Insurance Sector
Content
REFORMS BEFORE AND AFTER 1991INSURANCE SECTOR
SUBMITTED TO: Mrs. YAMINI
SUBMITTED BY: ABHISHEK SHARMA ADITYA SARAOGI GOURAB SINGH MADAN LAL NITIN LAHOTI SUMIT KHANEJA
Economics of Markets
Table of Contents Executive Summary ........................................................................... 3
Introduction ....................................................................................... 3 Pre-Reforms in Insurance Sector ..................................................... 4-5 The liberalization policy in India ........................................................ 5 Post Liberalization Period ............................................................... 5-8 Conclusion ......................................................................................... 8 Appendix ........................................................................................... 9 Bibliography .................................................................................... 10
Page 2
Economics of Markets
Indian Economy and Insurance Sector - Before and After Reforms of 1991
Executive Summary
In this report we discuss the government policies in the insurance sector such as privatization, liberalization and globalization which impacted the Indian economy. To understand the changes in the economic system better, we looked at policies that prevailed before 1991 and reform measures introduced in 1991.We have found here various changes and modification in insurance sector which took place after 1991. In this report we also discuss about the contribution of insurance sector in GDP of India before and after reforms and how it is generating employment after reforms. We also talk about various factors that are affecting insurance sector today and also on what trend it can move in future. After studying we found that the reforms helped India to bring back economy on track and to attract foreign investors. In insurance sector many new companies came into the scene after the reforms and ultimately it helped citizen of India.
Introduction:
Economics is a study through which scarce resources are used efficiently. Economy of a country will do well when that country¶s resources are used proficiently. But economic condition of a country depends upon various factors such as type of economy, scarce resources, government policies etc. Before 1991 India had mixed economy with more policies of socialist economy and government was monitoring and controlling every sector but after 1991 new reforms came and Indian economy had market economy policies more than past. These reforms attracted foreign investors to invest in India. After these policies India is ranked 12th in terms of its market exchange rates and 4th in terms of Purchasing Power Parity (PPP) so it is important to understand the impact of these reforms. To understand the impact of liberalization, privatization and globalization on Indian economy we choose Insurance Sector. The study of insurance sector is extremely important from a point of view of economist because it play an important role in Indian economy.
Page 3
Economics of Markets Pre-Reforms in Insurance Sector:
The first insurance company was started by British company as ³Oriental Life Insurance Company´ in Calcutta in 1818. But on that time there was no much progress in insurance sector. So that¶s why it failed in 1834 because premium price was high and it¶s difficult for people of India to pay this. (IRDA , 2007). In 1870, after a long period a company started as named ³Bombay Mutual Life Insurance.´ This company came with normal rates of premium to give the message of social security to people. In 1906, many insurance companies came into picture in which main companies were The United India in Madras, National Indian and National Insurance in Calcutta and the Co-operative Assurance at Lahore. Before 1912, there was no legislation on insurance companies for their business. But in 1912, Life Insurance Companies Act and The Provident Fund Act were approved. In these acts some rules and regulations were made for companies that they follow the table of premium rate and valuations of a particular period certified by an actuary. There were 44 insurance companies in 1912 and did a business of Rs. 22.44 crores. There were 176 insurance companies which got business of Rs. 298 crores. (LIC , n.d.) Insurance sector: In 1956 and 1973 life insurance and non-life insurance nationalized respectively after a century insurance sector become nationalized because of three main reasons:
y y
Private companies are not giving attention towards of rural areas.; After nationalization, the control will be in hands of government and government can use the resources for saving and investment for the betterment.
y
To stop the insolvency of life insurance companies, which was the highest in 1946-1956? (Subhash and Bhat, 2007)
The private insurance companies also doing their business in urban area. They had the option to sell insurance product in different pricing, misusing the funds of common people and making this sector unfaithful so government took harsh decision and brought all private company together to solve this problem. Life insurance Company (LIC) was managing all 243 different business units in India. The total assets in 1956, were about Rs. 4,110 million, 5 million policies in force, declare that the total was more than Rs. 12,500 million and 27,000 employees in this sector. (Subhash and Bhat, 2007)
Page 4
Economics of Markets
Life insurance policies were for long term which needs variety of services and for this in the later year LIC place a branch office at each district. After this, insurance sector performed well and from Rs. 200 crores in 1956-1957 it became Rs. 1000 crores in 1969-1970 and in 1985-86 it comes around Rs. 7000 crores. (Subhash and Bhat, 2007) After this entire success, insurance sector failed to give service and policies to people. These all things were happened because of highly practical way of thinking, dishonest and disorganized administration and negligence of investable fund. This all issues open this market for the private companies and in 1991 Indian economy was obtainable for Liberalization, Privatization, and Globalization (LPG). But for insurance sector in Indian privatized, it took more eight years. (Subhash and Bhat, 2007) (EXBHIT-I)
The liberalization policy in India
In 1990-91 The Indian economy was suffering from economic crisis. Increased in the price of crude oil during the Gulf war and the downfall of Soviet Union which is a trading associate of India caused a major imbalance in payments of loans in global market. This forced India to bring money from outside the country or to invite investors. On that time Finance Minister Dr. Manmohan Singh came with new policy called liberalization. This policy helped investors to invest in India and finally ended many sectors monopoly.
