Determinants For Evaluating Life Insurance Corporation of India

Transcription

1 Determinants For Evaluating Life Insurance Corporation of India Dr.Sangeetha Natarajan, Associate Professor, Vivekananda Institute Of Management Studies, Coimbatore, Tamilnadu, India. Abstract The insurance industry has undergone a drastic change since liberalization, privatization and globalization of the Indian economy in general and the insurance sector in particular. For almost four decades LIC has been sole player with virtual monopoly in the life insurance sector. The entry of so many companies in this sector was likely to affect the performance of Life Insurance Corporation. Thus the LIC public sector giant, which never faced competition earlier, now has to compete with the private players who boast of the rich and long experience of their partners from the developed countries of the world. It becomes imperative at this instance to appraise the performance of Life Insurance Corporation of India, succeeding sectoral reforms. And for evaluating the performance of LIC in progression, key determinants are identified and listed. Keywords: LIC, Performance Evaluation, Reformation, Nationalization, Productivity, Investment Portfolio Introduction Conceptual framework: Insurance is the outcome of man s constant search for security and finding out ways and means of ameliorating to the hardships arising out of calamities. Insurance may be described as a social device to reduce or eliminate risk to life and property. It is rightly defined as a social device for reducing risk by combining a sufficient number of exposure units to make their individual losses collectively predictable, the predictable loss is then shared proportionally by all these in the combination.(rober Mehr, Emesson Cammack, 2000).There are two branches of insurance viz, general insurance and life insurance. General insurance deals with the exposure of risks of goods and property, whereas life insurance is a way to meet the contingencies of physical death and economic death. In case of premature death of the assured the proceeds of the policy are paid to the beneficiaries and annuities protect the assured against economic death when he lives too long to arrange for his necessities. Thus life insurance is a contract for payment of a sum of money to the person assured on the happening of the event insured against. (Ali Sajid et al, 2007). Origin of Life Insurance in India: In 1818 a British firm called the Oriental Life Insurance Company was formed in Calcutta to serve the interest of those who came from Europe. This was followed by the establishment of the Bombay Life Assurance Company in 1823 in Bombay. The Madras Equitable Life Insurance Society in 1829 and The Oriental Government Security Life Assurance Company in It is a telling comment on the British view of Indians that prior to 1871, Indian lives were treated as substandard and attracted an extra premium of 15 to 20 percent. The Bombay Mutual Life Assurance Society, an Indian insurer formed in 1871, was the first one to charge normal rates for Indian lives. There were no specific regulations for the life insurance business until 1912, when it came to be formally regulated under the provisions of the Indian Life Assurance Companies Act 1912.In 1928 the Indian Insurance Companies Act was enacted to enable the government to collect statistical information about both the life and the non-life insurance business including the provident insurance societies. During the period from 1912 to 1930 the insurance business witnessed a setback. A number of changes took place from 1930 to 1938 and the Government of India passed Insurance Act 1938, with comprehensive provisions for the detailed and effective control over the insurers so as to protect the interest of insuring public. Nationalisation of Life Insurance Business By 1956, as many as 154 Indian insurers 16 non Indian insurers and 75 provident societies have entered the life insurance business in India. However the geographical spread and the number of lives covered were rather small. Insurance companies by and large were governed by short term considerations and consequently the business was confined mainly to cities and the more affluent segments of society. Offering insurance policies to people with small incomes to suit their income and financial position had not even been attempted. Blue Ocean Research Journals 47

