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Insurance

Globalization of Indian insurance sector issues and challenges
A. Vijayakumar

The author argues that opening up of the insurance sector will foster competition, innovation and product variations. However, in this context one has to consider various issues at stake including demand for pension plan, separateness of banking from insurance sector, role of IT, possible use of postal network for selling insurance products and above all, the role of Insurance Regulatory Authority.

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he basic human trait is to be averse to the idea of taking risks. There is always an urge to minimize the risks and take protection against possible failure. The risk includes fire, the perils of sea, death and accidents and burglary. Any risk may be insured against at a premium commensurate with the risk involved. Thus collective bearing of risk is insurance. Insurance, whether life or non-life, provides people with a reasonable degree of security and assurance that they will be protected in the event of a calamity or failure of any sort. There are number of forces driving the services sector today. Five environmental variables that affect all industries-customers, competitors, government, technology and globalisation-are forcing rapid changes in the service sector. In addition, there are four factors of particular importance to service providers-change in how quality is perceived, cost control, customer services and the new definitions of the customer.
Reader in Commerce, Erode Arts College, Erode - 638 009, Tamil Nadu.

Services are relatively intangible, produced and consumer simultaneously and often less produced and consumer simultaneously and often less standardized than goods. These unique characteristics of services present special challenges and strategic marketing opportunities to the service marketers. The real competition between the service marketers is set on after globalisation of the Indian economy. The service marketing organization has to adopt professional management and its marketers have to imbibe the qualities of professionalism in order to meet the expectation of the customers. Hence, in this paper an attempt has been made to discuss the penetration of insurance industry, key issues in insurance and Emerging Areas of insurance, which is one of the leading service sector in our country. Origin and Growth of Insurance sector Insurance in modern form originated in the Mediterranean during

the 13th century. The earliest references to insurance have been found in Babylonia, the Greeks and the Romans. Marine insurance is the oldest form of insurance followed by life insurance and fire insurance. Life insurance activity in its modern form started in India in 1818 to provide for English widows when oriental life Insurance Company was incorporated at Calcutta, followed by Bombay Life Assurance Company in 1823 and Tritron Insurance Company for General Insurance in 1850. Insurance regulation formally began in India through the passing of two acts, the Life Insurance companies Act of 1912 and the Provident Fund Act of 1912. However the first comprehensive legislation was introduced with the Insurance Act of 1938 that provided strict state control over insurance business in the country. After independence, the business of India Insurance grew at a faster place as competition amongst the Indian companies intensified. The decision of nationalization of life in-

