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INDUSTRY INSIGHT

INDIAN LIFE INSURANCE

April 2004

Cygnus Economic & Business Research
4th & 5th Floors, Astral Heights, Road No. 1, Banjara Hills, Hyderabad-500034, India Tel: +91-40-23430203-07, Fax: +91-40-23430208, E-mail: [email protected] Website: www.cygnusindia.com
Disclaimer: All information contained in this report has been obtained from sources believed to be accurate by Cygnus Economic and Business Research (Cygnus). While reasonable care has been taken in its preparation, Cygnus makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. The information contained herein may be changed without notice. All information should be considered solely as statements of opinion and Cygnus will not be liable for any loss incurred by users from any use of the publication or contents

Industry Insight- Indian Life Insurance

Table of Contents
EXECUTIVE SUMMARY................................................................................................................4 HIGHLIGHTS ....................................................................................................................................5 INTRODUCTION .............................................................................................................................6 DEMAND DRIVERS........................................................................................................................6 Economic Factors......................................................................................................................6 Demographic factors.................................................................................................................6 GLOBAL INSURANCE INDUSTRY............................................................................................7 WORLD INSURANCE PREMIUMS.............................................................................................8 Current Scenario ........................................................................................................................8 GLOBAL LIFE INSURANCE INDUSTRY.................................................................................9 Emerging Markets....................................................................................................................11 GLOBAL TRENDS IN INSURANCE MARKET ....................................................................13 INDIAN INSURANCE INDUSTRY...........................................................................................16 Evolution ..................................................................................................................................16 Insurance Sector Reforms ......................................................................................................17 CURRENT SCENARIO..................................................................................................................18 Insurance Penetration .............................................................................................................19 Insurance Density ....................................................................................................................19 INDUSTRY STRUCTURE.............................................................................................................20 INDIAN LIFE INSURANCE INDUSTRY ................................................................................22 Overview ...................................................................................................................................22 Product Profile .........................................................................................................................22 Major Lines of Life Insurance Business ...............................................................................23 Market Share and Growth ......................................................................................................24

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Industry Insight- Indian Life Insurance

TRENDS AND STRATEGIES .....................................................................................................28 Innovative Products ................................................................................................................28 Distribution Channels .............................................................................................................29 Innovative Marketing Efforts ................................................................................................31 ISSUES AND CHALLENGES......................................................................................................32 Lack of Adequate Data ...........................................................................................................32 Falling Interest Rates ...............................................................................................................32 Ambiguity of Role of Intermediaries ....................................................................................33 Unfavorable Tax Regime ........................................................................................................33 FDI Cap ....................................................................................................................................34 Restrictive Investment Guidelines.........................................................................................34 Health Insurance......................................................................................................................34 Pension Funds..........................................................................................................................35 CRITICAL SUCCESS FACTORS .................................................................................................35 FUTURE OUTLOOK .....................................................................................................................38 Huge Population ......................................................................................................................38 Increasing Standard of Living ................................................................................................38 Rural Population ......................................................................................................................38 Competition..............................................................................................................................38 Pension market.........................................................................................................................38 CONCLUSION.................................................................................................................................40 ANNEXURE .....................................................................................................................................41 BIBLIOGRAPHY .............................................................................................................................44

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Industry Insight- Indian Life Insurance

EXECUTIVE SUMMARY
India, with around 16% of the world population has 0.59% of the world life insurance market. India has a savings rate of 22%, but only around 5% is spent on insurance. Insurance penetration in India is very low at 3.26. Despite India’s vast population, low incomes, rural poverty, low levels of education, absence of innovative products and lack of awareness about insurance products have constrained the growth and penetration of insurance products in the past. The Indian life Insurance industry has been experiencing tremendous activity in the recent past. The opening up of the insurance market in 1999 has paved way to the entry of many foreign players. Presently there are 13 players operating in the life insurance market. However, the industry is highly concentrated in the hands of the Life Insurance Corporation of India which held 88% of the market share in the year 2002-2003. Overall the market share of private insurers’ increased from 2 % in the year 2001-02 to nearly 12.78% in the year 2003-04. The new entrants coped with the challenges of setting up operations, building up the agent force and spreading to the rural and semi-urban areas. Moreover, increasingly deregulated and liberalized environment, innovative distribution, and better use of technology are helping the new breed of private life insurers take market share away from the erstwhile public sector companies. With a large population, fast and rapid growing economy and constant improvement of its people’s living standard, the insurance industry in India has tremendous market potential. However, it is still at its preliminary stage of development now with a relatively small size. The strength and depth of the Indian insurance industry has a large gap compared to the average world level. In the current scenario product innovation, consumer awareness, distribution networks and customer service would be critical factors. The successful insurance companies would be those that anticipate market demand and evolve suitable products and services and offer good customer services.

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Industry Insight- Indian Life Insurance

HIGHLIGHTS
● Global insurance premium volume in 2002 amounted to $ 2,627 billion, of which $ 1,536 billion (58%) was attributable to life insurance and $ 1,091 billion (42%) to non-life insurance. ● US continues to be the world leader where insurance premium has, for the first time, crossed the 1 trillion mark to $1,000.3bn in 2002 accounting for 38% of world premium up from 35.41% three years ago. ● The growth in premium income in 2002 has been 5.5% growth over the 2001. Growth was 3.0% in life insurance and 9.2% in non-life insurance. ● India stands 19 (23 in ’00-01) in the premium income rankings world-wide with an annual premium income of $15,472m ($9,933m in ’00-01) and a meagre of 0.59% of the global market (0.41 in 00-01) ● In terms of insurance penetration in world rankings, India stands at No 43 up from 52 in ’00. ● Out of one billion people in India, only 40 million people are covered by insurance. ● Insurance penetration — the percentage of premium income to GDP — has moved up from 2.32% in ’00-01 to 3.26% in ’02-03. ● The improvement has been largely on account of the growth in life insurance business where premium income grew from 1.77% of GDP to 2.59%. ● The life insurance market in India is highly concentrated in the hands of the Life Insurance Corporation (LIC) which held 92% of the market share in the year 2002-2003. ● The new players in the life insurance sector have been successful in eating up a reasonable share of LIC with ICICI prudential emerging as a clean leader. ● Indian insurance market is set to touch US $25 billion by 2010, on the assumption that the real annual growth in GDP would be 7%.

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Industry Insight- Indian Life Insurance

INTRODUCTION
Insurance is a contract, which provides financial risk coverage to the insured for any adverse events. It plays a vital role in the lives of most people, as a means of dealing with risks which they face and as a means of savings. Insurance, in any economy, is regarded as a pillar of growth and works as a catalyst in the overall development of the economy. As the economy grows the living standards of people also would increase. Consequently, demand for life insurance increases.

DEMAND DRIVERS
Economic Factors
Economic Development – The demand for insurance tend to increases with increase in the per capita income. The level of spending on insurance directly depends on the level of disposable income in the hands of an individual. Decline interest rates- The declining interest rates in the economy make it all the more necessary to start saving early to ensure long term wealth creation. Today's consumers are increasingly interested in products to help build wealth and provide for retirement income. In terms of returns, insurance products today offer competitive returns ranging between 7% and 9%. Besides returns, what really increases the appeal of insurance is the benefit of life protection from insurance products along with health cover benefits.

