Theoretical Perspective of Indian Insurance Industry Profile

Transcription

1 Chapter III Theoretical Perspective of Indian Insurance Industry Profile Contents in Third Chapter Introduction to Indian Life Insurance New reforms - The Insurance regulatory and development authority (IRDA) Major principles of Indian insurance contract Major role of Life Insurance in India The scope of a Life insurance company in India Life Insurance contribution to Indian Economy Factors Affecting Consumer Behavior.

2 41 CHAPTER III THEORETICAL PERSPECTIVE OF INDIAN INSURANCE INDUSTRY PROFILE 3.1. Introduction to Indian Life Insurance Life insurance in its modern form came to India from England in the Year Oriental Life insurance company started by Europeans in Calcutta was the first life insurance company on Indian soil. All the insurance companies established during that period were brought up with the purpose of looking after the needs of European community and Indian natives were not being insured by these companies. However, later with the efforts of eminent people like Babu Muttyalal lives. But Indian lives were being treated as substandard lives and heavy extra premiums were being charged on them. Bombay Mutual Life Assurance society heralded the birth of first Indian life insurance company in the year 1870, and covered Indian lives at normal rates. Starting as Indian enterprise with highly patriotic motives, Insurance and social security through insurance to various sectors of society. Bharat Insurance Company (1896) was also one of such companies inspired by nationalism. In the year 1912, the Life Insurance Companies Act, and provident fund act were passed. The life insurance companies act, 1912 made it necessary that the premium rate tables and periodical valuations of companies should be certified by an actuary. But the act discriminated between foreign companies at a disadvantage.

3 42 The insurance act 1938 was the first legislation governing not only life insurance but also non-life insurance to provide strict state control over insurance business. This repeatedly in the past but it gathered momentum in 1944 when a bill to amend the life insurance act 1938 was introduced in the legislative assembly. However, it was much later on the 19 th of January 1956 that Life Insurance in India was nationalized The Insurance Regulatory and Development Authority (IRDA) The formation of the Malhotra Committee in 1993 initiated reforms in the Indian insurance sector. The aim of the Malhotra Committee was to assess the functionality of the Indian insurance sector. This committee was also in charge of recommending the future path of insurance in India. The Malhotra Committee attempted to improve various aspects of the insurance sector, making them more appropriate and effective for the Indian market. The recommendations of the committee put stress on offering operational autonomy to the insurance service providers and also suggested forming an independent regulatory body. The Insurance Regulatory and Development Authority Act of 1999 brought about several crucial policy changes in the insurance sector of India. It led to the formation of the Insurance Regulatory and Development Authority (IRDA) in Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in Parliament in December The IRDA since its incorporation as a statutory body in April 2000 has fastidiously stuck to its

4 43 schedule of framing regulations and registering the private sector insurance companies. The other decisions taken simultaneously to provide the supporting systems to the insurance sector and in particular the life insurance companies were the launch of the IRDA s online service for issue and renewal of license to agents. The approval of institutions for imparting training to agents has also ensured that the insurance companies would have a trained workforce of insurance agents in place to sell their products, which are expected to be introduced by early next year. Since being set up as an independent statutory body the IRDA has put in a framework of globally compatible regulations. The level of penetration, particularly in life insurance, tends to rise as income levels increase. India, with its huge middle class households, has exhibited growth potential for the insurance industry. Saturation of markets in many developed economies has made the Indian market even more attractive for global insurance majors. The insurance market in India has witnessed dynamic changes including entry of number of global insurers in both life and non-life segment. Most of the private insurance companies are joint ventures with recognized foreign players across the globe. Over the last eight years, consumer awareness has improved. Competition has brought more product innovation and better customer servicing. This made a positive impact on the economy of income generation and creating employment opportunities in this sector. At present there are a total of 23 companies in the life insurance business in India and only LIC is in the public sector and rest all 22 companies are in the private sector.

5 44 The goals of the IRDA are to safeguard the interests of insurance policyholders, as well as to initiate different policy measures to help sustain growth in the Indian insurance sector Major Principles of Indian Insurance Contract Principles Utmost Good Faith Principles of Material Facts Principles of Insurable Interest Principles of Indemnity Principle of Utmost Good Faith Insurance contracts are based upon mutual trust and confidence between the insurer and the insured. Hence, they are said to be uberrimae fidei i.e. of the utmost good faith. Utmost good faith in insurance means that each party to a proposed contract is legally obliged to reveal to the other party all information which would influence the other s decision to enter the contract, whether such information is requested or not. Though the insurance contracts are subject to good faith and are based upon mutual trust and confidence, it is not possible to apply any doctrine or caveat emptor (let the buyer beware) because of the fiduciary nature of insurance. The information necessary for the parties to assess the contract adequately cannot be ascertained as with contracts of sale where the buyer before contracting to purchases anything must satisfy himself as to nature and quality of good he needs.

