INDIAN INSURANCE INDUSTRY ANALYSIS
Content
INDIAN INSURANCE INDUSTRY
[INDUSTRY ANALYSIS]
26TH JULY 2010, MONDAY
CONTENTS
SR. No. 1 2. 3. 4. 5.
PARTICULARS INTRODUCTION INSURANCE STRUCTURE OF INDIAN INSURANCE INDUSTRY SIZE OF THE INDIAN INSURANCE INDUSTRY STRATEGIC GROUPS INSURANCE INDUSTRY SEGMENTATION: PRODUCTS CUSTOMERS INTERNATIONAL OVERVIEW NEW ENTRANTS IN THE RECENT PAST TOP FIVE PLAYERS IN THE INDUSTRY MAJOR POLICY CHANGES IN THE RECENT PAST EXTERNAL ANALYSIS: PEST ANALYSIS PORTER S FIVE FORCES MODEL EXTERNAL ANALYSIS: SWOT ANALYSIS PROJECTED FUTURE TRENDS CONCLUSION BIBLIOGRAPHY
PAGE NO. 3 9 10 14 15
6. 7. 8. 9. 10. 11. 12. 13. 14. 15.
23 24 26 47 51 77 84 86 88 89
2
INTRODUCTION ± INSURANCE
In India, insurance has a deep-rooted history. It finds mention in the writings of Manu ( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya
(Arthasastra ). The writings talk in terms of pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine. This was probably a pre-cursor to modern day insurance. Ancient Indian history has preserved the earliest traces of insurance in the form of marine trade loans and carriers¶ contracts. Insurance in India has evolved over time heavily drawing from other countries, England in particular.
1818 saw the advent of life insurance business in India with the establishment of the Oriental Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the Madras Equitable had begun transacting life insurance business in the Madras Presidency. 1870 saw the enactment of the British Insurance Act and in the last three decades of the nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were started in the Bombay Residency. This era, however, was dominated by foreign insurance offices which did good business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard comp etition from the foreign companies.
In 1914, the Government of India started publishing returns of Insurance Companies in India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life business. In 1928, the Indian Insurance Companies Act was enacted to enable the Government to collect statistical information about both life and non-life business transacted in India by Indian
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and foreign insurers including provident insurance societies. In 1938, with a view to protecting the interest of the Insurance public, the earlier legislation was consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for effective control over the activities of insurers.
The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a large number of insurance companies and the level of competition was high. There were also allegations of unfair trade practices. The Government of India, therefore, decided to nationalize insurance busines s. An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 non -Indian insurers as also 75 provident societies²245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector.
The history of general insurance dates back to the Industrial Revolution in the west and the consequent growth of sea-faring trade and commerce in the 17th century. It came to India as a legacy of British occupation. General Insurance in India has its roots in the establishment of Triton Insurance Company Ltd., in the year 1850 in Calcutta by the British. In 1907, the Indian Mercantile Insurance Ltd, was set up. This was the first company to transact all classes of general insurance business. 1957 saw the formation of the General Insurance Council, a wing of the Insurance Associaton of India. The General Insurance Counc il framed a code of conduct for ensuring fair conduct and sound business practices.
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In 1968, the Insurance Act was amended to regulate investments and set minimum solvency margins. The Tariff Advisory Committee was also set up then.
In 1972 with the passing of the General Insurance Business (Nationalisation) Act, general insurance business was nationalized with effect from 1stJanuary, 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on January 1sst 1973.
This millennium has seen insurance come a full circle in a journey extending to nearly 200 years. The process of re-opening of the sector had begun in the early 1990s and the last decade and more has seen it been opened up substantially. In 1993, the Government set up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms in the insurance sector.The objective was to complement the reforms initiated in the financial sector. The committee submitted its report in 1994 wherein , among other things, it recommended that the private sector be permitted to enter the insurance industry. They stated that foreign companies be allowed to enter by floating Indian companies, preferably a joint venture with Indian partne rs. Following the recommendations of the Malhotra Committee report, in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance customer
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satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market.
The IRDA opened up the market in August 2000 with the invitation for application for registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the power to frame regulations under Section 114A of the Insurance Act, 1938 and has from 2000 onwards framed various regulations ranging from registration of companies for carrying on insurance business to protection of policyholders¶ interests.
In December, 2000, the subsidiaries of the General Insurance Corporation of India were restructured as independent companies and at the same time GIC was converted into a national re -insurer. Parliament passed a bill de-linking the four subsidiaries from GIC in July, 2002.
Today there are 14 general insurance companies including the ECGC and Agriculture Insurance Corporation of India and 14 life insurance companies operating in the country.
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Overview Insurance business is divided into four classes: a) Life Insurance b) Fire c) Marine d) Miscellaneous Insurance.
Life insurers undertake the Life Insurance business; general insurers handle the rest. The business of insurance essentially means defraying risks attached to an activity (including life) and sharing the risks between various entities, both persons and organisations. Insurance companies are important players in financial markets as they collect and invest large amounts of premium in various investment instruments. Insurance offers the following benefits: a) Protection to investors b) Accumulation of savings c) Channelling these savings into sectors needing huge long -term investments.
Insurance companies receive a steady cash stream of premium or contributions to pension plans. Their cash flows are determined on the basis of various actuary studies and model s. Since their liabilities are long-term or contingent in nature, their investments are also long -term and they are able to maintain a healthy liquidity position. Since they offer more than the return on savings in the shape of life cover to the investors, the rate of return guaranteed on their insurance policies is relatively low. Consequently, the need to seek high rates of return on their investments is also low. Since the risk factor in the insurance business is quite high, insurance companies usually i nvest in relatively safer bets such as bonds of GOI, PSUs, state governments, local bodies, corporate houses and mortgages of long-term nature. Lately, insurance companies have also ventured into pension schemes and mutual funds.
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Life insurance constitutes the major share of insurance business. Life insurance depends upon the laws of mortality. Life has to end sooner or later and the claim in respect of life is certain. On the other hand, in case of general insurance, there may never be any claim and the amount cannot be ascertained in advance. Hence, life insurance, besides providing a cover for life of individuals, alsoserves as a good source of savings for the beneficiaries. The life insurance market in India presents several striking features, which appear, for the most part, to be necessary concomitants of the underdeveloped nature of the country¶s economy.
Existences of a large number of life insurance sellers and the narrowness of the life insurance market have been the characteristics peculiar to In dia. The volume of life insurance business annually sold on the Indian life insurance market came on an average to about Rs 160 crore . Most of these policies were sold during the phase of private enterprise, by Indian organisations termed ³insurers´ by the Indian Insurance Act (Act IV of 1938). The term ³insurers´ included´: a) Proprietary Joint Stock Companies b) Mutual Joint Stock Companies c) Partnership firms to which the Indian Partnership Act of 1932 applied d) Co-operative Life Insurance Societies
8
STRUCTURE OF INDAIN INSURANCE INDUSTRY
9
SIZE OF THE INDIAN INSURANCE INDUSTRY
The Insurance sector is a colossal one and is growing at a speedy rate of 1520%. Together with banking services , Insurance services add about 7% to the country¶s GDP. Total value of the Indian insurance market(2004 -05) is
estimated at Rs. 450 billion (US$10 billion). The funds available with the state-owned Life Insurance Corporation (LIC) for investments are 8% of GDP.
There are presently 12 general insurance c ompanies with four public sector companies and eight private insurers. According to estimates, private insurance companies collectively have a 10% share of the non-life insurance market.
The US$ 41-billion Indian life insurance industry is considered the fifth largest life insurance market, and growing at a rapid pace of 32 -34 per cent annually, according to the Life Insurance Council.
Life Insurance Corporation of India (LIC) registered an 83 per cent increase in new business income in March 2010, while private players posted a 47 per cent growth in new business premium .
Moreover, according to IRDA, insurers sold 10.55 million new policies in 2009 10 with LIC selling 8.52 million and private companies 2.03 million policies. At the end of March 2010, LIC held 65 per cent market share in terms of new business income collection with the private sector contributing the remaining 35 per cent share in 2009-10. According to IRDA, total premium collected in 2009 -10 was US$ 24.64 billion, an increase of 25.46 per ce nt over US$ 19.64 billion collected in 2008 -09.
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A growth of 18 per cent is expected in total premium income and is likely to cross the US$ 64.93 billion mark, according to B Mathur, Secretary General, Life Insurance Council.
General Insurance
Vehicle financing firm, Magma Fincorp has applied to IRDA for approval and expects clearance in 2010. The firm is entering the general insurance business in a joint venture with Germany -based company HDI-Gerling International Holding AG. According to data released by IRDA, the general insurance industry recorded
13.42 per cent growth in gross premium collected during 2009 -10. The
industry collected gross premium of US$ 7.84 billion in 2009 -10 compared with US$ 6.91 billion in 2008-09. The public sector players posted 13.85 per cent growth in gross premium in 2009-10. At the same time, private players recorded a 12.82 per cent increase in gross premium till March 2010. During April-May 2010, non-life insurers mopped up US$ 1.59 billion against US$ 1.34 billion in the previous year, registering an increase of 19 per cent according to IRDA data. The four state-run insurers fared better than their private counterparts, with New India Insurance collecting the maximum premium of US$ 294.5 million in April and May 2010, compared to US$ 253.15 million in the previous year, growing by 16.34 per cent. According to the IRDA's Summary Reports of Motor Data of Public and Private Sector Insurers - 2008-09, nearly 30 million vehicle policies were issued and a total premium worth US$ 1.83 billion was collected.
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Health nsurance The Indi n health insurance market has emerged as a new and lucrati e growth avenue for both the existing players as well as the new entrants. According to a latest research report "Booming Health Insurance in India" by research firm R C released in April 2010,all emerging trends including the key factors
driving the market growth. Furthermore, the report also identifies what could be the possible growth areas for expansion and gives a detailed overview of the competitive landscape. The Indian health insurance market has continued to post record growth in the last two fiscals (2008-09 and 2009-10). Moreover, as per the R C estimates, the health insurance premium is expected t gr at
a c mpound annual growth rate (CAGR) of over 25 per cent for the period spanning from 2009-10 to 2013-14.
A well-developed and evolved insurance sector is a boon for economic development as it provides long- term funds for infrastructure development at the same time strengthening the risk taking ability of the country.
Current Position:
Insured
33%
yes
67%
no
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Awareness of Different Schemes:
Awareness
22%
yes 78%
no
Reasons for taking Insurance:
120% 100% 80% 60% 40% 20% 0%
Busine ssman
rofes sional
65%
Studen t
5%
ouse wife
22%
ax Benefit 32% Flexible 0 00% ess isk 11% ide cceptance 10% Security 42% igh eturn 5%
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2 00% 15% 5% 13% 0%
0 00% 2% 12% 75% 6%
5 00% 12% 18% 31% 12%
STRATEGIC GROUPS ± INSURANCE INDUSTRY
Insurance Business
LIFE INSURANCE
Life Insurance Corporation of India Bajaj Allianz Life Insurance Company Limited . Birla Sun Life Insurance Co. Ltd ICICI Prudential Life Insurance Co. Ltd Reliance Life Insurance Company Limited. etc.
GENERAL INSURANCE
The Oriental Insurance Co. Ltd. Reliance General Insurance Co. Ltd. Bajaj Allianz General Insurance Co. Ltd. ICICI Lombard General Insurance Co. Ltd. IFFCO Tokio General Insurance Co. Ltd. etc.
y FIRE INSURANCE y MARINE INSURANCE y MISCELLANEOUS INSURANCE
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SIZE OF THE INDIAN INSURANCE INDUSTRY
The Insurance industry in India has been progressing at a rapid pace since opening up of the industry in 2000. Indian domestic insurance market would touch around US$ 60.5 Billion in the year 2010 from existing size of about US$ 10.2 billion about 500% hike. According to the Insurance Regulatory and Development Authority (IRDA), new business premium income from April 2006 to February 2007 amounted to INR 579.38 billion (US$13.18 billion), registering an impressive 120% growth over the same period last year. India¶s life insurance premium as a percentage of GDP is currently estimated at 1.8% against 5.2% in US, 6.5% in UK and about 8% in South Korea. Rural and semi-urban India will contribute US $35 billion to the Indian insurance industry by 2010, including US $20 billion by way of life insurance and the rest US $15 billion through non -life insurance schemes.
The Insurance industry graph is definitely ascending. Distribution accounts for the largest element in insurers cost and affects profitability. The size of the country combined with problems of connectivity in the rural areas, makes insurance selling in India a difficult proposition. The distribution capabilities strongly influence product design in insurance. The distribution channels have a direct impact on the insurer¶s market image. Emergence of alternative channels such as Bancassurance and Internet is reshaping the insurance
industry. India with a population of more than a billion people offers unlimited growth potential.
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SEGME TATION OF CUSTOMERS(AGE WISE) AND VARIOUS PRODUCTS OFFERED BY INSURANCE COMPANIES
100% 90% 80%
11%
13% 28% 42%
70% 60%
0%
44%
40% 34%
12%
40% 30% 17% 42% 32%
20% 10% 0%
38% 21%
14%
16
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di al n uran
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3%
9%
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du ati n
tir m nt n uran if n uran
DYNAMICS OF THE INSURANCE INDUSTRY
Changing Customer Expectations in Insurance Sector ( PRE TO POST liberalization) :
Pre Liberalisation Post Liberalisation
Motivating Factor(s) for Considering Insurance
Security Savings Tax Rebate
43% 14% 43%
Security Savings* Tax Rebate
50% 34% 16%
* children¶s education, daughter¶s marriage, retirement plan
Sources of Information on Insurance & Product Awareness
Friends, Colleagues, Relatives and Agent Low awareness of several insurance products
Additionally from direct mailers, consumer
meets, internet & media (mass media & outdoor)
due to poor communication in spite of availability
Rising level of awareness of new products of both LIC and private companies
Choice of First Policy
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Money Back Endowment Whole Life
60% 40% 0%
Money Back Endowment Whole Life
42% 48% 10%
This change in product-mix reflects maturing of the insurance customer
Pre Purchase Process LIFE Pre Liberalisation Post Liberalisation
Motivating Factor(s) for Considering Insurance Security Savings Tax Rebate 43% 14% 43% Security Savings* Tax Rebate 50% 34% 16%
* children¶s education, daughter¶s marriage, retirement plan Sources of Information on Insurance & Product Awareness Friends, Colleagues, Relatives and Agent Low awareness of several insurance products Additionally from direct mailers, consumer
meets, internet & media (mass media & outdoor) Rising level of awareness of new products of both LIC and private companies
due to poor communication in spite of availability
Choice of First Policy
18
Money Back Endowment Whole Life
60% 40% 0%
Money Back Endowment Whole Life
42% 48% 10%
This change in product-mix reflects maturing of the insurance customer
Purchase Process LIFE Pre Liberalisation Post Liberalisation
Discount Offering Practices No. of customers getting discount 50% Rate of discount 25%-50% of first year premium Customers getting discount 33% (highest in Delhi) Rate of discount More or less same
Policy Delivery Mode Mode
- Registered post for LIC, hand delivered by agent in 23% cases Time taken 0% 65% 35%
- Registered post for LIC - Courier for private companies In both cases, policy comes in attractive, protective plastic jacket Time taken Private Co Up to 1 week 85% Up to one month LIC
Up to 1 week One month > 1 month
5%
77%
19
15% > 1 month 0% 18%
Post Purchase Process : LIFE
Pre Liberalisation
Post Liberalisation
Correspondence (other than premium notice) from Company / Agent
Generally no correspondence from either
company or agent except for late premium payment reminder from company
Mailers from both private companies & LIC on
products & services, greeting cards on birthdays, anniversary and new year
Agent maintained informal contact with close customers
Phone calls from private company call centres Agent in regular contact for offering new products
Delay in Premium Payment
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Incidence of delay high 30%
Incidence of delay low 15%
(due to irregular receipt of premium notice from company / reminder from agent)
(more regular receipt of premium notice from company / reminder from agent)
Changing Customer Expectations ± LIFE
Role of IRDA Educate public on regulatory safeguards, investment guidelines and plough back of profits (several people had expressed concern about security of their money, credibility of private insurance company¶s investment of funds in foreign markets and repatriation of profits to foreign countries) Inform public on Social and Rural obligations of private players (several people believed that only LIC was responsible for insuring the poor)
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Changing Trends in Savings Pattern:
Pre Liberalisation
Saving Instruments Respondents Insurance Bank Deposit PPF NSC Shares Post office Bonds Gold TOTAL % of 23 28 19 12 7 7 0 4_ 100
Post Liberalisation
Saving Instruments Respondents Insurance Bank Deposit PPF NSC Shares Post office Bonds Gold TOTAL % of 33 44 8 0 3 3 9 0_ 100
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International Overview
n the 19th uly 2010 the ndian based ompany arsen & oubro ( & ) re eived final approval from ndian insuran e regulators to start ommen ing business through it s subsidiary & nsuran e he newly formed general insurer is supported by & valued at S$9 8 billion he ndian onglomerate & will have 100% equity in & nsuran e
" " ! " # "
arsen & oubro is one the largest private se tor onglomerates in ndia and thede ision to enter into the insuran e industry omes at a time when & aim to strengthen their position in the ndian finan ial servi e industry lready established in the non-banking finan ial se tor with & Finan e td the move into the general insuran e se tor meets & s aim to diversify the ompany s finan ial servi es offerings and reate a bigger orporate presen e in the ndian finan ial market ith health insuran e as the key fo us of its entry to the insuran e business the ompany plans to emphasize the importan e of their offerings in this area s su h the long term aim for & nsuran e is the development of its own health insuran e laim management team
" $ " ! " ! $ " %
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NEW ENTRANTS IN THE RECENT PAST
Indian Insurance Industry in the year 2007-2008, has 5 new entrants:
LIFE INSURERS:
I. II.
Future Generali India Life Insurance Company Limited IDBI Fortis Life Insurance Company Ltd.
