
1980-81 41.82 21.59 36.59
1990-91 34.92 24.49 40.59
1991-92 34.08 23.93 41.99
1992-93 34.17 23.74 42.09
1993-94 33.54 23.69 42.77
1994-95 32.94 24.35 42.71
1995-96 30.58 25.47 43.95
1996-97 30.86 25.45 43.69
1997-98 29.03 25.20 45.77
1998-99 29.03 24.51 46.46

Service sector in recent years - EPV Page 3 of 13

 1999-2000 27.49 24.63 47.88
2000-2001 27.04 24.84 48.12
2001-2002 26.24 24.62 49.14
Notes: Among the following symbols,
# includes forestry and logging, fishing, mining and quarrying;
Y includes construction, electricity, gas and water supply;
* includes (a) transport, communication and trade;
(b) banking and insurance, real estate, dwellings and
business services; and
(c) public administration and defence and other
services.
Source: Economic Survey 2002-2003.

Introduction about insurance sector in India

As a part of its WTO obligations, India has opened up the insurance, banking, accounting and legal
services sectors by 1st January, 2005 to global competition. The banking and accountancy sector
opened up without much to-do. The opposition has been in the legal and insurance sectors. In India,
the insurance business had been completely controlled by the state through the Life Insurance
Corporation of India and the General Insurance Corporation of India, till August, 2000, when the
market opened up.

The recommendations of the Malhotra Committee on insurance sector reform led to the constitution of
the interim Insurance Regulatory Authority. However, the actual regulation and operation of the
insurance business remained with the statutory corporations, where bureaucratic red tape combined
with supreme inefficiency in service, had rendered the benefits flowing to the insured both
inaccessible and ineffectual.

The first initiative taken to ameliorate this state of affairs — the Insurance Regulatory Authority Bill,
1998 — lapsed; partly, because of the government’s concurrent intent to amend the LIC and GIC
Nationalisation Act, which actually threatened vested interests. Further, since the proposed opening
up was to foreign investors as well, it brought upon itself the wrath of the swadeshis. In this context,
the passage of the Insurance Regulatory and Development Authority Act, 1999 must be seen as a
victory for sound reason.

The IRDA Act was ultimately passed with the objective of promotion, regulation of growth of the
industry, and protection of interests of the insured parties. The IRDA Act provides for assumption of
the powers and functions of the interim IRA, financial authority of accounts and audit of the central
government, both over the private entrants and existing government companies. Rural and social
sector insurance has been made mandatory for all insurers with stringent penalty for private
companies for default, and strict solvency norms. A minimum equity capital of Rs 100 crore has been
stipulated for new entrants. Norms have also been laid down for deployment and investment of funds
by companies to the extent of 65 per cent in Government securities and infrastructure.

So far, the IRDA has moved relatively quickly and promulgated regulations on the above issues, as
well on actuarial appointment and duties, licensing of agents, disclosure norms, preparation of
financial statements, etc. So what’s holding up things? Why, when more than 100 private companies
were nationalised, are there only a dozen new entrants, that too mostly in life insurance? Why is the
customer still shy? Why are new products not particularly innovative? True, waters need to be tested
before taking the plunge. But in addition, two dimensions of the Act need consideration.

Section 14 (2)(i) empowers the regulator to “control and regulate the rates, advantages, terms and
conditions that may be offered by insurers in respect of general insurance business “; Section 14 (2)
(k) permits him to “regulate investment of funds by insurance companies”. Each provision taken by
itself is unexceptionable. The first to prevent misuse of monopoly powers in pricing, and the second
for prudential reasons. Taken together, however, they can severely restrict the scope for differentiation
and innovation. In such a situation, the sheer size and reach of the incumbents, GIC and its off
springs , can prove a serious dampener to new entrants. After all, there is a limit to what can be

Service sector in recent years - EPV Page 4 of 13

achieved simply by providing better service for the same product. Insurance companies need at least
one degree of freedom to be able to compete. Tying both hands defeats the effort at liberalisation

But a first step has been taken. And, the removal of road blocks is a sequential process. But must we
cross each major hurdle by dint of trial and error, or can we at least avoid the more obvious ones
upfront? The onus is now on the regulator. He can choose not to exercise some of the powers vested
in him by the Act and thereby justify the second part of his appellation — the Insurance Regulatory
and Development Authority.

