Description
India is among the most promising emerging insurance markets in the world. Its current premium volume of USD 18 billion has the potential to increase to USD 90 billion within the next decade. In particular, life insurance, which currently makes up 80% of premiums, is widely tipped to lead the growth. The major drivers include sound economic fundamentals, a rising middle-income class,an improving regulatory framework and rising risk awareness. The groundwork for realising potential was arguably laid in 2000 when India undertook to open the domestic insurance market to private-sector and foreign companies.
SYBBI(FOURTH SEMISTER)
1/1/2012
PROJECT ON:-
CURRENT INSURANCE MARKET
SUBMITTED TO:- | PROF.JALPA
ACKNOWLEDGEMENT
We would firstly like to thank our Institution & sincere thanks to Principal Prof. A. E. Lakdawala and Vice Principal Prof. Kamala Arunachalam for providing us support and giving us an opportunity for doing B&I course and completing this project. We would also like to extent our profound and sincere gratitude to our project guide PROF. JALPA who has guided our project with her vast fund of knowledge advice and constant encouragement. We kindly appreciate her implicit and valuable contribution in drawing up this project. We also take an opportunity to highlight the invaluable contribution of our B&I co-coordinator Prof. Kamal Rohra who have always supported and encouraged us. We also thank our parents and all our colleagues without who this project would have not been completed. Thank you all for your contribution towards the project whether big or small and will forever be indebted to each and every one of you. We also thank to all those whom we have forgotten to mention in this space.
Group members
MARIA KAGDI DIVYA RAI HEEBA SHAIKH SHABINA SHAIKH ANJALI SINGH
ROLL NO.
05 15 20 22 25
Index
INTRODUCTION OF INSURANCE
The Insurance sector in India governed by Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and General Insurance Business (Nationalization) Act, 1972, Insurance Regulatory and Development Authority (IRDA) Act, 1999 and other related Acts. With such a large population and the untapped market area of this population Insurance happens to be a very big opportunity in India. Today it stands as a business growing at the rate of 15-20 per cent annually. Together with banking services, it adds about 7 per cent to the country?s GDP .In spite of all this growth the statistics of the penetration of the insurance in the country is very poor. Nearly 80% of Indian populations are without Life insurance cover and the Health insurance. This is an indicator that growth potential for the insurance sector is immense in India. It was due to this immense growth that the regulations were introduced in the insurance sector and in continuation “Malhotra Committee” was constituted by the government in 1993 to examine the various aspects of the industry. The key element of the reform process was Participation of overseas insurance companies with 26% capital. Creating a more efficient and competitive financial system suitable for the requirements of the economy was the main idea behind this reform. Since then the insurance industry has gone through many sea changes. The competition LIC started facing from these companies were threatening to the existence of LIC .since the liberalization of the industry the insurance industry has never looked back and today stand as the one of the most competitive and exploring industry in India. The entry of the private players and the increased use of the new distribution are in the limelight today. The use of new distribution techniques and the IT tools has increased the scope of the industry in the longer run.
HISTORY OF INSURANCE SECTOR
India had the nineteenth largest insurance market in the world in 2003. Strong economic growth in the last decade combined with a population of over one billion makes it one of the potentially largest markets in the future. Insurance in India has gone through two radical transformations. Before 1956, insurance was private with minimal government intervention. In 1956, life insurance was nationalized and a monopoly was created. In 1972, general insurance was nationalized as well.255 But, unlike life insurance, a different structure was created for the industry. One holding company was formed with four subsidiaries. As a part of the general opening up of the economy after 1992, a government-appointed committee recommended that private companies should be allowed to operate. It took six years to implement the recommendation. The private sector was allowed into the insurance business in 2000. However, foreign ownership was restricted. No more than 26 percent of any company can be foreign-owned. The term general insurance is used in Britain and other Commonwealth countries. Elsewhere, the equivalent term is property-casualty insurance or non-life insurance. Indian Insurance Market – History The Insurance Sector in India dates back to 1818 when the first insurance company was established the Oriental Life Insurance Company at Calcutta. This was followed in quick succession with the establishment of Bombay Life Assurance Company (1823) and Madras Equitable Life Assurance Society (1829). In the general insurance business Triton Insurance Company (1850) was the first to be established. Prior to 1871, Indians were charged about 15 percent more premium as compared to Europeans. Bombay Mutual Life Assurance Society (1871) was the first company not to differentiate
between Indians and Europeans in the matter of fixation of premiums. The first attempt at regulation of the insurance business in India was through the Indian Life Assurance Companies Act in 1912. This was later broad-based and the Insurance Act came into existence from the year 1928 onwards. The Insurance Act was subsequently reviewed and a comprehensive
legislation was enacted called the Insurance Act, 1938. The nationalization of Life insurance business took place in 1956 when 245 Indians and Foreign insurance and provident societies were first amalgamated and then
nationalized. The Life Insurance Corporation of India (LIC) came into existence and has enjoyed a monopoly over the life insurance business in India. The milestones in the Insurance sector 1912 onwards can be summarized development: 1912 : The Indian Life Assurance Corporation Act enacted as the first statute to regulate the life insurance business. 1928 : The Indian Insurance Companies Act enacted to enable the as under. The insurance sector witnessed the following
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. The General insurance business in India, on the other hand, can trace its root to the Triton Insurance Company Ltd., the first general insurance company established in the year 1850 in Calcutta by the British. Some of
the important milestones in the general insurance business in India are: 1907: The Indian Mercantile Insurance Ltd. set up , the first company to transact all classes of general insurance business. 1957 : General Insurance Council, a wing of the Insurance Association of India, frames a code of conduct for ensuring fair conduct and sound business practices. 1968 : The Insurance Act amended to regulate investments and set minimum solvency margins and the Tariff Advisory Committee set up. 1972 : The General Insurance Business (Nationalization) Act, 1972
nationalized the general insurance business in India with effect from 1st January 1973. 107 insurers amalgamated and grouped into four companies viz., the National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd, and the United India Insurance Company Ltd. GIC incorporated as a company.