2 During this period a number of malpractices occurred in the industry causing loss to the unsuspecting public. There were also some instances of mismanagement and mis-utilization of the funds collected. Despite the regulatory measures, the private insurance industry suffered from all the maladies such as under-cutting of premiums, unscrupulous management misfeasance falsification of reports questionable investment. The claims settlement ratio was abysmally poor and so was the high rate of expenses and managerial privileges. Winding up of companies was also not totally unknown. This process gathered momentum especially after the First World War and between 1914 and 1920 many insurance companies were closed down causing large losses for the small investors.in the light of these developments the demand for stricter government control of the industry gathered momentum and called for nationalization of insurance business. Formation of Life Insurance Corporation of India: The Government of India took the first step towards nationalization of life assurance business in India on 19 th January 1956 by promulgating an ordinance vesting the management and control of life insurance business of 154 Indian, 16 Non- Indian Insurers and 75 Provident Societies operating in the country. Moreover the companies continued to exist as separate entities and the ownership continued to exist with respective shareholders. On June 18, 1956 they put a bill through the parliament which emerged as the Life Insurance Corporation Act (XXXI of 1956) which was gazette the next day. It came into force in July By this act all the assets and liabilities pertaining to the life assurance business in India of all registered Indian Insurers were to be transferred to and vested in the Life Insurance Corporation of India as from the appointed day. According to this act, a corporation called the Life Insurance Corporation of India (LIC) was established which started its career on September 1, Mr.H.M.Patel of the Indian Civil Service (ICS) and Secretary, Ministry of Finance, was nominated as its First Chairman. At the time of its inception, The LIC had five zonal offices, 33 divisional offices and 212 branches. Objectives of LIC: Pandit Jawaharlal Nehru the then Prime Minister expressed confidence that (Lok Sabha debates, 1956), Its objective will be to serve the individual as well as the state. The profit motive goes out of it and the service motive becomes much more dominant. I trust that this corporation will serve an ever-increasing number of our people and will do this work in the true spirit of service. We require life insurance to spread rapidly all over the country and to bring a measure of security to our people. Dr.Deshmukh, while piloting the bill for nationalization, 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 policyholders consistent with safety of the capital and to render prompt and efficient service to policyholders thereby making insurance widely popular. Review of Economic Environment of Insurance: According to 1995 statistics, India has the highest number of life insurance policies in force and the total investible funds with LIC were almost 8 percent of GDP. The LIC employs more than one lakh employees who in turn supervise through 200 branches and more than five lakh agents. Yet these numbers believe the fact that life insurance in India is spread very thinly and shallowly and its role as a mobiliser of long term savings is under developed. As more than 42% of the country s current GDP is being generated by service sector, obviously necessary steps are required to be taken to sustain this process of growth and towards this end a coordinated approach is necessary. And insurance industry being a service industry could prima facie act as an engine of growth. In this regard, the history of development of insurance industry in India has been one of the underperformance and under achievement. Some basic and fundamental statistics related to the Indian economy, which are relevant to the insurance industry, have been presented in the Table no.2.1 followed by Tables 2.2, 2.3, 2.4 and 2.5, which portray India s Profile, the picture of Indian Insurance market, Comparative data of Insurance Density and Insurance Penetration, Growth of GDP, Gross Domestic Savings in India regarding various countries all over the world. Blue Ocean Research Journals 48

3 Table 2.2 International Comparison of Insurance Density- Life Insurance (Premiums per capita in US$) Countries (1) 1999 (2) 2000 (3) 2001 (4) 2002 (5) 2003 (6) 2004 (7) 2005 (8) 2006 (9) 2007 (10) 2008 (11) US Canada Brazil Mexico Chile UK Germany France Russia Japan South Korea PR China India Malaysia Indonesia South Africa Nigeria Kenya Australia Blue Ocean Research Journals 49

4 International Comparison of Insurance Penetration - Life Insurance (Premiums as percentage of GDP) Countries (1) United States Canada Brazil Mexico Chile UK Germany France Russia Japan South Korea PR China India Malaysia Indonesia South Africa Nigeria Kenya Australia 1999 (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) Year Table No:2.4 Growth of GDP,Gross Domestic Savings in India GDP Rs.in crores at market prices Gross Domestic Savings Rs. In Crores at current prices Gross Domestic Savings as % of GDP at current market prices Table 2.5 Insurance Penetration: International Comparison Household savings Percent of penetration of Life Insurance Base year ,52,036 4,84, ,12, ,02,314 4,99, ,54, ,78,952 5,34, ,04, ,54,561 6,64, ,63, ,54,620 8,20, ,64, ,49,407 9,97, ,16, Base year ,39,224 10,44, ,55, ,06,673 12,26, ,58, ,83,979 14,74, ,80, ,47,857 18,01, ,20, ,74,448 18,11, NS 4.00 Country/Region India Asia World Blue Ocean Research Journals 50