There is no market research worth the name and computerization is woefully inadequate. The subsequent government moved an insurance bill but it was not passed. 1993 under the chairmanship of R. 3. 13% for south Africa.K. N. Insurance awareness among the general public is low. There is a dearth of innovative and buyer-friendly insurance products. Globalization of Insurance Sector - . They do not create products that the market wants. This was due to the following reasons. While per capita insurance premium in developed countries is very high. the Insurance Act was amended to allow for social control over the general insurance business. South Africa 2. the government set up an insurance returns Committee in April. $ 887 for Singapore. Malhotra.3%. 8. While Japan has 31%. Insurance covers are expensive. 1972 was promulgated. 12% for Korea. The insurance Premium as a Percentage ofGDP was 14% for Japan. GIC and strengthening the regulatory system. General Insurance followed suit and 1968. 4. 9. For instance. Subsequently in 1973. $ 823 for Hong Kong and $ 144 for Malaysia.. 5. which was referred back to a select committee of parliament after wards the government introduced the insurance regulatory Development authority (IRDA) Bill in parliament with some changes in the original structure the government of India created history on October private sector companies. 9% for UK and less than 2% in India in 1999 Similarly the insurance Premium as a percentage of Gross Domestic saving (GDS) was 52% for U. it is quite low in India per capital insurance premium in India in 1999 was only $8 while it was $ 4800 for Japan. recommending a phased program of liberalization and called for a private sector entry and restructuring ofLIC and GIC. it is only 0. Penetration of insurance sector in India: Insurance is a Rs. Insurance companies create products and go out to find customers. 35% for other European and American countries . non-life insurance business was nationalized and the General Insurance Business (Nationalization) Act. India also has highest number of life insurance policies in force in the world. The committee submitted its report to union finance minister on 7-01-1994. to suggest reforms in the insurance sector including improving the functioning of the LIC. Returns from Insurance Products are low. i Insurance sector . It paved the way towards the establishment of Life Insurance was to raise the muchneeded funds for rapid industrialization and self-reliance in heavy industries. the next government moved on insurance bill again in 1998. 7. . 400 billion business in India’s and together with banking services adds about 7% to India’s gross domestic product (GDP) gross premium collection is about 2 percent of GDP and growing between 15 and 20 percent per annum.it was only 9% for India in 1999 The share of India in the World market in terms of Gross insurance premium is again very 1000.Insurance Plants are not promoted. Globalisation of insurance sector: The experience after independence in insurance sector showed that the ultimate objective remained largely unfulfilled due to the relatively low spread of insurance in the country the efficient and quality functioning of the public sector insurance companies and the untapped potential for mobilizing long term financial resources to finance the growth of infrastructure. Unit -linked assurances are not available. yet more than three fourth of India’s insurance population has no life insurance cover the penetration of insurance is very low in India the following indices support this contention. 2. European Union 25% . Canada 1.Insurance surance business took place in 1956 when 245 India and foreign insurance provident societies were first merged and then nationalized.3% for India. Term. Most agents and development officers are interested only in producing new business servicing existing customers satisfactorily has not been a priority for them the obvious reason to this is that incentives are them the obvious reason to this is that incentives are based on new business generation and not on satisfactory serving of existing customers it is surprise to note that more than 10% of LIC policies are surrendered or get lapsed every year.7% share of the global insurance premium. 6.Hurdles: The insurance industry has been growing between 15 and 20 percent. 1. Inefficient management and low investment yield are responsible for the high premium charged by Indian Insurance companies Investment restrictions have been responsible for 10w yields. but it lags for behind its global counterparts. $ 1000 for Republic of Korea.

rebating and misappropriation of funds. but the potential for further growth is phenomenal. it would expose banks to additional and unnecessary risks and banks would have unfair advantages since they have detailed information on their customers financial position. Insurance Sector . better technology and better customer service including faster settlements. Separateness of Banking and Insurance: There is lot of speculation whether banks should be allowed to operate in the insurance sectors. Insurance company thereby offers schemes of different kinds. India had about 54 million people above the age of 60. opening of the sector to private firms will foster competition. This debate is for from settled and we are likely to see some restructuring in operations of . 2. power. In 1990. (ii) Market Structure: What is the appropriate market structure for insurance markets? Should it be monopoly (state or regulated) or should there be unlimited private entry or should there only be a few regulated players? The answer is quite obvious. Different situation and different people require different mix of risk . ensuring the solvency of insurers is a very important function of regulatory authority. This number is expected to increase to 100 million by 2004. The first one is the joint family system which worked like an insurance arrangement. what market structure to have finally and what is the role for regulator.Emerging Areas: Some of the emerging areas for insurance sector in India are: (i) Demand for Pension Plans: Two relatively modern trends affect life insurance business in India significantly. why must insurance remain a state monopoly? State monopoly had little incentives to offer a wide range of products with more complex and extensive risk categorization. innovation and variety of products. airlines and even postal services have been allowed private entry. fraudulent practices. Among the emerging economies. The reasons for allowing banks are . This means ensuring proper disclosure. public-men enjoy a “One. It has evolved guidelines on the entry and functions of such intermediaries. With more and more nuclear families becoming the rule. telecom. IRDA has granted licenses to three private companies on October 24.it would create unhealthy concentration of market power. which is currently done.cost combinations. When traditional public sector businesses like banking. creating better incentives for agents and intermediaries. IRDA has evolved a set of operational guidelines to deal with maintaining the solvency of insurers. and no firm be allowed to operate both in life and non-life insurance. HDFC Standard Life Insurance and Royal Sundaram Alliance Insurance. 2000 . to set up the shop and to get into business. It will also generate greater awareness on the need for buying insurance as a service and not merely for tax exemption. Licensing of agents and brokers are required to check their indulgence in activities such as twisting. banks could recoup some of the lost business to securities firms and there would be synergies in operating insurance and banking. (iii) Role of IRDA IRDA’s primary function is to protect consumer interests. keeping prices affordable but also insisting on some mandatory products. and to almost 10% of the total population by 2010.Insurance Issues : The three key issues that impinge on liberalization of insurance in India are: why liberalize.Reliance Fire and General Insurance. After Korean and Taiwanese insurance sectors were liberalized. These two trends portend a large and growing market for life insurance in India.Stop Financial Service Paradigm”. : (i) Reason for opening up the Insurance Industry: An insurance policy protects the buyer at some cost against financial loss arising from a specified a risk. Growth of insurance business entails better education and production to customers.competition would enhance efficiency and benefit consumers. there it a greater demand for life insurance cover the second trend is that elderly are increasingly having to fend for themselves. Further. rising literacy rates and increase of the service sectors. Keeping in view the recommendations of insurance reforms committee that a limited number of high capital private companies be licensed. The demand for insurance is likely to increase with rising per capital incomes. and most importantly making sure that consumers get paid by insurers. Thus future senior citizens look towards planning for their own old age and the need for pensions and annuities. India is one of the least insured countries. the Korean market has grown 3 times faster than GDP and Taiwan the rate of growth has been almost 4 times than that of its GDP. The reasons against are . Further.