Insurance Market- Present
The insurance sector was opened up for private participation four years ago. For years now, the private players are active in the liberalized environment. The insurance market have witnessed dynamic changes which includes presence of a fairly large number of insurers both life and non-life segment. Most of the private insurance companies have formed joint venture partnering well recognized foreign players across the globe. There are now 29 insurance companies operating in the Indian market – 14 private life insurers, nine private non-life insurers and six public sector companies. With many more joint ventures in the offing, the insurance industry in India today stands at a crossroads as competition intensifies and companies prepare survival strategies
in a current scenario. There is pressure from both within the country and outside on the Government to increase the foreign direct investment (FDI) limit from the current 26% to 49%, which would help JV partners to bring in funds for expansion. There are opportunities in the pensions sector where regulations are being framed. Less than 10 % of Indians above the age of 60 receive pensions. The IRDA has issued the first license for a standalone health company in the country as many more players wait to enter. The health insurance sector has tremendous growth potential, and as it matures and new players enter, product innovation and enhancement will increase. The deepening of the health database over time will also allow players to develop and price products for larger segments of society. State Insurers Continue to Dominate There may be room for many more players in a large underinsured market like India with a population of over one billion. But the reality is that the intense competition in the last five years has made it difficult for new entrants to keep pace with the leaders and thereby failing to make any impact in the market. Also as the private sector controls over 26.18% of the life insurance market and over 26.53% of the non-life market, the public sector companies still call the shots. The country?s largest life insurer, Life Insurance Corporation of India (LIC), had a share of 74.82% in new business premium income in November 2005. Similarly, the four public-sector non-life insurers – New India Assurance, National Insurance, Oriental Insurance and United India Insurance – had a combined market share of 73.47% as of October 2005. ICICI Prudential Life Insurance Company continues to lead the private sector with a 7.26% market share in terms of fresh premium, whereas ICICI Lombard General Insurance Company is the leader
among the private non-life players with a 8.11% market share. ICICI Lombard has focused on growing the market for general insurance products and increasing penetration within existing customers through product innovation and distribution. Reaching out to Customers No doubt, the customer profile in the insurance industry is changing with the introduction of large number of divergent intermediaries such as brokers, corporate agents, and bancassurance. The industry now deals with customers who know what they want and when, and are more demanding in terms of better service and speedier responses. With the industry all set to move to a detariffed regime by 2007, there will be considerable improvement in customer service levels, product innovation and newer standards of underwriting. Intense Competition In a de-tariffed environment, competition will manifest itself in prices, products, underwriting criteria, innovative sales methods and creditworthiness. Insurance companies will vie with each other to capture market share through better pricing and client segmentation. The battle has so far been fought in the big urban cities, but in the next few years, increased competition will drive insurers to rural and semi-urban markets. Global Standards While the world is eyeing India for growth and expansion; Indian companies are becoming increasingly world class. Take the case of LIC, which has set its sight on becoming a major global player following a Rs280-crore investment from the Indian government. The company now operates in Mauritius, Fiji, the UK, Sri Lanka, and Nepal and will soon start operations in Saudi Arabia. It also plans to venture into the African and Asia-Pacific regions in 2006. The year 2005 was a testing phase for the general insurance industry with a series of catastrophes hitting the Indian sub-continent.
However, with robust reinsurance programs in place, insurers have successfully managed to tide over the crisis without any adverse impact on their balance sheets. With life insurance premiums being just 2.5% of GDP and general insurance premiums being 0.65% of GDP, the opportunities in the Indian market place is immense. The next five years will be challenging but those that can build scale and market share will survive and prosper. Some Areas of Future Growth Life Insurance The traditional life insurance business for the LIC has been a little more than a savings policy. Term life (where the insurance company pays a predetermined amount if the policyholder dies within a given time but it pays nothing if the policyholder does not die) has accounted for less than 2% of the insurance premium of the LIC (Mitra and Nayak, 2001). For the new life insurance companies, term life policies would be the main line of business. Health Insurance Health insurance expenditure in India is roughly 6% of GDP, much higher than most other countries with the same level of economic development. Of that, 4.7% is private and the rest is public. What is even more striking is that 4.5% are out of pocket expenditure (Berman, 1996). There has been an almost total failure of the public health care system in India. This creates an opportunity for the new insurance companies. Thus, private insurance companies will be able to sell health insurance to a vast number of families who would like to have health care cover but do not have it. Pension The pension system in India is in its infancy. There are generally three forms of
plans: provident funds, gratuities and pension funds. Most of the pension schemes are confined to government employees (and some large companies). The vast majority of workers are in the informal sector. As a result, most workers do not have any retirement benefits to fall back on after retirement. Total assets of all the pension plans in India amount to less than USD 40 billion. Therefore, there is a huge scope for the development of pension funds in India. The finance minister of India has repeatedly asserted that a Latin American style reform of the privatized pension system in India would be welcome (Roy, 1997). Given all the pros and cons, it is not clear whether such a wholesale privatization would really benefit India or not (Sinha, 2000).
PRESENT SCENARIO OF INSURANCE INDUSTRY
? India with about 200 million middle class household shows a huge untapped potential for players in the insurance industry. Saturation of markets in many developed economies has made the Indian market even more attractive for global insurance majors. The insurance sector in India has come to a position of very high potential and competitiveness in the market. Indians, have always seen life insurance as a tax saving device, are now suddenly turning to the private sector that are providing them new products and variety for their choice. ? Consumers remain the most important centre of the insurance sector. After the entry of the foreign players the industry is seeing a lot of competition and thus improvement of the customer service in the industry. Computerization of operations and updating of technology has become imperative in the current scenario. Foreign players are bringing in
international best practices in service through use of latest technologies ? The insurance agents still remain the main source through which insurance products are sold. The concept is very well established in the country like India but still the increasing use of other sources is imperative. At present the distribution channels that are available in the market are listed below. Direct selling
? Customers have tremendous choice from a large variety of products from pure term (risk) insurance to unit-linked investment products. Customers are offered unbundled products with a variety of benefits as riders from which they can choose. More customers are buying products and services based on their true needs and not just traditional money back policies, which is not considered very appropriate for long-term protection and savings. There is lots of saving and investment plans in the market. However, there are still some key new products yet to be introduced - e.g. health products. ? The rural consumer is now exhibiting an increasing propensity for insurance products. A research conducted exhibited that the rural consumers are willing to dole out anything between Rs 3,500 and Rs 2,900 as premium each year. In the insurance the awareness level for life insurance is the highest in rural India, but the consumers are also aware about motor, accidents and cattle insurance. In a study conducted by MART the results showed that nearly one third said that they had purchased some kind of
insurance with the maximum penetration skewed in favor of life insurance. The study also pointed out the private companies have huge task to play in creating awareness and credibility among the rural populace. The perceived benefits of buying a life policy range from security of income bulk return in future, daughter's marriage, children's education and good return on savings, in that order, the study adds.
