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Macro-Analysis of
INDIAN
INSURANCESECTOR
Business Environment Assignment No.2
Arundeep, Arjun, Avinash, Bharat, Deepak, Eashani
MBA Gen. IInd Semester , Section B, UBS
Submitted to: Dr. S.K. Chadha
UBS, Chandigarh
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Table of Contents:
S. No. Contents Page No.
1 What is Insurance and How does Insurance Work? 2
2 Historical Perspective 3
3 Need for Life Insurance 5
4 Benefits from Life Insurance 6
5 EMERGENCE OF IRDA 7
6 INSURANCE SECTOR REFORMS 8
7 PRESENT SCENARIO 10
8 MAJOR PLAYERS IN INSURANCE SECTOR 13
9 Growth and Competition 14
10 PEST ANALYSIS 21
11 ECONOMICAL FACTORS AFFECTING
INSURANCE INDUSTRY
23
12 SOCIO-CULTURAL FACTORS AFFECTING
LIFEINSURANCE INDUSTRY
26
13 TECNOLOGICAL FACTORS AFFECTING
LIFEINSURANCE INDUSTRY
28
14 Opportunities & Threats Analysis 31
15 FUTURE POSSIBILITIES 34
16 References 37
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What is Insurance and How does Insurance Work?
According to the U.S. Life Office Management Association Inc. (LOMA), life insurance is
defined as follows: Life insurance provides a some of money if the person who is insured Dies
whilst the policy is in effect. Anybody who has knowledge about life insurance will be tempted
to say yes.BUT In other words, surly this is far too brief an explanation for a financial
service that provides a very sophisticated range of savings and investment products, as well
as mere compensation for death.
Classification of Insurance:
Insurance business can be divided into two broad categories:
i. Lifeii. Non-lifeLife insurance is concerned with making provision for a specific event happening to the
individual, such as death where as non life (or general insurance) is more commonly
concerned with the provision for a specific event, which affects a property, such as fire,
flood, theft etc.
With largest number of life insurance policies in force in the world, Insurance happens to be a
mega opportunity in India. It's a business growing at the rate of 15-20 per cent annually and
presently is of the order of Rs 450 billion. Together with banking services, it adds about 7 per
cent to the country's GDP. Gross premium collection is nearly 2 per cent of GDP and funds
available with LIC for investments are 8 per cent of GDP.
Yet, nearly 80 per cent of Indian population is without life insurance cover while health
insurance and non-life insurance continues to be below international standards. And this part of
the population is also subject to weak social security and pension systems with hardly any old
age income security. This it is an indicator that growth potential for the insurance sector is
immense.
A well-developed and evolved insurance sector is needed for economic development as it
provides long term funds for infrastructure development and at the same time strengthens the risk
taking ability. It is estimated that over the next ten years India would require investments of the
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order of one trillion US dollar. The Insurance sector, to some extent, can enable investments in
infrastructure development to sustain economic growth of the country. Insurance is a federal
subject in India. There are two legislations that govern the sector- The Insurance Act- 1938 and
the IRDA Act- 1999.
In India, insurance is generally considered as a tax-saving device instead of its other implied long
term financial benefits. Indian people are prone to investing in properties and gold followed by
bank deposits. They selectively invest in shares also but the percentage is very small. Even to
this day, Life Insurance Corporation of India dominates Indian insurance sector. With the entry
of private sector players backed by foreign expertise, Indian insurance market has become more
vibrant.
Historical Perspective
The history of life insurance in India dates back to 1818 when it was conceived as a means to
provide for English Widows. Interestingly in those days a higher premium was charged for
Indian lives than the non-Indian lives as Indian lives were considered more riskier for coverage.
The Bombay Mutual Life Insurance Society started its business in 1870. It was the first company
to charge same premium for both Indian and non-Indian lives. The Oriental Assurance Company
was established in 1880. The General insurance business in India, on the other hand, can trace its
roots to the Triton (Tital) Insurance Company Limited, the first general insurance company
established in the year 1850 in Calcutta by the British. Till the end of nineteenth century
insurance business was almost entirely in the hands of overseas companies.
Insurance regulation formally began in India with the passing of the Life Insurance Companies
Act of 1912 and the provident fund Act of 1912. Several frauds during 20's and 30's sullied
insurance business in India. By 1938 there were 176 insurance companies. The first
comprehensive legislation was introduced with the Insurance Act of 1938 that provided strictState Control over insurance business. The insurance business grew at a faster pace after
independence. Indian companies strengthened their hold on this business but despite the growth
that was witnessed, insurance remained an urban phenomenon.
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The Government of India in 1956, brought together over 240 private life insurers and provident
societies under one nationalized monopoly corporation and Life Insurance Corporation (LIC)
was born. Nationalization was justified on the grounds that it would create much needed funds
for rapid industrialization. This was in conformity with the Government's chosen path of State
lead planning and development.
The (non-life) insurance business continued to thrive with the private sector till 1972. Their
operations were restricted to organized trade and industry in large cities. The general insurance
industry was nationalized in 1972. With this, nearly 107 insurers were amalgamated and grouped
into four companies- National Insurance Company, New India Assurance Company, Oriental
Insurance Company and United India Insurance Company. These were subsidiaries of the
General Insurance Company (GIC).
Indian federal government considers insurance as one of major sources of funds for
infrastructure development. The government has identified the following as major thrust areas:
* Timely and reliable statistical data and information about policies and markets to instill a
degree of credibility;
* A code of good practices based on international best practices to raise the standard of Indian
insurance sector;
* Strengthening of supervision and regulation;
* Market participation in decision-making;
* High solvency standard' and Developing alternative channels.
Till end of 1999-2000 fiscal years, two state-run insurance companies, namely, Life Insurance
Corporation (LIC) and General Insurance Corporation (GIC) were the monopoly insurance (both
life and non-life) providers in India. Under GIC there were four subsidiaries-- National Insurance
Company Ltd, Oriental Insurance Company Ltd, New India Assurance Company Ltd, and
United India Assurance Company Ltd. In fiscal 2000-01, the Indian federal government lifted all
entry restrictions for private sector investors. Foreign investment insurance market was also
allowed with 26 percent cap. GIC was converted into India's national reinsure from December,
2000 and all the subsidiaries working under the GIC umbrella were restructured as independent
insurance companies.
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Indian Parliament has cleared a Bill on July 30, 2002 de-linking the four subsidiaries from GIC.
A separate Bill has been approved by Parliament to allow brokers, cooperatives and
intermediaries in the sector. Currently insurance companies- both private and public-- have to
cede 20 percent of its reinsurance with GIC. GIC is planning to increase re-insurance premium
by 20 percent which works out at Rs 3000 cr. GIC is actively considering entry into overseas
markets including West Asia, South-east Asia and SAARC region.
