Insurance Business: focusing on tactical opportunities to improve their

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1 Insurance Business: focusing on tactical opportunities to improve their performance in India. Abstract This study is conduct to know the approach of the insurance sector in Indian economy and to measure the performance, contribution and challenges faced by of the public and private companies of the insurance business. The state controlled insurance companies faced stiff competition from private insurance companies after post reforms period. The private insurance companies were able to exploit the shortcomings in the state run insurance companies. It is also possible through the study about their contribution and effective role played by the insurance industry in the development of economy. Study is relevant for clients, Govt, and financial institutions to judge their role and contribution in the insurance sector in Indian economy. Introduction: Key words: Contribution, performance, IRDA, premium Insurance sector in India has become a full circle from being an open competitive market to nationalization and back to a liberalized market. Tracing the developments in the Indian insurance sector reveals the 360- degree turn witnessed over a period in almost 195 years. The insurance industry originated in India in the year 1818 with the formation of life insurance Corporation in Calcutta. In 1870 Bombay mutual life insurance society established its insurance business and the same premium was charges for both Indian and English people. In 1912 the insurance sector came under the purview of regulations when the governments passed the life insurance companies act. But it was in the year 1938 when the government came up with the first legislation to bring the insurance sector under state control. In 1956, total 245 Indian and foreign insurers and provident societies taken over by the central government and formed nationalized LIC by an act of parliament viz, LIC Act 1956 with a capital contribution of Rs 5 crore from government of India. Now, Insurance industry in India is governed by 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. The new economic policy adopted by the Government of India since 1991 allowed the private players to be in the business of insurance. Privatization of the insurance sector has encouraged many overseas insurance companies to open their branches in our country. The opening of the sector to the private companies has changed the performance. The private sector has to compete with the existing public sector companies in terms of the

2 performance and contribution in the insurance sector. Performance, contribution and challenges are complex phenomenon which depends upon a variety of intrinsic and extrinsic factors. Initially insurance industry was controlled by the government sector, however, in the insurance market was opened to private and foreign investment. The insurance industry of India consists of 52 insurance companies of which 24 are in life insurance business and 28 are non-life insurers. Among the life insurers, Life Insurance Corporation (LIC) is the sole public sector company. Apart from that, among the non-life insurers there are six public sector insurers. In addition to these, there is sole national re-insurer, namely, General Insurance Corporation of India. Other stakeholders in Indian Insurance market include Agents (Individual and Corporate), Brokers, Surveyors and Third Party Administrators servicing Health Insurance claims. Out of 28 non-life insurance companies, 5 private sector insurers are registered to underwrite policies exclusively in Health, Personal Accident and Travel insurance segments. They are Star Health and Allied Insurance Company Ltd, Apollo Munich Health Insurance Company Ltd, Max Bupa Health Insurance Company Ltd, Religare Health Insurance Company Ltd and Cigna TTK Health Insurance Company Ltd. There are two more specialised insurers belonging to public sector, namely, Export Credit Guarantee Corporation of India for Credit Insurance and Agriculture Insurance Company Ltd for Crop Insurance. There are many foreign players who are doing business in this sector. Some of the major foreign players are: - AIG, Aviva, MetLife, New York life, Prudential, Allianz, Sun life, Standard life and Lombard. These foreign players are present with small states in joint ventures with Indian companies for both life and non life segments. Reform process of Insurance Sector: Insurance may be described as a social device to reduce or eliminate risk of loss to life and property. 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 risk involved. Modern insurance industry is a scientific product that is theoretically upgraded all the times, which offers different forms of practical usage in present and near future. The process of insurance sector reform started in April- 1993, by formation of Malhotra committee. On January-1994 Malhotra committee submitted their report to the finance minister. December -1996, IRDA bill introduced in the parliament and referred to the standing committee. August IRDA withdrawn following opposition to foreign participation. Govt. of India clears greater autonomy to LIC and GIC in the month of Nov Ultimately Union budget announces opening up of insurance sector on June In January- 1999, Govt. notified IRDA as a statutory authority and in Oct 1999 approval of