APPLICATION OF INFORMATION TECHNOLOGY IN INSURANCE SECTOR
There is a evolutionary change in the technology that has revolutionized the entire insurance sector. Insurance industry is a data-rich industry, and thus, there is a need to use the data for trend analysis and personalization. With increased competition among insurers, service has become a key issue. Moreover, customers are getting increasingly sophisticated and tech-savvy. People today don?t want to accept the current value propositions, they want personalized interactions and they look for more and more features and add ones and better service The insurance companies today must meet the need of the hour for more and more personalized approach for handling the customer. Today managing the customer intelligently is very critical for the insurer especially in the very competitive environment. Companies need to apply different set of rules and treatment strategies to different customer segments. However, to personalize interactions, insurers are required to capture customer information in an integrated system. With the explosion of Website and greater access to direct product or policy information, there is a need to developing better techniques to give customers a truly personalized experience. Personalization helps organizations to reach their
customers with more impact and to generate new revenue through cross selling and up selling activities. To ensure that the customers are receiving personalized information, many organizations are incorporating knowledge database-
repositories of content that typically include a search engine and let the customers locate the all document and information related to their queries of request for services. Customers can hereby use the knowledge database to manage their products or the company information and invoices, claim records, and histories of the service inquiry. These products also may be able to learn from the customer?s previous knowledge database and to use their information when determining the relevance to the customers search request. There is a probability of a spurt in employment opportunities. A number of websites are coming up on insurance, a few financial magazines exclusively devoted to insurance and also a few training institutes being set up hurriedly. Many of the universities and management institutes have already started or are contemplating new courses in insurance. Life insurance has today become a mainstay of any market economy since it offers plenty of scope for garnering large sums of money for long periods of time. A well-regulated life insurance industry which moves with the times by offering its customers tailor-made products to satisfy their financial needs is, therefore, essential if we desire to progress towards a worry-free future.
Life products before and after deregulation
In the past, the LIC had three commonly sold policies in the market for life insurance: whole life, endowment and money-back policies. The number of new policies sold each year went from about 0.95 million a year in 1957 to 26.97 million in 2003. The total number of in-force policies went from 5.42 million in 1957 to 141 million by March 2003. There are presently several dozen life
products offered by the LIC. However, they are small variations on the three products mentioned above. In addition, even though term life policies were available, they were not actively promoted. LIC also has several pension products. Following the entry of the private insurers, there was a proliferation of products. According to the Annual Report of the IRDA, 116 life products were offered by life insurance companies in India as of 31 March 2002. Of course, they were not all distinct products. Many products across different companies were very similar, if not identical. Some of the more popular products launched recently include creditor protection products like mortgage life, and unit-linked products.
Non-life products before and after deregulation
Before deregulation in 1999, non-life products that were available in the market were rather limited and similar across the four GIC subsidiaries. They could also be classified by whether they were regulated by tariffs: fire insurance, motor vehicle insurance, engineering insurance and workers? compensation etc that came under tariff; and burglary insurance, Mediclaim, personal accident insurance etc that did not. In addition, most specialized insurance (e.g. racehorse insurance) did not fall under tariff regulations. After the opening of the sector to private players, more new products were introduced. To take an example, one joint-venture nonlife insurer introduced 29 different products during the year, according to the IRDA. They included products liability, corporate cover, professional indemnity policies, burglary cover, individual and group health policies, weather insurance, credit insurance, travel insurance and so on. Some of these products were completely new (e.g. weather insurance) while others were already available through the public insurance companies.
Other regulatory developments
The following are a few new features of the regulatory regime introduced by the IRDA: • Insurance agents are governed by the Licensing of Insurance Agents Regulations 2000 and the Licensing of Insurance Regulations (amendment) 2002. Importantly, to ensure professional standards, the IRDA has mandated minimum educational qualifications for all agents, together with training and examination requirements. • Through a Government of India Notification dated 11 November 1998, the Insurance Ombudsman was created to address grievances of the insured customers and protect the interest of policyholders. Twelve Ombudsmen have been appointed across the country to expedite disposal of complaints. They have jurisdiction in respect of personal lines of insurance where the contract value does not exceed INR 20 lacs. The Ombudsman is bound to pass a judgment within three months from the receipt of the complaint. It should be noted that the system is monitored and operated through a governing body of Insurance Council comprising of representatives of insurance companies. The IRDA deals with other disputes that fall outside the Ombudsman?s jurisdiction. • Policyholder protection was enhanced through the enactment of the Protection of Policyholders’ Interests Regulations, 2002. It stipulates the responsibility of insurance companies to spell out clearly the terms and conditions of insurance policies as well as other details. For example, in life insurance, details of any riders attaching to the main policy have to be given to the policyholders.
Future changes in insurance law
Changes to the insurance law in India became enormously complicated during the twentieth century. Just a few years ago it would have been difficult to anticipate that the Insurance Act, 1938, would be re-enforced through the IRDA Act, 1999. This juxtaposition of laws produced some Important anomalies. In order to streamline regulations and eliminate these anomalies, the Law Commission was entrusted with examining these matters for future amendments. A key proposal of the Law Commission is to merge some of provisions of the IRDA Act and the Insurance Act. This will facilitate market practitioners in understanding the role of IRDA while putting all the provisions in one place. This will also help to make revisions easier in future, in accordance to changes in market conditions. The main suggestions of the Law Commission are summarized below (1) The Insurance Act, 1938, is a piece of colonial legislation. Therefore, it contains terminology like “Provident societies” and “mutual insurance companies” that is not relevant in the modern Context. Such terminology has to be deleted. (2) The IRDA Act, 1999, inserted some provisions into the Insurance Act, 1938, to nullify existing provisions. The latter have not been deleted, thus giving rise to anomalies. (3) References in the Insurance Act, 1938, to older enactments have to be replaced by references to the corresponding new legislations that have replaced such enactments. For example, references to the Indian Companies Act, 1913, have to be replaced by references to the Companies Act, 1956. (4) Insurance companies have developed a wider range of products with more riders. Hence, a reclassification of insurance businesses is necessary. For instance,
insurance business may broadly be classified as „life? and „non-life? or „short-term? and „long-term? insurance business. For this purpose, the definition of the term „insurance? and „insurer? would have to be amended. (5) The IRDA, while regulating the business activities of insurers, exercises quasijudicial powers, in addition to its administrative powers, e.g. issue, renewal and cancellation of registration certificates to insurers, order with regard to investigation of the affairs of the insurers, making applications to the court for the winding-up of the insurance companies etc. It is felt necessary that there must be a provision of appeal against the decisions of the IRDA to an independent body constituted under the Act itself. (6) When consumers are dissatisfied with an insurance company, particularly in the area of claims settlement, they can go to the Ombudsman under the Redressal of Public Grievances Rules, 1998. They can also appeal under the Consumer Protection Act, 1986. Consumer courts are called upon to interpret the provisions of the Insurance Act 1938, which is a complex piece of legislation. If a special body of law develops, then a special tribunal is necessary to deal with Insurance cases. This provision would parallel the Securities Appellate Tribunal functioning under the SEBI Act, 1992. (7) The principle of uberrimae fidei (of absolute good faith) governs both parties to a contract of insurance. Specific statutory enumerations are required for protecting the interest of policyholders so that unintended minor mistakes in disclosure do not lead to a loss of coverage. Such a provision is missing. (8) Provisions regarding investments, loans and management need constant review and revision. The IRDA has revised detailed investment regulations; hence provisions will need to be revised so as to eliminate inconsistencies and
duplication. For example, the term “approved securities” requires revision in the context of new economic policy and business practices. (9) IRDA has defined regulations for the determination of the amount of liabilities, solvency margin and valuation of assets. But the provisions regarding solvency margins still have to address the extent of appropriate matching of assets and liabilities. The legal framework of insurance regulation in India is still evolving. Issues regarding compulsory insurance, non-life tariffs and foreign equity shareholdings could see further realignments in the future. Nevertheless, the IRDA has successfully established itself as a progressive and efficient regulator, while remaining unbiased even with its wide, sometimes potentially conflicting, and spectrum of responsibility.
