Description
Privatization has also been used to describe two unrelated transactions. The first is the buying of all outstanding shares of a publicly traded company by a single entity, taking the company private.
A REPORT ON PERCEPTION TOWARDS LIFE INSURANCE AFTER PRIVATISATON
A report submitted in partial fulfillment of The requirements of MBA Program
BY: xxxxxxxxxxx
Distribution list 1) xxxxxxxxxxxxxxxxxxxxx 2) xxxxxxxxxxxxxxxxxxxxx
1
2
ACKNOWLEDGMENT
Learning is a lifelong process; one should not stop learning until dead. I am thankful to ICFAI Business School for giving me an opportunity to learn and perform under SBI Life Insurance.
I take this opportunity to express my sincere gratitude and profound regards to Dr. xxxxxxxxx, my faculty guide, who has always given me motivational boost to go and perform. I would further like to thank her for her persistence to listen to my problems and to give apt solutions . I would like to thank my company guide Mr. Thirumalai Who in spite of busy schedule has co- operated with me continuously and indeed, his valuable contribution and guidance have been certainly indispensable for my project work . It would be really injustice on my part if didn?t thank Mr. E. ThirumudiPandian , Area sales manager and Mr. M. Arjunan, branch sales manager for their invaluable advice and enlightening my path at every stage of my project . I take this opportunity to thank all the senior executives and every associate of SBI Life Insurance Co Ltd, without their cooperation I would not be able to complete this project.
xxxxxxxxxxxxxxxx IBS-CHENNAI
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LIST OF ILLUSTRATIONS
LIST OF FIGURES S.No 1 2 3 4 5 6 7 TITLE OF FIGURES No of males and females surveyed Educational qualifications of males Educational qualifications of females Popularity percentage of life insurance companies Familiarity of schemes among people Purpose of Insurance Ranking of some benefits of insurance (figures expressed in %) Insurance as the viable option for investment Availability of Insurance Cover Estimate of IT professionals enrolled into insurance Type of investment interested in Mode of premium payment Services provided by the insurance company (figures expressed in %) Returns given by the insurance company (figures expressed in %) Ratings of various insurance companies Privatization of insurance Availability of good services after privatization PAGE No. 34 35 35 36 37 38 39
8 9 10
40 40 41
11 12 13
42 42 43
14
44
15 16 17
44 45 46
4
LIST OF TABLES S.No 1 2 3 4 TITLE OF TABLES Popularity percentage of life insurance companies Familiarity of schemes Purpose of Insurance Ranking of some benefits of insurance (figures expressed in %) Estimate of IT professionals enrolled into insurance Mode of premium payment Ratings of various insurance companies PAGE No. 36 37 38 39
5
41
6 7
42 44
5
ABSTRACT
The project deals with the perception of the people towards insurance after the privatization of the insurance sector. The report tries to find the reason for opening up of insurance sector and discuss factors which completely change the picture of the insurance industry in India. We are trying to understand the perception of people when there are so many national and international companies have now entered in the Indian market. Whether they still see insurance as a tax saving product or they start looking towards it as a good investment opportunity. To actually understand this one need to conduct some primary and secondary research. In primary research one need to find out persons monthly income, age, risk appetite, his thinking towards insurance as an investment or tax benefit product and most importantly about his awareness of insurance companies and products offered by them in the market. As well as his knowledge about other investment products in the market and what is his feedback when they had already invested in such products. We also look towards one insurance product available in the market as ULIP. We see what its important features and good aspects of this product, what the risk of investing in this product are, what are the returns it offered etc.
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PURPOSE, SCOPE AND LIMITATIONS
The purpose of this report is to find out the change in the perception of the people towards life insurance after privatization and to understand and compare the current insurance market with the market existing before opening up of the industry for the private and outside players with some current issues and latest development. This report also takes in to consideration the new innovative and contemporary products available to the customers in the market and to which level they are satisfied with these products and what is their recommendation for any changes that should be done in the products. The project report is structured
according to the data procured from the websites of life insurance companies, IRDA annual report, and insurance council of India and through the survey conducted by means of preparing a questionnaire. A small sample size is taken for conducting the survey. The survey is conducted only in the Chennai so the statistical data collected, analyzed and results drawn only reflects views and perception of local residents, professionals about the life insurance and
insurance products. So the results through this effort may vary and deviate from the actual findings and proceedings.
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SOURCES AND METHODS
The main source of materials for collecting and procuring the data includes the annual IRDA report, the regulatory body for insurance in India and the insurance council of India and data is also collected by conducting a survey among general mass using a carefully prepared questionnaire which tries to take in to account the investment behavior of the people towards life insurance which includes their yearly investment, investment in a particular product, their satisfaction level with the service and returns and their recommendations for further improvement in the product. The analysis and interpretation is done using the data collected by means of using Microsoft Excel software and represented by means of pie
charts, bar graphs etc. some of the results are also include an element of assumption where ever the data is not available and incomplete due to some inevitable reasons so results may vary from the actual findings.
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INDUSTRIAL ANALYSIS
Historical Background: The Indian economy is currently showing signs of vibrancy; it is also depicting a qualitative change in its composition. which had been essentially built on agricultural The economy wealth, has
transformed itself in stages over the period of the five year plans, initially into an economy, where industry assumed a leadership role accompanied by a perceptible change in the last few years or so with an accent on information technology and other service sectors. Today, the Gross Domestic Product of the countr y is predominantly derived from the services sector. integral part. Government's decision to accept the recommendations of the This will naturally have its effect on the state of capital market of which insurance sector is an
Committee on Reforms in th e Insurance Sector and to constitute an interim Insurance Regulatory Authority, by an executive order in January 1996, to look into the modifications, the regulatory frame work of the insurance sector, has resulted in the establishment of a statutory body, for regulating the players and in broadening the sector by admission of new players from the private sector. Such a development has had a ripple effect leading to the establishment and development of professional institutions that are connected with the industry. aspects. As more than 42% of the country's current GDP is being generated by the services sector, obviously necessary steps are required to be taken to sustain this process of growth and towa rds this end a coordinated approach is necessary. And insurance being a service industry could prima facie act as an engine of growth. In this regard, the history of development of insurance industry in India has 9 Subsequent sections of this report deal with these
been
one
of
under-performance
and
under-achievement.
Appreciation for the necessity to cover risks of both personal lives and property has been very poor. insurance market has been In fact, the growth in the life driven by income tax mainly
considerations and this had been the primary reason why the urban population has been a major beneficiary of life policies. Coverage of property to risks of different types has always been a secondary consideration of its owners and has been prompted by lenders' requirements. Unless there exists a compulsion on the part of All these characteristics of the current owners to cover the risks of loss, the industry shall not move in the high gear for development. market are changing, albeit slowly, as a result of the transformation that has been ushered in with t he current developments in the insurance sector. The compelling reason for the same which was to provide an opportunity for the consumers to have a choice in the matter of selection of their risk bearers is slowly unfolding into a system whereby newer and newer dimensions are being added to the product profiles that the companies produce. There is still considerable work to be done in this area by insurance companies. But decidedly the f irst step in this direction has now been taken by admission of new p layers and the Authority hopes that this step, though small in nature, will be a significant one. In the statements that follow, the Authority portrays some basic and fundamental statistics that relate to the Indian economy which are relevant to the insura nce industry. Also added to these statements is a short table which depicts the state of insurance penetration in the Indian context. A discerning reader may note that the level of development of insurance in the country is still not on the same level as the development noticed in the neighborhood but the increase shown in a period of the past few years is encouraging.
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The opening of the market to private participation is a bold experiment and was necessitated by the public perception of a necessity to have a free availability of choice to customers. Hopes were entertained that the opening up of the market will deepen the insurance penetration, bring about a rationalization of premium structure, end cross subsidization, provide covers which were lacking in the market and provide the necessary resources for infrastructure development. The functioning of the old insurers gave enough hopes to nurture and encourage these thoughts. The new companies have also supported this philosophy by their current actions; however, they have been active for so little a time that their effect on the market will be felt only in the years to come. Some of the hopeshave been achieved - in the areas of innovation of products, extension of facilities to cus tomers etc.
CURRENT DEVELOPMENTS IN ULIP
It is nearly seven years since the Indian insurance market was opened up. In life insurance, we have seen unprecedented growth which is continuing. By the end of the financial year 2007 -08 we are likely to see more than twenty life in surance companies in India. A frequently asked question is: what is the optimum number of insurance companies that is ideal for India?s needs? Considering that life insurance penetration is 3% of GDP and that one is aiming at say 7% or 8% of GDP, that vast sections of people are still not covered by life insurance and large geographical areas are
untouched by insurance, we can say that we have a long way to go and that there is room for more insurance companies. The annual „new business? growth has been aro und 100% for the last three years and it looks likely that such a growth will continue for some time. That such an incredible growth, to a great extent, has been due to ULIP products is another matter. A significant part of „current
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issues? are consequent to such high growth.
W ith current and
projected growth of the Indian economy at 9% for the foreseeable future, domestic savings rate can be expected to grow from, or at least be stable at 23 -24%. It follows that unless the sector makes
major strategic e rrors, growth of life insurance business will remain high. Predicting a company?s future over long term is difficult enough; attempting that for a sector in a market is much more risky. Yet when one discusses „current issues in life assurance (CILA)? one must devote thought to market -related strategic issues and
directions and to mid -term and long-term solutions. In a recent special issue of Harvard Business Review on „long term planning? its editor concludes his observations saying: ‘…the art of managing for the long term is the art of making the whole greater than the sum of its parts’. I believe this is apt for our life insurance market. It is necessary to create a market that fits the HBR editor?s comment and one needs to keep this in mind when analyzin g current issues and identif ying solutions. It is also said that „building the future is really about building the present……..and a …. Leader must be careful to stay close to the front line -the people who deal with customers and markets? (Maurice Levy-HBR). In this context let us look at the industry issues in „building the present? and what steps are needed to resolve them and take the industry forward in a wholesome, healthy and customer -oriented manner. It is essential that the life insurance market func tions with „optimum efficiency? and ensures that resources are allocated efficiently, „ensuring customer choice and value? (Skipper). An efficient market will have innovative and constantly improving products, predictable and affordable prices and transpa rent practices. But no market is
perfect and our life insurance sector has more than its share of imperfections. In a perfect market a regulator is perhaps not
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needed. Information asymmetry between the three viz. insurer intermediary-customer is a major i mperfection that manifests itself in several of our operational issues and regulatory interventions. Dr. Harold Skipper notes: “…within a competitive insurance market government / regulatory interventions are desirable only if three conditions exist: a. Actual or potential market imperfections exist b. The market imperfections could and do lead to economic inefficiency or inequity c. Government (regulatory) action can ameliorate the inefficiency / inequity.” All the three mentioned above apply to our life insurance market. The industry can do continuing introspection, as is being attempted in this conference, and reduce if not eliminate imperfections. W hat we call „issues? are actually the visible manifestations of
imperfections. Saving Rates (as % of) GDP at Curren t Market Prices 1993-941994-951995-961996-971997-981998-99 (P) (Q) Gross Domestic Saving Public Private Household sector (a) Financial savings (b)Physical savings 22.5 0.6 21.9 18.4 11.0 7.4 25.0 1.7 23.3 19.8 12.0 7.8 25.5 2.0 23.4 18.5 8.9 9.6 23.3 1.7 21.6 17.1 10.4 6.7 24.7 1.4 23.3 19.0 10.4 8.6 22.3 0.0 22.3 18.5 10.9 7.6
Gross Domestic Investment*
23.1
26.1
27.2
24.6
26.2
23.4
13
GFCF Change in stocks Saving-Investment Gap@ Public (-) 7.6 (-) 6.6 Private
21.4 (-) 0.2 (-) 0.6 (-) 7.1 8.9
22.0 1.6 (-) 1.2 (-) 5.6 8.5
24.6 1.9 (-) 1.8
23.0 (-) 1.2 (-) 1.3 (-) 6.7
22.7 0.7 (-) 1.5 5.3 6.6
21.4 0.4 (-) 1.0
(-) 5.3 4.5
7.1
Note: (i) Gross domestic investment denotes gross domestic capital formation (GDCF) (ii) Figures may not add up due to rounding off * : adjusted for errors and omissions; @ : refers to the difference between the rates of savings and investment GFCF : Gross fixed capital formation; P : Provisional estimates; Q : Quick estimates Source : Economic Survey, 1999 -2000 TABLE-3 Savings of the Household Sector in Financial Assets (Rs. in crore) Item 1992-931993-941994-951995-961996-97 1997-98P1998-99$
Savings(Gross) of the Household Sector in Financial Assets of which 80,387 109,485 145,381 124,986 157,424178,576207,841 Currency 6,562 13,367 15,916 16,525 13,643 (8.2) Bank Deposits # (12.2) (10.9 (13.2) (8.7) 12,780 22,131 (7.2) (10.6)
29,550 36,200 55,834 39,995 57,367 (36.8) (33.1) (38.4) (32.0) (36.4)
79,514 76,590 (44.5) (36.9)
Non-banking Deposits
6,035 11,654 11,547 13,198 21,411 (7.5) (10.6) (7.9) (10.6) (13.6)
7,775 15,376 (4.4) (7.4)
Life Insurance Fund**
7,114 8.8)
9,548 11,370 13,894 16,188 (8.7) (7.8) (11.1) (10.3)
19,431 22,766 (10.9) (11.0)
Provident and Pension Fund 14,814 18,226 21,295 22,292 26,248 32,808 38,742 (18.4) (16.6) 14 (14.6) (17.8) (16.7) (18.4) (18.6)
Claims on Government + 3,885 (4.8)
6,908 13,186 (6.3) (9.1)
9,588 11,701 (7.7) 8,839 (7.1) 262 (0.2) (7.4) 6,696 (4.3) 3,776 (2.4)
22,164 27,004 (12.4) 3,777 (2.1) 595 (0.3) (13.0) 4,935 (2.4) 565 (0.3)
Shares and Debentures ++ 8,212 10,067 13,474 (10.2) (9.2) (9.3) 3,908 (2.7)
Units of Unit Trust of India 5,612 4,705 (7.0) (4.3)
Due to Changes in Coverag e of non-banking deposits, figures prior to 1998-99 are not strictl y comparable with those of 1992 -96 These data are compiled /revised in December 1999 and hence, do not tall y with the Quick Estimates of CSO released in February 1999. Constituents may not add up to total due to rounding off. Figures in brackets indicate percentages to total Financial Asse ts of households. # Includes deposits with Co -operative non -credit societies. ** Includes State / Central Government and postal insurance fund. + Includes compulsory deposits. ++ Includes investment in shares and debentures of credit / non -credit societies, public sector bonds, and investment in mutual funds (other than UTI) $ Tentative Estimates Source: Report on Currency and Finance 1998 -99, RBI
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Privatization of the Insurance Market in India: From the British Raj to Monopoly Raj to Swaraj.