Need for Life Insurance:
The above definition captures the original, basic, and intention of life insurance: i.e. to provide
for ones family and perhaps others in the event of death, especially premature death. Originally,
policies were to provide for short periods of time, covering temporary risk situations, such as sea
voyages. As life insurance 10 becomes more established, it was realized what a useful tool it was
for a number of situation including:
Temporary needs/ threats:
The original purpose of life insurance remains an important element, namely providing for
replacement of income on death etc.
Regular Savings:
Providing for ones family and oneself, as a medium to long-term exercise (through a series of
regular payment of premiums). This has become more relevant in recent times as people seek
financial independence from their family.
Investment:
Put simply, the building up of savings while safeguarding it from the ravages of inflation. Unlike
regular saving products, investment products are traditionally lump sum investments, where the
individual makes a one-time payment.
Retirement:
Provision for ones own later years become increasing necessary, especially in a changing
culture and social environment. One can buy a suitable insurance policy, which will provideperiodical payments in ones old age. This simple example illustrates the impact premature death
can have on a family, where the main earner has no life cover. A simple life insurance policy
(term assurance) could have provided Mr. Atols family with a lump sum that could have been
invested to provide an income equal to all or part of his income. We will discuss how to analyze
the need for life cover and the value of life later in the course.
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Benefits from Life Insurance:
i. It is superior to a traditional saving vehicle:
As well as providing a secure vehicle to build up saving s etc, it provides peace of mind to the
policyholder. In the event of untimely death, of say the main earner in the family, the policy will
pay out of the guaranteed sum assured, which is likely to be significant more than the total
premiums paid. With more traditional savings vehicles, such as fixed deposits, the only return
would be the amount invested plus any interest accrued.
ii. It encourages saving and forces thrift:
Once an insurance contract has been entered into, the insured has an obligation to continue
paying premiums, until the end of the term of the policy, otherwise the policy will lapse. In other
words, it becomes compulsory for the insured to save regularly and spend wisely. In contrast
savings held in a deposit account can be accessed or stopped easily.
iii. It provides easy settlement and protection against creditors:
Once a person is appointed for receiving the benefits (nomination) or a transfer of rights is made
(assignment), a claim under the life insurance contract can be settled easily. In addition, creditors
have no rights to any monies paid out by the insurer, where the policy is written under trust.
Under the Married Womens Property Act (M.W.Act), the money available from the policy
forms a kind of trust, which creditors cannot claim on.
iv. It helps to achieve the purpose of the Life Assured:If someone receives a large sum of money, it is possible that they may spend the money unwisely
or in a speculative way. To overcome this, the person taking the policy can instruct the insurer
that the claim amount is given in installments. For example, if the total amount to be received by
the dependents is Rs. 2,00,000 say Rs.50, 000 can be taken out as a lump sum and the balance
paid out in smaller installments, say Rs. 5,000 per month.
v. It can be enchased and facilitates borrowing:
Some contracts may allow the policy can be surrendered for a cash amount, if a policyholder is
not in a position to pay the premium. A loan, against certain policies, can be taken for a
temporary period to tide over the difficulty; some lending institutions will accept a life insurance
policy as collateral for a personal or commercial loan.
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Tax Relief: The policyholders obtain Income Tax rebates by paying the insurance premium. The
specified forms of saving which enjoy a tax rebate, under section 88 of the Income Tax Act,
include Life Insurance Premiums and contributions to a recognized Provident Fund etc.
EMERGENCE OF IRDA
Insurance Regulatory and Development Authority (IRDA):
Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in Parliament in
December 1999. 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. The other decisions taken simultaneously to provide the supporting
systems to the insurance sector and in particular the life insurance companies were the launch of
the IRDAs online service for issue and renewal of licenses to agents. The approval of
institutions for imparting training to agents has also ensured that the insurance companies would
have a trained workforce of insurance agents in place to sell their products, which are expected
to be introduced by early next year. Since being set up as an independent statutory body the
IRDA has put in a framework of globally compatible regulations. In the private sector 12 life
insurance and 6 general insurance companies have been registered.
Duties, Power and Functions of IRDA:Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA.1. Subject to
the provisions of this Act and any other law for the time being in force, the Authority shall have
the duty to regulate, promote and ensure orderly growth of the insurance business and re-
insurance business.2. Without prejudice to the generality of the provisions contained in
subsection. The powers and functions of the Authority shall include
Issue to the applicant a certificate of registration, renew, modify, withdraw, suspend orcancel such registration.
Protection of the interests of the policy holders in matters concerning assigning ofpolicy, nomination by policy holders, insurable interest, settlement of insurance claim,
surrender value of policy and other terms and conditions of contracts of insurance.
Specifying requisite qualifications, code of conduct and practicaltraining for intermediary or insurance intermediaries and agents.
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Specifying the code of conduct for surveyors and loss assessors. Promoting efficiency in the conduct of insurance business. Promoting and regulating professional organizations connected with the insurance and
re-insurance business.
Levying fees and other charges for carrying out the purposes of this Act. Calling for information from, undertaking inspection of, conducting enquiries and
investigations including audit of the insurers, intermediaries, insurance intermediaries
and other organizations connected with the insurance business.
Control and regulation of the rates, advantages, terms and conditions that may beoffered by insurers in respect of general insurance business not so controlled and
regulated by the Tariff Advisory Committee under section 64U of the Insurance Act,
1938 (4 of 1938); j. Specifying the form and manner in which books of account shall
be maintained and statement of accounts shall be rendered by insurers and other
insurance intermediaries.
Regulating investment of funds by insurance companies Adjudication of disputes between insurers and intermediaries or insurance
intermediaries.
Supervising the functioning of the Tariff Advisory Committee. Specifying the percentage of premium income of the insurer to finance schemes for
promoting and regulating professional organizations referred to in clause (f).
Specifying the percentage of life insurance business and general insurance business to beundertaken by the insurer in the rural or social sector; and p. Exercising such other
powers as may be prescribed.
INSURANCE SECTOR REFORMS
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 its future
direction. The Malhotra committee was set up with the objective of complementing the reforms
initiated in the financial sector. The reforms were aimed at creating a more efficient and
competitive financial system suitable for the requirements of the economy keeping in mind the
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structural changes currently underway and recognizing that insurance is an important part of the
overall financial system where it was necessary to address the need for similar reforms. In 1994,
the committee submitted the report and some of the key recommendations included:
i) Structure
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.1bn should be allowed to enter the
sector. 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 the 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- a part of 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. Computerization of operations and updating of
technology to be carried out in the insurance industry.
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The committee emphasized that in order to improve the customer services and increase the
coverage of insurance policies, 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 committee felt the need to provide greater autonomy to insurance companies in order to
improve their performance and enable them to act as independent companies with economic
motives. For this purpose, it had proposed setting up an independent regulatory body- The
Insurance Regulatory and Development Authority.
Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in Parliament in
December 1999. 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. Since being set up as an independent statutory body the IRDA has put in a
framework of globally compatible regulations. The other decision taken simultaneously to
provide the supporting systems to the insurance sector and in particular the life insurance
companies was the launch of the IRDA online service for issue and renewal of licenses to agents.
The approval of institutions for imparting training to agents has also ensured that the insurance
companies would have a trained workforce of insurance agents in place to sell their products.PRESENT SCENARIO
The Government of India liberalized the insurance sector in March 2000 with the passage 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. Under the current guidelines, there is a 26 percent equity cap for foreign
partners in an insurance company. There is a proposal to increase this limit to 49 percent.
The opening up of the sector is likely to lead to greater spread and deepening of insurance inIndia and this may also include restructuring and revitalizing of the public sector companies. In
the private sector 12 life insurance and 8 general insurance companies have been registered. A
host of private Insurance companies operating in both life and non-life segments have started
selling their insurance policies since 2001.
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Today hardly 20 per cent of the population in India is insured and insurance premium (life as
well as non-life) account for just 2 per cent of GDP as against the G-7 average of 9.2 per cent.
Consequently, the fear that new companies will displace public companies is misplaced. There
is room for more for not only the existing companies but also for any number of competitors.
In China, insurance premium accounted for just over 1 per cent of China's GDP in 1995 but in
the four years since the market has been liberalized (albeit partially),spending on insurance has
grown at a compound annual rate of 33 per cent. It is not just foreign companies alone that have
grown but also the national PICC as well. The story is no different in S Korea. There, the
opening of the sector saw the Big Six domestic players, who initially controlled the entire
market, increase their business from 7 to 37 trillion won by 1997. Meanwhile foreign companies
were not able to capture more than a miniscule 0.7 per cent of the market.
The liberalization of life insurance will benefit the industry in the following ways:
It helps transfer of technology in the field of life insurance. New techniques and methodscan be used for assessment of risk, fixation of reasonable premium and provide new
investment opportunities. This will help in expansion and development of business.
It helps in adopting a flexible price policy on new life insurance policies developed andintroduce now onward. It will make available in all countries of the world the service of
efficient management and financial experts. It can help in development of knowledge ofinsurance business. Many educational and training institution stand fast functioning this
lead to availability of professional managers. It will enlarge the scope of insurance. It will
help spread it in rural and small villages also. The life insurance market will become
global. The productivity as well as the efficiency also increases. The international
competition in the field itself will play an important roll in this direction. Competing
ability will increase due to liberalization. All categories of employees serving in life
insurance sector will get more satisfaction through good opportunity for training, higher
opening in jobs and higher income.
The general public will also be benefited from liberalization of life insurance sector:
They can get better choice of selection of policy and insurer.
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When there is large number of insurer, the insurer is able to select such an insurer whosepremium rate is reasonable.
The insurers play more attention to the interest of insured. This way interest of theinsured is well protected.
There will be number of policies based on social security brought out by differentinsurers. Such schemes include plan like pension scheme, gratuity scheme, medical claim
etc.
Good employment opportunity in the life insurance sector when a number of newinstitutions are established in these fields.
The employee will also benefit from liberalization life insurance sector:
Better opportunity for training and development. Knowledge can be gain about new method of functioning through education and training. The employee gets opportunity for job promotion and other financial non-financial
benefits. The productivity of employees shall develop due to education and training
facility.
Working with professional manager benefit the employee in learning the new methodsand technique in work situation. The employee will get motivation and their moral will
be higher.
Negative implication:-
Cut throat competition liberalization will create acute competition in the insurance market, which
is not in the interest of the industry, customers or the country. This type of acute competition
may sometime leads to insolvency of insurance companies and thereby the policy holders may
face serious consequences. This seems far from truth, as the experience shows that nowhere the
competition has threatened anybody. The experience of banking sector in our own country
testifies to this effect that despite presence of 42 foreign banks, the balance is not distributed.
Total investment assets of the foreign banks are about10 %. But the impact of the competition
has increased the size of the market.
End of government monopoly: This liberalization of life insurance sector brings an end tothe government monopoly in life insurance sector and private companies may exercise
their domination.
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Dominance of outside companies: foreign companies capture the life insurance sectors asa whole under their dominance, because they possess more efficient insurance
techniques, knowledge. As such Indian companies cannot survive before these foreign
companies.
Shortage of funds for social cause: It is estimated that at present the LIC and GIC invest atotal of Rs 90,000 crores to the public/ social sector. This amount is early 70-80 % of
their total fund available. Although the government is making rules for the private sector
companies to invest certain percentages of their premium income in the social sector, the
availability of such huge fund is doubtful.
Policies of heavy amountthe insurance companies issues policies of heavy amountwhen at present a policy is available for an insured sum even below Rs.1,00,007/- where
the sum assured against a policy becomes very heavy, economically backward people
cannot benefit of insurance.
More attention towards profitable policies:- the private sector life insurance companiesdevelop and introduce only those policies that involve the minimum risk burden and
more profitable of them. They overlook the interest of the common people. They want
taken any special attention to insured the lives of woman, physically handicapped etc.
which involve more risk.
Neglect the rural lives: The people who are against the concept of liberalizationof insurance sector believe that the domestic as well as foreign private companies neglect
the rural areas, by giving more attention in getting people insured from urban areas. This
because of the average cost incurred on policies is less in urban areas.
Problem of exercising control over insurance companies: it becomes very difficult tocontrol Indian and foreign private insurance companies by the government.
MAJOR PLAYERS IN INSURANCE SECTOR
About the various player of life insurance sector:
Since being set up as an independent statutory body the IRDA has put in a framework of globally
compatible regulations. In the private sector 12 life insurance and 6 general insurance companies
have been registered than after remaining companies are registered. Here we have described the
private life insurance companies registered in which year wise.
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Private Player in Life Insurance industry:
HDFC Standard Life Insurance Company Ltd. Max New York Life Insurance Co. Ltd. ICICI Prudential Life Insurance Company Ltd. OM Kotak Mahindra Life Insurance Co. Ltd. Birla Sun Life Insurance Company Ltd. Tata AIG Life Insurance Company Ltd. SBI Life Insurance Company Limited. ING Vysya Life Insurance Company Private Limited. Allianz Bajaj Life Insurance Company Ltd. MetLife India Insurance Company Pvt. Ltd. AMP SANMAR Assurance Company Ltd. Aviva Life Insurance Co. India Pvt. Ltd. Sahara India Insurance Company Ltd.
Growth and Competition
The size of the insurance business has been increasing. The life insurance segment witnessed an
average annual growth of 43.8 per cent in first-year premium between 2000-01 and 2007-08 andgeneral insurance witnessed an average annual growth rate of 17 per cent during the same period.
While the growth in both private and public sectors is comparable in the life sector, the general
insurance sector saw a higher growth in the private sector.