Insurance division – ministry of finance

Major Functions

The functions of the Division include formulation of policy for the orderly growth of the Insurance
sector. These, inter alia, include administration of the Insurance Act, 1938, the Life Insurance
Corporation Act, 1956 and General Insurance Business (Nationalisation) Act, 1972, Insurance
Regulatory and Development Authority (IRDA) Act, 1999 and other related Acts; monitoring of the
performance of the nationalised insurance companies, framing of rules and regulations in respect of
service conditions of employees of nationalised insurance companies; framing of Rules in respect of
terms and conditions of services of the Chairpersons and Members of Insurance Regulatory and
Development Authority (IRDA) and appointment of the Members of IRDA, co-ordination of vigilance
matters in the nationalised insurance industry; and appointment of Chief Executives and Directors on
the Boards of nationalised insurance companies.

Life Insurance Corporation of India (LIC)

Life Insurance Corporation of India (LIC) was formed in September, 1956 by an Act of Parliament, viz.,
Life Insurance Corporation Act, 1956, with capital contribution from the Government of India. The then
Finance Minister, Shri C.D. Deshmukh, while piloting the bill, outlined the objectives of LIC thus: to
conduct the business with the utmost economy, in a spirit of trusteeship; to charge premium no higher
than warranted by strict actuarial considerations; to invest the funds for obtaining maximum yield for
the policy holders consistent with safety of the capital; to render prompt and efficient service to policy
holders, thereby making insurance widely popular.

Since nationalisation, LIC has built up a vast network of 2,048 branches, 100 divisions and 7 zonal
offices spread over the country. The Life Insurance Corporation of India also transacts business
abroad and has offices in Fiji, Mauritius and United Kingdom. LIC is associated with joint ventures
abroad in the field of insurance, namely, Ken-India Assurance Company Limited, Nairobi; United
Oriental Assurance Company Limited, Kuala Lumpur and Life Insurance Corporation (International)
E.C. Bahrain. The Corporation has registered a joint venture company in 26 th December, 2000 in
Kathmandu, Nepal by the name of Life Insurance Corporation (Nepal) Limited in collaboration with
Vishal Group Limited, a local industrial Group. An off-shore company L.I.C. (Mauritius) Off-shore
Limited has also been set up in 2001 to tap the African insurance market.

General Insurance

General insurance business in the country was nationalised with effect from 1 st January, 1973 by the
General Insurance Business (Nationalisation) Act, 1972. More than 100 non-life insurance companies
including branches of foreign companies operating within the country were amalgamated and grouped
into four companies, viz., the National Insurance Company Ltd., the New India Assurance Company
Ltd., the Oriental Insurance Company Ltd., and the United India Insurance Company Ltd. with head
offices at Calcutta, Bombay, New Delhi and Madras, respectively. General Insurance Corporation
(GIC) which was the holding company of the four public sector general insurance companies has
since been delinked from the later and has been approved as the "Indian Reinsurer" since 3 rd
November 2000. The share capital of GIC and that of the four companies are held by the Government
of India. All the five entities are Government companies registered under the Companies Act.

Service sector in recent years - EPV Page 5 of 13

The general insurance business has grown in spread and volume after nationalisation. The four
companies have 2699 branch offices, 1360 divisional offices and 92 regional offices spread all over
the country. GIC and its subsidiaries have representation either directly through branches or agencies
in 16 countries and through associate/ locally incorporated subsidiary companies in 14 other
countries. A wholly- owned subsidiary company of GIC, i.e. Indian International Pte. Ltd. is operating
in Singapore and there is a joint venture company, viz. Kenindia Assurance Ltd. in Kenya. A new
wholly owned subsidiary called New India International Ltd., UK has also been registered.