Demographic Factors
Growing consumer awareness – Earlier insurance products were viewed as only savings instruments. However, over the past few years insurance consumers are looking at Insurance as a complete financial solution offering stable returns together with total protection. Increasing Longevity- Where once the fear was one of dying too early, now, with increasing longevity, the fear also is one of living too long and outliving one's assets. With the breakdown of traditional forms of social security like the joint family system, consumers are now more concerned to provide themselves with the need to provide for a comfortable

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retirement. Increasing longevity generally increases the demand for savings based life insurance products and annuity income streams. Education- Increase in literacy levels also influences the demand for insurance products. Educated people understand the need for insurance better and would help in the increase in the demand.

GLOBAL INSURANCE INDUSTRY
Major part of the insurance business is concentrated in the developed and higher income countries. Region wise North America and Europe followed by Asia with Japan in particular constitute the major markets. Regarding the individual countries the United States stands first in terms of premium followed by Japan, and the other major European countries UK, Germany and France. Market share as per the insurance premiums in 2002

Other, 19.40%  Netherlands, 1.50% Canada, 1.90%   Italy, 3.20% France, 4.80% Germany, 5.20% United Kingdom, 9% Japan, 17% United States, 38%

Data Source: Sigma World Insurance 2002 No. 8/2003

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Industry Insight- Indian Life Insurance

WORLD INSURANCE PREMIUMS
Globally the life insurance segment is larger than the property/casualty segment. In 2002 the world insurance premium amounted to $ 2,627 billion, of which $ 1,536 billion was attributable to life insurance and $ 1,091 billion to non-life insurance. The overall growth has been 5.5 % over the previous year. Life insurance income grew by 3% and non-life insurance income grew by 9.2%. The world life and non life insurance premiums constitute 58.4 % and 41.6 % of the total premiums respectively. Over the 10-year period, 1992 to 2002, total world insurance premiums grew 79.2%. While life insurance premiums grew 99% over the same period the non life premiums grew 56%. Growth of Insurance Premiums (1992-2002)
3000 2500 Premiums in $Bn 2000 1500 1000 500 0
19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02

Life

Nonlife *

Year

Data Source: Sigma World Insurance 2002 No. 8/2003

Current Scenario
The recession in the global economy since 2000 and the sharp increase in the claims in years 2001 have severely impacted the insurance industry. The profitability of all the insurance companies suffered due to lower investment returns. While financial market turbulence continued to plague the insurance markets in 2002, some signs of recovery were evident in the most markets. While the life sector posted minor improvement, the non-life insurance sector grew at a record-breaking rate.

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GLOBAL LIFE INSURANCE INDUSTRY
The developed countries produced almost 90 % of the global life and non-life premiums in the year 2002. North America was the most important region followed by Western Europe (US$ 826 billion), Japan (US$ 446 billion) South and East Asia (US$ 167 billion) and Oceania (US$ 37 billion). In the developed countries the average life insurance penetration (insurance premiums as a percentage of GDP) amounted to 5.4%. The UK reported the highest level of penetration at 10.2%, followed by Japan at 8.6% and Switzerland at 8.4%. The average per-capita spending on life insurance was USD 1450. The Swiss spent the most on life insurance in 2002 (USD 3100), followed by the Japanese (USD 2784) and the British (USD 2679). Growth in Premium volume in Major Insurance markets in 2002 Country United States Japan United Kingdom Germany France Italy 2002 480.5 354.6 159.7 60.9 80.4 52.4 % Growth (YOY) 6.7 -2.3 -1.9 2.6 -0.9 17.4 Life insurance premium volume grew by 1.9% in the developed countries in 2002 down from the previous year’s 2.4%. While premium volume in the US, Italy and Germany, increased it decreased in Japan, the UK and France.

Data Source: Sigma World Insurance 2002 No. 8/2003

The growth is mainly because of the increase in premiums in the US. In Japan, UK and France, life insurance was hindered by the adverse capital market conditions and weak economy. In the low interest rate environment, guaranteed returns in particular turned out to be a heavy burden for European life insurers.

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However, the life insurance sector is expected to stabilize in 2003. The profitability of many life insurers are set to improve slowly as interest rates and stock markets will overcome the worst. The driving force behind the recovery in the developed countries will be the private pension provision, which is assuming a major role after the state pension systems in many countries are proving increasingly inadequate. North America In North America life insurance and annuity grew by 6.3% in 2002 up from the negative of 1.5% in 2001. Life insurance premiums in the US increased by 6.7% and declined in Canada by 2.2%. The main reason for the strong growth in the US has been the increase in sales of protection and savings products which are provided with fixed returns. The industry benefited from the shift of consumers into forms of investments offering secure returns. The fall in demand for occupational pension products affected the premium growth in Canada. The capital base of North American life insurers deteriorated due to the losses incurred on their equity and corporate bond investments. The reduction in the spreads between the guaranteed rates on their products and investment yields prompted insurers to reduce their guarantees. Investment returns are expected to strengthen again in 2003, due to the improved conditions on capital markets and rising interest rates. Life insurance and annuity premium growth are likely to continue in the region, although at a slow pace given weak employment and income. Western Europe The life insurance premiums of Western European companies have increased by 1.2% in 2002 up from the -6.1 in 2001. Unit- and index-linked life insurance products with capital guarantees were offered in many markets with the aim of making them more attractive in an environment of falling stock markets. The gradual privatization of pension provision in Germany and Spain and a change in taxation law in Italy provided considerable impetus for growth. However the investment results and equity bases of most of Europe's life insurers worsened because of the low interest rates and ever-declining stock markets. Life insurers were forced to reduce their profit shares and raise new capital. Some insurers reported solvency problems, which resulted in several of them being downgraded. The situation has

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Industry Insight- Indian Life Insurance

relaxed a little after the improvement in conditions in the capital markets. The UK life insurance market - the biggest in Europe - is facing up to a difficult year, as the market for single premium with-profit bonds has collapsed. Overall, growth in the western European life insurance market is likely to remain slow for some more time. Japan The stagnating economy in Japan has pushed down the life insurance premiums by 2.3% in 2002 down from the previous year’s growth of 1.3%. Only individual annuity business registered growth. Interest rates and stock prices were even lower at the end of 2002 than they had been at the beginning. However, stocks rallied in the first half of 2003, which should boost the insurance industry. Oceania In 2002, premium income in the Australian and New Zealand life insurance markets fell by 9.5% (2001: -4.6%) and 4.5% (2001: -1.3%), respectively. Although the Australian financial markets did better than their international counterparts, falling global stock markets had a negative influence on the life insurers in the region. With single-premium policies accounting for the majority of business, investment market sentiment had a strong bearing on both life insurers' premium volume and profitability. However, premiums for term-life insurance increased by 12.9%. Due to their solid capital base and mandatory superannuation requirements, Australian life insurers were relatively flexible despite the difficult operating environment. Emerging Markets Life insurance business in the emerging markets grew by just under 13% in 2002. This strong growth was supported by developments in many regions: China, Taiwan and India in particular, along with Brazil and Mexico, contributed the most to this growth. Premium income in Central and Eastern Europe as well as in the Middle East and Central Asia were burdened by special factors. For instance, the changes in Russian and Israeli tax legislation held premium development in these countries in check. This had a negative impact on

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results across the region. Overall, premium income in most of emerging markets increased at a markedly faster pace than gross domestic product. Major Emerging markets and their premium Country Latin America and the Caribbean Central and Eastern Europe South and East Asia Middle east and Central Asia Africa Total premium in USD billion 15.4 8.1 117.0 6.1 17.8 % Change over 2001 4.8 -4.9 18.3 3.3 7

Data Source: Sigma World Insurance 2002 No. 8/2003

Also the demand for life insurance rose at the expense of low rate bank deposits with China and India reporting incredible growth of 62.2% and 14.1%, respectively. In both these markets rising incomes, social security reforms and further opening up of the market stimulated the growth of life insurance. But the world average has been pushed up due to developed countries such as Japan (10.86%) and the US (9.58%), where higher disposable income leads to higher purchase of insurance. Asia promises to register the highest growth rates in the world. China and India, both of which have recently opened their insurance sectors to competition will continue to attract global and regional insurance companies. China and India constitute one third of the world’s population. They are also among the fastest growing economies in the world and offer huge, untapped potential. China is undergoing sweeping insurance liberalization with the support of the World Trade Organisation. By end-2006, the insurance market in China will be fully liberalized, with no geographic or product restrictions. In India, foreign investment restrictions (26%) and the enforcement of tariffs are also under review, indicating a more liberal and competitive regime going forward. Life insurance, particularly, is likely to remain strong due to rising household income and greater risk awareness. The ageing population in some parts of Asia is also spurring demand for investment-linked and pension products.