There has also been an increase in insurance penetration. Underwritten premium in a given year
to GDP ratio has increased, from 2.3 per cent in 2000 to 4.7 per cent in 2007. This compares
favourably with some of the emerging economies in Asia, i.e., Malaysia, Thailand and China
with ratios of 4.9, 3.5 and 2.7 per cent respectively.
Insurance density, which is defined as the ratio of premium underwritten in a given year to total
population (per capita premium underwritten), has increased significantly from Rs.465 (US $
9.9)70 to Rs.2190 (US $ 46.6) between 2001 and 2007. This is still lower than in other Asian
emerging market economies; the comparable figures for Malaysia, Thailand and China are US $
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292.2, 110.1 and 53.5, respectively. Premia as a per cent of GDP, however, compared well in
respect of life, though it lagged behind in non-life
Table 3.28: Premia as a Per Cent of GDP
Country Life insurance
premia
Non-life insurance
premia
2005 2008 2005 2008
India 2.11 4.00* 0.55 0.60*
Malaysia 2.96 3.68 1.75 1.86
Thailand 1.83 1.83 0.90 0.92
China 1.34 1.77 1.07 1.61
*pertains to 2008
Source: IRDA
The Herfindahl Index for concentration for the life insurance industry is very high due to the
dominance of the Life Insurance Corporation of India (LIC). Growing competition in the sector
is, however, evident from the decline in the index over the years.
Life insurance sectors financial soundness
The life insurance segment is dominated by the public sector Life Insurance Corporation (LIC),
and there is significant variance between the
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business models of LIC and private sector participants. Accordingly, the financial soundness
indicators are analyzed separately for these two categories to better understand the underlying
difference between the two segments.
Solvency and Capital Adequacy
The weighted solvency ratio for the life insurance sector shows an increasing trend and has
increased from 134.1 per cent to 159.5 per cent, indicating a increase in the available solvency
margin relative to the required. LICs solvency ratio, which increased to 152 per cent by 2008
from 130 per cent in 2006, still remains relatively low compared to other players in the life
insurance segment.
The stipulated solvency requirement as per regulation is based on a formula approach. Solvency
ratio and entry level capital requirement are the tools used with regard to capital adequacy
requirement for the insurance sector. Capital adequacy for the purpose of the analysis, which is
measured by the ratio of capital + reserves and surplus to total mathematical reserves71, is low.
This is mainly due to the low capital base of LIC, the dominant component of the life insurance
industry. The solvency ratio, though consistently higher than the stipulated solvency
requirement, had shown a decline till 2006-07 before exhibiting an increase in 2007-08 for
private sector companies.
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Asset Quality
The asset quality of the insurance sector is measured in terms of the potential volatility of its
investment portfolio, and is looked at from the ratio of its equity investment to non-linked/linked
investment. There has been some increase in these ratios, though they are well within the
regulatory stipulations Mathematical reserve is the amount that a life insurance company must
set aside and capitalize in order to meet its future obligations.
Reinsurance and Actuarial Issues
The ratio of net to gross premium remains stable at nearly 100 per cent. The ratio reflects the risk
retention policy of the insurer.
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Earnings and Profitability
While operating expenses to gross premium after showing a decline has shown an increasing
trend, the wide difference in the quantum of total expenses to net premium between the private
insurers and LIC is an indication of the maturity structure of the business portfolio of LIC.
Liquidity
The cash and bank balances of life insurers are sufficient to meet immediate liability towards
claims towards payments but not paid. It also covers the incurred, but not reported, portion of
the claims liabilities.
Non-Life
Solvency
The weighted solvency ratio of the non-life sector was significantly above the stipulated 150 per
cent.
The lower and declining capital base relative to the net premium of the private sector non-life
companies is evident from their increasing net premium to capital ratio. The asset risk of these
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companies also shows a slight increasing trend, as evidenced from their marginally declining
capital to assets ratio between 2005-06 and 2007-08.
Reinsurance and Actuarial Issues
The propensity to reinsure is much higher in the non-life sector than in the life insurance
segment. In the case of non-life insurers, the private sector
is more inclined to reinsure risk. There is a slight decline in the ratio of net technical reserves to
average of net claims.
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Earnings and Profitability
Operating expenses to gross premium has shown a general decline in recent years. However, the
high ratio of net claims to net premiums particularly in public sector companies raises concerns.
This calls for better quality control in underwriting new business, better risk management and
appropriate utilization of reinsurance. The adequacy of premium, particularly in respect of public
sector companies, needs to be looked into. The combined ratio, which takes into account both
loss ratio and expenses incurred, is more than 100 per cent, which indicates potential
vulnerability. The ratio of investment income to net premium shows that the public sector
companies have larger investment assets than their private sector counterparts.
Liquidity
The liquidity position, as indicated by the ratio of current assets to current liabilities, at around
60 per cent indicates its inadequacy, as current assets are not sufficient to cover all current
liabilities.
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PEST ANALYSIS
POLITICAL FACTORS AFFECTING INSURANCEINDUSTRY:
Within India political ambitions and rise of communalism, fissiparous tendencies are on the rise
and may well continue for quite some time to time. Therefore, it expected that the insurance
companies might consider offering political risk coverage also. The only area where Indian
insurers consider giving cover is with regard to customs duty change under certain conditions.
Certain type of political risk at the international level has serious implications for exporters. The
term political risk has a wider connotation than commonly understood or assumed. It covers
events arising not just from politics, but risks in the course of international transactions. In this
connection, it may be noted that export credit insurance has evolved out of uncertainties relating
to international trade, particularly due to problems arising out of foreign legal jurisdiction,
political changes and currency exchange difficulties faced by many developing countries.
Prohibition for Investment: -
The funds of policyholders are prohibited from being directly / indirectly invested outside India
as per section 27C.
Manner and conditions of investment
Subject to the above provisions contained in Section 27 -/ 27- A / 27 B, the IRDA may,
In the interest of the policyholders, specify the time, manner and other conditions ofinvestment by insurer.
Give specific directions applicable to all insurers for the time, manner and otherconditions subject to which the policyholders funds should be invested in the
infrastructure and social sectors.
After taking into account the nature of business and to protect the interest of thepolicyholders, issue directions to insurers relating to time, manner and other conditions of
the investments provided the latter are given a reasonable opportunity of being heard.
Insurance business in rural / social sector: -All insurers are required to undertake such percentage of their insurance business,
including insurance for crops, in the rural social sector as specified by the IRDA. They
should discharge their obligations to providing life insurance policies to persons residing
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in the rural sector, workers in the unorganized sector or to economically vulnerable
classes of society and other categories of persons as specified by the IRDA.
Capital requirement: -The paid up equity of an insurance company applying for registration to carryon life
insurance business should be Rs 100 Crores.
