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Life Insurance - An Overview

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Research Paper
on
Impact of Insurance industry on
India’s economic development – AN
OVERVIEW

By
DR. AVINASH G PESHWE,
ASSOCIATE PROFESSOR and HEAD, DEPT. OF COMMERCE,
NETAJI SUBHASH CHANDRA BOSE COLLEGE, NANDED

Email-Id: [email protected], Mobile: 09822060012
&

Mr. MANOJ KUMAR GELDA
Associate Professor, Dept. of Commerce and Business Management,
Nishitha Degree & PG College, Nizamabad – A.P

Email-Id: [email protected], [email protected], Mobile: 9492009452

ABSTRACT

Life insurance is a commercial contract between the insurance policy proposer and the
insurance service provider. However, apart from customized plan of insurance policy and its
coverage, there are wide ranges of insurance policies available in market under different flagship
brands. Although the aim of all insurance policies are almost the same, which is providing best
quality life coverage and return value of investments in the form of premium, it is extremely
essential to learn the basic details about the life insurance plans and the coverage provided by
these plans.
Insurance industry contributes to the financial sector of an economy and also provides an
important social security net in developing countries. The growth of the insurance sector in India
has been phenomenal. The insurance industry has undergone a massive change over the last few
years and the metamorphosis has been noteworthy. There are numerous private and government
insurance companies in India that have become synonymous with the term insurance over the
years. Offering a diversified product portfolio and excellent services the many insurance
companies in India have managed to make their way into almost every Indian household.

Introduction
Insurance is the backbone of a country’s risk management system. Risk is an inherent part of our
lives. The insurance providers offer a variety of products to businesses and individuals in order to
provide protection from risk and to ensure financial security. They are also an important component in
the financial intermediation chain of a country and are a source of long-term capital for infrastructure
and long-term projects. Through their participation in financial markets, they also provide support in
stabilizing the markets by evening out any fluctuations.
The insurance business is broadly divided into life, health, and non-life insurance. Individuals,
families, and businesses face risks of premature death, depletion in income because of retirement, health
risks, loss of property, risk of legal liability, etc. The insurance companies offer life insurance, pension
and retirement income, property insurance, legal liability insurance, etc., to cover these risks. In
addition, they offer several specialized products to meet the specific needs and requirements of
businesses and individuals. Businesses also depend on these companies for various property and liability
covers, employee compensation, and marine insurance.
Insurance does influence the growth and development of an economy in several ways. The
availability of insurance can mitigate the impacts of risk by providing products which help organizations
and individuals to minimize the consequences of risk and has a positive effect on industry growth as
entrepreneurs are able to cover their risks. In the absence of a full range of insurance products and/or
deficient products in terms of coverage and scope, the risk-taking abilities would be hampered and
chances are that the economic activities would turn out to be high-risk activities. The implications of
leaving various risks uncovered can be significant and the impact of losses can be devastating creating a
huge burden on the governments. Therefore, a strong and competitive insurance industry is considered
imperative for economic development and growth. However, the contribution of the insurance
companies is also dependent on the fact that they are able to pool risks effectively. Only then would it be
possible to cover these risks at an affordable and reasonable cost as the insurance provider will be able
to spread the risks throughout the economy.

The insurance industry is also an integral part of the financial system. For effective functioning
of the financial system, it is important that the markets are efficient by ensuring liquidity and
transparency in price discovery. The role of the insurance companies as financial intermediaries is also
considered significant in making these markets efficient by providing liquidity and credit. This, in turn,
helps in lowering down the cost of capital and providing risk-free opportunities to all participants in the
market.
Penetration of insurance critically depends on the availability of insurance products and services.
Huge untapped market, proliferation of schemes, new product innovations, perception of insurable risks
of Indian consumers, competitive pressures arising from integration of bank and insurance, impact of
information technology, and the role of insurance Industry in financial services industry are some of the
forces which shape the competitive structure of the insurance industry.
The insurance companies have a pivotal role in offering insurance products which meet the
requirements and expectations of the customers and, at the same time, are affordable. The future growth
of this sector will depend on how effectively the insurers are able to come up with product designs
suitable to our context and how effectively they are able to change the perceptions of the Indian
consumers and make them aware of the insurable risks. The future growth also depends on how service
oriented insurers are going to be. On the demand side, the rise in incomes will trigger the growth of
physical and financial assets. With the growth of infrastructure projects, the demand for insurance to
cover the project and the risks during operations will increase. The other growth trigger is the increase in
international trade. However, servicing of the large domestic market in India is a real challenge. Some
of these challenges pertain to the demand conditions, competition in the sector, product innovations,
delivery and distribution systems, use of technology, and regulation.

