Description
The documentation about Indian Insurance Industry and also talks about the benefits of deregulation
Indian Insurance Industry
Indian Insurance Industry
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Indian Insurance Industry
Indian Insurance Industry DeRegulation
Table of Contents
I. Introduction ............................................................................................................................................... 3 II. An overview of India’s insurance market.................................................................................................. 3 Insurance development and potential...................................................................................................... 4 III. India in the international context ............................................................................................................ 4 Insurance penetration .............................................................................................................................. 5 Demand elasticity and growth potential .................................................................................................. 5 IV. History of insurance development in India.............................................................................................. 6 Modern insurance came with a British accent ......................................................................................... 6 Life insurance business ............................................................................................................................. 8 Investment portfolio of the LIC ................................................................................................................. 9 Life products before and after deregulation .......................................................................................... 10 Non-life business..................................................................................................................................... 10 Non-life products before and after deregulation ................................................................................... 11 Recent privatisation and foreign partnerships ....................................................................................... 11 V. Regulatory regime .................................................................................................................................. 12 Features of the 1999 IRDA Act ................................................................................................................ 13 Licensing.............................................................................................................................................. 13 Solvency controls ................................................................................................................................ 14 Business conduct................................................................................................................................. 14 Investment allocation and norms ....................................................................................................... 15 Other regulatory developments ......................................................................................................... 17 Market development .......................................................................................................................... 17 VI. Non-life insurance.............................................................................................................................. 19 Detariffication ......................................................................................................................................... 20 2
Indian Insurance Industry VII. Summary of Deregulation of the Industry ........................................................................................ 20 Establishment of Liaison Offices in India by Foreign Insurance Companies ....................................... 22 Market Structure following Deregulation ........................................................................................... 22 Deregulation and Competition ........................................................................................................... 23
I. Introduction
In 2003, the Indian insurance market ranked 19th globally and was the fifth largest in Asia.Although it accounts for only 2.5% of premiums in Asia, it has the potential to become one of the biggest insurance markets in the region. A combination of factors underpins further strong growth in the market, including sound economic fundamentals, rising household wealth and a further improvement in the regulatory framework. The insurance industry in India has come a long way since the time when businesses were tightly regulated and concentrated in the hands of a few public sector insurers. Following the passage of the Insurance Regulatory and Development Authority Act in 1999, India abandoned public sector exclusivity in the insurance industry in favour of market-driven competition. This shift has brought about major changes to the industry. The inauguration of a new era of insurance development has seen the entry of international insurers, the proliferation of innovative products and distribution channels, and the raising of supervisory standards. By mid-2004, the number of insurers in India had been augmented by the entry of new private sector players to a total of 28, up from five before liberalisation. A range of new products had been launched to cater to different segments of the market, while traditional agents were supplemented by other channels including the Internet and bank branches. These developments were instrumental in propelling business growth, in real terms, of 19% in life premiums and 11.1% in non-life premiums between 1999 and 2003. There are good reasons to expect that the growth momentum can be sustained. In particular, there is huge untapped potential in various segments of the market. While the nation is heavily exposed to natural catastrophes, insurance to mitigate the negative financial consequences of these adverse events is underdeveloped. The same is true for both pension and health insurance, where insurers can play a critical role in bridging demand and supply gaps. Major changes in both national economic policies and insurance regulations will highlight the prospects of these segments going forward.
II. An overview of India’s insurance market
Insurance in India used to be tightly regulated and monopolised by state-run insurers. Following the move towards economic reform in the early 1990s, various plans to revamp the sector finally resulted in the passage of the Insurance Regulatory and Development Authority (IRDA) Act of 1999. Significantly, the insurance business was opened on two fronts. Firstly, domestic private-sector companies were permitted to enter both life and non-life insurance
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business. Secondly, foreign companies were allowed to participate, albeit with a cap on shareholding at 26%. With the introduction of the 1999 IRDA Act, the insurance sector joined a set of other economic sectors on the growth march.During the 2003 financial year1, life insurance premiums increased by an estimated 12.3% in real terms to INR 650 billion (USD 14 billion) while non-life insurance premiums rose 12.2% to INR 178 billion (USD 3.8 billion). The strong growth in 2003 did not come in isolation. Growth in insurance premiums has been averaging at 11.3% in real terms over the last decade.
Insurance development and potential
Notwithstanding the rapid growth of the sector over the last decade, insurance in India remains at an early stage of development. At the end of 2003, the Indian insurance market (in terms of premium volume) was the 19th largest in the world, only slightly bigger than that of Denmark and comparable to that of Ireland.2 This was despite India being the second most populous country in the world as well as the 12th largest economy. Yet, there are strong arguments in favour of sustained rapid insurance business growth in the coming years, including India’s robust economic growth prospects and the nation’s high savings rates. The dynamic growth of insurance buying is partly affected by the (changing) income elasticity of insurance demand. It has been shown that insurance penetration and per capita income have a strong non-linear relationship.4 Based on this relation and other considerations, it can be postulated that by 2014 the penetration of life insurance in India will increase to 4.4% and that of non-life insurance to 0.9%
III. India in the international context
The Indian insurance market is the 19th largest globally and ranks 5th in Asia, after Japan, South Korea, China and Taiwan.6 In 2003, total gross premiums collected amount to USD 17.3 billion,representing just under 0.6% of world premiums. Similar to the pattern observed in other regional markets, and reflecting the country’s high savings rate, life insurance business accounted for 78.5% of total gross premiums collected in the year, against 21.5% for non-life insurance business.
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Insurance penetration
Insurance penetration (premiums as a percentage of GDP) has remained stable at a relatively low level in the early 1990s. Total insurance penetration in India was 1.5% in 1990 and was not much higher by the middle of the decade. By 2003, total penetration had risen to 2.88%, comprising 2.26% life insurance business and 0.62% non-life insurance business. In the context of international comparison, insurance penetration in India is low but commensurate with its level of per capita income. In 2003, India had the 11th highest insurance penetration in Asia and ranked 54th worldwide.
Demand elasticity and growth potential
India’s low level of insurance penetration and density has to be viewed in the context of the country’s early stage of economic development. Per capita income in India is currently at around USD 600 but is expected to increase rapidly, which could bring in an era of accelerated demand for insurance. International experience tends to suggest that demand for insurance will take off once per capita income has surpassed the USD 1000 mark (Figure 3.4). This income level is deemed high enough for households to consider insurance protection, particularly as many people begin to own their homes and cars. The empirical relationship between insurance demand elasticity and per capita income can be characterised as a bell-shaped curve. Elasticity remains relatively low at a low income level but increases at an accelerated rate once it has
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passed the USD 1000 level. The following chart depicts the current position of different emerging markets as well as their expected position by 2013.