3 IRDA bill by the cabinet with FDI limited to 26 %. Private insurance companies are back on Oct (Source- yojan-2000) The recommendation of Malhotra committee on the insurance regulatory and development authority was set up to monitor and control the insurance industry. Some of the initiatives taken by the government after insurance sector reforms are:- -Government to have not more than 50% state in insurance companies. -Insurance sector to be opened up for private companies and any number of insurance enterprises can operate. -Private players with minimum paid up capital of Rs. 1 billion should be given opportunity to do business. -Foreign companies can eater Indian market through joint ventures with Indian companies. Objectives of the study: The research paper has the following objectives:- 1- To analysis performance of insurance sector in India 2- To know about the major players in insurance sector 3- To find out contribution of insurance sector in Indian economy 4- To find out the challenge faced by the insurance sector. Statistical data: The entire study is divided into two time period. First time period is from to and from to The study will be based on secondary economic data published by the government of India, published by RBI, the official directory, publications of journal on economic and finance and news paper like economics times, business standard, business line, financial express and magazine etc. Statistical Tools: The data thus proposed to be mobilized will processed through the various measures of central tendencies, deviations, trends analysis, correlation, and percentages etc. so as to ascertain the trends and patterns. Analysis and Interpretation: The major market share in the field of life insurance is still dominated by life insurance Corporation (LIC). Life Insurance Corporation holds 78% share of the market. In the case of non life insurance field private sector companies both independently as well as joint ventures with foreign insurers account for 20% of the market and have growth at 60% p.a. Insurance sector in India is one of the booming sectors of the economy and is growing at the rate of % annum. The outcome of liberalization over a period of five years has been positive in terms of the premium under written and the annual growth rate. During

4 the financial year life insurance premiums increased by an estimated 29.54% in real terms to INR billion while num life insurance premiums rose 12.2% to INR billion, The strong growth in 2008 did not come in isolation, growth in insurance premiums has been averaging at 12.3 % in real terms over the last decade. Insurance penetration of India i.e. premium collected by Indian insurers is 3.96 % of GDP in FY Per capita premium underwritten i.e. insurance density in India during FY is US$ (A) From the point of view of Premium: 1- Life Insurance:-(Premiums of Life Insurance) The Country s 22 life insurance companies saw 29.5 per cent rise in premium collected through sale of new policies to Rs 3602 crore in April 2009, as against Rs2780 crore in the corresponding period last year. This is the fastest growth since April In case of LIC, which recorded per cent growth in first- year premium during April, a bulk of the growth came from the group single premium segment, where the first premium income rose over six times to Rs crore, as against Rs crore in the corresponding period last year. Similarly, individual single premium rose to Rs crore from Rs 366 crore in corresponding period of last year. As a result of the increase in premium collection, LIC s market share increased to per cent. Even in case of SBI life, the second-largest life insurance company. Private players, first-year collection fell by 2.85 per cent in April. ICICI Prudential slipped from the second position to fifth in the April collection, with SBI life taking over as the largest private sector life insurance. Insurance have been focusing on profitability. They are consolidating their business by bringing down their expansion plans For instance, Reliance life has reported 30% dip in its first year premium as against 28% growth in ICICI Prudential is looking at consolidation. The Company posted Rs 577 crore net loss in

5 T: 1- TOTAL LIFE INSURANCE PREMIUM (Rs. Crore) Insurer companies LIC Aegon Religare Aviva Bajaj Allianz Bharti Axa Birla Sunlife Canara HSBC DLF Pramerica Future Generali HDFC Standard ICICI Prudential IDBI Fortis ING Vysya Kotak Mahindra Met Life Max New York Reliance Life Sahara SBI Life Shriram Star Union Tata AIG

