Research Paperon

Impact of Insurance industry on Indias economic development AN OVERVIEW

By

DR. AVINASH G PESHWE,

ASSOCIATE PROFESSOR and HEAD, DEPT. OF COMMERCE,

NETAJI SUBHASH CHANDRA BOSE COLLEGE, NANDED

Email-Id: peshweavinash@gmail.com, Mobile: 09822060012&Mr. MANOJ KUMAR GELDA

Associate Professor, Dept. of Commerce and Business Management,

Nishitha Degree & PG College, Nizamabad A.P

Email-Id: mr_gelda@yahoo.co.in, mrpgelda@gmail.com, Mobile: 9492009452

ABSTRACTLife insurance is a commercial contract between the insurance policy proposer and the insurance service provider. However, apart from customized plan of insurance policy and its coverage, there are wide ranges of insurance policies available in market under different flagship brands. Although the aim of all insurance policies are almost the same, which is providing best quality life coverage and return value of investments in the form of premium, it is extremely essential to learn the basic details about the life insurance plans and the coverage provided by these plans.

Insurance industry contributes to the financial sector of an economy and also provides an important social security net in developing countries. The growth of the insurance sector in India has been phenomenal. The insurance industry has undergone a massive change over the last few years and the metamorphosis has been noteworthy. There are numerous private and government insurance companies in India that have become synonymous with the term insurance over the years. Offering a diversified product portfolio and excellent services the many insurance companies in India have managed to make their way into almost every Indian household.

Introduction

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 a 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, 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/or 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 pivotal 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.Current scenarioA growing middle-class segment, rising income, increasing insurance awareness, rising investments and infrastructure spending, have laid a strong foundation to extend insurance services in India. The opening up of the insurance sector for private participation/global players during the 1990s has resulted in stiff competition among the players, with each offering better quality products. This has certainly offered consumers the choice to buy a product that best fits his or her requirements.

The number of players during the decade has increased from four and eight in life and non-life insurance, respectively, in 2000 to 23 in life and 24 in non-life insurance (including 1 in reinsurance) industry as in August 2010.

Most of the private players in the Indian insurance industry are a joint venture between a dominant Indian company and a foreign insurer. Life insurance industry overviewThe life insurance sector grew at an impressive CAGR of 25.8% between FY03 and FY09, and the number of policies issued increased at a CAGR of 12.3% during the same period. As of August 2010, there were 23 players in the sector (1 public and 22 private). The Life Insurance Corporation of India (LIC) is the only public sector player, and held almost 65% of the market share in FY10 (based on first-year premiums).To address the need for highly customized products and ensure prompt service, a large number of private sector players have entered the market. Innovative products, aggressive marketing and effective distribution have enabled fledgling private insurance companies to sign up Indian customers more rapidly than expected. Private sector players are expected to play an increasingly important role in the growth of the insurance sector in the near future.

In a fragmented industry, new players are gnawing away the market share of larger players. The existing smaller players have aggressive plans for network expansion as their foreign partners are keen to capitalize on the enormous potential that is latent in the Indian life insurance market.ICICI Prudential, Bajaj Allianz and SBI Life collectively account for approximately 50% of the market share in the private life insurance segment. To tap this opportunity, banks have also started entering alliances with insurance companies to develop/underwrite insurance products rather than merely distribute them.Non-life insurance industry overview

Between FY03 and FY10, the non-life insurance sector grew at a CAGR of 17.05%. Intense competition that followed the de-tariffication and pricing deregulation (which was started during FY07) decelerated the growth momentum.

As of August 2010, the sector had a total of 24 players (6 public insurers, 17 private insurers and 1 re-insurer). The non-life insurance sector offers products such as auto insurance, health insurance, fire insurance and marine insurance. In FY10, the non-life insurance industry had the following product mix. Private sector players have now pivoted their focus on auto and health insurance. Out of the total non-life insurance premiums during FY10, auto insurance accounted for 43.5% of the market share. The health insurance segment has posted the highest growth, with its share in the total non-life insurance portfolio increasing from 12.8% in FY07 to 20.8% in FY10. These two sectors are highly promising, and are expected to increase their share manifold in the coming years. Growth drivers Health insurance attracts insurance companies The Indian health insurance industry was valued at INR51.2 billion as of FY10. During the period FY0310, the growth of the industry was recorded at a CAGR of 32.59%. The share of health insurance was 20.8% of the total non-life insurance premiums in FY10. Health insurance premiums are expected to increase to INR300 billion by 2015.

Private sector insurers are more aggressive in this segment. Favorable demographics, fast progression of medical technology as well as the increasing demand for better healthcare has facilitated growth in the health insurance sector. Life insurance companies are expected to target primarily the young population so that they can amortize the risk over the policy term.

Rising focus on the rural market

Since more than two-thirds of Indias population lives in rural areas, micro insurance is seen as the most suitable aid to reach the poor and socially disadvantaged sections of society.