Current scenario
A growing middle-class segment, rising income, increasing insurance awareness, rising
investments and infrastructure spending, have laid a strong foundation to extend insurance services in
India. The opening up of the insurance sector for private participation/global players during the 1990s
has resulted in stiff competition among the players, with each offering better quality products. This has
certainly offered consumers the choice to buy a product that best fits his or her requirements.
The number of players during the decade has increased from four and eight in life and non-life
insurance, respectively, in 2000 to 23 in life and 24 in non-life insurance (including 1 in reinsurance)
industry as in August 2010.

Most of the private players in the Indian insurance industry are a joint venture between a
dominant Indian company and a foreign insurer.
Life insurance industry overview
The life insurance sector grew at an impressive CAGR of 25.8% between FY03 and FY09, and
the number of policies issued increased at a CAGR of 12.3% during the same period. As of August
2010, there were 23 players in the sector (1 public and 22 private). The Life Insurance Corporation of
India (LIC) is the only public sector player, and held almost 65% of the market share in FY10 (based on
first-year premiums).

To address the need for highly customized
products and ensure prompt service, a large
number of private sector players have entered the
market. Innovative products, aggressive marketing
and effective distribution have enabled fledgling
private insurance companies to sign up Indian
customers more rapidly than expected. Private
sector players are expected to play an increasingly
important role in the growth of the insurance sector
in the near future.
In a fragmented industry, new players are gnawing away the market share of larger players. The
existing smaller players have aggressive plans for network expansion as their foreign partners are keen
to capitalize on the enormous potential that is latent in the Indian life insurance market.
ICICI Prudential, Bajaj Allianz and SBI Life collectively account for approximately 50% of the
market share in the private life insurance segment. To tap this opportunity, banks have also started
entering alliances with insurance companies to develop/underwrite insurance products rather than
merely distribute them.
Non-life insurance industry overview
Between FY03 and FY10, the non-life
insurance sector grew
Intense

competition

at a CAGR of 17.05%.
that

followed

the

de-

tariffication and pricing deregulation (which was
started during FY07) decelerated the growth
momentum.
As of August 2010, the sector had a total of 24
players (6 public insurers, 17 private insurers and 1
re-insurer). The non-life insurance sector offers
products such as auto insurance, health insurance,

fire insurance and marine insurance. In FY10, the non-life insurance industry had the following product
mix. Private sector players have now pivoted their focus on auto and health insurance. Out of the total
non-life insurance premiums during FY10, auto insurance accounted for 43.5% of the market share. The
health insurance segment has posted the highest growth, with its share in the total non-life insurance
portfolio increasing from 12.8% in FY07 to 20.8% in FY10. These two sectors are highly promising,
and are expected to increase their share manifold in the coming years.
Growth drivers


Health insurance attracts insurance companies

The Indian health insurance industry was valued at INR51.2 billion as of FY10. During the period
FY03–10, the growth of the industry was recorded at a CAGR of 32.59%. The share of health insurance
was 20.8% of the total non-life insurance premiums in FY10. Health insurance premiums are expected
to increase to INR300 billion by 2015.
Private sector insurers are more aggressive in this segment. Favorable demographics, fast progression of
medical technology as well as the increasing demand for better healthcare has facilitated growth in the
health insurance sector. Life insurance companies are expected to target primarily the young population
so that they can amortize the risk over the policy term.


Rising focus on the rural market

Since more than two-thirds of India’s population lives in rural areas, micro insurance is seen as the
most suitable aid to reach the poor and socially disadvantaged sections of society.
o LIC was the first player to offer specialized products with lower premium costs for the
rural population. Other private players have also started focusing on the rural market to


strengthen their reach.
Government tax incentives
Currently, insurance products enjoy EEE benefits, giving insurance products an advantage over

mutual funds. Investors are motivated to purchase insurance products to avail the nearly 30% effective
tax benefit on select investments (including life insurance premiums) made every financial year. Life
insurance is already the most popular financial product among Indians because of the tax benefits and

income protection it offers in a country where there is very little social security. This drives more and
more people to come within the insurance ambit.