Introduction
Over the past century, Indian insurance industry has gone through big changes. It started as a fully private system with no restriction on foreign participation. After the independence, the industry went to the other extreme. It became a state-owned monopoly. In 1991, when rapid changes took place in manyParts of the Indian economy, nothing happened to the institutional structure ofInsurance: it remained a monopoly. Only in 1999, a new legislation came into effect signaling a change in the insurance industry structure. We examine what might happen in the future when the domestic private insurance companies are allowed to compete with some foreign participation. Because of the time dependence of insurance contracts, it is highly unlikely that these erstwhile monopolies are going to disappear.
Insurance in India started without any regulation in the Nineteenth Century. It was a typical story of a colonial era: a few British insurance Companies dominating the market serving mostly large urban centers. After the independence, it took a dramatic turn. Insurance was nationalized. First, the life insurance companies were nationalized in 1956, and then the general insurance business was nationalized in 1972. Only in 1999 private insurance companies have been allowed back into the business of insurance with a maximum of 26% of foreign holding. In what follows, we describe how and why of regulation and deregulation. The entry of the State Bank of India with its proposal of bancassurance brings a new dynamics in the game. We study the collective experience of the other countries in Asia already deregulated their markets and have allowed foreign companies to participate. If the experience of the other countries is any guide, the dominance of the Life Insurance Corporation and the General Insurance Corporation is not going to disappear any time soon. Insurance under the British Raj Life insurance in the modern form was first set up in India through a British company called the Oriental Life Insurance Company in 1818 followed by the Bombay Assurance Company in 1823 and the Madras Equitable Life Insurance Society in 1829. All of these companies operated in
16
India but did not insure the lives of Indians. They were there insuring the lives of Europeans living in India. Some of the companies that started later did provide insurance for Indians. But, they were treated as "substandard" and therefore had to pay an extra premium of 20% or more.3policies that could be bought by Indians with "fair value" was the Bombay Mutual Life Assurance Society starting in 1871.The first general insurance company, Triton Insurance Company Ltd., was established in 1850. It was owned and operated by the British. The first indigenous general insurance company was the Indian Mercantile Insurance Company Limited set up in Bombay in 1907.By 1938, the insurance market in India was buzzing with 176 companies (both life and non-life). However, the industry was plagued by fraud. Hence, a comprehensive set of regulations was put in place to stem this problem (see Table 1). By 1956, there were 154 Indian insurance companies, 16 non-Indian insurance companies and 75 provident societies that were issuing life insurance policies. Most of these policies were centered in the cities (especially around big cities like Bombay, Calcutta, Delhi and Madras). In 1956, the then finance minister S. D. Deshmukh announced nationalization of the life insurance business.
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TABLE 1 MILESTONES OF INSURANCE REGULATIONS IN THE 20THCENTURY
Year Significant 1912 Regulatory Event The Indian Life Insurance Company Act 1938 1938The Insurance Act: Comprehensive Act to regulate
insurance business in India 1956 Nationalization of business in india 1972 1972Nationalization insurance business in India 1993 1994 Setting up of Malhotra Committee Recommendations of Malhotra Committee 1995 Setting up of Mukherjee Committee of general life insurance
1996
Setting up of (interim) Insurance Regulatory
Authority (IRA) 1997 The Government gives greater
autonomy to LIC, GIC and its subsidiaries with regard to the restructuring of boards and flexibility in investment norms aimed at channeling funds to the
infrastructure sector 1998 The cabinet decides to allow 40% foreign equity in private
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insurance
companies-26%
to
foreign companies and 14% to NRI?s, OCB?s and FII?s 1999 The Standing Committee headed by MuraliDeora decides that foreign equity in private insurance should be limited to 26%. The IRA bill is renamed the Insurance Regulatory and Development
Authority (IRDA) Bill1999Cabinet clears IRDA
Bill2000President gives Assent to the IRDA
Bill Sources: Various Monopoly Raj The nationalization of life insurance was justified mainly on three counts. (1) It was perceived that private companies would not promote insurance in rural areas. (2) The Government would be in a better position to channel resources for saving and investment by taking over the business of life insurance. (3) Bankruptcies of life insurance companies had become a big problem (at the time of takeover, 25 insurance companies were already bankrupt and another 25 were on the verge of bankruptcy). The experience of the next four decades would temper these views.
Life Story of the Life Insurance CorporationThe life insurance industry
was nationalized under the Life Insurance Corporation (LIC) Act of India. In some ways, the LIC has become very successful. (1) Despite being a monopoly, it has some 60-70 million policyholders. Given that the Indian middle-class is around 250-300 million, the LIC has managed to capture some 30 odd percent of it. (2) The level of customer satisfaction is high for the LIC (one of the findings of the Malhotra Committee, see below). This is somewhat surprising given the frequent delays in claim settlement. (3) Market penetration in the rural areas has grown substantially. Around 48% of the customers of the LIC are from rural and semi-
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urban areas. This probably would not have happened had the charter of the LIC not specifically set out the goal of serving the rural areas. One exogenous factor has helped the LIC to grow rapidly in recent years: a high saving rate in India. Even though the saving rate is high in India (compared with other countries with a similar level of development), Indians exhibit high degree of risk aversion. Thus, nearly half of the investments are in physical assets (like property and gold). Around twenty three percent are in (low yielding but safe) bank deposits. In addition, some 1.3- percent of the GDP are in life insurance related savings vehicles. This figure has doubled between 1985 and 1995. Life Insurance in India: A World PerspectiveIn many countries, Insurance has been a form of savings. Table 2 shows that in many developed countries, a significant fraction of domestic saving is in the form of (endowment) insurance plans. This is not surprising. The prominence of some developing countries is more surprising. For example, South Africa features at the number two spot. India is nestled between Chile and Italy. This is even more surprising given the levels of economic development in Chile and Italy. Thus, we can conclude that there is an insurance culture in India despite a low per capita income. This bodes well for future growth. Specifically, when the income level improves, insurance (especially life) is likely to grow rapidly.
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Table 2 LIFE INSURANCE PREMIUM AS PERCENTAGES OF THE GROSS DOMESTIC SAVING (GDS) AND THAT OF GROSS DOMESTIC PRODUCT (GDP)
Rank
1
Country
United kingdom
% of GDS
52.50
% of GDP
7.31
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
South Africa Japan France USA South Korea Finland Switzerland Netherlands Israel Sweden Australia Canada Zimbabwe Ireland Greece New Zealand Taiwan Denmark Spain Germany Norway Belgium Portugal
51.55 32.46 26.20 25.20 23.66 23.10 21.92 19.04 18.84 17.88 17.88 17.05 15.88 14.96 13.87 12.75 12.29 12.00 11.68 11.40 9.57 9.13 8.76
10.32 10.10 4.91 3.63 9.10 4.98 5.99 4.51 4.41 3.51 3.48 3.04 6.27 4.59 1.12 3.04 3.64 2.71 2.23` 2.80 2.33 2.38 1.65
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25 26 27 28 29 30
Austria Chile India Italy Malaysia Singapore
6.96 6.96 5.95 5.60 5.35 4.72
2.10 1.95 1.29 1.13 2.30 2.73
Source: Roy (1999). Figures for 1994.
Malhotra Committee
Liberalization of the Indian insurance market was recommendedin a report released in 1994 by the Malhotra Committee, indicating that themarket should be opened to private-sector competition, and ultimately, foreignprivate-sector competition. It also investigated the level of satisfaction ofthe customers of the LIC. Curiously, the level of customer satisfaction seemed to be high. The union of the LIC made political capital out of this finding(The following are the purposes of the committee. (a) To suggest the structure of the insuranceIndustry, to assess the strengths and weaknesses of insurance companies in termsof the objectives of creating an efficient and viable insurance industry, tohave a wide coverage of insurance services, to have a variety of insuranceproducts with a high quality service, and to develop an effective instrument formobilization of financial resources for development. (b) To make recommendationsfor changing the structure of the insurance industry, for changing the generalpolicy framework etc. (c) To take specific suggestions regarding LIC and GICwith a view to improve the functioning of LIC and GIC. (d) To makerecommendations on regulation and supervision of the insurance sector in India.(e) To make recommendations on the role and functioning of surveyors, intermediaries like agents etc. in the insurance sector. (f) To makerecommendations on any other matter which are relevant for development of theinsurance industry in India. The committee made a number of important andfar-reaching recommendations.(a) The LIC should be selective in the recruitmentof LIC agents. Train these people after the identification of training needs.