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GLOBAL TRENDS IN INSURANCE MARKET
Over the last few years the insurance industry all over the world is being driven by common factors discussed hereunder. Increasing Consolidation Size brings with itself market power and reduced costs. The desire for economies of scale in the insurance sector continues to drive consolidation. Players are also trying to expand distribution channels, increase cross selling opportunities, diversify product lines and diversify into new product lines. A look at the ratios of some firms indicated that in the North American life insurance segment, management expenses as a fraction of net premiums written decreases from 16% for the smaller firms to 11% for the larger ones; in Europe the ratio decreases from 9% to 4%. In terms of profitability, a consistent pattern emerges: larger insurance firms are more profitable than smaller ones. In North America, the return on equity increases from 3% to 13% for the life segment and in Europe, it increases from 1% to 12%. Thus, the insurance industry seems to be benefited from a consolidation process that would allow them to exploit scale economies and transfers of high-quality managerial skills.

Globalization Globalization results in the gradual removal of barriers between countries. The influence of the Internet and developments in technology have led to business process outsourcing (BPO) which is nothing but shifting of labour intensive tasks to low wage countries. The US insurers are using Canada for outsourcing claim settlement, accounting policy administration and underwriting operations. At the same time insurers from Europe are setting up their own back office facilities in countries like India. Deregulation Deregulation is encouraging the emergence of global financial services firms to replace stand alone banks or insurers. Deregulation has gained widespread acceptance in Asia. Countries like China, Malaysia, Indonesia and Thailand, which opened their insurance markets to
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foreign players, displayed significant increases in growth rates. The rank of South Korea, which opened its insurance sector in 1971, in global premium mobilization improved from 30th in 1971 to 7th in 2001. However, deregulation is being opposed by increasing the controls over the way the products are sold and delivered to consumers. Segregation The traditional view of an insurance business as a provider of all integrated services like distribution, underwriting, administration, funds management is changing. As the various companies are seeking to meet, customer needs they will need to place emphasis on multiple channels and multiple relationships rather than providing all the services by themselves. Ageing Population People all over the world are living longer. The percentage of world population aged 60 years and above (60+) increased from 8.2% in 1950 to 10% in 2000. The present demographic transition is expected to continue into the present century. Worldwide, the proportion of 60+ is expected to increase to 15% by 2025, and 21.1% by 2050, and nearly 33% by 2150. The older population itself is ageing. As the following table illustrates, striking differences exist between economic status and regions. During 2000, the population of 60+ comprised 7.7% of the total population in developing countries, as compared with 19.4% in developed countries. In terms of regions, one out of five Europeans, but only one out of 20 Africans, is 60 years or older. Population Trends –aged 60 years and above World More Developed Less Developed Africa Asia Europe Latin America North America Oceania
Data Source: United Nations

2000 10.0 19.4 7.7 5.1 8.8 20.3 8.0 16.1 13.4

Percent of Population 2025 15.0 28.2 12.6 6.3 14.7 28.8 14.0 25.1 19.7

2050 21.1 33.5 19.3 10.2 22.6 36.6 22.5 27.2 23.3

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The “ageing society” has significant implications for the insurance industry. Numbers of dependent individuals are increasing in countries with significant ageing populations which pose a big problem to them. Establishing how much social security cover should be provided by governments and how much by private operators is a crucial issue. However, in most countries, governments alone cannot provide social security by covering all the costs, which has opened the way for private insurance. Government coverage is also beset by financing problems, implying increased opportunity for private insurers. Worldwide, there has been a general trend for governments to play a less pervasive role in providing social security for the aged. This in part reflects political changes, and also the fact that governments are unable to justify to voters the higher taxes (or more State borrowing) necessary to support this government role. As a result, there has been a transfer of more of the responsibility for pension provision onto the private insurance sector. Social security provisions in Asia, which has a wide variety of social security systems, are generally characterized by low coverage: for example 8% of the labor force in India, 10% in Thailand, and 18% in China. Social security expenditure as a percentage of GDP remains generally low. However, the higher- and middle-income countries (e.g. Malaysia, Republic of Korea, Thailand and Singapore) have seen the share of GDP devoted to financing social security grow in real terms, and coverage has been extended. Banc assurance Banc assurance is emerging as the most sought after distribution channel for the insurers, and will make a very large impact on financial services industry. Traditional methods of distributing financial services are being challenged, and innovative, customized products and channels are emerging. Banks are trying to bring in customer database, leverage on their brand recognition and reputation at both local and regional levels, make use of the personal contact with their clients, which a new entrant cannot, as they are new to the industry. However, the success of Banc assurance would mostly depend on how well insurers and

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banks understand each other's businesses and seize the opportunities leveraging each other’s strengths.

INDIAN INSURANCE INDUSTRY
The Insurance industry in India has undergone a drastic change over the years from being an industry operating in an open competitive market, later being nationalized and again being open to competition.

Evolution
1912 The Indian Life Assurance Companies Act – kicked off regulations in the Indian insurance sector 1938 The Insurance Act - marked the real beginning of comprehensive regulations; several amendments and additions were made in the Act until the nationalization of the industry 1956 Nationalization of life insurance business through enactment of the Life Insurance Act 1972 Nationalization of general (non-life) insurance business through enactment of the General Business (Nationalization) Act 1993 Constitution of the Malhotra Committee to study the insurance industry and suggest reforms 1994 Malhotra Committee recommendations released - key suggestions: • • • • • • Open industry to private participation - domestic and foreign Strengthen the capital base of companies ; reduce mandatory investments Restructure LIC/GIC operations; induct accountability to policy holders Set up a statutory autonomous regulatory body with independent financing Introduce intermediaries between insurers and customers Periodic review of product pricing and premia rate rationalization

1995 Constitution of the Mukherjee Committee to examine issues of transparency in insurance accounting and suggest new standards for solvency margins

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1996 Constitution of the Interim Insurance Regulatory Authority (IRA) to suggest legislative reforms in the insurance industry until the establishment of an independent regulatory authority 1997 Mukherjee Committee Report on solvency issues submitted to Government; findings and recommendations not made public 1999 Passing of the Insurance Regulatory and Development Authority (IRDA) Act

Insurance Sector Reforms
Reforms in the Insurance sector in India were initiated with the passage of the IRDA Bill in Parliament in December 1999. Some important provisions under the act are: • • • • • The maximum limit of foreign equity capital is 26% in life, general and reinsurance ventures A company is not allowed to venture into both life and non life insurance business. Separate set if license is required if the same set of bidders desire licenses in both. The act made it mandatory for the Indian promoter to divest shareholding in excess of 26% after a period of 10 years from the commencement of business. The minimum paid up capital for both life and general insurance business is fixed at Rs.1bn. The private insurers who foray into general insurance should maintain a solvency margin out of the highest of Rs.500 mn or 20 percent of net premium income or 30 percent of the net incurred claims • • • Banks, NBFCs’ and other financial institutions are allowed to enter into the insurance market only through joint ventures Policyholders funds to be invested within India Compulsory rural and social sector exposure norms specified

