Journal of Social and Economic Policy, Vol. 11, No. 1, June 2014, pp. 103-108 INDIAN LIFE INSURANCE INDUSTRY CHANGING SCENARIO AND NEED FOR INNOVATION ARVIND KUMAR SINGH * AND MAMTA SINGH ** In the last decade most industrialized countries have experienced a sustained growth of value added and employment in service sector. (L. George et. Al. 1999). Traditionally most of discussion of the management of innovation has been based on manufacturing industry. This is not surprising because manufacturers have tangible products, the development of which normally follows a well defined process. However, service industry is now of greater importance for instance the contribution of service sector in Indian GDP is 55.2 percent according to Union Budget 2010-11 of which 5.4 percent comes from banking and insurance In general, high per capita income is associated with high proportion of GDS and GDP coming from insurance sector. Thus higher level of development seems to come with high level of activities in the insurance sector. When various components of the insurance market develop, insurance sector takes on a bigger share of the GDS and of the GDP. With the liberalisation and entry of private companies in insurance the Indian insurance sector has started showing signs of significant change. The study Insurance industry - Challenge, Reforms and Realignment, conducted by Confederation of Indian Industry (CII), also said that the sector regulator also needs to phase in changes based on regulatory impact assessment, thereby giving industry time to adjust to the changed environment, along with initiatives to drive insurance awareness programmes. This paper is primarily concerned of problems in insurance sector s innovation and the need to accelerate innovation rate. We will also try to compare the rate of innovation of various companies and their effects. Insurance is a federal subject in India. The primary legislation that deals with insurance business in India is Insurance Act, 1938, and Insurance Regulatory & Development Authority Act, 1999. Insurance is an assurance of receiving financial support, even in the absence of the insuree. Insurance provides with a sum of money and thus permanently protects a family from financial crisis. Apart from helping as a protective cover, insurance acts as a flexible money-saving scheme, which empowers to build up wealth. Insurance also triples up as a perfect tax-saving scheme. The form of insurance business has been changing across the globe and this wave is no different in India. Insurance constitutes an important and increasing proportion of the gross financial savings of the households. It has been estimated that the potential of Indian insurance industry is huge considering the fact that insurance has not yet reached to large untapped population of the country. Only 20 per cent of the insurable population is covered under various life insurance schemes/segments. The insurance sector is experiencing a growth rate of 15 to 20 per cent during the post reform period in India (2008-09). The insurance and banking services contribution to * Research Scholar, Noida International University, E-mail: arvind_sagreen@yahoo.com ** Assistant Professor, School of Business Management, Noida International University, E-mail: mamtasingh609@gmail.com
104 ARVIND KUMAR SINGH AND MAMTA SINGH the country s gross domestic product (GDP) is 7 per cent (2008-09) out of which the gross premium collection forms a significant part. The funds available with the stateowned Life Insurance Corporation (LIC) for investments are 8 per cent of GDP (Economic Survey, 2008-09) The penetration rates of health and other non-life insurances in India is also well below the international level. The beginnings of the insurance industry in India date back to the nineteenth century when the first life insurance company was established at Kolkata in 1818. Subsequently, the first general insurance company commenced operations at Kolkata in 1850 (Bhave, 1970). Over the years the industry expanded, with numerous entities operating in both life and general insurance segments. With the end of government monopoly and passing of the Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign ownership, there has been a revolution in the Indian insurance sector. Accordingly, foreign investments of Rs. 8.7 billion (Economic Survey, 2006-07) have poured into the Indian market and 21 private companies have been granted licenses. The Union Government had opened up the insurance sector for private participation in 1999, also allowing the private companies to have foreign equity up to 26 per cent. Following the opening up of the insurance sector, 12 private sector companies have entered the life insurance business. Apart from the HDFC, which has foreign equity of 18.6 per cent, all the other private companies have foreign equity of 26 per cent. In general insurance 8 private companies have entered, 6 of which have foreign equity of 26 per cent. Among the private players in general insurance, Reliance and Cholamandalam does not have any foreign equity. CURRENT STATUS OF INSURANCE SECTOR Even after the liberalisation of the insurance sector, the public sector insurance companies have continued to dominate the insurance market, enjoying over 90 per cent of the market share. In fact, the LIC, which is the only public sector life insurer, enjoys