GENERAL INSURERS:
1. Apollo Munich Health Insurance Company Limited 2. Future Generali India Insurance Company Limited 3. Universal Sompo General Insurance Company Ltd.
Indian Insurance Industry in the year 2008-2009, so far has 5 new entrants in life and 3 new entrant in general:
LIFE INSURERS:
I. II. III. IV. V.
Canara HSBC Oriental Bank of Commerce Life Insurance Company Ltd. Aegon Religare Life Insurance Company Ltd. DLF Pramerica Life Insurance Company Ltd. Star Union Dai-ichi Life Insurance Co. Ltd., IndiaFirst Life Insurance Company Ltd.
GENERAL INSURERS :
1. Shriram General Insurance Company Limited, 2. Bharti Axa General Insurance Company Ltd. 3. Raheja QBE General Insurance Co. Ltd
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Indian Insurance Industry in the year 2009 -20010: Max Bupa Health Insurance, the India-based joint venture between Max India Ltd. and Bupa, has launched its business and revealed its first product on April 29th, 2010.
Max Bupa Health Insurance¶s first product, named Heartbeat, which is targeted at Indian families, providing health insurance coverage for infants, senior citizens and all the family members in between. The company currently has an initial capital base of Rs 1.51 billion, or Rs 151 crore (US$ 33.89 million), with intentions to raise that number up to Rs 700 750 crore (US$ 157-168 million) in five years time.
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TOP 5 PLAYERS IN THE INDIAN INSURANCE INDUSTRY
Top five players in the Indian Insurance Industry are:
1. Life Insurance Corporation of India 2. ICICI Prudential Life Insurance Co Ltd 3. Bajaj Allianz Life Insurance Co Ltd 4. SBI Life Insurance Co Ltd 5. Reliance Life Insurance Co Ltd
Market Share of Insurance Companies In India
2 96%
Life nsuran e orporation of ndia
rudential Life nsuran e o
98%
%
'
Ltd
64%
elian e Life nsuran e o Ltd
thers
26
5 7
5 7
4
4
7
4
8 93%
&
SB Life nsuran e o Ltd
5 7
4
8
6 98%
Bajaj llianz Life nsuran e o Ltd
5 7
4
3 2
6 45454 9
1
@
1
'00
()&(
'
I. Life Insurance Corporation of India
LIC still remains the largest life insurance company accounting for 64% market share. Its share, however, has dropped from 74% a year before, mainly owing to entry of private players with innovative products and better sales force.
LIC experienced growth of only 5% during 2007 -08 in new business premium. It had an estimated 1.1 million licensed agents, with the private insurers adding another 900,000.
LIC witnessed decline in sales by 24% for new business premium for the first four months for the current financial year.
Total sales stood at Rs 10,797.1 crore during April-July as against new sales of Rs 14,186.04 crore in the corresponding period last financial year.
This is was mainly due to slowdown in economy and crash of stock market. Also, private companies are eating the share of L IC by introducing innovative products.
Products in different market segment: 1. Insurance Plans:
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As individuals it is inherent to differ. Each individuals insurance needs and requirements are different from that of the others. LICs Insurance Plans are policies that talk to you individually and give you the most suitable options that can fit your requirement.
Jeevan Anurag CDA Endowment Vesting At 21 CDA Endowment Vesting At 18 Jeevan Kishore Child Career Plan Child Fortune Plus
Komal Jeevan Marriage Endowment Or Educational Annuity Plan Jeevan Chhaya Child Future Plan
Jeevan Aadhar Jeevan Vishwas
The Endowment Assurance Policy The Endowment Assurance Policy-Limited Payment Jeevan Mitra(Double Cover Endowment Plan) Jeevan Mitra(Triple Cover Endowment Plan) Jeevan Anand New Janaraksha Plan
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Jeevan Amrit
Jeevan Shree-I Jeevan Pramukh
The Money Back Policy-20 Years The Money Back Policy-25 Years Jeevan Surabhi-15 Years Jeevan Surabhi-20 Years Jeevan Surabhi-25 Years Bima Bachat
Jeevan Bharati - I
The Whole Life Policy The Whole Life Policy- Limited Payment The Whole Life Policy- Single Premium Jeevan Anand Jeevan Tarang
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Two Year Temporary Assurance Policy The Convertible Term Assurance Policy Anmol Jeevan-I Amulya Jeevan-I
Jeevan Saathi Plus Jeevan Saathi
2. Pension Plans:
Pension Plans are Individual Plans that gaze into your future and foresee financial stability during your old age. These policies are most suited for senior citizens and those planning a secure future, so that you never give up on the best things in life.
Market Plus I Jeevan Nidhi Jeevan Akshay-VI New Jeevan Dhara-I
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New Jeevan Suraksha-I
3. Unit Plans:
Unit plans are investment plans for those who realise the worth of hard -earned money. These plans help you see your savings yield rich benefits and help you save tax even if you don't have consistent income.
Market Plus I Profit Plus Money Plus-I Child Fortune Plus Jeevan Saathi Plus
4. Pension Plan
LIC¶s Special Plans are not plans but opportunities that knock on your door once in a lifetime. These plans are a perfect blend of insurance, investment and a lifetime of happiness!
New Bima Gold
Health Protection Plus
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Bima Nivesh 2005 Jeevan Saral
Jeevan Madhur Jeevan Mangal
5. Group Scheme:
Group Insurance Scheme is life insurance protection to groups of people. This scheme is ideal for employers, associations, societies etc. and allows you to enjoy group benefits at really low costs.
Group LIC's Superannuation Plus Group Term Insurance Schemes Group Insurance Scheme in Lieu Of EDLI Group Gratuity Scheme Group Super Annuation Scheme Group Savings Linked Insurance Scheme Group Leave Encashment Scheme Group Mortgage Redemption Assurance Scheme
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Gratuity Plus Group Critical Illness Rider
JanaShree Bima Yojana (JBY) Shiksha Sahayog Yojana Aam Admi Bima Yojana
6. Withdrawn Plans:
Jeevan Nischay Wealth Plus Jeevan Aastha Jeevan Varsha Fortune Plus Health Plus
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FINANCIAL ANALYSIS OF LIC:
Figures are as on March 2010
1.) P/E Ratio : 25.06
P/E ratio of LIC is favourable
2. ) Current Ratio: 18.49 The short term financial position of LIC is favourable.
3.) Debt Equity Ratio: 10.26
PSU bonds offer yields of close to 10 per cent, conforming to the insurer¶s yield expectations. However, the sources said, LIC¶s covenants were stiff. Borrowers are not permitted early exits. This was because LIC preferred to have long-term assets on its books to match its liabilities. Besides, borrowers are expected to maintain a debt equity ratio (DER) of 2:1 (67:33) during the tenure of the loan. The ratios are far tighter than the Finance Ministry prescribed guidelines of 80:20 DER.
4.) ROE: 8.70
LIC¶s ROE is high which is very favorable.
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5.) EPS: 69.75
6.) Debt Service Ratio: 1.38
The DSCR measures the amount of cash available for debt servicing ± interest, principal and lease/royalty payments ± and is used by project financiers to assess the debt carrying capacity of borrowers. In addition, LIC has also begun insisting on physical asset cover by PSU borrowers. NHPC, for instance, has mortgaged some of its project assets to LIC.
7.) Net Profit Margin: 16.05
The overall operational efficiency of LIC is favourable with 16.05
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II. ICICI Prudential Life Insurance Co Ltd
ICICI Pru is the biggest private life insurance company in India. It experienced growth of 58% in new business premium, accounting for increase in market share to 8.93% in 2007-08 from 6.97% in 2006-07.
Total premium collected increased to Rs 8,305.80 crore from Rs 5,254.64 in 2006-07. Total number of policies sold went up by 49%, from 1,960,034 to 2,913,606 in 2007-08, with a market share of 5.73%.
Renewal premium had gone up by 101% to Rs .5,526 crore from Rs 2,751 crore.
The company has 950 urban and 1,000 non -urban branches across the country. For the first four months of current financial year, it reported growth of 45.3%.
Products in different market segment:
1.) Life Insurance Plans: Education Solutions Wealth Creation plans Protection Plans 2.) Retirement Plans 3.) Health Insurance Products Health saver
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HealthAssure Hospital Care II Crisis Cover FINANCIAL ANALYSIS OF ICICI Prudential Life Insurance Co Ltd
Fi
i l
i
wit
tit
37
C
t Rati
0.68 0.66 0.64
0.62 0.6
0.58 0.56 0.54
2008 2007
Debt Equity Ratio:
0.8 0.6 0.4 0.2 0
2008
38
2007
Profit bilit
tio:
0
-0.2 -0.4 -0.6 2007 2008
-0.8 -
39
III.) Bajaj Allianz Life Insurance Co Ltd
Total new business premium collected by Bajaj Insurance was Rs 6,491.70 crore in 2007-08.
The company reported a growth of 52% and its market share went up to 6.98% in 2007-08 form 5.66% in 2006-07. The company ranked second (after LIC) in number of policies sold in 2007-08, with total market share of 7.36%.
For the period of April ± July 2008, total amount of new insurance premium sold was Rs 1,197.95 crore as against Rs 1,075.93 in the same period last year, experiencing a growth of 11.35%. Number of policies sold dropped by around 3%.
Bajaj Allianz Life has a strong distribution network across the country with o ver 1000 branches spread over 950 towns.
It plans to raise its capital base by infusing Rs 500 crore in next few months to support its expansion plans.
40
Products offered in different market segments:
UNIT LINKED Regular Premium
PENSION Annuity Retirement
TRADITIONAL Endowment
TERM PLANS
Life Time Care Super Saver
Money Back
New Risk Care Term Care
New UnitGain II Assured Gain
Single Premium
Retirement Advantage RP Future Income Generator
CashGain
Shield Plus Wealth Gain
HEALTH WOMEN INSURANCE
CHILDREN PLAN
JUST LAUNCHED
Family CareFirst Health Care
ChildGain YoungCare II Invest Plus Premier Group Secure Life
House Wives
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B R F Q HgD F D CC H
e He
D RB FB Q F Y GPP
M e
D RBFB Q F Y GPP
e
P R CF HC
P FBD Y X FB
DGQP D C RF R BF B C
D GQ P D IG DBGC H
FBEDCB A
Organization Design and Structure
B D e
C
CFO
s
S es e C He s
M D e
A He
B WUHedcb f
B H W V VUT SB
B Ass
e
G
&R He s
S B DY
aU
`YGD
A
U
Key A M
GSM
RGSM
T e A e es
CMO
HR He
aU
Se v e & s O e
42
F G CQ BD ` P D C
IV.) SBI Life Insurance Co Ltd
State Bank of India has a 74% equity stake and the balance 26% is held by French firm Cardif SA in SBI Life insurance. The company broke even in March 2006.
It¶s the fourth year of operations. SBI Life leveraged the 14,000 -odd bank branches of its parent SBI to push insurance policies.
The company grew 142.5% in the first four months of the current fiscal year. Total market share of the company increased from 3.14% in 2006 -07 to 5.15% in 2007-08, making it the 4th largest company in India.
However, in terms of new number of policies sold, the company ranked 6th in 2007-08. New premium collection for the company was Rs 4,792.66 crore in 2007-08, an increase of 87% over last year.
The company this year got approval to open 100 more branches to sell life insurance products.
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Products offerent in different segments:
Protection Plan Pension Plan Savings Plan Child Plan Unit linked Plan Health Plan Group Plan
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V.) Reliance Life Insurance Co Ltd
Reliance Life has sold maximum number of new group non -single policies in 2007-08. It experienced a phenomenal growth of 196% in 2008.
Total new business premium collected was Rs 2,792.76 crore and its market share went up to 2.96% from 1.23% a year back. It now ranks 5th in new business premium and 4th in number of new policies sold in 2007-08.
RLIC has been one of the fast gainers in market share in new business premium amongst the private players. It has crossed 1.7 Million policies in just two years of operations, after its takeover of AMP Sanmar business.
The number of policies sold in the year 2007-08 stood at 10.74 lakh as against 4.51 lakh in the previous year. In a short span of time, the company accomplished a large distribution set-up by opening 600 branches in 10 months, taking the overall branch network to above
Products offered in different segments: 1.) For individuals:
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Protection Plan Savings and investment Plans Retirement Plan Child Plans
2.) For Groups: Employers Liability Solutions Employers Protection Solutions Employee Voluntary Benefit
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Major policy changes that has affected the industry (both positively and negatively) in the recent past.
Regulatory tightening for the Insurance Industry in 2009:
2009 was a year in which regulators ushered in quite a few changes and proposed as many, for the insurance industry. The most notable changes were the ones that had policyholder interests in mind ² a cap on the expenses of the popular unit-linked insurance plans and allowing life insurers to sell products online. Apart from regulations which have already passed into law, there are others in the proposal stage ² such as the Swarup Committee recommendations and the Direct Taxes Code ² which may have far reaching implications for players. Here's a look at the changes suggested, implemented and their impact on the industry.
1.) Cap on ULIP expenses
Unit-linked insurance plans (ULIPs) have been long criticised for their high front-end charges, compared to alternative investments such as mutual funds; which depressed the yield to the investor. It was to address this issue that the Insurance Regulatory Development Authority introduced an upper ceiling on ULIP charges. This cap is expressed in terms of difference between the gross and net yield to customers. For ULIPs up to 10 years, the yield difference is capped at 300 basis points, and for those running over 10 years, it should not exceed 225 basis points.
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Apart from this, the regulator has also imposed a cap on fund management charges at 1.35 per cent annually, within the overall cap, for all products. Insurance companies voiced their reservation on including the mortality and morbidity charges in the overall cap and upon the representation, IRDA removed these charges from the purview of the cap on expenses. The new regulation came into effect from October 1 for new products and existing ULIPs are required to meet these criteria by December 31. Responding to this change, a few insurers have already withdrawn some existing products and re-launched them in line with the new regulation.
2.) Online purchases
IRDA has permitted insurers to sell life insurance products online, which allow customers to purchase a life insurance policy without an inte rmediary. This is expected to drive down the cost of buying policies with one insurer recently offering a discount of 40 per cent on premia for investors who opted for its online term insurance plan.
3.) Promoters lock-in
IRDA is also ready with the final guidelines on corporate governance pertaining to the insurance industry. According to the guidelines, the promoters of insurance companies would have a lock-in period of five years before they are allowed to transfer the shares of the company to a third pa rty. In India, AMP Sanmar was the only insurance company to exit the business since the sector was opened up to private players. However, this regulation is designed to ensure that policyholders enjoy continuity as only players with a long-term view will enter the sector.
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4.) Swarup Committee recommendations
The Swarup committee has submitted its proposals for doing away with the agent commission that is embedded in the premium paid by the policyholder, akin to mutual fund entry loads. It has also suggested rationalising the current commission structures of the agent. While the agent force has predictably objected to these recommendations, the insurance regulator, insurers and the life insurance council have also opposed these proposals.
5.) Direct Taxes Code
The draft of the proposed Direct Taxes Code recommended that insurance investments, for long driven by their tax benefits, should be brought under Exempt-Exempt- Tax regime, which would make the final proceeds of insurance policies taxable on withdrawal. Further, it has stated that to get tax exemption, the premium payable during the term of the policy does not exceed 5 per cent of the capital sum assured. If the committee's proposals are accepted, insurance companies may find it hard to sell traditional endowment products that driven largely by tax benefits.
6.) Multiple products
IRDA is considering allowing banks to tie -up with multiple insurance companies, for vending their products. That will give bank customers wider menu of options to choose from, and they can buy insurance products based on their needs.
7.) IPOs from insurers
Initial public offerings (IPOs) from insurance players have been on the anvil for some time now. However, according to IRDA regulations, only those with a 10 year track record are allowed to float public offers.
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Reliance Life has approached IRDA to seek its permission to float a public issue, despite a shorter history and the regulator has asked the company to approach the Government. Currently, the Government is considering the request.
Recent Investment policy changes in the Indian Insurance Industry
y
A policy known by the name of 'Health plus Life Combi Product', offering life cover along with health insurance has been granted permission by the IRDA act and insurance companies are allowed to provide it now.
y
The FDI limit in the insurance sector has been cappe d at 26% for the foreign marketers but the government is thinking to increase it to 49% and a bill of this offer is pending at the Rajya Sabha
y
A low cost pension scheme is supposed to be formed by the Pension Fund Regulatory and Developmental Authority (PFRDA) on 1st April, 2010 to provide social security to the the poorer class.
y
The compulsory ceding by every General Insurance Corporation (GIC), would go on to stay at 10% under current regulations as specified by IRDA.
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EXTERNAL ANALYSIS OF INDIAN INSURANCE INDUSTRY
PEST ANALYSIS I.] POLITICAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY
Within India political ambitions and rise of communalism, fissiparous tendencies are on the rise and may well continue for quite some time to time. Therefore, it expected that the insurance companies might consider offering political risk coverage also. The only area where Indian insurers consider giving cover is with regard to customs duty change under certain conditions. Certain type of political risk at the international level has serious implications for exporters. The term µpolitical risk¶ has a wider connotation than commonly understood or assumed. It covers events arising not just from politics, but risks in the course of international transactions. In this connection, it may be noted that export credit insurance has evolved out of uncertainties relating to international trade, particularly due to problems arising out o f foreign legal jurisdiction, political changes and currency exchange difficulties faced by many developing countries.