Post Liberalization Period:
y y y
In 1991, many foreign companies started entering in Indian market. In 1994, Indian insurance companies liberalized by Malhotra Committee. In 1999, Insurance Regulatory and Development Authority act (IRDA) passed by Indian government.
y
In 2000, private companies started entering in Indian insurance market. In the end of 2000, six private companies (3 life insurance and 3 non-life insurance) were registered. (Subhash and Bhat, 2007)
After liberalization in 1991 insurance sector were out of bonds for private companies because government want to take care of this sector. The insurance sector in our country reformed in 1993. At the start of the reforms, public sector had monopoly in the insurance sector. Reform in Indian insurance sector was initiated by Malhotra Committee. The main
Page 5
Economics of Markets
reason behind this idea of reform was to evaluate the functionality of the Indian Insurance sector. (Subhash and Bhat, 2007). Objective of Malhotra Committee are:
y y y
Selective while employing LIC agent and give training according to his capacity. Time bound claim settlement to be followed.
Care to be taken for product pricing, awareness of systems and procedures, focusing on customer service, and technology used.
y
The committee suggested some norms relating to promoters' equity and equity capital by foreign companies, etc. (Subhash and Bhat, 2007)
In the year of 1999 there were many crucial policy changes took place in Indian insurance sector because of the act of Insurance Regulatory and Development Authority. For the welfare of the policy holders and to increase the growth rate of the Indian Insur ance sector, these changes done by IRDA. Major policy changes: (India allow banks into insurance., 2000)
y
Company has to run their business under the companies act, 1956. Companies will register and formed under this act.
y
For general or life insurance business, paid up equity capital should be Rs. 100 crores minimum.
y
For carrying on reinsurance business, paid up capital should be Rs. 200 crores minimum.
y
Company¶s aim should be carrying on life insurance business or reinsurance business or general insurance business.
y
A foreign company or its subsidiary companies or its nominees can have maximum 26% of equity share. (India allow banks into insurance., 2000)
The authority has notified 27 policies on solvency margin, re-insurance, investment and accounting procedure, protection of policy holder¶s etc. (India allow banks into insurance., 2000)
Page 6
Economics of Markets
IRDA act passed in 1999 by Indian government. Main reason behind this act was, to protect interest of policyholders. Authority has taken some steps to achieve its objective which are following: (India allow banks into insurance., 2000)
y y
To meet the obligation of shareholders, insurers have to maintain solvency margin. Benefits, term and conditions have to be disclosed clearly by insurance companies and advertisement should be straightforward which do not misguide or mislead the people.
y
All head offices and other offices of insurance sector should have grievance redress machinery.
y
Insurers give the complaint to the authority which they receive from the policyholders in regarding with services provided by them. (India allow banks into insurance., 2000)
After IRDA act, the growth of insurance sector from 2001-02 to 2007-08 is Rs.151256.95
crores. ( EXHIBIT-II ). (insurance premium, 2008)
After the period of liberalization the life
insurance sector added more than four per cent towards Indian gross domestic product (GDP) and the contribution of General insurance sector towards the GDP were 0.6 per cent. (Insurance, 2009) Among the different life insurance companies, SBI Life Insurance got the number one position across the world by the Million Dollar Round Table members. This Million Dollar round Table is an organization which consists of some best life insurance representatives. (Insurance, 2009) India absorbed third place internationally in provisions of employment with 42% in 20072008. Every year, around 15million new policies are being sold. This sector mainly recruits freshers at junior level because they are flexible in nature and they can do part-time job also. (Best Employers in Insurance, 2009) As per the rating done by the Agency care, it is observed that now the Indian insurance market is largely dominated by some public sector companies. Among them MetLife Indian Insurance is one. It is one of the first private sector insurance companies which provide guaranteed monthly income. For the last two years MetLife is continuously holding the position as one of the fastest growing Indian insurance company. (Insurance, 2009)
Page 7
Economics of Markets
The Investment Commission of India is hoping that Indian insurance markets will achieve more than 52 billion dollar within the next year. It is also observed by the report of Booming Insurance Market in India that the total life insurance premium will increase by US $ 253 billion within the end of the next year. (Insurance, 2009)
Conclusion
The reforms of year 1991 helped Indian economy to become better and also it benefited insurance sector. A sector which was not doing well before the liberalization changed and became a major contributor of GDP. It was the result of new flexible policies of government for investment. It is now growing well and generating new jobs. Many new companies are entering in insurance sector which was not possible before reforms. This sector was one of some sector which was not too much affected by recession because a fter reforms its roots became stronger. Some problems are there as now market is about to saturated in India. But insurance sector is still growing at a good rate.