6 45 Principle of Insurable Interest The second principle of insurance is that the subject-matter of the insurance must be of insurable interest. This means that the insured stands in such relation to the subject matter of insurance that he suffers loss by its destruction or damage and is benefited by its safety, or existence. An insurable interest is an interest of such a nature that, if the event insured against takes place, the insured might suffer a financial loss. If the happening of the event insured against cannot cost the insured money, then there is no insurable interest. Thus insurable interest mean proprietary or monetary interest. It is the legal right to insure as an insurance policy does not cover property, but relates to the insured s interest in the property. In every contracts of insurance, the law regards possession of an insurable interest in the subject-matter of insurance to be a necessary pre-requisite. The insured must own either own part or whole of it or he must be in such a position that injury to it would affect him adversely. Principle of Material Facts A material fact is one which affects the nature or incident of risk in a proposed insurance. It is an essential fact which the insurer will take into consideration in deciding whether to accept the insurance proposal for a given risk or not. It is the fact which has a bearing or which is expected to influence the amount of premium. Thus, the material fact depends on the circumstances of a case and the subject-matter of insurance. However, unimportant facts or omission or misstatements may be excused.

7 46 Principle of indemnity This is the regulating principle of insurance. It is applicable in all contracts of insurance except life, personal accident and sickness insurance. It does not apply to every class of business but it applicable to fire, marine, burglary or any other policy and not on the life insurance policy. Under an insurance contract the insurer undertakes to indemnity the insured against loss suffered by the latter. Indemnity literally means security against damages or loss or compensation for loss. Prof. Hansell has defined it as an exact financial compensation. In the case of loss against which the policy has been made the assured shall be indemnified for only the actual loss suffered by him but will never be more than fully indemnified. Thus indemnity restores the insured to the same financial position after a loss as he enjoyed immediately prior to the loss. This is in conformity with the basic concept of insurance, whereby an insurer is required to compensate the unfortunate few for the loss they sustain but does not allow to earn profit from misfortune. Under the principle of indemnity no profit can be made out of the insurance contract.

8 Insurance in World 47

9 48 Table - III.1 Life Insurance Companies in India (as on 31 st March, 2010) S. No. Insurers Foreign Partner s Reg. No. Dt. of Registration Yr. of operation 1 Life Insurance Corporation of India Sep HDFC Standard Life Insurance Co. Ltd. 3 Max New York Life Insurance Co. Ltd. Standard Life Assurance, UK New York Life, USA ICICI-Prudential Life Insurance Co. Ltd Prudential, U.K Om Kotak Life Insurance Co. Ltd. Old Mutual, South Africa Birla Sun Life Insurance Co. Ltd. Sun Life, Canada Tata-AIG Life Insurance Co. Ltd. American International Assurance Co., USA SBI Life Insurance Co. Ltd BNP Paribas Assurance SA, France ING Vysya Life Insurance Co. Ltd. 10 Allianz Bajaj Life Insurance Co. Ltd 11 Metlife India Insurance Co. Ltd. ING Insurance International B.V., Netherlands Allianz, Germany Met life International Holdings Ltd., USA

10 49 12 Reliance Life Insurance Co. Ltd. (Earlier AMP Sanmar Life Insurance Company from to ) AVIVA Aviva International Holdings Ltd., UK Sahara Life Insurance Co Shriram Life Insurance Co. Ltd. 16 Bharti AXA Life Insurance Co. Ltd. 17 Future Generali India Life Insurance Company Ltd. 18 IDBI Fortis Life Insurance Company Ltd Sanlam, South Africa AXA Holdings, France Pantaloon Retail Ltd.; Marketing Network Pvt. Ltd. Generali, Italy Fortis, Netherlands Canara HSBC OBC Life Insurance Company Ltd. HSBC, UK Aegon Religare Life Insurance Company Ltd. 21 DLF Pramerica Life Insurance Co. Ltd. Religare, Netherlands Prudential of America, USA Star Union Dai-ichi Life Dai-ichi life India First Life Insurance Company Limited (Bank of Baroda & Andhra Bank) -- March

