LIFE INSURANCE INDUSTRY IN INDIA

Transcription

1 LIFE INSURANCE INDUSTRY IN INDIA INTRODUCTION The insurance industry in India is under a phase of constant change for the past few years, due to increasing private participation in the market. At global level also insurance has established itself as a key field due to increasing risk and hazards, which includes both, due to natural imbalances and activities of mankind. As part of the study of the insurance mechanism and the way in which it works, it will be helpful to examine some of the unique facets of insurance company operations. The unique nature of the insurance product requires certain specialized functions that do not exist in other businesses. This chapter presents functions of insurers, marketing mix for life insurance business, and a brief history of the evolution and growth of insurance industry in India. Kinds of Insurance From commercial point of view insurance business is broadly divided into: (i) Life Insurance, and (ii) General Insurance. In fact, insurance other than life is included under the category of general insurance. General insurance include: Property insurance, Liability insurance and other forms. Marine and fire insurance are included under property insurance. Liability insurance includes workmen compensation insurance, fidelity, and public liability insurance, etc. The examples of other forms of insurance are export credit insurance, deposit guarantee insurance, etc., whereby the insurer guarantees to pay certain sum at certain events. This kind of insurance is extending these days. Life insurance is different from other insurances. Under life insurance, the subject matter of insurance is life of human being. In life

2 64 insurance, unlike in general insurance, the promise has to be redeemed sooner or later. In general insurance, amount is payable only if loss occurs to the insured property. General insurance is a contract of indemnity. The amount payable in general insurance depends on the extent of damage and insurance coverage, and has to be determined through surveys and assessment. If the property is not fully insured, the average clause is applicable in general insurance. The amount payable on a claim arising in life insurance is not in doubt. It is as mentioned in the policy. Life insurance contracts are long period contracts. Most of the policies are for term of 15 years or more. General insurance is a one year contract, unless renewed. Long term nature of the life insurance policy results in a long lasting relationship between the insurer and the customer (insured), and in the meantime a number of policy services arise. The long lasting relationship between the insurer and the customer calls for relationship marketing in the case of life insurance services 1. Life insurance enjoys maximum scope because life is the most important property of the society or an individual. Life insurance not only provides protection but is also a sort of investment. Benefits of a Strong Life Insurance Market to Economic Development An evolving insurance sector is of vital importance for economic growth. While encouraging savings habit it also provides a safety net to both enterprises and individuals. Development of the insurance sector is necessary to support the structural changes in the economy. Social security and pension reforms too benefit from a mature insurance industry. A study by the UNCTAD noted that a strong and efficient life insurance market can aid in overall economic development in the following ways: 2

3 65 Life insurance can contribute to social stability by permitting individuals to minimize financial stress and worry. Life insurance can reduce the financial burden on the state of caring for the aged and for those made financially destitute because of the death of a family breadwinner. Through the accumulation from thousands of policyholders of small amounts of private savings, life insurers can accumulate sums to be invested in the public and private sectors. This can benefit an economy by creating a source of financing for new business, for new house owners, and for farmers and their equipment. The life insurance business generates employment. Life insurance can permit more favourable credit terms to borrowers both individuals and business and can decrease the risk of default. Life insurance can also minimize the financial disruption to business caused by the death of key employees and owners. By making available a variety of employee benefit plans, life insurance companies can promote better employee-employer relations and can provide low-cost benefits to a broad spectrum of persons who may otherwise have been unable to obtain such protection. Functions of Insurers Although there are definite operational differences between life insurance companies and property and liability insurers, the major activities of all insurers may be classified as: (1) Ratemaking, (2) Production, (3) Underwriting, (4) Claim settlement, and (5) Investment. In addition to these, there are, of course, various other activities common to most

4 66 business firms such as accounting, human resource management, market research, and so on. Thus all the activities of a life insurance company may be arranged into three major functional classifications marketing, investment, and administration. Of these three areas, marketing is the largest in terms of both personnel requirements and costs and is critical to success 3. Rate Making Function An insurance rate is the price charged for each unit of protection. Like any other price, it is a function of the cost of production. However, in insurance, unlike other industries, the cost of production is not known when the policy is sold, and it will not be known until some time in future, when the policy has expired. One fundamental difference between insurance pricing and the pricing function in other industries is that the price for insurance must be based on prediction. Rate should be distinguished from a premium, which is determined by multiplying the rate by the number of units of protection purchased. The rate making function in life insurance company is performed by the actuarial department. The rates are subject to government regulation. The rates must be adequate, not excessive, and not unfairly discriminatory. To the extent possible, rates should be relatively stable over time. At the same time, rates should be sufficiently responsive to changing conditions to avoid inadequacies in the event of deteriorating loss experience 4. Life insurance rates are influenced by three major determinants: (1) Mortality rate, (2) Interest on investment, and (3) commission and other expenses incurred in operating an insurance enterprise (loading). Production Function The production department of an insurance company, sometimes called the agency department, is its sales or marketing division. This