Prohibition for Investment: -
The funds of policyholders are prohibited from being directly / indirectly invested outside India as per section 27 ± C.
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Manner and conditions of investment : -
Subject to the above provisions contained in Section 27 -/ 27- A / 27 B, the IRDA may, In the interest of the policyholders, specify the time, manner and other conditions of investment by insurer. Give specific directions applicable to all insurers for the time, manner and other conditions subject to which the policyholder¶s funds should be invested in the infrastructure and social sectors.
After taking into account the nature of busine ss and to protect the interest of the policyholders, issue directions to insurers relating to time, manner and other conditions of the investments provided the latter are given a reasonable opportunity of being heard.
Insurance business in rural / social sector: -
All insurers are required to undertake such percentage of their insurance business, including insurance for crops, in the rural social sector as specified by the IRDA. They should discharge their obligations to providing life insurance policies to persons residing in the rural sector, workers in the unorganized sector or to economically vulnerable classes of society and other categories of persons as specified by the IRDA.
Capital requirement: -
The paid up equity of an insurance company applying for registration to carry on life insurance business should be Rs 100 Crores.
Renewal of registration: -
An insurer, who has been granted a certificate of registration, should have the registration renewed annually with each year ending on March 31 after the
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commencement of the IRDA Act. The application for renewal should be accompanied by a fee as determined by IRDA regulations, not exceeding one forth of one percent of the total gross premium income in India in the preceding year or Rs 5 Crores or whichever is less, but not less than Rs 50000 for each class of business as per Section 3-A.
Requirements as to Capital: -
The minimum paid up equity capital, excluding required deposits with the RBI and any preliminary expenses in the formation of the country , requirement of an insurer would be Rs 100 crore to carry on life insurance business and Rs 200 crore to exclusively do reinsurance business as per Section 6.
Investment of funds outside India: -
Insurers outside India as per Section 27-C cannot invest the funds of policyholders.
Insurance business in Rural Sector: -
After the commencement of the IRDA Act, 1999, every insurer would have to undertake such percentage of life insurance business in the rural sector as may be specified by the IRDA in this behalf. It is mandatory for the new companies to meet the obligations relating to the rural and unorganized sector as per section 32-B.
Power to investigation or inspection: -
The IRDA may, at any time, order in writing a person as investigating authority to investigate the affairs of any insurer and report to it. Government has power to change the tax policy against life insurance industry. Health insurance rebate, Pension saving rebate,
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Mede claim premium rebate, P.P.F., E.P.F., NSC all are tax exempted saving, All life insurance policy are tax exempted saving , Agricultural income is tax exempted, House rent allowances, Post office saving, Expenses on dreaded diseases are tax exempted. Recently there is issue to increase FDI level from 26% to 49%.
Role of the government: -
As insurance is an important service sector, hence it is highly regulated by government. Since 1956 insurance sector was highly regulated by government of India. On March 16, 1999, the Indian cabinet approved on Insu rance Regulatory Authority Bills that was designed to liberalize the insurance sector. Two governments in India have fallen over the issue of liberalization of the insurance sector (which was nationalized in 1971). But the government of A.B.Vajpayee as gone ahead to announce the liberalization of this sector announcement was made in November 1998.
Government¶s objectives for liberalization of insurance: -
The main objective of opening of insurance sector to the private insurers is as under: 1. To provide better coverage to the Indian citizens. 2. To augment the flow of long-term financial resources to finance the growth of infrastructure.
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Important government guidelines for private players for entering into Indian life insurance market: 1. Private companies with a minimum paid -up capital of Rs. 1bn should be allowed to enter the industry. 2. No company should deal in both life and general insurance through a single entity. 3. Foreign companies may be allowed to enter the industry in collaboration wi th the domestic companies. 4. Postal life insurance should be allowed to operate in the rural market. 5. Only one state level life insurance company should be allowed to operate in each state. 6. Foreign investors can invest up to 26% of the equity of their joint venture with Indian firms.
Government will prevail on grounds that the Rs. 4.5 billion India needs for infrastructure development in the five years from 1997 -98, cannot materialize if the insurance sector is not opened up.
BODIES THAT REGULATE THE SECTOR:
For better regulation purpose of the insurance sector the government has established following bodies; 1. IRA: Insurance Regulatory Authority. 2. IRDA: Insurance Regulatory and Development Authority. 3. TAC: Tariff Advisory Committee.
1. IRA: Insurance Regulatory Authority:
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The IRA, under the chairmanship of Rangachary, was set-up in January 1996. IRA Bill has to be passed by parliament to make the IRA a statutory body. Comprehensive legislation aimed at reviewing the insurance Act of 1938 and repealing the life insurance corporation Act of 1956 have to be passed. The IRA is also preparing an internal rating system to screen all applications, as entry will be in phases. The joint venture status of life insurance companies (with majority holding of the domestic partner) is likely to be approved by the parliament. Consensus also seems to be emerging on the minimum of Rs. 1 bn capital stipulations for new insurance companies.
The IRA has stipulated a minimum rural presence for all companies. The exhaustive guidelines have been issued for the appointment of intermediaries (brokers, agents, surveyors and actuaries).
2. IRDA: Insurance Regulatory and Development Authority: The Insurance Regulatory and Development Authority, constituted under the IRDA Act, 1999, provide for the establishment of an authority to protect the interest policyholders, to regulate, promote and ensure orderly growth of the life insurance industry.
a. Business Requirement:-
A company will not be issued a license unless the IRDA is satisfied with the sound financial condition, the general charact er of management, the volume of business, the capital structure, earning prospects for the insurers and that the interests of the general public will be served if registration is gran ted to the insurer.
Foreign insurance companies have been allowed to have a maximum 26% share holding. No life insurance company can be registered under the Act unless they
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have a paid up capital of Rs. 100 crores. Every life insurer shall deposit with th e reserve bank of India one percent of the total gross premium written in India in any financial year, not exceeding Rs. 10 crores. This amount would not be susceptible to any assignment or charge nor would it be available for the discharge of any liabilit ies other than liabilities arising out of policies issued, so long as any such liabilities remain undercharged.
b. Investment of Assets:-
Every insurer is required to invest, and keep invested, assets equivalent to not less than the net liabilities as fol lows: (a) 25 % in government securities, (b) a least 25% of the said sum in government securities or other approved securities and (c) the balance in any approved investment rated as ³very stron g´ or more by reputed rating agencies, which include various debt instruments on which dividend on its ordinary shared for the five years immediately preceding or for at least five out of the six or seven years immediately preceding have been paid and which have priority in payment over ordinary shares of the comp any in winding up.
The IRDA may in the interest of the policyholder¶ s directions relation the time, manner and other conditions and investments of a ssets to be held by an insurer. The IRDA may also direct the insurer to realize the investment, if it sees the investments to be unsuitable or undesirable. The Act prohibits an insurer from directly or indirectly investing policyholder funds outside India. Further, every insurer has to always maintai n an excess of the value of his assets over the amount of his liabilities of not less than Rs. 50 crores in the case of an insurer carrying of life insurance business. If at any time an insurer does not maintain the required solvency margin, he is required to submit a financial plan,
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as per directions issued by the IRDA, indicating a plan of action to correct the deficiency within three months.
In order to ensure that the company does not risk the money of the policyholder¶s, the Act provides that an insurer who does not comply with the aforesaid provisions may be deemed to be insol vent and may be would up by the court.
Insurers are required to get an actuary to investigate the financial conditions of the life insurance business including a valuation of lia bilities every year in order to ensure continual compliance. In order to maintain transparency in its dealings, insurers would have to keep separate account relating to funds of shareholders and policyholders.
c. Consequences of non-compliance: -
A company failing to comply with the act shall be liable for panel action. Further, IRDA is empowered to investigate into the aff airs of the company. Failure to comply with the directions may lead to cancellation of the license for the company. Also, if the IRDA has reason to believe that a company is doing business in a manner likely to be prejudicial to the interest of policyholders, it is required to report to the central government. The central government may base on the repo rt, appoint an administrator to manage the affairs of the company . This would act as a further assurance to the consumers, as their interests would at all times be a prio rity and that in the event that the company acts in the manner prejudicial to their i nterests, than an administrator would be appointed to serve their needs.
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The court may also wind up the company if it fails to deposit or keep deposits as per the requirements of the act or if the continuanc e of the company is prejudicial to the interest of the policyholders or public interest. But an insurance company cannot be wound up voluntarily or on the grounds that by reasons o its liabilities it cannot continue its business, except for the purpose of affecting an amalgamation or a reconstruction of the company. Therefore, a company after issuing a policy cannot escape liability by seeking voluntary winding up.
The four amendments, made in the life insurance Bill by the Lok Sabha, are as under: 1. The Insurance Regulatory and Development Authority should give priority to health insurance. 2. Policyholder¶s fund will be invested in the social sector and infrastructure. The percent may be specified by the IRDA and such regulations will apply to all insurers operating in the country. 3. Insurers will be expected to undertake a certa in percent of business in rural areas, and cover workers in the unorganized and informal sectors and economically backward classes. 4. In the event of insurers failing to fulfill the social sector obligations, a fine of Rs. 25 lakh would be imposed the first time. Subsequent failures would result in cancellation of licenses.
3. TARIFF ADVISORY COMMITTEE: The tariff advisory committee established under the Act is empowered to control and regulate the rates, terms, and etc. that may be offered by insurers in respect of any risk or of any category of risks. It is provided that in fixing, amending or modifying such rates etc. the committee shall try to ensure as far as possible that there is no unfair discrimination between risk of essentially the
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same hazard and also that consideration is given to past and prospective loss experience. Every insurer is required to make payment to the TAC of the prescribed annual fees.
i. TAX POLICY AND INSURANCE SECTOR:
Another factor, which affects the insurance sector, is the tax policy. The tax reforms in India are such that it encourages the citizens to invest in the insurance sector. The tax policy of the government is particular relevant for life insurance which is a long-term contract and inculcates among the policyholders the habit of saving.
Taxation of returns on investment influences, investment decisions and high rates of taxation will discourage the desire to save. Already in India there are complaints that the rates of return on life policies are not what they could be. Therefore tax incentives play a vital role in determining the attractiveness of such policies. Such tax breaks are available in many countries and have helped in the development of their life sector.
In western countries the gain from the proceeds of a life insurance policy is pa id free of tax. Provided the policy satisfies certain qualifying conditions. Non qualifying policies get basic rate tax relief, though higher rate taxpayers may still have to pay tax on the gain, although at a reduced rate. The insurance companies can use such tax concessions rate. The insurance companies can use such tax concessions to design products for different categories of taxpayers.
The other factors, which affect the insurance sector, are the employment law, and government stability. These are the factors, which affect the insurance industry.
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ii. INVESTMENT DECISIONS MANDATED BY GOVERNMENT:
Insurers are required to fulfill certain social commitments as well. As many of the social welfare measures companies are not just regulated, but have been mandated to hand over a portion of their funds to the state for investment in infrastructure and for social development through government bonds and securities. In India, the pattern was, accordingly, prescribed in great detail by the government. This was not in the form of guidelines, but as a legal obligation under the insurance Act, 1938. Pattern of investment specified for life insurance:
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II.] ECONOMICAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY
Interest rate at bank and interest rate of P.F variation very much affect to life insurance industry, because people always attract by higher return. Therefore, they do not prefer lower return policy. Unemployment also affects insurance industry, because the unemployment people will not have earning, so saving also affect to life insurance sector Life insurance industry will directly affected by Earthquake, Monsoon, and Natural calamity. Because of these events turns into lots of death, so the life insurance companies have to pay claim against policy. Infant mortality rate and maternity mortality rate are also affecting to life insurance. Typical Indian want luxurious product against low income, so that they prefer installment or annuity (EMI), so that they may not have extra saving to invest in life insurance.
1. Adequacy of capital: Capital adequacy is a matter of attention in view of the nature of the life insurance business, where in the case a contingency arises, the insurers should be in a position to meet its long-term contractual obligations and pay up the dues or claims. In that sense, life insurance is a capital-intensive business and must be backed by an adequate capital base on the part of the owners and the companies should not be running their business purely on other people¶s money. So minimum start up amounts and long running capital adequacy norms are absolutely essential, in consideration of this, the Malhotra committee suggested and subsequently the IRDA stipulated a minimum capital base of Rs 1 bn for any entity wanting to enter the life insurance business.
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2. Increased Economical Activity: Although economic activity has slowed down since 1996, sooner or later there will be an upswing. The increase in the growth rate in various sectors accompanied by the growth in trade in the context of fulfilling of commitments to the WTO will signal a growth in the demand for insurance covers of new types. For example, aviation insurance cover will be on an increasing scale in view of the need for more frequent air travel for men and for transporting materials. This would necessitate substantial property, liability and personal insurance. As far as cover against business interruption is concerned, the pace of business and of change today is so fast that even the most careful assessment of exposure time, and the most liberal coverage cannot protect the insured adequate in the event of a loss be on the increase and insurance companies cannot afford to ignore the vast potential in this business.
3. Interest Rates: During the last years the government has rationalized interest rate creates better business opportunities for the life insurance sector because the substitute products are graded lower by the customers. On the other hand the value of the holdings of the insurance companies will increase. Rationalized of the interest rates is still expected, and it is an opportunity for the company.
Low interested rates mean low investment return for reinsures causing negative impact on their overall net profitability as pricing is to a certain extent sensitive to interest rate fluctuations. The negative impact therefore, lead to higher
pricing level for reinsures in order to sustain their profitability. But, in reinsurance market, which is characterized by over capitalization a resulting intense competition.
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The opportunity for such rate increases practically remains very slim and even non-existent. As a result, reinsures are under tremendous pressure to cut their operational cost to safeguard profitability. Furthermore, low interest rates discourage and even prevent any outflow of capital from reinsurance business to capital markets, causing current over capitalization in reinsurance market to continue.
A positive outcome is that low inflation rates, if sustained for a considerable period, usually bring some relief to reinsures from the resulting lower than forecast claims payment. Also, this can lead stability to reinsures administrative cost.
As interest rates fall, bond value rise, and insurers feel richer. On the liability side, reserves are not explicitly discounted so lower interest rates do not increase reserves, lower inflation means lower expected future claims payments which lowers required reserves. This in turn increase surplus, again allowing insurers to feel richer. Therefore, low interest rates and low inflation result in h igher assets, lower liabilities hence greater surplus and greater risk capacity resulting in less demand for, and greater surplus of reinsurance.
Low interest rates and low inflation reduce the ability of reinsures to off set technical losses by using financial products and should, as a consequences, force market competition downloads. However, this will also serve to weaken the balance sheets of insurers and create an increase in the demand for balance sheet protections.
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Lastly, these conditions move risk from the liability side of the balance sheet to the asset side while actually generating new needs for cover.
4. Inflation rate: Inflation can also be one of the causes to change the scenario of the insurance sector. High inflation for instance, would tend to reduce the insurance business, particularly life, because the real value of the money paid back to the policyholder on maturity of the policy would go down and would, therefore, lose its attraction for the investor. At the most, the insuring public may prefer pure risk plans (terms insurance), which have a low premium outlay.
The response to an inflationary situation will depend on what benefit the insured is looking for. In a situation of high inflation, clients would prefer policies where the savings portion is periodically returned while the risk portion is maintain for the duration of the contract. Those who prefer risk protection are likely to opt for long term policies, which may also be preferred because they are likely to be low premium policies.
A flexible system, under which the sum insured, is increased from time to time so that the real value of the cover is maintained, and c ould give a boost to the market under conditions of high inflation. Fortunately, the rate of inflation in India has been contained to less than 5 percent for a fairly long time and unless it goes out of hand, it is not likely to dampen the market. 5. Market related factors: These are the factors, which governs the entire life insurance sector. This includes internal as well as the external factors. We have seen the various factors like technological, economical and will see the political and government
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factors, environmental factors and competitive analysis of insurance sector in the next session.
These all factors have changed the trend of life insurance sector, which is shown in the following figure.
From the above figure we can see that strength of the insurance product s brand is very important aspect for the success in this sector. Of course you should have strong distribution channel without which growth is not possible.
6. C t
satisfacti
-
Since the customer is the focus of any service industry, every such industry continuously strives for greater variety and better quality of products, improvement in its delivery system, cost effectiveness, easy access, and quick response to perceived needs ± in short qualitatively superior service. Indian life
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insurance companies already have a sizable line up of the products. The difference between them and the foreign operators perhaps lies in the service provided, because there is still not enough concern on the part of the Indian companies, with customer satisfaction, on time renewals, claims settlements, etc. if high standards have been achieved else where, it is not impossible to attain the same in India too.
The concept of ³sales´ is now redefined as a long ± standing relationship. The relationship does not end with the conclusion of the transaction, but has to be durable and of a long term nature. Hence, improved in performance of the company will not be synonymous with only basic cost reduction or l arger business, but the new measure of performance will be set in terms of service to the customer. One can anticipate greater insistence from pressure groups like customer forums to keep customer satisfaction at the top of the list of priorities of the insurers.
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III.] SOCIO-CULTURAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY:
The basic social factors that affect the life insurance sector are as under: Population Life style Educational level Level of earning Societal benefits These are the major social factors, which affect the life insurance sector. We will discuss all of them in brief:
i.) Population: Growth in the population is a major factor pushing up the demand. It is also going to exert a special influence on the life insurance market in other ways. Apart from exerting pressure on demand for goods and services, and through that, ill effects of uncontrolled growth of population also could spur the growth of demand. For example, overcrowding in public places of entertainment, public support, or too many vehicles on the road can result in hazards like stampedes and pollution, which require covers and still are not sold on a large scale today. Thus the positive as well as the negative aspects of population growth are going to spur demand. ii.) Life style: The peculiar lifestyle of a country or an age also influences the insurance business. Change therein produces different demands for life insurance. For e.g. All over the world, family size is shrinking and the fact that in decades to come, both presents are more frequently likely to work outside the home will mean
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that there could be a greater possibility of property loss. Similarly, a larger number of vehicles on the roads for people commuting to their jobs or business would mean larger incidence of accidents. This will increase the demand for life insurance products.