LIC was the first player to offer specialized products with lower premium costs for the rural population. Other private players have also started focusing on the rural market to strengthen their reach. Government tax incentives Currently, insurance products enjoy EEE benefits, giving insurance products an advantage over mutual funds. Investors are motivated to purchase insurance products to avail the nearly 30% effective tax benefit on select investments (including life insurance premiums) made every financial year. Life insurance is already the most popular financial product among Indians because of the tax benefits and income protection it offers in a country where there is very little social security. This drives more and more people to come within the insurance ambit.

Contribution of the insurance sector to the economyInsurance has had a very positive impact on Indias economic development. The sector is gradually increasing its contribution to the countrys GDP. In addition, insurance is driving the infrastructure sector by increasing investments each year. Further, insurance has boosted the employment scenario in India by providing direct as well as indirect employment opportunities. Due to the healthy performance of the Indian economy, the share of life insurance premiums in the gross domestic savings (GDS) of the households sector has increased.The increased contribution of the insurance industry from the household GDS has been ploughed back into the economy, generating higher growth. The following factors showcase how the contribution of the insurance industry has strengthened economic growth:

Contribution of insurance to infrastructureGenerally, countries with strong insurance industries have a robust infrastructure and strong capital formation. Insurance generates long-term capital, which is required to build infrastructure projects that have a long gestation period. Concurrently, insurance protects individuals and businesses from sudden unfavorable events. A well developed and evolved insurance sector is needed for economic development as it provides long-term funds for infrastructure development and simultaneously strengthens the risk taking ability.

Although the insurance sector is relatively young in India, its contribution to infrastructural development has been on a visible rise as depicted in the following exhibit. In FY09, the total investments by the insurance industry increased to INR9, 742 billion, as against INR8, 183 billion in the previous year. Further, investments by both life and non-life insurers increased by 20.2% and 4.6% to INR9,1 63 billion and INR589 billion, respectively, in FY09. However, as outlined in the Eleventh Five Year Plan (2008 2012), there is a significant fund requirement of INR20, 562 billion in the infrastructure sector. Given an expected robust increase in the insurance business and the increasing participation of foreign insurers in India, insurance companies are well positioned to contribute to infrastructure development in the country.These investments could further increase with the development of sound debt markets, especially the market for long-term government paper and income tax incentives to attract savings for infrastructural schemes. The direct investment of policyholder funds of life insurers in government bonds is another way in which the industry has helped the development of infrastructure. In addition, IRDAs mandate for insurance companies to invest 15% of their annual sales in infrastructure is expected to boost capital formation.Contribution of insurance to FDI

The importance of FDI in the development of a capital- deficient country such as India cannot be undermined. This is where the high-growth sectors of an economy play an important role by attracting substantial foreign investments. Currently, the total FDI in the insurance sector, which was INR50.3 billion at the end of FY09, is estimated to increase to approximately INR51 billion in FY10. It is difficult to estimate, but an equal amount of additional foreign investment, can roughly flow into the sector if the government increases the FDI limit from 26% to 49%.

The insurance sector, by virtue of attracting long-term funds, is best placed to channelize long-term funds toward the productive sectors of the economy. Therefore, the growth in their premium collections is expected to translate into higher investments in other key sectors of the economy. Therefore, the liberalization of FDI norms for insurance would not only benefit the sector, but several other critical sectors of the economy.Contribution of insurance to employmentInsurance helps create both direct and indirect employment in the economy. Alongside regular jobs in insurance, there is always demand for a range of associated professionals such as brokers, insurance advisors, agents, underwriters, claims managers and actuaries. The increasing insurance business has increased the demand for highly skilled professionals as well as semiskilled and unskilled people.ConclusionIndias rapid rate of economic growth over the past decade has been one of the most significant developments in the global economy. This growth traces its origin in the introduction of economic liberalization in the early 1990s, which has equipped India to exploit its economic potential and substantially raise the standard of living of its people.Together with other financial services, insurance services contributed 7% of the countrys GDP in 2009. A well developed and evolved insurance sector is a boon for economic development as it provides long-term funds for infrastructure development and concurrently strengthens the risk-taking ability of the country. Further, insurance has been a notable employment generator, not only for the insurance industry, but has also created significant demand for a range of associated professionals such as brokers, Insurance advisors, agents, underwriters, claims managers and actuaries.By the nature of its business, insurance is closely linked to saving and investing. Life insurance, funded pension systems and non-life insurance have accumulated a significant amount of capital over time, which can be invested productively in the economy. The mutual dependence of insurance and capital markets plays an instrumental role in channeling funds and investment capabilities to augment the development potential of the Indian economy. Indias growing consumer class, rising insurance awareness, increasing domestic savings and investments are among the most critical factors that have positively driven the market penetration of the insurance products among its consumer segments. However, there are large untapped areas, which have yet not benefited from the upside of insurance.To summarize, the Indian insurance industry is poised for a quantum leap in performance with unprecedented growth opportunities, notwithstanding a temporary sliding growth curve. The stage is now well poised for the real show to commence.

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