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ContentsSr. No. Subjects Covered Pages
Project ProposedObjective of the projectMethodologySamplingLimitations
1. Introduction1.1 Introduction to insurance
1.2 Definition of insurance1.3 Pre liberalization of insurance1.4 Post liberalization of insurance
2. Trends in Insurance Sector2.1 Indian Insurance in 21 Century2.2 Emerging Trend in Indian
Insurance Sector2.3 Growth of Insurance Sector
2.4
Present Scenario of Insurance
Sector in India2.5 Technology Trend in Insurance
Sector2.6 Globalization of Life Insurance
Market3. Impact of Budget on Insurance
Sector3.1 Impact of Budget 2004
4. Private V/S Public Insurance Sector
4.1
Comparison between private andPublic Insurance sector In India
Conclusion
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INSURANCE INDUSTRY:
CLASSIFICATION
2
INSURANCE
LIFEINSURANCE
GENERALINSURANCE
Fireinsuranc
Marineinsurance
Mediclaim Motorvehicle
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Insurance = Collective bearing of
Risk
Insurance is nothing but a system of spreading
the risk of one onto the shoulders of many. While it
becomes somewhat impossible for a man to bear by
himself 100% loss to his own property or interest
arising out of an unforeseen contingency, insurance is
a method or process which distributes the burden of
the loss on a number of persons within the group
formed for this particular purpose.
Basic Human trait is to be averse to the idea of
risk taking. Insurance, whether life or non-life,
provides people with a reasonable degree of security
and assurance that they will be protected in the event
of a calamity or failure of any sort.
Insurance may be described as a social device to
reduce or eliminate risk of loss to life and property.
Under the plan of insurance, a large number of peopleassociate themselves by sharing risks attached to
individuals. The risks, which can be insured against,
include fire, the perils of sea, death and accidents
and burglary. Any risk contingent upon these, may be
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insured against at a premium commensurate with the
risk involved. Thus collective bearing of risk is
insurance.
Insurance Indemnifies Assets & Income
Every Asset has a value and generates Income to
its Owner. There is a normally expected Life-time for
the Asset during which time it is expected to perform.
If the Asset gets lost earlier, being destroyed or made
Non-functional through an Accident or other
unfortunate event the Owner is Prejudiced. Insurancehelps to reduce CONSEQUENCES of such Adverse
Circumstances which are called Risks
Insurance is the science of spreading of
the risk
It is the system of spreading the losses of an
Individual over a group of Individuals
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Insurance is a Method of sharing of
financial losses
of a few from a common fund formed out of
Contribution of the many who are equally exposed to
the same loss
What is uncertainty for an Individual becomes a
certainty for a Group. This is the basis of All
Insurance Operations. Thus insurance convert
uncertainties to certainty
DEFINITIONS
The definition of insurance can be made from two
points:
Functional definition.
Contractual definition.
Functional definition
Insurance is a co-operative device to spread the loss
caused by a particular risk over a number of persons
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who are exposed to it and who agree to insure
themselves against the risk.
General Definition
Insurance has been defined to be that in which a sum
of money as a premium is paid in consideration of the
insurers incurring the risk of paying a large sum
upon a given contingency.
In the words of John Magee, Insurance
is a plan by themselves which large number of people
associate and transfer to the shoulders of all, risks
that attach to individuals.
Fundamental Definition
In the words of D.S. Hansell, Insurance accumulated
contributions of all parties participating in the
scheme.
Contractual Definition
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In the words of justice Tindall, Insurance is a
contract in which a sum of money is paid to the
assured as consideration of insurers incurring the
risk of paying a large sum upon a given contingency.
Working of Insurance
Pre-Liberalization Scenario
Indian History: Time to turn the clock back-and open up
insurance
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Fifty years ago, India had a bustling, if somewhat
chaotic, entirely private insurance industry. The year
after Independence, 209 life Insurance companies
were doing business worth Rs712.76 crore (which
grew to an amazing Rs 295,758 crore in 1995-96).