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(b) The committee suggested that the Federation of Insurance Institute, Mumbai shouldstart new courses and diploma courses forintermediaries of the insurance sector. (c) The LIC should use an MBAspecialized in Marketing (a similar suggestion for the GIC subsidiaries). (c) Itsuggested that settlement of claims were to be done within a specific time framewithout delay. (d) The committee has several recommendations on product pricing,vigilance, systems and procedures, improving customer service and use oftechnology. (f) It also made a number of recommendations to alter the existingstructure of the LIC and the GIC. (g) The committee insisted that the insurancecompanies should pay special attention to the rural insurance business. (h) Inthe case of liberalization of the insurance sector the committee made severalrecommendations, including entry to new players and the minimum capital levelrequirements for such new players should be Rs. 100 crores (about USD 24million). However, a lower capital requirement could be considered for aco-operative sectors' entry in the insurance business. (i) The committeesuggested some norms relating to promoters? equity and equity capital by foreigncompanies, etc.Mukherjee CommitteeImmediately after the publication of theMalhotra Committee Report, a new committee (called the Mukherjee Committee) wasset up to make concrete plans for the requirements of the newly formed insurancecompanies. Recommendations of the Mukherjee Committee were never made public.But, from the information that filtered out it became clear that the committeerecommended the inclusion of certain ratios in insurance company balance sheets to ensure transparency in accounting. But the Finance Minister objected. Heargued (probably on the advice of some of the potential entrants) that it could affect the prospects of a developing insurance company.
Insurance Regulatory Act (1999)After the report of the Malhotra Committee
cameout, changes in the insurance industry appeared imminent. Unfortunately, Instability in Central Government, changes in insurance regulation could notpass through the parliament. The dramatic climax came in 1999. On March 16,1999, the Indian Cabinet approved an Insurance Regulatory Authority (IRA) Billthat was designed to liberalize the insurance sector. The bill was awaitingratification by the Indian Parliament. However, the BJP Government fell in April1999. The deregulation was put on hold once again. An election was held in late1999. A
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new BJP-led government came to power. On December 7, 1999, the newgovernment passed the Insurance Regulatory and Development Authority (IRDA) Act. This Act repealed the monopoly conferred to the Life Insurance Corporation in1956 and to the General Insurance Corporation in 1972. The authority created bythe Act is now called IRDA. It has ten members. New licenses are being given toprivate companies (see below). IRDA has separated out life, non-life andreinsurance insurance businesses. Therefore, a company has to have separatelicenses for each line of business. Each license has its own capitalrequirements (around USD24 million for life or non-life and USD48 million forreinsurance).Some Details of the IRDA BillOn July 14, 2000, the Chairman of theIRDA, Mr. N. Rangachari set forth a set of regulations in an extraordinary issueof the Indian Gazette that details of the regulation. Regulations The first covers the Insurance Advisory Committee that sets out the rules and regulation. The second stipulates that the "Appointed Actuary" has to be a Fellow of the Actuarial Society of India. Given that there has been a dearth of actuaries in India with the qualification of a Fellow of the Actuarial Society of India, this becomes a requirement of tall order. As a result, some companies have not been able to attract a qualified Appointed Actuary (Dasgupta, 2001). The IRDA is also in the process of replacing the Actuarial Society of India by a newly formed institution to be called the Chartered Institute of Indian Actuaries (modeled after the Institute of Actuaries of London). Curiously, for life insurers the Appointed Actuary has to be an internal company employee, but he or she may be an external consultant if the company happens to be a non-life insurance company. Third, the Appointed Actuary would be responsible for reporting to the IRDA a detailed account of the company. Fourth, insurance agents should have at least a high school diploma along with training of 100 hours from a recognized institution. More than a dozen institutions have been recognized by the IRDA for training insurance agents (the list appears online at
http://www.irdaonline.org/press.asp).Fifth, the IRDA has set up strict guidelines on asset and liability management of the insurance companies along with solvency margin requirements. Initial margins are set high (compared with developed countries). The margins vary with the lines of business (for example,
24
fire insurance has a lower margin than aviation insurance).Sixth, the disclosure requirements have been kept rather vague. This has been done despite the recommendations to the contrary by the Mukherjee Committee
recommendations. Seventh, all the insurers are forced to provide some coverage for the rural sector. (1) In respect of a life insurer, (a) five percent in the first financial year; (b) seven percent in the second financial year; (c) ten percent in the third financial year; (d) twelve percent in the fourth financial year; (e) fifteen percent in the fifth year (of total policies written direct in hat year). (2) In respect of a general insurer, (a) two percent in the first Financial year; (b) three percent in the second financial year; (c) five percent thereafter (of total gross premium income written direct in that year).New Entry Immediately after the passage of the Act, a number of companies announced that they would seek foreign partnership. In mid-2000, the following companies made public statements that they already were in the process of setting up insurance business with foreign partnerships (see Table 3). However, not all the partnerships panned out in the end (see below) There are three other companies with "in principal" approvals
1) Max New York Life. It is a partnership between Delhi based pharmaceutical company Max India and New York Life, the New York based life insurance company.(2) ICICI Prudential Life Insurance Company. This is a joint venture between Mumbai based Industrial Credit & Investment Corporation and the London based Prudential PLC. (3) IFFCO Tokio General Insurance Company. It is a joint venture between Indian Farmers' Fertilizer Cooperative and Tokio Marine and Fire of Japan. To date (end of April 2001), the following companies have thus been granted licenses: ICICI -Prudential, Reliance General, Reliance Life, Tata-AIG General, HDFC-Standard Life, Royal-Sundaram, Max-New York Life, IFFCO-Tokio Marine, Birla-SunLife, Bajaj-Allianz General, Tata-AIG Life, ING-Vyasa, Bajaj-Allianz Life, SBI-Cardiff Life. Note that all of these companies are either in the life insurance business or in the non-life insurance business. No license has been granted for reinsurance business so far (the size of the reinsurance business can be 10-20% of the total revenue). No stand-alone health insurance company has been granted license so far. Enter the DragonOn December 28, 2000, the State Bank of India (SBI) announced a joint venture partnership with Cardif SA (the insurance arm of BNP Paribas Bank). This partnership won over several others (with Fortis and with GE Capital). The entry
25
of the SBI has been awaited by many. It is well known that the SBI has long harbored plans to become a universal bank (a universal bank has business in banking, insurance and in security). For bank with more than 13,000 branches all over India, this would be a natural expansion. In the first round of license issue, the SBI was absent. There were several reasons for this delay. First, the SBI was seeking a foreign partner to help with new product design. Second, it did not want the partner to become dominant in the long run (when the 26% foreign investment cap is eventually lifted). It wanted to retain its own brand name. Third, it wanted a partner that is well versed in the universal banking business. This ruled out an American partner (where underwriting insurance business by banks have been strictly forbidden by law). Cardif is the third largest insurance company in France. More than 60% of life insurance policies in France are sold through the banks. Fourth, the Reserve Bank of India (RBI) needed to clear participation by the SBI because in India banks are allowed to enter other businesses on a "case by case" basis. Over the course of the next twelve months, the SBI will sell insurance in 00 branches. Over a period of 2-3 years it will expand operation in 500 branches. Initially it will hold 74% ownership of the joint venture company with Cardif. Over time, it will dilute its holding to 5060%.The SBI entry is groundbreaking for several reasons. This was the first for a bank to enter the insurance market. This kind of synergy between a bank and an insurance company is extremely rare in many parts of the world. In Continental Europe, it is called bancassurance (in France) or allfinanz (in Germany). Second, even though the regulators have said that banks would not (generally) be allowed to hold more than 50% of an insurance company, the SBI was allowed to do so (with a promise that its share would be eventually diluted).
Broken MarriagesSeveral partnerships broke down during the year 2000.
Probably the most dramatic breakdown took place between Hindustan Times (a newspaper group) and the Commercial Union of the UK. The management of Hindustan Times realized that they are heavily reliant on a steady daily cash flow (Kumari, 2001). Insurance is a completely different business. Their shareholders would revolt if they faced large one-time losses (common in insurance business).Similarly, by the end of July 2000, Kotak-Mahindra and Chubb declared their divorce. Dabur Group and Allstate also parted company. Allianz
26
and Alpic broke their partnership.Re-pairing of PartnersA curious trend has developed by the end of 2000. Several divorced partners have come back to the field to tie knots to some other partners. Dabur has decided to tie the knot with another divorcee - Commercial Union. Allianz has announced a new partnership with the giant Indian scooter-maker Bajaj.Back to the Future: Mostly Swaraj with a Foreign Twist At present, 312 million middle class consumers in India have enough financial resources to purchase insurance products like pension, health care, accident benefit, life, property and auto insurance. Only 2.5 per cent of this insurable population, however, have insurance coverage in any form. The potential premium income is estimated at around US $80 billion. This will place India as the sixth largest market in the world (after the US, Japan, Germany, UK and France).
Lessons from ChinaChina is the most populous country in the world (at 1.2
billion); India is a close second (just over a billion). Both have followed the path of deregulation and privatization - China started it in 1979 and India in 1991. Comparisons of these processes are described in Sinha and Sinha (1997). In this section, I will concentrate only on the insurance industry in the two countries. The insurance business in India has a premium volume of $8.3 billion n 1999 whereas in China the premium volume is $16.8 billion in 1999. However, premium per capita is not all that dissimilar: $13.7 per person in China and $8.5 in India in 1999. As a percent of GDP, insurance is 1.93% in India and 1.63% in China in 1999 (all data from Sigma, 2000).In China, the People's Insurance Company of China (PICC) had a monopoly between 1949 and 1959. In 1959, insurance business was deemed capitalistic and all forms of insurance were suspended (and the insurance business was taken over by the Peoples Bank of China). The insurance business reopened in 1979, the PICC reassumed its old role as the monopoly. There are many differences in the way China and India have handled deregulation. First, in China, the China Insurance Regulatory Commission (CIRC) was set up in November 1998, well after the first Insurance Law was promulgated in 1995. In India, the IRDA was launched first with the authority to issue licenses. It took almost a year before it issued licenses for the first set of private insurance companies. Second, in China, foreign insurers need to have a representative office for three years before they can submit a proposal for operation (in practice, this has been reduced to two years in some cases).
27
In India, there is no such requirement. Third, foreign insurers can only own 1825% of the total value of the market (although, in reality, it has been much less than that in Shanghai). In India, the limit is set at 26% per company. In China, there is no limit at the company level. Thus, a foreign company can own 100% of an approved insurance company in China. Fourth, in India, the licenses are national. A company with a license can operate in any part of the country. In China, on the other hand, foreign companies are restricted to operation in two metropolitan areas: Shanghai and Guangzhou. Fifth, the IRDA is a Law-implementing body. It can only interpret the laws that have been passed by the Indian Parliament. On the other hand, it seems that the CIRC has been a Law-making body, it is setting up rules as it sees fit. Sixth, China seems to Have been forced to issue insurance licenses to a host of foreign companies by the end of 2000 simply because it wanted an assured entry into the World Trade Organization (WTO). In India, there is no such pressure as India is already a part of the WTO.Quo Vadis, Insurance? In this section, we gaze into the future of the insurance industry in India. A number of trends are already emerging. ConvergenceIn many other regions around the world, one sure sign is emerging in the insurance business. Different parts of the financial sectors are converging This happened first in European Union (with the so-called Third Directive). It is now happening in the United States with the effective repealing of the GlassSteagall Act of 1933. In India, it will surely come. Not everybody in India, however, believes so. For example, the Insurance Regulatory Development Authority (IRDA) chairman N. Rangachari said that India is not yet ready for the convergence of all financial sectors under one supervisory authority as suggested by the banking division of the finance ministry. The RBI (Reserve Bank of India) has erected a firewall between banks and insurance companies to protect investor interests. With the insurance sector transforming from total regulation to being opened up after 35 years, fears have been expressed on how it would move. However, the convergence is already happening on the ground in a “curious way” as 10 out of 12 insurance proposals received for license by the IRDA have come in from companies who are in the pure or applied finance sector. It may appear curious, but clearly the companies who want to enter the insurance sector see some kind of a synergy between their existing business and insurance. Monitor Group Report how would the insurance market be divided up
28
between the incumbent Life Insurance Corporation and the newcomers? The Monitor Group (from Boston) has published a study at the end of 1999 (reported in Business Today, 2000). It estimates that the $5 billion market of life insurance in India (figure for 1998) will become a $23 billion market by 2008. The report estimates that the LIC will have some 70-80% of the market whereas the new companies will share some 20-30%. The bright prognostics for the LIC come from several key observations. (1) The LIC has a vast distribution network in the rural and semi-urban areas. This would be hard to duplicate. (2) The LIC has had a real annual growth rate of 8% over the last decade. This is much larger than industrial growth. Therefore, the LIC has a head start. (3) As life insurance benefits accrue over time, it becomes more expensive to switch - because switching would mean a loss of accrued benefits. The general insurance business is expected to grow from USD 1.8 billion (1998) to 12 billion in 2008. The Monitor Group Report predicts that the private companies would have an easier access to the general insurance business. The market share of the newcomers will be 40-50% of the total market. Cause for better market penetration for the new companies come from the fact that it makes no difference for the insured to switch companies. Unlike life insurance, it is not expensive to switch insurers. However, the lack of good data would hamper the newcomers (see below).Reinsurance The GIC has decided to spin off its reinsurance business as a separate company to be called Indian Reinsurer. The insurance business in India is less than USD $1 billion at present (2000). In the near term (three to five years), it is expected to double in size for two simple reasons. (1) Under the new regime, the reinsurance requirements are higher (as a percentage of total insurance business). (2) Privately run non-life insurance companies have a higher reinsurance requirement in the early years. Aftermath of the Gujarat EarthquakeOn January 26, 2001, an earthquake measuring 6.9 on the Richter scale hit parts of Gujarat. Many buildings toppled. An estimated 20,000 persons were killed - most of them in Bhuj district of Gujarat (around 18,000). Estimated damage was in the order of magnitude of USD 5 billion - most of it uninsured. The disaster was once in a lifetime event. In a curious way, it will help the new entrants in the insurance industry in India. It is well known in the psychology literature that disasters make people more aware of their insurance needs. Given what happened in Gujarat, most Indians will now have a higher awareness about
29
buying an insurance policy than they would have otherwise. No amount of advertisement by the insurance companies (both life and general) could have achieved this. Ironically, India's national insurance companies began to exclude earthquake cover in the new policy forms adopted from 1 April 2000 and began to offer the protection as a buy-back on the recommendation of the Tariff Advisory Committee (TAC) report. Many policyholders were unaware of the change and so the relatively few individuals and companies that have been prudent enough to buy insurance may discover that, in the case of the Gujarat event, they are uninsured. 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 inIndia.