Of course, there is also the other possibility that wherever it is possible, some people will try to spend a part of their time working at home either because they would like to be with their families or because they find it more convenient. Activities like life insurance and financial services are particularly well suited for such arrangements.
With time becoming scarcer for most people who pack in a full day, there is a higher demand for convenience and service. Companies will respond by trying to shorten the transaction time for the delivery of products and services and creating distribution systems that can reac h clients wherever they are and whenever they want to use them, so as to ensure convenient access to service providers.
In recent times, there has been a surge in the high end business of the LIC. For instance, as against 90 policies each worth more than Rs 10 million in 19992000, the number was as high as 900 policies in the next year. Or again, the number of jeevan shri policies jumped from 88,000 to a total of 2,33,000 policies in the same period. However, consumer¶s behaviour cannot be adequately and accurately predicted. The younger generation is overwhelmingly influenced by consumerism. If this trend continues or increases with increasing income, there will be fewer propensities to save or insure, as a result of which the increasing purchasing poser may not be reflected in the life insurance market.
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Crumbling social values, the deteriorating law and order situation, the growing incidence of crime, extortion, abduction, etc., are posing a new category of risks which need to be covered through suitably designed policies.
iii.) Level of education: India is one of the developing countries: the level of education is very low here. The literacy rate is very poor. More than 50% of the population is still uneducated or more or less not educated. Thus the peo ple are not able to understand the concept of the life insurance. Among the educated people the quality of the education is still a big question mark. Thus the awareness is not created and it has become a big challenge for the industry. Thus one of the factors, which affect the life insurance sector, is low level of education.
iv.) Level of earning: Another factor, which affects the life insurance sector, is the level of earning. In India the rule of 80-20 is working. The 80% of the total population is having the 20% of the wealth and the 20% of the total population is having 80% of total wealth. Thus the richer are richer and poorer are poorer. Due to this the life insurance sector is affected very much.
v.) Societal benefits: In view of the fact that large sections of India have inadequate life insurance cover, an important social responsibility of the government relates to spreading it far and wide. In addition, the government attempts to extent life insurance with certain social obligations in view in both urban and the rural areas through such means special schemes for the weaker sections, and by tilting of the life insurance companies¶ investments in favour of social developments.
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The social changes emerging in the country provide opportunities for insurers to sell financial services products such as family health care programmed, retirement plans disability insurance, long -term care for senior citizens and different employee benefit plans.
It is not the total population but the insurable populati on which is material for the conclusion of potential. Apart from the usual demographic and other well known factors such as age group, income level, sex wise distribution, and literacy level, a realistic assessment of this potential has to be based on seve ral other relevant factors.
Many invisible factors like religious faiths and social values too need to be considered. As such, there is considerable difficulty in accurately estimating the potential and crude estimates can be misleading. The estimate will also vary according to the criteria used to measure if. In principal, every individual is a potential candidate for life insurance. In reality, financial status limits this potential, not only because of the practical consideration of the insurable worth of a person to the insurer in financial terms, but more so due to the prospect¶s capacity to pay life insurance premium after meeting other pressing needs.
Again, there are many practical factor affecting µ insurability¶ such as old age, past and present illness, and physical and mental impairments. In addition, the cost of reaching out to a very large number of customers, if they are dispersed, becomes important. In that sense, the cost and profitability of exploiting the potential, which is otherwise attractive, limit the opportunity.
The sheer size of the numbers, therefore is not crucial itself. For assessing the practical business potential of life insurance, the eligible population needs to be ³Qualified´ in relation to other factors including those mentioned above. Thus,
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in the opinion of some experts, out of the population in the insurable age group, Only the main workers (i.e., excluding marginal wor kers) with adequate income may be considered as the actual insurable population.
The population in the age group 15 -55 is usually regarded as the insurable population, since this can be considered as the main ³active´ age group (in the sense of working, earning. And supporting others), and beyond this range life risk may be considered to be not worth insuring. There is one opinion, which suggests that in our country the age group 15 -55 as the base is not totally suitable. Due to various factors including t he unemployment problem, real earning starts from around the age of 25 for salaried persons.
For others, particularly small entrepreneurs, traders and businessman, the starting age is a little higher. Only in the affluent sector of society life insurance can be taken before personal earning starts. Thus, number wise life insurance below the age of 25 is not so significant (although amount wise it need not be so). On the other hand, people over the age of 50 rarely apply for fresh life insurance, mainly because in India the normal retirement age is around 60 years.
Also, a high percentage of the population in the lower income group does not remain ³insurable´ after the age of 50. thus, in our country the practical age range for insurable population actual ly narrows down to 25 to 50.
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IV.] TECNOLOGICAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY:
Internet as an intermediary in the current Indian market customer is not aware about the intrinsic value of insurance. Customers think of insurance only as a tax saving measure. The security provide by an insurance cover is rarely thought about. In such a scenario Internet can be an effective medium for educating the consumers about insurance. It serves as a single window for disseminating product, process and procedural information to the consumers.
Product development and target marketing through the Internet: with increase in the number of insurance companies there will be a need for market segmentation and subsequently product designed for each of them. In such a scenario Internet can be a effective channel for pushing product specific information to a particular market segment. Consumer feedback about a particular product as well as suggestions for different types or covers can also be generated through the Internet.
Retail marketing is a commonly accepted concept and the providers of the retail products and service will try out for larger market and market share. There would be cut through competition and the real benefit would be to the customers in terms of better products, distribution, pricing, post transaction service and technology.
Technology will perhaps be the single largest driver of the retail thrust. The entire strategy will evolve around the absolute ability of the organization. The customer will demand for greater convenience of excess to the product/ service and all at low cost of delivery. Therefore the use of technology and specifically the Internet with realigned strategies would be one of the key factors to success.
73
Constraints of locations, timing and accessibility would not be a hurdle for either customers or businesses.
a.) Maintaining the database The most important factor that is effecting the insurance industry is the marinating the database of the customers. The insurance industr y having a huge list of the customers. In order to maintain it in manual format it is really the work of stupidity. With the change in time the computers has taken the work of this things. Thus with the development of the technology it has becoming possible to maintain such huge database very easily. A person can switch over to the computer and get the details of the customer very easily. Thus maintaining the database has really become easy due to the development in technology.
b.) E-business insurance in India: The Internet has played a vital role in transforming the business of the 21 st century. Computers are now being used extensively for creating a storing data, information with the help of complex and sophisticated technological tools in every kind of business. This change having been widely accepted, the advantages are numerous such as fast processing improved. Efficiency, cost reduction among several other benefits.
However, with every positive change, there is an evil attached and technology is no exception. In technical is an evil attached and technology is no exception. In technical terms, increased sophistications of technology brings with it, an increased factor of risk involved. The risk can be of various attributes, for example, the risk of data being lost due to a virus attack, the theft of important
74
and confidential information and so on, which ultimately results in losses for the business entity.
With this change in the business process, insurers have to devise new methods for assessing, underwriting and servicing claims for the so -called e-business insurance. Insurers face challenges to ascertain risks, in order to quantify them because such risks don¶t have any past data, which makes it all the more difficult for actuaries. Moreover, what financial impact a particular risk can have is very difficult to be determined. For example, if some hackers obtain credit card information of few customers, it¶s a loss for banks, their credibility, customers and also their brand. Will an insurance policy cover all of this is million dollar question hence; the difficulty is to design a cover first of all, which really answers the needs of customers. But even after designing and pricing such products with difficulty, the challenge to underwrite and handl e claims for such policies remains existent.
c.) Impact on distribution channels: Distribution channels are the most important part of the insurance industry. The scenario is continuously changing in this industry. In future the customers are expected to be more technology ± oriented, better informed, more knowledgeable and more demanding. The insurers will have to offer all types of channel to customer and it is the customer who will have the right to choose the channel suiting him/ her.
Dual income families with young children, singles with long working days and flexi-timers all demand high level of sophistication and ease when it comes to service. Hence the companies have to be very careful and cautious in catering to
75
the needs of these customers who provides a good amount of business to the insurers. Thanks to the technological advancement and increased de regulation and sophistication, the carriers and producers can now reach the customers in different ways as has been proved in the US market and ot her developed nations the web is extensively used for the access of information but when it comes to the purchase of policy, the offline mode is preferred. The private players in India seems to have identified this and have put substantial information on t here websites regarding policies, quotes and contact information among other routine stuff.
76
MICHAEL PORTER¶S FIVE FORCES MODEL
1. Threat new entrants: The future of life insurance market scenario will be marked by the active presence of many international players, beside several Indian players. As far as life insurance industry there would be fewer entries due to more specialized firm with lower expenses ratios and better capitalization. Threat of entry is determine by the entry barriers which act to prevents firms from entering the industry. In life insurance industry entry barriers is moderate so that it becomes profitable, it attracts new entrants, thereby increasing the number of competitors.
The Indian market is highly brand oriented, it is difficult to introduce new brand. The acceptability of new brand is also very low.
The capital requirement in life insurance is Rs. 100 crores, which attract more companies to invest in. promoters, can hold paid up equity cap ital up to 26% in an Indian insurance company. In case promoters hold more than 26% of the paid up equity capital, they shall divest the excess shares in the phased manner within a period of ten year.
Tax exemption structure makes the industry attracti ve.
High level of competition in life insurance industry become giant player came into the market.
77
High profit in life insurance industry act as a magnet to firms outside the industry motivating potential entrants to commit the resources needed to hurdle entry barriers.
But again due to potential market, private giants and international player try to enter in to the market in the large scale with their proper homework with customized and products too. An Indian private are well ± developed and has capacity to face challenges, foreign companies foresee good prospects for new business by alliances and partnership with domestic outfits .
Registration: Every insurer is required to obtain a certificate of registration from the controller of insurance. The registration is required to be renewed after a period of three years.
Economies of scale: Economies of scale is difficult to find in the initial stage of entry into the market because of experience as evidence by the theory of experience curve.
Legislation or government action: special permission is required from the government to enter in the insurance sector. With the tariff advisory committee to control the rates, rules and regulation, and with the control of IRDA and the government¶s attitude to serve to the needs of the people with social objectives, the multinationals may face breathing and developmental problems.
78
2. Bargaining power of buyer: Now a day competition is increasing in the each and every sector, and as a competition in the market increase the bargaining power of the buyer will get increase. So buyers bargaining power is high.
Market is highly segmented.
Buyers in this industry are very return oriented and it switches easily.
The switching cost of buyer over brand or close substitute products: The life insurance industry has the uniqueness of providing risk protection, which does have any substitute. Thus the switching cost has no place. As far as the substitute products are concerned they are providing the service of saving and tax benefits but still they lag in the risk coverage factor.
If buyers buy insurance then switching cost become high. High switching cost creates buyers lock in and makes a buyer¶s bargaining power.
Buyers have a strong competitive force when they are able to exercise bargaining leverage over premium, service or other terms of sale.
79
3. Bargaining power of Suppliers: Policy designer tend to have less leverage to bargain over premium and other terms of sale when the company they are supplying a major customer.
Suppliers bargaining power increase if reduced administrative cost and also reduced claim procedure time.
Insurance is tax exempted so that suppliers bargaining power increases.
Suppliers then have a big incentive to protect and enhance their customer¶s competitiveness via reasonable premium, better service and on going advances in the technology of the item supplied.
Supplier¶s ability to integrate forward: the private players can integrate forward to increase the volumes of business by providing customized and tailor made policies whereas existing players whereas lack on this point.
Brand identity: there is certainty among the minds of people in relation to existence and payment of claims from the existing players whereas the solvency of private players is not certain.
80
4. Threat from Substitutes:Life insurance sector can be featured in t hree factors. They are saving, risk and tax benefit.
SAVING:
As far as saving are concerned, Existences of a large number are saving through PPF, EPF. Most of customer saving their money in bank, post deposit. Many customers invest their money in share market, purchase Gold & Silver also.
The substitute products for the industry are as follow:
Term deposits in bank (5.25-8 %)
Investment in government securities. (4-5%)
Money market investment (for corporate)
Capital market (around 13% p.a. for developing country like India)
There is threat of increasing market potential of NSC, Government debenture etc.
If investments in insurance policies are made with the objective of tax benefits then there are other investment avenues, which offer similar benefits.
RISK COVERAGE:
81
For risk coverage, there is no close substitute of the products. The risk protection is provided by this sector only. No other instrument provides assurance against risk.
TAX BENEFIT:
There are various substitute of this feature of life insurance. Some of the substitute which provides tax benefit is: PPF NSE POST OFFICE SECURITIES. INVESTMENT IN THE MUTIAL FUND. OTHER TAX SAVING INSTRUMENT.
Thus these are the substitute of the life insurance industry. But the core competency of this sector is the risk protection providing capacity, which no other sector can provide.
5. Rivalry among the exiting player:
As a result of privatization competitive conditions will prevail in which entry of companies buyers will exercise control.
There is cut- thought competitions among rivals in life insurance industry.
82
There are mainly 13 private organizations and one public organization in life insurance competition.
The insurance sector is showing high market growth rate, w hich enables the insurance companies to achieve its own market growth through the growth in market place. As per the study conducted by the monitor group, the size of the Indian general insurance market was of the order rs.10000 crores in 2001. The annual growth rate is expected to be 15%.
All the insurance companies deal in identical policies, as service levels offered are similar. Hence, there is no product differentiation.
83
SWOT ANALYSIS
Strength
y Risk protection is provided by this sector only. yInsurance having currently good market. yTax exemption. yThe variety of products is increasing. yInsurance to build close relationship with customers.
Weakness
y Unable to convince people about the products. yInsurance companies instability yLimited working capital yProducts or services similar to competitors.
Opportunities
yTechnology is improving paperless transaction are available. yBusy life, customer need flexible and customizable policies. yLike mobile banking mobile insurance could be a hit. y New innovations in technology-measuring weather variables.
84
Threats
yWeather cycles. y New substitute product emerging. yIncreasing expenses and lower profit margins with hard on the smaller agencies and insurance companies. yGovernment regulations on issues like health care terrorism can quickly change the direction on insurance.
85
Projected Future Prospects: Market Share
Estimating the potential of the Indian insurance market from the perspective of macro-economic variables such as the ratio of premium to GDP, Assocham Papers reveals that India¶s life insurance premium, as a percentage of GDP is 1.8% against 5.2% in the US, 6.5% in the UK or 8% in South Korea.
Assocham findings reveal that in the coming years the corporate segment, as a whole will not be a big growth area for insurance companies. This is because penetration is already good and companies receive good services. In both volumes and profitability therefore, the scope for expansion is modest. Survey suggested that insurer¶s strategy should be to stimulate demand in areas that are currently not served at all. Insurance companies mostly focus on manufacturing sector, however, the services sector is taki ng a large and growing share of India¶s GDP. This offers immense opportunities for expansion opportunities.
Being an agrarian economy again there are immense opportunities for the insurance companies to provide the liability and risks associated in this sector. The Paper found that the rural markets are still virgin territories to a great extent and offer exciting opportunities for insurance companies. To understand the prospects for insurance companies in rural India, it is very important to understand the requirements of India's villagers, their daily lives, their peculiar needs and their occupational structures. There are farmers, craftsmen, milkmen, weavers, casual labourers, construction workers and shopkeepers and so on. More often than not, they are into more than one profession.
The rural market offers tremendous growth opportunities for insurance companies and insurers should develop viable and cost -effective distribution channels; build consumer awareness and confidence. The Paper found that the re
86
are a total 124 million rural households. Nearly 20% of all farmers in rural India own a Kissan Credit cards. The 25 million credit cards used till date offer a huge data base and opportunity for insurance companies. An extensive rural agent network for sale of insurance products could be established. The agent can play a major role in creating awareness, motivating purchase and rendering insurance services.
There should be nothing to stop insurance companies from trying to pursue their own unique policies and target whatever needs that they want to target in rural India. Assocham suggests that insurance needs to be packaged in such a form that it appears as an acceptable investment to the rural people. In the near future, when we¶ll see more innovations in agriculture in the form of corporatization or a more professional approach from the farmers¶ side, insurance will definitely be one option that the rural Indian is going to accept.
87
Conclusions
India is among the important emerging insurance markets in the world. Life insurance will grow very rapidly over the next decades in India. The major drivers include sound economic fundamentals, a rising middle -income class, an improving regulatory framework and rising risk awareness. The fundamental regulatory changes in the insurance sector in 1999 will be critical for future growth. Despite the restriction of 26% on foreign ownership, large foreign insurers have entered the Indian market. State -owned insurance companies still have dominant market positions. But, this would probably change over the next decade. In the life sector, new private insurers are bringing in new products to the market. They also have used innovative distribution channels to reach a broader range of the population. There is huge in the largely undeveloped private pension market. The same is true for the health insurance business. The Indian general insurance segment is still heavily regulated. Three quarters of premiums are genera ted under the tariff system. Reinsurance in India is mainly provided by the General Insurance Corporation of India, which receives 20% compulsory cessions from other general insurers. Finally, the rural sector has potential for both life and general insurance. To realize this potential, designing suitable products is important. Insurers will need to pay special attention to the characteristics of the rural labor force, like the prevalence of irregular income streams and preference for simple products.