Foreign insurers had a large market share 40 per cent
for general insurance but there were also plenty of
Indian companies, many promoted by business
houses like the Tatas and Dalmias. The first Indian-
owned life insurance company, the Bombay MutualLife Assurance Society, was set up in 1870 by six
friends. It Insured Indian lives at the normal rates
instead of charging a premium of 15 to 20 percent as
foreign insurers did. Its general insurance
counterpart, Indian Mercantile Insurance Company
Ltd., opened in Bombay in 1907.
A plethora of insufficiently regulated players was a
sure recipe for abuse, especially because there was
no separation between business houses and the
insurance companies they promoted. The Insurance
Act, 1938, introduced state controls on insurance,
including mandatory investments in approvedsecurities, but regulation remained ineffective. In
1949, Purshottamdas Thakurdas, chairman of the
Oriental Assurance Company, admitted: "We cannot
deny that, today, there is a tendency on the part of
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insurance companies in general to make illicit gains.
Can we overlook the cutthroat competition for
acquiring business? And still worse is the dishonest
practice of adjusting of accounts." After a 1951
inquiry, the government was dismayed that
companies had high expense and premium rates,
were speculating in shares, and giving loans
regardless of security. No wonder that between 1945
and 1955, 25 insurers went into liquidation and 25
transferred their business to other companies.
This reckless record stoked the pro-nationalization
fires. The 1956 life insurance Nationalization was a
top-secret intrigue; for fear that unscrupulous
insurers would siphon funds off if warned. The
government resolved to first take over the
management of life insurance companies by
ordinance, then their ownership. The then finance
minister C.D. Deshmukh later wrote: 'Seth
Ramakrishna Dalmias extraction of Rs.225 crore
(misappropriation by the Bharat Insurance Company)
was a heaven-sent opportunity. We were ready to
nationalize, with every detail worked out." On 19January 1956, the news was announced on the radio,
though even the director- general of AIR was not
shown the speech. The next morning, at 9 am, while
executives were frantically seeking details over the
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trunk telephone, says Deshmukh in his
autobiography, our officers walked into the
respective insurance offices, showed their authority
and then took over the business. I believe this will be
regarded as one of the best kept secrets of the
Government of India in all times to come." The
ordinance transferred control of 245 insurers to the
government. LIC, established eight months later, took
over their ownership. General Insurance had its turn
in 1972, when 107 insurers were amalgamated intofour companies headquartered in the four metros,
with GIC as a holding company. Nationalization
brought some benefits. Insurance spread from an
urban-oriented, high-end business to a mass one.
Today, 48 per cent Of LIC's new business is rural. Net
premium income in general insurance grew from
Rs222 crore in 1973 to Rs 5,956 crore in 1995- 96.
Yet, rigid controls hamper operational flexibility and
initiative so both customers service and work culture
today are dismal. The frontier spirit of the early
insurers has been lost. Insurance companies have
also been timid in managing their investment
portfolios. Competition between the four GIC
subsidiaries remains illusory. If Nationalization ever
had a purpose, it has been served. It's now time to
turn back the clock in some respects, and open up the
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sector again. The government already intends to
insist on large minimum capital requirements, a
strong regulator, and a healthy distance between
insurers and industry. To ensure that history doesn't
repeat itself
Post Liberalization Scenario
While no aspect of the reform process in India has
gone smoothly since its inception in 1991, no
individual initiative has stirred the proverbial hornets'
nest as much as the proposal to liberalize the
country's insurance industry. However, the political
debate that followed the submission of the report by
the Malhotra Committee has presumably come to an
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end with the ratification of the Insurance Regulatory
Authority (IRA) Bill both by the central Cabinet and
the standing committee on finance. This section
traces the evolution of the life insurance companies
in the US from firms underwriting plain vanilla
insurance contracts to those selling sophisticated
investment contracts bundled with insurance
products. In this context, it brings into focus the
importance of portfolio management in the insurance
business and the nature and impact of portfoliorelated regulations on the asset quality of the
insurance companies. It also provides a rationale for
the increased autornatisation of insurance
companies, and the increased emphasis on agent-
independent marketing strategies for their products.
