Insurance Sector in India

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With largest number of life insurance policies in force in the world, Insurance happens to be a mega opportunity in India. It’s a business growing at the rate of 15-20 per cent annually and presently is of the order of Rs 450 billion. Together with banking services, it adds about 7 per cent to the country’s GDP. Gross premium collection is nearly 2 per cent of GDP and funds available with LIC for investments are 8 per cent of GDP. Yet, nearly 80 per cent of Indian population is without life insurance cover while health insurance and non-life insurance continues to be below international standards. And this part of the population is also subject to weak social security and pension systems with hardly any old age income security. This itself is an indicator that growth potential for the insurance sector is immense. A well-developed and evolved insurance sector is needed for economic development as it provides long term funds for infrastructure development and at the same time strengthens the risk taking ability. It is estimated that over the next ten years India would require investments of the order of one trillion US dollar. The Insurance sector, to some extent, can enable investments in infrastructure development to sustain economic growth of the country.

Insurance is a federal subject in India. There are two legislations that govern the sector- The Insurance Act- 1938 and the IRDA Act1999. The insurance sector in India has come a full circle from being an open competitive market to nationalization and back to a liberalized market again. Tracing the developments in the Indian insurance sector reveals the 360 degree turn witnessed over a period of almost two centuries.

Historical Perspective
The history of life insurance in India dates back to 1818 when it was conceived as a means to provide for English Widows. Interestingly in those days a higher premium was charged for Indian lives than the non-Indian lives, as Indian lives were considered more risky for coverage. The Bombay Mutual Life Insurance Society started its business in 1870. It was the first company to charge same premium for both Indian and non-Indian lives. The Oriental Assurance Company was established in 1880. The General insurance business in India, on the other hand, can trace its roots to the Triton (Tital) Insurance Company Limited, the first general insurance company established in the year 1850 in Calcutta by the British. Till the end of nineteenth century insurance business was almost entirely in the hands of overseas companies. Insurance regulation formally began in India with the passing of the Life Insurance Companies Act of 1912 and the provident fund Act of 1912. Several frauds during 20's and 30's sullied insurance business in India. By 1938 there were 176 insurance companies. The first comprehensive legislation was introduced with the Insurance Act of 1938 that provided strict State Control over insurance business. The insurance business grew at a faster pace after independence. Indian companies strengthened their hold on this business but despite the growth that was witnessed, insurance remained an urban phenomenon. The Government of India in 1956, brought together over 240 private life insurers and provident societies under one nationalized monopoly corporation and Life Insurance Corporation (LIC) was born. Nationalization was justified on the grounds that it would

create much-needed funds for rapid industrialization. This was in conformity with the Government's chosen path of State lead planning and development.

A brief history of the Insurance sector
The business of life insurance in India in its existing form started in India in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. Some of the important milestones in the life insurance business in India are: 1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business. 1928: The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and non-life insurance businesses. 1938: Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public. 1956: 245 Indian and foreign insurers and provident societies taken over by the central government and nationalized. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore from the Government of India.

Insurance sector reforms
In 1993, Malhotra Committee headed by former Finance Secretary and RBI Governor R. N. Malhotra, was formed to evaluate the Indian insurance industry and recommend its future direction. The Malhotra committee was set up with the objective of complementing the reforms initiated in the financial sector. The reforms were aimed at “creating a more efficient and competitive financial system suitable for the requirements of the economy keeping in mind the structural changes currently underway and recognizing that insurance is an important part of the overall financial system where it was necessary to address the need for similar reforms…” In 1994, the committee submitted the report and some of the key recommendations Included:

i) Structure
• Government stake in the insurance Companies to be brought down to 50%. • Government should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as independent corporations • All the insurance companies should be given greater freedom to operate.

ii) Competition
• Private Companies with a minimum paid up capital of Rs.1bn should be allowed to enter the industry. • No Company should deal in both Life and General Insurance through a single entity. • Foreign companies may be allowed to enter the industry in collaboration with the domestic companies. • Postal Life Insurance should be allowed to operate in the rural market. • Only one State Level Life Insurance Company should be allowed to operate in each state.

iii) Regulatory Body
• The Insurance Act should be changed. • An Insurance Regulatory body should be set up. • Controller of Insurance (Currently a part from the Finance Ministry) should be made independent.

iv) Investments
• Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%. • GIC and its subsidiaries are not to hold more than 5% in any company (There current holdings to be brought down to this level over a period of time).

