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Globalisation
of insurance
sector:
The experience after independence in insurance sector showed thatthe ultimate obje
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ctiveremainedlargely unfulfilleddue to the
relatively lowspread of
insurance in thecountry
theefficient andquality
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functioning of thepublic sectorinsurance
companies andthe
untapped potential for mobilizing
longterm financial
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resources tofinance thegrowth of
infrastructure,thegovernment set
up an insurancereturns Committee
in April, 1993under the
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chairmanship ofR. N. Malhotra, tosuggest reforms in
the insurancesector including
improving thefunctioningof the
LIC, GIC andstrengthening the
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regulatory system.The committeesubmitted its
report tounionfinance minister
on 7-01-1994,recommending a
phased programof liberalization
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andcalled fora private sectorentry
and restructuringof LIC and GIC.
The subsequentgovernmentmove
d an insurancebill but it was not
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passed, the nextgovernmentmoved on
insurancebillagain in 1998,
which wasreferred back to a
select committeeof parliament
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afterwardsthegovernment introduced the insu
rance regulatoryDevelopment aut
hority (IRDA) Bill in
parliament withsome changes
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in the originalstructurethe government
of India createdhistoryon October
private sectorcompanies.
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Penetration of
insurance
sector in India:
Insurance is a Rs.400 billionbusiness in Indias
and together withbanking services
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adds about7% toIndias gross
domestic product
(GDP) grosspremium
collection is about2 percent of
GDPand growingbetween 15 and
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20 percent perannum. Indiaalso has highest
number oflifeinsurance poli
cies in force in the world.
Yet more than three fourth
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of Indiasinsurance population hasno life insurance
cover thepenetration of
insurance is verylow in India
thefollowingindices support
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this contention.While per capitainsurance
premium indevelopedcountri
es is very high, itis quite low in
India per capitalinsurance
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premium in Indiain 1999 wasonly$8 while it was $
4800 for Japan, $1000 for Republic
of Korea, $ 887for Singapore, $
823for HongKong and $ 144
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for Malaysia. TheinsurancePremium as a
Percentage ofGDP was14% for
Japan, 13% forsouth Africa,
12% for Korea,9% for UK and
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less than 2% inIndia in1999Similarly the
insurancePremium as a
percentage ofGross Domestic
saving (GDS)was52% for U.K,
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35% for otherEuropean andAmerican
countries,it wasonly 9% for India
in 1999The shareof India in the
World market interms of Gross
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insurancepremium is againvery 1000.For
instance, WhileJapan has 31%,
European Union25%. South
Africa 2.3%,Canada
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1.7%share of theglobal insurancepremium, it is
only 0.3% forIndia.
Insurancesector -
Hurdles:
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The insuranceindustry has beengrowing between
15 and 20percent, but it
lags far behinditsglobal
counterparts.Thiswas due to the
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following reasons..1.Insurancecompanies create
products and goout to find
customers. Theydo not
create productsthat the market
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wants.2. Insurance awarenessamong the
general public islow.3.Term-
Insurance Plantsare not
promoted.4.Unit-linked
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assurances arenot available.5.
Insurance coversare expensive.
Inefficientmanagement and
low investmentyield
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areresponsible forthe high premiumcharged by Indian
Insurancecompanies
Investmentrestrictions have been
responsible for10w
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yields.6. Returnsfrom InsuranceProducts are
low.7.There is adearth of
innovative andbuyer-friendly
insuranceproducts.
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2
Globalization
of InsuranceSector -Issues:
The three keyissues thatimpingeon liberalization
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of insurance inIndia are: whyliberalize,
whatmarketstructure to have
finally and what isthe role for
regulator. :
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(i) Reason for
opening up the
Insurance
Industry:An insurance pol
icy protectsthe buyer at som
e cost against financial loss arisin
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g from aspecifieda risk. Differentsituation and
different peoplerequire different
mix of riskcostcombinations
. Insurance company thereby offer
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s schemes of different kinds. Among theemerging
economies, Indiais one of the least
insured countries,but the potential
for further growthis phenomenal.