Page 8
Economics of Markets
Appendix
Business (In crores Rs.)
8000
7000 6000 5000 4000
Business (In crores Rs.) 3000 2000 1000 0 1969-70 1979-80 1985-1986
EXHBIT-I
250000.00
200000.00
150000.00
100000.00
50000.00
0.00 2008-07 2007-06 2006-05 2005-04 2004-03 2003-02 2002-01
EXHBIT-II
Page 9
Economics of Markets Bibliography
Best Employers in Insurance. (2009). Retrieved 10 20, 2009, from naukrihub.com: http://www.naukrihub.com/best-workplaces/insurance-employers/ ICMR. (n.d.). Retrieved from www.icmrindia.com: http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy2/Life%20Insurance %20Corp oration%20of%20India.htm# India allow banks into insurance. (2000, feberury). Retrieved 10 20, 2009, from web.ebscohost.com: http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=2798358&site=ehostlive Insurance. (2009, 09). Retrieved 10 20, 2009, from www.ibef.org/: http://www.ibef.org/industry/insurance_industry.aspx Insurance premium. (2008). Retrieved 10 20, 2009, from irdaindia: http://www.irdaindia.org/ IRDA . (2007, January 2). Retrieved 2009, from Insurance Regulatory and DevelopementAuthority: http://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo4&mid=2 LIC . (n.d.). Retrieved from www.lic.com: http://www.licindia.com/history.htm Subhash and Bhat. (2007). What Lies Beneath: The Untappped Insurance Market in India. Retrieved 10 21, 2009, from web.ebscohost.com: http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=27508794&site=ehostlive -
Page 10
SUBMITTED TO: Mrs. YAMINI
SUBMITTED BY: ABHISHEK SHARMA ADITYA SARAOGI GOURAB SINGH MADAN LAL NITIN LAHOTI SUMIT KHANEJA
Economics of Markets
Table of Contents Executive Summary ........................................................................... 3
Introduction ....................................................................................... 3 Pre-Reforms in Insurance Sector ..................................................... 4-5 The liberalization policy in India ........................................................ 5 Post Liberalization Period ............................................................... 5-8 Conclusion ......................................................................................... 8 Appendix ........................................................................................... 9 Bibliography .................................................................................... 10
Page 2
Economics of Markets
Indian Economy and Insurance Sector - Before and After Reforms of 1991
Executive Summary
In this report we discuss the government policies in the insurance sector such as privatization, liberalization and globalization which impacted the Indian economy. To understand the changes in the economic system better, we looked at policies that prevailed before 1991 and reform measures introduced in 1991.We have found here various changes and modification in insurance sector which took place after 1991. In this report we also discuss about the contribution of insurance sector in GDP of India before and after reforms and how it is generating employment after reforms. We also talk about various factors that are affecting insurance sector today and also on what trend it can move in future. After studying we found that the reforms helped India to bring back economy on track and to attract foreign investors. In insurance sector many new companies came into the scene after the reforms and ultimately it helped citizen of India.
Introduction:
Economics is a study through which scarce resources are used efficiently. Economy of a country will do well when that country¶s resources are used proficiently. But economic condition of a country depends upon various factors such as type of economy, scarce resources, government policies etc. Before 1991 India had mixed economy with more policies of socialist economy and government was monitoring and controlling every sector but after 1991 new reforms came and Indian economy had market economy policies more than past. These reforms attracted foreign investors to invest in India. After these policies India is ranked 12th in terms of its market exchange rates and 4th in terms of Purchasing Power Parity (PPP) so it is important to understand the impact of these reforms. To understand the impact of liberalization, privatization and globalization on Indian economy we choose Insurance Sector. The study of insurance sector is extremely important from a point of view of economist because it play an important role in Indian economy.