30
Questionnaire
Name__________________________________________ Age_____ Gender: Male/Female Educational Qualification: a) Engineering b) CA/MBA c) MCA d) Others If Others. Specify_______________________ Email id __________________________________
1. Tick the life insurance companies you are familiar with:1) LIC 3) SBI Life 5) Max New York Life 6) 2) 4) ICICI-Prudential Bajaj-Allianz Birla Sun Life
2. Tick the types of schemes you are familiar with:1) Term plan 2) Endowment plan 3) Money Back plan 4) ULIP ( Unit Linked Insurance Plan) 5) Child plan 6) Pension plan
3. Tick on what the life insurance company provides?
31
a) Security for life b) Investment Opportunity c) Tax Benefits d) High returns e) Pension
4. Rank the following benefits of Insurance on a 1-5 scale:
_____ Financial Expenses _____ loved Ones? future security _____ Exemption from tax _____ Mortgage payments/Rent fund _____ College/School Education
5. Do you think insurance is the viable option for investment?
Yes
No
Why?........................................................................................................................ ..................... 6. Do you have any insurance cover? Yes No
If Yes, then which company?.......................................................................................................
7. What type of investment are you interested in?
Short term Long term
ULIP 32
Why?.................................................................................................................. .......................... ………………………………………………………………………………………… ……
8. What is idea behind your investment in insurance? Tax Benefit Future Security High Returns
9. What is the mode of your premium payment?
1) Monthly 2) Quarterly 3) Half-Yearly 4) Yearly
10. Are you happy with the services provided by the insurance company? Yes No
11. Are you happy with the returns given by the insurance company? Yes No
12. Which is the most trusted insurance company at present? (Both in the public and the private sector) Rate on the basis of 1-5 scale appropriate no.) 1- least trusted …. 5- Most trusted (Tick the
LIC SBI-Life ICICI-Prudential Bajaj-Allianz Birla- Sun Life 1
1 2 1 1 1
2 3 2 2 2
3 4 3 3 3
4 5 4 4 4
5
5 5 5
33
13. Entry of large no. of private insurance companies is good for the public?
Yes
No
14. After privatization whether the public is getting good products/service?
Yes
No
15. What do you think about the role of the IRDA? Regulator ………………. …. Facilitator…………………… A govt. body…………………
34
ANALYSIS OF THE SURVEY
The survey was conducted to understand the knowledge and perception of the people towards life insurance after privatization. The response is quantified by means of response obtained in the form of answers and views put forward by the people in a survey conducted. The survey includes response from professionals, businessmen, daily workers, and housewives and working in different sectors and fields in Chennai. Almost everyone knew insurance and relates insurance with LIC and those who have invested in insurance products mainly invested for availing tax exemption and all traditional reasons of investing like risk coverage and loved ones future security while some of them also said that insurance is not a good option for investment due to inflation and when long term gains were considered. Use of bar, line graphs, tables and pie diagrams are done to represent the findings of the survey.
No of males and females software professionals surveyed
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 24 7
male
female
35
Educational qualifications of males
16.66 Engg. CA/MBA 20.83 58.33 MCA Others
4.16
Educational qualifications of females
42.85
42.85
Engg. CA/MBA MCA Others
14.28 0
36
Popularity percentage of life insurance companies
61.29 45.16 41.93 61.29
LIC 80.64 ICICI BAJAJ 67.74 BIRLA HDFC SBI
Even though, the private sector insurance companies are increasing, the most sought after insurance company even among people is LIC which has the highest market share in India. This is also depicted by the pie-chart as shown above.
CATEGORY
RESPONSE (in %)
1. LIC 2. ICICI 3. BAJAJ 4. Birla 5. HDFC 6. SBI
80.64 67.74 61.29 41.93 45.16 61.29
37
Familiarity of Schemes
25.8 58.06 38.7 term plan endowment plan money back ULIP 67.74
Among many plans available, the most preferred one among the mass is money back plan. This plan helps you to withdraw your money at regular intervals and still staying insured. This plan is famous for its high liquidity advantage. The other product gaining popularity is ULIP (unit linked insurance plan), as its serve multiple purpose, it give high returns, tax benefit, life insurance , critical illness cover and is admired for its flexibility for paying premium amount.
SCHEMES
1. Term plan 2. Endowment plan 3. Money back 4. ULIP
RESPONSE (in %)
25.8 38.7 67.74 58.06
Objective for investment in Insurance
38
Among the surveyed people about 61.29% view insurance tax saving product. Life insurance plans of some private insurance companies are giving 100% tax exemption. Even the IT returns are also 100% tax free on annual basis. After that around 46 percent buy insurance to cover risk followed by good returns and savings objective.
CATEGORY
1. Life Insurance 2. Investment 3. Tax Benefit 4. High Returns 5. Savings
RESPONSE (in %)
45.16 32.25 61.29 22.58 29.03
Ranking of some benefits of insurance (figures expressed in %)
39
Among some benefits of insurance, loved ones’ security secured the least percentage i.e. overall the highest rank. So, people take insurance so that their loved ones and they themselves get secured and enjoy the life cover.
CATEGORY
1. Final Exp. 2. Loved ones’ security 3. Income Needs 4. Housing Loans 5. Children Edu.
RESPONSE (in %)
254 187 200 316 374
Insurance as the viable option for investment
40
80% 60% 40% 20% 0%
80%
20% yes
no
Among the surveyed, 80% of them said that insurance is the viable option for investment. The reasons were there that it is the medium of tax benefit, risk coverage and regular savings. But, 20% of them said that it is not favorable for investment due to inflation and comparatively less returns than other financial instruments.
Availability of Insurance Cover
Among the people surveyed, 90% of them said that they had life-insurance cover but only 10% of them were devoid of insurance but were planning to take one in the future.
Estimate of IT professionals enrolled into insurance
41
About 54.83% of IT professionals have chosen LIC as their premier insurance investment company. And the rest all insurance companies having their insurance cover are far less as compared to LIC. So, this illustrates that even the IT professionals have faith in LIC as their most favored life insurance company.
INSURANCE COMPANY
1. LIC 2. Birla Sun-Life 3.ICICI 4.MetLife 5. Bajaj- Allianz 6. ING-Vyasa 7. SBI-Life 8. Tata- AIG 9. HDFC 10. Reliance
RESPONSE (in %)
54.83 6.45 12.90 3.22 6.45 3.22 6.45 3.22 3.22 6.45
42
Type of investment interested in
16.12
32.25 Short term Long term
54.83
ULIP
About 54.83% people said that the type of investment which they are interested in is long term investment. This is because they wanted to reap benefits for a longer term. Long life insurance cover will naturally give them high risk coverage and higher returns.
Mode of premium payment
38.7
38.7 quarterly monthly
22.58
22.58
half yearly yearly
About 38.7% of them said that they paid their premium through quarterly and yearly mode. And only 22.58% favored monthly and half yearly medium of premium payment.
43
MODE OF PREMIUM PAYMENT
1. Quarterly 2. Monthly 3. Half- yearly 4. Yearly
RESPONSE (in %)
38.7 22.58 22.58 38.7
Services provided by the insurance company (figures expressed in %)
100 80 60 40 20 0
90.32
6.45
Yes
No
About 90.32% of people said that they were happy with the services provided by the insurance company. And only 6.45% were not satisfied. This shows that life insurance companies are fairly performing well especially in India.
Returns given by the insurance company (figures expressed in %)
44
80 60 40 20 0
70.96
Yes 22.58 No
Yes
No
About 70.96% of people have view that they were happy with the returns given by the insurance companies. But 22.58% were not. The reason for their dissatisfaction is that they think that other financial instruments like bonds, shares, debentures, securities and mutual funds are other good options for investment and they think that insurance does not provide investment opportunity for the short term.
Ratings of various insurance companies
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0
4.64 4.03 3.12 3.16 3.12
LIC
SBI-Life
ICICI
Bajaj-Allianz Birla SunLife
LIC of India is the most preferred life insurance company even among software professionals as depicted through the above bar graph. It has a rating of 4.64. The other private life insurance companies are having less percentage of share of it. 45
INSURANCE COMPANY
1. LIC 2. SBI-Life 3. ICICI 4. Bajaj- Allianz 5. Birla- Sun Life
RATING
4.64 4.03 3.12 3.16 3.12
Privatization of insurance
25 20 15 10 5 0 Yes No 7 24
78 % people of those surveyed were of the view that privatization is good for the public. This is because they think that the many private insurance companies have come up with some attractive plans like ULIPs which are fetching good returns even for a short period. Only 22% of them think that that investing in a private insurance company is risky because the returns are not guaranteed.
Availability of good services after privatization
46
19.35
Yes No 70.96
About 70.96 % of people think the insurance companies are providing good services even after privatization. This is because they have come up with some new schemes and plans which are innovative and are giving better returns even for a short period than compared to plans pertaining to public sector insurance company like LIC. Only 19.35% think that services are not good after privatization as they have less belief on these private life insurance companies or they do not consider life insurance as important investment option and also the private insurance companies have high premium allocation charges and high surrender charges, fixed charges and other formalities.
47
CONCLUDING REMARKS Unit Linked products are finally products of choice. If you feel equipped to manage your investments on your own or are not comfortable with long lock -ins or you can't make the most of these tax breaks, you may be better off investing elsewhere after securing your life insurance needs. 1. There is a great need to disclose the risk involved in the schemes properly to the investor/insurance seeker by the insurance/investment companies. 2. The Insurance Regulatory and Development Authority has to issue set of guidelines on ULIP policies offered in the market. 3. The charges in the initial years should be brought down. 4. The high returns (above 20 per cent) are definitely not sustainable over a long term, as they have been generated during the biggest Bull Run in recent stock market. 5. Investors/Insurance seeker has to take switching charges i nto consideration as they have a long -term implication on the returns generated.