11 Major Role of Life insurance in India Life insurance as Investment Insurance is an attractive option for investment. While most people recognize the risk hedging and tax saving potential of insurance, many are not aware of its advantages as an investment option as well. Insurance products yield more compared to regular investment options, and this is besides the added incentives (read bonuses) offered by insurers. You cannot compare an insurance product with other investment schemes for the simple reason that it offers financial protection from risks, something that is missing in noninsurance products. Life insurance as "Risk cover" First and foremost, insurance is about risk cover and protection - financial protection, to be more precise - to help outlast life's unpredictable losses. Designed to safeguard against losses suffered on account of any unforeseen event, insurance provides you with that unique sense of security that no other form of investment provides. By buying life insurance, you buy peace of mind and are prepared to face any financial demand that would hit the family in case of an untimely demise. To provide such protection, insurance firms collect contributions from many people who face the same risk. A loss claim is paid out of the total premium collected by the insurance companies, who act as trustees to the monies.

12 51 Insurance also provides a safeguard in the case of accidents or a drop in income after retirement. An accident or disability can be devastating, and an insurance policy can lend timely support to the family in such times. It also comes as a great help when you retire, in case no untoward incident happens during the term of the policy. With the entry of private sector players in insurance, you have a wide range of products and services to choose from. Further, many of these can be further customized to fit individual / group specific needs. Considering the amount you have to pay now, it's worth buying some extra sleep. Life insurance as Tax planning Insurance serves as an excellent tax saving mechanism too. The Government of India has offered tax incentives to life insurance products in order to facilitate the flow of funds into productive assets. Under Section 80C of Income Tax Act 1961, an individual is entitled to a rebate of maximum Rs.1,00,000 on the annual premium payable on his/her life and life of his/her children or adult children. The rebate is deductible from tax payable by the individual or a Hindu Undivided Family The scope of a Life insurance Company in India To understand the nature and principal of insurance providers, you really need to understand what a life insurance policy is and how it works. With times and financial situations changing rapidly, risks of illness and accidents are increasing and this is leading to a lot of people thinking about getting life

13 52 insurance cover to secure their family's future financially. As the awareness of the benefits of the life insurance policies keeps increasing, the breadwinners are giving serious thought to getting themselves life insurance to ensure that their family or loved ones, also known as beneficiaries, are taken care of financially in case of an untimely end of the insured. The money given to the beneficiaries, in the case of life cover, is known as death benefit, which is paid to the beneficiaries when the policyholder is no more. This amount is decided at the time the policyholder decides to buy the policy from the particular insurance provider. This amount is provided to the beneficiaries of the policyholder to fulfill their financial responsibilities and for them to lead a comfortable life, feel financially secure and safe even after the death of the policyholder. A life insurance policy can provide the much-needed financial support to the beneficiaries or the family members of the policyholder on his death. Though it cannot cover the emotional damages but it can for sure help them lead a good and financially secure life. This is what life insurance policy provides and the agents make this point clear to the policy buyers, getting them to buy their policy and making sales for their respective companies Life insurance Contribution to Indian Economy 1. Life Insurance is the only sector which garners long term savings. 2. Spread of financial services in rural areas and amongst socially less privileged. 3. Long term funds for infrastructure.

14 53 4. Strong positive correlation between development of capital markets and Insurance / pension Structure. 5. Employment generation. Table - III.2 Insurance Trends in Asian Countries Comparison of Life Insurance Penetration* in Asian Countries Rank Country Projected 01 Taiwan Hong Kong Japan South Corea Singapore Malaysia Israel India Thailand China Vietnam Lebanon Philippines Indonesia Sri lanka Bangladesh UAE Jordan Pakistan Oman Kuwait Iran Saudi Arabia Source: Swiss Re, Sigma volumes 3/2004, 2/2005 and 5/2010 * Insurance penetration is measured as ratio (in Per Cent) of premium to GDP

15 54 The insurance penetration and density in the areas of life insurance across the select Asian countries are examined in this regard. The projections for the year 2010 are also made on the basis of data available. The ranking is done according to the performance during India stands at eighth position regarding life insurance penetration with 2.53 per cent, whereas a small country like Taiwan stands first with per cent. Fifteen countries are lagging behind India. The least life insurance penetration is observed in Saudi Arabia Percentage

16 55 The table below shows that India is going well in comparison to several countries but the life insurance penetration is still low and there is huge scope for growth in the insurance industry. Table - III.3 International Comparison of Life Insurance Penetration (In percent) Place India USA China Germany France Japan England Canada Italy Source: Swiss Re, Sigma Volumes 2/2010 and 3/2009. * Insurance penetration is measured as ratio of premium (in US Dollars) to GDP (in US Dollars) * Data pertains to the Financial year 2005 to Data relates to financial year and The above table shows that since the total premium collected is just 4% of India s GDP in 2009 as compared to France, Japan, England which have very high penetration so there is a great scope for growth of life insurance in India.