Page 3
Economics of Markets Pre-Reforms in Insurance Sector:
The first insurance company was started by British company as ³Oriental Life Insurance Company´ in Calcutta in 1818. But on that time there was no much progress in insurance sector. So that¶s why it failed in 1834 because premium price was high and it¶s difficult for people of India to pay this. (IRDA , 2007). In 1870, after a long period a company started as named ³Bombay Mutual Life Insurance.´ This company came with normal rates of premium to give the message of social security to people. In 1906, many insurance companies came into picture in which main companies were The United India in Madras, National Indian and National Insurance in Calcutta and the Co-operative Assurance at Lahore. Before 1912, there was no legislation on insurance companies for their business. But in 1912, Life Insurance Companies Act and The Provident Fund Act were approved. In these acts some rules and regulations were made for companies that they follow the table of premium rate and valuations of a particular period certified by an actuary. There were 44 insurance companies in 1912 and did a business of Rs. 22.44 crores. There were 176 insurance companies which got business of Rs. 298 crores. (LIC , n.d.) Insurance sector: In 1956 and 1973 life insurance and non-life insurance nationalized respectively after a century insurance sector become nationalized because of three main reasons:
y y
Private companies are not giving attention towards of rural areas.; After nationalization, the control will be in hands of government and government can use the resources for saving and investment for the betterment.
y
To stop the insolvency of life insurance companies, which was the highest in 1946-1956? (Subhash and Bhat, 2007)
The private insurance companies also doing their business in urban area. They had the option to sell insurance product in different pricing, misusing the funds of common people and making this sector unfaithful so government took harsh decision and brought all private company together to solve this problem. Life insurance Company (LIC) was managing all 243 different business units in India. The total assets in 1956, were about Rs. 4,110 million, 5 million policies in force, declare that the total was more than Rs. 12,500 million and 27,000 employees in this sector. (Subhash and Bhat, 2007)
Page 4
Economics of Markets
Life insurance policies were for long term which needs variety of services and for this in the later year LIC place a branch office at each district. After this, insurance sector performed well and from Rs. 200 crores in 1956-1957 it became Rs. 1000 crores in 1969-1970 and in 1985-86 it comes around Rs. 7000 crores. (Subhash and Bhat, 2007) After this entire success, insurance sector failed to give service and policies to people. These all things were happened because of highly practical way of thinking, dishonest and disorganized administration and negligence of investable fund. This all issues open this market for the private companies and in 1991 Indian economy was obtainable for Liberalization, Privatization, and Globalization (LPG). But for insurance sector in Indian privatized, it took more eight years. (Subhash and Bhat, 2007) (EXBHIT-I)
The liberalization policy in India
In 1990-91 The Indian economy was suffering from economic crisis. Increased in the price of crude oil during the Gulf war and the downfall of Soviet Union which is a trading associate of India caused a major imbalance in payments of loans in global market. This forced India to bring money from outside the country or to invite investors. On that time Finance Minister Dr. Manmohan Singh came with new policy called liberalization. This policy helped investors to invest in India and finally ended many sectors monopoly.
Post Liberalization Period:
y y y
In 1991, many foreign companies started entering in Indian market. In 1994, Indian insurance companies liberalized by Malhotra Committee. In 1999, Insurance Regulatory and Development Authority act (IRDA) passed by Indian government.
y
In 2000, private companies started entering in Indian insurance market. In the end of 2000, six private companies (3 life insurance and 3 non-life insurance) were registered. (Subhash and Bhat, 2007)
After liberalization in 1991 insurance sector were out of bonds for private companies because government want to take care of this sector. The insurance sector in our country reformed in 1993. At the start of the reforms, public sector had monopoly in the insurance sector. Reform in Indian insurance sector was initiated by Malhotra Committee. The main
Page 5
Economics of Markets
reason behind this idea of reform was to evaluate the functionality of the Indian Insurance sector. (Subhash and Bhat, 2007). Objective of Malhotra Committee are:
y y y
Selective while employing LIC agent and give training according to his capacity. Time bound claim settlement to be followed.