5 67 department supervises the external portion of the sales effort, which is conducted by the agents and development officers. It is the responsibility of this department to select and appoint agents and assist in sales. In general, it renders assistance to agents in technical matters. Underwriting Function Underwriting is an essential element in the operation of any insurance program. The underwriting process determines which applicants are eligible for insurance coverage. The purpose of underwriting is to control adverse selection and assemble a group of insured whose loss potential is homogeneous. In the life insurance field, applicants may be classified as standard, preferred, substandard, and uninsurable. Since the application for the insurance originates with the agent, this person is often called a field underwriter. The agent plays a far more important role in the underwriting process in life insurance. To perform effectively, the underwriter must obtain as much information about the subject of the insurance as possible within the limitations imposed by time and the cost of obtaining additional data. The proposed is required to provide all information regarding the subject matter of insurance, in the proposal form. Failure to reveal important information can result in dispute with the insurer or expensive litigation and may be grounds for the insurer to deny claims. In life insurance, the primary focus is on the health of the applicant 5. In case of policies other than non-medical, a medical report from the physician selected by the insurance company is required. Claim Settlement Function One basic purpose of insurance is to provide for the indemnification of those members of the group who suffer losses. In the case of life insurance contract, the indemnity principle is not applicable. In life insurance, when the insured event happens, i.e., maturity or death, the

6 68 insurer is required to pay the sum assured along with vested bonus, if any, to the policyholder in the case of maturity claims, and to the beneficiary in the case of death claims. The payment of claim amount is the function of the claims department. As per the Insurance Regulatory and Development Authority (IRDA) guidelines, death claim should be paid within 30 days of intimation of claim. Investment Function As a result of the business operations, insurance companies accumulate large amounts of money for the payment of claims in the future. It is the responsibility of the investment committee to see that they are properly invested. The primary requisite of insurance company investments is safety of principal. In addition, the return earned on investment is an important variable in the rating process. The investment of LIC is governed by Section 27A of the insurance Act, 1938 and the (Investment) Regulations prescribed by the IRDA. The investment norm applicable for life insurers as per IRDA Regulations is indicated in Table 3.1. Table 3.1 Investment Norms for Life Insurers Sl. No. Type of Investment IRDA Norm 1. Govt. Securities Not less than 25% 2. Govt. Securities or other Approved Securities (including item no.1) 3. Approved Investments (a) Infrastructure & Social Sector (b) Others Source: IRDA Regulations Not less than 50% Not less than 15% Not exceeding 35% LIFE INSURANCE MARKETING

7 69 Marketing is concerned with identifying customer needs and determining ways in which the organization is able to meet these needs in a profitable manner. It is the process by which products (both goods and services) are matched with market and through which the customer is able to enjoy the product. Marketing is the delivery of customer satisfaction at a profit. The twofold goal of marketing is to attract new customers by promising superior value and to keep current customers by delivering satisfaction 6. The term insurance marketing refers to the marketing of insurance services with the motto of customer-orientation and profit-generation. In insurance business, the prime focus is on the policy-holders and therefore, an individual or an institution taking the policies is known as the actual policy-holder whereas the persons or organizations willing to do so but waiting for the creative persuasive efforts of the agents are known as the prospects or potential policy-holders. Insurance marketing is an effort to transform the prospects into actual policy-holders. In marketing, the job is not to find the right customers for the products, but the right products for the customers 7. The demand for insurance depends on various factors, sometimes particular to an individual. However, the following factors are generally common. (1) Perception towards losses If the individual feel that insurer s calculation of risk and expected losses is better than his own; he will opt for insurance cover. (2) Price for risk transformation The cost of insurance vis-à-vis other products. (3) Income and wealth status Demand for insurance logically is positively correlated with the income and wealth of the potential insured.

8 70 (4) Social Insurance Programs If good social program by government or other public agencies are available as per individual s satisfaction, demand for private insurance will be lower. (5) Nature of loss Insurance covers for non-monetary losses like mental tension and pain, psychological sufferings are generally not very common and also legal structure takes care of these partially. At the life insurance market, an individual s specific behaviour is governed by internal factors like need, motives, perception and attitudes as well as by external factors or environmental influences such as the family, social groups, cultural, economic and business influences 8. From the above, it is clear that the purchase strategy of an individual is influenced by a number of factors and an in-depth study of these influences is essential to understand the behavioural profile of customers. The marketing personnel are required to understand the needs and aspirations of the prospects, family background, social and economic status, their perception and attitude towards life insurance. LIFE INSURANCE MARKETING MIX The marketing concept dictates that marketing decisions should be based upon customer needs and wants. Also, because services are intangible customers will be looking for any tangible cue to help them understand the nature of the service experience. The insurance marketing focuses on the formulation of an ideal mix for the insurance business so that the insurance organizations survive and thrive in a right perspective. Identification of demand and supply involves various functions of life insurance marketing to attain success in the insurance market and the combination of these functions is known as Life Insurance Marketing Mix 9.

9 71 Product Figure 3.1 Expanded Marketing Mix for Life Insurance Services Figure 3.1 portrays Process expanded marketing Price mix for life insurance services. The traditional marketing mix is composed of the four P s: Product, Price, Place, and Promotion. In addition to the traditional four P s, Marketin the insurance services Physical marketing mix includes people, physical evidence, g Mix evidence and process 10. Place Product: Product is the sum total of physical, social and psychological benefits. In life insurance, the products are policies/plans or schemes People Promotion developed and marketed for different market segments. Life insurance product has to be developed keeping in view the needs of the people i.e., (i) providing financial security to the family in case of early death of the breadwinner of the family, and (ii) providing financial support to the insured in case of he/she living too long. An insurance company may offer a single product or a mix of several products to a person or family. Whole life, Endowment, and Term assurance policies are suitable to the first category, whereas Pension Plans, Annuities and the like are suitable to the second category mentioned above. The conventional policies have the main attributes of protection at early death or living too long; but majority of the population is interested mainly in investment. Price: Premium is the price which the person seeking insurance pays to the insurance company for purchase of life insurance policy. It is fixed taking into account three factors: (i) mortality rate, (ii) Interest on investment, and (iii) commission and other administrative expenses (loading). Price fixing is the function of actuarial department. (i) Mortality: Since the insurance company assumes the risk of the individual and since this risk is based on life contingencies, it is