India’s improving economic fundamentals will support faster growth in per capita income in the coming years, which will translate into stronger demand for insurance products. It is also worthwhile to note that it generally takes longer for life insurance demand to reach saturation than non-life insurance (in terms of rising income elasticity). Based on the growth assumption provided by Swiss Re Economic Research & Consulting, it can be seen that the window of opportunity in India’s insurance market will remain wide open for a prolonged period of time. Strong growth can be sustained for 30–40 years before the market reaches saturation as income elasticity starts to decline
IV. History of insurance development in India
Modern insurance came with a British accent
Insurance in its modern form first arrived in India through a British company called the Oriental Life Insurance Company in 1818, followed by the Bombay Assurance Company in 1823,
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and the Madras Equitable Life Insurance Society in 1829. They insured the lives of Europeans living in India. The first company that sold policies to Indians with “fair value” was the Bombay Mutual Life Assurance Society starting in 1871.10 The first general insurance company, Triton Insurance Company Limited, was established in 1850. For the next hundred years, both life and non-life insurance were confined mostly to the wealthy living in large metropolitan areas.
Regulation of insurance companies began with the Indian Life Assurance Companies Act, 1912. In 1938, all insurance companies were brought under regulation when a new Insurance Act was passed. It covered both life and non-life insurance companies. It clearly defined what would come under life and non-life insurance business. The Act also covered, among others, deposits, supervision of insurance companies, investments, commissions of agents and directors appointed by the policyholders. This piece of legislation lost significance after the insurance business was nationalized in 1956 (life) and 1972 (non-life), respectively. When the market was opened again to private participation in 1999, the earlier Insurance Act of 1938 was reinstated as the backbone of the current legislation of insurance companies, as the IRDA Act of 1999 was superimposed on the 1938 Insurance Act. By mid-2004, there were 21 private sector insurance companies operating in India, alongside eight public sector companies (Table 4.1). Of these, there were 14 life insurance companies comprising one public (the old monopoly) and 13 private companies. Most private companies had foreign participation up to the permissible limit of 26% of equity.11 One such charter worth special mention is the joint venture between the State Bank of India (SBI) and Cardif SA of France (the insurance arm of BNP Paribas Bank) – SBI Life Insurance Company Limited. Since the SBI is a bank, the Reserve Bank of India (RBI) needed to approve the SBI’s participation because banks are allowed to enter other business on a “caseby-case” basis. It is also an encouraging sign that the authorities are ready to accommodate more diverse forms of corporate structures, as bancassurance will become an important channel for the distribution of insurance.
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At the same time, in a few joint ventures, Indian banks shared the domestic equity portion with other non-bank entities. It still remains to be seen how this new mode of corporate cooperation will develop going forward.The latest group to receive an outright charter for operating a life insurance company is the Sahara Group (on 5 March 2004). Sahara’s entry is notable for two reasons. Firstly, Sahara would be the first domestic corporation to enter the Indian life insurance market without any foreign partner. Secondly, it would become the first non-banking financial company to operate in the life insurance sector.In the non-life insurance sector, there were 14 companies operating in India by mid-2004. Six of them are public-sector companies, of which four were former subsidiaries of the GIC that operated as nationalised companies, and the other two are the Export Credit Guarantee Corporation Limited and the Agriculture Insurance Company of India Limited. The rest are private-sector companies. Most of these private-sector companies have foreign partners with a maximum of 26% of shares, but there are also purely domestic companies (eg Reliance General Insurance Company Limited). The insurance business in India can be broadly sub-divided into two categories: • Life Insurance • General Insurance
Life insurance business
When the life insurance business was nationalised in 1956, there were 154 Indian life insurance companies. In addition, there were 16 non-Indian insurance companies and 75 provident societies also issuing life insurance policies. Most of these policies were centred in the metropolitan areas like Bombay, Calcutta, Delhi and Madras. The life insurance business was nationalised in 1956 with the Life Insurance Corporation of India (LIC) designated the sole provider – its monopolistic status was revoked in 1999. There were several reasons behind the nationalisation decision. Firstly, the government wanted to channel more resources to national development programmes. Secondly, it sought to increase insurance market penetration through nationalisation.12 Thirdly, the government found the number of failures of insurance companies to be unacceptable. The government argued that the failures were the result of mismanagement and nationalisation would help to better protect policyholders. Thus, the post independence history of life insurance in India is largely the history of the LIC. From the perspective of national economic policy, the LIC has been instrumental in the implementation of monetary policy in India. For example, 52% of the outstanding stock of government securities is held by just two public-sector institutions – V the State Bank of India and the Life Insurance Corporation of India – in approximately equal proportion.The lack of investment channels in India and the cautious approach adopted by the regulator are also factors contributing to the high concentration of insurance assets in government securities. Table 4.2 shows the historical development of LIC’s financial data. In nominal terms, during that period the total income of the LIC grew 700-fold. The largest part of payments to policyholders has been through the maturity of policies. This proportion has gone up over time,
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relative to death benefits. To a certain extent, this reflects the increasing popularity of life insurance products as savings vehicles in lieu of life protection.15 It can also be discerned that the operating costs (as percentage of premiums) remained high over a sustained period of time, with a decline in the past two decades. Part of this decline has come from the increased sale of group policies which are cheaper to sell per policy than individual life policies.
Investment portfolio of the LIC
The investment portfolio of LIC over time is summarised in Table 4.3. Broadly, the first item of “Loans to state and central government and their corporations and boards” has steadily fallen from 42% to around 18% in twenty years. In their place, the share of the second item “Central government, state government, and local government securities” has gone up steadily from 55% in 1980 to 80% in 2000. As such, the LIC (along with the State Bank of India) has become one of the two largest owners of government bonds in India. Whether it is in government loans or bonds, GIC has steadfastly made available over 95% of its investment to Indian government liabilities. It can be seen that the companies have so far refrained from investing in equities or overseas. Recently, however,the LIC has taken a more aggressive stance in boosting its equity investment, both through private placements and secondary market purchases in the stock exchanges. In financial year 2003-2004,it recorded equity investment profit of INR 2,400 crore.
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Life products before and after deregulation
In the past, the LIC had three commonly sold policies in the market for life insurance: whole life, endowment and money-back policies. The number of new policies sold each year went from about 0.95 million a year in 1957 to 26.97 million in 2003. The total number of inforce policies went from 5.42 million in 1957 to 141 million by March 2003. There are presently several dozen life products offered by the LIC. However, they are small variations on the three products mentioned above. In addition, even though term life policies were available, they were not actively promoted. LIC also has several pension products. Following the entry of the private insurers, there was a proliferation of products. According to the Annual Report of the IRDA, 116 life products were offered by life insurance companies in India as of 31 March 2002. Of course, they were not all distinct products. Many products across different companies were very similar, if not identical. Some of the more popular products launched recently include creditor protection products like mortgage life, and unit-linked products.