MAJOR POLICY CHANGES

Reforms in Insurance Sector

Insurance sector has been opened up for competition from Indian private insurance companies with
the enactment of Insurance Regulatory and Development Authority Act, 1999 (IRDA Act). As per the
provisions of IRDA Act, 1999, Insurance Regulatory and Development Authority (IRDA) was
established on 19th April 2000 to protect the interests of holder of insurance policy and to regulate,
promote and ensure orderly growth of the insurance industry. IRDA Act 1999 paved the way for the
entry of private players into the insurance market which was hitherto the exclusive privilege of public
sector insurance companies/ corporations. Under the new dispensation Indian insurance companies
in private sector were permitted to operate in India with the following conditions:

 Company is formed and registered under the Companies Act, 1956;

 The aggregate holdings of equity shares by a foreign company, either by itself or through its
subsidiary companies or its nominees, do not exceed 26%, paid up equity capital of such
Indian insurance company
 The company’s sole purpose is to carry on life insurance business or general insurance
business or reinsurance business.
 The minimum paid up equity capital for life or general insurance business is Rs.100 crores.
 The minimum paid up equity capital for carrying on reinsurance business has been prescribed
as Rs.200 crores.

The Authority has notified 27 Regulations on various issues which include 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 etc.
Applications were invited by the Authority with effect from 15 th August, 2000 for issue of the Certificate
of Registration to both life and non-life insurers. The Authority has its Head Quarter at Hyderabad.
Detailed information on IRDA is available at their web-site www.irdaindia.org

Insurance companies

IRDA has so far granted registration to 12 private life insurance companies and 9 general insurance
companies. If the existing public sector insurance companies are included, there are currently 13
insurance companies in the life side and 13 companies operating in general insurance business.
General Insurance Corporation has been approved as the "Indian reinsurer" for underwriting only
reinsurance business. Particulars of the life insurance companies and general insurance companies
including their web address is given below:

Service sector in recent years - EPV Page 6 of 13

 LIFE INSURERS Websites

Service sector in recent years - EPV Page 7 of 13

Public Sector

1. Life Insurance Corporation of India www.licindia.com

Private Sector

2. Allianz Bajaj Life Insurance Company Limited www.allianzbajaj.co.in

3. Birla Sun-Life Insurance Company Limited www.birlasunlife.com

4. HDFC Standard Life Insurance Co. Limited www.hdfcinsurance.com

5. ICICI Prudential Life Insurance Co. Limited www.iciciprulife.com

6. ING Vysya Life Insurance Company Limited www.ingvysayalife.com

7. Max New York Life Insurance Co. Limited www.maxnewyorklife.com

8. MetLife Insurance Company Limited www.metlife.com

9. Om Kotak Mahindra Life Insurance Co. Ltd. www.omkotakmahnidra.com

10. SBI Life Insurance Company Limited www.sbilife.co.in

11. TATA AIG Life Insurance Company Limited www.tata-aig.com

12. AMP Sanmar Assurance Company Limited www.ampsanmar.com

13. Dabur CGU Life Insurance Co. Pvt. Limited www.avivaindia.com

GENERAL INSURERS

Public Sector

1. National Insurance Company Limited www.nationalinsuranceindia.com

2. New India Assurance Company Limited www.niacl.com

3. Oriental Insurance Company Limited www.orientalinsurance.nic.in

4. United India Insurance Company Limited www.uiic.co.in

Private Sector

5. Bajaj Allianz General Insurance Co. Limited www.bajajallianz.co.in

6. ICICI Lombard General Insurance Co. Ltd. www.icicilombard.com

7. IFFCO-Tokio General Insurance Co. Ltd. www.itgi.co.in

8. Reliance General Insurance Co. Limited www.ril.com

9. Royal Sundaram Alliance Insurance Co. Ltd. www.royalsun.com

10. TATA AIG General Insurance Co. Limited www.tata-aig.com

11. Cholamandalam General Insurance Co. Ltd. www.cholainsurance.com

12. Export Credit Guarantee Corporation www.ecgcindia.com

13. HDFC Chubb General Insurance Co. Ltd.

REINSURER

1. General Insurance Corporation of India www.gicindia.com

'New Eonomy' investment opportunities

Service sector in recent years - EPV Page 8 of 13

  In addition to IT, finance, telecommunications, health, education, environmental services,
biotechnology, media and entertainment also can offer attractive direct investment
opportunities. The report found that since the 1990s reforms, only the service sector has
grown more considerably strongly than in the 1980s; manufacturing growth has improved
only marginally, while infrastructure and mining have grown more slowly.
 With total revenue expected to reach about US$11.4 billion in 2000-01, India's IT sector is
flourishing; this is due the country's huge pool of skilled, relatively low cost IT engineers
and strongly supportive government policy. The software sector is the fastest growing
major component of the IT industry; its US dollar measured revenue expanded 46 per cent
per year for the past 7 years to reach US$7.4 billion in 2000-01. It now employs about 340
000 people and exported about 70 per cent of its output last year. Although India trains
between 35 000 and 50 000 new software engineers each year, with the sector's rapid
growth, demand is outstripping supply and skilled staff shortages have pushed up IT
engineer salaries by around 20 per cent per year since the late 1990s. This situation will
prove a challenge to the longer-term viability of the sector in India, although the Indian
government is responding encouragingly to this challenge.
 Another 70 000 Indian workers now are employed in the even faster growing IT enabled
sector (call centres, back office support, data entry, etc); its revenue more than tripled over
the last two years. This sector should face less labour shortages, as it has a much larger
pool of potential employees to draw from, so may have even stronger growth prospects
than software.
 The financial sector increasingly is open to foreign investment and is growing
strongly. While banking has been constrained by a strong public presence,
overstaffing and non-performing assets, the Government is working to address
these issues. Investors may find the best opportunities lie in partnering recent
private Indian financial sector entrants.
 The telecommunications sector also is growing strongly; recent reforms promise opportunities
for private companies to compete more effectively with public incumbents and provide
services and equipment to this sector; foreign investor interest in this sector is increasing
again.
 Health, education, biotechnology, environmental services, media and entertainment are other
fast growing 'new economy' sectors where recent liberalisation and stronger market growth
should allow Australian firms with strong capabilities in these sectors to invest profitably.

FOREIGN INVESTMENT REFORMS

 India's gradual economic liberalisation, growing incomes, generally low labour costs and the
widespread use of English are some major attractors for foreign investors. Key sectors of
manufacturing, mining, infrastructure and software now permit 100 per cent FDI, though
many sectors still impose foreign ownership limits below 100 per cent.
 However, with new FDI under US$2.5 billion in 2000, India still receives low per capita FDI
inflows by emerging economy standards. The challenging business environment and
remaining policy restrictions constrain sustained inflows into agriculture and, to a lesser
extent, infrastructure, manufacturing and mining.

Increasingly, fast growing 'new economy' services sectors, particularly the export oriented information
technology, IT, sector and several high performing states, are attracting the majority of foreign
investment approvals.

Service sector in recent years - EPV Page 9 of 13

Insurance Reforms & IRDA

In line with the global trend of deregulation and the economic reforms in India, and based on the
recommendations of the Malhotra Committee, the Government of India passed The Insurance
Regulatory and Development Authority Act in 1999. The Act has paved the way for the birth of the
Insurance Regulatory and Development Authority (IRDA) and the result is:

 Indian insurance sector opened up for private participation

 a level playing field for state and private insurers
 foreign equity investment upto 26% of the total paid-up capital

IRDA-The harbinger of reforms

IRDA - central to the insurance reform process - is an autonomous, regulatory authority endeavoring
to protect the interests of policy holders; and regulate, promote & ensure orderly growth of the
insurance industry. The IRDA has been empowered to carry out several functions, including:

 promoting and regulating professional organisations connected with insurance & reinsurance
 improving the efficiency while conducting the insurance business
 establishing a code of conduct for players in insurance
 determining the specification of accounts, and the manner in which funds are invested
 laying down prudential norms for investment for both life and general insurance companies

Contemporary development:

IRDA to exclude FII holding in calculation of FE cap

The first official indication that the government is proposing to exclude the FII holdings from the
calculation of foreign equity came from reports that the government is inclined to exclude the FII stake
from the calculation of 26 percent foreign equity cap set for the insurance sector.