17 56 Chart - 1 International Comparison of Life Insurance Penetration

18 57 Table - III.4 Number of Life Insurance Offices in India - Company Wise (as on 31 st March 2010) Insurer Private Sector LIC Total (*Secondary data: IRDA Report ) The number of offices of the life insurers has increased dramatically in the year from 5373 at the beginning of the year to 8913 by the end of the year, showing a growth of over 65%. A major portion of this expansion was in the private sector whose offices more than doubled from 3072 to LIC s offices increased at a more modest 10% from 2301 offices to 2522 on the other hand, there had been a move towards rationalisation of the offices of life insurance companies in India. While LIC opened 220 new offices, the number of offices of the private insurers decreased to 8,768 from 8,785 in Most private players resorted to restructuring to bring down operating costs. Since opening up of the sector in 2000, this is the first time that a negative growth has been observed in the number of branch offices of private sector life insurance companies. In , the number of offices in the private sector had increased by per cent.

19 58 Chart - 2 Number of Life Insurance offices in India - Company wise (as on 31 st March 2010)

20 59 Table - III.5 New Policies issued by Life Insurers in India (As on 31 st March 2010) Insurer LIC (31.75) (21.01) (-1.61) (-4.52) (8.21) Private sector (73.37) (104.64) (67.40) (13.19) (-4.32) Industry Total New polices underwritten by the industry were lakhs in as against lakhs during showing an increase of 10.23%. While the private insurers exhibited a growth of 67.40%, (previous year %), LIC showed a decline of 1.61% as against a growth of 21.01% in The market shares of private insurers and LIC, in terms of number of policies underwritten, were -4.32% and 8.21 in Therefore the LIC was achieved moderate growth for issuing new policy compare with private insurers. We can clearly see that private companies are catching up as they are registering a continuously high growth rate as compared to LIC which is a matter of concern.

21 60 Chart - 3 New Policies issued by Life Insurers in India Year Percentage

22 61 Table - III.6 Total Life Insurance Premium Collected by Life insurers In India (as according to IRDA Hand book to 09-10) (Rs. In Crore) Insurer LIC 1,86, (18.30) 1,57, (5.01) (17.19) (40.79) (20.85) Private 79, , Sector (23.06) (25.09) (82.50) (87.08) (95.19) Industry 2,65,450 2,21, Total (19.69) (10.15) (29.01) (47.38) (27.78) Source: IRDA Figure in the bracket represents the growth over the previous year in percent Life insurance industry recorded a premium income of Rs crore during as against Rs crore in the previous financial year, recording a growth of per cent. Life insurance industry recorded a premium income of 2,65,450 crore during as against 2,21,785 crore in the previous financial year, registering a growth of per cent. While private sector insurers posted per cent growth (25.09 per cent in previous year) in their premium income, LIC recorded per cent growth (5.01 per cent in previous year).

23 62 Chart 4 Life Insurance Premium Review

24 63 Table III- 7 Channel Wise - New Business Performance (Individual and Group) of Life Insurers (for Channel wise) Insurer Individual Agents Corporate Agents Banks others Brokers Direct Selling Total New Referrals Business (I and G) LIC Private LIC Industry total Source: Secondary Data *Any entity other than banks but licensed as a corporate agent. # Does not include its overseas new business premium. Note: 1) New business premium includes first year premium and single premium. 2) The leads obtained through referral arrangements have been included in the respective channels.

25 64 For the first time since the opening up of the insurance sector to private participation, individual agents have held on to their share in the new business premium. The share of individual agents in the new business premium, underwritten increased marginally to per cent in , as against per cent in Among the other channels, banks increased their share in new business premium from 9.69 per cent in to per cent in The share of direct selling decreased from 4.76 per cent in to 4.13 per cent in While the private insurers have procured per cent of their new business through the direct selling channel, LIC did not procure any new business through this channel, and has yet to make in-roads through this channel of distribution to procure new individual business. The share of corporate agents in the new business premium procured by the private life insurers is significant at per cent in as compared to per cent in On the other hand, LIC has continued to rely on its agency force, and per cent of its new business premium is procured by individual agents.