6 Private Total Industry Total Note: Figure in bracket indicates the growth over the previous year in percent. "-" indicates the company has not started its operation. T:2- TOTAL LIFE INSURANCE PREMIUM GROWTH (in %) Insurer companies LIC Aviva Bajaj Allianz Bharti Axa Birla Sunlife Canara HSBC DLF Pramerica Future Generali HDFC Standard ICICI Prudential IDBI Fortis 0.00 ING Vysya Kotak Mahindra Met Life Max New York Reliance Life Sahara SBI Life Shriram

7 Star Union Tata AIG Private Total Industry Total Premium of Non life Insurance:- The non life insurance sector comprising PSUs and private players has sustained its composite growth rates in premium income for three consecutive April December periods.(calender years 2007,2008 and2009).according to data released by IRDA the non-life sector witnessed a9.95% growth in premiums during the first nine months of the current fiscal against 10.24% in the previous corresponding period. The Gross premium underwritten by public sector non life insurance for the April- Dec-2009 period posted year-on year growth of 11.37% as compared to the year on year growth of 7.93% posted by private sector non life insurance. Overall, the non life insurance sector grew 9.95% in April-Dec compared to the corresponding period last year. The private sector general insurance saw growth rates decline steadily from 27% during April- Dec 2007 to 14% during the corresponding period in 2008 and now stand at 8% in GROSS DIRECT PREMIUM OF NON-LIFE INSURANCE (WITHIN & OUTSIDE INDIA) (Rs. Crore) Insurer National New India Oriental United Public Total Bajaj Allianz Bharti AXA Cholamandala m Future Generali HDFC Ergo ICICI Lombard

8 Iffco-Tokio Reliance Royal Sundaram Shriram Tata AIG Universal Sompo Private Total Total (9.11) (11.09) (21.51) (15.62) (11.57) (11.25) (20.06) (17.97) Specialised Insurers AIC ECGC Stand-alone Health Insurers Star Health Apollo DKV Figure in the bracket represent the growth over the previous year in percent.

9 "-" indicates the company has not started its operation. GROSS DIRECT PREMIUM OF NON-LIFE INSURANCE (WITHIN & OUTSIDE INDIA) (Growth %) Insurer National New India Oriental United Public Total Bajaj Allianz Bharti AXA Cholamandalam HDFC Ergo ICICI Lombard Iffco-Tokio Reliance Royal Sundaram Tata AIG Private Total Total Specialised Insurers AIC ECGC

10 (B) Market Share of Insurance companies: Indian life insurance market has become more vibrant. Competition in this market is increasing with companies continues effort to lure the customer with new product offering. However, the market share of private insurance companies remains in the 10-15% range. Even today, Life Insurance corporation (LIC of India dominates Indian insurance sector and in the year it has sold 3.75 crore policies collecting Rs crore as premium. The Heavy hand of government still dominates the market, with price controls, limits on ownership and other restraints. Total Industry Market Share (%) Company Market Share of Life Insurance ICICI Prudential Bajaj Allianz SBI Life HDFC Standrad Reliance Life nil Birla Sunlife Max New York Kotak OM Aviva Tata AIG Met Life ING Vysya Shriam Life Nil Nil Bharti AXA Nil Nil nil Sahara Life Nil IDBI Fortis Nil Nil nil Private Players (total) LIC

11 Economic Times Market Share of Non Life Insurance: New India Insurance, National Insurance,oriental Insurance and united india Insurance had combined market share of 73.47% as of oct 2005.ICICI prudential life insurance company continues to lead the private sector with 7.26% market share in terms of fresh premium, whereas ICICI Lombard general insurance company is the leader among the private non-life players with a 8.11% market share. ICICI Lombard has focused on growing the market for general insurance products and increasing penetration within existing customers through product innovation and distribution. Market Share (%) Company Royal Sundram Tata -AIG Reliance General IFFCO-Tokio ICICI-Lombard Bajaj Allianz HDFC CHUBB Cholamandalam New India National United India Oriental Source:IRDA