in this millennium.family system. Role of Information Techno-logy : The Business of selling life insurance requires assessing the profile of the customer and assigning the right policy. However the success of the insurance industry will primarily depend upon meeting the rising expectations of the consumers who will be the real king in the liberalized Insurance market in future.50. August 1997 IRDA is withdrawn following opposition to foreign participation. Conclusion: The needs of the nation and its people have finally prevailed and privatization of insurance is now a reality towards further liberalization of the Indian economy. Already postal banks generate more deposits than all commercial banks and hence their role can hardly be overemphasized. This vast Potential can be tapped only by a large number of insurance.7. Vol. November 1997 Government of India clears greaterautonomytoLICand GIC June 1998 Union Budget announces openingupofinsurancesector January1999 Notification oflRDA as a statutory authority October1999 Approval of IRDA Bill by the cabinet with FDI limited to 26% February2000 Insurance Bill presented in the budget session October2000 Privateinsurancecompanies areback Source:Yojana. 3. References: 1. . private sector operators in collaboration with their overseas partners are likely to bring in a more professional and focused approach. Using Postal Network: Another important factor is allowing the existing network of 1. No. This process is facilitated by a database and is completely driven by information technology. 6. With the opening up of the industry after reforms. Exhibit -I Insurance Sector Reforms April 1993 Malhotra Committee on Insurance Sector Reforms and Deregulation set up. 3. 4. Mangalore University. pp. Hence.Insurance banking and insurance. Yojana. it would have better utilized this vastly underutilized capacity. In developed economies. 4. 2. insurance industry is likely to play an important role in changing the economic landscape of the country. Malhotra Committee Report. January1994 Malhotra Committee submits report to the Finance Minister December 1996 IRDA Bill introduced in Parliament and Referred to the Standing Committee. Creating Insurance awareness: It is the need of hour to create insurance awareness among the general public. Government of India. Finance Ministry. If it uses this network of database to offer their products.000 branch offices of post and telegraph to sell life insurances and related financial products. Mahesh Chandra Garg. Insurance Bill.45. It will require a whole lot of efforts on the supply and distribution side. October 2000. insurance products are sold Focus of insurance industry is changing towards providing a mix of both protection / risk cover and long . 5. New Paradigms in Indian Insurance Industry.27-32. October 2000. To serve the population of more than 100 crore Indians. However they cannot be expected to underwrite risks. With the increase in the life expectancy of individuals and disintegration of Joint . Mangalore. Indian insurance market offers tremendous opportunities to private insurers. coverage of insurers has to grow very fast. Seminar on Trends in Marketing Management.2001. April 2001. Government of India.term investment opportunities Insurance sector in India. each individual now has arranged cover for himself and for his family. Therefore. only 10% of the market share has been tapped by LIC and GIC and the balance 90% of the market still remains untapped. Innovative Products: Insurance companies should offer innovative products to tap huge amount of resources for the developmental activities.Future Scenario: In India. Post offices can also act as avenues or agents of non-life insurance companies. January 1994.