48
REFERENCES 1. www.irdaonline.com 2. www.licindia.com 3. www.lifeinsurancecouncil.com 4. www.sbilife.co.in
49
doc_484449136.docx
Privatization has also been used to describe two unrelated transactions. The first is the buying of all outstanding shares of a publicly traded company by a single entity, taking the company private.
A REPORT ON PERCEPTION TOWARDS LIFE INSURANCE AFTER PRIVATISATON
A report submitted in partial fulfillment of The requirements of MBA Program
BY: xxxxxxxxxxx
Distribution list 1) xxxxxxxxxxxxxxxxxxxxx 2) xxxxxxxxxxxxxxxxxxxxx
1
2
ACKNOWLEDGMENT
Learning is a lifelong process; one should not stop learning until dead. I am thankful to ICFAI Business School for giving me an opportunity to learn and perform under SBI Life Insurance.
I take this opportunity to express my sincere gratitude and profound regards to Dr. xxxxxxxxx, my faculty guide, who has always given me motivational boost to go and perform. I would further like to thank her for her persistence to listen to my problems and to give apt solutions . I would like to thank my company guide Mr. Thirumalai Who in spite of busy schedule has co- operated with me continuously and indeed, his valuable contribution and guidance have been certainly indispensable for my project work . It would be really injustice on my part if didn?t thank Mr. E. ThirumudiPandian , Area sales manager and Mr. M. Arjunan, branch sales manager for their invaluable advice and enlightening my path at every stage of my project . I take this opportunity to thank all the senior executives and every associate of SBI Life Insurance Co Ltd, without their cooperation I would not be able to complete this project.
xxxxxxxxxxxxxxxx IBS-CHENNAI
3
LIST OF ILLUSTRATIONS
LIST OF FIGURES S.No 1 2 3 4 5 6 7 TITLE OF FIGURES No of males and females surveyed Educational qualifications of males Educational qualifications of females Popularity percentage of life insurance companies Familiarity of schemes among people Purpose of Insurance Ranking of some benefits of insurance (figures expressed in %) Insurance as the viable option for investment Availability of Insurance Cover Estimate of IT professionals enrolled into insurance Type of investment interested in Mode of premium payment Services provided by the insurance company (figures expressed in %) Returns given by the insurance company (figures expressed in %) Ratings of various insurance companies Privatization of insurance Availability of good services after privatization PAGE No. 34 35 35 36 37 38 39
8 9 10
40 40 41
11 12 13
42 42 43
14
44
15 16 17
44 45 46
4
LIST OF TABLES S.No 1 2 3 4 TITLE OF TABLES Popularity percentage of life insurance companies Familiarity of schemes Purpose of Insurance Ranking of some benefits of insurance (figures expressed in %) Estimate of IT professionals enrolled into insurance Mode of premium payment Ratings of various insurance companies PAGE No. 36 37 38 39
5
41
6 7
42 44
5
ABSTRACT
The project deals with the perception of the people towards insurance after the privatization of the insurance sector. The report tries to find the reason for opening up of insurance sector and discuss factors which completely change the picture of the insurance industry in India. We are trying to understand the perception of people when there are so many national and international companies have now entered in the Indian market. Whether they still see insurance as a tax saving product or they start looking towards it as a good investment opportunity. To actually understand this one need to conduct some primary and secondary research. In primary research one need to find out persons monthly income, age, risk appetite, his thinking towards insurance as an investment or tax benefit product and most importantly about his awareness of insurance companies and products offered by them in the market. As well as his knowledge about other investment products in the market and what is his feedback when they had already invested in such products. We also look towards one insurance product available in the market as ULIP. We see what its important features and good aspects of this product, what the risk of investing in this product are, what are the returns it offered etc.
6
PURPOSE, SCOPE AND LIMITATIONS
The purpose of this report is to find out the change in the perception of the people towards life insurance after privatization and to understand and compare the current insurance market with the market existing before opening up of the industry for the private and outside players with some current issues and latest development. This report also takes in to consideration the new innovative and contemporary products available to the customers in the market and to which level they are satisfied with these products and what is their recommendation for any changes that should be done in the products. The project report is structured
according to the data procured from the websites of life insurance companies, IRDA annual report, and insurance council of India and through the survey conducted by means of preparing a questionnaire. A small sample size is taken for conducting the survey. The survey is conducted only in the Chennai so the statistical data collected, analyzed and results drawn only reflects views and perception of local residents, professionals about the life insurance and
insurance products. So the results through this effort may vary and deviate from the actual findings and proceedings.
7
SOURCES AND METHODS
The main source of materials for collecting and procuring the data includes the annual IRDA report, the regulatory body for insurance in India and the insurance council of India and data is also collected by conducting a survey among general mass using a carefully prepared questionnaire which tries to take in to account the investment behavior of the people towards life insurance which includes their yearly investment, investment in a particular product, their satisfaction level with the service and returns and their recommendations for further improvement in the product. The analysis and interpretation is done using the data collected by means of using Microsoft Excel software and represented by means of pie
charts, bar graphs etc. some of the results are also include an element of assumption where ever the data is not available and incomplete due to some inevitable reasons so results may vary from the actual findings.
8
INDUSTRIAL ANALYSIS
Historical Background: The Indian economy is currently showing signs of vibrancy; it is also depicting a qualitative change in its composition. which had been essentially built on agricultural The economy wealth, has
transformed itself in stages over the period of the five year plans, initially into an economy, where industry assumed a leadership role accompanied by a perceptible change in the last few years or so with an accent on information technology and other service sectors. Today, the Gross Domestic Product of the countr y is predominantly derived from the services sector. integral part. Government's decision to accept the recommendations of the This will naturally have its effect on the state of capital market of which insurance sector is an
Committee on Reforms in th e Insurance Sector and to constitute an interim Insurance Regulatory Authority, by an executive order in January 1996, to look into the modifications, the regulatory frame work of the insurance sector, has resulted in the establishment of a statutory body, for regulating the players and in broadening the sector by admission of new players from the private sector. Such a development has had a ripple effect leading to the establishment and development of professional institutions that are connected with the industry. aspects. As more than 42% of the country's current GDP is being generated by the services sector, obviously necessary steps are required to be taken to sustain this process of growth and towa rds this end a coordinated approach is necessary. And insurance being a service industry could prima facie act as an engine of growth. In this regard, the history of development of insurance industry in India has 9 Subsequent sections of this report deal with these
been
one
of
under-performance
and
under-achievement.
Appreciation for the necessity to cover risks of both personal lives and property has been very poor. insurance market has been In fact, the growth in the life driven by income tax mainly
considerations and this had been the primary reason why the urban population has been a major beneficiary of life policies. Coverage of property to risks of different types has always been a secondary consideration of its owners and has been prompted by lenders' requirements. Unless there exists a compulsion on the part of All these characteristics of the current owners to cover the risks of loss, the industry shall not move in the high gear for development. market are changing, albeit slowly, as a result of the transformation that has been ushered in with t he current developments in the insurance sector. The compelling reason for the same which was to provide an opportunity for the consumers to have a choice in the matter of selection of their risk bearers is slowly unfolding into a system whereby newer and newer dimensions are being added to the product profiles that the companies produce. There is still considerable work to be done in this area by insurance companies. But decidedly the f irst step in this direction has now been taken by admission of new p layers and the Authority hopes that this step, though small in nature, will be a significant one. In the statements that follow, the Authority portrays some basic and fundamental statistics that relate to the Indian economy which are relevant to the insura nce industry. Also added to these statements is a short table which depicts the state of insurance penetration in the Indian context. A discerning reader may note that the level of development of insurance in the country is still not on the same level as the development noticed in the neighborhood but the increase shown in a period of the past few years is encouraging.
10
The opening of the market to private participation is a bold experiment and was necessitated by the public perception of a necessity to have a free availability of choice to customers. Hopes were entertained that the opening up of the market will deepen the insurance penetration, bring about a rationalization of premium structure, end cross subsidization, provide covers which were lacking in the market and provide the necessary resources for infrastructure development. The functioning of the old insurers gave enough hopes to nurture and encourage these thoughts. The new companies have also supported this philosophy by their current actions; however, they have been active for so little a time that their effect on the market will be felt only in the years to come. Some of the hopeshave been achieved - in the areas of innovation of products, extension of facilities to cus tomers etc.
CURRENT DEVELOPMENTS IN ULIP
It is nearly seven years since the Indian insurance market was opened up. In life insurance, we have seen unprecedented growth which is continuing. By the end of the financial year 2007 -08 we are likely to see more than twenty life in surance companies in India. A frequently asked question is: what is the optimum number of insurance companies that is ideal for India?s needs? Considering that life insurance penetration is 3% of GDP and that one is aiming at say 7% or 8% of GDP, that vast sections of people are still not covered by life insurance and large geographical areas are
untouched by insurance, we can say that we have a long way to go and that there is room for more insurance companies. The annual „new business? growth has been aro und 100% for the last three years and it looks likely that such a growth will continue for some time. That such an incredible growth, to a great extent, has been due to ULIP products is another matter. A significant part of „current
11
issues? are consequent to such high growth.
W ith current and
projected growth of the Indian economy at 9% for the foreseeable future, domestic savings rate can be expected to grow from, or at least be stable at 23 -24%. It follows that unless the sector makes
major strategic e rrors, growth of life insurance business will remain high. Predicting a company?s future over long term is difficult enough; attempting that for a sector in a market is much more risky. Yet when one discusses „current issues in life assurance (CILA)? one must devote thought to market -related strategic issues and
directions and to mid -term and long-term solutions. In a recent special issue of Harvard Business Review on „long term planning? its editor concludes his observations saying: ‘…the art of managing for the long term is the art of making the whole greater than the sum of its parts’. I believe this is apt for our life insurance market. It is necessary to create a market that fits the HBR editor?s comment and one needs to keep this in mind when analyzin g current issues and identif ying solutions. It is also said that „building the future is really about building the present……..and a …. Leader must be careful to stay close to the front line -the people who deal with customers and markets? (Maurice Levy-HBR). In this context let us look at the industry issues in „building the present? and what steps are needed to resolve them and take the industry forward in a wholesome, healthy and customer -oriented manner. It is essential that the life insurance market func tions with „optimum efficiency? and ensures that resources are allocated efficiently, „ensuring customer choice and value? (Skipper). An efficient market will have innovative and constantly improving products, predictable and affordable prices and transpa rent practices. But no market is
perfect and our life insurance sector has more than its share of imperfections. In a perfect market a regulator is perhaps not
12
needed. Information asymmetry between the three viz. insurer intermediary-customer is a major i mperfection that manifests itself in several of our operational issues and regulatory interventions. Dr. Harold Skipper notes: “…within a competitive insurance market government / regulatory interventions are desirable only if three conditions exist: a. Actual or potential market imperfections exist b. The market imperfections could and do lead to economic inefficiency or inequity c. Government (regulatory) action can ameliorate the inefficiency / inequity.” All the three mentioned above apply to our life insurance market. The industry can do continuing introspection, as is being attempted in this conference, and reduce if not eliminate imperfections. W hat we call „issues? are actually the visible manifestations of
imperfections. Saving Rates (as % of) GDP at Curren t Market Prices 1993-941994-951995-961996-971997-981998-99 (P) (Q) Gross Domestic Saving Public Private Household sector (a) Financial savings (b)Physical savings 22.5 0.6 21.9 18.4 11.0 7.4 25.0 1.7 23.3 19.8 12.0 7.8 25.5 2.0 23.4 18.5 8.9 9.6 23.3 1.7 21.6 17.1 10.4 6.7 24.7 1.4 23.3 19.0 10.4 8.6 22.3 0.0 22.3 18.5 10.9 7.6
Gross Domestic Investment*
23.1
26.1
27.2
24.6
26.2
23.4
13
GFCF Change in stocks Saving-Investment Gap@ Public (-) 7.6 (-) 6.6 Private
21.4 (-) 0.2 (-) 0.6 (-) 7.1 8.9
22.0 1.6 (-) 1.2 (-) 5.6 8.5
24.6 1.9 (-) 1.8
23.0 (-) 1.2 (-) 1.3 (-) 6.7
22.7 0.7 (-) 1.5 5.3 6.6
21.4 0.4 (-) 1.0
(-) 5.3 4.5
7.1
Note: (i) Gross domestic investment denotes gross domestic capital formation (GDCF) (ii) Figures may not add up due to rounding off * : adjusted for errors and omissions; @ : refers to the difference between the rates of savings and investment GFCF : Gross fixed capital formation; P : Provisional estimates; Q : Quick estimates Source : Economic Survey, 1999 -2000 TABLE-3 Savings of the Household Sector in Financial Assets (Rs. in crore) Item 1992-931993-941994-951995-961996-97 1997-98P1998-99$
Savings(Gross) of the Household Sector in Financial Assets of which 80,387 109,485 145,381 124,986 157,424178,576207,841 Currency 6,562 13,367 15,916 16,525 13,643 (8.2) Bank Deposits # (12.2) (10.9 (13.2) (8.7) 12,780 22,131 (7.2) (10.6)
29,550 36,200 55,834 39,995 57,367 (36.8) (33.1) (38.4) (32.0) (36.4)
79,514 76,590 (44.5) (36.9)
Non-banking Deposits
6,035 11,654 11,547 13,198 21,411 (7.5) (10.6) (7.9) (10.6) (13.6)
7,775 15,376 (4.4) (7.4)
Life Insurance Fund**
7,114 8.8)
9,548 11,370 13,894 16,188 (8.7) (7.8) (11.1) (10.3)
19,431 22,766 (10.9) (11.0)
Provident and Pension Fund 14,814 18,226 21,295 22,292 26,248 32,808 38,742 (18.4) (16.6) 14 (14.6) (17.8) (16.7) (18.4) (18.6)
Claims on Government + 3,885 (4.8)
6,908 13,186 (6.3) (9.1)
9,588 11,701 (7.7) 8,839 (7.1) 262 (0.2) (7.4) 6,696 (4.3) 3,776 (2.4)
22,164 27,004 (12.4) 3,777 (2.1) 595 (0.3) (13.0) 4,935 (2.4) 565 (0.3)
Shares and Debentures ++ 8,212 10,067 13,474 (10.2) (9.2) (9.3) 3,908 (2.7)
Units of Unit Trust of India 5,612 4,705 (7.0) (4.3)
Due to Changes in Coverag e of non-banking deposits, figures prior to 1998-99 are not strictl y comparable with those of 1992 -96 These data are compiled /revised in December 1999 and hence, do not tall y with the Quick Estimates of CSO released in February 1999. Constituents may not add up to total due to rounding off. Figures in brackets indicate percentages to total Financial Asse ts of households. # Includes deposits with Co -operative non -credit societies. ** Includes State / Central Government and postal insurance fund. + Includes compulsory deposits. ++ Includes investment in shares and debentures of credit / non -credit societies, public sector bonds, and investment in mutual funds (other than UTI) $ Tentative Estimates Source: Report on Currency and Finance 1998 -99, RBI
15
Privatization of the Insurance Market in India: From the British Raj to Monopoly Raj to Swaraj.