10 72 important that the company knows within reasonable limits how many people will die at each stage. For this purpose, insurers use an instrument called mortality table which is a statistical representation showing the rate of mortality at each age. Based on past experience, applying the theory of probability, actuaries are able to predict the number of deaths among a given number of people at some given age. (ii) Interest: The insurance company collects the premium in advance and does not pay claims until a future date. Therefore, it has the use of the insured s money for some time. They can invest this money and earn interest on it. Since they do earn interest on the funds they collect, they do not need to collect the full amount of future losses from the members of the group. When interest is taken into the computation of premiums, there will be a corresponding reduction in the net premium payable by each individual insured. (iii) Loading: Mortality and interest are used to compute the net premium, which measures only the cost of claims and omits the provision for operating expenses. The net premium plus expense loading constitute the gross premium, which is the selling price of the contract and the amount the insured pays. Place: Since life insurance services are intangible, they cannot be normally stored. Distribution channels like agents, brokers, bancassurance, tie-ups with corporate agencies, etc. are used to market life insurance products. Branch offices, policy servicing centres, home or office of the customer, clubs, festival places, etc., are the places where life insurance services can be offered and delivered. Promotion: In the case of service, consumer would prefer more personal information. He/she is unlikely to buy without adequate information on the

11 73 services. The provider of service may be required to communicate the intangible aspects of the service through advertising, publicity, sales promotion campaigns, personal selling, public relations, exhibition and demonstration. Potential policy-holders are reluctant to think about the disaster and death. So they postpone planning for these possibilities unless they are contacted and influenced by insurance agents. For promoting life insurance business, sales promotion activities are to be carried out by the agents, development officers and branch offices. Satisfied customers also promote life insurance through word of mouth advertising 11. People: It refers to all human actors who play a part in service delivery and thus influence the buyer s perceptions. All of the human actors such as the firm s personnel, the customer, and other customers in the service environment provide cues to the customer regarding the nature of the service itself. Agents, brokers, development officers and other company staff are the people element in the marketing mix for life insurance services. How these people are dressed, their personal appearance, and their attitudes and behaviours all influence the customer s perception of the service 12. Physical evidence: The physical evidence of service includes all of the tangible representations of the service. The physical evidence cues provide excellent opportunities for the firm to send consistent and strong messages regarding the organization s purpose, the intended market segments, and nature of the service. The policy document, premium receipt, billing statements, brochures, letters, and website of the branch office are the physical evidence in life insurance service 13. Process: The actual procedures, mechanisms, and flow of activities by which the service is delivered are called the process. According to Shotstack, the issues in process management go from process planning and

12 74 control, operations planning, facilities design, scheduling, inventory planning and control, quality control, operation control to forecasting, and long-term planning 14. The various process in life insurance service are receiving applications, verification of the application, medical examination of the proposed, sanction and acceptance of first premium, underwriting, issue of policy document, claim intimation, and claim settlement and the like. HISTORICAL FRAMEWORK OF INSURANCE The story of insurance is probably as old as the story of mankind. A study of human history reveals a universal desire for security. The quest for security has been one of the most potent and motivating forces in material and cultural evolution. The same instinct that prompts the modern businessman to secure himself against loss and disaster existed in primitive man also 15. The beginnings of the concept of insurance date back almost 6000 years. The ideas of insurance were being practiced in Babylonia and India, centuries ago. The codes of Hammurabi and of Manu had recognized the advisability of provision for sharing the future losses 16. The Sanskrit term Yogakshema is found in the Rig Veda and that some kind of commercial insurance was practiced by the Aryan tribes in India nearly 3000 years ago. Yogakshema implies the idea of welfare, well-being, including the idea of prosperity, happiness and so on 17. Evidences are on record that marine insurance was the earliest form of insurance. Marine insurance, in fact, started from Italy where some of its famous commercial centres like Florence, Janeva, Venice and Lombard Street started the use of marine insurance policies. Then this system spread over to other countries like France, Holland, Spain, Germany and England. The marine policies of the present form were sold in the beginning of 14 th century by the Brugians 18. Lloyd s Coffee-house in

13 75 England gave an impetus to develop marine insurance. After the evolution of marine insurance, fire insurance system came into existence. The fire insurance was started in India with the establishment of Triton Insurance Company at Calcutta in Global Perspective of Life Insurance The beginnings of personal insurance are generally attributed to the Greeks. The Greek societies practiced elementary insurance. Life insurance made its first appearance in England in 16 th century. The first recorded evidence in England being the policy on the life of William Gybbons on June 18, Even before this date annuities had become quite common in England 20. The first registered life office in England was the Hand-in-Hand society established in In France, the first life insurance company was chartered by the King in The first life insurer in Germany appears to have been the Deutsche Lebenversicherungs Gesellschaft, founded in English companies had established insurance agencies in Germany, Netherlands and Scandinavian countries. French companies reached out into Belgium, Spain, Italy and Switzerland. These countries, as well as Austria and Hungary did not establish their own companies until the middle of the 19 th century. Life insurance did not prosper in the United States during the 18 th century because of serious fluctuations in death rate. The growth of insurance in the American colonies was hampered due to the monopoly on corporate insurers granted by the English Crown in The first mutual life insurance corporation was established in the United States in 1759 which is now known as the Presbyterian Ministers Fund. The Girard Life Insurance, Annuity and Trust Company of Philadelphia, established in1836, used a new principle of granting policy owners participation in its profits.

