Topic role of private players in insurance sector

INTRODUCTION:
According to Mr J. Hari Narayan, Chairman of insurance watchdog IRDA, Indian
insurance industry in set for some serious changes. Speaking to students of
Institute of Insurance and Risk Management at their graduation ceremony, Mr
Narayan said the Indian insurance industry had matured from its state of childhood
to early adulthood. He said that in countries like UK, the agents have adopted
themselves to latest form of marketing and very soon such changes will also be
introduced in India.With an annual growth rate of 15-20% and the largest number
of life insurance policies in force, the potential of the Indian insurance industry is
huge. Total value of the Indian insurance market (2004-05) is estimated at Rs. 450
billion (US$10 billion). According to government sources, the insurance and
banking services contribution to the country's gross domestic product (GDP) is 7%
out of which the gross premium collection forms a significant part. The funds
available with the state-owned Life Insurance Corporation (LIC) for investments
are 8% of GDP.

Insurance is the backbone of a countrys risk management system. Risk is an

inherent part of our lives. The insurance providers offer a variety of products to
businesses and individuals in order to provide protection from risk and to ensure
financial security. They are also an important component in the financial
intermediation chain of a country and are the source of long term capital for
infrastructure and long term projects. Through their participation in financial
markets, they also provide support in stabilizing the markets by evening out any
fluctuations.

The insurance business is broadly divided into life, health and non-life insurance.
Individuals, families, and businesses face risks of premature death, depletion in
income because of retirement, health risks, loss of property, risk of legal liability
etc. The insurance companies offer life insurance, pension and retirement income,
property insurance, legal liability insurance etc. To cover these risks, In addition to
they offer several specialized products to meet the specific needs and requirements
of businesses and individuals. Businesses also depend on these companies for
various property and liability covers, employee compensation, and marine
insurance.
 Insurance does influence the growth and development of an economy in several
ways. The availability of insurance can mitigate the impacts of risk by providing
products which help organizations and individuals to minimize the consequences
of risk and has a positive effect on industry growth as entrepreneurs are able to
cover their risks. In the absence of a full range of insurance products and deficient
products in terms of coverage and scope, the risk-taking abilities would be
hampered and chances are that the economic activities would turn out to be high
risk activities. The implications of leaving various risks uncovered can be
significant and the impact of losses can be devastating creating a huge burden on
the governments. Therefore, a strong and competitive insurance industry is
considered imperative for economic development and growth. However, the
contribution of the insurance companies is also dependent on the fact that they are
able to pool risks effectively. Only then would it be possible to cover these risks at
an affordable and reasonable cost as the insurance provider will be able to spread
the risks throughout the economy.

The insurance industry is also an integral part of the financial system. For effective
functioning of the financial system, it is important that the markets are efficient by
ensuring liquidity and transparency in price discovery. The role of the insurance
companies as financial intermediaries is also considered significant in making
these markets efficient by providing liquidity and credit. This, in turn, helps in
lowering down the cost of capital and providing risk-free opportunities to all
participants in the market.

Penetration of insurance critically depends on the availability of insurance products

and services. Huge untapped market, proliferation of schemes, new product
innovations, perception of insurable risks of Indian consumers, competitive
pressures arising from integration of bank and insurance, impact of information
technology, and the role of insurance industry in financial services industry are
some of the forces which shape the competitive structure of the insurance industry.

The insurance companies have a vital role in offering insurance products which
meet the requirements and expectations of the customers and, at the same time, are
affordable. The future growth of this sector will depend on how effectively the
insurers are able to come up with product designs suitable to our context and how
effectively they are able to change the perceptions of the Indian consumers and
make them aware of the insurable risks. The future growth also depends on how
service oriented insurers are going to be. On the demand side, the rise in incomes
will trigger the growth of physical and financial assets. With the growth of
infrastructure projects, the demand for insurance to cover the project and the risks
during operations will increase. The other growth trigger is the increase in
international trade. However, servicing of the large domestic market in India is a
real challenge. Some of these challenges pertain to the demand conditions,
competition in the sector, product innovations, delivery and distribution systems,
use of technology, and regulation.

Another area of concern has been the pricing of products. This is likely to be an
important determinant of growth. As the insurance companies increase the
geographic coverage, the average size of polices (i.e., average premium per policy)
will continuously become smaller. As a result of this, the intermediation costs will
go up. To understand these, we posed questions on the product market scenario:
Will the competition in future lead to product specialization (focused products) or
product proliferation? Will costs be a major concern? What would be the pricing of
these products? What would be the cost-containing strategies which would help the
insurer to develop streamlined businesses and address intensifying competition?
Will the consumer benefit from this and in what way?