88
BIBLIOGRAPHY
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www.
http://www. e
e e.
www.sbilife.co.in www.moneycontrol.com
http://www.
prulife.
http://www. lobalsurance.com www.economywatch.com
http://economictimes.indiatimes.com/Personal-Finance/Insurance www.financialtimes.com www.thehindubusinessline.com
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http://www.
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.
j j
e. . / /
/
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/public/Life-plans
89
[INDUSTRY ANALYSIS]
26TH JULY 2010, MONDAY
CONTENTS
SR. No. 1 2. 3. 4. 5.
PARTICULARS INTRODUCTION INSURANCE STRUCTURE OF INDIAN INSURANCE INDUSTRY SIZE OF THE INDIAN INSURANCE INDUSTRY STRATEGIC GROUPS INSURANCE INDUSTRY SEGMENTATION: PRODUCTS CUSTOMERS INTERNATIONAL OVERVIEW NEW ENTRANTS IN THE RECENT PAST TOP FIVE PLAYERS IN THE INDUSTRY MAJOR POLICY CHANGES IN THE RECENT PAST EXTERNAL ANALYSIS: PEST ANALYSIS PORTER S FIVE FORCES MODEL EXTERNAL ANALYSIS: SWOT ANALYSIS PROJECTED FUTURE TRENDS CONCLUSION BIBLIOGRAPHY
PAGE NO. 3 9 10 14 15
6. 7. 8. 9. 10. 11. 12. 13. 14. 15.
23 24 26 47 51 77 84 86 88 89
2
INTRODUCTION ± INSURANCE
In India, insurance has a deep-rooted history. It finds mention in the writings of Manu ( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya
(Arthasastra ). The writings talk in terms of pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine. This was probably a pre-cursor to modern day insurance. Ancient Indian history has preserved the earliest traces of insurance in the form of marine trade loans and carriers¶ contracts. Insurance in India has evolved over time heavily drawing from other countries, England in particular.
1818 saw the advent of life insurance business in India with the establishment of the Oriental Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the Madras Equitable had begun transacting life insurance business in the Madras Presidency. 1870 saw the enactment of the British Insurance Act and in the last three decades of the nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were started in the Bombay Residency. This era, however, was dominated by foreign insurance offices which did good business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard comp etition from the foreign companies.
In 1914, the Government of India started publishing returns of Insurance Companies in India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life business. In 1928, the Indian Insurance Companies Act was enacted to enable the Government to collect statistical information about both life and non-life business transacted in India by Indian
3
and foreign insurers including provident insurance societies. In 1938, with a view to protecting the interest of the Insurance public, the earlier legislation was consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for effective control over the activities of insurers.
The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a large number of insurance companies and the level of competition was high. There were also allegations of unfair trade practices. The Government of India, therefore, decided to nationalize insurance busines s. An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 non -Indian insurers as also 75 provident societies²245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector.
The history of general insurance dates back to the Industrial Revolution in the west and the consequent growth of sea-faring trade and commerce in the 17th century. It came to India as a legacy of British occupation. General Insurance in India has its roots in the establishment of Triton Insurance Company Ltd., in the year 1850 in Calcutta by the British. In 1907, the Indian Mercantile Insurance Ltd, was set up. This was the first company to transact all classes of general insurance business. 1957 saw the formation of the General Insurance Council, a wing of the Insurance Associaton of India. The General Insurance Counc il framed a code of conduct for ensuring fair conduct and sound business practices.
4
In 1968, the Insurance Act was amended to regulate investments and set minimum solvency margins. The Tariff Advisory Committee was also set up then.
In 1972 with the passing of the General Insurance Business (Nationalisation) Act, general insurance business was nationalized with effect from 1stJanuary, 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on January 1sst 1973.
This millennium has seen insurance come a full circle in a journey extending to nearly 200 years. The process of re-opening of the sector had begun in the early 1990s and the last decade and more has seen it been opened up substantially. In 1993, the Government set up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms in the insurance sector.The objective was to complement the reforms initiated in the financial sector. The committee submitted its report in 1994 wherein , among other things, it recommended that the private sector be permitted to enter the insurance industry. They stated that foreign companies be allowed to enter by floating Indian companies, preferably a joint venture with Indian partne rs. Following the recommendations of the Malhotra Committee report, in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance customer
5
satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market.
The IRDA opened up the market in August 2000 with the invitation for application for registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the power to frame regulations under Section 114A of the Insurance Act, 1938 and has from 2000 onwards framed various regulations ranging from registration of companies for carrying on insurance business to protection of policyholders¶ interests.
In December, 2000, the subsidiaries of the General Insurance Corporation of India were restructured as independent companies and at the same time GIC was converted into a national re -insurer. Parliament passed a bill de-linking the four subsidiaries from GIC in July, 2002.
Today there are 14 general insurance companies including the ECGC and Agriculture Insurance Corporation of India and 14 life insurance companies operating in the country.
6
Overview Insurance business is divided into four classes: a) Life Insurance b) Fire c) Marine d) Miscellaneous Insurance.
Life insurers undertake the Life Insurance business; general insurers handle the rest. The business of insurance essentially means defraying risks attached to an activity (including life) and sharing the risks between various entities, both persons and organisations. Insurance companies are important players in financial markets as they collect and invest large amounts of premium in various investment instruments. Insurance offers the following benefits: a) Protection to investors b) Accumulation of savings c) Channelling these savings into sectors needing huge long -term investments.
Insurance companies receive a steady cash stream of premium or contributions to pension plans. Their cash flows are determined on the basis of various actuary studies and model s. Since their liabilities are long-term or contingent in nature, their investments are also long -term and they are able to maintain a healthy liquidity position. Since they offer more than the return on savings in the shape of life cover to the investors, the rate of return guaranteed on their insurance policies is relatively low. Consequently, the need to seek high rates of return on their investments is also low. Since the risk factor in the insurance business is quite high, insurance companies usually i nvest in relatively safer bets such as bonds of GOI, PSUs, state governments, local bodies, corporate houses and mortgages of long-term nature. Lately, insurance companies have also ventured into pension schemes and mutual funds.
7
Life insurance constitutes the major share of insurance business. Life insurance depends upon the laws of mortality. Life has to end sooner or later and the claim in respect of life is certain. On the other hand, in case of general insurance, there may never be any claim and the amount cannot be ascertained in advance. Hence, life insurance, besides providing a cover for life of individuals, alsoserves as a good source of savings for the beneficiaries. The life insurance market in India presents several striking features, which appear, for the most part, to be necessary concomitants of the underdeveloped nature of the country¶s economy.
Existences of a large number of life insurance sellers and the narrowness of the life insurance market have been the characteristics peculiar to In dia. The volume of life insurance business annually sold on the Indian life insurance market came on an average to about Rs 160 crore . Most of these policies were sold during the phase of private enterprise, by Indian organisations termed ³insurers´ by the Indian Insurance Act (Act IV of 1938). The term ³insurers´ included´: a) Proprietary Joint Stock Companies b) Mutual Joint Stock Companies c) Partnership firms to which the Indian Partnership Act of 1932 applied d) Co-operative Life Insurance Societies
8
STRUCTURE OF INDAIN INSURANCE INDUSTRY
9
SIZE OF THE INDIAN INSURANCE INDUSTRY
The Insurance sector is a colossal one and is growing at a speedy rate of 1520%. Together with banking services , Insurance services add about 7% to the country¶s GDP. Total value of the Indian insurance market(2004 -05) is
estimated at Rs. 450 billion (US$10 billion). The funds available with the state-owned Life Insurance Corporation (LIC) for investments are 8% of GDP.
There are presently 12 general insurance c ompanies with four public sector companies and eight private insurers. According to estimates, private insurance companies collectively have a 10% share of the non-life insurance market.
The US$ 41-billion Indian life insurance industry is considered the fifth largest life insurance market, and growing at a rapid pace of 32 -34 per cent annually, according to the Life Insurance Council.
Life Insurance Corporation of India (LIC) registered an 83 per cent increase in new business income in March 2010, while private players posted a 47 per cent growth in new business premium .
Moreover, according to IRDA, insurers sold 10.55 million new policies in 2009 10 with LIC selling 8.52 million and private companies 2.03 million policies. At the end of March 2010, LIC held 65 per cent market share in terms of new business income collection with the private sector contributing the remaining 35 per cent share in 2009-10. According to IRDA, total premium collected in 2009 -10 was US$ 24.64 billion, an increase of 25.46 per ce nt over US$ 19.64 billion collected in 2008 -09.
10
A growth of 18 per cent is expected in total premium income and is likely to cross the US$ 64.93 billion mark, according to B Mathur, Secretary General, Life Insurance Council.
General Insurance
Vehicle financing firm, Magma Fincorp has applied to IRDA for approval and expects clearance in 2010. The firm is entering the general insurance business in a joint venture with Germany -based company HDI-Gerling International Holding AG. According to data released by IRDA, the general insurance industry recorded
13.42 per cent growth in gross premium collected during 2009 -10. The
industry collected gross premium of US$ 7.84 billion in 2009 -10 compared with US$ 6.91 billion in 2008-09. The public sector players posted 13.85 per cent growth in gross premium in 2009-10. At the same time, private players recorded a 12.82 per cent increase in gross premium till March 2010. During April-May 2010, non-life insurers mopped up US$ 1.59 billion against US$ 1.34 billion in the previous year, registering an increase of 19 per cent according to IRDA data. The four state-run insurers fared better than their private counterparts, with New India Insurance collecting the maximum premium of US$ 294.5 million in April and May 2010, compared to US$ 253.15 million in the previous year, growing by 16.34 per cent. According to the IRDA's Summary Reports of Motor Data of Public and Private Sector Insurers - 2008-09, nearly 30 million vehicle policies were issued and a total premium worth US$ 1.83 billion was collected.
11
Health nsurance The Indi n health insurance market has emerged as a new and lucrati e growth avenue for both the existing players as well as the new entrants. According to a latest research report "Booming Health Insurance in India" by research firm R C released in April 2010,all emerging trends including the key factors
driving the market growth. Furthermore, the report also identifies what could be the possible growth areas for expansion and gives a detailed overview of the competitive landscape. The Indian health insurance market has continued to post record growth in the last two fiscals (2008-09 and 2009-10). Moreover, as per the R C estimates, the health insurance premium is expected t gr at
a c mpound annual growth rate (CAGR) of over 25 per cent for the period spanning from 2009-10 to 2013-14.
A well-developed and evolved insurance sector is a boon for economic development as it provides long- term funds for infrastructure development at the same time strengthening the risk taking ability of the country.
Current Position:
Insured
33%
yes
67%
no
12
Awareness of Different Schemes:
Awareness
22%
yes 78%
no
Reasons for taking Insurance:
120% 100% 80% 60% 40% 20% 0%
Busine ssman
rofes sional
65%
Studen t
5%
ouse wife
22%
ax Benefit 32% Flexible 0 00% ess isk 11% ide cceptance 10% Security 42% igh eturn 5%
13
2 00% 15% 5% 13% 0%
0 00% 2% 12% 75% 6%
5 00% 12% 18% 31% 12%
STRATEGIC GROUPS ± INSURANCE INDUSTRY
Insurance Business
LIFE INSURANCE
Life Insurance Corporation of India Bajaj Allianz Life Insurance Company Limited . Birla Sun Life Insurance Co. Ltd ICICI Prudential Life Insurance Co. Ltd Reliance Life Insurance Company Limited. etc.
GENERAL INSURANCE
The Oriental Insurance Co. Ltd. Reliance General Insurance Co. Ltd. Bajaj Allianz General Insurance Co. Ltd. ICICI Lombard General Insurance Co. Ltd. IFFCO Tokio General Insurance Co. Ltd. etc.
y FIRE INSURANCE y MARINE INSURANCE y MISCELLANEOUS INSURANCE
14
SIZE OF THE INDIAN INSURANCE INDUSTRY
The Insurance industry in India has been progressing at a rapid pace since opening up of the industry in 2000. Indian domestic insurance market would touch around US$ 60.5 Billion in the year 2010 from existing size of about US$ 10.2 billion about 500% hike. According to the Insurance Regulatory and Development Authority (IRDA), new business premium income from April 2006 to February 2007 amounted to INR 579.38 billion (US$13.18 billion), registering an impressive 120% growth over the same period last year. India¶s life insurance premium as a percentage of GDP is currently estimated at 1.8% against 5.2% in US, 6.5% in UK and about 8% in South Korea. Rural and semi-urban India will contribute US $35 billion to the Indian insurance industry by 2010, including US $20 billion by way of life insurance and the rest US $15 billion through non -life insurance schemes.
The Insurance industry graph is definitely ascending. Distribution accounts for the largest element in insurers cost and affects profitability. The size of the country combined with problems of connectivity in the rural areas, makes insurance selling in India a difficult proposition. The distribution capabilities strongly influence product design in insurance. The distribution channels have a direct impact on the insurer¶s market image. Emergence of alternative channels such as Bancassurance and Internet is reshaping the insurance
industry. India with a population of more than a billion people offers unlimited growth potential.
15
SEGME TATION OF CUSTOMERS(AGE WISE) AND VARIOUS PRODUCTS OFFERED BY INSURANCE COMPANIES
100% 90% 80%
11%
13% 28% 42%
70% 60%
0%
44%
40% 34%
12%
40% 30% 17% 42% 32%
20% 10% 0%
38% 21%
14%
16
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DYNAMICS OF THE INSURANCE INDUSTRY
Changing Customer Expectations in Insurance Sector ( PRE TO POST liberalization) :
Pre Liberalisation Post Liberalisation
Motivating Factor(s) for Considering Insurance
Security Savings Tax Rebate
43% 14% 43%
Security Savings* Tax Rebate
50% 34% 16%
* children¶s education, daughter¶s marriage, retirement plan
Sources of Information on Insurance & Product Awareness
Friends, Colleagues, Relatives and Agent Low awareness of several insurance products
Additionally from direct mailers, consumer
meets, internet & media (mass media & outdoor)
due to poor communication in spite of availability
Rising level of awareness of new products of both LIC and private companies
Choice of First Policy
17
Money Back Endowment Whole Life
60% 40% 0%
Money Back Endowment Whole Life
42% 48% 10%
This change in product-mix reflects maturing of the insurance customer
Pre Purchase Process LIFE Pre Liberalisation Post Liberalisation
Motivating Factor(s) for Considering Insurance Security Savings Tax Rebate 43% 14% 43% Security Savings* Tax Rebate 50% 34% 16%
* children¶s education, daughter¶s marriage, retirement plan Sources of Information on Insurance & Product Awareness Friends, Colleagues, Relatives and Agent Low awareness of several insurance products Additionally from direct mailers, consumer
meets, internet & media (mass media & outdoor) Rising level of awareness of new products of both LIC and private companies
due to poor communication in spite of availability
Choice of First Policy
18
Money Back Endowment Whole Life
60% 40% 0%
Money Back Endowment Whole Life
42% 48% 10%
This change in product-mix reflects maturing of the insurance customer
Purchase Process LIFE Pre Liberalisation Post Liberalisation
Discount Offering Practices No. of customers getting discount 50% Rate of discount 25%-50% of first year premium Customers getting discount 33% (highest in Delhi) Rate of discount More or less same
Policy Delivery Mode Mode
- Registered post for LIC, hand delivered by agent in 23% cases Time taken 0% 65% 35%
- Registered post for LIC - Courier for private companies In both cases, policy comes in attractive, protective plastic jacket Time taken Private Co Up to 1 week 85% Up to one month LIC
Up to 1 week One month > 1 month
5%
77%
19
15% > 1 month 0% 18%
Post Purchase Process : LIFE
Pre Liberalisation
Post Liberalisation
Correspondence (other than premium notice) from Company / Agent
Generally no correspondence from either
company or agent except for late premium payment reminder from company
Mailers from both private companies & LIC on
products & services, greeting cards on birthdays, anniversary and new year
Agent maintained informal contact with close customers
Phone calls from private company call centres Agent in regular contact for offering new products
Delay in Premium Payment
20
Incidence of delay high 30%
Incidence of delay low 15%
(due to irregular receipt of premium notice from company / reminder from agent)
(more regular receipt of premium notice from company / reminder from agent)
Changing Customer Expectations ± LIFE
Role of IRDA Educate public on regulatory safeguards, investment guidelines and plough back of profits (several people had expressed concern about security of their money, credibility of private insurance company¶s investment of funds in foreign markets and repatriation of profits to foreign countries) Inform public on Social and Rural obligations of private players (several people believed that only LIC was responsible for insuring the poor)
21
Changing Trends in Savings Pattern:
Pre Liberalisation
Saving Instruments Respondents Insurance Bank Deposit PPF NSC Shares Post office Bonds Gold TOTAL % of 23 28 19 12 7 7 0 4_ 100
Post Liberalisation
Saving Instruments Respondents Insurance Bank Deposit PPF NSC Shares Post office Bonds Gold TOTAL % of 33 44 8 0 3 3 9 0_ 100
22
International Overview
n the 19th uly 2010 the ndian based ompany arsen & oubro ( & ) re eived final approval from ndian insuran e regulators to start ommen ing business through it s subsidiary & nsuran e he newly formed general insurer is supported by & valued at S$9 8 billion he ndian onglomerate & will have 100% equity in & nsuran e
" " ! " # "
arsen & oubro is one the largest private se tor onglomerates in ndia and thede ision to enter into the insuran e industry omes at a time when & aim to strengthen their position in the ndian finan ial servi e industry lready established in the non-banking finan ial se tor with & Finan e td the move into the general insuran e se tor meets & s aim to diversify the ompany s finan ial servi es offerings and reate a bigger orporate presen e in the ndian finan ial market ith health insuran e as the key fo us of its entry to the insuran e business the ompany plans to emphasize the importan e of their offerings in this area s su h the long term aim for & nsuran e is the development of its own health insuran e laim management team
" $ " ! " ! $ " %
23
NEW ENTRANTS IN THE RECENT PAST
Indian Insurance Industry in the year 2007-2008, has 5 new entrants:
LIFE INSURERS:
I. II.
Future Generali India Life Insurance Company Limited IDBI Fortis Life Insurance Company Ltd.