Introduction
Over the past century, Indian insurance industry has gone through big changes. It started as a fully private system with no restriction on foreign participation. After the independence, the industry went to the other extreme. It became a state-owned monopoly. In 1991, when rapid changes took place in manyParts of the Indian economy, nothing happened to the institutional structure ofInsurance: it remained a monopoly. Only in 1999, a new legislation came into effect signaling a change in the insurance industry structure. We examine what might happen in the future when the domestic private insurance companies are allowed to compete with some foreign participation. Because of the time dependence of insurance contracts, it is highly unlikely that these erstwhile monopolies are going to disappear.
Insurance in India started without any regulation in the Nineteenth Century. It was a typical story of a colonial era: a few British insurance Companies dominating the market serving mostly large urban centers. After the independence, it took a dramatic turn. Insurance was nationalized. First, the life insurance companies were nationalized in 1956, and then the general insurance business was nationalized in 1972. Only in 1999 private insurance companies have been allowed back into the business of insurance with a maximum of 26% of foreign holding. In what follows, we describe how and why of regulation and deregulation. The entry of the State Bank of India with its proposal of bancassurance brings a new dynamics in the game. We study the collective experience of the other countries in Asia already deregulated their markets and have allowed foreign companies to participate. If the experience of the other countries is any guide, the dominance of the Life Insurance Corporation and the General Insurance Corporation is not going to disappear any time soon. Insurance under the British Raj Life insurance in the modern form was first set up in India through a British company called the Oriental Life Insurance Company in 1818 followed by the Bombay Assurance Company in 1823 and the Madras Equitable Life Insurance Society in 1829. All of these companies operated in
16
India but did not insure the lives of Indians. They were there insuring the lives of Europeans living in India. Some of the companies that started later did provide insurance for Indians. But, they were treated as "substandard" and therefore had to pay an extra premium of 20% or more.3policies that could be bought by Indians with "fair value" was the Bombay Mutual Life Assurance Society starting in 1871.The first general insurance company, Triton Insurance Company Ltd., was established in 1850. It was owned and operated by the British. The first indigenous general insurance company was the Indian Mercantile Insurance Company Limited set up in Bombay in 1907.By 1938, the insurance market in India was buzzing with 176 companies (both life and non-life). However, the industry was plagued by fraud. Hence, a comprehensive set of regulations was put in place to stem this problem (see Table 1). By 1956, there were 154 Indian insurance companies, 16 non-Indian insurance companies and 75 provident societies that were issuing life insurance policies. Most of these policies were centered in the cities (especially around big cities like Bombay, Calcutta, Delhi and Madras). In 1956, the then finance minister S. D. Deshmukh announced nationalization of the life insurance business.
17
TABLE 1 MILESTONES OF INSURANCE REGULATIONS IN THE 20THCENTURY
Year Significant 1912 Regulatory Event The Indian Life Insurance Company Act 1938 1938The Insurance Act: Comprehensive Act to regulate
insurance business in India 1956 Nationalization of business in india 1972 1972Nationalization insurance business in India 1993 1994 Setting up of Malhotra Committee Recommendations of Malhotra Committee 1995 Setting up of Mukherjee Committee of general life insurance
1996
Setting up of (interim) Insurance Regulatory
Authority (IRA) 1997 The Government gives greater
autonomy to LIC, GIC and its subsidiaries with regard to the restructuring of boards and flexibility in investment norms aimed at channeling funds to the
infrastructure sector 1998 The cabinet decides to allow 40% foreign equity in private
18
insurance
companies-26%
to
foreign companies and 14% to NRI?s, OCB?s and FII?s 1999 The Standing Committee headed by MuraliDeora decides that foreign equity in private insurance should be limited to 26%. The IRA bill is renamed the Insurance Regulatory and Development
Authority (IRDA) Bill1999Cabinet clears IRDA
Bill2000President gives Assent to the IRDA
Bill Sources: Various Monopoly Raj The nationalization of life insurance was justified mainly on three counts. (1) It was perceived that private companies would not promote insurance in rural areas. (2) The Government would be in a better position to channel resources for saving and investment by taking over the business of life insurance. (3) Bankruptcies of life insurance companies had become a big problem (at the time of takeover, 25 insurance companies were already bankrupt and another 25 were on the verge of bankruptcy). The experience of the next four decades would temper these views.
Life Story of the Life Insurance CorporationThe life insurance industry
was nationalized under the Life Insurance Corporation (LIC) Act of India. In some ways, the LIC has become very successful. (1) Despite being a monopoly, it has some 60-70 million policyholders. Given that the Indian middle-class is around 250-300 million, the LIC has managed to capture some 30 odd percent of it. (2) The level of customer satisfaction is high for the LIC (one of the findings of the Malhotra Committee, see below). This is somewhat surprising given the frequent delays in claim settlement. (3) Market penetration in the rural areas has grown substantially. Around 48% of the customers of the LIC are from rural and semi-
19
urban areas. This probably would not have happened had the charter of the LIC not specifically set out the goal of serving the rural areas. One exogenous factor has helped the LIC to grow rapidly in recent years: a high saving rate in India. Even though the saving rate is high in India (compared with other countries with a similar level of development), Indians exhibit high degree of risk aversion. Thus, nearly half of the investments are in physical assets (like property and gold). Around twenty three percent are in (low yielding but safe) bank deposits. In addition, some 1.3- percent of the GDP are in life insurance related savings vehicles. This figure has doubled between 1985 and 1995. Life Insurance in India: A World PerspectiveIn many countries, Insurance has been a form of savings. Table 2 shows that in many developed countries, a significant fraction of domestic saving is in the form of (endowment) insurance plans. This is not surprising. The prominence of some developing countries is more surprising. For example, South Africa features at the number two spot. India is nestled between Chile and Italy. This is even more surprising given the levels of economic development in Chile and Italy. Thus, we can conclude that there is an insurance culture in India despite a low per capita income. This bodes well for future growth. Specifically, when the income level improves, insurance (especially life) is likely to grow rapidly.
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Table 2 LIFE INSURANCE PREMIUM AS PERCENTAGES OF THE GROSS DOMESTIC SAVING (GDS) AND THAT OF GROSS DOMESTIC PRODUCT (GDP)
Rank
1
Country
United kingdom
% of GDS
52.50
% of GDP
7.31
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
South Africa Japan France USA South Korea Finland Switzerland Netherlands Israel Sweden Australia Canada Zimbabwe Ireland Greece New Zealand Taiwan Denmark Spain Germany Norway Belgium Portugal
51.55 32.46 26.20 25.20 23.66 23.10 21.92 19.04 18.84 17.88 17.88 17.05 15.88 14.96 13.87 12.75 12.29 12.00 11.68 11.40 9.57 9.13 8.76
10.32 10.10 4.91 3.63 9.10 4.98 5.99 4.51 4.41 3.51 3.48 3.04 6.27 4.59 1.12 3.04 3.64 2.71 2.23` 2.80 2.33 2.38 1.65
21
25 26 27 28 29 30
Austria Chile India Italy Malaysia Singapore
6.96 6.96 5.95 5.60 5.35 4.72
2.10 1.95 1.29 1.13 2.30 2.73
Source: Roy (1999). Figures for 1994.
Malhotra Committee
Liberalization of the Indian insurance market was recommendedin a report released in 1994 by the Malhotra Committee, indicating that themarket should be opened to private-sector competition, and ultimately, foreignprivate-sector competition. It also investigated the level of satisfaction ofthe customers of the LIC. Curiously, the level of customer satisfaction seemed to be high. The union of the LIC made political capital out of this finding(The following are the purposes of the committee. (a) To suggest the structure of the insuranceIndustry, to assess the strengths and weaknesses of insurance companies in termsof the objectives of creating an efficient and viable insurance industry, tohave a wide coverage of insurance services, to have a variety of insuranceproducts with a high quality service, and to develop an effective instrument formobilization of financial resources for development. (b) To make recommendationsfor changing the structure of the insurance industry, for changing the generalpolicy framework etc. (c) To take specific suggestions regarding LIC and GICwith a view to improve the functioning of LIC and GIC. (d) To makerecommendations on regulation and supervision of the insurance sector in India.(e) To make recommendations on the role and functioning of surveyors, intermediaries like agents etc. in the insurance sector. (f) To makerecommendations on any other matter which are relevant for development of theinsurance industry in India. The committee made a number of important andfar-reaching recommendations.(a) The LIC should be selective in the recruitmentof LIC agents. Train these people after the identification of training needs.