The IRDA since its incorporation as a statutory body in April 2000 has stuck to its schedule of framing regulations and registering the private sector insurance companies. Every insurer seeking to carry out the business of insurance in India is required to obtain a certificate of

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registration from the IRDA prior to commencement of business. In the private sector 13 life insurance and 9 general insurance companies have been registered. Since the IRDA act has been enacted the Authority has taken a number of initiatives. A number of regulatory orders dealing with various practices of insurers have been put in place to raise and bring the standards in the Indian insurance market in line with the international standards. Some of its initiatives are: • • • • • • Developing the rural and social sector insurances, personal insurances including health insurance to increase the penetration of Indian market. Licensing the Brokers and corporate agents to stimulate demand for insurance covers and also to professionalize the intermediary link. Grading Surveyors and loss assessors according to the expertise. Revising the motor tariff and a setting up a separate terrorism pool. Regulating the policyholder protection through imposition of punitive provisions on insurers for their failure to follow its code. Raising the profile of the Indian market in the domestic and the international markets through extensive participation in the insurance related events.

CURRENT SCENARIO
Despite the introduction of financial reforms in the insurance sector which paved way for the liberalization of the insurance market the business is still a virtual monopoly. GIC, with its four subsidiaries, enjoys the monopoly in the general insurance business. LIC, which has a vast network of 2,048 branches, and 10, 02149 agents is a monopoly in the life insurance business. FY2002 was the first full year of operations of the private sector insurance companies in India. In the fiscal year 2002 the total premiums stood at US $ 15.45 billion which is at 0.59% of the total global premiums of US$ 2626.8 billion. In absolute terms, India stands 19 (up from 23 in 2001) in the premium income rankings world-wide. There are around 200 million people who can afford to take life insurance policies in India but currently 40 -45 million

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people are covered. India has a savings rate of 22%, but less than 5% is spent on insurance. Hence the Indian insurance market has huge potential. With just eight per cent of the Indian population having insurance policies and most of them underinsured, the life insurance companies see a double-digit growth in business for the next five years.

Insurance Penetration
Insurance penetration (the percentage of premium income to GDP) in India has moved up from 2.32% in ’00-01 to 3.26% in ’02-03. The improvement has been largely on account of the growth in life insurance business where premium income grew from 1.77% of GDP to 2.59%. Although non-life premium has also grown from 0.55% to 0.67% of the economy, it is much lower than the growth in life insurance. In terms of insurance penetration India ranks 43 in the world in 2002 up from 52 in 2000. While the improvement in insurance penetration is significant, it is still low compared to the 10.2% in UK, 8.6% in Japan and 8.4% in Switzerland and the world average of 8.14%. Low insurance penetration is an indicator to the fact that the spread of insurance business has been relatively poor in the country and large sections of the insurable population are still isolated from insurance coverage. Given India’s large population, the number of potential buyers of insurance is certainly attractive. In most developed countries insurance premiums constitute 10 per cent of the GDP.

Insurance Density
The per capita premium in India in 2002 stood at US$ 14. 7 compared to the world average of US $ 175.6. Most savings in India go to bank deposits, primarily because of the guaranteed rate of return. Investment takes place only when there are savings in the economy. Life insurance funds constitute one of the major components of financial saving of an economy. Life insurance funds, which comprised of 8% of the financial savings in 1993-94 increased to almost 14% in 2001. The distribution of financial assets over the years is shown in the Annexure.

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Industry Insight- Indian Life Insurance

The following graph depicts the percentage of the life insurance funds in the year 2002 in terms of the percentage of household financial saving spent on life insurance.
Breakup of Financial Savings

Provision plus pension fund 19% Life insurance funds 14% Net claims on Government 17%

Currency 10%

Net deposits 38% Shares and debentures 2%

Data Source: RBI Annual Report 2002-2003

The growing share of insurance in the savings of the household sector is a positive development. However life insurance density in India measured as the life insurance premium as a percentage of the gross domestic saving is low at 6.2% compared to the high of 80% in South Africa, 55.4% in UK, 25.4% in USA and 27.1 % in Japan. This indicates that there is a vast potential for growth in the life insurance funds in India. In the current scenario where the disposable income is rising leading to better standard of living and increasing life expectancy, concerns such as old age security will result in increasing share of financial saving in the life insurance instruments. New insurance companies are now trying to lure depositors to invest in insurance products by enticing them with guaranteed returns

INDUSTRY STRUCTURE
The Indian Insurance Industry has traditionally been divided into life insurance and non life or general insurance. The industry is again classified into public sector where the life Insurance Corporation of India (LIC) operates as a monopoly and private sector where 12 players have started operating since 1999.

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Industry Insight- Indian Life Insurance

Indian Insurance Industry

Life

Non-Life

Public Sector (1)

Private Sector (13)

Public Sector (4)

Private Sector (9)

The list of the Life insurance companies operating in India is given in the Annexure. Industry Analysis using Michael Porter’s Model Competitive Forces Barriers to Entry Influence High • • • • • Bargaining Power of Low Buyers Bargaining Power of Low Suppliers Threat of Substitute Low Products • • • Reasons Huge Economies of Scale First Mover Advantage for LIC and GIC -Well established distribution network for the PSUs Minimum paid up equity capital of Rs. 1bn for entry Heavy capital investment required in distribution networks, hiring of agents Long gestation period of 7-10 years The buyers of insurance policies are highly fragmented Premiums charged controlled by the TAC for some line of businesses (non life) No substitute if insurance products are viewed as risk management instruments. However as an investment and savings tool there are various other substitutes like bonds, mutual funds etc. High Strategic Stakes Exit Barriers are high.

Rivalry among High Existing Firms

• •

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Industry Insight- Indian Life Insurance

INDIAN LIFE INSURANCE INDUSTRY
Overview
The Indian Life insurance Industry has seen a remarkable shift since the time of the establishment of first Company, Oriental Life Insurance Company (a British firm) in 1823. Compared with a total of 245 insurers (154 Indian insurers, 16 foreign insurers and 75 provident fund societies) who were carrying on the life insurance business in India at the time of India’s Independence in 1947, the country today has 13 players in the life Insurance segment(1 in public sector and 12 in the private sector). The change in this profile has been mainly because of various Acts, reforms and legislations which have been passed over years and the final boost coming up with opening up of the Insurance Sector for Private Players.

Product Profile
Life insurance products are mainly designed to provide funds to a survivor, family or business in the event of the death of the insured. It is used to help replace income, pay off mortgages, debts or estate taxes, and provide cash to buy out a partnership or acquire stock owned by the deceased. There are two basic types of life insurance policies: term insurance, which provides coverage for a specified period of time (the term), and endowment insurance, which combines a death benefit with a cash value component. The endowment insurance offers lifetime protection, while term insurance may be most affordable option for buying life insurance mainly for the financial protection it offers, and when the need for life insurance is temporary. Based on the Demographic Profile various products have been created and continuous product innovations are done to meet the growing needs of different segments of the society. Some of the products categories catering to different segments are:

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Industry Insight- Indian Life Insurance

Age Groups 0-20 years 20-49 years Children Plan

Policy

Educational Needs, Marriage Plans
Money Back, Endowment Plan, Loan Cover, Term Plans, Unit Linked Insurance Plans.