If politicized, regulations have potential to adversely
affect the pricing of risks, especially in the non-life
industry, and hence the viability of the insurance
companies. Finally, the backdrop of US experience
provides some pointers for Indian policymakers
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Chapter 2
Trends in
Insurance
Sector
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INDIAN INSURANCE IN 21ST
CENTURY:
2000: IRDA starts giving licenses to private insurers:
ICICI prudential and HDFC Standard Life
insurance first private insurers to sell a policy
2001: Royal Sundaram Alliance first non life insurer
to sell a policy
2002: Banks allowed selling insurance plans. As TPAs
enter the scene, insurers start setting non-life
claims in the cashless mode
2007: First Online Insurance portal, https:/// set up by
an Indian Insurance Broker, Bonsai Insurance
Broking Pvt Ltd.
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.
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Minimum capital requirement for direct life and Non-
life Insurance company is INR1000 million and that for
reinsurance company is INR 2000 million. In the 2004-
05 budgets, the Government proposed for increasing
the foreign equity stake to 49%, this is yet to be
effected. Under the current guidelines, there is a 26
percent equity cap for foreign partners in direct
insurance and reinsurance Company.
Emerging Trend in Indian Insurance
Sector
Market by 2015, particularly in countries like India
and China. The IRDA is the major body, which is
providing better opportunities for the private player
in India. GIC & LIC's monopoly market approach is no
more prevalent in India. The new market scenario for
insurance is growing; no doubt it is a flying bird.
Change is the eternal law of nature. Everything is
changing according to the need of the time. Economic
growth and social development in present scenario is
due to sudden change in industrial policy and
economic planning. Globalization has been the basic
mantra after 1991, so every one thinks of being
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global. Liberalization, privatization and globalization
is the basic concept of success in all aspect of
development. Competition is tough now due to
globalization. Business has positioned the entire
economy, and industrialists think about making
things global. There are no stringent rules or
regulations for making any business house or
industry. Government gives more emphasis on export
and entrepreneurship. This is a changing world.
Everyone has to compete for better success.Marketing is the major concept for developing any
type of business. After globalization, marketing has
taken a new dimension and it is the most challenging
task now. The new horizon of marketing in the field of
finance and insurance in present scenario is a good
sign of development.
Globalization - "The Dynamic Force"
Many people consider globalization nothing new -
societies have been interconnected for years. The
world has never experienced globalization at this
level of intensity before, or the speed at which it is
transforming and integrating societies.
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Herman E. Daly, an analyst of Global Policy Forum,
characterizes globalization as, "Global integration of
many former national economies into global economy,
mainly by free trade and free mobility, but also by
easy or uncontrolled economic purposes." He further
clarifies that globalization is not internationalization -
globalization brings about a single, integrated, global
economy, while internationalization is a federation of
nations cooperating as sovereign units to advance the
national interest of all members. Though globalizationhas become a broad heading for a multitude of global
interactions, ranging from the expansion of cultural
influences across borders to the enlargement of
economic and business relations throughout the
world, it has different dynamic force for different
person. For the economist, globalization is essentially
the emergence of a global market. For a historian, it
is an epoch dominated by global capitalism.
Sociologists see globalization as the celebration of
diversity and the convergence of social preferences in
matters of life style and social values. To the political
scientist, it represents the gradual erosion of state
sovereignty. But discipline specific studies explain
only a part of the phenomenon.
From a multi-disciplinary angle, globalization may be
treated as a phenomenon, a philosophy and a
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process, which affects human beings as profoundly as
any previous event. Several factors have been
responsible for this phenomenon. This study confines
its attention to four growth-enhancing facets of
globalization that have been among its key drivers,
namely trade, finance, communication and transport.
MNCs - "The New Path Maker"
After globalization, so many MNCs are the major path
maker for economic growth. The world-class MNCs
constantly pursued their strategy of gaining access to
every promising market world over, which had sound
growth potentialities, in order to expand their
network and control over the respective local
economies. The consequence was that some of the
markets, particularly in developing countries like
China and India, adopted some sort of self-
protectionist mechanisms by imposing certain
deliberate politico-legal restrictions in order to
restrict the entry of capital goods of these MNCs into
their markets.