over 98 per cent of the market share in Life insurance. A major role played by the insurance sector is to mobilize national savings and channelize them into investments in different sectors of the economy. However, no significant change seems to have occurred as far as mobilizing savings by the insurance sector is concerned, following the liberalization of the insurance sector in 1999. The trend of the savings in life insurance by the households to GDP ratio, while showing a clear upward trend through the 1990s signifying increasing business for the insurance sector, does not show any structural break after 1999 (Rao, 2000). It can be inferred that the foreign capital which flowed in after the opening up of the insurance sector has not been accompanied by any technological innovation in the insurance business, which would have created greater dynamism in savings mobilization. Far from expanding the market for the insurance sector, the business activities of the private companies are limited in urban areas, where a fairly good market network of the public sector insurance companies already exists. The glaring evidence for this
INDIAN LIFE INSURANCE INDUSTRY CHANGING SCENARIO AND NEED FOR INNOVATION 105 is the composition of agents operating in the insurance sector. According to the IRDA Annual Report, 2002-03, the number of insurance agents in urban and rural India was in 100:76 ratio in the public sector companies. For the private insurance companies this ratio was 100:1.4. Due to their urban-biased operational activity, the private insurance companies can neither increase the insurance base of the economy significantly, nor lead to substantial employment generation. Given this scenario, further increase in foreign participation is only going to lead to intensified competition for the urban insurance markets, rather than leading to a growth in overall savings. While the proposals for hike in FDI were placed, the arguments advanced were that FDI will continue to be encouraged and actively sought, particularly in areas of infrastructure, high technology and exports. The Life Insurance Corporation of India (LIC) was established in 1956 as a Statutory Corporation under the Life Insurance Act, 1956, to carry on life insurance business. The first 150 years of the British Rule in India were characterized by turbulent economic conditions. The first war of independence in 1857, the World Wars I and II (1914-1918 and 1939-45) and India s national struggle for freedom had adverse effect on the economy. In addition to this the period of world wide economic crisis in between the two World Wars termed as the period of Great Depression led to the high rate of bankruptcies and liquidation of most Life Insurance Companies in India that existed during that time (Wilson, 1977). Existing as a towering insurance company for over 50 years, LIC has acquired almost monopoly power in the solicitation and sale of life insurance policies in India. In addition to the summary regarding the present stature provided at the beginning, LIC has extended its activities in 12 countries other than India with the objective of catering to the insurance needs of Non Resident Indians. The only insurance company belonging to the public sector now has to compete with several other corporate entities of its kind which often are heavyweight Indian as well as Multinational Life Insurance Brands in themselves. OBJECTIVE OF THE STUDY The primary objective of this study is to observe what are the steps taken by the companies to bring innovation in their product offerings and also to find out is there any difference in the rate of innovation in public and private insurers. Hypothesis H0 = Public and Private sector both does more innovation to penetrate in Insurance market H1 = None of them are really pushing up innovation. The Indian insurance sector has been able to extend its services to include various new categories of the Indian populace in recent years. The average Indian now spends four or five times as much on life insurance as what they did when the industry was yet to be opened up for private participation, that is before 1999. With the higher number of life insurance policies in force in the world, India s insurance sector
106 ARVIND KUMAR SINGH AND MAMTA SINGH accounted for 4.1 per cent of GDP in 2006-07, up from 1.2 per cent in 1999-2000 which is far ahead of China where insurance accounts for just 1.7 per cent of the GDP and even the US where insurance penetration stands at 4 per cent of the GDP (IRDA, 2007-08). Table 1.1 Regression Results of the Strategies of Life Insurance Companies in India Significant Variables Coeffi- Std t P> t [95% Conf. R 2 Adjucient Error Interval] sted R 2 Branch Expansion Strategy Open new branches where competitors have branches 0.442 0.137 3.220 0.001 0.172 0.712 0.051 0.046 Branch expansion 0.807 0.172 4.700 0.000 0.470 1.145 through forecast Sales Strategy of Insurance Companies Penalized for not meeting 2.413 0.368 6.550 0.000 1.690 3.136 0.155 0.139 the sales target Target young executives 1.329 0.490 2.710 0.007 0.367 2.291 Target the 36 50 age 2.148 0.511 4.200 0.000 1.144 3.151 group people Concentrate on Rs. 35000-2.490 0.637-3.910 0.000-3.740-1.241 50000 income group Concentrate more on -1.175 0.560-2.100 0.036-2.273-0.076 Rs. 50,000 income group Adopt different sales 1.310 0.653 2.010 0.045 