Investments, Tax planning
50 and above Pension plans

Security and Regular Flows

• • • • • • Children Plan • Education Plans • Marriage Plans

Money Back Policies Endowment Plans Unit Linked Plans Health Plans Loan Cover

Series1
• Pension Plans • Money back Policies

Age Bracket

0-14

15-49

50-69

>70

Major Lines of Life Insurance Business
In India there are four major lines of business in the life insurance industry – individual life, individual annuities, group life, and group annuities. The most important lines of business in terms of both revenues and profits are individual life and individual and group annuities. Individual insurance accounts for almost 90% of the premium income, group insurance accounts for 6% of the premium income and superannuation policies account of the remaining 4%. The private players commenced their business by writing individual policies but now many of them have entered the group insurance market as well.

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Industry Insight- Indian Life Insurance

Market Share and Growth
The year 2002-03 had 13 companies competing with each other for capturing a share of the huge life insurance market. Apart from LIC which is a public sector monolith operating for over fourty years, 12 of these players are new private sector. However, recently Sahara has also joined the team of private life insurance making the number of private players to 13. Despite the opening up of the life insurance business to private participation, LIC with its vast network of 2048 branches and 10,02,149 agents remained effectively a monopoly. However, the new entrants coped with the challenges of setting up operations, building up the agent force and spreading to the rural and semi-urban areas. In addition, the industry as a whole also faced a regime of declining interest rates and shrinking avenues for investment in the face of the overall slowdown in the economy. The entry of the private sector insurance players into the
Market Share of LIC

market has made a reasonable impact on the public sector insurance giant Life Insurance Corporation. In the first 11 months ending February 2004, LIC has received first premium

100 98 96 94 92 90 88 86 84 82 80

Performance Of Life Insurers
99 92.16 7.84 12.78

14 Market Share Of Pvt. Insurers 12 10 8 87.22 6 4 2 0

1 2001-02 LIC 2002-03 Feb. 04 Pvt. Insurers

income of only Rs 113.71 bn. All of its business earned in 11 months of 2003-04 financial years has come from 19.34 mn policies which account for 93.75% of policies issued for the same period in Indian Life Insurance Industry. An analysis of the new business of the private insurers reveals that overall business captured by the twelve companies grew to Rs 16.66 bn in 2003-04 (till February) exhibiting an increase of more than 300% since last year. Overall the total market share of private insurers had 12.78 % upto February 2003-04. ICICI Prudential captured nearly 4.43 % of the new

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Industry Insight- Indian Life Insurance

business underwritten, followed by Birla Sunlife and HDFC Standard at 1.90% and 1.15% of the premium underwritten respectively. In terms of number of policies, while ICICI Prudential had issued approximately 0.34mn policies, HDFC Standard and Allianz Bajaj followed with 0.16mn and 0.11mn policies respectively (Allianz’s market share in terms of premium was 0.83 %) during first eleven months of FY04. New Life Business Premium for the year 2003-2004 (up to February) (In Rs Lakh)
SL. NO. INSURER TOTAL PREMIUM U/W February Apr.-Feb.
14287.10 6960.61 24752.43 10518.15 4517.13 15001.83 1828.21 11396.91 57714.15 11617.38 5935.31 2100.10 166629.31 1137126.91 1303756.22

TOTAL NO. OF POLICIES ISSUED February
16368 4789 19792 18137 8415 19058 2912 17168 79752 10025 7558 3105 207079 2570814 2777893

Apr.Feb.
136990 38925 112254 117351 59225 167769 19497 142536 340511 60121 56478 36843 128850 0 193417 07 206302 07

MARKET SHARE BASED ON Premiu Policy m
1.10 0.53 1.90 0.81 0.35 1.15 0.14 0.87 4.43 0.89 0.46 0.16 12.78 87.22 100.00 0.66 0.19 0.54 0.57 0.29 0.81 0.09 0.69 1.65 0.29 0.27 0.18 6.25 93.75 100.00

1 2 3 4 5 6 7 8 9 10 11 12

Tata Aig Om Kotak Birla Sunlife Max New York ING Vysya HDFC Standard Met Life Allianz Bajaj ICICI Prudential SBI Life AVIVA AMP Sanmar Total Private

2754.11 973.53 5247.67 1420.12 681.79 2218.18 268.62 2007.56 11900.37 2036.63 944.16 264.13 30716.85 159078.35

13

LIC Grand Total

189795.20 Data Source: IRDA journal, April 2004

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Analysis of Premiums by Line of Business
Prem ium U/N By Private Players Upto Feb. 2004
A M P SA N M A R A V IV A SB I IC IC I P R UD E N T IA L A LLIA N Z B A JA J M E T LIF E H D F C ST A N D A R D IN G VYSYA M A X N EW YOR K B IR LA S UN LIF E OM KO T A K T A T A A IG

Premium Per Policy For Private Players
AMP SANMAR AVIVA SBI ICICI PRUDENTIAL ALLIANZ BAJAJ MET LIFE HDFC STANDARD ING VYSYA MAX NEW YORK BIRLA SUNLIFE OM KOTAK TATA AIG

0

20000

40000

60000

80000

0

5000 10000 15000 20000 25000

Data Source: IRDA journal, April 2004

Individual Business Analysis of individual business statistics reveals that LIC accounted for 87.22 % of the business in terms of premium and 93.75 % in terms of policies. As against this, the private insurers captured 12.78 % of the premium and 6.25 % of the policies. The only public sector life insurer LIC, with more than 87% market share, is leading the life insurance market followed by ICICI Prudential and Birla Sun life in terms of premium underwritten till February 2004, as the above graph shows. LIC taking advantage of its large and well established distribution network is being able to lead the pack. However, the scenario changes dramatically when the premium underwritten per policy is taken into consideration. As the above graph for Premium Underwritten Per policy indicates, its Birla Sun life who is underwriting maximum premium per policy and not LIC, which is way behind at the second last position, or ICICI Prudential, which is at the second position. Birla Sun life has underwritten, on an average, Rs 22050 per policy in first eleven months of FY 2003-04 followed by SBI Life, OM Kotak and ICICI Prudential with underwritten premium of about Rs 19,323, Rs 17,882 and Rs 16,949 per policy respectively. These figures

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suggest that although LIC is way ahead of any other life insurer in India in terms of number of policies sold and the amount of premium underwritten but it is behind the private life insurers in terms of premium collected per policy, which stands only at Rs 5879 for first eleven months of FY 2003-04. It means though the private players like Birla Sun life, ICICI Pru and SBI Life, who have started their business only 3 years ago, they are underwriting more premium per policy sold than LIC suggesting higher profitability in long run. This fact clearly indicates that although LIC, who has operated as a monopolist in Indian life insurance market for 50 years, is currently having major market share in terms of premium underwritten will struggle to protect its leadership in long run if the above trend continues. Group Business
Premiums U/W Under Group Scheme Met Life MaxNew OmKotak Aviva Birla ICICI HDFC Tata SBI Life AMP ING Allianz 0.00 100.00 200.00 300.00 400.00 500.00 LIC Met Life MaxNew OmKotak Aviva Birla ICICI HDFC Tata SBI Life AMP ING Allianz Premium Per Life Under Group Scheme

Data Source: IRDA journal, February 2004

In terms of group business, LIC captured 93.41% of the premium and 93.84 % of the policies. The twelve private insurers captured 6.59% of the premium business and 6.26 % of the policies underwritten for group. Among private players, Birla Sun life has underwritten maximum premium of around Rs 435 million and has covered maximum lives, around 0.02 million lives, followed by SBI life, who has underwritten around Rs 433 million as premium and has covered around 0.04 million lives under group scheme. These figures mean that if the premium underwritten per life is taken as criteria to measure the performance then the above graph indicates that LIC is underwriting maximum premium per life of around Rs 7488 followed by Birla Sun life and Tata Aig with around Rs 2890 and Rs 1612 premium respectively. It clearly suggests that the private players with Birla Sun life in particular is taking the lead in terms of premium generated from group insurance business. Higher
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Industry Insight- Indian Life Insurance

premium per life in group business means that the operating costs are less because costs incurred when underwriting group policies in less than that of the underwriting individual policies. Higher premium per life in group business also means that the private players are ready to underwrite greater risks by charging higher premiums.