Insurance being an integral part of financial service
could not claim immunity to the impact of the
globalization process and opened up to private and
global players world over, including India. So many
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MNCs are now entering into the insurance sector
which is now a booming sector.
New Horizons of Insurance Market after
Globalization
After 1970, insurance sector has become more
prosperous. For a long time, the two most important
insurance players were LIC & GIC. Now so many MNCshave entered into the same sector like Bajaj Allianz,
Aviva, Birla Sunlife, ICICI Prudential, etc. Insurance is
now acting on two dimensions, i.e., the element of
investment and the element of protection. The
Economic Value Addition (EVA) has taken the major
concern of the same business.
Marketing after globalization has
become: -
More customer oriented
Mostly better service oriented
More competitive
Better satisfaction, more value addition and strategic
development can help any insurance sector to sustain
in the present era.
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New Market Scenario & Insurance
Insurance market in present scenario though is a
booming sector, but the market has changed fromsimpler to complex, less challenging to more
challenging. Going domestic to international is a very
difficult task. Understanding market synergy and
cognisation of perception of customer in the
insurance field is very difficult. The Regulatory Board
like 'IRDA' is playing a very crucial role for the benefit
of the insurance holder. The premium and interest
rate can't be violated for better profit and
development. The market is becoming tougher
gradually.
Globalization of Insurance Market
Historically, insurance has been an integral part of
financial services system and recognized as a corner-
stone of a country's financial health and symbol of
progress. Insurance provides for the financial security
of citizens and their families. It offers valuable
investment advice and serves as an effective step
towards both individual and national financial
stability.
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After the terrorist attack on the World Trade Center
in September 2001, the momentum of growth of
world economy suffered some temporary setback.
According to 3rd Annual Globalization Index Report of
World Watch Institute, the growth rate fell sharply
from 4% in 2000 to 1.3% in 2001. But the world had
become stabilized after that and the economic growth
was back with entry of so many MNCs and insurances.
Triggered by the sound fundamentals in global
economy and internationalization of world markets,
several countries turned towards free market regimes
in banking and insurance, putting an end to several
decade-old state-owned controlled markets. The
insurance market in China & India is brighter. The
leading reinsurance company like Swiss Re & Munich
Re has projected 20-25% growth in life and health
insurance market by 2015, particularly in countries
like India & China
Growth of Insurance
GROWTH OF LIFE INSURANCE SOME FACTS
(MAY 2008):
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Global Industry Statistics
HOW THEY STACK UPPremium income of life insurers in Rs crore
April - June Growth
%Total
Share (%)2007 2008
LIC 8580.84 7524.56 -12 52.55
ICICI Prudential 1056.45 1,590.27 51 11.11Bajaj Allianz 731.85 829.24 13 5.79
SBI Life 426.39 1,148.67 169 8.02
HDFC Standard 355.93 490.40 38 3.42
Max New York 289.74 501.16 73 3.50
Reliance Life 204.10 557.33 173 3.89
Birla Sun Life 174.63 501.53 187 3.50
Total Private 3930.95 6,795.64 73 47.45
Total Market 12511.80 14,320.20 14 100.00
Emerging Markets
(Total Premium, figures in $billion)
Taiwan 17.3China 13.4India 7.2Hong Kong 6.1
Israel 5.8Singapore 5.0
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Present Scenario of the Insurance
Sector in India
As per the findings of a survey carried out in 2003-04,
the Indian insurance market ranked 5th in the Asian
continent after Japan, South Korea, China & Taiwan,
and 19th
In India, the process of liberalization and opening ofinsurance sector to private and foreign players
started taking shape as part of the series of financial
and economic reforms brought in by the Government
in the late 1990s, in accordance with the
recommendations made by R. N. Malhotra Committee
constituted by the Government in April 1993. By
amending the relevant provisions of the Insurance
Act, 1938, and passing the IRDA Act, 1999, by an Act
of Parliament, Insurance Regulatory and Development
Authority (IRDA) was established in the year 2000,
which marked the opening act of the insurance sector
to private participation and foreign investment.