Contribution of the insurance sector to the economy
Insurance has had a very positive impact on India’s
economic development. The sector is gradually
increasing its contribution to the country’s GDP. In
addition, insurance is driving the infrastructure sector
by increasing investments each year. Further,
insurance has boosted the employment scenario in
India by providing direct as well as indirect employment opportunities. Due to the healthy performance
of the Indian economy, the share of life insurance premiums in the gross domestic savings (GDS) of the
households sector has increased.

The increased contribution of the insurance industry from the household GDS has been ploughed
back into the economy, generating higher growth. The following factors showcase how the contribution
of the insurance industry has strengthened economic growth:

Contribution of insurance to infrastructure

Generally, countries with strong insurance industries have a robust infrastructure and strong
capital formation. Insurance generates long-term capital, which is required to build infrastructure
projects that have a long gestation period. Concurrently, insurance protects individuals and businesses
from sudden unfavorable events. A well developed and evolved insurance sector is needed for economic
development as it provides long-term funds for infrastructure development and simultaneously
strengthens the risk taking ability.
Although the insurance sector is relatively young in India, its contribution to infrastructural
development has been on a visible rise as depicted in the following exhibit.
In FY09, the total investments by the insurance industry increased to INR9, 742 billion, as
against INR8, 183 billion in the previous year. Further, investments by both life and non-life insurers
increased by 20.2% and 4.6% to INR9,1 63 billion and INR589 billion, respectively, in FY09. However,
as outlined in the Eleventh Five Year Plan (2008– 2012), there is a significant fund requirement of
INR20, 562 billion in the infrastructure sector. Given an expected robust increase in the insurance
business and the increasing participation of foreign insurers in India, insurance companies are well
positioned to contribute to infrastructure development in the country.
These investments could further increase with the development of sound debt markets, especially
the market for long-term government paper and income tax incentives to attract savings for
infrastructural schemes. The direct investment of policyholder funds of life insurers in government
bonds is another way in which the industry has helped the development of infrastructure. In addition,
IRDA’s mandate for insurance companies to invest 15% of their annual sales in infrastructure is
expected to boost capital formation.

Contribution of insurance to FDI

The importance of FDI in the development of a capital- deficient country such as India cannot be
undermined. This is where the high-growth sectors of an economy play an important role by attracting
substantial foreign investments. Currently, the total FDI in the insurance sector, which was INR50.3
billion at the end of FY09, is estimated to increase to approximately INR51 billion in FY10. It is
difficult to estimate, but an equal amount of additional foreign investment, can roughly flow into the
sector if the government increases the FDI limit from 26% to 49%.
The insurance sector, by virtue of attracting long-term funds, is best placed to channelize longterm funds toward the productive sectors of the economy. Therefore, the growth in their premium
collections is expected to translate into higher investments in other key sectors of the economy.
Therefore, the liberalization of FDI norms for insurance would not only benefit the sector, but several
other critical sectors of the economy.
Contribution of insurance to employment

Insurance helps create both direct and indirect employment in the economy. Alongside regular
jobs in insurance, there is always demand for a range of associated professionals such as brokers,
insurance advisors, agents, underwriters, claims managers and actuaries. The increasing insurance
business has increased the demand for highly skilled professionals as well as semiskilled and unskilled
people.

Conclusion

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

references














Insurance Regulatory and Development Authority (IRDA)
Reserve Bank of India
Life Insurance Council
General Insurance Council
Centre for Monitoring Indian Economy
Insurance industry: the evolving dynamics, Ernst & Young, 2009
“World Insurance in 2009,” Swiss Re
“Life Insurance,” Edelweiss, 6 August 2010, via Thomson Research
“India Life Insurance Sector,” Credit Suisse, 29 July 2009, via Thomson Research
“IRDA’s new guidelines on ULIPs to impact profitability of Life Insurers,” First Global, 9 July
2010, via Thomson Research
“All is well,” RBS, 8 February 2010, via Thomson Research
“India Life Insurance,” ICICI Securities, 23 September 2010, via Thomson Research
Neha Singhvi and Prachi Bhatt, “Distribution Channels in Life Insurance,” Bimaquest - Vol. VIII
Issue I, January 2008



Sreedevi Lakshmikutty and Sridharan Baskar, “Insurance Distribution in India - A Perspective,”
Domain Competency Group (Insurance), Infosys Technologies Limited





“Alternative insurance distribution models in Asia Pacific,” Deloitte
“The Emergence of Alternative Distribution in India,” Towers Watson
S. Varadharajan, “Future Generali to introduce use-based insurance product,” The Hindu, 10
August 2010, via Dow Jones
Factiva, © 2010 Kasturi & Sons Ltd.



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