Innovations waiting in selling Insurance policies for Rural India!
Till date most of the companies in India are always focused on urban market or at least they sell their products/services with the same models that of predominantly urban-market oriented. However, of the late, there is a slight shift due to the popularity of so called “Bottom of the Pyramid Model”. One of the main vocal points of BOP model is that understands low-income people as your consumers and makes your product affordable (units) to the BOP market. Most of the companies, these days, have started to remodel their products/services according to this principle. However, targeting BOP market means more than this. You need to make sure your offerings suit to the local needs. That is exactly missing in insurance sector. Nowadays, I have come across many insurance companies selling their policies as low as Rs. 10, Rs. 25 (much less than a US dollar). This is really a welcome step. And now coming to the other innovations part:-
1. Insurance policies should be completely flexible. There should not be like separately priced like health insurance, life insurance, vehicle insurance, farm insurance etc. You price them as a combination (as a flexible percentage and choice is given to the customer). Now let the customer chooses the way he wants. 2. Second comes from distribution aspect. Do not try to keep a separate chain of distribution. Utilize 1-2 millions telecom retail distribution chains. For the simple reason that these bring the structural efficiency in order to reduce the costs. 3. Third comes from social angle. Most of the rural people live in joint families or at least they would love to consume services as a family. This is evident from their consumption patterns such as marriage/functions, pilgrim trips etc. So your service should consider this trick and offer them a group oriented policies. One may even consider community based policies. That would possibly become an instant hit. In all of the above scenarios, recent advances in technology would play a great role. So insurance companies should start looking at the benefits that new tech developments could bring them
KEY HURDLES
Despite government promotion, rural insurance has remained a small part of the total market. Most insurance companies see rural business as an obligation rather than an opportunity. This problem has been recognized by the IRDA. In its Annual Report of 2002-2003, the IRDA stated the following. “While on the one hand, on account of social considerations, the need for spreading insurance throughout the country is a necessity, on the other, with the purchasing power parity of the rural
Population steadily growing, the rural market offers a vast potential for the insurance sector, which has essentially remained untapped so far. In order to tap these markets, there is a need to understand the psyche of the rural populace, their perception towards the importance of different type of insurance, and their willingness to purchase policies. Studies have shown that the rural market holds tremendous potential for growth of the insurance business, particularly due to the prevalence of strong saving habits. Even the relatively low-income families tend to save about a third of their annual earnings. In the agrarian belts, the savings are high around harvest time. The various channels of savings include banks, post offices and informal institutions like local lenders, and Jewellers?. This, of course, is in addition to the agent force. Similarly, auto dealers financing vehicles create awareness for motor vehicle and tractor insurance. It is, however, a matter of concern that, other than in cases of mandatory requirements, spontaneous awareness levels are low, particularly for general insurance products. In addition, there is no felt need for insurance.” Data for private life insurance companies show that, on average, 13% of new private life insurance policies were sold in the rural sector in 2001-2002. There are a few exceptions. One of the key features of nonlife insurance is the clear relationship between the proportion of rural agents deployed and the proportion of policies sold by companies.
Conclusion
India is among the most promising emerging insurance markets in the world. Its current premium volume of USD 18 billion has the potential to increase to USD 90 billion within the next decade. In particular, life insurance, which currently makes up 80% of premiums, is widely tipped to lead the growth. The major drivers include sound economic fundamentals, a rising middle-income class,
an improving regulatory framework and rising risk awareness. The groundwork for realising potential was arguably laid in 2000 when India undertook to open the domestic insurance market to private-sector and foreign companies. Since then, 13 private life insurers and eight general insurers have joined the Indian market. Significantly, foreign players participated in most of these new companies – despite the restriction of 26% on foreign ownership. Present state-owned insurance companies have so far managed to hold their own and retain dominant market positions. Yet, their market share is likely to decline in the near to medium term. Important steps have thus been already taken, but there are still major hurdles to overcome if the market is to realize its full potential. To begin with, India needs to further liberalize investment regulations on insurers to strike a proper balance between insurance solvency and investment flexibility. Furthermore, both the life and non-life insurance sectors would benefit from less invasive regulations. In addition, price structures need to reflect product risk. Obsolete regulations on Insurance prices will have to be replaced by risk-differentiated pricing structures. In the life sector, insurers will need to increase efforts to design new products that are suitable for the market and make use of innovative distribution channels to reach a broader range of the population. There is huge untapped potential, for example, in the largely undeveloped private pension market. At the moment, less than 11% of the working population in India is eligible for participation in any formal old-age retirement scheme. Private insurers will have a key role to play in serving the large number of informal sector workers. The same is true for the health insurance business. In addition, the rapid growth of insurance business will put increasing pressure on insurers? capital level. The current equity holding ceilings, however, could limit the ability of new companies to Rapidly inject capital to match business growth. A key challenge for India?s nonlife insurance sector will be to reform the existing tariff structure. From a pricing
perspective, the Indian non-life segment is still heavily regulated. Some 75% of premiums are generated under the tariff system, which means that they are often below market clearing levels. Price liberalization will be needed to improve underwriting efficiency and risk management. It is also the responsibility of nonlife insurers to help manage India?s high exposure to natural catastrophes. To do this, technical know-how and financial capability are imperative. International reinsurance could provide both, but there is currently only a limited scope for global reinsurers to transfer risk efficiently in India at the moment. Reinsurance in India is mainly provided by the General Insurance Corporation of India (GIC), which receives 20% compulsory cessions from other non-life insurers. As far as reinsurance is concerned, policymakers have to recognise that insurance and reinsurance cannot be treated in the same manner. Due to the unique nature of reinsurance, it is necessary to delink the sector from regulations governing direct insurance companies. To allow branching of foreign reinsurers, for example, would make the market more attractive for international players and secure cover for natural catastrophe risks which, today, are mainly uninsured. Finally, the largely underserved rural sector holds great promise for both life and non-life insurers. To unleash this potential, insurance companies will need to show long-term commitment to the sector, design products that are suitable for the rural population and utilize appropriate distribution mechanisms. Insurers will have to pay special attention to the characteristics of the rural labour force, like the prevalence of irregular income streams and preference for simple products, before they can successfully penetrate this sector.