Non-life business
Non-life insurance was not nationalised in 1956 along with life insurance. The reason was addressed by the then Finance, Minister C. D. Deshmukh, in his budget speech of 1956. “I would also like to explain briefly why we have decided not to bring in general insurance into the public sector. The consideration which influenced us most is the basic fact that general insurance is part and parcel of the private sector of trade and industry and functions on a year to year basis. Errors and omission in the conduct of its business do not directly affect the individual citizen. Life insurance business, by contrast, directly concerns the individual citizen whose savings, so vitally needed for economic development, may be affected by any acts of folly or misfeasance on the part of those in control or be retarded by their lack of imaginative policy.” Sixteen years later, in 1972, non-life insurance was finally nationalised (with effect from 1 January 1973). At that time there were 107 general insurance companies. They were mainly large cityoriented companies catering to the organised sector (trade and industry). They were of different sizes, operating at different levels of sophistication. Upon nationalisation, these
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businesses were assigned to the four subsidiaries (roughly of equal size) of the General Insurance Corporation of India (GIC). There were several goals in setting up this structure. Firstly, the subsidiary companies were expected to set up standards of conduct, sound practices and provision of efficient customer service in general insurance business. Secondly, the GIC was to help control the expenses of the subsidiaries. Thirdly, it was to help with the investment of funds for its four subsidiaries. Fourthly, it was to bring general insurance to the rural areas of the country, by distributing business to the four subsidiaries, each operating in different areas in India. Fifthly, the GIC was also designated the national reinsurer.By law, all domestic insurers were to cede 20% of their gross direct premium in India to the GIC.The idea was to retain as much risk as possible domestically. This was in turn motivated by the desire to minimise the expenditure on foreign exchange. Sixthly, all four subsidiaries were supposed to compete with one another. After the passage of the 1999 IRDA Act, the GIC was de-linked from its four subsidiaries. Each subsidiary, with their headquarters based in the four largest metropolitan areas, became independent. The only function the GIC retained was that of national reinsurer. However, the government still remains the sole owner of the four former GIC subsidiaries.
Non-life products before and after deregulation
Before deregulation in 1999, non-life products that were available in the market were rather limited and similar across the four GIC subsidiaries. They could also be classified by whether they were regulated by tariffs: fire insurance, motor vehicle insurance, engineering insurance and workers’ compensation etc that came under tariff; and burglary insurance, Mediclaim, personal accident insurance etc that did not. In addition, most specialised insurance (eg racehorse insurance) did not fall under tariff regulations. After the opening of the sector to private players, more new products were introduced. To take an example, one joint-venture non-life insurer introduced 29 different products during the year, according to the IRDA. They included products liability, corporate cover, professional indemnity policies, burglary cover, individual and group health policies, weather insurance, credit insurance, travel insurance and so on. Some of these products were completely new (eg weather insurance) while others were already available through the public insurance companies.
Recent privatisation and foreign partnerships
Recent privatisation has brought in new players in the market – almost all of them with foreign partners. Table 4.5 below lists the equity share capital of insurance companies in the financial years 2001-02 and 2002-03. There was a substantial injection of equity capital in the private sector in life insurance. In non-life business, the change was marginal. Notice that the equity share capital for LIC was relatively small.
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V. Regulatory regime
After the release of the Malhotra Committee report in 1994, changes in the insurance industry appeared imminent. Unfortunately, changes in the central government slowed down the process. The dramatic climax came on 7 December 1999 when the government finally passed the Insurance Regulatory and Development Authority (IRDA) Act. This Act repealed the monopoly conferred to the Life Insurance Corporation in 1956 and to the General Insurance Corporation in 1972. The authority created by the Act is called the Insurance Regulatory and Development Authority (IRDA). Table below summarises some of the milestones in India’s insurance regulation.
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Features of the 1999 IRDA Act
The Insurance Regulatory and Development Act of 1999 set out “to provide for the establishment of an Authority to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto and further to amend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956, and the General Insurance Business (Nationalisation) Act, 1972.” The Act effectively reinstituted the Insurance Act of 1938 with (marginal) modifications. Whatever was not explicitly mentioned in the 1999 Act referred back to the 1938 Act. The salient features of the 1999 IRDA Act are discussed below. Licensing The IRDA Act, 1999, sets out details of registration of an insurance company along with renewal requirements. The minimum capital requirement for direct non-life and life insurance business is 100 crores (ie INR 1 billion). The IRDA regulates the entry and exit of players, capital norms, and maintains a strict watch on the equity and solvency situation of insurers. Should an application be rejected, the applicant will have to wait for a minimum of two years to make another proposal, which will have to be with a new set of promoters and for a different class of business. For renewal, it stipulates a fee of one-fifth of one percent of total gross premiums written direct by an insurer in India during the financial year preceding the renewal year. It also seeks to give a detailed background for each of the following key personnel: chief executive, chief marketing officer, appointed actuary, chief investment officer, chief of internal audit and chief finance officer. Details of the sales force, activities in rural business and projected values of each line of business are also required. Further, the Act sets out the reinsurance requirement for (general) insurance business. For all general insurance a compulsory cession of 20%, regardless of the line of business, to the General Insurance Corporation (the designated
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national reinsurer) is stipulated. Currently, India allows foreign insurers to enter the market in the form of a joint venture with a local partner, while holding no more than 26% of the company’s shares (Table 5.2). Compared to the other regional markets, India has more stringent restrictions on foreign access. Solvency controls General insurance business lines that are subject to tariffs include fire, motor, marine hull, tea crop, engineering, industrial all risks, business interruption, personal accident and workers’ compensation. Tariffs are managed by the Tariff Advisory Committee. In addition, insurers have to observe the required solvency margin (RSM).20 For general insurers, this is the higher of RSM-1 or RSM-2, where ? ? • ? ? ? RSM-1 is based on 20% of the higher of (i) gross premiums multiplied by a factor A,21 or (ii) net premiums; RSM-2 is based on 30% of the higher of (i) gross net incurred claims multiplied by a factor B,or (ii) net incurred claims; there is also a lower limit of INR 500 million for the RSM. Life insurers have to observe the solvency ratio, defined as the ratio of the amount of available solvency margin to the amount of required solvency margin: the required solvency margin is based on mathematical reserves and sum at risk, and the assets of the policyholders‘ fund; the available solvency margin is the excess of the value of assets over the value of life insurance liabilities and other liabilities of policyholders’ and shareholders’ funds.
Business conduct As well as licensing and solvency regulations, the IRDA Act also prescribes guidelines and regulations on business conduct. It specified the creation and functioning of an Insurance Advisory Committee that sets out relevant rules and regulation. An important point is that it stipulates the role of the “appointed actuary”. He/she has to be a Fellow of the Actuarial Society of India. 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 general insurance company. The appointed actuary is responsible for providing a detailed account of the company to the IRDA. Further, all insurers are required to provide some coverage for the rural sector.This is known as the Obligations of Insurers to Rural Social Sectors. In respect of a life insurer, the share of premiums from the rural social sectors shall be • 5% in the first financial year; • 7% in the second financial year; • 10% in the third financial year; • 12% in the fourth financial year; and • 15% in the fifth year (of total policies written direct in that year).
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In respect of a general insurer, • 2% in the first financial year; • 3% in the second financial year; and • 5% thereafter (of total gross premium incomewritten direct in that year). In addition, each company is obliged to service the social sector23 as follows. In respect of all insurers, • 5000 lives in the first financial year; • 7500 lives in the second financial year; • 10,000 lives in the third financial year; • 15,000 lives in the fourth financial year; and • 20,000 lives in the fifth financial year. Investment allocation and norms The Insurance Act of 1938 required life insurance companies to hold 55% of their assets in government securities or other approved securities (Section 27A of the Insurance Act). In the 1940s, many life insurance companies were part of financial conglomerates. With a 45% balance to play with, some life insurance companies used these funds for other enterprises or even for speculation. In 1958, Section 27A of the Insurance Act was modified to stipulate the following investment regime: • • • Central government market securities of not less than 20%; Loans to National Housing Bank including o above should be no less than 25%; In state government securities including above should be no less than 50%; and In socially oriented sectors including the public sector, cooperative sector, house building by policyholders, own-your-own-home schemes including above should be no less than 75%.