GDP & Insurance
Though potentially insurance is more than Rs. 500
Billion business in India, and together with banking, it
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adds slightly more than 7.5% to the GDP, of the
country, the gross premium collection has been
hardly 2% of the GDP, not withstanding its growth
between 15-20% annually, during the decade
preceding the opening up of insurance market for
private and foreign players in the year 2000. As the
insurance premium database of various developed
and developing countries for the year 1999 indicates,
the per capita premium of India was just around $ 8
as against the same having been very high in thedeveloped countries. In other words, and in terms of
percentage of GDP, it was 14% for Japan, 12% for
Korea and 9% for UK as against the same staggering
below 2% for India for the fiscal year 2000-2001.
In the new economic reality in globalization,
insurance companies in 21st century face a dynamic
global business environment. Radical changes are
taking place owing to the internationalization of
activities. The appearance of new risks, new types of
cover to match with new risk situation,
unconventional and innovative ideas on customer
service, low growth rates in developed markets,changing customer needs and the uncertain economic
conditions in the developing world are exerting
pressure on insurers resources while testing their
ability to survive. The existing insurers are facing
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difficulties from non-traditional competitors that are
entering the retail market with new approaches and
through new channels. The basic premise of
globalization is opening up of new service markets to
provide the developing countries with new
opportunities for the expansion of trade and
economic growth.
The rapidly changing economic scene, the political
attitude, social values and structures, cultural
patterns, developments in IT have transformed
lifestyles in urban and rural areas. Developments in
other parts of the world, which are witnessing
sweeping changes in terms of convergence of
financial and insurance markets through banc
assurance, replacement of reinsurance contracts by
financial instruments, sale of insurance through
mergers and acquisitions will also have their impact
on Indian Insurance Industry.During the long
monopoly regime, the government attempted minor
changes in the procedures without going into the root
cause. The deregulation requires comprehensive
changes in the character and basic policies of theindustry.
Till the year 2000, the insurance industry was a
government monopoly and is now experiencing cut-
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throat competition because a number of players have
entered into the Indian market in the form of Joint
ventures with Indian private sector partners.
Consequently, Indian Insurance Industry has closely
integrated with world economy thereby making
crucial for insurance companies to operate outside
national boundaries.
India Insurance sector after globalization has
brighter future. The economic status of people is
changing. So many new government policies andeconomic reforms are impetus for insurance sector.
The firmament of economic growth is vast and never
ending but the insurance as a bird have to fly. No
doubt insurance market after globalization is "A
flying bird"!
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TECHNOLOGY TREND IN INSURANCE
MARKET ARE AS FOLLOWS
Computerization:
Initially, in the late 1950s the insurance
companies used Unit Record Machines (Electro
Magnetic Machines) to process data punched into
cards. Computers were introduces in the mid 1960s
and by the 1980s the Unit Phased Machines were
phased out and the entire process was computerized.This brought about greater efficiency and quick
service delivery
Internet:
Today, the internet has completely changed the
service delivery process. Internet is today used toeven sell insurance policies. Internet is, in fact,
proving to be one of the widely used distribution
networks for selling insurance policies. Also internet
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is used for sending premium notices to policy holders
through e-mails
Companies like LIC (www.licindia.com), ICICI
(www.iciciprudential.com) all have websites from
which people can get the information about their
products, prices, various schemes, and lots of other
information. People can also purchase the product
through this website.
Electronic Clearance Service (ECS):
Almost all the big organizations today provide
the ECS facility to its customers. A policy holder
having an account in any bank which is a member of
the local clearing house can opt for ECS debit to pay
premiums. The advantage here is that once the
option is exercised, the policy holder need not visit a
branch for paying the premium or collecting the
receipts. On the day indicated by the policy holder,
the premium amount will be directly debited to the
bank account of the policyholder and the receipt will
be issued by the designated branch office.