Renewal of registration: -An insurer, who has been granted a certificate of registration, should have the registration
renewed annually with each year ending on March 31 after the commencement of
the IRDA Act. The application for renewal should be accompanied by a fee as
determined by IRDA regulations, not exceeding one forth of one percent of the total
gross premium income in India in the preceding year or Rs 5 Crores or whichever is less,
but not less than Rs 50000 for each class of business as per Section3-A.
Requirements as to Capital: -The minimum paid up equity capital, excluding required deposits with the RBI and any
preliminary expenses in the formation of the country, requirement of an insurer would be
Rs. 100 crore to carry on life insurance business and Rs 200 crore to exclusively do
reinsurance business as per Section 6
Role of the government: -As insurance is an important service sector, hence it is highly regulated by government.Since 1956 insurance sector was highly regulated by government of India. On March 16,
1999, the Indian cabinet approved on Insurance Regulatory Authority Bills that was
designed to liberalize the insurance sector.
Two governments in India have fallen over the issue of liberalization of the insurance sector
(which was nationalized in 1971). But the government of A.B.Vajpayee as gone ahead to
announce the liberalization of this sector announcement was made in November 1998.
Governments objectives for liberalization of insurance: -
The main objective of opening of insurance sector to the private insurers is asunder:
1. To provide better coverage to the Indian citizens.
2. To augment the flow of long-term financial resources to finance the growth of infrastructure.
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BODIES THAT REGULATE THE SECTOR:
For better regulation purpose of the insurance sector the government has established following
bodies;
1. IRA: Insurance Regulatory Authority.
2. IRDA: Insurance Regulatory and Developmental Authority.
3. TAC: Tariff Advisory Committee.
ECONOMICAL FACTORS AFFECTING INSURANCE INDUSTRY
Interest rate at bank and interest rate of P.F variation very much affect to insurance industry,
because people always attract by higher return. Therefore, they do not prefer lower return policy.
Unemployment also affects insurance industry, because the unemployment people will not
have earning, so saving also affect to life insurance sector Life insurance industry will directly
affected by Earthquake, Monsoon, and Natural calamity. Because of these events turns into lots
of death, so the insurance companies have to pay claim against policy. Infant mortality rate and
maternity mortality rate are also affecting to life insurance. Typical Indian want
luxurious product against low income, so that they prefer installment or annuity (EMI), so that
they may not have extra saving to invest in insurance.
Adequacy of capital:
Capital adequacy is a matter of attention in view of the nature of the life insurance business,
where in the case a contingency arises, the insurers should be in a position to meet its long-term
contractual obligations and pay up the dues or claims. In that sense, life insurance is a capital-
intensive business and must be backed by an adequate capital base on the part of the owners and
the companies should not be running theirbusiness purely on other peoples money. So
minimum start up amounts and long running capital adequacy norms are absolutely essential, in
consideration of this, the Malhotra committee suggested and subsequently the IRDA stipulated a
minimum capital base of Rs 1 bn for any entity wanting to enter the life insurance business.
Increased Economical Activity:
Although economic activity has slowed down since 1996, sooner or later there will bean
upswing. The increase in the growth rate in various sectors accompanied by the growth in trade
in the context of fulfilling of commitments to the WTO will signal a growth in the demand for
insurance covers of new types. For example, aviation insurance cover will be on an increasing
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scale in view of the need for more frequent travel for men and for transporting materials. This
would necessitate substantial property, liability and personal insurance. As far as cover against
business interruption is concerned, the pace of business and of change today is so fast that even
the most careful assessment of exposure time, and the most liberal coverage cannot protect the
insured adequate in the event of a loss be on the increase and insurance companies cannot afford
to ignore the vast potential in this business.
Interest Rates: -
During the last years the government has rationalized interest rate creates better business
opportunities for the life insurance sector because the substitute products are graded lower by the
customers. On the other hand the value of the holdings of the insurance companies will increase.
Rationalized of the interest rates is still expected, and it is an opportunity for the company. Low
interested rates mean low investment return for reinsures causing negative impact on their
overall net profitability as pricing is to a certain extent sensitive to interest rate fluctuations. The
negative impact therefore, lead to higher pricing level for reinsures in order to sustain their
profitability. But, in reinsurance market, which is characterized by over capitalization a resulting
intense competition. The opportunity for such rate increases practically remains very slim and
even non-existent. As a result, reinsures are under tremendous pressure to cut their operational
cost to safeguard profitability. Furthermore, low interest rates discourage and even prevent any
outflow of capital from reinsurance business to capital markets, causing current over
capitalization in reinsurance market to continue. A positive outcome is that low inflation rates, if
sustained for a considerable period, usually bring some relief to reinsures from the resulting
lower than forecast claims payment. Also, this can lead stability to reinsures administrative cost.
As interest rates fall, bond value rise, and insurers feel richer. On the liability side, reserves are
not explicitly discounted so lower interest rates do not increase reserves, lower inflation means
lower expected future claims payments which lowers required reserves. This in turn increases
surplus, again allowing insurers to feel richer. Therefore, low interest rates and low inflationresult in higher assets, lower liabilities, hence greater surplus and greater risk capacity resulting
in less demand for, and greater surplus of reinsurance. Low interest rates and low inflation
reduce the ability of reinsures to off set technical losses by using financial products and should,
as a consequences, force market competition downloads. However, this will also serve to weaken
the balance sheets of insurers and create an increase in the demand for balance sheet protections
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.Lastly, these conditions move risk from the liability side of the balance sheet to the asset side
while actually generating new needs for cover.
Inflation rate:Inflation can also be one of the causes to change the scenario of the insurancesector. High inflation for instance, would tend to reduce the insurance business, particularly life,
because the real value of the money paid back to the policyholder on maturity of the policy
would go down and would, therefore, lose its attraction for the investor. At the most, the insuring
public may prefer pure risk plans (terms insurance), which have a low premium outlay. The
response to an inflationary situation will depend on what benefit the insured is looking for. In a
situation of high inflation, clients would prefer policies where the savings portion is periodically
returned while the risk portion is maintain for the duration of the contract. Those who prefer risk
protection are likely to opt for long term policies, which may also be preferred because they are
likely to be low premium policies. A flexible system, under which the sum insured, is increased
from time to time so that the real value of the cover is maintained, and could give a boost to the
market under conditions of high inflation. Fortunately, the rate of inflation in India has been
contained to less than 5 percent for a fairly long time and unless it goes out of hand, it is not
likely to dampen the market.