14 76 The first life insurance company to open business in Japan was Meiji Life Assurance Company. Life insurance spread throughout Japan as a result of World War II. Japanese and British insurers played a significant role in the development of life insurance in other Asian countries 22. In Korea, British companies were most active in the insurance business until Japan gained control of Korea in The modern Korean life industry really began in the 1960s. British and other foreign companies played a major role in the development of life insurance business in Singapore 23. The global insurance industry has undergone a major change after 11 th September attack on the World Trade Center in United States. An estimated loss of $ 70 billion of this event has posed serious questions before the players all around the world to rethink and devise their strategies accordingly. A few insurers have disappeared from the global picture. Also, the cover for terrorism has disappeared from the international markets. Insurers have become cautious while underwriting risk on a global basis. In terms of demand, Japan and the U.S.A. are still the largest insurance markets, accounting over 70 percent of global premiums. Insurance penetration (premium volume as a percent of GDP) for life insurance is highest in Japan, South Africa, and the Republic of Korea where it averages over 10 percent. Worldwide insurance premium amounted to US $ 3723 billion in 2006 comprising of US $ 2209 billion in life and US $ 1514 billion in general insurance business. At this level the premium has increased by 5.0 per cent in real terms in 2006 as compared to 2.5 per cent in The growth in life insurance premium was about 7.7 percent which is the highest since It is interesting to note that in most of the countries the growth in life insurance premium was faster than growth in the economic activity. In emerging markets, the growth in life insurance tripled to 21.1 percent from 7.5 percent in 2005.

15 77 Indian Perspective The insurance business in India has completed a full circle from being an open competitive market to nationalization and to a liberalized market again. The saga of life insurance business in India can be viewed in three different phases, namely: (1) Pre-nationalisation, (2) Post nationalisation and pre-liberalisation (3) Post-liberalisation 1. Pre-nationalisation The insurance business in India dates back to 1818 when the first insurance company called Oriental Life Insurance Company established at Calcutta. This was followed in quick succession with the establishment of Bombay Life Insurance Company in 1823 and Madras Equitable in About 285 companies were formed during the period from 1818 to 1868 and out of these, 174 had ceased to exist by The oldest known life policy issued in India appears to be the one sold by the Royal insurance on the life of one Cursetjee Furdoonjee on 6 th January There were in all nearly 15 companies working in India by 1870, out of which seven were established in India and eight foreign companies with their head offices in U.K. Prior to 1871, Indians were charged about 15 percent more premiums as compared to Europeans 26. Bombay Mutual Life Insurance Society established in 1870 was the first company not to differentiate between Indians and Europeans in the matter of fixation of premium 27. The period of 20 years after the establishment of Bombay Mutual was dominated by small societies, promoted mainly for the benefit of specified communities. Foreign companies had an upper hand in matters of insurance business and they enjoyed near monopoly right up to the end of the 19 th century.

16 78 The Swadeshi movement ( ) gave a great impetus to formation of more number of insurance companies. Subsequently, insurance regulations formally began in India through the passing of the Life Insurance Companies Act, In 1914, there were only 44 insurance companies in India and during the next 25 years it rose to 176 but many of them failed 28. The Insurance Act, 1912 was later broad based and the Insurance Act 1928 came in to existence. The Insurance Act was subsequently reviewed and a comprehensive legislation was enacted called the Insurance Act, There was mushroom growth of insurance companies in India after the passing of Insurance Act, But the per capita insurance in India was minimum during that period with USA Rs. 2000, UK Rs. 600, and India Rs After independence, the Indian Insurance business witnessed severe competition as a result of which the known Indian Insurance were dislodged by Indian Life Insurance companies. From Rs crores business in 1943, it reached to rupees crores in 1945; the first time that Indian Insurance crossed the Rs. 100 cores mark 30. Even this limited growth was marked by many malpractices, deficiencies, and frequent liquidations of insurance companies shaking public confidence. During the decade , as many a 25 insurers went into liquidation and equal number had to transfer their business to other companies. Since banking and insurance in those days were in the hands of big industrial houses, there was interlocking of funds between them. Life insurance business remained essentially an urban phenomenon during these years. This led to the nationalization of life insurance. By 1956, 154 Indian insurers, 16 foreign insurers and 75 provident societies were carrying on life insurance business in India. The bill to provide for the nationalization of Life insurance business in India was introduced in the Lok Sabha on 18th

17 79 February 1956 and it became an act on and Life Insurance Corporation of India came in to being on 1 st September At the time of nationalization, LIC had 05 Zonal Offices 33 Divisional Offices 212 Branches and Sub-Offices all over India at 97 Centres 31. Table 3.2 exhibits the life insurance business in India from 1928 to 1956 (pre nationalization period). Table 3.2 reveals that new business number of policies sold has increased from 93,000 to 5,67,000 during the pre-nationalisation period from 1928 to 1956 i.e., an increase of percent over a period of 28 years. The sum assured of new business policies increased from Rs crore to Rs crore i.e., an increase of percent during the same period. The number of policies in force increased from 5,64,000 to 49,99,000 during the period from 1928 to The increase in terms of percentage was The sum assured of business in force during the pre-nationalisation period increased from Rs. 124 crore to Rs. 1,275 crore i.e., an increase of percent over a period of 28 years.