Call Centres and SMS services :
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Almost all the insurance companies have their
own call centres which cater to the phone based
queries of the policyholders. This service is 24x7 and
they have the Interactive Voice Response (IVR)
systems at all the branches
Globalization of Life Insurance Market
SOME GENERAL INFORMATION ABOUT
LIFE INSURANCE IN INDIA
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The Life Insurance market in India is an
underdeveloped market that was only tapped by the
state owned LIC till the entry of private insurers. The
penetration of life insurance products was 19 percent
of the total 400 million of the insurable population.
The state owned LIC sold insurance as a tax
instrument, not as a product giving protection. Most
customers were under- insured with no flexibility or
transparency in the products. With the entry of the
private insurers the rules of the game have changed.
Life Insurance
GDP penetration
of 4.1%
Significant channel for
household savings into capital
formation
2nd largest
financial service
in India after
banking
Total Assets Under Management
of Life Insurance Cos. as on
March 31, 2008- Rs. 8,50,000
crores
Total number oflives insured and
on books as on
March 31, 2008-
22 Crs
Statutory
requirements to
provide reach
to rural areas
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The 12 private insurers in the life insurance
market have already grabbed nearly 9 percent of the
market in terms of premium income. The new
business premium of the 12 private players has
tripled to Rs 1000 crore in 2002- 03 over last year.
Meanwhile, state owned LIC's new premium business
has fallen.
Innovative products, smart marketing and
aggressive distribution. That's the triple whammycombination that has enabled fledgling private
insurance companies to sign up Indian customers
faster than anyone ever expected. Indians, who have
always seen life insurance as a tax saving device, are
now suddenly turning to the private sector and
snapping up the new innovative products on offer.
The growing popularity of the private insurers
shows in other ways. They are coining money in new
niches that they have introduced. The state owned
companies still dominate segments like endowments
and money back policies. But in the annuity or
pension products business, the private insurers have
already wrested over 33 percent of the market. And
in the popular unit-linked insurance schemes they
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have a virtual monopoly, with over 90 percent of the
customers.
The private insurers also seem to be scoring big
in other ways- they are persuading people to take out
bigger policies. For instance, the average size of a life
insurance policy before privatisation was around Rs
50,000. That has risen to about Rs 80,000. But the
private insurers are ahead in this game and the
average size of their policies is around Rs 1.1 lakh toRs 1.2 lakh- way bigger than the industry average.
Buoyed by their quicker than expected success,
nearly all private insurers are fast- forwarding the
second phase of their expansion plans. No doubt the
aggressive stance of private insurers is already
paying rich dividends. But a rejuvenated LIC is also
trying to fight back to woo new customers
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Market Share of Private Sector life
Insurance Companies
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Chapter 3
Impact of
Budget on
Insurance
Sector
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IMPACT OF BUDGET 2004
The finance ministers reform to strengthen risk
management in banking The Finance Bill has some
brilliant promises to offer and yet there are adverse
to the financial service sector.
The decision to permit 49 per cent foreign direct
investment (FDI) in insurance is welcome. The
industry will agree that there is an acute need for it
to grow and to write more business. If one were to
analyze the growth of some new private sector
insurance players the underlying strength seems to
be their ability to get more capital and meet the
solvency requirement perform, write more business
and grow faster. Lets not forget that these insurance
companies will be able to tap the capital market in
two to three years.
The best performer in the sector have also expanded
their capital to about Rs. 700 to 800 crore. A look at
the non performers suggests that they do not have
adequate capital to grow. Hence the increase in the
FDI limit would help. More importantly, this will give
greater control to the foreign partners in areas of
management control and governance. They will now
be more willing to bring in their expertise in product
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development, technology, and implement best
practices.
The striking future of the Finance Bill is that the
government has accepted defined contribution as the
way forward for pension reforms, particularly for new
government employees.