In India, most of the insurance companies in the private sector have come into
existence after forming joint ventures with a global partner. We raised the
following questions in this context: Has the insurance sector benefited from the
knowledge base of the global partners? In what way? Which innovative products
offered by insurance companies have changed the face of the insurance sector?
Have there been any process innovations within the insurance companies that have
made the Indian insurer stronger? How much of this has come through the partner?

The health segment of the insurance sector was the first to be liberalized but has
still remained less developed. We asked the panelists to respond to the following
concerns: What policy changes would you propose in terms of easing the entry
barriers by reducing capital requirements, reforming the private health sector by
having appropriate regulations including provider payment systems and
strengthening of the third-party administrators to monitor the providers? Are the
complexities in this segment really unmanageable? Given these complexities of
health insurance, should we have a separate insurance regulatory body to regulate
health insurance? Many countries around the world have a separate health
insurance regulation and a separate regulatory body.

Technology is likely to play an important role in this sector. Our questions focused
on to what extent technology gains in telecommunications, computer information,
and data processing have contributed to increased efficiency and productivity of
insurance companies and how the new technologies have facilitated the
development and servicing of the global markets.

There are concerns that regulations and modulation play a critical role in market
situations which are evolving and developing. IRDA has an important
responsibility of regulating this sector. However, given the experiences, concerns
are being raised whether our regulator is slow and soft. There are concerns that
they are not proactive. The experience in the recent past about the key-man
insurance reflects this point. There is a lack of proper guidelines about the norms
of reporting the performance of life insurance organizations. For example, should
one-time premium be included as part of one year performance or not? This
significantly distorts the comparison of performance between insurance providers.
Similarly, there are issues related to bancassurance models and direct sales force
which need continuous monitoring and guidelines to evolve in these areas. Most of
the insurance companies are going for unit-linked products. Should the insurance
companies have in-house fund management or should it be outsourced and to
whom? These are some policy questions which need to be addressed. Given the
complexity of health insurance, there is a need for having a separate health
insurance regulation and this needs to be addressed in a proactive manner.

A HISTORICAL REVIEW OF INDIAN INSURANCE

INDUSTRY:
In 1818, a British company called Oriental Life Insurance setup the first insurance
firm in India followed by the Bombay Assurance Company in 1823 and the Madras
Equitable Life Insurance Society in 1829. Though all this companies were
operating in India but insuring the life of European living in India only. Later some
of the companies started providing insurance to Indians with approximately 20%
higher premium\ than Europeans as Indians were treated as substandard.
Substandard in insurance parlance refers to lives with physical disability. Bombay\
Mutual Life Assurance Society was the first company established in 1871 which
started selling policies to Indians with fair value. Insurance business was
subjected to Indian company act1866, without any specific regulation. In 1905, the
slogan Be Indian-Buy Indian declared by Swadwshi Movement gave birth to
dozens of indigenous life insurance and provident fund companies. In 1937, the
Government of India setup a consultative committee and finally first
comprehensive insurance act was passed in 1938.
In oct.2000, IRDA (Insurance Regulatory and Development Authority) issued
license paper to three companies, which are HDFC Life Standard, Sundaram Royal
Alliance Insurance Company and Reliance General Insurance. At the same time
Principal approval was given to Max New York Life, ICICI Prudential Life
Insurance Company and IFFCO Tokio General Insurance Company. Today total 22
life insurance companies including one public sector are successfully operating in
India. The growth of the sector can easily be judged through According to a study
by McKinsey total life insurance market premiums in India is likely to more than
double from the current US$ 40 billion to US$ 80 US$100 billion by 2012.

CONCLUSION:

1. Where almost all the industries in the world trying hard for survival due to the
major economic meltdown, Indian life insurance industry is one of the sectors that
is still observing good growth. It is the changing trends of Indian insurance
industry only that has made it to cope with the changing economic environment.
Indian insurance industry has modified itself with the passage of time by
introducing customized products based on customers need, through innovative
distribution channels, Indian life insurance industry searched its path to grow.
Changing government policy and guideline of the regulatory authority, IRDA have
also played a very vital role in the growth of the sector. Move from non-linked to
unit liked insurance policies is one of the major positive changes in\ Indian life
insurance sector. Similarly, opening on the sector for private insurer broke the
monopoly of LIC and bring in a tough competition among the players. This
completion resulted into innovations in products, pricing, distribution channels,
and marketing in the industry. Though the sector is growing fast, the industry has
not yet insured even 50% of insurable population of India. Thus the sector has a
great potential to grow. To achieve this objective, this sector requires more
improvement in the insurance density and insurance penetration. Development of
products including special group policies to cater to different categories should be
a priority, especially in rural areas. The life insurers should conduct more extensive
market research before introducing insurance products targeted at specific
segments of the population so that insurance can become more meaningful and
affordable. By adopting appropriate strategy along with proper government support
and able guidance of IRDA, India will certainly become the new insurance giant in
near future.