However a caveat added later shows that the treatment will be extended only to FIIs whose
subsidiaries do not have an interest in the insurance sector. However this might not constitute exactly
good news for a company like HDFC where Standard Life has a shareholding, both as a JV partner as
well as a FII. The combined shareholding of Standard Life through the FDI and FII route in HDFC
already exceeds the foreign investment cap of 26 percent set for the insurance sector.

Ever since the government has set the 26 percent sectoral cap for foreign investments, there has
been a debate on what will happen to financial market players like ICICI and HDFC which have
foreign equity stakes exceeding 26 percent.

The rationale behind IRDA's thinking is probably that FIIs generally take equity for investment
purposes, instead of management control. IRDA may not be inclined towards allowing FIIs to acquire
equity stake in domestic ventures. As long as the FII-FDI combination is not used to wrest
management control, FII investment is all right. But if the foreign insurer seeks to circumvent the
sectoral cap by trying to control the company indirectly through FII positioning, then it stands no
chance.

The rules made it mandatory for all companies to get IRDA's permission for the transfer of shares
beyond one percent of the company's share capital. The IRDA Act requires insurance rules to be
finalised in consultation with the advisory committee and are expected to take care of overseas
mergers and acquisitions in insurance ventures and their impact on the Indian market.

Flash News

IFC keen to invest in insurance sector

Service sector in recent years - EPV Page 10 of 13

 Friday, 06 January , 2006, 08:57 (sify business news)
Bangalore: The International Finance Corporation (IFC), the private sector funding arm of the World
Bank, has expressed interest in investing in the country's insurance sector.

IFC's Chief Investment Officer for South Asia, Anitha George, said, "The main problem is with the FDI
ceiling in the sector."

IFC's investments are treated as foreign direct investments. Foreign investment in this sector is
currently capped at 26 per cent. IFC is interested in investing in both the life and non-life sectors,
George told Business Line.

IFC has already made substantial equity investments in the manufacturing and financial sectors. It
has so far invested about $413 million in some of the private sector banks and non-bank finance
companies. However, in other parts of the world, IFC already has substantial investments in the
insurance sector. George said, "We have spoken to the government and will wait for a liberalisation in
the ceiling before taking a call."

However, it is not IFC alone that has been pushing for relaxing the FDI ceiling in the insurance sector.
Almost all foreign and domestic joint venture partners have sought a revision in the ceiling to upwards
of 49 per cent. One of the major factors that have prompted insurance companies for seeking a
revision in the cap was the need for additional capitalization in their respective joint ventures.

Industry sources said that additional capitalisation is required to sustain the growth rate. Premium
collections of the non-life insurance sector were up 15.5 per cent on year-on-year basis, with the
private sector alone growing by 55 per cent, according to figures released by the Insurance
Regulatory and Development Authority (IRDA).

In the life sector, the premium growth of the private sector was 30 per cent though the entire industry
had grown by close to 170 per cent.

Premium accretions automatically lead to an increase in the insurable liabilities with a direct impact on
the solvency margins prescribed by the IRDA.

The private sector, the sources said, has been finding it difficult to capitalise without a relaxation in the
ceiling.

Moreover, additional capital is also required to offset the depreciation of investments, especially
government securities. Insurers have been hit by the sharp rise in the yields by close to 100 basis
points over the last one-year. This has also impacted the solvency margin, they added.

Conclusion

Service sector in recent years - EPV Page 11 of 13

There has been much discussion in recent years about India’s services revolution and its growing
global presence in services. Growth in services has consistently surpassed growth in other sectors of
the Indian economy in the past decade. Today, services constitute around 50% of India’s GDP. India’s
service exports recorded the highest growth rate among all countries in the past five years. India
accounts for 1.4% of world services trade compared to 0.9% of world merchandise trade. The
phenomenal growth rates in India’s IT sector and India’s leading position as an offshoring destination
are proof of the country’s potential in services. The IT and BPO sectors today employ about a million
persons and their contribution to employment will rise as more work is offshored to India. Other
services such as telecommunications and transport have also experienced a growth spurt since their
deregulation. The service sector has also played an instrumental role in attracting FDI. Hence, there
has definitely been a services revolution in India and the sector has played an important role in
integrating India with the world economy.