One could have expected some clarity on the subject
of multiple regulators for pension. Though there be
some benefits having a separate pension regulator,
one supposes that there would be a strong case for
just one regulator both the pension and insurance
sectors. The government must examine the confusion
that may arise on account of having multiple
regulators.
Banking and insurance companies are significant
players in the securities market today. Midsize public
sector banks may have made a turnover of about Rs.
40,000 crore on securities trade and larger banks
would have made two to three times the number. The
transaction tax of a 0.15 per cent would certainly eat
away a good part of banks profits.
Likewise, all services rendered by banks (except the
fund based assistances) would attract service tax.
Banks would be able to conveniently pass on some of
these costs to the customers. So, each time an
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individual goes and gets a demand draft or pay order,
they will end up paying much more than the existing
rates. However, if competition becomes acute, banks
would have to bear it, which is bad news for the
banking companies.
Chapter 4
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Private V/S
Public
Insurance
Sector
PRIVATE V/S PUBLIC INSURANCE
SECTOR
Private players in the life insurance business are
growing at a scorching pace. Within three years of
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their inception, they have seized about 14 per cent of
the market.
Compare this to new generation private-sector banks,
which took nine years for 20 per cent share in the
Indian banking industry. And after seven years in the
industry, in 2000, private mutual funds accounted for
just 9 per cent of a market that had been dominated
by the Unit Trust of India.
There's another dimension to the insurance numbersgame. While the private insurance companies have
attained 13 to 14 per cent share of the overall
insurance market, their share in the key metros
(Mumbai and Delhi) is as high as 30 to 40 per cent.
"We have to struggle to complete a deal in the metros
now, because policyholders are comparing products
and asking for better deals," says S B Mathur,
chairman of the Life Insurance Corporation of India.
Private insurance companies are essentially joint
ventures with global insurance companies holding a
maximum of 26 per cent stake. The foreign partners
are investing heavily in the Indian market and,
thereby, driving sales, because they see India
emerging as one of the biggest markets in the Asian
region.
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"India will become the biggest market for us in the
next three to four years," predicts Dan Bardin,
Prudential Corporation Asia managing director south
Asia and greater China.
Private players have certainly done their bit to
increase the penetration levels of insurance, mainly
by creating alternative distribution channels--such as
associations with banks, brokers and corporate
agents.
"Our bancassurance channel--with tie-ups with four
banks--contributes almost 70 per cent of our total
sales," says Aviva CEO Stuart Purdy.
OM Kotak Mahindra Life, which is ranked eighth
among private players, is also leaning towards
alternative distribution channels that will contribute
to 45 per cent of total sales, in line with the
contribution from its tied agency force.
In sharp contrast, most of the LIC's policies continue
to be sold through its tied-agency network. The state
life corporation acknowledges that it is unable to
maintain its lead in some metros: penetration by the
private-sector insurers has come of age and they are
giving the LIC a run for its money.
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The multi-channel approach adopted by private
insurance companies has proved to be a boon in
terms of costing and their ability to capture business.
Earlier, most private insurance companies focused
their energies on the top 20 cities. Today they are
moving to smaller cities.
"The potential in smaller cities is increasing and
companies are moving to smaller cities and towns
because these are increasingly becoming more
prosperous with a rise in agricultural income. With
the increase in buying power, this has fuelled growth
opportunities for us," says Max New York Life CEO
Anuroop Tony Singh.
AMP Sanmar, another private player, has tied up with
various chit funds and transport finance companies in
the country, where it is selling life policies on the
back of fixed deposits and bonds. A senior company
official cites the example of Vijaywada where a
significant portion of the income is derived from
farming activities.
"The rural populace is managing their money well and
no longer keeping it under their beds. They have
mobile phones and have opened bank accounts. They
are not very different from their urban counterparts
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when it comes to purchasing life insurance covers,"
he points out.
And that's making the private sector optimistic about
its future in the Indian insurance market. "We
[private insurers] are becoming an alternative to LIC.
If a customer has already bought an LIC plan, his
second policy is likely to be bought by the private
insurance sector on account of various reasons--more
specifically flexibility and transparency," says OM
Kotak Mahindra Life CEO Shivaji Dam.