Insurance can be summed up as “Praying for the best … …being PREPARED for the WROST
WEBLIOGRAPHY:http://ruralindia.blogspot.com/2008/06/inoovations-waiting-in-selling.html http://business.mapsofindia.com/insurance/brief-history-of-insurance-sector.html http://www.ibef.org/artdispview.aspx?in=40&art_id=30232&cat_id=801&page=2 http://www.indianmba.com/Faculty_Column/FC1080/fc1080.html http://www.docstoc.com/docs/15616419/Project-on-Insurance-Sector
doc_286862744.docx
India is among the most promising emerging insurance markets in the world. Its current premium volume of USD 18 billion has the potential to increase to USD 90 billion within the next decade. In particular, life insurance, which currently makes up 80% of premiums, is widely tipped to lead the growth. The major drivers include sound economic fundamentals, a rising middle-income class,an improving regulatory framework and rising risk awareness. The groundwork for realising potential was arguably laid in 2000 when India undertook to open the domestic insurance market to private-sector and foreign companies.
SYBBI(FOURTH SEMISTER)
1/1/2012
PROJECT ON:-
CURRENT INSURANCE MARKET
SUBMITTED TO:- | PROF.JALPA
ACKNOWLEDGEMENT
We would firstly like to thank our Institution & sincere thanks to Principal Prof. A. E. Lakdawala and Vice Principal Prof. Kamala Arunachalam for providing us support and giving us an opportunity for doing B&I course and completing this project. We would also like to extent our profound and sincere gratitude to our project guide PROF. JALPA who has guided our project with her vast fund of knowledge advice and constant encouragement. We kindly appreciate her implicit and valuable contribution in drawing up this project. We also take an opportunity to highlight the invaluable contribution of our B&I co-coordinator Prof. Kamal Rohra who have always supported and encouraged us. We also thank our parents and all our colleagues without who this project would have not been completed. Thank you all for your contribution towards the project whether big or small and will forever be indebted to each and every one of you. We also thank to all those whom we have forgotten to mention in this space.
Group members
MARIA KAGDI DIVYA RAI HEEBA SHAIKH SHABINA SHAIKH ANJALI SINGH
ROLL NO.
05 15 20 22 25
Index
INTRODUCTION OF INSURANCE
The Insurance sector in India governed by Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and General Insurance Business (Nationalization) Act, 1972, Insurance Regulatory and Development Authority (IRDA) Act, 1999 and other related Acts. With such a large population and the untapped market area of this population Insurance happens to be a very big opportunity in India. Today it stands as a business growing at the rate of 15-20 per cent annually. Together with banking services, it adds about 7 per cent to the country?s GDP .In spite of all this growth the statistics of the penetration of the insurance in the country is very poor. Nearly 80% of Indian populations are without Life insurance cover and the Health insurance. This is an indicator that growth potential for the insurance sector is immense in India. It was due to this immense growth that the regulations were introduced in the insurance sector and in continuation “Malhotra Committee” was constituted by the government in 1993 to examine the various aspects of the industry. The key element of the reform process was Participation of overseas insurance companies with 26% capital. Creating a more efficient and competitive financial system suitable for the requirements of the economy was the main idea behind this reform. Since then the insurance industry has gone through many sea changes. The competition LIC started facing from these companies were threatening to the existence of LIC .since the liberalization of the industry the insurance industry has never looked back and today stand as the one of the most competitive and exploring industry in India. The entry of the private players and the increased use of the new distribution are in the limelight today. The use of new distribution techniques and the IT tools has increased the scope of the industry in the longer run.
HISTORY OF INSURANCE SECTOR
India had the nineteenth largest insurance market in the world in 2003. Strong economic growth in the last decade combined with a population of over one billion makes it one of the potentially largest markets in the future. Insurance in India has gone through two radical transformations. Before 1956, insurance was private with minimal government intervention. In 1956, life insurance was nationalized and a monopoly was created. In 1972, general insurance was nationalized as well.255 But, unlike life insurance, a different structure was created for the industry. One holding company was formed with four subsidiaries. As a part of the general opening up of the economy after 1992, a government-appointed committee recommended that private companies should be allowed to operate. It took six years to implement the recommendation. The private sector was allowed into the insurance business in 2000. However, foreign ownership was restricted. No more than 26 percent of any company can be foreign-owned. The term general insurance is used in Britain and other Commonwealth countries. Elsewhere, the equivalent term is property-casualty insurance or non-life insurance. Indian Insurance Market – History The Insurance Sector in India dates back to 1818 when the first insurance company was established the Oriental Life Insurance Company at Calcutta. This was followed in quick succession with the establishment of Bombay Life Assurance Company (1823) and Madras Equitable Life Assurance Society (1829). In the general insurance business Triton Insurance Company (1850) was the first to be established. Prior to 1871, Indians were charged about 15 percent more premium as compared to Europeans. Bombay Mutual Life Assurance Society (1871) was the first company not to differentiate
between Indians and Europeans in the matter of fixation of premiums. The first attempt at regulation of the insurance business in India was through the Indian Life Assurance Companies Act in 1912. This was later broad-based and the Insurance Act came into existence from the year 1928 onwards. The Insurance Act was subsequently reviewed and a comprehensive
legislation was enacted called the Insurance Act, 1938. The nationalization of Life insurance business took place in 1956 when 245 Indians and Foreign insurance and provident societies were first amalgamated and then
nationalized. The Life Insurance Corporation of India (LIC) came into existence and has enjoyed a monopoly over the life insurance business in India. The milestones in the Insurance sector 1912 onwards can be summarized development: 1912 : The Indian Life Assurance Corporation Act enacted as the first statute to regulate the life insurance business. 1928 : The Indian Insurance Companies Act enacted to enable the as under. The insurance sector witnessed the following
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. The General insurance business in India, on the other hand, can trace its root to the Triton Insurance Company Ltd., the first general insurance company established in the year 1850 in Calcutta by the British. Some of
the important milestones in the general insurance business in India are: 1907: The Indian Mercantile Insurance Ltd. set up , the first company to transact all classes of general insurance business. 1957 : General Insurance Council, a wing of the Insurance Association of India, frames a code of conduct for ensuring fair conduct and sound business practices. 1968 : The Insurance Act amended to regulate investments and set minimum solvency margins and the Tariff Advisory Committee set up. 1972 : The General Insurance Business (Nationalization) Act, 1972
nationalized the general insurance business in India with effect from 1st January 1973. 107 insurers amalgamated and grouped into four companies viz., the National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd, and the United India Insurance Company Ltd. GIC incorporated as a company.