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The demand forinsurance islikely to increase
with rising percapitalincomes,
rising literacyrates and increase
of the servicesectors. After
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Korean andTaiwaneseinsurance sectors were
liberalized, theKorean market
has grown 3times faster than
GDP andTaiwanthe rate of growth
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has been almost 4times than that ofits GDP. Further,
opening ofthesector to
private firms willfoster
competition,innovation and
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variety ofproducts. It willalsogenerate
greater awarenesson the need for
buying insuranceas a service and
not merely fortaxexemption,
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which is currentlydone.(ii) Market
Structure:What is the
appropriatemarket structure
for insurancemarkets? Should
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it be monopoly(stateor regulated) or
should there beunlimited private
entry or shouldthere only be a
fewregulated players
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? The answer isquite obvious.When traditional
public sectorbusinesses like
banking, power,telecom, airlines
and even postalservices have
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been allowedprivate entry,why
mustinsuranceremain a state
monopoly? Statemonopoly had
little incentives tooffer a wide range
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of products withmore complexand extensive risk
categorization,better technology
andbetter customer s
ervice including faster settlements.
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Keeping in viewthe recommendations of insuranc
e reforms committee that a limited
number of highcapital private co
mpanies belicensed, and no firm be
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allowed to operateboth in life andnon-life
insurance, IRDAhas
grantedlicenses tothree private
companies onOctober 24, 2000
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- Reliance Fireand GeneralInsurance,HDFC
Standard LifeInsurance and
Royal SundaramAlliance
Insurance, to set
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up the shop andtoget into business.
2
(iii) Role of IRDA
IRDAsprimary
function is to protect consumer i
nterests. This means ensuring pro
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per disclosure,keeping pricesaffordable but
also insisting onsome mandatory
products, andmostimportantly
making sure thatconsumers get
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paid by insurers.Further, ensuringthe solvency
of insurers is avery
important functionof regulatory
authority.IRDAhas evolved a set
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of operationalguidelines to dealwith maintaining
the solvencyof insurers.
Growth ofinsurance
business entailsbetter education
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and production tocustomers,creating better
incentives foragents and
intermediaries. Ithas evolved
guidelines on theentryand
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functions of suchintermediaries.Licensing of
agents andbrokers are
required to checktheir indulgence
in activities suchas twisting,
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fraudulentpractices, rebatingmisappropriation
of funds.
Insurance
Sector -
Emerging
Areas:
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Some of theemerging areasfor insurance
sector in India are:1. Demand for P
ension Plans:Two relatively
modern trendsaffect life
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insurance businessin Indiasignificantly. The
first one isthejoint family
system whichworked like an
insurancearrangement.
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With more andmorenuclearfamilies becoming
the rule, there it agreater demand
for life insurancecover the
secondtrend isthat elderly are
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increasinglyhaving to fend forthemselves. In
1990, India hadabout 54million
people above theage of 60. This
number isexpected to
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increase to 100million by2004,and to
almost 10% ofthe total
population by2010. Thus future
senior citizenslook
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towards planningfor their own oldage and the need
for pensions andannuities. These
two trendsportenda large and
growing market
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for life insurancein India.
2.
Separateness of
Banking andInsurance:
There is lot ofspeculation
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whether banksshould be allowedto operate in the
insurancesectors.The reaso
ns forallowing banks a
recompetition wou
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ld enhanceefficiency and benefitconsumers,
public-men enjoya One- Stop
Financial ServiceParadigm, banks
could recoupsomeof the lost
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business tosecurities firmsand there would
be synergies inoperating
insuranceandbanking. The
reasons againstare - it would
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create unhealthyconcentration ofmarket
power,it would expose banks to a
dditional andunnecessary risks
and banks wouldhave
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unfair advantagessince they havedetailed
information ontheir customers
financial position.Thisdebate is far
from settled andwe are likely to
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see somerestructuring inoperations of
bankingandinsurance.
3.
Role of
InformationTechnology :
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2
The Business ofselling life insura
nce requires assessing the profile
of the customer andassigning
the right
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policy. Thisprocess isfacilitated
by a databaseand is completely
driven byinformation technology. If
it uses thisnetwork of
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database to offertheir products, itwould have better
utilized this vastlyunderutilized
capacity.4.
Using PostalNetwork:
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2