Perhaps this partly explains why the LIC has
increased its advertising spend multifold since the
insurance sector was privatized. Its ad spend more
than doubled to Rs 81 crore (Rs 810 million) in fiscal
2003, against Rs 37 crore (Rs 370 million) in 1999-
2000, prior to the industry being privatized.
Of course, the private insurance sector has also been
steadily increasing its ad spend, from Rs 29 crore (Rs
290 million) in fiscal 2001 when the industry opened
up, to Rs 92 crore (Rs 920 million) the following year.
In fiscal 2003, private insurers spent Rs 143 crore (Rs
1.43 billion) on advertising.
But it's not the increased spend on advertising alone
that has helped private players in grabbing market
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share. One of the key differential factors responsible
for their growing market is the 150,000-odd life
insurance advisors of the private insurance
companies.
"The private insurance agents sell better than their
counterparts at the LIC. Life insurance advisors of
private sector insurance companies adopt the need-
based selling approach, unlike the LIC's agency force
that pushes the number of policies," says Dam.
This also gets reflected in the average sum assured
by private insurance companies being higher than
that of the LIC. Policies sold by the private players
tend to be of a higher value.
For instance, Birla Sun Life's average premium stands
at Rs 24,500, while that of OM Kotak Mahindra Life is
equally high at Rs 20,400. Against this is the LIC's
average premium of Rs 3,200.
Of course, there's also a difference in the target
client of the private and the state-run insurance
companies. While the private players are targeting
the upper middle-class and high net-worth
individuals, the LIC aims for the masses through its
2,048 branches spread across semi-rural and rural
towns.
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Meanwhile, private insurance companies are
capitalizing on global relationships. "Business deals
are often a call away since we capitalize on AIG's
global relationship with multinational companies such
as GE and Kodak," says Tata AIG Life Ian Watts.
OM Kotak has gone a step further and tied up with
Swiss Life International so that it can capitalize on
the latter's relationship with 300 multinational
subsidiaries and affiliates.
But it's not as if LIC has lost out on group insurance.
The insurance major's group business reached new
heights in fiscal 2004, recording a 119 per cent
growth in new premium income and 50 per cent
increase in the number of lives covered.
Still, new business income for private companies has
grown at 146 per cent in fiscal 2004, compared to the
18 per cent average industry growth in new premium
income for the same period.
"The key in product sales lies in offering unbundled
and transparent products that give customer value,"
points out Dam.
The biggest draw in insurance in fiscal 2004 was unit-
linked plans. Ninety-five per cent of the policies sold
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by Birla Sun Life and over 80 per cent of the 436,000
policies sold by ICICI Prudential were unit-linked
plans.
And even though the LIC was late (January 2004) in
pushing its unit-linked product "Bima Plus", it
managed to mop up a premium income of Rs 373
crore (Rs billion) with the sale of just under 1.7-lakh
unit-linked policies, the highest sales figure in the
industry.
The advantage with unit-linked plans is that they
offer policyholders transparency in terms of costs,
annual returns and bonus calculations. With many
companies guaranteeing the capital investment
(some like Birla Sun Life even guarantee 3 per cent
assured returns on its unit-linked plans), the interest
in unit-linked plans only increased.
And the switch from traditional products to unit-
linked plans gained momentum as the Sensex climbed
higher: the returns on such policies are linked to the
equity market.
"The stock market has helped to a certain extent and
has contributed to our growth and performance,"
agrees Birla Sun Life CEO Nani Javeri.
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Aviva has shown a compounded aggregate growth
rate of 36 per cent since the inception of its fund.
Returns on OM Kotak's balanced and growth funds
stand at 31.79 to 43.25 per cent respectively.
Dam claims that OM Kotak has sold several policies of
Rs 25-50 lakh (Rs 2.5-5 million) since the "savvy
investor thinks it best to invest in unit-linked
products." He adds: "Growth is coming faster in
insurance companies with unit-linked plans."
Chapter 5
Recommended