Insurance Market- Present
The insurance sector was opened up for private participation four years ago. For years now, the private players are active in the liberalized environment. The insurance market have witnessed dynamic changes which includes presence of a fairly large number of insurers both life and non-life segment. Most of the private insurance companies have formed joint venture partnering well recognized foreign players across the globe. There are now 29 insurance companies operating in the Indian market – 14 private life insurers, nine private non-life insurers and six public sector companies. With many more joint ventures in the offing, the insurance industry in India today stands at a crossroads as competition intensifies and companies prepare survival strategies
in a current scenario. There is pressure from both within the country and outside on the Government to increase the foreign direct investment (FDI) limit from the current 26% to 49%, which would help JV partners to bring in funds for expansion. There are opportunities in the pensions sector where regulations are being framed. Less than 10 % of Indians above the age of 60 receive pensions. The IRDA has issued the first license for a standalone health company in the country as many more players wait to enter. The health insurance sector has tremendous growth potential, and as it matures and new players enter, product innovation and enhancement will increase. The deepening of the health database over time will also allow players to develop and price products for larger segments of society. State Insurers Continue to Dominate There may be room for many more players in a large underinsured market like India with a population of over one billion. But the reality is that the intense competition in the last five years has made it difficult for new entrants to keep pace with the leaders and thereby failing to make any impact in the market. Also as the private sector controls over 26.18% of the life insurance market and over 26.53% of the non-life market, the public sector companies still call the shots. The country?s largest life insurer, Life Insurance Corporation of India (LIC), had a share of 74.82% in new business premium income in November 2005. Similarly, the four public-sector non-life insurers – New India Assurance, National Insurance, Oriental Insurance and United India Insurance – had a combined market share of 73.47% as of October 2005. ICICI Prudential Life Insurance Company continues to lead the private sector with a 7.26% market share in terms of fresh premium, whereas ICICI Lombard General Insurance Company is the leader
among the private non-life players with a 8.11% market share. ICICI Lombard has focused on growing the market for general insurance products and increasing penetration within existing customers through product innovation and distribution. Reaching out to Customers No doubt, the customer profile in the insurance industry is changing with the introduction of large number of divergent intermediaries such as brokers, corporate agents, and bancassurance. The industry now deals with customers who know what they want and when, and are more demanding in terms of better service and speedier responses. With the industry all set to move to a detariffed regime by 2007, there will be considerable improvement in customer service levels, product innovation and newer standards of underwriting. Intense Competition In a de-tariffed environment, competition will manifest itself in prices, products, underwriting criteria, innovative sales methods and creditworthiness. Insurance companies will vie with each other to capture market share through better pricing and client segmentation. The battle has so far been fought in the big urban cities, but in the next few years, increased competition will drive insurers to rural and semi-urban markets. Global Standards While the world is eyeing India for growth and expansion; Indian companies are becoming increasingly world class. Take the case of LIC, which has set its sight on becoming a major global player following a Rs280-crore investment from the Indian government. The company now operates in Mauritius, Fiji, the UK, Sri Lanka, and Nepal and will soon start operations in Saudi Arabia. It also plans to venture into the African and Asia-Pacific regions in 2006. The year 2005 was a testing phase for the general insurance industry with a series of catastrophes hitting the Indian sub-continent.
However, with robust reinsurance programs in place, insurers have successfully managed to tide over the crisis without any adverse impact on their balance sheets. With life insurance premiums being just 2.5% of GDP and general insurance premiums being 0.65% of GDP, the opportunities in the Indian market place is immense. The next five years will be challenging but those that can build scale and market share will survive and prosper. Some Areas of Future Growth Life Insurance The traditional life insurance business for the LIC has been a little more than a savings policy. Term life (where the insurance company pays a predetermined amount if the policyholder dies within a given time but it pays nothing if the policyholder does not die) has accounted for less than 2% of the insurance premium of the LIC (Mitra and Nayak, 2001). For the new life insurance companies, term life policies would be the main line of business. Health Insurance Health insurance expenditure in India is roughly 6% of GDP, much higher than most other countries with the same level of economic development. Of that, 4.7% is private and the rest is public. What is even more striking is that 4.5% are out of pocket expenditure (Berman, 1996). There has been an almost total failure of the public health care system in India. This creates an opportunity for the new insurance companies. Thus, private insurance companies will be able to sell health insurance to a vast number of families who would like to have health care cover but do not have it. Pension The pension system in India is in its infancy. There are generally three forms of
plans: provident funds, gratuities and pension funds. Most of the pension schemes are confined to government employees (and some large companies). The vast majority of workers are in the informal sector. As a result, most workers do not have any retirement benefits to fall back on after retirement. Total assets of all the pension plans in India amount to less than USD 40 billion. Therefore, there is a huge scope for the development of pension funds in India. The finance minister of India has repeatedly asserted that a Latin American style reform of the privatized pension system in India would be welcome (Roy, 1997). Given all the pros and cons, it is not clear whether such a wholesale privatization would really benefit India or not (Sinha, 2000).
PRESENT SCENARIO OF INSURANCE INDUSTRY
? India with about 200 million middle class household shows a huge untapped potential for players in the insurance industry. Saturation of markets in many developed economies has made the Indian market even more attractive for global insurance majors. The insurance sector in India has come to a position of very high potential and competitiveness in the market. Indians, have always seen life insurance as a tax saving device, are now suddenly turning to the private sector that are providing them new products and variety for their choice. ? Consumers remain the most important centre of the insurance sector. After the entry of the foreign players the industry is seeing a lot of competition and thus improvement of the customer service in the industry. Computerization of operations and updating of technology has become imperative in the current scenario. Foreign players are bringing in
international best practices in service through use of latest technologies ? The insurance agents still remain the main source through which insurance products are sold. The concept is very well established in the country like India but still the increasing use of other sources is imperative. At present the distribution channels that are available in the market are listed below. Direct selling
? Customers have tremendous choice from a large variety of products from pure term (risk) insurance to unit-linked investment products. Customers are offered unbundled products with a variety of benefits as riders from which they can choose. More customers are buying products and services based on their true needs and not just traditional money back policies, which is not considered very appropriate for long-term protection and savings. There is lots of saving and investment plans in the market. However, there are still some key new products yet to be introduced - e.g. health products. ? The rural consumer is now exhibiting an increasing propensity for insurance products. A research conducted exhibited that the rural consumers are willing to dole out anything between Rs 3,500 and Rs 2,900 as premium each year. In the insurance the awareness level for life insurance is the highest in rural India, but the consumers are also aware about motor, accidents and cattle insurance. In a study conducted by MART the results showed that nearly one third said that they had purchased some kind of
insurance with the maximum penetration skewed in favor of life insurance. The study also pointed out the private companies have huge task to play in creating awareness and credibility among the rural populace. The perceived benefits of buying a life policy range from security of income bulk return in future, daughter's marriage, children's education and good return on savings, in that order, the study adds.