Market related factors:
These are the factors, which governs the entire life insurance sector. This includes internal as
well as the external factors. We have seen the various factors like technological, economical and
will see the political and government factors , environmental factors and competitive analysis
of insurance sector in the next session. These all factors have changed the trend of life insurance
sector, which is shown in the following figure:
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Customer satisfaction: -
Since the customer is the focus of any service industry, every such industry continuously strives
for greater variety and better quality of products, improvement in its delivery system, cost
effectiveness, easy access, and quick response to perceived needsin short qualitatively superior
service. Indian life insurance companies already have a sizable line up of the products. The
difference between them and the foreign operators perhaps lies in the service provided, because
there is still not enough concern on the part of the Indian companies, with customer satisfaction,
on time renewals, claims settlements, etc. if high standards have been achieved else where, it is
not impossible to attain the same in India too. The concept of sales is now redefined as a long
standing relationship. The relationship does not end with the conclusion of the transaction, but
has to be durable and of a long term nature. Hence, improved in performance of the company
will not be synonymous with only basic cost reduction or larger business, but the new measure of
performance will be set in terms of service to the customer. One can anticipate greater insistence
from pressure groups like customer forums to keep customer satisfaction at the top of the list
of priorities of the insurers.
SOCIO-CULTURAL FACTORS AFFECTING LIFEINSURANCE INDUSTRY:
The basic social factors that affect the life insurance sector are as under: -
Population
Life style Educational level Level of earning Societal benefits
These are the major social factors, which affect the life insurance sector. We will discuss all of
them in brief
Population:
Growth in the population is a major factor pushing up the demand. It is also going to exert a
special influence on the life insurance market in other ways. Apart from exerting pressure on
demand for goods and services, and through that, ill effects of uncontrolled growth of population
also could spur the growth of demand. For example, overcrowding in public places of
entertainment, public support, or too many vehicles on the road can result in hazards like
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stampedes and pollution, which require covers and still are not sold on a large scale today. Thus
the positive as well as the negative aspects of population growth are going to spur demand.
Life Style: The peculiar lifestyle of a country or an age also affects the insurance business.
Change therein produces different demands for life insurance. For e.g. Allover the world, family
size is shrinking and the fact that in decades to come, both presents are more frequently likely to
work outside the home will mean that there could be a greater possibility of property loss.
Similarly, a larger number of vehicleson the roads for people commuting to their jobs orbusiness would mean larger incidence of accidents. This will increase the demand for life
insurance products. Of course, there is also the other possibility that wherever it is possible,
some people will try to spend a part of their time working at home either because they would like
to be with their families or because they find it more convenient. Activities like life insurance
and financial services are particularly well suited for such arrangements. With time becoming
scarcer for most people who pack in a full day, there is a higher demand for convenience and
service. Companies will respond by trying to shorten the transaction time for the delivery of
products and services and creating distribution systems that can reach clients wherever they are
and whenever they want to use them, so as to ensure convenient access to service providers .In
recent times, there has been a surge in the high end business of the LIC. For instance, as against
90 policies each worth more than Rs 10 million in 1999-2000, the number was as high as 900
policies in the next year. Or again, the number of jeevanshri policies jumped from 88,000 to a
total of 2,33,000 policies in the same period. However, consumers behavior cannot be
adequately and accurately predicted. The younger generation is overwhelmingly influenced by
consumerism. If this trend continues or increases with increasing income, there will be fewer
propensities to save or insure, as a result of which the increasing purchasing poser may not be
reflected in the life insurance market.
Crumbling social values, the deteriorating law and order situation, the growing incidence of
crime, extortion, abduction, etc., are posing a new category of risks which need to be coveredthrough suitably designed policies.
Thus these are how changing life style of the citizens is affecting the life insurance industry.
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Level of education:
India is one of the developing countries: the level of education is very low here. The literacy rate
is very poor. More than 50% of the population is still uneducated or more or less not educated.
Thus the people are not able to understand the concept of the life insurance. Among the educated
people the quality of the education is still a big question mark. Thus the awareness is not created
and it has become a big challenge for the industry. Thus one of the factors, which affect the life
insurance sector, is low level of education.
Level of earning:
Another factor, which affects the life insurance sector, is the level of earning. In India the rule of
80-20 is working. The 80% of the total population is having the 20%of the wealth and the 20%
of the total population is having 80% of total wealth. Thus the richer are richer and poorer are
poorer. Due to this the life insurance sector is affected very much.
Societal benefits:
In view of the fact that large sections of India have inadequate life insurance cover, an important
social responsibility of the government relates to spreading it far and wide. In addition, the
government attempts to extent life insurance with certain social obligations in view in both urban
and the rural areas through such means special schemes for the weaker sections, and by tilting of
the life insurance companies investments in favor of social developments. The social changes
emerging in the country provide opportunities for insurers to sell financial services products such
as family health care programmed, retirement plans disability insurance, long-term care for
senior citizens and different employee benefit plans.
It is not the total population but the insurable population which is material for the conclusion of
potential. Apart from the usual demographic and other well known factors such as age group,
income level, sex-wise distribution, and literacy level, a realistic assessment of this potential has
to be based on several other relevant factors. Many invisible factors like religious faiths and
social values too need to be considered. As such, there is considerable difficulty in accurately
estimating the potential and crude estimates can be misleading. The estimate will also vary
according to the criteria used to measure it.
TECNOLOGICAL FACTORS AFFECTING LIFEINSURANCE INDUSTRY:
Internet as an intermediary in the current Indian market customer is not aware about the intrinsic
value of insurance. He thinks of insurance only in the mount of March as a tax saving measure.
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The security provide by an insurance cover is rarely thought about. In such a scenario Internet
can be an effective medium for educating the consumers about insurance. It serves as a single
window for disseminating product, process and procedural information to the consumers.
Product development and target marketing through the Internet: with increase in the number of
insurance companies there will be a need for market segmentation and subsequently product
designed for each of them. In such a scenario Internet can be a effective channel for pushing
product specific information to a particular market segment. Consumer feedback about a
particular product as well as suggestions for different types or covers can also be generated
through the Internet. Retail marketing is a commonly expected concept and the providers of the
retail products and service will try out for larger market and market share. There would be cut
through competition and the real benefit would be to the customers in terms of better products,
distribution, pricing, post transaction service and technology. Technology will perhaps be the
single largest driver of the retail thrust. The entire strategy will evolve around the absolute ability
of the organization. The customer will demand for greater convenience of excess to the product/
service and all at low cost of delivery. There fore the use of technology and specifically the
Internet with realigned strategies would be one of the key factors to success. Constraints of
locations, timing and accessibility would not be a hurdle for either customers or businesses.
Maintaining the database
The most important facto that is affecting the insurance industry is the marinating the database of
the customers. The insurance industry having a huge list of the customers.
In order to maintain it in manual format it is really the work of stupidity. With the change in
time the computers has taken the work of this things. Thus with the development of the
technology it has becoming possible to maintain such huge database very easily. A person can
switch over to the computer and get the details of the customer very easily. Thus maintaining the
database has really become easy due to the development in technology.