18 80 Table 3.2 Life Insurance Business in India (Pre-nationalisation): (No. of policies in thousands, sum assured in crores of rupees) Year No. of Policies New Business Growth (%) Sum Assured Growth (%) No. of Policies Business in Force Growth (%) Sum Assured Growth (%) Source: Journal of Insurance & Risk Management Vol. 1, Issue 2, May Post-Nationalisation and Pre-Liberalisation Period Indian life insurance industry, since nationalisation, has registered a significant growth and gradually increased its share in household financial savings and premium income has done reasonably well 32.

19 81 Table 3.3 Life Insurance Business in India (Post-Nationalisation & Pre-Liberalisation Period): (No. of policies in thousands and sum assured in crores) New Business Business in Force Year No. of policies Growth % Sum Assured Growth % No. of Policies Growth % Sum Assured Growth % 1957* ** * 15 months ending in December. ** 15 months ending in March. Source: Journal of Insurance and Risk Management, Vol. 1, Issue2, May 2003.

20 82 Table 3.3 gives the growth of life insurance business in India during the post nationalisation period i.e., from fiscal year 1957 to The number of new policies sold increased from 9,32,000 to 1,48,44,000 at a growth rate of 1, percent and sum assured of new policies sold increased from Rs crore to Rs.75, crore at a growth rate of 22, percent over a period of 42 years from 1957 to The business in force in terms of number of policies increased from 54,17,000 to 9,16,37,000 at a rate of 1, percent and the sum assured of business in force increased from Rs.1, crore to Rs.3,68, crore at a rate of 26, percent during the same period. During the post nationalised era, the industry introduced more than fifty different products to cater to the needs of different segments of the market. Statistics indicate the creditable performance of life insurance industry in terms of covering of premium, the number of products sold, and the variety of products introduced but also in the area of geographical coverage. However, the monopoly and the growth of business over a period of time have not met the requirements that normally one anticipates when it comes to growth of business 33. Despite the impressive growth indicated by the Table 3.3, there was a general feeling of dissatisfaction with the performance of the insurance sector when viewed against the relevant demographic data. In the mid nineties when the economic reforms process was under way, the total insurance premium as a proportion of Gross Domestic Product (GDP) amounted to a paltry 1.80 percent of which life premium accounted for only 1.2 percent and non-life premium for only 0.6 percent, which was negligible as compared to Malaysia (3.7 percent), Hong Kong (31percent), Thailand (2 percent), and Japan (8.7 percent). According to the World Development Report and World insurance in 1997, the life fund as percentage of Gross Domestic Savings (GDS) in USA was percent, UK 55.40

21 83 percent, Canada percent, Japan percent, South Korea percent, Malaysia 9.2 percent, Brazil 22 percent, Philippines 4.10 percent, and China 1.19 percent. Life fund as percentage of GDS in India was 6.02 percent in the year , as per the report 34. Life fund as percentage of GDS in the developed and developing countries shows the progress made by insurance industry in these countries. Insurance Sector Reforms in India Reforms in the insurance sector in India started part of the liberalization, privatization and globalization process initiated by the Government. In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor, R.N. Malhotra, was formed to evaluate the Indian insurance industry and recommend future direction. The committee was set up with the objective of complementing the reforms initiated in the financial sector. In 1994, the committee submitted the report and some of the key recommendations included: 35 (i) Structure Government stake in the insurance companies to be brought down to 50%. Government should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as independent corporations. All the insurance companies should be given greater freedom to operate. (ii) Competition Private companies with a minimum paid up capital of Rs.1 billion should be allowed to enter the industry.

22 84 No company should deal in both Life and General Insurance through a single entity. Foreign companies may be allowed to enter the industry in collaboration with domestic companies. Postal life insurance should be allowed to operate in the rural market. Only one State Level Life Insurance Company should be allowed to operate in each state. (iii) Regulatory Body The Insurance Act should be changed. An Insurance Regulatory body should be set up. Controller of Insurance (Currently a part from the Finance Ministry) should be made independent. (iv) Investments Mandatory Investments of LIC Life Fund in government securities to be reduced from 75 % to 50 %. GIC and its subsidiaries are not to hold more than 5 % in any company (There current holdings to be brought down to this level over a period of time). (v) Customer Service LIC should pay interest on delays in payments beyond 30 days. Insurance companies must be encouraged to set up unit linked pension plans. Computerisation of operations and updating of technology to be carried out in insurance industry.