22
(b) The committee suggested that the Federation of Insurance Institute, Mumbai shouldstart new courses and diploma courses forintermediaries of the insurance sector. (c) The LIC should use an MBAspecialized in Marketing (a similar suggestion for the GIC subsidiaries). (c) Itsuggested that settlement of claims were to be done within a specific time framewithout delay. (d) The committee has several recommendations on product pricing,vigilance, systems and procedures, improving customer service and use oftechnology. (f) It also made a number of recommendations to alter the existingstructure of the LIC and the GIC. (g) The committee insisted that the insurancecompanies should pay special attention to the rural insurance business. (h) Inthe case of liberalization of the insurance sector the committee made severalrecommendations, including entry to new players and the minimum capital levelrequirements for such new players should be Rs. 100 crores (about USD 24million). However, a lower capital requirement could be considered for aco-operative sectors' entry in the insurance business. (i) The committeesuggested some norms relating to promoters? equity and equity capital by foreigncompanies, etc.Mukherjee CommitteeImmediately after the publication of theMalhotra Committee Report, a new committee (called the Mukherjee Committee) wasset up to make concrete plans for the requirements of the newly formed insurancecompanies. Recommendations of the Mukherjee Committee were never made public.But, from the information that filtered out it became clear that the committeerecommended the inclusion of certain ratios in insurance company balance sheets to ensure transparency in accounting. But the Finance Minister objected. Heargued (probably on the advice of some of the potential entrants) that it could affect the prospects of a developing insurance company.
Insurance Regulatory Act (1999)After the report of the Malhotra Committee
cameout, changes in the insurance industry appeared imminent. Unfortunately, Instability in Central Government, changes in insurance regulation could notpass through the parliament. The dramatic climax came in 1999. On March 16,1999, the Indian Cabinet approved an Insurance Regulatory Authority (IRA) Billthat was designed to liberalize the insurance sector. The bill was awaitingratification by the Indian Parliament. However, the BJP Government fell in April1999. The deregulation was put on hold once again. An election was held in late1999. A
23
new BJP-led government came to power. On December 7, 1999, the newgovernment passed the Insurance Regulatory and Development Authority (IRDA) Act. This Act repealed the monopoly conferred to the Life Insurance Corporation in1956 and to the General Insurance Corporation in 1972. The authority created bythe Act is now called IRDA. It has ten members. New licenses are being given toprivate companies (see below). IRDA has separated out life, non-life andreinsurance insurance businesses. Therefore, a company has to have separatelicenses for each line of business. Each license has its own capitalrequirements (around USD24 million for life or non-life and USD48 million forreinsurance).Some Details of the IRDA BillOn July 14, 2000, the Chairman of theIRDA, Mr. N. Rangachari set forth a set of regulations in an extraordinary issueof the Indian Gazette that details of the regulation. Regulations The first covers the Insurance Advisory Committee that sets out the rules and regulation. The second stipulates that the "Appointed Actuary" has to be a Fellow of the Actuarial Society of India. Given that there has been a dearth of actuaries in India with the qualification of a Fellow of the Actuarial Society of India, this becomes a requirement of tall order. As a result, some companies have not been able to attract a qualified Appointed Actuary (Dasgupta, 2001). The IRDA is also in the process of replacing the Actuarial Society of India by a newly formed institution to be called the Chartered Institute of Indian Actuaries (modeled after the Institute of Actuaries of London). Curiously, for life insurers the Appointed Actuary has to be an internal company employee, but he or she may be an external consultant if the company happens to be a non-life insurance company. Third, the Appointed Actuary would be responsible for reporting to the IRDA a detailed account of the company. Fourth, insurance agents should have at least a high school diploma along with training of 100 hours from a recognized institution. More than a dozen institutions have been recognized by the IRDA for training insurance agents (the list appears online at
http://www.irdaonline.org/press.asp).Fifth, the IRDA has set up strict guidelines on asset and liability management of the insurance companies along with solvency margin requirements. Initial margins are set high (compared with developed countries). The margins vary with the lines of business (for example,
24
fire insurance has a lower margin than aviation insurance).Sixth, the disclosure requirements have been kept rather vague. This has been done despite the recommendations to the contrary by the Mukherjee Committee
recommendations. Seventh, all the insurers are forced to provide some coverage for the rural sector. (1) In respect of a life insurer, (a) five percent in the first financial year; (b) seven percent in the second financial year; (c) ten percent in the third financial year; (d) twelve percent in the fourth financial year; (e) fifteen percent in the fifth year (of total policies written direct in hat year). (2) In respect of a general insurer, (a) two percent in the first Financial year; (b) three percent in the second financial year; (c) five percent thereafter (of total gross premium income written direct in that year).New Entry Immediately after the passage of the Act, a number of companies announced that they would seek foreign partnership. In mid-2000, the following companies made public statements that they already were in the process of setting up insurance business with foreign partnerships (see Table 3). However, not all the partnerships panned out in the end (see below) There are three other companies with "in principal" approvals
1) Max New York Life. It is a partnership between Delhi based pharmaceutical company Max India and New York Life, the New York based life insurance company.(2) ICICI Prudential Life Insurance Company. This is a joint venture between Mumbai based Industrial Credit & Investment Corporation and the London based Prudential PLC. (3) IFFCO Tokio General Insurance Company. It is a joint venture between Indian Farmers' Fertilizer Cooperative and Tokio Marine and Fire of Japan. To date (end of April 2001), the following companies have thus been granted licenses: ICICI -Prudential, Reliance General, Reliance Life, Tata-AIG General, HDFC-Standard Life, Royal-Sundaram, Max-New York Life, IFFCO-Tokio Marine, Birla-SunLife, Bajaj-Allianz General, Tata-AIG Life, ING-Vyasa, Bajaj-Allianz Life, SBI-Cardiff Life. Note that all of these companies are either in the life insurance business or in the non-life insurance business. No license has been granted for reinsurance business so far (the size of the reinsurance business can be 10-20% of the total revenue). No stand-alone health insurance company has been granted license so far. Enter the DragonOn December 28, 2000, the State Bank of India (SBI) announced a joint venture partnership with Cardif SA (the insurance arm of BNP Paribas Bank). This partnership won over several others (with Fortis and with GE Capital). The entry25
of the SBI has been awaited by many. It is well known that the SBI has long harbored plans to become a universal bank (a universal bank has business in banking, insurance and in security). For bank with more than 13,000 branches all over India, this would be a natural expansion. In the first round of license issue, the SBI was absent. There were several reasons for this delay. First, the SBI was seeking a foreign partner to help with new product design. Second, it did not want the partner to become dominant in the long run (when the 26% foreign investment cap is eventually lifted). It wanted to retain its own brand name. Third, it wanted a partner that is well versed in the universal banking business. This ruled out an American partner (where underwriting insurance business by banks have been strictly forbidden by law). Cardif is the third largest insurance company in France. More than 60% of life insurance policies in France are sold through the banks. Fourth, the Reserve Bank of India (RBI) needed to clear participation by the SBI because in India banks are allowed to enter other businesses on a "case by case" basis. Over the course of the next twelve months, the SBI will sell insurance in 00 branches. Over a period of 2-3 years it will expand operation in 500 branches. Initially it will hold 74% ownership of the joint venture company with Cardif. Over time, it will dilute its holding to 5060%.The SBI entry is groundbreaking for several reasons. This was the first for a bank to enter the insurance market. This kind of synergy between a bank and an insurance company is extremely rare in many parts of the world. In Continental Europe, it is called bancassurance (in France) or allfinanz (in Germany). Second, even though the regulators have said that banks would not (generally) be allowed to hold more than 50% of an insurance company, the SBI was allowed to do so (with a promise that its share would be eventually diluted).
Broken MarriagesSeveral partnerships broke down during the year 2000.
Probably the most dramatic breakdown took place between Hindustan Times (a newspaper group) and the Commercial Union of the UK. The management of Hindustan Times realized that they are heavily reliant on a steady daily cash flow (Kumari, 2001). Insurance is a completely different business. Their shareholders would revolt if they faced large one-time losses (common in insurance business).Similarly, by the end of July 2000, Kotak-Mahindra and Chubb declared their divorce. Dabur Group and Allstate also parted company. Allianz
26
and Alpic broke their partnership.Re-pairing of PartnersA curious trend has developed by the end of 2000. Several divorced partners have come back to the field to tie knots to some other partners. Dabur has decided to tie the knot with another divorcee - Commercial Union. Allianz has announced a new partnership with the giant Indian scooter-maker Bajaj.Back to the Future: Mostly Swaraj with a Foreign Twist At present, 312 million middle class consumers in India have enough financial resources to purchase insurance products like pension, health care, accident benefit, life, property and auto insurance. Only 2.5 per cent of this insurable population, however, have insurance coverage in any form. The potential premium income is estimated at around US $80 billion. This will place India as the sixth largest market in the world (after the US, Japan, Germany, UK and France).
Lessons from ChinaChina is the most populous country in the world (at 1.2
billion); India is a close second (just over a billion). Both have followed the path of deregulation and privatization - China started it in 1979 and India in 1991. Comparisons of these processes are described in Sinha and Sinha (1997). In this section, I will concentrate only on the insurance industry in the two countries. The insurance business in India has a premium volume of $8.3 billion n 1999 whereas in China the premium volume is $16.8 billion in 1999. However, premium per capita is not all that dissimilar: $13.7 per person in China and $8.5 in India in 1999. As a percent of GDP, insurance is 1.93% in India and 1.63% in China in 1999 (all data from Sigma, 2000).In China, the People's Insurance Company of China (PICC) had a monopoly between 1949 and 1959. In 1959, insurance business was deemed capitalistic and all forms of insurance were suspended (and the insurance business was taken over by the Peoples Bank of China). The insurance business reopened in 1979, the PICC reassumed its old role as the monopoly. There are many differences in the way China and India have handled deregulation. First, in China, the China Insurance Regulatory Commission (CIRC) was set up in November 1998, well after the first Insurance Law was promulgated in 1995. In India, the IRDA was launched first with the authority to issue licenses. It took almost a year before it issued licenses for the first set of private insurance companies. Second, in China, foreign insurers need to have a representative office for three years before they can submit a proposal for operation (in practice, this has been reduced to two years in some cases).
27
In India, there is no such requirement. Third, foreign insurers can only own 1825% of the total value of the market (although, in reality, it has been much less than that in Shanghai). In India, the limit is set at 26% per company. In China, there is no limit at the company level. Thus, a foreign company can own 100% of an approved insurance company in China. Fourth, in India, the licenses are national. A company with a license can operate in any part of the country. In China, on the other hand, foreign companies are restricted to operation in two metropolitan areas: Shanghai and Guangzhou. Fifth, the IRDA is a Law-implementing body. It can only interpret the laws that have been passed by the Indian Parliament. On the other hand, it seems that the CIRC has been a Law-making body, it is setting up rules as it sees fit. Sixth, China seems to Have been forced to issue insurance licenses to a host of foreign companies by the end of 2000 simply because it wanted an assured entry into the World Trade Organization (WTO). In India, there is no such pressure as India is already a part of the WTO.Quo Vadis, Insurance? In this section, we gaze into the future of the insurance industry in India. A number of trends are already emerging. ConvergenceIn many other regions around the world, one sure sign is emerging in the insurance business. Different parts of the financial sectors are converging This happened first in European Union (with the so-called Third Directive). It is now happening in the United States with the effective repealing of the GlassSteagall Act of 1933. In India, it will surely come. Not everybody in India, however, believes so. For example, the Insurance Regulatory Development Authority (IRDA) chairman N. Rangachari said that India is not yet ready for the convergence of all financial sectors under one supervisory authority as suggested by the banking division of the finance ministry. The RBI (Reserve Bank of India) has erected a firewall between banks and insurance companies to protect investor interests. With the insurance sector transforming from total regulation to being opened up after 35 years, fears have been expressed on how it would move. However, the convergence is already happening on the ground in a “curious way” as 10 out of 12 insurance proposals received for license by the IRDA have come in from companies who are in the pure or applied finance sector. It may appear curious, but clearly the companies who want to enter the insurance sector see some kind of a synergy between their existing business and insurance. Monitor Group Report how would the insurance market be divided up
28
between the incumbent Life Insurance Corporation and the newcomers? The Monitor Group (from Boston) has published a study at the end of 1999 (reported in Business Today, 2000). It estimates that the $5 billion market of life insurance in India (figure for 1998) will become a $23 billion market by 2008. The report estimates that the LIC will have some 70-80% of the market whereas the new companies will share some 20-30%. The bright prognostics for the LIC come from several key observations. (1) The LIC has a vast distribution network in the rural and semi-urban areas. This would be hard to duplicate. (2) The LIC has had a real annual growth rate of 8% over the last decade. This is much larger than industrial growth. Therefore, the LIC has a head start. (3) As life insurance benefits accrue over time, it becomes more expensive to switch - because switching would mean a loss of accrued benefits. The general insurance business is expected to grow from USD 1.8 billion (1998) to 12 billion in 2008. The Monitor Group Report predicts that the private companies would have an easier access to the general insurance business. The market share of the newcomers will be 40-50% of the total market. Cause for better market penetration for the new companies come from the fact that it makes no difference for the insured to switch companies. Unlike life insurance, it is not expensive to switch insurers. However, the lack of good data would hamper the newcomers (see below).Reinsurance The GIC has decided to spin off its reinsurance business as a separate company to be called Indian Reinsurer. The insurance business in India is less than USD $1 billion at present (2000). In the near term (three to five years), it is expected to double in size for two simple reasons. (1) Under the new regime, the reinsurance requirements are higher (as a percentage of total insurance business). (2) Privately run non-life insurance companies have a higher reinsurance requirement in the early years. Aftermath of the Gujarat EarthquakeOn January 26, 2001, an earthquake measuring 6.9 on the Richter scale hit parts of Gujarat. Many buildings toppled. An estimated 20,000 persons were killed - most of them in Bhuj district of Gujarat (around 18,000). Estimated damage was in the order of magnitude of USD 5 billion - most of it uninsured. The disaster was once in a lifetime event. In a curious way, it will help the new entrants in the insurance industry in India. It is well known in the psychology literature that disasters make people more aware of their insurance needs. Given what happened in Gujarat, most Indians will now have a higher awareness about
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buying an insurance policy than they would have otherwise. No amount of advertisement by the insurance companies (both life and general) could have achieved this. Ironically, India's national insurance companies began to exclude earthquake cover in the new policy forms adopted from 1 April 2000 and began to offer the protection as a buy-back on the recommendation of the Tariff Advisory Committee (TAC) report. Many policyholders were unaware of the change and so the relatively few individuals and companies that have been prudent enough to buy insurance may discover that, in the case of the Gujarat event, they are uninsured. 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 inIndia.