12 (C) India s Insurance Market::- Insurance Is a Rs450 Billion business in India s and together with banking adds about 7% to India s gross domestic product (GDP).The Gross premium collection is about 2% of GDPand growing between 15% and 20% Per annum.india also has highest number of life insurance policies in force in the word. The rapid growth of the insurance sector over the last decade, insurance in India remains at an early stage of development. At the end of the Indian insurance market (in terms of premium volume) was the12th largest in the world. Here are some performance highlights of the Indian insurance industry. Life Insurance Business Performance: Public Sector Private Sector Public Sector Private Sector Premium Underwritten (Rs in Crores) New Policies Issued (in Lakhs) Number of Offices Benefits Paid (Rs in Crores) Individual Death Claims (Number of Policies) Individual Deatlaims Amount Paid (Rs in Crores) Group Death Claims (Number of lives) Group Death Claims Amount Paid (Rs in Crores) Claim Settlement Ratio (in percent) Non-Life Insurance Business Performance: Public Sector Private Sector Public Sector Private Sector Premium Underwritten (Rs in Crores) New Policies Issued (in Lakhs) Number of Offices Incurred Claim Ratio Number of Grievances Grievances Resolved During the Year Grievance Resolved (in percent) Source: Annual Report on Insurance The dynamic growth of insurance buying is partly affected by the changing income elasticity of insurance demand. It has been shown that insurance penetration and per capita income have a strong non-linear relationship. Based on this relation and other considerations, it can be postulated that by 2014 the penetration of life insurance in India will increase to 4.45 and that of non-life insurance to 0.9%.

13 Projection of life insurance and non-life insurance premiums, Life Insurance Non Life Insurance S. No Year INR m INR m Constant 2004 prices INR,M INR m Constant 2004 prices Average growth rate between % 12.50% 15.10% 9.60% Source:Swiss Re Economic Research & Consulting (D) Challenges in the Insurance Sector : Insurance is a growing sector in India and accordingly the challenges will also be going on. Insurance industry has a numerous challenges like: low level of awareness, branding, distribution and perhaps increasing the penetration of insurance is probably the single largest challenge. Not only is just over one fourth of the insurable population of this country actually insured, but also most of those who possess insurance could well be underinsured. The challenges of the insurance sector are discussed below.

14 1) Low Level of Awareness: In India, literacy level is low in rural and semi urban areas. The people are not aware about the insurance policy. According to the study conducted by FORTE there is only- 73% of the population does not have life insurance in rural areas, In India rural areas contribution is just about 54.7% of the total of LIC S policies, and the penetration rate for non life is only 14% mainly for motor(tractor) insurance. 2) Branding of Product: One way insurance companies are tackling the challenge is by attempting to extend their product lines to include a host of financial service offerings and then reinventing their brands to support this extension. In general, however, most are struggling in the face of several obstacles chief among them the ability to build credibility as financial services providers while meeting customer s expectations of what it means to be a financial service company. To make headway will require that insurance companies manage their brands as strategic assets. Namely, they must determine how to leverage their brands to achieve their growth objective in the broader financial service market without diluting their existing brand equity, causing customer confusion and alienating their core customer base. 3) Distribution Channel: Managing the expectations of channel partners viz, banks, corporate agents, brokers and advisory force and keeping the acquisition costs at manageable proportions at the same time will help the new players reach breakeven relatively sooner increased rural penetration of insurance will also be a fallout of the above factors and will depend upon the spread that the distribution footprint will help the insurer achieve. 4) Technological advancement: Technological advancement will be critical to functions like data management, under writing, fund management, actuarial efficiency and the end to end service delivery process.technology will provide the cutting edge in terms of improved disclosure to the policy holder as well as the regulator in due course of time. 5) Level of Human Resource: Insurance is and intensively people-oriented business and human resources will be the undoubted differentiator like in any other retail industry. The quality of manpower attached and retained by insurer and how their abilities and ambitions are harnessed would be the litmus test for the industry. 6) Acquisition Costs : Acquisition costs which is sum total of technological, operational and distribution costs, will be the key differentiating factor in initial years. While the initial hits on the