23 85 The committee emphasized that in order to improve the customer services and increase the coverage of the insurance, the industry should be opened up to competition. But at the same time, the committee felt the need to exercise caution as any failure on the part of new players could ruin the public confidence in the industry. The Insurance Regulatory and Development Authority (IRDA) The insurance sector began its reform process with the passage of the insurance Regulatory and Development Authority (IRDA) bill in Parliament in December With the setting up of IRDA, the government has once again de-regulated the sector opening it for private players. One of the primary objectives of the Indian insurance regulation is the protection of policyholders against insolvency of insurance companies. To achieve this objective, the Regulator is endowed with a host of regulatory and supervisory powers, delegated to him by the government to ensure the financial and managerial soundness of insurers licensed 36. The IRDA since its incorporation as a statutory body in April 2000 has fastidiously stuck to its schedule of framing regulations and registering the private sector insurance companies. As per the Act, new entrants, who must be Indian, will be granted license to transact insurance business only if they introduce a minimum capital of Rs. 100 crore for life and general insurance business and Rs. 200 crore for re-insurance business. Foreign collaboration will be allowed but foreign investment is capped at 26% of the total capital. The minimum solvency margin for private insurers is Rs. 50 crore for life insurance companies, Rs. 50 crore or a sum equivalent to 20 percent of net premium income for general insurance and Rs. 100 crore for re-insurance companies. Some of the very important functions of the Regulator include inter alia the following:

24 86 Licensing to transact insurance business. Ensuring security to policyholders. Control over products and illustrations/sales literatures. Monitoring mechanism. There are also other functions like provisions in regard to management expenses and agency commissions, re-insurance, standards of accounting, consumer grievance reddressals, control over company operations etc. According to the Act, a person desiring to obtain or renew a licence to act as an insurance agent or a composite insurance agent shall make an application to the regulator in prescribed form. The applicant shall possess the minimum qualification of a pass in 12 th standard or equivalent examination, where the applicant resides in urban area, and a pass in 10 th standard or equivalent examination if the applicant resides in rural area. The applicant shall have completed from an approved institution, at least, one hundred hours practical training in life or general insurance business as the case may be, where such applicant is seeking license for the first time to act as insurance agent. The period of training shall be 150 hours, if the person is seeking license for the first time to act as a composite insurance agent. The applicant shall have passed the pre-recruitment examination in life or general insurance business, or both, as the case may be, conducted by the Insurance Institute of India, Mumbai, or any other examination body. The proposed insurance company, when applying for licence, has to submit complete details about the promoters and their financial standing; also it s paid up capital and other financial data. It has also to submit its strategic plans and financial projections for initial stipulated number of years. Rural and Social Sector Obligations

25 87 Every insurer, who carries on insurance business after the commencement of the IRDA Act, 1999 is required to ensure that the following obligations are undertaken, during the first financial years, in respect of the following: (a) Rural Sector (where the population is not more than 5000; population density not more than 400 per Sq. Km; and at least 75 percent of male working population is engaged in agriculture) in respect of life insurer. 5 % in the first financial year; 7 % in the second financial year; 10 % in the third financial year; 12 % in the fourth financial year; 15 % in the fifth year; of total policies written directly in that year. (b) Social Sector (includes unorganized sector, informal sector, economically vulnerable or backward classes and other categories of persons, both rural and urban areas) in respect of all insurers. 5,000 lives in the first financial year; 7,500 lives in the second financial year; 10,000 lives in the third financial year; 15,000 lives in the fourth financial year; 20,000 lives in the fifth year. In case of government insurers the quantum of insurance business to be done shall not be less than what has been recorded by them for the accounting year ended 31 st March, Life Insurance in the Post-Liberalised Era

26 88 With foreign direct investment in the insurance sector permitted up to 26 percent of equity, global insurers have rushed into the Indian market to capitalize on the sizeable middle class. Indian private companies have also entered into the field. The first of the licenses for the companies in the private sector was issued in October, 2000 to HDFC Standard. Insurance industry as on comprised mainly two players: (1) Life Insurance Corporation of India (LIC) in the life sector and (2) General insurance Corporation of India (GIC) in the non-life sector. GIC had four subsidiary companies, namely: i) The Oriental Insurance Company Limited, ii) The New India Assurance Company Limited, iii) National Insurance Company Limited, and iv) United India Insurance Company Limited. With effect from December 2000, these subsidiaries have been de-linked from the parent company and made as independent insurance companies. With effect from December 2000, the GIC functions as a National Re-insurer. Insurance industry in the year alone had 16 new entrants; ten in the life sector and six in the non-life sector. Since opening up of the insurance sector in 1999, 27 private companies have been granted licenses by 31 st March, 2007 to conduct business in life and general insurance. Of the 27, 16 were in the life insurance and eleven (including a standalone health insurance company) in general insurance (see Table 3.4). During the last several years capital amounting to Rs. 8, crore was brought in by the private players, of which the contribution of foreign partners has been Rs.1, crore 37. There has been no infusion of capital in the case of LIC which stood at Rs. 5 crore (See appendix 1). Table 3.4 Number of Registered Insurers in India Type of Business Public Sector Private Sector Total Life Insurance 1 16* 17

27 89 General insurance 6 11# 17 Re-insurance Total * One has been granted registration in # Two have been granted registration in Source: IRDA Annual report Indian insurance sector recorded an impressive growth after the sector was opened for private players. According to the IRDA Annual Report, the life and non-life market touched Rs.1,00,000 crore mark. Indian insurance business, which remained underdeveloped with low levels of insurance penetration and insurance density, has shown signs of improvement after opening of the market in The premium underwritten in India and abroad by life insurers in has grown by percent as against percent in First year premium including single premium accounted for percent and renewal premium accounted for percent of the total life premium. The industry services the largest number of life insurance policies in the world. Competition among the companies has impacted their efficiency in production, innovation and claim management. Further, new untapped market is being exploited by the private insurers forcing the public insurer to come out with innovative schemes. Life insurance penetration and density throw light on the business performance of life insurance providers at global level. The insurance penetration in a country depends on its level of economic activity, risk awareness among the people and the deepening of the financial system. Insurance penetration is measured in terms of premium (in US$) as a percentage of GDP of the country and insurance density is measured as ratio (in percent) of premium to total population. Even though there has been growth in the life insurance business after the entry of private players,

28 90 the fact remains that the insurance penetration and insurance density in India, compared to some of the developed and developing countries of the world is very low in the post liberalized era 38. Table 3.5 shows the life insurance penetration in some of the developed and developing countries of the world.