TRENDS AND STRATEGIES
Reaching anywhere near LIC's vast network, which was built over decades, was extremely tough for the new players. Hence, private insurers are adopting aggressive advertising and promotional measures and use hitherto untried distribution channels. insurers take market share away from LIC. New products, innovative distribution, and better use of technology are helping the new breed of private life

Innovative Products
The new players have also introduced a wider range of products, along with more needbased selling techniques. Most companies are offering a choice of riders, covering benefits such as accidental death, critical illness, term, waiver of premium, total and permanent disability, paid-up additions, guaranteed insurability and spouse's insurance. Several of the new players have already launched unit-linked products, for example:
• • •

Birla Sun Life - unit-linked incorporating certain guarantees ICICI Prudential - unit-linked Old Mutual Kotak - unitized with profits

Today along with the traditional whole life insurance, the consumer also has a choice of term, group, child endowment, pension products from the basket available with the private players and LIC along with riders. Insurance is now treated as a protection-cum-savings product rather than a tool for tax savings only. The focus of the new players has been on need-based selling of life insurance, which allows integration of assets, liabilities, fund inflows and outflows and reconcile them with important life events such as children's education, marriages, death, disability, critical illness and retirement.

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Industry Insight- Indian Life Insurance

Distribution Channels
In the present day scenario, traditional distribution channels for product lines are being continuously replaced by unconventional methods of distribution. The emergence of alternative distribution channels has significantly changed the way insurance products are now distributed. The latest trend is not to restrict to a single mode of distribution like agents but to utilize a combination of distribution channels. These include the internet led channels, company-led channels, bank-led channels and agent-led channels. To minimize cost, the companies are tying up with established financial services companies and using their distribution network instead of setting up their own network. The various distribution channels are: Agents: Traditionally, tied agents were the single channel through which insurance policies were sold. Insurance agents would visit prospective and existing customer’s homes and places of business to market new products and provide service claims. But this has its limitations – like the number of people that a single agent could reach was limited. Today tied agents still contribute the maximum business, but the manner in which they approach customers has changed significantly. Now, the agents are more educated and more professional and are able to guide customers much better about the product that would best suit their needs. Bancassurance: With over a billion people in India, mass marketing may be profitable and cost-effective for gaining market share. Bancassurance is an instant channel to reach out to a large customer base through the wide spread network of branches. Bancassurance is emerging to be a viable solution to mass selling of insurance products. This channel brings insurance products right at the branch counters for the benefit of millions of bank customers and convenience and transparency are the driving factors along with lower premium rates.

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Industry Insight- Indian Life Insurance

Category I II III IV

Type of broker Direct General Insurance Direct Life Insurance Reinsurance broker Composite broker

Min. Capital required (in lakhs) 50 50 200 250

Brokers: Insurance brokers are organizations who assess the complete insurance needs of the clients and advice the best option. According to IRDA’s regulation, there are four categories of brokers with varying minimum capital requirement. The minimum capital requirement for each of the categories has been set at these levels to ensure the quality of brokers coming into the markets and therefore ensures the quality of service provided. Moreover, brokers are not tied to any particular insurance company; therefore the broker will be able to provide advice about the best product in the market, which suits the client’s needs the best. E-insurance: The emerging technology also has given way for new channels of distribution, one of them being the internet. Selling on the internet reduces the distribution costs of the insurer to a large extent and is also a convenient channel of distribution to the customers. Insurance products by their very nature are based on the need and capital availability of the customer and hence are bought on advice and requires after sales service. Life insurance buyers prefer to have personal interaction, and opt for reliability. But as the insurance awareness is rising, insurance is slowly becoming a commodity, which is making it easier for the companies to transact their business through the net. Moover standard policies like the term insurance, mediclaim policies, vehicle insurance etc can be sold through the internet. Therefore, today the companies are actively pursuing new IT initiatives. Direct Marketing: Direct marketing is another channel through which a company can reach a large population. Typically, direct mail or telemarketing is used. It is important to target the right customer with the right affinity and message. For example, a high-income

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Industry Insight- Indian Life Insurance

person may be interested in a whole of life product while a rural farmer may be interested in protecting the family’s assets. The ability to data mine is very important.

Innovative Marketing Efforts
Insurance companies are trying hard to increase the market share. They are spending a lot on the advertisements to capture the major pie of the share. They are using all kinds of channels of marketing from newspapers to television to insurance agents and direct mailers. A severe battle has started among the Indian insurance companies to make one's own brand win over the other. The private companies are focusing their campaigns primarily on building an image of trustworthiness and reliability for themselves. Secondly, their advertisements are focused on insurance as an investment option and not a mere tax saving tool. Most of these advertisements carried messages like the family's happiness, human bonding, etc, with underlying importance on the security that insurance could provide.

In addition to TV commercials, the private insurance companies are trying to make their presence felt by organizing blood donation camps, contests and sponsoring various events. Sponsoring plays and events like these gives them high-quality attentiveness of the customers. These may not directly show the way to the sales, but certainly gives a better visibility. It is all about building relationships with corporate agents and customers. Companies’ are planning all kinds of action that would produce awareness about the company and its policies and `leads' (interest by a prospective customer) and converting the same into its customers. For e.g. they are offering wide range of health-related products, health and fitness equipment and membership in gyms, health resorts and clinics, development of the punch lines used by private insurance players which are consistently trying to associate positive emotions with insurance products.

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Industry Insight- Indian Life Insurance

ISSUES AND CHALLENGES
Lack of Adequate Data
Lack of adequate data has become a serious roadblock in the way of the companies’ life and health insurance schemes. The problem being faced by the insurance industry is the increasing expectation of life. There has always been an improvement in the longevity in the developed and developing countries. As of now, there is no study based on any experience in India that indicates the level of improvement in mortality at the higher ages. That is one of the risks that the industry is facing. The life insurance players are not in a position to ascertain as to how to make provision for the improvements in the mortality. These uncertainties are preventing them from designing innovative products and aggressively tapping the market. At present insurers are left with the option of depending on the data currently available from abroad. But the problem is that the experience abroad may not match that of India. While the public sector insurance players, who had a monopoly over the Indian insurance industry all these days, were enjoying availability of such data, the private players feel they were deprived of access to such data.

Falling Interest Rates
With decreasing interest rate scenario no insurance company is in a position to give any kind of guarantee for pensions. When the insurance companies announce the pension rates, there would an implicit guarantee involved. The problem today is that owing to falling interest rates, no player is able to guess rightly as to what could be the interest scenario in the time to come.