•
For General Insurance, Section 27B of the Insurance Act of 1938 was amended in 1976. The guideline for investment was set out as follows: • • • central government securities of no less than 25%; state government and public sector bonds of no less than 10%; and loans to state governments, various housing schemes of no less than 35%. The remaining 30% investment could be in the market sector in the form of equity, longterm loans, debentures and other forms of private sector investment.
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At least half of the investment has to be either directly in government securities (bonds) or in infrastructure. These investment options are “safe” as they are fully backed by the government. Of course, it also means they earn the lowest rate of return in the Indian market. The government (both at the federal and state levels) has used the insurance business as a way of raising capital. The actual investment patterns are shown in Tables 5.4a and 5.4b below.
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The LIC has 65% invested in government securities and other approved securities. For the private sector it ranges from 40% (Birla Sun Life) to 70% (AMP Sanmar). Infrastructure investment for LIC was 12%. For the private companies it ranges from a high of 20% for AMP Sanmar and Allianz Bajaj to a low of 9% for Birla Sun Life. In the “other approved” investment category, LIC has invested 23%. Other regulatory developments The following are a few new features of the regulatory regime introduced by the IRDA: ? Insurance agents are governed by the Licensing of Insurance Agents Regulations 2000 and the Licensing of Insurance Regulations (amendment) 2002. Importantly, to ensure professional standards, the IRDA has mandated minimum educational qualifications for all agents, together with training and examination requirements. ? Through a Government of India Notification dated 11 November 1998, the Insurance Ombudsman was created to address grievances of the insured customers and protect the interest of policyholders. Twelve Ombudsmen have been appointed across the country to expedite disposal of complaints. They have jurisdiction in respect of personal lines of insurance where the contract value does not exceed INR 20 lakhs. The Ombudsman is bound to pass a judgement within three months from the receipt of the complaint. It should be noted that the system is monitored and operated through a governing body of Insurance Council comprising of representatives of insurance companies. The IRDA deals with other disputes that fall outsidethe Ombudsman’s jurisdiction. • Policyholder protection was enhanced through the enactment of the Protection of Policyholders’ Interests Regulations, 2002. It stipulates the responsibility of insurance companies to spell out clearly the terms and conditions of insurance policies as well as other details. For example, in life insurance, details of any riders attaching to the main policy have to be given to the policyholders. Market development Economic fundamentals continue to suggest that there is huge potential for the life insurance sector to attain further growth. India is one of the world’s fastest growing economies, with real GDP rising by an average annual rate of 6.1% over the last decade. Along with strong economic growth, the life insurance market has also expanded rapidly – direct life insurance premiums grew by an annual real rate of 13.1% between 1993 and 2003 (Figure 6.1). However, life insurance penetration remains modest at slightly over 2%. Considering that life insurance accounts for more than three-quarters of total insurance business, reaching these untapped markets thus holds the key to realising the growth potential of the insurance industry.
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The life insurance landscape in India is undergoing major change. Closed to foreign competitionsince nationalisation in 1956, the life insurance industry had been protected from competitive pressures until the market was opened again in late 1999/early 2000. The initial years of liberalisation have continued to see the former monopoly Life Insurance Corporation of India (LIC) retaining a dominant position in the market. Nevertheless, the latest statistics show a decline in LIC’s share of new business from 98% in 2001 to 87% in 2003. In contrast, companies like ICICI Prudential Life and Birla Sun Life, which were among the first batch of private entrants, have shown the greatest success in securing new business. This is an indication that the industry’s private sector is establishing itself in the market, and is turning into a competitive force. It is possible to get an indication of where the market is heading by examining the new business written in the 2003 financial year. Direct new life business grew by 10.5% in nominal terms over the year. The distribution of premium is given in Table 6.1. The LIC has slightly more than 87% of the market, leaving the rest for the twelve private companies.28 The high share means that LIC is able to defend its dominant position in the face of heightening competition. Among the private companies, ICICI Prudential Life has the biggest market share at 4%, followed by Birla Sun Life at 2.4%. HDFC Standard Chartered and SBI Life are the only two other companies with more than a 1% market share
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VI. Non-life insurance
Market developments India’s non-life insurance industry received gross premiums of INR 161 billion in 2003, which represented a five-fold increase from INR 28 billion in 1990 and an average 6% growth in real terms over the period . Nonetheless, non-life insurance penetration, measured as premiums as a share of GDP, remained at a stable low level of 0.6%. In comparison, penetration has increased at a far brisker pace in China, from 0.4% in 1998 to 0.7% in 2002. It is estimated that 90% of the Indian population are not covered by non-life insurance, which points to significant untapped growth potential.
Liberalisation has become the key to unlocking this potential. The Insurance Regulatory and Development Authority (IRDA) Act of 1999 puts an end to the monopolistic positions that had hitherto been assumed by the state-owned GIC group of subsidiaries, and makes way for private sector participation in the market. This, together with the establishment of the IRDA as the industry’s prudential supervisor, has paved the way for India to fully realise the growth potential of its insurance sector. India’s non-life insurance industry was previously dominated by the state-owned GIC and its four subsidiaries. Since liberalisation, eight private sector insurers have entered the market, with all but one being joint ventures between overseas insurance companies and large Indian companies and institutions. These companies (including the Export Credit Guarantee Corporation Limited) received premiums totalling INR 161 billion in the 2002 financial year, representing a 13% jump from the previous year. Preliminary data suggest that their premiums for the 2003 financial year should grow by another 13%.
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Detariffication
Despite a promising start, rising competitive pressure has exposed weaknesses within the industry that will require stronger ongoing supervisory attention. Considerable rigidities still exist which adversely impact profitability and deter new initiatives. The prevalence of market tariffs and the cap on foreign ownership are two of the major liberalisation issues India will have to tackle. Various reasons have been put forward to justify these restrictions, including to protect consumers and to preclude capital outflows. However, international experience suggests that a liberal insurance regime caters to these concerns much better than a restrictive one, while at the same time helping the local economy to reap the full benefit of insurance. One controversial aspect of India’s non-life insurance industry is its tariff regime, which dates back to the 19th century and is still very much in evidence today. The Tariff Advisory Committee (TAC) was established in 1968, and in 1999 became the rating arm of the IRDA. At present, the tariff rates set by the TAC cover major lines like motor and fire insurance, and are applied to around 70% of general insurance premiums. While the tariff system has been praised on the grounds of market stability and consumer protection, it has also been blamed for market distortions. Where price competition is pre-empted by tariffication, the insurers engage in non-price forms of competition from which consumers do not benefit.