E-business insurance in India: -
The Internet has played a vital role in transforming the business of the 21st century. Computers
are now being used extensively for creating a storing data, information with the help of complex
and sophisticated technological tools in every kind of business. This change having been widely
accepted, the advantages are numerous such as fast processing improved. Efficiency, cost
reduction among several other benefits. However, with every positive change, there is an evil
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attached and technology is no exception. In technical is an evil attached and technology is no
exception. In technical terms, increased sophistications of technology brings with it, an increased
factor of risk involved. The risk can be of various attributes, for example, the risk of data being
lost due to a virus attack, the theft of important and confidential information and so on, which
ultimately results in losses for the business entity. With this change in the business process,
insurers have to devise new methods for assessing, underwriting and servicing claims for the so-
called e-business insurance. Insurers face challenges to ascertain risks, in order to quantify them
because such risks dont have any past data, which makes it all the more difficult for actuaries.
Moreover, what financial impact a particular risk can have is very difficult to be determined. For
example, if some hackers obtain credit card information of few customers, its a loss for banks,
their credibility, customers and also their brand. Will an insurance policy cover all of this is
million dollar question hence; the difficulty is to design a cover first of all, which really answers
the needs of customers. But even after designing and pricing such products with difficulty, the
challenge to underwrite and handle claims for such policies remains existent.
Impact on distribution channels: -
Distribution channels are the most important part of the insurance industry. The scenario is
continuously changing in this industry. In future the customers are expected to be more
technologyoriented, better informed, more knowledgeable and more demanding. The insurers
will have to offer all types of channel to customer and it is the customer who will have the right
to choose the channel suiting him/ her. Dualin come families with young children, singles with
long working days and flexi-timers all demand high level of sophistication and ease when it
comes to service. Hence the companies have to be very careful and cautious in catering to the
needs of these customers who provides a good amount of business to the insurers. Thanks to the
technological advancement and increased de regulation and sophistication, the carriers and
producers can now reach the customers in different ways as has been proved in the US market
and other developed nations the web is extensively used for the access of information but when it
comes to the purchase of policy, the offline mode is preferred. The private players in India
seems to have identified this and have put substantial information on there websites
regarding policies, quotes and contact information among other routine stuff.
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OTANALYSIS( Opportunities & Threats Analysis)
OT- analysis of the industry shows opportunity and threat the industry is likely to face. OT
analysis of Indian life insurance industry shows the comparative strengths and weakness of
Indian life insurance industry with rest of the world and also major opportunities and threats the
Indian life insurance industry is facing.
Opportunities:
Todays human life becomes full uncertain, so they prefer protection against therisk. Therefore they prefer life insurance. This is the opportunity for the life
insurance sector.
Easy accesses to development in the more advance market providefurther opportunity to upgrade their working. Technological, financial or
specific area based avenues of absorbing improved system are also now more
easily available. So, that insurance companies working efficiently and fast
service.
Increased economic activities: increase in the economic activity has become the
opportunity for the life insurance sector. The activity such as development in the
automobile industry, development in the shipping industry. The growth in the GDP
shows the opportunity for this industry. The growth rate expected this year 7-7.5%. So
this is also one of the opportunities for the life insurance sector.
Uncovered market: The Indian insurance market is the one of the least markets in the
world. India has a population 1044.15 million out of which only 77.7 million have a life
insurance policy. Almost 300 million people in the country can afford to buy life
insurance but of this only 20 % have an insurance cover. Thus there lies a
big opportunity for the insurance industry. No doubt lots of marketing and promotional
efforts have to be done for trapping the uncovered portion of the huge market. Indias
insurance has long way to catch up with the rest of the world. According to the institute
of charted financial analyst of India. India is the 23rd largest insurance market in the
world. India accounts for just 0.4% of the global insurance market which is very low. The
ratios of premium to GDP for India stands at only 3% against 5.2% in US ,6.5%in UK.
To enter into rural market where customer awareness about insurance is low by effectiveand efficient marketing strategies.
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To sell insurance products through electronic Medias. Natural calamities: natural calamities taking place now days have created a concern for
life insurance among the public. Because of natural calamities like earthquake, flood, and
cyclone people have become conscious about benefits and need of insurance. Thus
through a calamity it has become a considerably big opportunity for the industry.
Growing population: the growth in the population (approximately 1.7%) is very high. It issaid that one Australia is added in our country every year. Thus potential customers for
the life insurance industry. It has become an opportunity for the life insurance industry.
The lack of comprehensive social security system combined with a willingness to savemeans that Indian people demand for pension products will be large. Thus, it has become
an opportunity for the life insurance industry.
India has traditionally been a highly savings oriented country. Needless to say, if theinsurance market is properly tapped, it is possible to raise life insurance premium as a
percentage of GDP from its existing level. Thus, it has become an opportunity for the life
insurance industry.
To use Internet and e-commerce technologies to dramatically cut the costs and/or topursue new sales-growth opportunities. With the help of technology it has become easy
for the companies to reach the customer quickly, easily, efficiently and in a better way.
Also the companies can cut down the cost of operation up to considerable level. Thus
technology has thrown lots of opportunity for the company.
Liberalized government policy toward insurance sector: the government has liberalizedthe government policy in the life insurance sector. Now a day role of government has
changed. Due to liberalized policy of government the country is benefited in earning
foreign inflows: the domestic company can also collaborate with foreign country and can
create synergy. Thus there is great opportunity for those who can trap it. Exist the option
of joint venture& alliance etc. for companies to create Synergy, value as well as
competitive capabilities for the firms.
Threats:
Private entrants are naturally targeting the profitable and more lucrative segments, by providing
better service, new products and flexibility. They are targeting the bigger corporate the other
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clients in the well established metropolitan center. These new entrants succeeded in eating share
of the existing entities. This creates threat among rival firms itself.
Decreased in bank rate: the decreased bank rate is the biggest threat for the insurancesector. Fluctuation in the bank rate makes big difference for the insurance industry. It has
become threats for the life insurance industry.
Interest rate of P.F and bank saving create threat to insurance sector. All other saving isobviously the threat for life insurance sector.
Increasing intensity of competition among industry rivals-may cause squeeze(fall) onprofit margins. Consumers education- consumers are more and more confused because
the market players are offering large number of product range. As at present the
awareness level is not much, it is only because the education level is only 62 %( in which
only 10% are well educated).
Fraud in insurance sector: the major problem fraud, which affects the insurance sector. The flight of talent to new entrants is already in evidence, and could be on the rise for
some time to come. Retaining qualified and competent executives will be considerable
challenges for existing companies.
One very serious danger that the government on units is likely to face is that even if atsome point of time, the government does decide to disinvest a portion of its equity; they
may not be fully free from government interference. They could face a peculiar problem
that although paper and in terms of legal definition they would not be public sector units.
In effects, their working could be no different from what it was before their ownership
pattern change. This could be genuine threats since they would be competing with units
which are free from such artificial and unnecessary restrictions.
