LIFE INSURANCE IN INDIA
History of insurance in India
In India, insurance has a deep-rooted history. It finds mention in the writings of Manu (
Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). The writings talk
in terms of pooling of resources that could be re-distributed in times of calamities such as fire,
floods, epidemics and famine. This was probably a pre-cursor to modern day insurance. Ancient
Indian history has preserved the earliest traces of insurance in the form of marine trade loans and
carriers’ contracts. Insurance in India has evolved over time heavily drawing from other
countries, England in particular.
1818 saw the advent of life insurance business in India with the establishment of the Oriental
Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the
Madras Equitable had begun transacting life insurance business in the Madras Presidency. 1870
saw the enactment of the British Insurance Act and in the last three decades of the nineteenth
century, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were started
in the Bombay Residency. This era, however, was dominated by foreign insurance offices which
did good business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and
London Globe Insurance and the Indian offices were up for hard competition from the foreign
companies. In 1914, the Government of India started publishing returns of Insurance Companies
in India.
Changes in law and regulations:
1) The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate
life business. In 1928, the Indian Insurance Companies Act was enacted to enable the
Government to collect statistical information about both life and non-life business transacted in
India by Indian and foreign insurers including provident insurance societies. In 1938, with a view
to protecting the interest of the Insurance public, the earlier legislation was consolidated and
amended by the Insurance Act, 1938 with comprehensive provisions for effective control over
the activities of insurers.
2) The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there
were a large number of insurance companies and the level of competition was high. There were
also allegations of unfair trade practices. The Government of India, therefore, decided to
nationalize insurance business.
3) An Ordinance was issued on 19th January, 1956 nationalizing the Life Insurance sector
and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154
Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and foreign insurers in
all. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private
sector.
This millennium has seen insurance come a full circle in a journey extending to nearly 200
years. The process of re-opening of the sector had begun in the early 1990s and the last decade
and more has seen it been opened up substantially.
4) In 1993, the Government set up a committee under the chairmanship of RN Malhotra,
former Governor of RBI, to propose recommendations for reforms in the insurance
sector.The objective was to complement the reforms initiated in the financial sector. The
committee submitted its report in 1994 wherein , among other things, it recommended that the
private sector be permitted to enter the insurance industry. They stated that foreign companies be
allowed to enter by floating Indian companies, preferably a joint venture with Indian partners.
5) Following the recommendations of the Malhotra Committee report, in 1999, the Insurance
Regulatory and Development Authority (IRDA) was constituted as an autonomous body to
regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in
April, 2000. The key objectives of the IRDA include promotion of competition so
as to enhance customer satisfaction through increased consumer choice and
lower premiums, while ensuring the financial security of the insurance market.
The IRDA opened up the market in August 2000 with the invitation for application for
registrations. Foreign companies were allowed ownership of up to 26%. The Authority has
the power to frame regulations under Section 114A of the Insurance Act, 1938 and has from
2000 onwards framed various regulations ranging from registration of companies for carrying on
insurance business to protection of policyholders’ interests.
The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together with
banking services, insurance services add about 7% to the country’s GDP. A well-developed and
evolved insurance sector is a boon for economic development as it provides long- term funds for
infrastructure development at the same time strengthening the risk taking ability of the country.
http://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx
?page=PageNo4&mid=2
Factors Responsible for Changes:
1) Insurance sector was in a very unorganized form in initial stage so there was urgent need
to bring these activities under some guidance of laws.
2) Unfair trade practice and allegations of corruption.
3) As there was no second choice there was no competition from any other insurance
companies and this lead to malpractice in LICI .There was almost no customer service for
the policy holders.
4) Very low penetration in Indian population. Only the affluent were the main target of the
insurance company.
5) Tax saving need based insurance mentality and no importance on real social need.
Changes:
1) Well organized, regulated and monitored thus ensuring more transparency in operation.
2) Better products and choice for customers.
3) Change in behavior of the insurance personnel. They have now become more customer
oriented, work with flexibility and speed.
4) Penetration has increased and new products have been designed specifically for the lower
income and socially underprivileged groups as well.
5) FDI is also allowed in insurance sector but is limited upto 26% of the capital.
6) Competitive premiums and better return prospect.
7) People now are not fearful about the private insurance companies. Improved awareness
level about social needs and insurance companies.
8) Aggressive marketing strategy adopted to expand business.
9) Better grievance redressal mechanism (Insurance Ombudsman).
10) Maturity values of insurance policies are now taxable (previously it was tax free).