VII. Summary of Deregulation of the Industry
While effecting reforms in the banking sector and capital markets during the 1990s, the GoI also recognized the importance of insurance as an important part of the overall financial system where it was necessary to undertake similar reform measures. In April 1993, the GoI appointed a Committee on Reforms in the Insurance Sector (the Malhotra Committee). The Committee, which submitted its report in January 1994, recommended that the insurance
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business in India be opened up to private players, and laid down several guidelines for managing the transition. The decision to allow private companies to sell insurance products in India rests with Indian Parliament. Opening up the insurance sector required crossing at least two legislative hurdles. These were the passage of the Insurance Regulatory Authority (IRA) Bill, which would make IRA a statutory regulatory body, and amendment of the LIC and GIC Acts, which would end their respective monopolies. Subsequently, in pursuance to the announcement made by the Union Finance Minister in his Budget Speech of 1998-99, the Insurance Regulatory & Development Authority (IRDA) Bill, 1999, was passed by both Houses of Parliament. The Bill was assented to by the President and notified on December 29, 1999. With the Insurance Regulatory and Development Authority Act, 1999 coming into force, the insurance industry has been opened up for the private sector. The Act provides for the establishment of a statutory IRDA to protect the interests of insurance policy holders and to regulate, promote and ensure orderly growth of the insurance industry. The IRDA was formed by an Act of Parliament on April 19, 2000. Under the IRDA Act, an ‘Indian insurance company’ will be allowed to conduct insurance business provided it satisfies the following conditions: • It must be formed and registered under the Companies Act, 1956; • The aggregate holdings of equity shares by a foreign company, either by itself or through its subsidiary companies or its nominees, should not exceed 26% paid up equity capital of the Indian insurance company; In the last budget, though the Government has proposed an enhancement in the FDI limit from 26% to 49% but this is yet to be notified in the Insurance Regulatory & Development Act (IRDA). • Its sole purpose must be to carry on the life insurance business or general insurance business or reinsurance business. • To operate the insurance business in India, the Indian insurance company has to obtain a certificate of registration from IRDA. t has also been provided in the IRDA Act that on or after the commencement of the IRDA Act, no insurer will be allowed to carry on the life and general insurance business in India, unless it has a paid up equity capital of Rs. 1 billion. For carrying on the reinsurance business, the minimum paid up equity capital has been prescribed as Rs. 2 billion. The Reserve Bank of India (RBI) has also issued guidelines for banks’ entry into the insurance business. For banks, prior approval of the RBI is required to enter into the insurance business. The RBI would give permission to banks on a case-by-case basis, keeping in view all relevant factors. Banks having a minimum net worth of Rs. 5 billion and satisfying other criteria in respect of capital adequacy, profitability, non-performing asset (NPA) level and track record of existing subsidiaries can undertake insurance business through joint ventures, subject to certain safeguards. However, banks need not obtain prior approval of the RBI for engaging in insurance agency business or referral arrangement without any risk participation, subject to certain conditions.
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Establishment of Liaison Offices in India by Foreign Insurance Companies The Government has since decided to grant general permission to establish liaison offices in India to insurance companies incorporated outside India, which have obtained prior approval from IRDA to establish liaison offices in India subject to the necessary terms and conditions as mentioned in the circular No. 39 dated 25 of April, 2005 and the other conditions that may be stipulated by the IRDA from time to time. Market Structure following Deregulation Following the passage of the IRDA Act, private players were allowed into the insurance business in 2000. At present, the life insurance business in India is conducted by 14 companies – one public sector company (LIC) and 13 private sector players. The general insurance business in India is carried out by 14 companies – six PSUs (including the old four PSUs, and recent entrants such as AICIL and Export Credit Guarantee Corporation of India Ltd. Or ECGC), and eight registered companies in the private sector. Although private insurance companies have commenced operations since FY 2001, the nationalized insurance companies are expected to dominate the market in the near future, especially in long-term savings products such as life insurance. During FY 2003, the premium income of private sector life insurance companies was only Rs. 1,096 million, as companied with Rs. 546,285 million for LIC. In the general insurance business, the gross direct premium income (GDPI) in India of private sector companies was Rs. 13,416 million during FY 2003, as compared with Rs. 129,311 million for the five PSUs (excluding AICIL). During FY 2003, the private sector players had a market share of 2% (in terms of premium income) in life insurance, and a market share of 9.4% (in terms of GDPI in India) in general insurance. The limiting factor for prospective private insurers will be the extensive and costly distribution structure required. Building and servicing a distribution network large enough to generate economies of scale are likely to be critical. At least during the next few years, the new entrants cannot expect to replicate the extensive distribution network of the nationalized insurance companies. Building a distribution network is expensive and time consuming. Private insurers are expected to follow a strategy similar to that of the foreign banks i.e. starting from the affluent segment and gradually building up the distribution network to reach out to the middle-income (even if urban) segment. In villages and semi-urban areas, insurance companies have introduced a number of innovative schemes to strengthen their distribution channels and expand operations. Players are also tapping the extensive banking network in the country. Subsequent to the enabling legislative framework being put in place by IRDA allowing Bancassurance, insurers have started offering products through this strategic channel.
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Deregulation and Competition The Indian insurance market has witnessed considerable deregulation over the past few years. This has facilitated an increase in the levels of competition, entry of reputed international insurers, expansion of the market, and adoption of more innovative approaches to distribution and product development. Significantly, however, despite the entry of large global players, the Indian market continues to be dominated by the incumbent public sector companies. Despite the low penetration of insurance in the country, the monopolization of the insurance sector by the public sector companies had till recently prevented the Indian insurance market from achieving its full growth potential. Deregulation has gained widespread acceptance in Asia. Countries like China, Malaysia, Indonesia and Thailand, which opened their insurance markets to foreign players, displayed significant increases in growth rates. The rank of South Korea, which opened its insurance sector in 1971, in global premium mobilization improved from 30 in 1971 to 7 in 2003. The scenario in India is also likely to change following the deregulation of the Indian insurance industry, which has resulted in global majors such as the Allianz Group, ING, Prudential, AIG Group, Aviva, MetLife, Chubb, Royal Sun Alliance and Lombard setting up operations in India in association with established domestic business houses. The newer players are expected to contribute towards the development of newer products and delivery systems, and focus on creating a greater awareness about insurance as a protection and risk management device. These efforts are expected to result in an expansion of the market over a period of time, and increased competition for public sector companies. While public sector players are likely to lose market share, the would continue to hold a strong market position on account of their well-established brand equity and distribution network. However, at the same time, it must be noted that major public sector banks such as State Bank of India, Bank of Baroda, Punjab National Bank and other large public-sector banks also have established brand equity and distribution strength. Banc-assurance is likely to catch on in India, the same way it has done globally.