5 Table 2.6 Insurance Density: International Comparison Country/Region India Asia World Insurance Industry Reformation: Insurance companies in the developed world also sell products for old age income security in form of pensions and annuities. The absence of pension coverage is a very important gap to be filled by the life insurance sector. LIC largely remains a slow moving, overstaffed behemoth. The phased globalization of the Indian economy that started in the early 1990s began to have its impact on the monopolistic structure of the Indian Insurance industry. The liberalization of insurance market was among the objectives of the Uruguay round negotiations conducted under the auspices of General Agreement on Trade and Tariff (GATT). However, LIC was put on its toes when in 1993, the Government of India appointed a committee headed by Shri.R.N.Malhotra (Report of Malhotra Committee on Insurance sector reforms, 1994) to examine the reforms required in the insurance sector. The Government with the committee came out with the following arguments in justification of liberalization: 1. Insurance penetration and density in the country is low. 2. The country needs massive investments in infrastructure and liberalizing insurance and pensions will help mobilization of long term funds. 3. Allowing foreign companies would help them bring a substantial portion of their world wide premium funds into Indian infrastructure and 4. India is a large economy and a big market with ample space for both private and public sector. Government s decision to accept recommendations of the committee on reforms in the insurance sector and to constitute an interim insurance regulatory authority by an executive order in January 1996, to look into the modifications, the regulatory framework of the insurance sector has resulted in the establishment of a statutory body for regulating the players and in broadening the sector by admission of new players from the private sector. As a result in 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor N.Malhotra, was formed to evaluate the Indian insurance industry and recommended future direction. The Malhotra Committee was setup with the objective of complementing the reforms in the financial sector. The reforms were aimed at creating a more efficient and competitive financial system suitable for the requirements of the economy keeping in mind the structural change currently underway and recognizing that insurance in an important part of the overall financial system where it was necessary to address the need for similar reforms. Appraisal of Life Insurance Corporation of India The insurance industry has undergone a drastic change since liberalization, privatization and globalization of the Indian economy in general and the insurance sector in particular. For almost four decades LIC has been sole player with virtual monopoly in the life insurance sector. In the early 90 s the government of India ventured into the policy of liberalization, privatization and globalization. This policy envisaged opening up of the economy along with most of its core sectors to the private entrepreneurs. Along with this the entry of international corporations into various business and services sectors was also planned. This attracted some private and international players in the insurance sector also. The decision to open up the insurance sector witnessed great public debate. There were arguments against opening up of the sector on the basis of the unhappy experiences of the privatization days. The government went ahead to liberalize the insurance sector on grounds of justification that insurance penetration and density in the country is low, country needs massive investments in infrastructure and liberalizing insurance will help in mobilization of long term funds. Allowing foreign companies would help in bringing substantial portion of worldwide premium funds into Indian infrastructure and India is a large economy and a big market with ample space for both private and public sector. Consequently by the year , 12 private players entered the life insurance sector. The entry of so many companies in this sector was likely to affect the performance of Life Insurance Blue Ocean Research Journals 51