11) More long term funds for infrastructure development.
12) More employment generation.
Abstract
The liberalization of the Indian insurance sector has been the subject of much heated
debate for some years. The policy makers on one hand wanted competition, development
and growth of insurance sector, which is extremely essential for channeling the investments
in to the infrastructure sector. At the other end the policy makers had also the fear that the
insurance premium, which are substantial, would seep out of the country; and thus in the
nation's interest, they want to have a cautious approach of opening for foreign participation
in this sector.
After a long discussion, confrences and fraction among some political parties, IRDA brought
consensus among factions of different political parties. Though some changes and some
restrictive clauses as regards to the foreign participation were included the IRDA has
opened the doors for the private entry into insurance.
The number of potential buyers of insurance is certainly attractive but much of this
population might not be accessible as it will take a long time for us to trust on private
Sector insurance companies and this would be the only major weapon in the hands of public
sector insurance companies to move ahead .Now it would be interesting to watch that how
long domestic companies can reap the fruits of being Indian and survive and expand in the
immense competition from foreign and private players.
Whether the insurer is old or new, private or public, expanding the market will present
multitude of challenges and opportunities.
The paper will analyze the likely impact of opening up India's insurance sector and will also
suggest growth & survival strategy for Indian Insurance companies.
Main Paper
Indian insurance is on the threshold of deep and fundamental changes. The life insurance
industry was nationalized in 1956 and the general insurance industry in 1972. Before that
India had a thriving and competitive insurance industry with hundreds of private and foreign
operators. Indian companies held a 60% market share even then. Yet, insufficient
regulation also meant that there were a number of abuses.
LIC has just about 100 million policies. This works out to an average of 1.5 policies per
individual. So, only 65 million people are policyholders in India. This translates into just six
to seven per cent of the Indian population. This clearly shows the low penetration of
insurance in India. Currently, it is very difficult to make changes in policies once they are
bought. This has to change. Moreover, to make them attractive, insurance policies should
be made more people-friendly by launching products such as equity-linked insurance. Such
policies can offer higher returns to investors.
Business And Social Objectives
When LIC was formed in 1956 through the amalgamation of 225 private companies, its
business objectives complemented its social objectives. The main objective is to spread life
insurance to every nook and corner of the country especially rural areas, to socially and
economically backward classes and provide them reasonably-priced financial cover against
death.
Other objectives include encouraging people to save for the future by making insurance-
linked savings more attractive and secure. The funds created are then utilized and invested
for nation building. The insurance business is conducted with the full realization that LIC is
only a trustee of the insured public and priority is given to meet the needs that arise due to
change in the social and economic environments.
Even today after 50 years, the core value of social commitment has not changed. What
have changed in recent times are customers' expectations and the environment in which the
life insurance sector operates. This is due to globalization, which has opened up the
insurance sector to private players.
The liberalization of the Indian insurance sector has been the subject of much debate for
some years. The policy makers were in Dilemma. As some of the them wanted competition,
development and growth of insurance sector which is extremely essential for channeling the
investments in to the infrastructure sector. On the other end, others had the fears that the
insurance premium, which are substantial, would move out of the country, and wanted to
have a cautious approach of opening for foreign participation in the sector. Some have
opinion that large scale of operations; public sector bureaucracies and cumbersome
procedures hampers nationalized insurers. Therefore, potential private entrants are given
entry in this area so the consumer will gain high customer service, speed and flexibility.
They point out that their entry will mean better products and choice for the consumer. The
critics counter that the benefit will be slim, because new players will concentrate on
affluent, urban customers as foreign banks did until recently.
As one of the rare occurrences the entire debate was put on the back burner and the IRDA
succeed in making political consensus among fractions of different political parties. Though
some changes and some restrictive clauses as regards to the foreign participation were
included the IRDA has opened the doors for the private entry into insurance.
Key Issue
Whether the insurer is old or new, private or public, expanding the market will present
multitude of challenges and opportunities. But the key issues, possible trends, opportunities
and challenges that insurance sector will have still remains under the realms of the
possibilities and speculation. What is the likely impact of opening up India's insurance
sector?
Thus we would first analyze that what is exact fear for the Indian insurance sector and is
this a realistic .