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doc_798236521.docx
The documentation about Indian Insurance Industry and also talks about the benefits of deregulation
Indian Insurance Industry
Indian Insurance Industry
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Indian Insurance Industry
Indian Insurance Industry DeRegulation
Table of Contents
I. Introduction ............................................................................................................................................... 3 II. An overview of India’s insurance market.................................................................................................. 3 Insurance development and potential...................................................................................................... 4 III. India in the international context ............................................................................................................ 4 Insurance penetration .............................................................................................................................. 5 Demand elasticity and growth potential .................................................................................................. 5 IV. History of insurance development in India.............................................................................................. 6 Modern insurance came with a British accent ......................................................................................... 6 Life insurance business ............................................................................................................................. 8 Investment portfolio of the LIC ................................................................................................................. 9 Life products before and after deregulation .......................................................................................... 10 Non-life business..................................................................................................................................... 10 Non-life products before and after deregulation ................................................................................... 11 Recent privatisation and foreign partnerships ....................................................................................... 11 V. Regulatory regime .................................................................................................................................. 12 Features of the 1999 IRDA Act ................................................................................................................ 13 Licensing.............................................................................................................................................. 13 Solvency controls ................................................................................................................................ 14 Business conduct................................................................................................................................. 14 Investment allocation and norms ....................................................................................................... 15 Other regulatory developments ......................................................................................................... 17 Market development .......................................................................................................................... 17 VI. Non-life insurance.............................................................................................................................. 19 Detariffication ......................................................................................................................................... 20 2
Indian Insurance Industry VII. Summary of Deregulation of the Industry ........................................................................................ 20 Establishment of Liaison Offices in India by Foreign Insurance Companies ....................................... 22 Market Structure following Deregulation ........................................................................................... 22 Deregulation and Competition ........................................................................................................... 23
I. Introduction
In 2003, the Indian insurance market ranked 19th globally and was the fifth largest in Asia.Although it accounts for only 2.5% of premiums in Asia, it has the potential to become one of the biggest insurance markets in the region. A combination of factors underpins further strong growth in the market, including sound economic fundamentals, rising household wealth and a further improvement in the regulatory framework. The insurance industry in India has come a long way since the time when businesses were tightly regulated and concentrated in the hands of a few public sector insurers. Following the passage of the Insurance Regulatory and Development Authority Act in 1999, India abandoned public sector exclusivity in the insurance industry in favour of market-driven competition. This shift has brought about major changes to the industry. The inauguration of a new era of insurance development has seen the entry of international insurers, the proliferation of innovative products and distribution channels, and the raising of supervisory standards. By mid-2004, the number of insurers in India had been augmented by the entry of new private sector players to a total of 28, up from five before liberalisation. A range of new products had been launched to cater to different segments of the market, while traditional agents were supplemented by other channels including the Internet and bank branches. These developments were instrumental in propelling business growth, in real terms, of 19% in life premiums and 11.1% in non-life premiums between 1999 and 2003. There are good reasons to expect that the growth momentum can be sustained. In particular, there is huge untapped potential in various segments of the market. While the nation is heavily exposed to natural catastrophes, insurance to mitigate the negative financial consequences of these adverse events is underdeveloped. The same is true for both pension and health insurance, where insurers can play a critical role in bridging demand and supply gaps. Major changes in both national economic policies and insurance regulations will highlight the prospects of these segments going forward.
II. An overview of India’s insurance market
Insurance in India used to be tightly regulated and monopolised by state-run insurers. Following the move towards economic reform in the early 1990s, various plans to revamp the sector finally resulted in the passage of the Insurance Regulatory and Development Authority (IRDA) Act of 1999. Significantly, the insurance business was opened on two fronts. Firstly, domestic private-sector companies were permitted to enter both life and non-life insurance
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business. Secondly, foreign companies were allowed to participate, albeit with a cap on shareholding at 26%. With the introduction of the 1999 IRDA Act, the insurance sector joined a set of other economic sectors on the growth march.During the 2003 financial year1, life insurance premiums increased by an estimated 12.3% in real terms to INR 650 billion (USD 14 billion) while non-life insurance premiums rose 12.2% to INR 178 billion (USD 3.8 billion). The strong growth in 2003 did not come in isolation. Growth in insurance premiums has been averaging at 11.3% in real terms over the last decade.
Insurance development and potential
Notwithstanding the rapid growth of the sector over the last decade, insurance in India remains at an early stage of development. At the end of 2003, the Indian insurance market (in terms of premium volume) was the 19th largest in the world, only slightly bigger than that of Denmark and comparable to that of Ireland.2 This was despite India being the second most populous country in the world as well as the 12th largest economy. Yet, there are strong arguments in favour of sustained rapid insurance business growth in the coming years, including India’s robust economic growth prospects and the nation’s high savings rates. The dynamic growth of insurance buying is partly affected by the (changing) income elasticity of insurance demand. It has been shown that insurance penetration and per capita income have a strong non-linear relationship.4 Based on this relation and other considerations, it can be postulated that by 2014 the penetration of life insurance in India will increase to 4.4% and that of non-life insurance to 0.9%
III. India in the international context
The Indian insurance market is the 19th largest globally and ranks 5th in Asia, after Japan, South Korea, China and Taiwan.6 In 2003, total gross premiums collected amount to USD 17.3 billion,representing just under 0.6% of world premiums. Similar to the pattern observed in other regional markets, and reflecting the country’s high savings rate, life insurance business accounted for 78.5% of total gross premiums collected in the year, against 21.5% for non-life insurance business.
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Insurance penetration
Insurance penetration (premiums as a percentage of GDP) has remained stable at a relatively low level in the early 1990s. Total insurance penetration in India was 1.5% in 1990 and was not much higher by the middle of the decade. By 2003, total penetration had risen to 2.88%, comprising 2.26% life insurance business and 0.62% non-life insurance business. In the context of international comparison, insurance penetration in India is low but commensurate with its level of per capita income. In 2003, India had the 11th highest insurance penetration in Asia and ranked 54th worldwide.
Demand elasticity and growth potential
India’s low level of insurance penetration and density has to be viewed in the context of the country’s early stage of economic development. Per capita income in India is currently at around USD 600 but is expected to increase rapidly, which could bring in an era of accelerated demand for insurance. International experience tends to suggest that demand for insurance will take off once per capita income has surpassed the USD 1000 mark (Figure 3.4). This income level is deemed high enough for households to consider insurance protection, particularly as many people begin to own their homes and cars. The empirical relationship between insurance demand elasticity and per capita income can be characterised as a bell-shaped curve. Elasticity remains relatively low at a low income level but increases at an accelerated rate once it has
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passed the USD 1000 level. The following chart depicts the current position of different emerging markets as well as their expected position by 2013.
India’s improving economic fundamentals will support faster growth in per capita income in the coming years, which will translate into stronger demand for insurance products. It is also worthwhile to note that it generally takes longer for life insurance demand to reach saturation than non-life insurance (in terms of rising income elasticity). Based on the growth assumption provided by Swiss Re Economic Research & Consulting, it can be seen that the window of opportunity in India’s insurance market will remain wide open for a prolonged period of time. Strong growth can be sustained for 30–40 years before the market reaches saturation as income elasticity starts to decline
IV. History of insurance development in India
Modern insurance came with a British accent
Insurance in its modern form first arrived in India through a British company called the Oriental Life Insurance Company in 1818, followed by the Bombay Assurance Company in 1823,
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and the Madras Equitable Life Insurance Society in 1829. They insured the lives of Europeans living in India. The first company that sold policies to Indians with “fair value” was the Bombay Mutual Life Assurance Society starting in 1871.10 The first general insurance company, Triton Insurance Company Limited, was established in 1850. For the next hundred years, both life and non-life insurance were confined mostly to the wealthy living in large metropolitan areas.