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Industry Insight- Indian Life Insurance

Ambiguity of Role of Intermediaries
It has been recognized that the intermediaries play a very important role in insurance business. But lack of clarity on the role of intermediaries, such as brokers, is identified to be one of the hindering factors for their development. There are other factors such as restriction on foreign equity for broker’s ventures, notification of IRDA withdrawing five per cent discount on the premium for brokers for certain segment of policyholders, nonpayment of brokerage on business originating from public sector units (PSU) etc., which are hindering the development of this important channel of distribution. There is a need for measures to be initiated by the regulators to develop a strong system of intermediaries including corporate agents, third-party administrators, surveyors, loss assessors and brokers. Though India has a good quality of talent the Insurance industry is unable to turn people into full time professionals especially because of low commission payment. The limit on commissions and cost must be raised to enable agents to earn a decent income through their profession.

Unfavorable Tax Regime
Life insurance is not a felt necessity in India. Its purchase is driven by tax rebate and loan facilities. The maturity proceeds from life insurance policies were tax exempt till the financial year 2002-2003. However, in the budget it is proposed to restrict this exemption to policies where the premium paid in any one year is less than the 20% of the sum assured. This effectively implies that the maturity proceeds under the single premium savings policies may be taxed. This is making the single premium savings policies unattractive to consumers, thereby adversely affecting the margins of the insurers. The premium from single premium policies of LIC fell from Rs 50.00 bn in fiscal 2002 to Rs 30.00 bn in 2002-03. The increase of service tax to 8 per cent in the Union Budget 2003-04 has an adverse impact on the insurance industry. The increase in service tax will make canvassing insurance a less attractive career — again a blow to the fledgling industry. The service tax on the agents will

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lead to them demanding greater commissions, thereby increasing the cost to the insurers. The service tax on not just the insurers but also the intermediaries in the value chain will lead to not just double but multiple taxation.

FDI Cap
With the volume of business growing for insurance companies the foreign equity cap of 26 per cent in insurance joint ventures continues to be an issue of concern. The 26 per cent cap on the foreign investment restrains the development of the insurance sector, as the initial expenses of setting up the business and processes will require a greater amount of capital, which the foreign equity provider will be more than capable to provide. Raising the FDI cap to 49 per cent will help mitigate this strain which the private insurers are facing. It will also help bring in more foreign funds into the economy. Inadequate capital to underwrite high value customers is forcing private players not to focus on sectors where the claims ratio is low.

Restrictive Investment Guidelines
As per the investment rules established by IRDA upto 65 per cent of insurance funds have to be invested in primarily in government and government-backed securities, which are lowyield in nature. This restrictions makes the insurance companies lose an opportunity to invest in a more productive and high-return industrial sector.

Health Insurance
Health of any person is always related to his / her life history and age. But the dilemma in India is that health insurance comes under non-life insurance industry and only non-life insurers can offer health insurance products separately while life insurers can only offer health insurance products as riders with their other policies. Though almost all the prerequisites for getting health insurance is same as of life insurance and already life insurers has a extensive data-base about their customers still they are not allowed to launch a separate health insurance product. Life insurers can understand the needs of the customers and can assess the risk better and therefore they are in a better position to come up with more innovative and customized health insurance products in future. Hence IRDA should allow

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the life insurers too to operate in health insurance market just like non-life players are, without any discrimination.

Pension Funds
To protect the social security system India needs to evolve a more mature and developed pension system. Presently, the pension fund market comprises over 240 million investors and funds worth $40 billion when compared to the entire life industry. For pension to be a success in India there is a need to spread its reach to metros, cities, towns, district headquarters and villages. This can only happen with the help of life insurers with their one million agents and their Bancassurance partners. The government has also to give some flexibility to allow the life insurance companies to participate in the accumulation phase and also remove the restriction on number of players in the market. In many parts of the world, life insurance companies are the main mode for saving for a pension. Thus there is a need for the Government to allow life insurance players in the market to operate freely and competitively in the pension market.

CRITICAL SUCCESS FACTORS
Product Innovation- With growing awareness customers are now looking at Insurance as a complete financial solution offering stable returns together with total protection. Insurers will need to constantly innovate in terms of product development to meet ever changing consumer needs. Understanding the customer better will enable Insurance companies to design appropriate products, determine the correct price and increase profitability. Pricing of the life insurance products in India are based on the actuarial tables (which are over 50 years old). There is a need for more research in this area so that the products are better priced. Channels of Distribution- Insurers should innovate and find new methods of delivering the products to customers. Corporate agency, brokerage, Banc assurance, e-insurance, etc are some of the channels which can be tapped by the insurers to reach the appropriate market segments. Innovative and right methods of distribution would help in capturing maximum market share to build brand equity, building strong and effective customer relationships and

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Industry Insight- Indian Life Insurance

also to impart cost effective customer service. For example modes of distribution such as internet, telemarketing and direct mailers, also selling insurance through bank branches will be one of the fastest emerging distribution modes to the upmarket segment i.e. the population which consists of new household configurations, new consumer expectations. Direct selling through company sales force will remain the primary distribution mode for retiring and aging population. Rural population can be tapped through rural based bank branches, the village panchayats or the ‘gram sevaks’ and different village based NGO’s that have deep network and trust among village population. Customer Education- A very large number of people are not well informed about the intangible benefits of life insurance. Moreover life insurance products in Asia are purchased as a tax saving or investment instruments rather than as a risk planning instrument. Educating the people of insurance as a risk planning tool is a critical factor for the success of the Industry. Customer service- In the present competitive scenario, a key differentiator would be professional customer service in terms of quality of advice on the product choice along with servicing of the policy. Servicing should focus on enhancing the customer experience and maximizing customer convenience. Effective CRM system would create sustainable competitive advantage and build long lasting relationship. Investment Management- The biggest challenge for an Insurer would be to provide returns comparable to other financial instruments. With recession in the global economy and falling interest rates the problem is further aggravated. Insurers have to follow prudent underwriting practices and efficiently cut down management and administrative expenses. Insurers must also follow best investment practices and have a strong Asset management Company to maximize returns. Untapped market Segments- Semi urban and rural areas offer huge potential particularly for the life insurance business and it is very important to tap this customer base. However,

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Industry Insight- Indian Life Insurance

much of the demand may not be reachable because of large distances or high costs relative to returns. Training and Development of agents/brokers- Agents/ brokers act as an intermediary between the insurance company and the customers. Today’s agents/ brokers have a professional outlook, are more tech savvy, and are in position to educate customers on the need for insurance in life. Ask for any information and it will be supported with necessary calculations and analysis and presented in a manner understood by common man. Technology- The impressive technological progress in the country, especially in the telecommunication field, is paving way for financial services to be available at the customer's doorsteps and at several convenient points of sale. It is now possible to pay insurance premium from any small town in the country through electronic transfer at a low cost. Soon all customers will be able to transfer insurance payment through any ATM terminal anywhere in the country. Regulatory Environment- The development of the any industry will depend on the nature and the quality of regulation. A regulator while protecting the interests of the consumer ensures efficiency of operations, transparency and fair play. A regulator also has to ensure stability and solvency of the industry. In insurance a favourable regulatory policy with regard to the tariffs, restrictions of foreign participation, etc would help in the growth of the industry.

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Industry Insight- Indian Life Insurance

FUTURE OUTLOOK
The Indian life insurance market size is dynamic and ever expanding. The growth is dictated by several factors:

Huge Population
India has a huge population. Moreover there is an increase of an estimated 20 million of new population each year. However only eight per cent of the Indian population have insurance policies and most of them are underinsured. Hence the life insurance companies see a double-digit growth in business for the next five years.

Increasing Standard of Living
There has been considerable amount of improvements in economic conditions in India. More and more people are moving continuously into the zone of people with ability to pay premium for a life insurance policy.