Fear of declining Market share: An un Realistic Fear
An often-voiced concern is that private players, especially foreign ones, will swamp the
market, grabbing a large share. A similar threat was overplayed in the case of basic
telephone services but still the dominance and market share of DoT has remain unaltered,
even after the private players started their operations. This hypothesis that the private
players would swamp the market has been disproved in many emerging markets worldwide
not only in case of the insurance but also in numerous different sectors (Power, Energy,
Telecom, Insurance etc.). As GIC and LIC are strong players in their respective business
segments. So they may lose some market share, but not business.
Untapped Opportunities: The Strength for Nationalized Insurance
There is no doubt that the potential market for the buyers of insurance is significant in India
and offers a great scope of growth. While estimating the potential of the Indian insurance
market we often tempt to look at it from the perspective of macro-economic variables such
as the ratio of premium to GDP, which is indeed comparatively low in India. For example,
India's life insurance premium as a percentage of GDP is 1.3% against 5.2% in the US,
6.5% in the UK or 8% in South Korea. But the fact is that the large part of the India's (the
number of potential buyers of insurance) is certainly attractive. However, this ignores the
difficulties of approaching this population. Much of the demand may not be accessible
because of poor distribution, large distances or high costs relative to returns.
Benefit of being nationalized
1.Distribution: Since distribution will be a key determinant of success for all insurance
companies regardless of age or ownership. The nationalized insurers currently have a large
reach and presence. New entrants cannot-and does not-expect to supplant or duplicate such
a network. Building a distribution network is expensive and time consuming. This will
restrict new entrants to penetrate in the market easily.
2.Variety of Product: The product policies of Nationalized Insurance companies are varied
and focus the need of Indian customer. Thus even in small village there is a Nationalized
policyholder. New entrant can-not at the initial stage expect the penetration and variety of
product as the small amount of policies will increase their carrying cost.
3.Trust and Faith: Being government owned subsidiary and existent since 1956, people of
India have real faith and are confident in parting their valuable savings with Nationalized
Insurance Companies.
4.Large Work force of Agent: Being in operation from 1956,Nationalised Insurance
companies have large and scattered human resource, which is very important for targeting
huge mass. The same will not be possible for the new private entrants in the initial years,
and if so they will lack in experience and patience, which is foremost quality of an agent.
Despite of the above benefit there are many other areas in insurance sector where with
planned strategy the new entrants can penetrate themselves in the market.
Opportunities for New entrants
The new entrants would be best served by micro-level pronged strategies.
1. They can introduce innovative products offering a right mix of
flexibility/risk/return depending which will suit the appetite of the customers
2. They can target specific niches, which are poorly served or are not served at all.
3. Being the agrarian economy again there are immense opportunities for the
new entrants to provide the liability and risks associated in this sector like
weather insurance, rainfall insurance, cyclone insurance, crop insurance etc.
4. The financial sector is aggressively targeting retail investors. Housing finance,
auto finance, credit cards and consumer loans all offer an opportunity for insurance
companies to introduce new products like creditor insurance etc. Similarly, organized
sector sales of TVs, refrigerators, washing machines and audio systems. Only a
negligible portion of these purchases is insured. Potential buyers for most of this
insurance lie in the middle class. This may be huge market for new private entrants.
5. The lack of a comprehensive social security system combined with a willingness to
save in India will lead to a large demand for pension products. However, current
penetration is poor. Making pension products into attractive saving instruments
would require only simple innovations already prevalent in other markets. For
example, their returns might be tied to index-linked funds or a specific basket of
equities. Buyers could be allowed to switch funds before the annuities begin and to
invest different amounts at different times
6. Health insurance is another segment with great potential because existing Indian
products are insufficient. By the end of the GIC's Mediclaim scheme covered only 2.5
million people. Indian products do not cover disability arising out of illness or
disability for over 100 weeks due to accident. Neither do they cover a potential loss
of earnings through disability.
Growth of Insurance Sector Since Private sector entry
The gains are obvious for anyone who has been closely monitoring the Indian insurance
scene. The total premium collected by the insurers both life and non-life in the year 2003-
2004 is Rs.82, 415 crores (Rs.66, 288 crores in life and Rs. 16,127 crores in non-life)
compared to Rs. 44, 985 crores (Rs.34, 898 crores in life and Rs. 10,087 crores in non-life)
during the year 2000-2001. This represents an 83% increase in the last three years over
the base year 2000-01. This is what we have witnessed after the opening up of the sector.
If we take the three year block prior to the opening of the sector, we find that the total
premium collected in 1997-98 was Rs.27, 089 crores (life: Rs.19354 crores; non-life
Rs.7735 crores) which has grown to Rs.44, 985 by 2000-2001 representing an increase of
66%. Insurance sector has obviously started growing at a rapid pace after the sector was
opened up. The private sector accounts for nearly 13% of the first year premium market.