APPLICATION OF INFORMATION TECHNOLOGY IN INSURANCE SECTOR
There is a evolutionary change in the technology that has revolutionized the entire insurance sector. Insurance industry is a data-rich industry, and thus, there is a need to use the data for trend analysis and personalization. With increased competition among insurers, service has become a key issue. Moreover, customers are getting increasingly sophisticated and tech-savvy. People today don?t want to accept the current value propositions, they want personalized interactions and they look for more and more features and add ones and better service The insurance companies today must meet the need of the hour for more and more personalized approach for handling the customer. Today managing the customer intelligently is very critical for the insurer especially in the very competitive environment. Companies need to apply different set of rules and treatment strategies to different customer segments. However, to personalize interactions, insurers are required to capture customer information in an integrated system. With the explosion of Website and greater access to direct product or policy information, there is a need to developing better techniques to give customers a truly personalized experience. Personalization helps organizations to reach their
customers with more impact and to generate new revenue through cross selling and up selling activities. To ensure that the customers are receiving personalized information, many organizations are incorporating knowledge database-
repositories of content that typically include a search engine and let the customers locate the all document and information related to their queries of request for services. Customers can hereby use the knowledge database to manage their products or the company information and invoices, claim records, and histories of the service inquiry. These products also may be able to learn from the customer?s previous knowledge database and to use their information when determining the relevance to the customers search request. There is a probability of a spurt in employment opportunities. A number of websites are coming up on insurance, a few financial magazines exclusively devoted to insurance and also a few training institutes being set up hurriedly. Many of the universities and management institutes have already started or are contemplating new courses in insurance. Life insurance has today become a mainstay of any market economy since it offers plenty of scope for garnering large sums of money for long periods of time. A well-regulated life insurance industry which moves with the times by offering its customers tailor-made products to satisfy their financial needs is, therefore, essential if we desire to progress towards a worry-free future.
Life products before and after deregulation
In the past, the LIC had three commonly sold policies in the market for life insurance: whole life, endowment and money-back policies. The number of new policies sold each year went from about 0.95 million a year in 1957 to 26.97 million in 2003. The total number of in-force policies went from 5.42 million in 1957 to 141 million by March 2003. There are presently several dozen life
products offered by the LIC. However, they are small variations on the three products mentioned above. In addition, even though term life policies were available, they were not actively promoted. LIC also has several pension products. Following the entry of the private insurers, there was a proliferation of products. According to the Annual Report of the IRDA, 116 life products were offered by life insurance companies in India as of 31 March 2002. Of course, they were not all distinct products. Many products across different companies were very similar, if not identical. Some of the more popular products launched recently include creditor protection products like mortgage life, and unit-linked products.
Non-life products before and after deregulation
Before deregulation in 1999, non-life products that were available in the market were rather limited and similar across the four GIC subsidiaries. They could also be classified by whether they were regulated by tariffs: fire insurance, motor vehicle insurance, engineering insurance and workers? compensation etc that came under tariff; and burglary insurance, Mediclaim, personal accident insurance etc that did not. In addition, most specialized insurance (e.g. racehorse insurance) did not fall under tariff regulations. After the opening of the sector to private players, more new products were introduced. To take an example, one joint-venture nonlife insurer introduced 29 different products during the year, according to the IRDA. They included products liability, corporate cover, professional indemnity policies, burglary cover, individual and group health policies, weather insurance, credit insurance, travel insurance and so on. Some of these products were completely new (e.g. weather insurance) while others were already available through the public insurance companies.
Other regulatory developments
The following are a few new features of the regulatory regime introduced by the IRDA: • Insurance agents are governed by the Licensing of Insurance Agents Regulations 2000 and the Licensing of Insurance Regulations (amendment) 2002. Importantly, to ensure professional standards, the IRDA has mandated minimum educational qualifications for all agents, together with training and examination requirements. • Through a Government of India Notification dated 11 November 1998, the Insurance Ombudsman was created to address grievances of the insured customers and protect the interest of policyholders. Twelve Ombudsmen have been appointed across the country to expedite disposal of complaints. They have jurisdiction in respect of personal lines of insurance where the contract value does not exceed INR 20 lacs. The Ombudsman is bound to pass a judgment within three months from the receipt of the complaint. It should be noted that the system is monitored and operated through a governing body of Insurance Council comprising of representatives of insurance companies. The IRDA deals with other disputes that fall outside the Ombudsman?s jurisdiction. • Policyholder protection was enhanced through the enactment of the Protection of Policyholders’ Interests Regulations, 2002. It stipulates the responsibility of insurance companies to spell out clearly the terms and conditions of insurance policies as well as other details. For example, in life insurance, details of any riders attaching to the main policy have to be given to the policyholders.
Future changes in insurance law
Changes to the insurance law in India became enormously complicated during the twentieth century. Just a few years ago it would have been difficult to anticipate that the Insurance Act, 1938, would be re-enforced through the IRDA Act, 1999. This juxtaposition of laws produced some Important anomalies. In order to streamline regulations and eliminate these anomalies, the Law Commission was entrusted with examining these matters for future amendments. A key proposal of the Law Commission is to merge some of provisions of the IRDA Act and the Insurance Act. This will facilitate market practitioners in understanding the role of IRDA while putting all the provisions in one place. This will also help to make revisions easier in future, in accordance to changes in market conditions. The main suggestions of the Law Commission are summarized below (1) The Insurance Act, 1938, is a piece of colonial legislation. Therefore, it contains terminology like “Provident societies” and “mutual insurance companies” that is not relevant in the modern Context. Such terminology has to be deleted. (2) The IRDA Act, 1999, inserted some provisions into the Insurance Act, 1938, to nullify existing provisions. The latter have not been deleted, thus giving rise to anomalies. (3) References in the Insurance Act, 1938, to older enactments have to be replaced by references to the corresponding new legislations that have replaced such enactments. For example, references to the Indian Companies Act, 1913, have to be replaced by references to the Companies Act, 1956. (4) Insurance companies have developed a wider range of products with more riders. Hence, a reclassification of insurance businesses is necessary. For instance,
insurance business may broadly be classified as „life? and „non-life? or „short-term? and „long-term? insurance business. For this purpose, the definition of the term „insurance? and „insurer? would have to be amended. (5) The IRDA, while regulating the business activities of insurers, exercises quasijudicial powers, in addition to its administrative powers, e.g. issue, renewal and cancellation of registration certificates to insurers, order with regard to investigation of the affairs of the insurers, making applications to the court for the winding-up of the insurance companies etc. It is felt necessary that there must be a provision of appeal against the decisions of the IRDA to an independent body constituted under the Act itself. (6) When consumers are dissatisfied with an insurance company, particularly in the area of claims settlement, they can go to the Ombudsman under the Redressal of Public Grievances Rules, 1998. They can also appeal under the Consumer Protection Act, 1986. Consumer courts are called upon to interpret the provisions of the Insurance Act 1938, which is a complex piece of legislation. If a special body of law develops, then a special tribunal is necessary to deal with Insurance cases. This provision would parallel the Securities Appellate Tribunal functioning under the SEBI Act, 1992. (7) The principle of uberrimae fidei (of absolute good faith) governs both parties to a contract of insurance. Specific statutory enumerations are required for protecting the interest of policyholders so that unintended minor mistakes in disclosure do not lead to a loss of coverage. Such a provision is missing. (8) Provisions regarding investments, loans and management need constant review and revision. The IRDA has revised detailed investment regulations; hence provisions will need to be revised so as to eliminate inconsistencies and
duplication. For example, the term “approved securities” requires revision in the context of new economic policy and business practices. (9) IRDA has defined regulations for the determination of the amount of liabilities, solvency margin and valuation of assets. But the provisions regarding solvency margins still have to address the extent of appropriate matching of assets and liabilities. The legal framework of insurance regulation in India is still evolving. Issues regarding compulsory insurance, non-life tariffs and foreign equity shareholdings could see further realignments in the future. Nevertheless, the IRDA has successfully established itself as a progressive and efficient regulator, while remaining unbiased even with its wide, sometimes potentially conflicting, and spectrum of responsibility.