2. The insurance sector is undergoing fundamental transformation and has an

important part in the build up of the countrys economic infrastructure. The
insurance regulator will play a key role in laying down the ground rules and paving
the way for the sectors growth and development. But the challenge clearly rests
with the insurers to take the industry to its next level of evolution. In India, the
ratio of assets of insurance companies to those of banks is 3 per cent while the ratio
in the US is 10 per cent. This serves as another indicator of the potential that the
industry must live up to.

INTEGRATED APPROACH: KEY TO GROWTH AND

DEVELOPMENT:
The evolution of the general insurance industry in India can be categorized into
three phases. The first phase was characterized by unfettered market access and
continued till the early 1970s. The second phase between 1975 and 2000 was the
era of government controlled oligopolies. The third phase after 2000 is of
liberalization and IRDA was formed to regulate the insurance industry.
The nationalization of the insurance sector in 1973 led to the formation of four
government-controlled entities with the General Insurance Corporation (GIC) as
the holding company. Between them, the four public sector insurance companies
set up close to 4,000 branches across the country and during the period 1973-2000,
insurance premiums at the gross level increased from Rs. 2 billion to Rs. 98 billion
at a CAGR of 17 per cent.

In 1999, the IRDA Act was enacted allowing entry to private sector players. At the
same time, the GIC was converted into a national reinsurance company. Eight
private players commenced business and, today, these players have captured close
to a third of the total market.

While the three phases have their own distinctive characteristics and the category
has grown in each phase, the key issue remains that India is one of the most
underpenetrated markets for insurance. While Indias GDP is 1.5 per cent of the
total world GDP, its general insurance premiums are only 0.3 per cent of global
premiums. Going forward, the challenge for the industry players is to grow the
category by increasing the width as well as the depth of insurance penetration.

Market Characteristics

The market comprises of a large number of products of which predominant are

those that are mandatory. Motor insurance which is statutory in nature forms close
to 37 per cent of the market. Fire insurance is the next largest and forms 23 per
cent. Along with fire insurance, engineering and marine are the other major
corporate products and the three together contribute to 37 per cent of the market.

The tariff regulations are another characteristic of the market. Notified by an arm
of IRDA, tariffs dictate the scope of the insurance cover and the price at which it
can be sold. Fire insurance, engineering insurance, motor insurance, and marine
hull insurance are all controlled by tariff. Tariff is essential to ensure that the new
players with their smaller capitalization are able to compete effectively in the
market in face of their much larger public sector competitors who have built up
reserves over the years that they have been in operation. De-tariffication is a
logical step in the evolution of the industry as the private sector players build their
business lines and attain a balance sheet size that ensures stability. Motor Own
Damage is slated to be de-tariffed in the next fiscal.

Product Demand
 Insurance is a push product. Insurance cover is procured where it is mandated.
Motor insurance that is statutory and fire insurance, which is mandated by lenders,
are cases in point. A few others like marine hull, marine transit, and liability
policies like public liability also fall into this category. With the liberalization of
the economy, the demand for insurance is growing. Drivers for this growth are:

Investments in industries and infrastructure development due to:

increase in demand for goods and services
increase in exports with the globalization of the economy.
Growth in retail consumption due to:
increase in per capita income
growth of retail financing at 35 per cent annually
paradigm shift in distribution with multiple channel options
upward mobility of the population leading to higher asset ownership.

Increasing awareness and penetration of certain product categories such as

liability insurance, health insurance, and overseas travel insurance.

Innovative product offerings in the market such as weather insurance

offering practical solutions to insurance needs.

Studies indicate that general insurance premiums grow between two and three
times the growth in GDP. In the context of the Indian market, the low penetration
rates indicate the potential for robust growth in this sector. It has been observed in
the developed markets that as income levels rise, general insurance volumes
increase at a higher than proportional rate till the market reaches saturation.
Initially, the need for protecting ones health builds up leading to an increase in
demand for life and health insurance. With further increase in incomes, the
individual builds assets and the need to protect them drives demand for asset
policies. With increasing awareness comes recognition of ones rights leading to
the demand for liability insurance like professional indemnity covers for doctors,
lawyers, etc. India is still at a stage where changing societal structures are
encouraging people to take life and health insurance indicating the early stage of
evolution of the category.

Key to Ensuring Growth

The key to market growth is through an integrated approach which includes

creating awareness about insurance, enhancing reach through cost-effective
distribution, and meeting customer needs through product innovation. A two-fold
approach is required while adopting these drivers of growth: increase the depth of
penetration in existing product-market segments and drive the width of penetration
leading to market expansion by targeting new segments. Given the complexity of
the industry, insurers will have to adopt a multiproduct, multi-channel, and multi-
segment route to the market to achieve these objectives.