GENERAL INSURERS:
1. Apollo Munich Health Insurance Company Limited 2. Future Generali India Insurance Company Limited 3. Universal Sompo General Insurance Company Ltd.
Indian Insurance Industry in the year 2008-2009, so far has 5 new entrants in life and 3 new entrant in general:
LIFE INSURERS:
I. II. III. IV. V.
Canara HSBC Oriental Bank of Commerce Life Insurance Company Ltd. Aegon Religare Life Insurance Company Ltd. DLF Pramerica Life Insurance Company Ltd. Star Union Dai-ichi Life Insurance Co. Ltd., IndiaFirst Life Insurance Company Ltd.
GENERAL INSURERS :
1. Shriram General Insurance Company Limited, 2. Bharti Axa General Insurance Company Ltd. 3. Raheja QBE General Insurance Co. Ltd
24
Indian Insurance Industry in the year 2009 -20010: Max Bupa Health Insurance, the India-based joint venture between Max India Ltd. and Bupa, has launched its business and revealed its first product on April 29th, 2010.
Max Bupa Health Insurance¶s first product, named Heartbeat, which is targeted at Indian families, providing health insurance coverage for infants, senior citizens and all the family members in between. The company currently has an initial capital base of Rs 1.51 billion, or Rs 151 crore (US$ 33.89 million), with intentions to raise that number up to Rs 700 750 crore (US$ 157-168 million) in five years time.
25
TOP 5 PLAYERS IN THE INDIAN INSURANCE INDUSTRY
Top five players in the Indian Insurance Industry are:
1. Life Insurance Corporation of India 2. ICICI Prudential Life Insurance Co Ltd 3. Bajaj Allianz Life Insurance Co Ltd 4. SBI Life Insurance Co Ltd 5. Reliance Life Insurance Co Ltd
Market Share of Insurance Companies In India
2 96%
Life nsuran e orporation of ndia
rudential Life nsuran e o
98%
%
'
Ltd
64%
elian e Life nsuran e o Ltd
thers
26
5 7
5 7
4
4
7
4
8 93%
&
SB Life nsuran e o Ltd
5 7
4
8
6 98%
Bajaj llianz Life nsuran e o Ltd
5 7
4
3 2
6 45454 9
1
@
1
'00
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'
I. Life Insurance Corporation of India
LIC still remains the largest life insurance company accounting for 64% market share. Its share, however, has dropped from 74% a year before, mainly owing to entry of private players with innovative products and better sales force.
LIC experienced growth of only 5% during 2007 -08 in new business premium. It had an estimated 1.1 million licensed agents, with the private insurers adding another 900,000.
LIC witnessed decline in sales by 24% for new business premium for the first four months for the current financial year.
Total sales stood at Rs 10,797.1 crore during April-July as against new sales of Rs 14,186.04 crore in the corresponding period last financial year.
This is was mainly due to slowdown in economy and crash of stock market. Also, private companies are eating the share of L IC by introducing innovative products.
Products in different market segment: 1. Insurance Plans:
27
As individuals it is inherent to differ. Each individuals insurance needs and requirements are different from that of the others. LICs Insurance Plans are policies that talk to you individually and give you the most suitable options that can fit your requirement.
Jeevan Anurag CDA Endowment Vesting At 21 CDA Endowment Vesting At 18 Jeevan Kishore Child Career Plan Child Fortune Plus
Komal Jeevan Marriage Endowment Or Educational Annuity Plan Jeevan Chhaya Child Future Plan
Jeevan Aadhar Jeevan Vishwas
The Endowment Assurance Policy The Endowment Assurance Policy-Limited Payment Jeevan Mitra(Double Cover Endowment Plan) Jeevan Mitra(Triple Cover Endowment Plan) Jeevan Anand New Janaraksha Plan
28
Jeevan Amrit
Jeevan Shree-I Jeevan Pramukh
The Money Back Policy-20 Years The Money Back Policy-25 Years Jeevan Surabhi-15 Years Jeevan Surabhi-20 Years Jeevan Surabhi-25 Years Bima Bachat
Jeevan Bharati - I
The Whole Life Policy The Whole Life Policy- Limited Payment The Whole Life Policy- Single Premium Jeevan Anand Jeevan Tarang
29
Two Year Temporary Assurance Policy The Convertible Term Assurance Policy Anmol Jeevan-I Amulya Jeevan-I
Jeevan Saathi Plus Jeevan Saathi
2. Pension Plans:
Pension Plans are Individual Plans that gaze into your future and foresee financial stability during your old age. These policies are most suited for senior citizens and those planning a secure future, so that you never give up on the best things in life.
Market Plus I Jeevan Nidhi Jeevan Akshay-VI New Jeevan Dhara-I
30
New Jeevan Suraksha-I
3. Unit Plans:
Unit plans are investment plans for those who realise the worth of hard -earned money. These plans help you see your savings yield rich benefits and help you save tax even if you don't have consistent income.
Market Plus I Profit Plus Money Plus-I Child Fortune Plus Jeevan Saathi Plus
4. Pension Plan
LIC¶s Special Plans are not plans but opportunities that knock on your door once in a lifetime. These plans are a perfect blend of insurance, investment and a lifetime of happiness!
New Bima Gold
Health Protection Plus
31
Bima Nivesh 2005 Jeevan Saral
Jeevan Madhur Jeevan Mangal
5. Group Scheme:
Group Insurance Scheme is life insurance protection to groups of people. This scheme is ideal for employers, associations, societies etc. and allows you to enjoy group benefits at really low costs.
Group LIC's Superannuation Plus Group Term Insurance Schemes Group Insurance Scheme in Lieu Of EDLI Group Gratuity Scheme Group Super Annuation Scheme Group Savings Linked Insurance Scheme Group Leave Encashment Scheme Group Mortgage Redemption Assurance Scheme
32
Gratuity Plus Group Critical Illness Rider
JanaShree Bima Yojana (JBY) Shiksha Sahayog Yojana Aam Admi Bima Yojana
6. Withdrawn Plans:
Jeevan Nischay Wealth Plus Jeevan Aastha Jeevan Varsha Fortune Plus Health Plus
33
FINANCIAL ANALYSIS OF LIC:
Figures are as on March 2010
1.) P/E Ratio : 25.06
P/E ratio of LIC is favourable
2. ) Current Ratio: 18.49 The short term financial position of LIC is favourable.
3.) Debt Equity Ratio: 10.26
PSU bonds offer yields of close to 10 per cent, conforming to the insurer¶s yield expectations. However, the sources said, LIC¶s covenants were stiff. Borrowers are not permitted early exits. This was because LIC preferred to have long-term assets on its books to match its liabilities. Besides, borrowers are expected to maintain a debt equity ratio (DER) of 2:1 (67:33) during the tenure of the loan. The ratios are far tighter than the Finance Ministry prescribed guidelines of 80:20 DER.
4.) ROE: 8.70
LIC¶s ROE is high which is very favorable.
34
5.) EPS: 69.75
6.) Debt Service Ratio: 1.38
The DSCR measures the amount of cash available for debt servicing ± interest, principal and lease/royalty payments ± and is used by project financiers to assess the debt carrying capacity of borrowers. In addition, LIC has also begun insisting on physical asset cover by PSU borrowers. NHPC, for instance, has mortgaged some of its project assets to LIC.
7.) Net Profit Margin: 16.05
The overall operational efficiency of LIC is favourable with 16.05
35
II. ICICI Prudential Life Insurance Co Ltd
ICICI Pru is the biggest private life insurance company in India. It experienced growth of 58% in new business premium, accounting for increase in market share to 8.93% in 2007-08 from 6.97% in 2006-07.
Total premium collected increased to Rs 8,305.80 crore from Rs 5,254.64 in 2006-07. Total number of policies sold went up by 49%, from 1,960,034 to 2,913,606 in 2007-08, with a market share of 5.73%.
Renewal premium had gone up by 101% to Rs .5,526 crore from Rs 2,751 crore.
The company has 950 urban and 1,000 non -urban branches across the country. For the first four months of current financial year, it reported growth of 45.3%.
Products in different market segment:
1.) Life Insurance Plans: Education Solutions Wealth Creation plans Protection Plans 2.) Retirement Plans 3.) Health Insurance Products Health saver
36
HealthAssure Hospital Care II Crisis Cover FINANCIAL ANALYSIS OF ICICI Prudential Life Insurance Co Ltd
Fi
i l
i
wit
tit
37
C
t Rati
0.68 0.66 0.64
0.62 0.6
0.58 0.56 0.54
2008 2007
Debt Equity Ratio:
0.8 0.6 0.4 0.2 0
2008
38
2007
Profit bilit
tio:
0
-0.2 -0.4 -0.6 2007 2008
-0.8 -
39
III.) Bajaj Allianz Life Insurance Co Ltd
Total new business premium collected by Bajaj Insurance was Rs 6,491.70 crore in 2007-08.
The company reported a growth of 52% and its market share went up to 6.98% in 2007-08 form 5.66% in 2006-07. The company ranked second (after LIC) in number of policies sold in 2007-08, with total market share of 7.36%.
For the period of April ± July 2008, total amount of new insurance premium sold was Rs 1,197.95 crore as against Rs 1,075.93 in the same period last year, experiencing a growth of 11.35%. Number of policies sold dropped by around 3%.
Bajaj Allianz Life has a strong distribution network across the country with o ver 1000 branches spread over 950 towns.
It plans to raise its capital base by infusing Rs 500 crore in next few months to support its expansion plans.
40
Products offered in different market segments:
UNIT LINKED Regular Premium
PENSION Annuity Retirement
TRADITIONAL Endowment
TERM PLANS
Life Time Care Super Saver
Money Back
New Risk Care Term Care
New UnitGain II Assured Gain
Single Premium
Retirement Advantage RP Future Income Generator
CashGain
Shield Plus Wealth Gain
HEALTH WOMEN INSURANCE
CHILDREN PLAN
JUST LAUNCHED
Family CareFirst Health Care
ChildGain YoungCare II Invest Plus Premier Group Secure Life
House Wives
41
B R F Q HgD F D CC H
e He
D RB FB Q F Y GPP
M e
D RBFB Q F Y GPP
e
P R CF HC
P FBD Y X FB
DGQP D C RF R BF B C
D GQ P D IG DBGC H
FBEDCB A
Organization Design and Structure
B D e
C
CFO
s
S es e C He s
M D e
A He
B WUHedcb f
B H W V VUT SB
B Ass
e
G
&R He s
S B DY
aU
`YGD
A
U
Key A M
GSM
RGSM
T e A e es
CMO
HR He
aU
Se v e & s O e
42
F G CQ BD ` P D C
IV.) SBI Life Insurance Co Ltd
State Bank of India has a 74% equity stake and the balance 26% is held by French firm Cardif SA in SBI Life insurance. The company broke even in March 2006.
It¶s the fourth year of operations. SBI Life leveraged the 14,000 -odd bank branches of its parent SBI to push insurance policies.
The company grew 142.5% in the first four months of the current fiscal year. Total market share of the company increased from 3.14% in 2006 -07 to 5.15% in 2007-08, making it the 4th largest company in India.
However, in terms of new number of policies sold, the company ranked 6th in 2007-08. New premium collection for the company was Rs 4,792.66 crore in 2007-08, an increase of 87% over last year.
The company this year got approval to open 100 more branches to sell life insurance products.
43
Products offerent in different segments:
Protection Plan Pension Plan Savings Plan Child Plan Unit linked Plan Health Plan Group Plan
44
V.) Reliance Life Insurance Co Ltd
Reliance Life has sold maximum number of new group non -single policies in 2007-08. It experienced a phenomenal growth of 196% in 2008.
Total new business premium collected was Rs 2,792.76 crore and its market share went up to 2.96% from 1.23% a year back. It now ranks 5th in new business premium and 4th in number of new policies sold in 2007-08.
RLIC has been one of the fast gainers in market share in new business premium amongst the private players. It has crossed 1.7 Million policies in just two years of operations, after its takeover of AMP Sanmar business.
The number of policies sold in the year 2007-08 stood at 10.74 lakh as against 4.51 lakh in the previous year. In a short span of time, the company accomplished a large distribution set-up by opening 600 branches in 10 months, taking the overall branch network to above
Products offered in different segments: 1.) For individuals:
45
Protection Plan Savings and investment Plans Retirement Plan Child Plans
2.) For Groups: Employers Liability Solutions Employers Protection Solutions Employee Voluntary Benefit
46
Major policy changes that has affected the industry (both positively and negatively) in the recent past.
Regulatory tightening for the Insurance Industry in 2009:
2009 was a year in which regulators ushered in quite a few changes and proposed as many, for the insurance industry. The most notable changes were the ones that had policyholder interests in mind ² a cap on the expenses of the popular unit-linked insurance plans and allowing life insurers to sell products online. Apart from regulations which have already passed into law, there are others in the proposal stage ² such as the Swarup Committee recommendations and the Direct Taxes Code ² which may have far reaching implications for players. Here's a look at the changes suggested, implemented and their impact on the industry.
1.) Cap on ULIP expenses
Unit-linked insurance plans (ULIPs) have been long criticised for their high front-end charges, compared to alternative investments such as mutual funds; which depressed the yield to the investor. It was to address this issue that the Insurance Regulatory Development Authority introduced an upper ceiling on ULIP charges. This cap is expressed in terms of difference between the gross and net yield to customers. For ULIPs up to 10 years, the yield difference is capped at 300 basis points, and for those running over 10 years, it should not exceed 225 basis points.
47
Apart from this, the regulator has also imposed a cap on fund management charges at 1.35 per cent annually, within the overall cap, for all products. Insurance companies voiced their reservation on including the mortality and morbidity charges in the overall cap and upon the representation, IRDA removed these charges from the purview of the cap on expenses. The new regulation came into effect from October 1 for new products and existing ULIPs are required to meet these criteria by December 31. Responding to this change, a few insurers have already withdrawn some existing products and re-launched them in line with the new regulation.
2.) Online purchases
IRDA has permitted insurers to sell life insurance products online, which allow customers to purchase a life insurance policy without an inte rmediary. This is expected to drive down the cost of buying policies with one insurer recently offering a discount of 40 per cent on premia for investors who opted for its online term insurance plan.
3.) Promoters lock-in
IRDA is also ready with the final guidelines on corporate governance pertaining to the insurance industry. According to the guidelines, the promoters of insurance companies would have a lock-in period of five years before they are allowed to transfer the shares of the company to a third pa rty. In India, AMP Sanmar was the only insurance company to exit the business since the sector was opened up to private players. However, this regulation is designed to ensure that policyholders enjoy continuity as only players with a long-term view will enter the sector.
48
4.) Swarup Committee recommendations
The Swarup committee has submitted its proposals for doing away with the agent commission that is embedded in the premium paid by the policyholder, akin to mutual fund entry loads. It has also suggested rationalising the current commission structures of the agent. While the agent force has predictably objected to these recommendations, the insurance regulator, insurers and the life insurance council have also opposed these proposals.
5.) Direct Taxes Code
The draft of the proposed Direct Taxes Code recommended that insurance investments, for long driven by their tax benefits, should be brought under Exempt-Exempt- Tax regime, which would make the final proceeds of insurance policies taxable on withdrawal. Further, it has stated that to get tax exemption, the premium payable during the term of the policy does not exceed 5 per cent of the capital sum assured. If the committee's proposals are accepted, insurance companies may find it hard to sell traditional endowment products that driven largely by tax benefits.
6.) Multiple products
IRDA is considering allowing banks to tie -up with multiple insurance companies, for vending their products. That will give bank customers wider menu of options to choose from, and they can buy insurance products based on their needs.
7.) IPOs from insurers
Initial public offerings (IPOs) from insurance players have been on the anvil for some time now. However, according to IRDA regulations, only those with a 10 year track record are allowed to float public offers.
49
Reliance Life has approached IRDA to seek its permission to float a public issue, despite a shorter history and the regulator has asked the company to approach the Government. Currently, the Government is considering the request.
Recent Investment policy changes in the Indian Insurance Industry
y
A policy known by the name of 'Health plus Life Combi Product', offering life cover along with health insurance has been granted permission by the IRDA act and insurance companies are allowed to provide it now.
y
The FDI limit in the insurance sector has been cappe d at 26% for the foreign marketers but the government is thinking to increase it to 49% and a bill of this offer is pending at the Rajya Sabha
y
A low cost pension scheme is supposed to be formed by the Pension Fund Regulatory and Developmental Authority (PFRDA) on 1st April, 2010 to provide social security to the the poorer class.
y
The compulsory ceding by every General Insurance Corporation (GIC), would go on to stay at 10% under current regulations as specified by IRDA.
50
EXTERNAL ANALYSIS OF INDIAN INSURANCE INDUSTRY
PEST ANALYSIS I.] POLITICAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY
Within India political ambitions and rise of communalism, fissiparous tendencies are on the rise and may well continue for quite some time to time. Therefore, it expected that the insurance companies might consider offering political risk coverage also. The only area where Indian insurers consider giving cover is with regard to customs duty change under certain conditions. Certain type of political risk at the international level has serious implications for exporters. The term µpolitical risk¶ has a wider connotation than commonly understood or assumed. It covers events arising not just from politics, but risks in the course of international transactions. In this connection, it may be noted that export credit insurance has evolved out of uncertainties relating to international trade, particularly due to problems arising out o f foreign legal jurisdiction, political changes and currency exchange difficulties faced by many developing countries.