6 Corporation. Thus the LIC public sector giant, which never faced competition earlier, now has to compete with the private players who boast of the rich and long experience of their partners from the developed countries of the world. The Life Insurance Corporation might even have to change its strategies of marketing, has to improve customer service and increase the level of training to its agents to hold its position in the market. It becomes imperative at this instance to appraise the performance of Life Insurance Corporation of India, succeeding sectoral reforms. Determinants for assessing the Life Insurance Corporation of India To study the performance of the entity, the three basic diagnostic tools referred by the Management Guru, Peter Drucker in his book Essential wisdom of Peter Drucker from the pages of Harvard Business Review namely Competence, Productivity and Allocation was taken as the base in terms of Performance, Productivity and Investment. The following are the list of key determinants sourced from the balance sheets and the annual reports of Insurance Regulatory and Development Authority of India, the sole governing body of Insurance. The determinants identified are listed on the basis of three categories as performance, productivity and investment portfolio. i) Determinants for assessing the Performance of LIC : The performance of LIC can be evaluated on the basis of the following indices: 1) New Business in India. 2) New Business out of India 3) Business in force in India 4) Business in force out of India 5) New Rural Business 6) Share of Rural business to Total business. 7) New Business progress under group superannuation schemes 8) Business inforce under group insurance and superannuation schemes 9) Growth in active agents 10) Composition of income 11) Average sum assured per policy 12) Ratio of First insurance to Total business in terms of number of policies and Sum assured 13) Life Insurance Fund 14) Claims settlement operations 15) Analysis of utilisation of income 16) Total life insurance premium 17) Market share of total life insurance premium 18) First year premium 19) Market share of first year premium 20) Market share of Single premium, Renewal premium and Total premium 21) New policies issued and growth rate 22) Number of life insurance offices 23) Lapsation ratio ( Number of policies & Sum Assured ) 24) Solvency margin of insurers 25) Status of grievances of life insurers & Ratio of resolved complaints and pending complaints to total complaints. ii) Determinants for assessing the Productivity of LIC This can be measured in terms of the following indices: 1) New business per branch 2) New business per agent 3) Number of policies per branch 4) Number of policies per agent 5) Premium income per agent 6) Premium income per branch 7) Ratio of expenses to premium income 8) Complaints per thousand mean number of policies in force 9) Percentage of outstanding claims to total claims payable 10) Members of various agents. 11) Operating Expenses Ratio & Growth rate 12) Dividend paid & Growth rate iii) Determinants for assessing the Investment portfolio of LIC In order to study the investment portfolio of LIC the following variables were identified: 1) Loans advanced for various development activities 2) Composition of Investments of LIC as per IRDA guidelines. 3) Equity share capital of insurance companies 4) Investments of insurers and Percentage growth 5) Proportion of Life fund to total investment fund. 6) Pattern of investments of life insurers Conclusion In a period of half a century and less, the insurance sector in the country has come a full circle, from being an open competitive market to full nationalization and then back again to a liberalized market, in which private players and public sector companies are on a level of playing field. It becomes imperative at this instance to appraise the performance of Life Insurance Corporation of India succeeding sectoral reforms. And for evaluating whether the performance of LIC is in progression, key determinants are identified and listed. Blue Ocean Research Journals 52

7 References: [1] Aggarwal, Preeti, A Note on the Insurance status in India for poor, Alliance Journal of business Ali,Ahmad,Mohammad,"Insurance in India ", Regal Publications, New Delhi, year, [2] Ali Sajid, Mohammad Riyaz, Ahmad Masharique, Insurance in India, Regal Publication New Delhi, Year [3] Amartya Sen, Lecture on Economics, politics and our lives, Organized by the Pratichi Trust, Kolkata, The Hindu, Feb 24, [4] Amit Kumar Chakrabarty, The Efficiency of LIC during the post liberalization and globalization period A case study of west Bengal, business perspectives Vol.8, No.2, pp.25-33, July-Dec (2006). [5] Finance Minister Pranab Mukherjee,LIC Contributes 4% to the country s GDP Economic Times,year [6] IRDA Annual Reports : 08 [7] In Defence of Nationalised LIC & GIC,Vol.1 AIIEA Publication,Year [8] Mehr.R.I,Puri.V.K, India and the World Economy: Himalaya publishing House, Mumbai, [9] National seminar on, A Decade of Liberalised Insurance Sector Away Ahead Andra University, Insurance worker, April 2010.pp [10] Pandit Jawaharlal Nehru, Lok Sabha debates, 1956, In Defence of Nationalised LIC & GIC, Vol.1 AIIEA Publication, Year [11] Report of Malhotra Committee on Insurance sector reforms, January 7, [12] Suminder Kaur Bawa, Life Insurance Corporation, Impact of Privatisation and performance, Regal publications, New Delhi, Year [13] Shri T.S. Vijayan, Chairman LIC, Interview in Business Standard. [14] Vivek Gupta, Global Insurance Industry A Perspective ICFAI University press (2006) Blue Ocean Research Journals 53