v) Customer Service
• LIC should pay interest on delays in payments beyond 30 days. • Insurance companies must be encouraged to set up unit linked pension plans. • Computerization of operations and updating of technology to be carried out in the insurance industry. The committee emphasized that in order to improve the customer services and increase the coverage of the insurance industry should be opened up to competition. But at the same time, the committee felt the need to exercise caution as any failure on the part of new players could ruin the public confidence in the industry. Hence, it was decided to allow competition in a limited way by stipulating the minimum capital requirement of Rs.100 crores. The committee felt the need to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives. For this purpose, it had proposed setting up an independent regulatory body- The Insurance Regulatory and Development Authority. Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in Parliament in December 1999. The IRDA since its incorporation as a statutory body in April 2000 has fastidiously stuck to its schedule of framing regulations and registering the private sector insurance companies. Since being set up as an independent statutory body the IRDA has put in a framework of globally compatible regulations. The other decision taken simultaneously to provide the supporting systems to the insurance sector and in particular the life insurance companies was the launch

of the IRDA online service for issue and renewal of licenses to agents. The approval of institutions for imparting training to agents has also ensured that the insurance companies would have a trained workforce of insurance agents in place to sell their products.

The Insurance Regulatory and Development Authority
Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in Parliament in December 1999. The IRDA since its incorporation as a statutory body in April 2000 has fastidiously stuck to its schedule of framing regulations and registering the private sector insurance companies.

The other decisions taken simultaneously to provide the supporting systems to the insurance sector and in particular the life insurance companies was the launch of the IRDA’s online service for issue and renewal of licenses to agents. The approval of institutions for imparting training to agents has also ensured that the insurance companies would have a trained workforce of insurance agents in place to sell their products, which are expected to be introduced by early next year. Since being set up as an independent statutory body the IRDA has put in a framework of globally compatible regulations. In the private sector 12 life insurance and 6 general insurance companies have been registered.

Present Scenario
The Government of India liberalized the insurance sector in March 2000 with the passage of the Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign ownership. Under the current guidelines, there is a 26 percent equity cap for foreign partners in an insurance company. There is a proposal to increase this limit to 49 percent. The opening up of the sector is likely to lead to greater spread and deepening of insurance in India and this may also include restructuring and revitalizing of the public sector companies. In the private sector 12 life insurance and 8 general insurance companies have been registered. A host of private Insurance companies operating in both life and non-life segments have started selling their insurance policies since 2001. THE new stars of the Indian Insurance Industry are on the rise as private insurers are increasingly chipping away at public sector behemoth LIC's lead in the Rs 25,000 crore life insurance market. Prominent among the newcomers are ICICI Prudential, Bajaj Allianz and HDFC Standard life. These together collectively account for around 15% of the total first year premiums collected for April-June '05. LIC is clearly losing market share, where it was the only player not so long ago. Consider this - for the year ended March '05. LIC had a share of 78.07% of the total life insurance premium market, which in a span of three months has fallen to around 74.87%.

ICICI Prudential is the second largest player and the largest among private insurers with a 7.53% share of premium collected during April-June '05 followed by Bajaj Allianz at 4.18% and HDFC Standard at 3.20%. Overall, the life insurance industry continues to see good growth with premiums collected registering a 36% growth over the previous year for FY05. The growth in premium collected is being driven by the increasing popularity of ULIPs (unit linked plans). In the past year, premiums from ULIPs grew by around 422% while non-ULIP business premiums increased by around 0.03% only. ULIPs are driving the growth in premiums collected with ULIPs accounting for 38% of total premiums collected as of June '05. The rising sensex has greatly increased the popularity of investment oriented insurance options. Private insurers seem to be the biggest beneficiaries of ULIPs with 72% of their total premium collections for FY05 coming from ULIPs. With LIC, ULIPs accounted for a more modest 21% share. This, too, is considerable since ULIPs accounted for just 2% of premiums collected during FY04. The increasing popularity of ULIPs can be attributed to the transparency and flexibility offered in comparison to other insurance products." In a ULIP plan, the NAVs are declared daily which allows the policyholder to keep check on how the premiums paid are invested unlike a blanket cover. Also, the flexibility to move among various investment options in a ULIP scheme has greatly increased the flexibility available to a policyholder. The order also remains same in terms of the number of lives insured or covered with LIC accounting for around 87.25% of the total lives covered, followed by ICICI Prudential among the private insurers with a 3% share and Bajaj Allianz at around 2% for April- June '05. Among the private players, Bajaj Allianz has seen the highest growth rates at around 388% for FY05 and 181% for the month of June. Others seeing strong growth are AMP Sanmar, HDFC Standard life, Max NewYork Life and Met life among the private