Prohibition for Investment: -
The funds of policyholders are prohibited from being directly / indirectly invested outside India as per section 27 ± C.
51
Manner and conditions of investment : -
Subject to the above provisions contained in Section 27 -/ 27- A / 27 B, the IRDA may, In the interest of the policyholders, specify the time, manner and other conditions of investment by insurer. Give specific directions applicable to all insurers for the time, manner and other conditions subject to which the policyholder¶s funds should be invested in the infrastructure and social sectors.
After taking into account the nature of busine ss and to protect the interest of the policyholders, issue directions to insurers relating to time, manner and other conditions of the investments provided the latter are given a reasonable opportunity of being heard.
Insurance business in rural / social sector: -
All insurers are required to undertake such percentage of their insurance business, including insurance for crops, in the rural social sector as specified by the IRDA. They should discharge their obligations to providing life insurance policies to persons residing in the rural sector, workers in the unorganized sector or to economically vulnerable classes of society and other categories of persons as specified by the IRDA.
Capital requirement: -
The paid up equity of an insurance company applying for registration to carry on life insurance business should be Rs 100 Crores.
Renewal of registration: -
An insurer, who has been granted a certificate of registration, should have the registration renewed annually with each year ending on March 31 after the
52
commencement of the IRDA Act. The application for renewal should be accompanied by a fee as determined by IRDA regulations, not exceeding one forth of one percent of the total gross premium income in India in the preceding year or Rs 5 Crores or whichever is less, but not less than Rs 50000 for each class of business as per Section 3-A.
Requirements as to Capital: -
The minimum paid up equity capital, excluding required deposits with the RBI and any preliminary expenses in the formation of the country , requirement of an insurer would be Rs 100 crore to carry on life insurance business and Rs 200 crore to exclusively do reinsurance business as per Section 6.
Investment of funds outside India: -
Insurers outside India as per Section 27-C cannot invest the funds of policyholders.
Insurance business in Rural Sector: -
After the commencement of the IRDA Act, 1999, every insurer would have to undertake such percentage of life insurance business in the rural sector as may be specified by the IRDA in this behalf. It is mandatory for the new companies to meet the obligations relating to the rural and unorganized sector as per section 32-B.
Power to investigation or inspection: -
The IRDA may, at any time, order in writing a person as investigating authority to investigate the affairs of any insurer and report to it. Government has power to change the tax policy against life insurance industry. Health insurance rebate, Pension saving rebate,
53
Mede claim premium rebate, P.P.F., E.P.F., NSC all are tax exempted saving, All life insurance policy are tax exempted saving , Agricultural income is tax exempted, House rent allowances, Post office saving, Expenses on dreaded diseases are tax exempted. Recently there is issue to increase FDI level from 26% to 49%.
Role of the government: -
As insurance is an important service sector, hence it is highly regulated by government. Since 1956 insurance sector was highly regulated by government of India. On March 16, 1999, the Indian cabinet approved on Insu rance Regulatory Authority Bills that was designed to liberalize the insurance sector. Two governments in India have fallen over the issue of liberalization of the insurance sector (which was nationalized in 1971). But the government of A.B.Vajpayee as gone ahead to announce the liberalization of this sector announcement was made in November 1998.
Government¶s objectives for liberalization of insurance: -
The main objective of opening of insurance sector to the private insurers is as under: 1. To provide better coverage to the Indian citizens. 2. To augment the flow of long-term financial resources to finance the growth of infrastructure.
54
Important government guidelines for private players for entering into Indian life insurance market: 1. Private companies with a minimum paid -up capital of Rs. 1bn should be allowed to enter the industry. 2. No company should deal in both life and general insurance through a single entity. 3. Foreign companies may be allowed to enter the industry in collaboration wi th the domestic companies. 4. Postal life insurance should be allowed to operate in the rural market. 5. Only one state level life insurance company should be allowed to operate in each state. 6. Foreign investors can invest up to 26% of the equity of their joint venture with Indian firms.
Government will prevail on grounds that the Rs. 4.5 billion India needs for infrastructure development in the five years from 1997 -98, cannot materialize if the insurance sector is not opened up.
BODIES THAT REGULATE THE SECTOR:
For better regulation purpose of the insurance sector the government has established following bodies; 1. IRA: Insurance Regulatory Authority. 2. IRDA: Insurance Regulatory and Development Authority. 3. TAC: Tariff Advisory Committee.
1. IRA: Insurance Regulatory Authority:
55
The IRA, under the chairmanship of Rangachary, was set-up in January 1996. IRA Bill has to be passed by parliament to make the IRA a statutory body. Comprehensive legislation aimed at reviewing the insurance Act of 1938 and repealing the life insurance corporation Act of 1956 have to be passed. The IRA is also preparing an internal rating system to screen all applications, as entry will be in phases. The joint venture status of life insurance companies (with majority holding of the domestic partner) is likely to be approved by the parliament. Consensus also seems to be emerging on the minimum of Rs. 1 bn capital stipulations for new insurance companies.
The IRA has stipulated a minimum rural presence for all companies. The exhaustive guidelines have been issued for the appointment of intermediaries (brokers, agents, surveyors and actuaries).
2. IRDA: Insurance Regulatory and Development Authority: The Insurance Regulatory and Development Authority, constituted under the IRDA Act, 1999, provide for the establishment of an authority to protect the interest policyholders, to regulate, promote and ensure orderly growth of the life insurance industry.
a. Business Requirement:-
A company will not be issued a license unless the IRDA is satisfied with the sound financial condition, the general charact er of management, the volume of business, the capital structure, earning prospects for the insurers and that the interests of the general public will be served if registration is gran ted to the insurer.
Foreign insurance companies have been allowed to have a maximum 26% share holding. No life insurance company can be registered under the Act unless they
56
have a paid up capital of Rs. 100 crores. Every life insurer shall deposit with th e reserve bank of India one percent of the total gross premium written in India in any financial year, not exceeding Rs. 10 crores. This amount would not be susceptible to any assignment or charge nor would it be available for the discharge of any liabilit ies other than liabilities arising out of policies issued, so long as any such liabilities remain undercharged.
b. Investment of Assets:-
Every insurer is required to invest, and keep invested, assets equivalent to not less than the net liabilities as fol lows: (a) 25 % in government securities, (b) a least 25% of the said sum in government securities or other approved securities and (c) the balance in any approved investment rated as ³very stron g´ or more by reputed rating agencies, which include various debt instruments on which dividend on its ordinary shared for the five years immediately preceding or for at least five out of the six or seven years immediately preceding have been paid and which have priority in payment over ordinary shares of the comp any in winding up.
The IRDA may in the interest of the policyholder¶ s directions relation the time, manner and other conditions and investments of a ssets to be held by an insurer. The IRDA may also direct the insurer to realize the investment, if it sees the investments to be unsuitable or undesirable. The Act prohibits an insurer from directly or indirectly investing policyholder funds outside India. Further, every insurer has to always maintai n an excess of the value of his assets over the amount of his liabilities of not less than Rs. 50 crores in the case of an insurer carrying of life insurance business. If at any time an insurer does not maintain the required solvency margin, he is required to submit a financial plan,
57
as per directions issued by the IRDA, indicating a plan of action to correct the deficiency within three months.
In order to ensure that the company does not risk the money of the policyholder¶s, the Act provides that an insurer who does not comply with the aforesaid provisions may be deemed to be insol vent and may be would up by the court.
Insurers are required to get an actuary to investigate the financial conditions of the life insurance business including a valuation of lia bilities every year in order to ensure continual compliance. In order to maintain transparency in its dealings, insurers would have to keep separate account relating to funds of shareholders and policyholders.
c. Consequences of non-compliance: -
A company failing to comply with the act shall be liable for panel action. Further, IRDA is empowered to investigate into the aff airs of the company. Failure to comply with the directions may lead to cancellation of the license for the company. Also, if the IRDA has reason to believe that a company is doing business in a manner likely to be prejudicial to the interest of policyholders, it is required to report to the central government. The central government may base on the repo rt, appoint an administrator to manage the affairs of the company . This would act as a further assurance to the consumers, as their interests would at all times be a prio rity and that in the event that the company acts in the manner prejudicial to their i nterests, than an administrator would be appointed to serve their needs.
58
The court may also wind up the company if it fails to deposit or keep deposits as per the requirements of the act or if the continuanc e of the company is prejudicial to the interest of the policyholders or public interest. But an insurance company cannot be wound up voluntarily or on the grounds that by reasons o its liabilities it cannot continue its business, except for the purpose of affecting an amalgamation or a reconstruction of the company. Therefore, a company after issuing a policy cannot escape liability by seeking voluntary winding up.
The four amendments, made in the life insurance Bill by the Lok Sabha, are as under: 1. The Insurance Regulatory and Development Authority should give priority to health insurance. 2. Policyholder¶s fund will be invested in the social sector and infrastructure. The percent may be specified by the IRDA and such regulations will apply to all insurers operating in the country. 3. Insurers will be expected to undertake a certa in percent of business in rural areas, and cover workers in the unorganized and informal sectors and economically backward classes. 4. In the event of insurers failing to fulfill the social sector obligations, a fine of Rs. 25 lakh would be imposed the first time. Subsequent failures would result in cancellation of licenses.
3. TARIFF ADVISORY COMMITTEE: The tariff advisory committee established under the Act is empowered to control and regulate the rates, terms, and etc. that may be offered by insurers in respect of any risk or of any category of risks. It is provided that in fixing, amending or modifying such rates etc. the committee shall try to ensure as far as possible that there is no unfair discrimination between risk of essentially the
59
same hazard and also that consideration is given to past and prospective loss experience. Every insurer is required to make payment to the TAC of the prescribed annual fees.
i. TAX POLICY AND INSURANCE SECTOR:
Another factor, which affects the insurance sector, is the tax policy. The tax reforms in India are such that it encourages the citizens to invest in the insurance sector. The tax policy of the government is particular relevant for life insurance which is a long-term contract and inculcates among the policyholders the habit of saving.
Taxation of returns on investment influences, investment decisions and high rates of taxation will discourage the desire to save. Already in India there are complaints that the rates of return on life policies are not what they could be. Therefore tax incentives play a vital role in determining the attractiveness of such policies. Such tax breaks are available in many countries and have helped in the development of their life sector.
In western countries the gain from the proceeds of a life insurance policy is pa id free of tax. Provided the policy satisfies certain qualifying conditions. Non qualifying policies get basic rate tax relief, though higher rate taxpayers may still have to pay tax on the gain, although at a reduced rate. The insurance companies can use such tax concessions rate. The insurance companies can use such tax concessions to design products for different categories of taxpayers.
The other factors, which affect the insurance sector, are the employment law, and government stability. These are the factors, which affect the insurance industry.
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ii. INVESTMENT DECISIONS MANDATED BY GOVERNMENT:
Insurers are required to fulfill certain social commitments as well. As many of the social welfare measures companies are not just regulated, but have been mandated to hand over a portion of their funds to the state for investment in infrastructure and for social development through government bonds and securities. In India, the pattern was, accordingly, prescribed in great detail by the government. This was not in the form of guidelines, but as a legal obligation under the insurance Act, 1938. Pattern of investment specified for life insurance:
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II.] ECONOMICAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY
Interest rate at bank and interest rate of P.F variation very much affect to life insurance industry, because people always attract by higher return. Therefore, they do not prefer lower return policy. Unemployment also affects insurance industry, because the unemployment people will not have earning, so saving also affect to life insurance sector Life insurance industry will directly affected by Earthquake, Monsoon, and Natural calamity. Because of these events turns into lots of death, so the life insurance companies have to pay claim against policy. Infant mortality rate and maternity mortality rate are also affecting to life insurance. Typical Indian want luxurious product against low income, so that they prefer installment or annuity (EMI), so that they may not have extra saving to invest in life insurance.
1. Adequacy of capital: Capital adequacy is a matter of attention in view of the nature of the life insurance business, where in the case a contingency arises, the insurers should be in a position to meet its long-term contractual obligations and pay up the dues or claims. In that sense, life insurance is a capital-intensive business and must be backed by an adequate capital base on the part of the owners and the companies should not be running their business purely on other people¶s money. So minimum start up amounts and long running capital adequacy norms are absolutely essential, in consideration of this, the Malhotra committee suggested and subsequently the IRDA stipulated a minimum capital base of Rs 1 bn for any entity wanting to enter the life insurance business.
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2. Increased Economical Activity: Although economic activity has slowed down since 1996, sooner or later there will be an upswing. The increase in the growth rate in various sectors accompanied by the growth in trade in the context of fulfilling of commitments to the WTO will signal a growth in the demand for insurance covers of new types. For example, aviation insurance cover will be on an increasing scale in view of the need for more frequent air travel for men and for transporting materials. This would necessitate substantial property, liability and personal insurance. As far as cover against business interruption is concerned, the pace of business and of change today is so fast that even the most careful assessment of exposure time, and the most liberal coverage cannot protect the insured adequate in the event of a loss be on the increase and insurance companies cannot afford to ignore the vast potential in this business.
3. Interest Rates: During the last years the government has rationalized interest rate creates better business opportunities for the life insurance sector because the substitute products are graded lower by the customers. On the other hand the value of the holdings of the insurance companies will increase. Rationalized of the interest rates is still expected, and it is an opportunity for the company.
Low interested rates mean low investment return for reinsures causing negative impact on their overall net profitability as pricing is to a certain extent sensitive to interest rate fluctuations. The negative impact therefore, lead to higher
pricing level for reinsures in order to sustain their profitability. But, in reinsurance market, which is characterized by over capitalization a resulting intense competition.
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The opportunity for such rate increases practically remains very slim and even non-existent. As a result, reinsures are under tremendous pressure to cut their operational cost to safeguard profitability. Furthermore, low interest rates discourage and even prevent any outflow of capital from reinsurance business to capital markets, causing current over capitalization in reinsurance market to continue.
A positive outcome is that low inflation rates, if sustained for a considerable period, usually bring some relief to reinsures from the resulting lower than forecast claims payment. Also, this can lead stability to reinsures administrative cost.
As interest rates fall, bond value rise, and insurers feel richer. On the liability side, reserves are not explicitly discounted so lower interest rates do not increase reserves, lower inflation means lower expected future claims payments which lowers required reserves. This in turn increase surplus, again allowing insurers to feel richer. Therefore, low interest rates and low inflation result in h igher assets, lower liabilities hence greater surplus and greater risk capacity resulting in less demand for, and greater surplus of reinsurance.
Low interest rates and low inflation reduce the ability of reinsures to off set technical losses by using financial products and should, as a consequences, force market competition downloads. However, this will also serve to weaken the balance sheets of insurers and create an increase in the demand for balance sheet protections.
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Lastly, these conditions move risk from the liability side of the balance sheet to the asset side while actually generating new needs for cover.
4. Inflation rate: Inflation can also be one of the causes to change the scenario of the insurance sector. High inflation for instance, would tend to reduce the insurance business, particularly life, because the real value of the money paid back to the policyholder on maturity of the policy would go down and would, therefore, lose its attraction for the investor. At the most, the insuring public may prefer pure risk plans (terms insurance), which have a low premium outlay.
The response to an inflationary situation will depend on what benefit the insured is looking for. In a situation of high inflation, clients would prefer policies where the savings portion is periodically returned while the risk portion is maintain for the duration of the contract. Those who prefer risk protection are likely to opt for long term policies, which may also be preferred because they are likely to be low premium policies.
A flexible system, under which the sum insured, is increased from time to time so that the real value of the cover is maintained, and c ould give a boost to the market under conditions of high inflation. Fortunately, the rate of inflation in India has been contained to less than 5 percent for a fairly long time and unless it goes out of hand, it is not likely to dampen the market. 5. Market related factors: These are the factors, which governs the entire life insurance sector. This includes internal as well as the external factors. We have seen the various factors like technological, economical and will see the political and government
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factors, environmental factors and competitive analysis of insurance sector in the next session.
These all factors have changed the trend of life insurance sector, which is shown in the following figure.
From the above figure we can see that strength of the insurance product s brand is very important aspect for the success in this sector. Of course you should have strong distribution channel without which growth is not possible.
6. C t
satisfacti
-
Since the customer is the focus of any service industry, every such industry continuously strives for greater variety and better quality of products, improvement in its delivery system, cost effectiveness, easy access, and quick response to perceived needs ± in short qualitatively superior service. Indian life
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insurance companies already have a sizable line up of the products. The difference between them and the foreign operators perhaps lies in the service provided, because there is still not enough concern on the part of the Indian companies, with customer satisfaction, on time renewals, claims settlements, etc. if high standards have been achieved else where, it is not impossible to attain the same in India too.
The concept of ³sales´ is now redefined as a long ± standing relationship. The relationship does not end with the conclusion of the transaction, but has to be durable and of a long term nature. Hence, improved in performance of the company will not be synonymous with only basic cost reduction or l arger business, but the new measure of performance will be set in terms of service to the customer. One can anticipate greater insistence from pressure groups like customer forums to keep customer satisfaction at the top of the list of priorities of the insurers.