Regulation of insurance companies began with the Indian Life Assurance Companies Act, 1912. In 1938, all insurance companies were brought under regulation when a new Insurance Act was passed. It covered both life and non-life insurance companies. It clearly defined what would come under life and non-life insurance business. The Act also covered, among others, deposits, supervision of insurance companies, investments, commissions of agents and directors appointed by the policyholders. This piece of legislation lost significance after the insurance business was nationalized in 1956 (life) and 1972 (non-life), respectively. When the market was opened again to private participation in 1999, the earlier Insurance Act of 1938 was reinstated as the backbone of the current legislation of insurance companies, as the IRDA Act of 1999 was superimposed on the 1938 Insurance Act. By mid-2004, there were 21 private sector insurance companies operating in India, alongside eight public sector companies (Table 4.1). Of these, there were 14 life insurance companies comprising one public (the old monopoly) and 13 private companies. Most private companies had foreign participation up to the permissible limit of 26% of equity.11 One such charter worth special mention is the joint venture between the State Bank of India (SBI) and Cardif SA of France (the insurance arm of BNP Paribas Bank) – SBI Life Insurance Company Limited. Since the SBI is a bank, the Reserve Bank of India (RBI) needed to approve the SBI’s participation because banks are allowed to enter other business on a “caseby-case” basis. It is also an encouraging sign that the authorities are ready to accommodate more diverse forms of corporate structures, as bancassurance will become an important channel for the distribution of insurance.
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At the same time, in a few joint ventures, Indian banks shared the domestic equity portion with other non-bank entities. It still remains to be seen how this new mode of corporate cooperation will develop going forward.The latest group to receive an outright charter for operating a life insurance company is the Sahara Group (on 5 March 2004). Sahara’s entry is notable for two reasons. Firstly, Sahara would be the first domestic corporation to enter the Indian life insurance market without any foreign partner. Secondly, it would become the first non-banking financial company to operate in the life insurance sector.In the non-life insurance sector, there were 14 companies operating in India by mid-2004. Six of them are public-sector companies, of which four were former subsidiaries of the GIC that operated as nationalised companies, and the other two are the Export Credit Guarantee Corporation Limited and the Agriculture Insurance Company of India Limited. The rest are private-sector companies. Most of these private-sector companies have foreign partners with a maximum of 26% of shares, but there are also purely domestic companies (eg Reliance General Insurance Company Limited). The insurance business in India can be broadly sub-divided into two categories: • Life Insurance • General Insurance
Life insurance business
When the life insurance business was nationalised in 1956, there were 154 Indian life insurance companies. In addition, there were 16 non-Indian insurance companies and 75 provident societies also issuing life insurance policies. Most of these policies were centred in the metropolitan areas like Bombay, Calcutta, Delhi and Madras. The life insurance business was nationalised in 1956 with the Life Insurance Corporation of India (LIC) designated the sole provider – its monopolistic status was revoked in 1999. There were several reasons behind the nationalisation decision. Firstly, the government wanted to channel more resources to national development programmes. Secondly, it sought to increase insurance market penetration through nationalisation.12 Thirdly, the government found the number of failures of insurance companies to be unacceptable. The government argued that the failures were the result of mismanagement and nationalisation would help to better protect policyholders. Thus, the post independence history of life insurance in India is largely the history of the LIC. From the perspective of national economic policy, the LIC has been instrumental in the implementation of monetary policy in India. For example, 52% of the outstanding stock of government securities is held by just two public-sector institutions – V the State Bank of India and the Life Insurance Corporation of India – in approximately equal proportion.The lack of investment channels in India and the cautious approach adopted by the regulator are also factors contributing to the high concentration of insurance assets in government securities. Table 4.2 shows the historical development of LIC’s financial data. In nominal terms, during that period the total income of the LIC grew 700-fold. The largest part of payments to policyholders has been through the maturity of policies. This proportion has gone up over time,
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relative to death benefits. To a certain extent, this reflects the increasing popularity of life insurance products as savings vehicles in lieu of life protection.15 It can also be discerned that the operating costs (as percentage of premiums) remained high over a sustained period of time, with a decline in the past two decades. Part of this decline has come from the increased sale of group policies which are cheaper to sell per policy than individual life policies.
Investment portfolio of the LIC
The investment portfolio of LIC over time is summarised in Table 4.3. Broadly, the first item of “Loans to state and central government and their corporations and boards” has steadily fallen from 42% to around 18% in twenty years. In their place, the share of the second item “Central government, state government, and local government securities” has gone up steadily from 55% in 1980 to 80% in 2000. As such, the LIC (along with the State Bank of India) has become one of the two largest owners of government bonds in India. Whether it is in government loans or bonds, GIC has steadfastly made available over 95% of its investment to Indian government liabilities. It can be seen that the companies have so far refrained from investing in equities or overseas. Recently, however,the LIC has taken a more aggressive stance in boosting its equity investment, both through private placements and secondary market purchases in the stock exchanges. In financial year 2003-2004,it recorded equity investment profit of INR 2,400 crore.
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Life products before and after deregulation
In the past, the LIC had three commonly sold policies in the market for life insurance: whole life, endowment and money-back policies. The number of new policies sold each year went from about 0.95 million a year in 1957 to 26.97 million in 2003. The total number of inforce policies went from 5.42 million in 1957 to 141 million by March 2003. There are presently several dozen life products offered by the LIC. However, they are small variations on the three products mentioned above. In addition, even though term life policies were available, they were not actively promoted. LIC also has several pension products. Following the entry of the private insurers, there was a proliferation of products. According to the Annual Report of the IRDA, 116 life products were offered by life insurance companies in India as of 31 March 2002. Of course, they were not all distinct products. Many products across different companies were very similar, if not identical. Some of the more popular products launched recently include creditor protection products like mortgage life, and unit-linked products.
Non-life business
Non-life insurance was not nationalised in 1956 along with life insurance. The reason was addressed by the then Finance, Minister C. D. Deshmukh, in his budget speech of 1956. “I would also like to explain briefly why we have decided not to bring in general insurance into the public sector. The consideration which influenced us most is the basic fact that general insurance is part and parcel of the private sector of trade and industry and functions on a year to year basis. Errors and omission in the conduct of its business do not directly affect the individual citizen. Life insurance business, by contrast, directly concerns the individual citizen whose savings, so vitally needed for economic development, may be affected by any acts of folly or misfeasance on the part of those in control or be retarded by their lack of imaginative policy.” Sixteen years later, in 1972, non-life insurance was finally nationalised (with effect from 1 January 1973). At that time there were 107 general insurance companies. They were mainly large cityoriented companies catering to the organised sector (trade and industry). They were of different sizes, operating at different levels of sophistication. Upon nationalisation, these
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businesses were assigned to the four subsidiaries (roughly of equal size) of the General Insurance Corporation of India (GIC). There were several goals in setting up this structure. Firstly, the subsidiary companies were expected to set up standards of conduct, sound practices and provision of efficient customer service in general insurance business. Secondly, the GIC was to help control the expenses of the subsidiaries. Thirdly, it was to help with the investment of funds for its four subsidiaries. Fourthly, it was to bring general insurance to the rural areas of the country, by distributing business to the four subsidiaries, each operating in different areas in India. Fifthly, the GIC was also designated the national reinsurer.By law, all domestic insurers were to cede 20% of their gross direct premium in India to the GIC.The idea was to retain as much risk as possible domestically. This was in turn motivated by the desire to minimise the expenditure on foreign exchange. Sixthly, all four subsidiaries were supposed to compete with one another. After the passage of the 1999 IRDA Act, the GIC was de-linked from its four subsidiaries. Each subsidiary, with their headquarters based in the four largest metropolitan areas, became independent. The only function the GIC retained was that of national reinsurer. However, the government still remains the sole owner of the four former GIC subsidiaries.