29 91 Table 3.5 International Comparison of Life Insurance penetration (premium as % of GDP) Countries United States Canada Brazil Mexico Chile United Kingdom Germany France Russia Japan South Korea PR China India Malaysia Indonesia South Africa Nigeria Kenya Australia Asia World Source: Swiss Re Sigma Vol., 2001, 2002, 2003, 2004, 2005, 2006, 2007, and Note: Data relates to calendar years. It is evident from Table 3.5 that life insurance penetration in India which was 1.77 percent in 2000 increased to 4 percent in 2007 at a growth rate of percent. However, in respect of life insurance, India presents a clear case of under insured country (4 percent of GDP) compared to the world average (4.40 percent), Asian average (4.60 percent) and developed countries like U.K. (12.60 percent), France (7.30 percent), and developing countries in Asia like Japan (7.50 percent), South Korea (8.20 percent) in 2007.

30 92 Table 3.6 International Comparison of Life Insurance Density (premium per capita in US $) Countries USA Canada Brazil Mexico Chile UK Germany France Russia Japan South Korea PR China India Malaysia Indonesia South Africa Nigeria Kenya Australia Asia World Source: Swiss Re Sigma 2000, 2001,2002,2003,2004, 2005, 2006 and Note: Data relates to calendar years. Table 3.6 represents the insurance density in terms of premium per capita (in USD) at global level. Life insurance density in India which was 6.1 USD in 1999 increased to 33.2 USD in the year 2006 i.e., at a growth rate of percent. However, while considering the significance of insurance in the life of an individual and the performance of the industry at the global level, the performance of India looks very gloomy during the period from

31 to Life insurance density in India was just 33.2 USD compared to the world average (330.6 USD), Asian average (154.6 USD) and developed countries like USA ( USD), UK ( USD), Germany (1136.1USD), France ( USD), Japan ( USD), developing countries in Asia like South Korea (1480 USD), Malaysia (189.2 USD) in Analysis of table 3.5 and 3.6 reveals that there is a gap between what is offered and what is demanded, with regard to life insurance in India. Growth of life insurance industry is measured in terms of first year premium income. Since the first private insurer entered in the market in October 2000, the year is taken as the first full year of operations in the post IRDA era. Table 3.7 reveals the growth of Indian life insurance industry in the post-liberalised period from to Table 3.7 Growth of Life Insurance Industry in the Post-Liberalised era Year FYPI - LIC (Rs. in cr.) Growth (in %) Private insurers FYPI (Rs.in cr.) Growth (in %) Total FYPI (Rs. in cr.) Growth (in %) , , , , , , , , , , , , , , , , Note: Figures do not include Group & Superannuation business. Source: Asia Insurance Post, Vol.6, Issue 11, June

32 94 It can be visualised from Table 3.7 that the First Year Premium Income (FYPI) for the industry in the year (i.e., the first full year of operations in the Post- IRDA era) was Rs.16, crore, out of which Rs crore was the contribution of the private sector companies. The FYPI for the industry in was Rs.61, crore, out of which Rs.16, crore was the contribution of the private insurers. The FYPI recorded a negative growth of percent in which can be attributed to the decline in the premium income of LIC, which again was due to the fall in the number of its agents in the same year 39. The industry picked up and recorded the highest growth of 99 percent in the year The growth in premium income for the period from to was percent for the private insurers whereas it was percent in the case of LIC. The growth rate for the industry as a whole was during the same period. Figure 3.2 depicts the growth of life insurance industry in India in the post-liberalised era.

33 95 Figure 3.2 Growth of Life Insurance Industry in the Post-Liberalised era LIC Private insurers Amount Year Table 3.7 depicts that FYPI of LIC fell down to percent whereas it increased to percent in the case of private insurers in i.e., the very next year of commencement of business by private players. But by the end of , LIC picked up and was able to grow at a rate of percent, whereas growth rate of private players fell down from percent in to percent in Life insurance business is significantly influenced by the state of economy of a country and major impacting factors are rate of growth of GDP, domestic savings, household financial savings, disposable income, etc. The share of life insurance funds in Gross Domestic Savings (GDS) has increased considerably after the liberalization process initiated in the country 40. Table 3.8 portrays the growth of life insurance funds in Gross

34 96 Domestic Savings (GDS), Financial Savings (FS), and Household Savings (HS) for the period from to Year Table 3.8 Gross Domestic Saving: Life Insurance Funds % Share in Gross Domestic Savings Life Insurance Funds % Share in Financial Savings % Share in Household Savings Source: National Income Statistics, Centre for Monitoring Indian Economy. The share of life insurance funds in GDS have increased from 4.75 percent in to 6.86 percent in At the same time, life insurance funds in Financial Savings (FS) have increased from 9.71 percent to percent, and in Household Savings (HS) the share increased from 5.81 percent to 7.34 percent during the same period. Though the share of life fund in household financial assets has gone up during the last decade and Indian life insurance industry registered better growth rate compared with global growth rate, life insurance premium volume and global market share remained quite low. Table 3.9 throws light on the premium volume of some of the developed and developing countries of the world in 2006 and 2007, and global share of life premium in USD in 2007, reported by Swiss Re Sigma. Table 3.9 Global Share of Life Premium (in US $ in 2007) Premium Volume Change Share of World