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III.] SOCIO-CULTURAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY:
The basic social factors that affect the life insurance sector are as under: Population Life style Educational level Level of earning Societal benefits These are the major social factors, which affect the life insurance sector. We will discuss all of them in brief:
i.) Population: Growth in the population is a major factor pushing up the demand. It is also going to exert a special influence on the life insurance market in other ways. Apart from exerting pressure on demand for goods and services, and through that, ill effects of uncontrolled growth of population also could spur the growth of demand. For example, overcrowding in public places of entertainment, public support, or too many vehicles on the road can result in hazards like stampedes and pollution, which require covers and still are not sold on a large scale today. Thus the positive as well as the negative aspects of population growth are going to spur demand. ii.) Life style: The peculiar lifestyle of a country or an age also influences the insurance business. Change therein produces different demands for life insurance. For e.g. All over the world, family size is shrinking and the fact that in decades to come, both presents are more frequently likely to work outside the home will mean
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that there could be a greater possibility of property loss. Similarly, a larger number of vehicles on the roads for people commuting to their jobs or business would mean larger incidence of accidents. This will increase the demand for life insurance products.
Of course, there is also the other possibility that wherever it is possible, some people will try to spend a part of their time working at home either because they would like to be with their families or because they find it more convenient. Activities like life insurance and financial services are particularly well suited for such arrangements.
With time becoming scarcer for most people who pack in a full day, there is a higher demand for convenience and service. Companies will respond by trying to shorten the transaction time for the delivery of products and services and creating distribution systems that can reac h clients wherever they are and whenever they want to use them, so as to ensure convenient access to service providers.
In recent times, there has been a surge in the high end business of the LIC. For instance, as against 90 policies each worth more than Rs 10 million in 19992000, the number was as high as 900 policies in the next year. Or again, the number of jeevan shri policies jumped from 88,000 to a total of 2,33,000 policies in the same period. However, consumer¶s behaviour cannot be adequately and accurately predicted. The younger generation is overwhelmingly influenced by consumerism. If this trend continues or increases with increasing income, there will be fewer propensities to save or insure, as a result of which the increasing purchasing poser may not be reflected in the life insurance market.
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Crumbling social values, the deteriorating law and order situation, the growing incidence of crime, extortion, abduction, etc., are posing a new category of risks which need to be covered through suitably designed policies.
iii.) Level of education: India is one of the developing countries: the level of education is very low here. The literacy rate is very poor. More than 50% of the population is still uneducated or more or less not educated. Thus the peo ple are not able to understand the concept of the life insurance. Among the educated people the quality of the education is still a big question mark. Thus the awareness is not created and it has become a big challenge for the industry. Thus one of the factors, which affect the life insurance sector, is low level of education.
iv.) Level of earning: Another factor, which affects the life insurance sector, is the level of earning. In India the rule of 80-20 is working. The 80% of the total population is having the 20% of the wealth and the 20% of the total population is having 80% of total wealth. Thus the richer are richer and poorer are poorer. Due to this the life insurance sector is affected very much.
v.) Societal benefits: In view of the fact that large sections of India have inadequate life insurance cover, an important social responsibility of the government relates to spreading it far and wide. In addition, the government attempts to extent life insurance with certain social obligations in view in both urban and the rural areas through such means special schemes for the weaker sections, and by tilting of the life insurance companies¶ investments in favour of social developments.
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The social changes emerging in the country provide opportunities for insurers to sell financial services products such as family health care programmed, retirement plans disability insurance, long -term care for senior citizens and different employee benefit plans.
It is not the total population but the insurable populati on which is material for the conclusion of potential. Apart from the usual demographic and other well known factors such as age group, income level, sex wise distribution, and literacy level, a realistic assessment of this potential has to be based on seve ral other relevant factors.
Many invisible factors like religious faiths and social values too need to be considered. As such, there is considerable difficulty in accurately estimating the potential and crude estimates can be misleading. The estimate will also vary according to the criteria used to measure if. In principal, every individual is a potential candidate for life insurance. In reality, financial status limits this potential, not only because of the practical consideration of the insurable worth of a person to the insurer in financial terms, but more so due to the prospect¶s capacity to pay life insurance premium after meeting other pressing needs.
Again, there are many practical factor affecting µ insurability¶ such as old age, past and present illness, and physical and mental impairments. In addition, the cost of reaching out to a very large number of customers, if they are dispersed, becomes important. In that sense, the cost and profitability of exploiting the potential, which is otherwise attractive, limit the opportunity.
The sheer size of the numbers, therefore is not crucial itself. For assessing the practical business potential of life insurance, the eligible population needs to be ³Qualified´ in relation to other factors including those mentioned above. Thus,
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in the opinion of some experts, out of the population in the insurable age group, Only the main workers (i.e., excluding marginal wor kers) with adequate income may be considered as the actual insurable population.
The population in the age group 15 -55 is usually regarded as the insurable population, since this can be considered as the main ³active´ age group (in the sense of working, earning. And supporting others), and beyond this range life risk may be considered to be not worth insuring. There is one opinion, which suggests that in our country the age group 15 -55 as the base is not totally suitable. Due to various factors including t he unemployment problem, real earning starts from around the age of 25 for salaried persons.
For others, particularly small entrepreneurs, traders and businessman, the starting age is a little higher. Only in the affluent sector of society life insurance can be taken before personal earning starts. Thus, number wise life insurance below the age of 25 is not so significant (although amount wise it need not be so). On the other hand, people over the age of 50 rarely apply for fresh life insurance, mainly because in India the normal retirement age is around 60 years.
Also, a high percentage of the population in the lower income group does not remain ³insurable´ after the age of 50. thus, in our country the practical age range for insurable population actual ly narrows down to 25 to 50.
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IV.] TECNOLOGICAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY:
Internet as an intermediary in the current Indian market customer is not aware about the intrinsic value of insurance. Customers think of insurance only as a tax saving measure. The security provide by an insurance cover is rarely thought about. In such a scenario Internet can be an effective medium for educating the consumers about insurance. It serves as a single window for disseminating product, process and procedural information to the consumers.
Product development and target marketing through the Internet: with increase in the number of insurance companies there will be a need for market segmentation and subsequently product designed for each of them. In such a scenario Internet can be a effective channel for pushing product specific information to a particular market segment. Consumer feedback about a particular product as well as suggestions for different types or covers can also be generated through the Internet.
Retail marketing is a commonly accepted concept and the providers of the retail products and service will try out for larger market and market share. There would be cut through competition and the real benefit would be to the customers in terms of better products, distribution, pricing, post transaction service and technology.
Technology will perhaps be the single largest driver of the retail thrust. The entire strategy will evolve around the absolute ability of the organization. The customer will demand for greater convenience of excess to the product/ service and all at low cost of delivery. Therefore the use of technology and specifically the Internet with realigned strategies would be one of the key factors to success.
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Constraints of locations, timing and accessibility would not be a hurdle for either customers or businesses.
a.) Maintaining the database The most important factor that is effecting the insurance industry is the marinating the database of the customers. The insurance industr y having a huge list of the customers. In order to maintain it in manual format it is really the work of stupidity. With the change in time the computers has taken the work of this things. Thus with the development of the technology it has becoming possible to maintain such huge database very easily. A person can switch over to the computer and get the details of the customer very easily. Thus maintaining the database has really become easy due to the development in technology.
b.) E-business insurance in India: The Internet has played a vital role in transforming the business of the 21 st century. Computers are now being used extensively for creating a storing data, information with the help of complex and sophisticated technological tools in every kind of business. This change having been widely accepted, the advantages are numerous such as fast processing improved. Efficiency, cost reduction among several other benefits.
However, with every positive change, there is an evil attached and technology is no exception. In technical is an evil attached and technology is no exception. In technical terms, increased sophistications of technology brings with it, an increased factor of risk involved. The risk can be of various attributes, for example, the risk of data being lost due to a virus attack, the theft of important
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and confidential information and so on, which ultimately results in losses for the business entity.
With this change in the business process, insurers have to devise new methods for assessing, underwriting and servicing claims for the so -called e-business insurance. Insurers face challenges to ascertain risks, in order to quantify them because such risks don¶t have any past data, which makes it all the more difficult for actuaries. Moreover, what financial impact a particular risk can have is very difficult to be determined. For example, if some hackers obtain credit card information of few customers, it¶s a loss for banks, their credibility, customers and also their brand. Will an insurance policy cover all of this is million dollar question hence; the difficulty is to design a cover first of all, which really answers the needs of customers. But even after designing and pricing such products with difficulty, the challenge to underwrite and handl e claims for such policies remains existent.
c.) Impact on distribution channels: Distribution channels are the most important part of the insurance industry. The scenario is continuously changing in this industry. In future the customers are expected to be more technology ± oriented, better informed, more knowledgeable and more demanding. The insurers will have to offer all types of channel to customer and it is the customer who will have the right to choose the channel suiting him/ her.
Dual income families with young children, singles with long working days and flexi-timers all demand high level of sophistication and ease when it comes to service. Hence the companies have to be very careful and cautious in catering to
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the needs of these customers who provides a good amount of business to the insurers. Thanks to the technological advancement and increased de regulation and sophistication, the carriers and producers can now reach the customers in different ways as has been proved in the US market and ot her developed nations the web is extensively used for the access of information but when it comes to the purchase of policy, the offline mode is preferred. The private players in India seems to have identified this and have put substantial information on t here websites regarding policies, quotes and contact information among other routine stuff.
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MICHAEL PORTER¶S FIVE FORCES MODEL
1. Threat new entrants: The future of life insurance market scenario will be marked by the active presence of many international players, beside several Indian players. As far as life insurance industry there would be fewer entries due to more specialized firm with lower expenses ratios and better capitalization. Threat of entry is determine by the entry barriers which act to prevents firms from entering the industry. In life insurance industry entry barriers is moderate so that it becomes profitable, it attracts new entrants, thereby increasing the number of competitors.
The Indian market is highly brand oriented, it is difficult to introduce new brand. The acceptability of new brand is also very low.
The capital requirement in life insurance is Rs. 100 crores, which attract more companies to invest in. promoters, can hold paid up equity cap ital up to 26% in an Indian insurance company. In case promoters hold more than 26% of the paid up equity capital, they shall divest the excess shares in the phased manner within a period of ten year.
Tax exemption structure makes the industry attracti ve.
High level of competition in life insurance industry become giant player came into the market.
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High profit in life insurance industry act as a magnet to firms outside the industry motivating potential entrants to commit the resources needed to hurdle entry barriers.
But again due to potential market, private giants and international player try to enter in to the market in the large scale with their proper homework with customized and products too. An Indian private are well ± developed and has capacity to face challenges, foreign companies foresee good prospects for new business by alliances and partnership with domestic outfits .
Registration: Every insurer is required to obtain a certificate of registration from the controller of insurance. The registration is required to be renewed after a period of three years.
Economies of scale: Economies of scale is difficult to find in the initial stage of entry into the market because of experience as evidence by the theory of experience curve.
Legislation or government action: special permission is required from the government to enter in the insurance sector. With the tariff advisory committee to control the rates, rules and regulation, and with the control of IRDA and the government¶s attitude to serve to the needs of the people with social objectives, the multinationals may face breathing and developmental problems.
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2. Bargaining power of buyer: Now a day competition is increasing in the each and every sector, and as a competition in the market increase the bargaining power of the buyer will get increase. So buyers bargaining power is high.
Market is highly segmented.
Buyers in this industry are very return oriented and it switches easily.
The switching cost of buyer over brand or close substitute products: The life insurance industry has the uniqueness of providing risk protection, which does have any substitute. Thus the switching cost has no place. As far as the substitute products are concerned they are providing the service of saving and tax benefits but still they lag in the risk coverage factor.
If buyers buy insurance then switching cost become high. High switching cost creates buyers lock in and makes a buyer¶s bargaining power.
Buyers have a strong competitive force when they are able to exercise bargaining leverage over premium, service or other terms of sale.
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3. Bargaining power of Suppliers: Policy designer tend to have less leverage to bargain over premium and other terms of sale when the company they are supplying a major customer.
Suppliers bargaining power increase if reduced administrative cost and also reduced claim procedure time.
Insurance is tax exempted so that suppliers bargaining power increases.
Suppliers then have a big incentive to protect and enhance their customer¶s competitiveness via reasonable premium, better service and on going advances in the technology of the item supplied.
Supplier¶s ability to integrate forward: the private players can integrate forward to increase the volumes of business by providing customized and tailor made policies whereas existing players whereas lack on this point.
Brand identity: there is certainty among the minds of people in relation to existence and payment of claims from the existing players whereas the solvency of private players is not certain.
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4. Threat from Substitutes:Life insurance sector can be featured in t hree factors. They are saving, risk and tax benefit.
SAVING:
As far as saving are concerned, Existences of a large number are saving through PPF, EPF. Most of customer saving their money in bank, post deposit. Many customers invest their money in share market, purchase Gold & Silver also.
The substitute products for the industry are as follow:
Term deposits in bank (5.25-8 %)
Investment in government securities. (4-5%)
Money market investment (for corporate)
Capital market (around 13% p.a. for developing country like India)
There is threat of increasing market potential of NSC, Government debenture etc.
If investments in insurance policies are made with the objective of tax benefits then there are other investment avenues, which offer similar benefits.
RISK COVERAGE:
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For risk coverage, there is no close substitute of the products. The risk protection is provided by this sector only. No other instrument provides assurance against risk.
TAX BENEFIT:
There are various substitute of this feature of life insurance. Some of the substitute which provides tax benefit is: PPF NSE POST OFFICE SECURITIES. INVESTMENT IN THE MUTIAL FUND. OTHER TAX SAVING INSTRUMENT.
Thus these are the substitute of the life insurance industry. But the core competency of this sector is the risk protection providing capacity, which no other sector can provide.
5. Rivalry among the exiting player:
As a result of privatization competitive conditions will prevail in which entry of companies buyers will exercise control.
There is cut- thought competitions among rivals in life insurance industry.
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There are mainly 13 private organizations and one public organization in life insurance competition.
The insurance sector is showing high market growth rate, w hich enables the insurance companies to achieve its own market growth through the growth in market place. As per the study conducted by the monitor group, the size of the Indian general insurance market was of the order rs.10000 crores in 2001. The annual growth rate is expected to be 15%.
All the insurance companies deal in identical policies, as service levels offered are similar. Hence, there is no product differentiation.
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SWOT ANALYSIS
Strength
y Risk protection is provided by this sector only. yInsurance having currently good market. yTax exemption. yThe variety of products is increasing. yInsurance to build close relationship with customers.
Weakness
y Unable to convince people about the products. yInsurance companies instability yLimited working capital yProducts or services similar to competitors.
Opportunities
yTechnology is improving paperless transaction are available. yBusy life, customer need flexible and customizable policies. yLike mobile banking mobile insurance could be a hit. y New innovations in technology-measuring weather variables.
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Threats
yWeather cycles. y New substitute product emerging. yIncreasing expenses and lower profit margins with hard on the smaller agencies and insurance companies. yGovernment regulations on issues like health care terrorism can quickly change the direction on insurance.
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Projected Future Prospects: Market Share
Estimating the potential of the Indian insurance market from the perspective of macro-economic variables such as the ratio of premium to GDP, Assocham Papers reveals that India¶s life insurance premium, as a percentage of GDP is 1.8% against 5.2% in the US, 6.5% in the UK or 8% in South Korea.
Assocham findings reveal that in the coming years the corporate segment, as a whole will not be a big growth area for insurance companies. This is because penetration is already good and companies receive good services. In both volumes and profitability therefore, the scope for expansion is modest. Survey suggested that insurer¶s strategy should be to stimulate demand in areas that are currently not served at all. Insurance companies mostly focus on manufacturing sector, however, the services sector is taki ng a large and growing share of India¶s GDP. This offers immense opportunities for expansion opportunities.
Being an agrarian economy again there are immense opportunities for the insurance companies to provide the liability and risks associated in this sector. The Paper found that the rural markets are still virgin territories to a great extent and offer exciting opportunities for insurance companies. To understand the prospects for insurance companies in rural India, it is very important to understand the requirements of India's villagers, their daily lives, their peculiar needs and their occupational structures. There are farmers, craftsmen, milkmen, weavers, casual labourers, construction workers and shopkeepers and so on. More often than not, they are into more than one profession.
The rural market offers tremendous growth opportunities for insurance companies and insurers should develop viable and cost -effective distribution channels; build consumer awareness and confidence. The Paper found that the re
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are a total 124 million rural households. Nearly 20% of all farmers in rural India own a Kissan Credit cards. The 25 million credit cards used till date offer a huge data base and opportunity for insurance companies. An extensive rural agent network for sale of insurance products could be established. The agent can play a major role in creating awareness, motivating purchase and rendering insurance services.
There should be nothing to stop insurance companies from trying to pursue their own unique policies and target whatever needs that they want to target in rural India. Assocham suggests that insurance needs to be packaged in such a form that it appears as an acceptable investment to the rural people. In the near future, when we¶ll see more innovations in agriculture in the form of corporatization or a more professional approach from the farmers¶ side, insurance will definitely be one option that the rural Indian is going to accept.
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Conclusions
India is among the important emerging insurance markets in the world. Life insurance will grow very rapidly over the next decades in India. The major drivers include sound economic fundamentals, a rising middle -income class, an improving regulatory framework and rising risk awareness. The fundamental regulatory changes in the insurance sector in 1999 will be critical for future growth. Despite the restriction of 26% on foreign ownership, large foreign insurers have entered the Indian market. State -owned insurance companies still have dominant market positions. But, this would probably change over the next decade. In the life sector, new private insurers are bringing in new products to the market. They also have used innovative distribution channels to reach a broader range of the population. There is huge in the largely undeveloped private pension market. The same is true for the health insurance business. The Indian general insurance segment is still heavily regulated. Three quarters of premiums are genera ted under the tariff system. Reinsurance in India is mainly provided by the General Insurance Corporation of India, which receives 20% compulsory cessions from other general insurers. Finally, the rural sector has potential for both life and general insurance. To realize this potential, designing suitable products is important. Insurers will need to pay special attention to the characteristics of the rural labor force, like the prevalence of irregular income streams and preference for simple products.
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