Rural Population
Millions of people living in the rural areas do not earn regular income and for families that depend on the irregular wages or income of a sole breadwinner, life insurance is an effective way to provide economic protection and family welfare. Due to improvements in economic conditions more and more people are moving continuously into the zone of people with ability to pay premium for a life insurance policy. The huge untapped market in the rural areas offers huge potential for the Indian life insurers.

Competition
Competition will result in the market to grow beyond current rates and offer additional consumer choice through the introduction of new products, services and price options.

Pension Market
The introduction of a full fledged regulator for the pension fund market in India is set to change the insurance market in the near future. With the setting up of the pension regulatory
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Industry Insight- Indian Life Insurance

the life insurance companies—offering pension funds—will have to report their accounts of pension funds to both IRDA and the new regulator so that the pension funds do not disappear like the US-64 Bonds. At present in India private sector insurance players account for 32% of the entire pension market. All life insurance companies have plans to come out with pension schemes. With increasing life expectancies and decreasing social security the pension fund market has got tremendous growth potential. There has also been an increase in awareness among the general public of the importance of retirement planning and hence there will be a huge demand. In USA the pension market accounts for 49% of the insurance policies sold each year while in India less than 1% of the insurance market is being covered by pension plans leaving the market virtually untapped. Pension funds in India are twice the size of mutual funds and if allowed the freedom to productively invest they can even make a significant contribution to the development of Indian capital markets. There is also going to be great demand for single premium retirement schemes from the large number of VRS volunteers in the country. Overall the insurance sector is growing. Due to all the above factors together with an addition of 20 million people every year the life insurance market growth is expected to grow at 20%.

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Industry Insight- Indian Life Insurance

CONCLUSION
As insurers operate in an increasingly deregulated and liberalized environment, India is poised to experience major changes in its insurance markets. However, despite the liberalization in the insurance sector, nationalised insurance companies are expected to maintain their dominant positions, at least in the foreseeable future. Indian market still has enormous potential and it is expected that there will be enough business for new entrants. For consumers, opening up of the insurance sector will mean new products, better packaging, and improved customer service. Product innovation and channel diversification would gain momentum, in line with the global trend of financial services convergence. For government, insurance, especially life insurance, can substitute for State security programmes. It can thus relieve pressure on social welfare systems and allow individuals to tailor their security programmes to their own preferences. This substitution role is especially valuable, given the growing demand for social security and the increased financial challenges faced by the Indian social insurance system. The future growth areas could be in term assurance, pension and health insurance. In terms of the distribution channels, there is tremendous opportunity with banks and finance companies and by making the channel IT driven. With increased commoditization of insurance products, brand building is going to play a vital role.

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Industry Insight- Indian Life Insurance

ANNEXURE
1. Life Insurers in India Public Sector Life Insurance Corporation of India Private Sector Allianz Bajaj Life Insurance Co. Ltd. AMP Sanmar Assurance Company Limited Birla Sun Life Insurance Co. Ltd. Dabur CGU Life Insurance Company Pvt. Ltd HDFC Standard Life Insurance Co. Ltd. ICICI Prudential Life Insurance Co Ltd. ING Vysya Life Insurance Co. Pvt. Ltd Max NewYork Life Insurance Co. Ltd. MetLife India Insurance Company OM Kotak Mahindra Life Insurance Co. Ltd. SBI Life Insurance Company Ltd. Tata AIG Life Insurance Co. Ltd
Compiled by Cygnus

2. Distribution of financial assets of household sector Category Cash Net deposits Shares and debentures Net claims on Government Insurance funds - Life Insurance funds - Postal Insurance - State Insurance Provident plus pension funds
* Provisional Data Source: RBI Annual Report 2002-03

93-94 12.2. 42.6 13.5 6.3 8.7 8.0 0.2 0.5 16.7

97-98 7.4 46.6 2.9 12.9 11.3 10.6 0.3 0.4 18.8

99-00 00-‘01* 8.7 37.5 7.1 12.1 12.0 11.3 0.3 0.5 18.8 7.1 42. 0 2.5 15.6 13.5 12.9 0.3 0.4 19.3

01-02* 9.5 37.9 2.3 16.8 14.4 13.9 0.2 0.4 19.0

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Industry Insight- Indian Life Insurance

3. Banc assurance tie-ups in India Insurance Company Bank Birla Sun Life Insurance Co. Bank of Rajasthan, Andhra Bank, Citi Bank, Bank of Ltd. Muscat, Development Credit Bank, Deutsche Bank, Catholic Syrian Bank Dabur CGU Life Insurance Canara Bank, Lakshmi Vilas Bank, American Express Company Pvt. Ltd Bank and ABN AMRO Bank HDFC Standard Life Union Bank of India, HDFC Bank Insurance Co. Ltd. ICICI Prudential Life Lord Krishna Bank, ICICI Bank, Bank of India, Citibank, Insurance Co Ltd. Allahabad Bank, Federal Bank, South Indian Bank, and Punjab and Maharashtra Co-operative Bank. Life Insurance Corporation Corporation Bank, Indian Overseas Bank, Centurion of India Bank, Satara District Central Co-operative Bank, Janata Urban Co-operative Bank, Yeotmal Mahila Sahkari Bank, Vijaya Bank, Oriental Bank of Commerce. Met Life India Insurance Co. Karnataka Bank, Dhanalakshmi Bank and J&K Bank Ltd. SBI Life Insurance Company State Bank of India Ltd. Allianz Bajaj Life Insurance Syndicate Bank. Co. AVIVA Life Insurance Canara Bank, ABN Amro Bank and Laxmi Vilas Bank. Company Pvt. Ltd OM Kotak Mahindra Life Kotak Bank and Dena Bank. Insurance Company Ltd
Data Source: www.bimaonline.com

4. Total World Insurance Premiums Year Nonlife * 1992 697.5 1993 792.1 1994 846.6 1995 906.7 1996 909.1 1997 896.8 1998 891.3 1999 912.7 2000 922.4 2001 969.01 2002 1090.8
*Non life includes accident and health insurance Data Source: Sigma World Insurance 2002 No. 8/2003

Life 768.4 1,010.4 1,121.1 1,236.6 1,196.7 1,231.7 1,275.0 1,424.2 1,521.2 1439.18 1536.1

Total 1,465.9 1,802.7 1,967.7 2,143.4 2,105.8 2,128.6 2,166.4 2,336.9 2,443.6 2408.25 2626.9

© Cygnus Economic & Business Research 2004

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Industry Insight- Indian Life Insurance

5. Top 10 global life/health insurance companies in 2001 Rank 1 2 3 4 5 6 7 8 9 10 Company ING Group AXA Nippon Life Insurance Aviva Assicurazioni Generali Dai-ichi Mutual Life Insurance Prudential Asahi Mutual Life Insurance Sumitomo Life Insurance MetLife Revenues (US Country $ Million) $82,999.10 Netherlands 65,579.90 France 63,827.20 Japan 52,317.60 United Kingdom 51,394.30 Italy 43,145.20 Japan 35,821.20 United Kingdom 33,142.80 Japan 32,548.50 Japan 31,928.00 United States

Data Source: www.financialservicesfacts.org

© Cygnus Economic & Business Research 2004

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Industry Insight- Indian Life Insurance

BIBLIOGRAPHY
Sites www.irdaindia.org www.bimaonline.com www.irmi.com www.iii.org/media/ (Insurance Information Institute) www.financialservicesfacts.org www3.ambest.com www.insuremagic.com www.asaininsurancereview.com www.worldinsurancenews.com www.insurance.about.com Magazines Asia Insurance Post Insurance Plus

© Cygnus Economic & Business Research 2004

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