India insurance industry growth in last few years

1. The life insurance companies have performed the best when it comes to growth
with an increase of almost 70% in new premium that has been collected in the
initial 5 months of 2012.

2. As per IRDA data, in April-August 2010 the insurance companies earned $11.73
billion in new premium - in the corresponding period in the previous year the
amount stood at 6.9 billion dollars.

3. LIC, a state held insurer, had been the biggest profit maker at that time with an
addition of 88% to their existing business. The privately owned insurers together
had seen a leap of 34% to their policy sales.

4. ICICI Prudential earned 576.60 million dollars at that time. During April-August
2009 SBI Life had earned $379.20 million in sales of new policies and that figure
went up to $531.87 million in the corresponding period in 2010 making it an
increase of 40%. HDFC Standard Life also experienced a good growth of 54% in
new sales.

5. IRDA data shows that between April and October 2010 the general insurance
industry experienced a year-on-year growth of 22.76% with regards to
underwritten gross premium.

6. The total value of that premium was 5.29 billion dollars while the same figure
stood at $4.31 billion in April-October 2009. For the public sector companies the
year-on-year growth rate was 21.09 percent between April-October 2010 and
April-October 2009.
7. In the same period the privately held insurers saw an increase of 25.19 percent in
terms of premium collected. Among the publicly owned entities, New India
Insurance was one of the better performers with a premium income of 916.77
million dollars in April-October 2010.

8. At the same period in 2009 they had earned 770.25 million dollars which implies
a growth rate of 19.04%. The IRDA Summary Report of Motor Data of Public and
Private Sector Insurers 2009-10 states that in the same period almost 28.4 million
policies were sold and the aggregate worth of premium collected was $2.31 billion.

9. The health insurance sector, according to the RNCOS' research report named
"Booming Health Insurance in India" posted unprecedented growth rates in 2008-
09 and 2009-10. The report also estimates that between the 2009-10 and 2013-14
the sector would see a compound annual growth rate (CAGR) of at least 25%.

India insurance industry - some key findings

Following are some important findings from World Bank regarding the condition
of insurance industry in India:

Between 2005 and 2010 the yearly GDP growth was approximately 8.56%.

At the same time, the ratio of gross savings to GDP was 33%.

Middle class saw the quickest growth.

The life expectancy rate of people went up and urban development happened
at almost 54%.
 In 2010 rate of premium growth came down to 4.2% and compared to global
standards the premium share was pretty low

Major operational issues for insurers were expenditure control, claims

settlement procedures, improving investment yields, and capital
requirements.

In the 2010-11 fiscal the life insurance industry grew by 4.20% while the
general insurance industry increased by 8.10%.

During that time the paid-up capital (private total) for the life insurance
sector was INR 236.57 billion while the paid-up capital (industry total) was
INR 236.63 billion.

In 2010-11 the paid-up capital (private total) for the general insurance sector
was INR 39.56 billion while the paid-up capital (industry total) was INR
67.06 billion.

In 2010-11 the operating costs of privately owned life insurers was INR
159.62 billion while the total life insurance industry expense was INR
329.42 billion.

In the same time the privately owned general insurers spent INR 39.32
billion from an industry total of INR 106.20 billion.

In 2010-11 the privately held life insurers paid benefits and claims worth
INR 312.51 billion while the industry aggregate was INR 1425.24 billion.
 At the same time the private general insurers paid benefits and claims worth
INR 99.37 billion while the industry total was INR 295.36 billion.

India insurance industry contribution to GDP

Experts are of the opinion that around the world the insurance industry contributes
around 4.5% to national GDPs. They have questioned the logicality of opinions
that in India the contribution can be higher saying that there are other important
sectors like education, defense, and health that cannot be undermined in this
context.

They have ruled out possibilities that the sector can contribute 10% to India's GDP.
The Chairman of IRDA, Hari Narayan has ruled out any such possibility asking if
India's GDP growth will be that much in the next few years ahead.

The IRDA states that in India land and gold are more preferred as forms of
investment. Narayan feels that if the insurance sector is to do well in terms of
contribution to GDP then more people should be convinced about its capability to
provide good ROI (return on investment).

Why are more people taking insurance policies?

One of the major reasons for an increasing number of people availing insurance
policies in India is the growing level of awareness. People nowadays value their
lives, their health, and their families even more than before given the tough
economic circumstances and so want to make sure that everything is fine even if
they are not there.

Yet another reason for the growing popularity of insurance policies is the benefit of
tax exemption that is provided to family oriented and individual plans. Majority of
the private insurers also provide lucrative returns and are now being availed by a
section of the Indian society with greater disposable earnings.

There is an aspect of psychological comfort attached to the insurance policies as

well - whenever an insurance is availed the policyholder can be more or less
assured of a safe future for that particular part of his or her life.