players. Birla Sunlife, among the private players has registered a negative growth 12% for the April-June '05 period and has failed to keep pace with the growth rates of other insurers apart from LIC for FY05. Sahara Life is the smallest among life insurers at 0.02% share of the market for April – June '05. Other insurers with a under one percent share of the market are ING Vysya, AMP Sanmar, Kotak Mahindra Old Mutual and Metlife insurance for April – June '05. Among insurance policies, the figures point towards increasing preference for categories like pension plans. Pension plans accounted for around one third of the total premiums collected in April-June '05. In terms of percentage share, though Life insurance still accounts for the lion's share at 64%, followed by pension plans at 33%, annuity's at 2% and health accounting for a round 0.025%. Within the life insurance category, the group schemes have been registering strong growth rates .The segment grew by 23% for the month of April-June '05 and a 75% growth over the previous year. Within group insurance LIC accounts for the largest pie at around 63% but there is change at top league within private insurers with Tata AIG taking top honours with a 12% share of the market and SBI life with a 7% share of the market. Group insurance has evolved into a cheap and alternate way for insurers to grow their businesses. Group Insurance lets insurers access a group of customers at lower rates of premium. The Advantage here is the lower origination costs involved for the over and the huge ticket sizes for the insurance company.

Life Insurance Market
The Life Insurance market in India is an underdeveloped market that was only tapped by the state owned LIC till the entry of private insurers. The penetration of life insurance products was 19 percent of the total 400 million of the insurable population. The state owned LIC sold insurance as a tax instrument, not as a product giving protection. Most customers were under- insured with no flexibility or transparency in the products. With the entry of the private insurers the rules of the game have changed. The 12 private insurers in the life insurance market have already grabbed nearly 9 percent of the market in terms of premium income. The new business premium of the 12 private players has tripled to Rs 1000 crore in 2002- 03 over last year. Meanwhile, state owned LIC's new premium business has fallen. Innovative products, smart marketing and aggressive distribution. That's the triple whammy combination that has enabled fledgling private insurance companies to sign up Indian customers faster than anyone ever expected. Indians, who have always seen life insurance as a tax saving device, are now suddenly turning to the private sector and snapping up the new innovative products on offer. The growing popularity of the private insurers shows in other ways. They are coining money in new niches that they have introduced. The state owned companies still dominate segments like endowments and money back policies. But in the annuity or pension products business, the private insurers have already wrested over 33 percent of the market. And in the popular unit-linked insurance schemes they have a virtual monopoly, with over 90 percent of the customers.

The private insurers also seem to be scoring big in other ways- they are persuading people to take out bigger policies. For instance, the average size of a life insurance policy before privatization was around Rs 50,000. That has risen to about Rs 80,000. But the private insurers are ahead in this game and the average size of their policies is around Rs 1.1 lakh to Rs 1.2 lakh- way bigger than the industry average. Buoyed by their quicker than expected success, nearly all private insurers are fast- forwarding the second phase of their expansion plans. No doubt the aggressive stance of private insurers is already paying rich dividends. But a rejuvenated LIC is also trying to fight back to woo new customers.

Health insurance growing and going rural
OVER the last few years, health insurance has witnessed a significant increase both in terms of premiums and numbers. The health insurance sector, which constitutes an estimated 9.6% of the total premiums of the general non-life insurance industry in India, has recorded a growth of 36% over the last year, health premium thus rising to Rs 1,732 crore in '04-05 from Rs 1,274 crore the previous year. Health insurance continues to be the fastest growing segment of the insurance industry. ICICI Lombard, which has a 6.9% share in the overall market but a 39% share of the private health insurance market, registered an increase of 257% of its health insurance business over the last year. As a result, while health premium represented not more than 6% of the company's insurance business in '03-04, it represents over 13% today. Likewise, Bajaj Allianz, which holds a 23.1% market share of the private health insurance market, has registered a 242.2% increase of its health business in '04-05. Health premium has increased from 4 to 8% of the company's total non-life business. If the private health insurance sector has registered a spectacular increase with an average growth rate of 148% of premiums, 82% of the total health insurance market remains under control of the public sector. The four public insurance providers' health premium has increased to Rs 1732.2 crore in '04-05 from Rs 1,151.2 crore a year ago.

Health represents 9.8% of the public insurance provider's business, a share increasing steadily every year. New India Assurance, with an overall market share of 30%, is the leader of the total market, followed by National Insurance, which controls 21% of the market followed by United India and finally Oriental Insurance. However, in spite of a significant growth over the last few years, the market for health insurance in India remains limited. Today, only 85m people in India are covered by heath insurance policy, and among them only 10.8m are covered by a health insurance provider. The rest are covered under government schemes, company schemes, etc. Insurance providers are starting to look at new opportunities. Senior citizens stand out as a promising untapped market and private players are looking at offering complementary insurance to individuals already benefiting from a government or a company scheme. Yet, lack of data has been and remains a significant stumbling block to the development of a robust health insurance market in India. Patients' needs vary from region, city and age group. According to insurance companies, without accurate data, designing adapted products and pricing them efficiently is very difficult. In fact, the health insurance portfolio is not profitable at the moment.

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