The market share of the private players has to be seen in the context of this enlarged
market. There is also evidence to show that the rate of growth of public sector undertakings
had not shown any decline after the entry of the private sector companies. All of them are
obviously having a share of a larger market. The Credit for enlarging the market should
however, go to the private sector as they came up with an aggressive marketing strategy to
establish their presence.
Date Base
• The total premium underwritten by
life insurance companies in the country during FY2004 was Rs 18,66,939.69 lakh ($4
billion) towards 286.26 lakh policies, recording a growth in premium and policies
underwritten of 10.24 per cent and 12.83 per cent, respectively over the previous
year.
• The non life insurance market grew by about Rs 1,820 crore ($392.8 million) (13 per
cent) to record a premium of Rs 16,130 crore ($3.4 billion), a lot of which was
because of the Rs 1,700 crore ($367 million) (17 per cent) growth in the
miscellaneous business such as motor, health, liability and aviation.
• The spectacular premium driver, motor grew by Rs 1,020 crore ($220 million) (20
per cent); health by Rs 270 crore ($58.3 million) (27 per cent); liability by Rs 165
crore ($35.6 million) (100 per cent); aviation by Rs 90 crore ($19.4 million) (25 per
cent).
• The traditional fire business grew by Rs 195 crore ($42 million) (6.5 per cent) and
engineering grew by Rs 36 crore ($7.7 million) (5 per cent).
Growth Strategy for Nationalized Insurance Companies
Most of the opportunities and challenges that we have discussed apply equally to existing
and new insurers. It must be emphasized that the opening of the insurance market is far
from a bad thing for nationalized insurers. With a strong presence, a wide network and
considerable brand equity, they are in a good position to tap the very same segments
profitably, while improving their product and service offerings. The Indian company should
Leverage information technology to service large numbers of customers efficiently and bring
down overheads. Technology can complement or supplement distribution channels cost-
effectively. It can also help improve customer service levels considerably.
Besides this, other areas can be focused to grow and survive in the Indian Market
1. Understanding Customer needs: Use data warehousing, management and mining
to gauge the profitability and potential of various customer and product segments
and ensure effective cross selling. Understanding the customer better will allow
insurance companies to design appropriate and-customized products, determine
pricing correctly and increase profitability.
2. High-level Training and Development: Ensure high levels of training and
development not just for staff but also for agents and distribution organizations.
Existing organizations will have to train staff for better service and flexibility, while
all companies will have to train employees to cope with new products and an
intensive use of information technology.
3. Alliance&Tieup: The importance of alliances and tie-ups means that companies will
have to integrate related but separate providers into their systems to ensure
seamless delivery.
4. Agent Relationship: Build strong relationships with intermediaries such as agents.
5. Market Segmentation: They must segment the market carefully to arrive at the
appropriate products and pricing and should cater the needs of every individual.
6. Revamped Marketing Strategy: Worldwide, insurance products move along a
continuum from pure service products to pure commodity products then they could
be sold through the medical shops, groceries, novelty stores etc. Once
commodization, popularity and awareness of the products are attained then the
products can move to remote channels such as the telephone or direct mail. In the
UK for example, retailer Marks & Spencer now sells insurance products. At this point,
buyers look for low price. Brand loyalty could shift from the insurer to the seller.
Conclusion
Despite innumerable delays the sector has finally opened up for private competition. The
threat of private players shaking and giving the run for incremental market share for the
Public Sector mammoths has been overplayed. The number of potential buyers of insurance
is certainly attractive but much of this population might not be accessible for the new
insurers. Since distribution will be a key determinant of success for all insurance companies
regardless of age or ownership, Indian Insurance companies should broaden the distribution
network. As the product move towards the mature stages of commodization (increased
awareness and popularity) they could then a host of new channels like grocery stores, direct
mails. Regulators must formulate strong and fair guidelines and ensure that old and new
players are subject to the same rules and at the same time the government should ensure
that the IRDA does not become yet another toothless tiger like CEA or TRAI.
In a reopened Indian insurance market, regulators must formulate strong fair and
transparent guidelines and make sure that old and new players are subject to the same
rules. Companies meanwhile must be prepared to set and meet high standards for
themselves. The big challenge for both companies and regulators is to ensure that they
replicate the benefits of the past while eliminating its ills.