Care to be taken for product pricing, awareness of systems and procedures, focusing on customer service, and technology used.
y
The committee suggested some norms relating to promoters' equity and equity capital by foreign companies, etc. (Subhash and Bhat, 2007)
In the year of 1999 there were many crucial policy changes took place in Indian insurance sector because of the act of Insurance Regulatory and Development Authority. For the welfare of the policy holders and to increase the growth rate of the Indian Insur ance sector, these changes done by IRDA. Major policy changes: (India allow banks into insurance., 2000)
y
Company has to run their business under the companies act, 1956. Companies will register and formed under this act.
y
For general or life insurance business, paid up equity capital should be Rs. 100 crores minimum.
y
For carrying on reinsurance business, paid up capital should be Rs. 200 crores minimum.
y
Company¶s aim should be carrying on life insurance business or reinsurance business or general insurance business.
y
A foreign company or its subsidiary companies or its nominees can have maximum 26% of equity share. (India allow banks into insurance., 2000)
The authority has notified 27 policies on solvency margin, re-insurance, investment and accounting procedure, protection of policy holder¶s etc. (India allow banks into insurance., 2000)
Page 6
Economics of Markets
IRDA act passed in 1999 by Indian government. Main reason behind this act was, to protect interest of policyholders. Authority has taken some steps to achieve its objective which are following: (India allow banks into insurance., 2000)
y y
To meet the obligation of shareholders, insurers have to maintain solvency margin. Benefits, term and conditions have to be disclosed clearly by insurance companies and advertisement should be straightforward which do not misguide or mislead the people.
y
All head offices and other offices of insurance sector should have grievance redress machinery.
y
Insurers give the complaint to the authority which they receive from the policyholders in regarding with services provided by them. (India allow banks into insurance., 2000)
After IRDA act, the growth of insurance sector from 2001-02 to 2007-08 is Rs.151256.95
crores. ( EXHIBIT-II ). (insurance premium, 2008)
After the period of liberalization the life
insurance sector added more than four per cent towards Indian gross domestic product (GDP) and the contribution of General insurance sector towards the GDP were 0.6 per cent. (Insurance, 2009) Among the different life insurance companies, SBI Life Insurance got the number one position across the world by the Million Dollar Round Table members. This Million Dollar round Table is an organization which consists of some best life insurance representatives. (Insurance, 2009) India absorbed third place internationally in provisions of employment with 42% in 20072008. Every year, around 15million new policies are being sold. This sector mainly recruits freshers at junior level because they are flexible in nature and they can do part-time job also. (Best Employers in Insurance, 2009) As per the rating done by the Agency care, it is observed that now the Indian insurance market is largely dominated by some public sector companies. Among them MetLife Indian Insurance is one. It is one of the first private sector insurance companies which provide guaranteed monthly income. For the last two years MetLife is continuously holding the position as one of the fastest growing Indian insurance company. (Insurance, 2009)
Page 7
Economics of Markets
The Investment Commission of India is hoping that Indian insurance markets will achieve more than 52 billion dollar within the next year. It is also observed by the report of Booming Insurance Market in India that the total life insurance premium will increase by US $ 253 billion within the end of the next year. (Insurance, 2009)
Conclusion
The reforms of year 1991 helped Indian economy to become better and also it benefited insurance sector. A sector which was not doing well before the liberalization changed and became a major contributor of GDP. It was the result of new flexible policies of government for investment. It is now growing well and generating new jobs. Many new companies are entering in insurance sector which was not possible before reforms. This sector was one of some sector which was not too much affected by recession because a fter reforms its roots became stronger. Some problems are there as now market is about to saturated in India. But insurance sector is still growing at a good rate.
Page 8
Economics of Markets
Appendix
Business (In crores Rs.)
8000
7000 6000 5000 4000
Business (In crores Rs.) 3000 2000 1000 0 1969-70 1979-80 1985-1986
EXHBIT-I
250000.00
200000.00
150000.00
100000.00
50000.00
0.00 2008-07 2007-06 2006-05 2005-04 2004-03 2003-02 2002-01
EXHBIT-II
Page 9
Economics of Markets Bibliography
Best Employers in Insurance. (2009). Retrieved 10 20, 2009, from naukrihub.com: http://www.naukrihub.com/best-workplaces/insurance-employers/ ICMR. (n.d.). Retrieved from www.icmrindia.com: http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy2/Life%20Insurance %20Corp oration%20of%20India.htm# India allow banks into insurance. (2000, feberury). Retrieved 10 20, 2009, from web.ebscohost.com: http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=2798358&site=ehostlive Insurance. (2009, 09). Retrieved 10 20, 2009, from www.ibef.org/: http://www.ibef.org/industry/insurance_industry.aspx Insurance premium. (2008). Retrieved 10 20, 2009, from irdaindia: http://www.irdaindia.org/ IRDA . (2007, January 2). Retrieved 2009, from Insurance Regulatory and DevelopementAuthority: http://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo4&mid=2 LIC . (n.d.). Retrieved from www.lic.com: http://www.licindia.com/history.htm Subhash and Bhat. (2007). What Lies Beneath: The Untappped Insurance Market in India. Retrieved 10 21, 2009, from web.ebscohost.com: http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=27508794&site=ehostlive -
Page 10