Innovations waiting in selling Insurance policies for Rural India!
Till date most of the companies in India are always focused on urban market or at least they sell their products/services with the same models that of predominantly urban-market oriented. However, of the late, there is a slight shift due to the popularity of so called “Bottom of the Pyramid Model”. One of the main vocal points of BOP model is that understands low-income people as your consumers and makes your product affordable (units) to the BOP market. Most of the companies, these days, have started to remodel their products/services according to this principle. However, targeting BOP market means more than this. You need to make sure your offerings suit to the local needs. That is exactly missing in insurance sector. Nowadays, I have come across many insurance companies selling their policies as low as Rs. 10, Rs. 25 (much less than a US dollar). This is really a welcome step. And now coming to the other innovations part:-
1. Insurance policies should be completely flexible. There should not be like separately priced like health insurance, life insurance, vehicle insurance, farm insurance etc. You price them as a combination (as a flexible percentage and choice is given to the customer). Now let the customer chooses the way he wants. 2. Second comes from distribution aspect. Do not try to keep a separate chain of distribution. Utilize 1-2 millions telecom retail distribution chains. For the simple reason that these bring the structural efficiency in order to reduce the costs. 3. Third comes from social angle. Most of the rural people live in joint families or at least they would love to consume services as a family. This is evident from their consumption patterns such as marriage/functions, pilgrim trips etc. So your service should consider this trick and offer them a group oriented policies. One may even consider community based policies. That would possibly become an instant hit. In all of the above scenarios, recent advances in technology would play a great role. So insurance companies should start looking at the benefits that new tech developments could bring them
KEY HURDLES
Despite government promotion, rural insurance has remained a small part of the total market. Most insurance companies see rural business as an obligation rather than an opportunity. This problem has been recognized by the IRDA. In its Annual Report of 2002-2003, the IRDA stated the following. “While on the one hand, on account of social considerations, the need for spreading insurance throughout the country is a necessity, on the other, with the purchasing power parity of the rural
Population steadily growing, the rural market offers a vast potential for the insurance sector, which has essentially remained untapped so far. In order to tap these markets, there is a need to understand the psyche of the rural populace, their perception towards the importance of different type of insurance, and their willingness to purchase policies. Studies have shown that the rural market holds tremendous potential for growth of the insurance business, particularly due to the prevalence of strong saving habits. Even the relatively low-income families tend to save about a third of their annual earnings. In the agrarian belts, the savings are high around harvest time. The various channels of savings include banks, post offices and informal institutions like local lenders, and Jewellers?. This, of course, is in addition to the agent force. Similarly, auto dealers financing vehicles create awareness for motor vehicle and tractor insurance. It is, however, a matter of concern that, other than in cases of mandatory requirements, spontaneous awareness levels are low, particularly for general insurance products. In addition, there is no felt need for insurance.” Data for private life insurance companies show that, on average, 13% of new private life insurance policies were sold in the rural sector in 2001-2002. There are a few exceptions. One of the key features of nonlife insurance is the clear relationship between the proportion of rural agents deployed and the proportion of policies sold by companies.
Conclusion
India is among the most promising emerging insurance markets in the world. Its current premium volume of USD 18 billion has the potential to increase to USD 90 billion within the next decade. In particular, life insurance, which currently makes up 80% of premiums, is widely tipped to lead the growth. The major drivers include sound economic fundamentals, a rising middle-income class,
an improving regulatory framework and rising risk awareness. The groundwork for realising potential was arguably laid in 2000 when India undertook to open the domestic insurance market to private-sector and foreign companies. Since then, 13 private life insurers and eight general insurers have joined the Indian market. Significantly, foreign players participated in most of these new companies – despite the restriction of 26% on foreign ownership. Present state-owned insurance companies have so far managed to hold their own and retain dominant market positions. Yet, their market share is likely to decline in the near to medium term. Important steps have thus been already taken, but there are still major hurdles to overcome if the market is to realize its full potential. To begin with, India needs to further liberalize investment regulations on insurers to strike a proper balance between insurance solvency and investment flexibility. Furthermore, both the life and non-life insurance sectors would benefit from less invasive regulations. In addition, price structures need to reflect product risk. Obsolete regulations on Insurance prices will have to be replaced by risk-differentiated pricing structures. In the life sector, insurers will need to increase efforts to design new products that are suitable for the market and make use of innovative distribution channels to reach a broader range of the population. There is huge untapped potential, for example, in the largely undeveloped private pension market. At the moment, less than 11% of the working population in India is eligible for participation in any formal old-age retirement scheme. Private insurers will have a key role to play in serving the large number of informal sector workers. The same is true for the health insurance business. In addition, the rapid growth of insurance business will put increasing pressure on insurers? capital level. The current equity holding ceilings, however, could limit the ability of new companies to Rapidly inject capital to match business growth. A key challenge for India?s nonlife insurance sector will be to reform the existing tariff structure. From a pricing
perspective, the Indian non-life segment is still heavily regulated. Some 75% of premiums are generated under the tariff system, which means that they are often below market clearing levels. Price liberalization will be needed to improve underwriting efficiency and risk management. It is also the responsibility of nonlife insurers to help manage India?s high exposure to natural catastrophes. To do this, technical know-how and financial capability are imperative. International reinsurance could provide both, but there is currently only a limited scope for global reinsurers to transfer risk efficiently in India at the moment. Reinsurance in India is mainly provided by the General Insurance Corporation of India (GIC), which receives 20% compulsory cessions from other non-life insurers. As far as reinsurance is concerned, policymakers have to recognise that insurance and reinsurance cannot be treated in the same manner. Due to the unique nature of reinsurance, it is necessary to delink the sector from regulations governing direct insurance companies. To allow branching of foreign reinsurers, for example, would make the market more attractive for international players and secure cover for natural catastrophe risks which, today, are mainly uninsured. Finally, the largely underserved rural sector holds great promise for both life and non-life insurers. To unleash this potential, insurance companies will need to show long-term commitment to the sector, design products that are suitable for the rural population and utilize appropriate distribution mechanisms. Insurers will have to pay special attention to the characteristics of the rural labour force, like the prevalence of irregular income streams and preference for simple products, before they can successfully penetrate this sector.
Insurance can be summed up as “Praying for the best … …being PREPARED for the WROST
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