35 97 Country (in millions of USD) in 2007 (in %) Market in 2007 (in %) Ranking United States United Kingdom France Italy Germany Japan PR China Taiwan India South Africa Australia World Source: Swiss Re Sigma No.3/2008 The share of India in World market was only 1.97 percent in respect of premium volume during the year USA was in the first place followed by Japan and U K in the second and third position respectively, in the year At the same time, life premium volume in respect of India has increased from US $ in 2006 to US $ in 2007 at a growth rate of percent. However, the world ranking in terms of life insurance premium volume has improved from 17 th in 2005 to 11 th in 2007 and the share in world market has increased from 1.02 percent to 1.97 percent during the same period 41. Conclusion With the starting of the first life insurance company in 1818, the organized Indian insurance industry in its life spanning nearly two centuries has witnessed several phases of boom and bust, growth and decline, confidence and distrust, yet has moved forward. The industry received sharper focus after Independence. Consequent on the recommendations of the Malhotra Committee, insurance sector was opened to private players

36 98 and the first private insurer commenced operations in After liberalization, the insurance industry has been growing between 30 and 40 per cent, but it lags far behind its global counterparts when it comes to insurance penetration and density. Insurance, together with banking services adds about 7 per cent to India s Gross Domestic Product. India has the highest number of life insurance policies in force in the world. Yet more than three fourth of India s insurable population has no life insurance cover. The next chapter portrays the profile of Life Insurance Corporation and reveals the growth in marketing of life insurance products in Kannur and Kasargod districts.

37 99 References: 1. Valarie, A. Zeithaml and Mary jo Bitner, Services Marketing, Tata McGraw-Hill Publishing Company, New Delhi, pp UNCTAD, The Promotion of Life Insurance in Developing Countries, pp. iii, Philip Kotler and Kevin Lane Keller, Marketing Management, Pearson Education, Singapore, pp Emmett, J. Vaughan and Therese Vaughan, Fundamentals of Risk and Insurance, John Wiley & Sons, Singapore, pp Arthur, C. Williams, Jr, et al., Risk Management and Insurance, 8 th ed., Irwin McGraw- Hill, p Valarie A. Zeithaml and Mary Jo Bitner., op. cit., p Booms, B.H., and Bitner, M.J., Marketing Strategies and Organisational Structures for Service firms in Marketing of Services, ed. J.H. Donnelly and W.R. George (Chicago: American Marketing Association, 1981), pp Mishra, M.N., Insurance Principles and Practice, S. Chand & Co., New Delhi, pp Jha, S.M., Services Marketing, Himalaya Publishing House, Mumbai, pp Srinivasan, K.B., New Marketing Strategies in a Competitive Scenario, The Journal of Insurance Institute of India, Vol. XXVII, July- December, 2001, pp Ibid. 12. Periasamy, Principles and Practice of Insurance, Himalaya Publishing House, pp Ibid. 14. Shostack, G. Lyan, Service Positioning Through Structural Changes, Journal of Marketing, No. 51, Jan. 1987, pp

38 Dharmendra Kumar, Tryst With Trust, LIC of India, 1991, p Ibid. 17. Kangle, K.P., The Kautilya Arthasastra Part III A Study, University of Bombay, 1965, p Kanwal I.S., Text Book of Insurance, Kalyani Publishers, Ludhiana, 1988, p Ibid. 20. M.N. Mishra, op. cit., Kenneth Black, Jr. and Harold D. Skipper, Jr., Pearson Education, Singapore, 2003, p The 100 year History of Nippon Life (Tokyo: The Nippon Life Insurance Company, 1991), p Allen, J. Pathmarajah, Growth and Development of the Singapore Life Insurance Market and its Future Outlook, (Singapore: Singapore insurance Training Centre, 1985), p Gupta, P.K., Insurance and Risk Management, Himalaya Publishing House, Mumbai, p Dharmendra Kumar, Indian Insurance: The Historical Perspective, India Insurance Report Series I, pp Gupta, P.K., op. cit., Gupta, P.K., op.cit., Rao, C.S., Insurance: Issues and Challenges, Yojana, Vol. 50, Issue No. 4, p Sadhak, H., Insuring Life, Yojana, Vol. 48, Issue No. 10, 2004, pp Bhave, S.R., Saga of Security: Story of Indian Life Insurance ( ), Life Insurance Corporation of India, Vakil and Sons, Bombay, pp Gupta P.K., op. cit., 87.

39 Tripati Rao, D., privatization and Foreign Participation in (Life) Insurance Sector, Economic and Political Weekly, Vol. XXXV No. 13, March 25-31, 2000,pp India Insurance Report Series-I, Allied Publishers Pvt. Ltd., New Delhi, p World Development Report Malhotra, R.N., Report of the committee on reforms in Insurance Sector, Ministry of Finance, Government of India, Rao, G.V., Funding Protection, Asia Insurance Post, Vol. 9, Issue 2, Sept IRDA Annual report, Krishnamurthy, S., Insurance Sector: Challenges of Competition and Future Scenario, Vikalpa, Vol. 30, No. 3, July September 2005, pp Ibid. 40. Jha, R.N., Globalization of World Insurance Markets, Yogakshema, February 2006, pp The Hindu Survey of Indian Industry 2007, pp