Insurance - Growth Sector

The good news about the insurance sector is - that with globalisation and deregulation worldwide,
insurance can reach more people. Besides, with increasing competition, it offers more innovative
products and services to individuals as well as the industry. The bad news is - that the business is
more complex than ever. But the best news is - that the sector is opening up several avenues for
professionals.

Insurance, worldwide, is one of the most potent financial sectors. In 2000, the global insurance
industry recorded revenues of $2244.30 billion. With the rapid development of technology, changing
consumer behaviour and increasing private participation & foreign equity, insurance companies have
shifted their focus to providing greater value to the customer with a wide range of products. And this is
a big challenge.

Devising specific strategies to reach out to specific segments of the market, different countries and
social strata, is one aspect of the challenge. The other more complex one entails - designing the
products, marketing them, ensuring the smooth selling of products, collecting premiums, managing
claims, managing & investing the funds and managing a vast enterprise.

Imagine India!

The picture gets even more challenging. India, a country of over one billion people and an estimated
middle class population of over 300 million, has a low level of insurance penetration. While the
National Council of Applied Economic Research (NCAER) estimates the insurable population in India
to be 240 million, the insured population is a mere 70 million. In the year 2000, the international
average of life insurance premium as a percentage of GDP was 7.4%; in India it was less than 2%.
This is even more surprising when looked against the fact that India is traditionally a country where
people believe in saving, and the gross domestic savings account for 26% of India's GDP.
Keeping in mind the parameters of annual growth rate in GDP and population growth, NCAER
estimates the insurable population to grow to 650 million by 2005. Now, imagine the potential of the
insurance industry in this scenario, with the continuous march of economic reforms, industrial growth
and, most importantly, deregulation of the insurance sector.

The Industry matrix

Monopoly has ended, and dramatic changes are already palpable. There is an increasing awareness
of insurance across the country. Today's insurance companies operate in a marketplace that is
extremely competitive. New entrants focus on improving customer service and increasing the
coverage of the insurance industry. Old players are struggling to counter the competition. Many
insurers are also looking beyond traditional markets and distribution channels for opportunities.
Sectors of the insurance business that offer substantial potential include health insurance and credit
risk insurance (directly affected by the increased growth in the banking sector). The pensions
business also promises substantial volumes in the future. But that isn't all. With the Government
hinting at further liberalisation of the banking sector, the prospect of banks entering the insurance

Service sector in recent years - EPV Page 12 of 13

market directly is high. "Bancassurance" will develop when new entrants adopt banks as local
partners.

Insurance companies are trustees to huge amounts of public money collected in the form of
premiums. Hence insurance professionals require an unusually high level of ethics and integrity. They
must manage complexity at several levels - strategy, advisory services, marketing, loss assessment,
third party administration, operations & finances audit, investment management, compliance with
IRDA etc. What they need is - specialised knowledge of insurance, an expertise in finance &
accounts, and the ability to assess, plan and manage money.

Needless to say, there is a dearth of professionals who can play this role.

What does this mean to us?

It means more scope and a larger role for professionals … to translate the potential for growth into a
reality; to play a crucial role in the development and success of the industry; to add their touch of
professional acumen and service for the many existing and emerging domains in this sunrise sector.
It means… opportunities unlimited, for commerce professionals, who can acquire the cutting-edge
knowledge and a clear perspective of the industry as it evolves.

Sources:
 www.irdaindia.org
 www.banking.nic.in
 www.licindia.com
 www.sify.com
 www.insurancemagic.com
 Reports in Economic Times, Financial Express, Hindu Business Line
 A media release from the Australian Department of Foreign affairs and Trade
 Prasad, Eswar, Kenneth Rogoff, Shang-Jin Wei, and M. Ayhan Kose (2003). “Effects of
Financial Globalisation on Developing Countries: Some Empirical Evidence”, mimeo, International
Monetary Fund

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