The new units, equipped with state of arts equipment and innovative procedure wouldhave an in-built edge over the erstwhile public sector units, which until recently had no
such opportunity and incentives. Due to possible negative impact on employment, there
were no serious efforts at updating technology and equipment. The resultant inadequate
investment in infrastructure could lead to their lagging behind in the race.
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FUTURE POSSIBILITIES (NEXT 5-10 YEARS)
Job opportunities are likely to increase manifold. The number of people working in theinsurance sector in India is roughly the same as in the UK with a population that is 1/7
India's; the US with a population 1/4 the size of India has nearly 4 times the number. In
the emerging markets, the picture is no less encouraging. In S Korea, the no of full time
employees more than doubled over a ten-year period. Thailand added 50 per cent more
jobs in four years.
The liberalization of the insurance sector promises several new jobs opportunities forthose employed in the finance sector that are equipped with degrees in finance. Finance
professionals who had witnessed a slump in the job market would be a much-relieved lot
to hear about the privatization of the insurance sector.
Let us look into the type of jobs that will be created once the private players come on thescene. Certainly, it won't be far different from the traditional streams in any other
industry. There will be demand for marketing specialists, finance experts, human
resource professionals, engineers from diverse streams like the petrochemical and power
sectors, systems professionals, statisticians and even medical professionals. Apart from
this, there will be high demand for professionals in the streams like Underwriting and
claims management and actuarial sciences.
There could be a huge inflow of funds into the country. Given the industry's hugerequirement of start-up capital, the initial years after opening up are bound to see a strong
inflow of foreign capital. Moreover, given that the break-even, typically, comes much
later than in the case of other sectors, odds are that the first remittance of dividend will
not happen before a good 10-15 years.
In the areas of reinsurance, huge capacity is likely to be created with players like SwissRe and Munich Re keenly observing the unfolding saga of liberalization of insurance
industry in India. Not only the outward reinsurance will reduce, it is bound to attract
inward reinsurance from the neighboring countries and regions. If the regulator is
forward looking and legislature is supportive, this trend may well lead to the creation of a
Lloyds like market for the direct as well as reinsurance businesses.
However, increased competition is very likely to result in rate reductions incertain classes of
business, but in those areas that have so far been cross-subsidized an increase in rates may be
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possible. Overall, the rate reductions may outweigh the increases, thus bringing down the re-
insurance premium volume available.
Apart from pure re-insurance activities, which is providing insurance protection, arevolution will come in service related fields like training, seminars, workshops, know-
how transfer regarding risk assessment and rating, risk inspections, risk management and
devising new policy covers, etc. Also, with more players in the market, there will be
significant increase in advertising, brand building, and keen pricing not ridiculous pricing
and this will benefit whole lot of ancillary industries.
Another effect of de-regulation will be that, projects, especially mega-projects where oneneeds the capacities of the international re-insurance market, will get exposed to
international trends to an even greater extent than is the case today. This will affect rates
too. Areas like the personal lines segment, where we also expect to see substantial growth
as also new types of covers, would usually not be affected by international trends in the
same way as, there is much less need for global re-insurance support.
Substantial shift in the distribution of LIFE insurance in India is likely to take place.Many of these changes will echo international trends. Worldwide, insurance products
move along a continuum from pure service products to pure commodity products.
Initially, insurance is seen as a complex product with a high advice and service
component. Buyers prefer a face-to-face interaction and place a high premium on brandnames and reliability.
As products become simpler and awareness increases, they become off-the-shelf,commodity products. Sellers move to remote channels such as the telephone or direct
mail. Various intermediaries, not necessarily insurance companies, sell insurance. In the
UK for example, retailer Marks & Spencer now sells insurance products. In some
countries like Netherlands and Japan, insurance is marketed using post office's
distribution channels. At this point, buyers look for low price. Brand loyalty could shift
from the insurer to the seller.
In other markets, notably Europe, this has resulted in bancassurance: banks entering theinsurance business. The Netherlands led with financial services firms providing an entire
range of products including bank accounts, motor, home and life insurance, and pensions.
Other European markets have followed suit. In France over half of all life insurance sales
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are made through banks. In the UK, almost 95% of banks and building societies are
distributing insurance products today.
In India too, banks hope to maximize expensive existing networks by selling a range ofproducts. Various seminars and conferences on banc assurance are taking place and many
bankers have clearly shown their inclination to enter insurance market by leveraging their
strengths in the areas of brand image, distribution network, and face to face contact with
the clients and telemarketing coupled with advanced information technology systems.
The mergers of Citibank with Travelers in USA and of Winterthur, the largest Swiss Co.
with Credit Suisse are recent examples of the phenomenon likely to sweep India too.
Insurers in India should also explore distribution through non-financial organizations. Forexample, insurance for consumer items such as refrigerators can be offered at the point of
sale. This piggybacks on an existing distribution channel and increases the likelihood of
insurance sales. Alliances with manufacturers or retailers of consumer goods will be
possible. With increasing competition, they are wooing customers with various
incentives, of which insurance can be one.
Another potential channel that reduces the need for an owned distribution network isworksite marketing. Insurers will be able to market pensions, health insurance and even
other general covers through employers to their employees. These products may be
purchased by the employer or simply marketed at the workplace with the employers co-operation.
Worldwide interest in E-commerce and India's predominant position in informationtechnology and software development is also likely to be a major factor in the marketing
of insurance products in the immediate future. The Internet account is increasing in
arithmetic progression and the trend has already been set by some of the leading insurers
and insurance brokers worldwide.
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References:
E&Y Indian Insurance Sector Report 2010 available at http://www.bellamy-
associes.com/Insurance_Report.pdf
http://www.acadjournal.com/2008/v22/part7/p2/
http://www.economywatch.com/indianeconomy/india-insurance-sector.html
http://www.ey.com/IN/en/Industries/Financial-Services/Insurance/Indian-insurance-sector
http://www.ibef.org/industry/insurance_industry.aspx
http://www.bellamy-associes.com/Insurance_Report.pdfhttp://www.bellamy-associes.com/Insurance_Report.pdfhttp://www.acadjournal.com/2008/v22/part7/p2/http://www.economywatch.com/indianeconomy/india-insurance-sector.htmlhttp://www.ey.com/IN/en/Industries/Financial-Services/Insurance/Indian-insurance-sectorhttp://www.ibef.org/industry/insurance_industry.aspxhttp://www.ibef.org/industry/insurance_industry.aspxhttp://www.ey.com/IN/en/Industries/Financial-Services/Insurance/Indian-insurance-sectorhttp://www.economywatch.com/indianeconomy/india-insurance-sector.htmlhttp://www.acadjournal.com/2008/v22/part7/p2/http://www.bellamy-associes.com/Insurance_Report.pdfhttp://www.bellamy-associes.com/Insurance_Report.pdf