15 technology and process costs have already been absorbed by majority of the new insurers, intermediary costs of distribution is critical variable. The intermediary costs to distribution channel partners are also lower due to the bargaining power that the strong brand possesses in life insurance. (E) Issue In Insurance Sector In India: Earning growth, strong operating fundamentals and record underwriting profits are all hallmarks of the sustained performance the insurance industry achieved in the past few years. Recently, the industry s solid footing has been weakened by an unprecedented chain of financial and economic events. As they head into2009, insurers will not be able count on continued investment returns to drive result and need to carefully scrutinize the overall effectiveness of their operations. The business issues like being competitive in a price driven market, maintaining compliance with changing statutory, federal and international regulations, creating a consistent customer experience that promotes customer acquisition and retention, promoting "ease of use" across varied lines of business and distribution channels, effectively mitigating and managing regulatory reviews, fines and penalties, managing product development and life cycle components effectively, increasing growth with decreasing levels of support resources, increasing work automation, process efficiency and continuous improvement opportunities, building consistent processes that can be extended across products or lines of business, optimizing legacy and mainframe system environments that will influence continued success and focusing on tactical opportunities to improve their business performance. Conclusion: In the present time, the insurance sector is playing an important role in changing the economic scenario of the country. Actually the success of insurance sector will primarily depend upon the meeting the rising expectations of the consumers who will be the real king in the liberalized insurance market in future. The insurance will need to increase effort to launch to new advanced products that are suitable for the market and making use to reach every part /people of the country. The private sector will play a key role in serving large number of in formal sector workers. In addition the insurance companies will need to show long term commitment to this sector. To design the product are suitable for the ruler population and utilize appropriate distribution mechanism. Insurance must have to pay special attention for the characterization of the rural labour force like the prevalence of irregular income streams and preference for simple products, before they can successfully penetrate this life and non life insurance sector.

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17 References : Books: Armstrong M and Baron A(1998), Performance Management: The new realities, Institute of Personnel and Management, London Urwick Lyndall F.,"The Manager s Span of control, Harvard Business Review,Vol.34, No.3,may-june,1956 Agarwala, A.N.: Insurance in India (Allahabad : Allahbad Law Journal Press), Agarwala, A.N. and Singh, S.P.: Accelerating Investment in Developing Countries (Bombay: Oxford University Press), Bajpai, O.P.: Life Insurance Finance in India (Varanasi : Vishwavidyalaya Prakashan), Crane, Frederick G.: Insurance Principles and Practices (New York: John Wiley and Sons), Crowe, Robert M. (ed.): Insurance in the World Economics (Pennsylvania Corporation for the Philadelphia World Insurance Congress), Desai, G.R.: Life Insurance in India (Madras: Macmillan India), Papers: Indian Insurance Opportunities & Challenges - Prof.Naryan Globalization and Its Impact of Insurance Industry in india - Bala Murugan lobalization of Indian insurance sector Issue and challenges The Insurance Company branding Challenge-- - A. Vijayakumar Brenda Smith The Indian insurance industry challenges and Prospects - Tapan Shina Indian Insurance Report Series-1 Annual Report Journals and Magazines: Dharmendra Kr/Rahul Singh Chartered Insurance Institute Journal: The Chartered Insurance Institute, London. Insurance Asia: Milagrosa Publishing House, Manila, Philippines. Insurance Facts and Figures: British Insurance Association, London. Japan Insurance News: Hoken Kenkyujo Ltd., Tokyo, Japan. Journal of American Insurance: Alliance of American Insurance, Chicago, U.S.A. Life Insurance Fact Book: American Council of Life Insurance, Washington, U.S.A. Insurance Marketing Magazine - Feb/March-2002, 2010, Business Standard - April The Economic Times -27-Jan-2009 Insurance Industry-Out Look Sep Web Site:

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