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Questionnaire
Name__________________________________________ Age_____ Gender: Male/Female Educational Qualification: a) Engineering b) CA/MBA c) MCA d) Others If Others. Specify_______________________ Email id __________________________________
1. Tick the life insurance companies you are familiar with:1) LIC 3) SBI Life 5) Max New York Life 6) 2) 4) ICICI-Prudential Bajaj-Allianz Birla Sun Life
2. Tick the types of schemes you are familiar with:1) Term plan 2) Endowment plan 3) Money Back plan 4) ULIP ( Unit Linked Insurance Plan) 5) Child plan 6) Pension plan
3. Tick on what the life insurance company provides?
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a) Security for life b) Investment Opportunity c) Tax Benefits d) High returns e) Pension
4. Rank the following benefits of Insurance on a 1-5 scale:
_____ Financial Expenses _____ loved Ones? future security _____ Exemption from tax _____ Mortgage payments/Rent fund _____ College/School Education
5. Do you think insurance is the viable option for investment?
Yes
No
Why?........................................................................................................................ ..................... 6. Do you have any insurance cover? Yes No
If Yes, then which company?.......................................................................................................
7. What type of investment are you interested in?
Short term Long term
ULIP 32
Why?.................................................................................................................. .......................... ………………………………………………………………………………………… ……
8. What is idea behind your investment in insurance? Tax Benefit Future Security High Returns
9. What is the mode of your premium payment?
1) Monthly 2) Quarterly 3) Half-Yearly 4) Yearly
10. Are you happy with the services provided by the insurance company? Yes No
11. Are you happy with the returns given by the insurance company? Yes No
12. Which is the most trusted insurance company at present? (Both in the public and the private sector) Rate on the basis of 1-5 scale appropriate no.) 1- least trusted …. 5- Most trusted (Tick the
LIC SBI-Life ICICI-Prudential Bajaj-Allianz Birla- Sun Life 1
1 2 1 1 1
2 3 2 2 2
3 4 3 3 3
4 5 4 4 4
5
5 5 5
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13. Entry of large no. of private insurance companies is good for the public?
Yes
No
14. After privatization whether the public is getting good products/service?
Yes
No
15. What do you think about the role of the IRDA? Regulator ………………. …. Facilitator…………………… A govt. body…………………
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ANALYSIS OF THE SURVEY
The survey was conducted to understand the knowledge and perception of the people towards life insurance after privatization. The response is quantified by means of response obtained in the form of answers and views put forward by the people in a survey conducted. The survey includes response from professionals, businessmen, daily workers, and housewives and working in different sectors and fields in Chennai. Almost everyone knew insurance and relates insurance with LIC and those who have invested in insurance products mainly invested for availing tax exemption and all traditional reasons of investing like risk coverage and loved ones future security while some of them also said that insurance is not a good option for investment due to inflation and when long term gains were considered. Use of bar, line graphs, tables and pie diagrams are done to represent the findings of the survey.
No of males and females software professionals surveyed
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 24 7
male
female
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Educational qualifications of males
16.66 Engg. CA/MBA 20.83 58.33 MCA Others
4.16
Educational qualifications of females
42.85
42.85
Engg. CA/MBA MCA Others
14.28 0
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Popularity percentage of life insurance companies
61.29 45.16 41.93 61.29
LIC 80.64 ICICI BAJAJ 67.74 BIRLA HDFC SBI
Even though, the private sector insurance companies are increasing, the most sought after insurance company even among people is LIC which has the highest market share in India. This is also depicted by the pie-chart as shown above.
CATEGORY
RESPONSE (in %)
1. LIC 2. ICICI 3. BAJAJ 4. Birla 5. HDFC 6. SBI
80.64 67.74 61.29 41.93 45.16 61.29
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Familiarity of Schemes
25.8 58.06 38.7 term plan endowment plan money back ULIP 67.74
Among many plans available, the most preferred one among the mass is money back plan. This plan helps you to withdraw your money at regular intervals and still staying insured. This plan is famous for its high liquidity advantage. The other product gaining popularity is ULIP (unit linked insurance plan), as its serve multiple purpose, it give high returns, tax benefit, life insurance , critical illness cover and is admired for its flexibility for paying premium amount.
SCHEMES
1. Term plan 2. Endowment plan 3. Money back 4. ULIP
RESPONSE (in %)
25.8 38.7 67.74 58.06
Objective for investment in Insurance
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Among the surveyed people about 61.29% view insurance tax saving product. Life insurance plans of some private insurance companies are giving 100% tax exemption. Even the IT returns are also 100% tax free on annual basis. After that around 46 percent buy insurance to cover risk followed by good returns and savings objective.
CATEGORY
1. Life Insurance 2. Investment 3. Tax Benefit 4. High Returns 5. Savings
RESPONSE (in %)
45.16 32.25 61.29 22.58 29.03
Ranking of some benefits of insurance (figures expressed in %)
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Among some benefits of insurance, loved ones’ security secured the least percentage i.e. overall the highest rank. So, people take insurance so that their loved ones and they themselves get secured and enjoy the life cover.
CATEGORY
1. Final Exp. 2. Loved ones’ security 3. Income Needs 4. Housing Loans 5. Children Edu.
RESPONSE (in %)
254 187 200 316 374
Insurance as the viable option for investment
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80% 60% 40% 20% 0%
80%
20% yes
no
Among the surveyed, 80% of them said that insurance is the viable option for investment. The reasons were there that it is the medium of tax benefit, risk coverage and regular savings. But, 20% of them said that it is not favorable for investment due to inflation and comparatively less returns than other financial instruments.
Availability of Insurance Cover
Among the people surveyed, 90% of them said that they had life-insurance cover but only 10% of them were devoid of insurance but were planning to take one in the future.
Estimate of IT professionals enrolled into insurance
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About 54.83% of IT professionals have chosen LIC as their premier insurance investment company. And the rest all insurance companies having their insurance cover are far less as compared to LIC. So, this illustrates that even the IT professionals have faith in LIC as their most favored life insurance company.
INSURANCE COMPANY
1. LIC 2. Birla Sun-Life 3.ICICI 4.MetLife 5. Bajaj- Allianz 6. ING-Vyasa 7. SBI-Life 8. Tata- AIG 9. HDFC 10. Reliance
RESPONSE (in %)
54.83 6.45 12.90 3.22 6.45 3.22 6.45 3.22 3.22 6.45
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Type of investment interested in
16.12
32.25 Short term Long term
54.83
ULIP
About 54.83% people said that the type of investment which they are interested in is long term investment. This is because they wanted to reap benefits for a longer term. Long life insurance cover will naturally give them high risk coverage and higher returns.
Mode of premium payment
38.7
38.7 quarterly monthly
22.58
22.58
half yearly yearly
About 38.7% of them said that they paid their premium through quarterly and yearly mode. And only 22.58% favored monthly and half yearly medium of premium payment.
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MODE OF PREMIUM PAYMENT
1. Quarterly 2. Monthly 3. Half- yearly 4. Yearly
RESPONSE (in %)
38.7 22.58 22.58 38.7
Services provided by the insurance company (figures expressed in %)
100 80 60 40 20 0
90.32
6.45
Yes
No
About 90.32% of people said that they were happy with the services provided by the insurance company. And only 6.45% were not satisfied. This shows that life insurance companies are fairly performing well especially in India.
Returns given by the insurance company (figures expressed in %)
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80 60 40 20 0
70.96
Yes 22.58 No
Yes
No
About 70.96% of people have view that they were happy with the returns given by the insurance companies. But 22.58% were not. The reason for their dissatisfaction is that they think that other financial instruments like bonds, shares, debentures, securities and mutual funds are other good options for investment and they think that insurance does not provide investment opportunity for the short term.
Ratings of various insurance companies
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0
4.64 4.03 3.12 3.16 3.12
LIC
SBI-Life
ICICI
Bajaj-Allianz Birla SunLife
LIC of India is the most preferred life insurance company even among software professionals as depicted through the above bar graph. It has a rating of 4.64. The other private life insurance companies are having less percentage of share of it. 45
INSURANCE COMPANY
1. LIC 2. SBI-Life 3. ICICI 4. Bajaj- Allianz 5. Birla- Sun Life
RATING
4.64 4.03 3.12 3.16 3.12
Privatization of insurance
25 20 15 10 5 0 Yes No 7 24
78 % people of those surveyed were of the view that privatization is good for the public. This is because they think that the many private insurance companies have come up with some attractive plans like ULIPs which are fetching good returns even for a short period. Only 22% of them think that that investing in a private insurance company is risky because the returns are not guaranteed.
Availability of good services after privatization
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19.35
Yes No 70.96
About 70.96 % of people think the insurance companies are providing good services even after privatization. This is because they have come up with some new schemes and plans which are innovative and are giving better returns even for a short period than compared to plans pertaining to public sector insurance company like LIC. Only 19.35% think that services are not good after privatization as they have less belief on these private life insurance companies or they do not consider life insurance as important investment option and also the private insurance companies have high premium allocation charges and high surrender charges, fixed charges and other formalities.
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CONCLUDING REMARKS Unit Linked products are finally products of choice. If you feel equipped to manage your investments on your own or are not comfortable with long lock -ins or you can't make the most of these tax breaks, you may be better off investing elsewhere after securing your life insurance needs. 1. There is a great need to disclose the risk involved in the schemes properly to the investor/insurance seeker by the insurance/investment companies. 2. The Insurance Regulatory and Development Authority has to issue set of guidelines on ULIP policies offered in the market. 3. The charges in the initial years should be brought down. 4. The high returns (above 20 per cent) are definitely not sustainable over a long term, as they have been generated during the biggest Bull Run in recent stock market. 5. Investors/Insurance seeker has to take switching charges i nto consideration as they have a long -term implication on the returns generated.
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REFERENCES 1. www.irdaonline.com 2. www.licindia.com 3. www.lifeinsurancecouncil.com 4. www.sbilife.co.in
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