26 65 Chart 5 Channel Wise New Business Performance ( )

27 Factors Affecting Consumer Behavior- In General Consumer behavior refers to the selection, purchase and consumption of goods and services for the satisfaction of their wants. There are different processes involved in the consumer behavior. Initially the consumer tries to find what commodities he would like to consume, then he selects only those commodities that promise greater utility. After selecting the commodities, the consumer makes an estimate of the available money which he can spend. Lastly, the consumer analyzes the prevailing prices of commodities and takes the decision about the commodities he should consume. Meanwhile, there are various other factors influencing the purchases of consumer such as social, cultural, personal and psychological. The explanation of these factors is given below. (i) Cultural Factors Consumer behavior is deeply influenced by cultural factors such as: buyer culture, subculture, and social class. Culture Basically, culture is the part of every society and is the important cause of person wants and behavior. The influence of culture on buying behavior varies from country to country therefore marketers have to be very careful in analyzing the culture of different groups, regions or even countries.

28 67 Subculture Each culture contains different subcultures such as religions, nationalities, geographic regions, racial groups etc. Marketers can use these groups by segmenting the market into various small portions. For example marketers can design products according to the needs of a particular geographic group. Social Class Every society possesses some form of social class which is important to the marketers because the buying behavior of people in a given social class is similar. In this way marketing activities could be tailored according to different social classes. Here we should note that social class is not only determined by income but there are various other factors as well such as: wealth, education, occupation etc. (ii) Social Factors Social factors also impact the buying behavior of consumers. The important social factors are: reference groups, family, role and status. Reference Groups Reference groups have potential in forming a person attitude or behavior. The impact of reference groups varies across products and brands. For example if the product is visible such as dress, shoes, car etc then the influence of reference groups will be high. Reference groups also include

29 68 opinion leader (a person who influences other because of his special skill, knowledge or other characteristics). Family Buyer behavior is strongly influenced by the member of a family. Therefore marketers are trying to find the roles and influence of the husband, wife and children. If the buying decision of a particular product is influenced by wife then the marketers will try to target the women in their advertisement. Here we should note that buying roles change with change in consumer lifestyles. Roles and Status Each person possesses different roles and status in the society depending upon the groups, clubs, family, organization etc. to which he belongs. For example a woman is working in an organization as finance manager. Now she is playing two roles, one of finance manager and other of mother. Therefore her buying decisions will be influenced by her role and status. (iii) Personal Factors Personal factors can also affect the consumer behavior. Some of the important personal factors that influence the buying behavior are: lifestyle, economic situation, occupation, age, personality and self concept.

30 69 Age Age and life-cycle have potential impact on the consumer buying behavior. It is obvious that the consumers change the purchase of goods and services with the passage of time. Family life-cycle consists of different stages such young singles, married couples, unmarried couples etc which help marketers to develop appropriate products for each stage. Occupation The occupation of a person has significant impact on his buying behavior. For example a marketing manager of an organization will try to purchase business suits, whereas a low level worker in the same organization will purchase rugged work clothes. Economic Situation Consumer economic situation has great influence on his buying behavior. If the income and savings of a customer is high then he will purchase more expensive products. On the other hand, a person with low income and savings will purchase inexpensive products. Lifestyle Lifestyle of customers is another import factor affecting the consumer buying behavior. Lifestyle refers to the way a person lives in a society and is expressed by the things in his/her surroundings. It is determined by customer

31 70 interests, opinions, activities etc and shapes his whole pattern of acting and interacting in the world. Personality Personality changes from person to person, time to time and place to place. Therefore it can greatly influence the buying behavior of customers. Actually, Personality is not what one wears; rather it is the totality of behavior of a man in different circumstances. It has different characteristics such as: dominance, aggressiveness, self-confidence etc which can be useful to determine the consumer behavior for particular product or service. (iv) Psychological Factors There are four important psychological factors affecting the consumer buying behavior. These are: perception, motivation, learning, beliefs and attitudes. Motivation The level of motivation also affects the buying behavior of customers. Every person has different needs such as physiological needs, biological needs, social needs etc. The nature of the needs is that, some of them are most pressing while others are least pressing. Therefore a need becomes a motive when it is more pressing to direct the person to seek satisfaction.

32 71 Perception Selecting, organizing and interpreting information in a way to produce a meaningful experience of the world is called perception. There are three different perceptual processes which are selective attention, selective distortion and selective retention. In case of selective attention, marketers try to attract the customer attention. Whereas, in case of selective distortion, customers try to interpret the information in a way that will support what the customers already believe. Similarly, in case of selective retention, marketers try to retain information that supports their beliefs. Beliefs and Attitudes Customer possesses specific belief and attitude towards various products. Since such beliefs and attitudes make up brand image and affect consumer buying behavior therefore marketers are interested in them. Marketers can change the beliefs and attitudes of customers by launching special campaigns in this regard.

33 72 Table III.8 Total Life Insurance Premium- by all Life Insurers after Reform (Year 2000 Under IRDA) Secondary source by IRDA report