0.029 2.591 techniques for different product Marketing Strategy of Insurance Companies Target all segment of -1.211 0.522-2.320 0.021-2.236-0.185 0.109 0.095 the people Acquire new customers 1.169 0.566 2.070 0.039 0.058 2.280 from competitors Separate business strategy -1.124 0.522-2.150 0.032-2.150-0.099 for insurance segments Basic values include 1.219 0.607 2.010 0.045 0.027 2.411 learning as key improvement Employee learning is an -2.275 0.547-4.160 0.000-3.349-1.201 investment, not an expense Market focus is on SEC 2.255 0.401 5.620 0.000 1.467 3.042 category of the customers Source: Calculated from the Data Available from ICMR. The branch expansion strategy signifies that the decision of the top management plays an important role. However the regression results (Table 6.14) show that in the branch expansion strategy, opening new branch where competitors have branches and
INDIAN LIFE INSURANCE INDUSTRY CHANGING SCENARIO AND NEED FOR INNOVATION 107 branch expansion through forecast are very significant. The sales of the insurance segment are strongly influenced by innovation and ideas from the foot-soldiers. However the factors that are most significant are penalizing employees for failing to meet the sales target, employment of young executives, insuring the 36-50 age group people, selling insurance products among higher income groups and adopting sales technique for different products. The regression results for the branch expansion strategy followed by the companies. It shows that opening new branches where competitors have branches and branch expansion through forecast are significant and positively related to the branch expansion strategy. In other words, the private firms open new branches on the basis of two criteria, either open branches where competitors have branches or plan branch expansion strategy through forecast. In order to find out the factors that are significant in determining the sales channel of the firms, we have regression results with sales channel being the dependent variable. The regression results give us a clear idea about the factor that is more significant in influencing the sales. The analysis shows that the factors influencing the sale of insurance segments for the companies are penalizing employees for not meeting the sales target, employing young executives, insuring the 36-50 age group people, selling insurance products among higher income groups and adopting sales technique for different products. All these variables are significant (except concentrate more on Rs. 50000 income group and adopting different sales techniques) at 5 per cent level (Regression was carried out on the basis of the data collected by ICMR). The regression results for the companies in regard to the marketing of the insurance products. The results shows that the factors that highly influence the marketing strategy of the insurance companies are targeting all segment of the people, acquire new customers from competitors, separate business strategy for insurance segments, basic values include learning as key improvement, employee learning is an investment not an expense and Market focus is on SEC category of the customers. For analyzing the second objective i.e. rate of innovation in this sector we have reviewed annual report of IRDA 2010-11 where it has been observed that this sector was opened before ten years but still the private companies with joint effort from the foreign sector are not able to compete with public sector giant LIC. Table 1.2 Number of New Policies Issued: Non-Life Insurers (In Lakhs) Insurer 2010-11 2011-12 Public Sector 505.76 528.14 (16.52) (4.43) Private Sector 287.65 329.30 (19.44) (14.48) Total 793.41 857.44 (17.56) (8.07) Note: Figures in brackets indicate the growth (in per cent) over previous years Source: Annual Report IRDA 2011.
108 ARVIND KUMAR SINGH AND MAMTA SINGH One probable reason of the low premium collection by the private sector could be the total no. of new policies issued in absolute term by the public sector in comparison to private sector. As we can see in table no 1.2, for the year 2010-11 and 2011-12. Whereas, the rate of growth of new policy issuance is high in the private sector. As the market share of LIC is much higher in comparison to private sector as seen in below mentioned table. Table 1.3 Market Share - Life Insurers Insurer 2010-11 2011-12 Total Premium LIC 69.77 70.68 Private Sector 30.23 29.32 Total 10.0 100 Source: Annual Report IRDA 2011 References Rao, D Tripati (1996), A Study of Life Insurance in India, unpublished MPhil dissertation, submitted to Jawaharlal Nehru University, New Delhi, Centre for Development Studies, Trivandrum. Rao D. Tripati (1999), Life Insurance Business in India: Analysis of Performance, Economic and Political Weekly, Vol. 34 (31). Rao Tripati D (2000), Privatization and Foreign Participation in (Life) Insurance Sector, Economic and Political Weekly, Vol. 35 (13). Sadhak, H., (2006), Life Insurance and the Macro Economy: Indian Experience, Economic and Political Weekly, March 18, 2006 Insurance Regulatory and Development Authority, Annual Report, 2010-11. Confederation of Indian Industry (2012), Insurance Industry- Challenges, Reforms and Realignment, released in 15 th Insurance Summit held on August 6 th, Mumbai. Webliography indiabudget.nic.in/es2010-11/echap-10.pdf CSO, indiabudget.nic.in, page -240