Non-life products before and after deregulation
Before deregulation in 1999, non-life products that were available in the market were rather limited and similar across the four GIC subsidiaries. They could also be classified by whether they were regulated by tariffs: fire insurance, motor vehicle insurance, engineering insurance and workers’ compensation etc that came under tariff; and burglary insurance, Mediclaim, personal accident insurance etc that did not. In addition, most specialised insurance (eg racehorse insurance) did not fall under tariff regulations. After the opening of the sector to private players, more new products were introduced. To take an example, one joint-venture non-life insurer introduced 29 different products during the year, according to the IRDA. They included products liability, corporate cover, professional indemnity policies, burglary cover, individual and group health policies, weather insurance, credit insurance, travel insurance and so on. Some of these products were completely new (eg weather insurance) while others were already available through the public insurance companies.
Recent privatisation and foreign partnerships
Recent privatisation has brought in new players in the market – almost all of them with foreign partners. Table 4.5 below lists the equity share capital of insurance companies in the financial years 2001-02 and 2002-03. There was a substantial injection of equity capital in the private sector in life insurance. In non-life business, the change was marginal. Notice that the equity share capital for LIC was relatively small.
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V. Regulatory regime
After the release of the Malhotra Committee report in 1994, changes in the insurance industry appeared imminent. Unfortunately, changes in the central government slowed down the process. The dramatic climax came on 7 December 1999 when the government finally passed the Insurance Regulatory and Development Authority (IRDA) Act. This Act repealed the monopoly conferred to the Life Insurance Corporation in 1956 and to the General Insurance Corporation in 1972. The authority created by the Act is called the Insurance Regulatory and Development Authority (IRDA). Table below summarises some of the milestones in India’s insurance regulation.
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Features of the 1999 IRDA Act
The Insurance Regulatory and Development Act of 1999 set out “to provide for the establishment of an Authority to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto and further to amend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956, and the General Insurance Business (Nationalisation) Act, 1972.” The Act effectively reinstituted the Insurance Act of 1938 with (marginal) modifications. Whatever was not explicitly mentioned in the 1999 Act referred back to the 1938 Act. The salient features of the 1999 IRDA Act are discussed below. Licensing The IRDA Act, 1999, sets out details of registration of an insurance company along with renewal requirements. The minimum capital requirement for direct non-life and life insurance business is 100 crores (ie INR 1 billion). The IRDA regulates the entry and exit of players, capital norms, and maintains a strict watch on the equity and solvency situation of insurers. Should an application be rejected, the applicant will have to wait for a minimum of two years to make another proposal, which will have to be with a new set of promoters and for a different class of business. For renewal, it stipulates a fee of one-fifth of one percent of total gross premiums written direct by an insurer in India during the financial year preceding the renewal year. It also seeks to give a detailed background for each of the following key personnel: chief executive, chief marketing officer, appointed actuary, chief investment officer, chief of internal audit and chief finance officer. Details of the sales force, activities in rural business and projected values of each line of business are also required. Further, the Act sets out the reinsurance requirement for (general) insurance business. For all general insurance a compulsory cession of 20%, regardless of the line of business, to the General Insurance Corporation (the designated
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national reinsurer) is stipulated. Currently, India allows foreign insurers to enter the market in the form of a joint venture with a local partner, while holding no more than 26% of the company’s shares (Table 5.2). Compared to the other regional markets, India has more stringent restrictions on foreign access. Solvency controls General insurance business lines that are subject to tariffs include fire, motor, marine hull, tea crop, engineering, industrial all risks, business interruption, personal accident and workers’ compensation. Tariffs are managed by the Tariff Advisory Committee. In addition, insurers have to observe the required solvency margin (RSM).20 For general insurers, this is the higher of RSM-1 or RSM-2, where ? ? • ? ? ? RSM-1 is based on 20% of the higher of (i) gross premiums multiplied by a factor A,21 or (ii) net premiums; RSM-2 is based on 30% of the higher of (i) gross net incurred claims multiplied by a factor B,or (ii) net incurred claims; there is also a lower limit of INR 500 million for the RSM. Life insurers have to observe the solvency ratio, defined as the ratio of the amount of available solvency margin to the amount of required solvency margin: the required solvency margin is based on mathematical reserves and sum at risk, and the assets of the policyholders‘ fund; the available solvency margin is the excess of the value of assets over the value of life insurance liabilities and other liabilities of policyholders’ and shareholders’ funds.
Business conduct As well as licensing and solvency regulations, the IRDA Act also prescribes guidelines and regulations on business conduct. It specified the creation and functioning of an Insurance Advisory Committee that sets out relevant rules and regulation. An important point is that it stipulates the role of the “appointed actuary”. He/she has to be a Fellow of the Actuarial Society of India. 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 general insurance company. The appointed actuary is responsible for providing a detailed account of the company to the IRDA. Further, all insurers are required to provide some coverage for the rural sector.This is known as the Obligations of Insurers to Rural Social Sectors. In respect of a life insurer, the share of premiums from the rural social sectors shall be • 5% in the first financial year; • 7% in the second financial year; • 10% in the third financial year; • 12% in the fourth financial year; and • 15% in the fifth year (of total policies written direct in that year).
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In respect of a general insurer, • 2% in the first financial year; • 3% in the second financial year; and • 5% thereafter (of total gross premium incomewritten direct in that year). In addition, each company is obliged to service the social sector23 as follows. In respect of all insurers, • 5000 lives in the first financial year; • 7500 lives in the second financial year; • 10,000 lives in the third financial year; • 15,000 lives in the fourth financial year; and • 20,000 lives in the fifth financial year. Investment allocation and norms The Insurance Act of 1938 required life insurance companies to hold 55% of their assets in government securities or other approved securities (Section 27A of the Insurance Act). In the 1940s, many life insurance companies were part of financial conglomerates. With a 45% balance to play with, some life insurance companies used these funds for other enterprises or even for speculation. In 1958, Section 27A of the Insurance Act was modified to stipulate the following investment regime: • • • Central government market securities of not less than 20%; Loans to National Housing Bank including o above should be no less than 25%; In state government securities including above should be no less than 50%; and In socially oriented sectors including the public sector, cooperative sector, house building by policyholders, own-your-own-home schemes including above should be no less than 75%.
•
For General Insurance, Section 27B of the Insurance Act of 1938 was amended in 1976. The guideline for investment was set out as follows: • • • central government securities of no less than 25%; state government and public sector bonds of no less than 10%; and loans to state governments, various housing schemes of no less than 35%. The remaining 30% investment could be in the market sector in the form of equity, longterm loans, debentures and other forms of private sector investment.
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At least half of the investment has to be either directly in government securities (bonds) or in infrastructure. These investment options are “safe” as they are fully backed by the government. Of course, it also means they earn the lowest rate of return in the Indian market. The government (both at the federal and state levels) has used the insurance business as a way of raising capital. The actual investment patterns are shown in Tables 5.4a and 5.4b below.
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The LIC has 65% invested in government securities and other approved securities. For the private sector it ranges from 40% (Birla Sun Life) to 70% (AMP Sanmar). Infrastructure investment for LIC was 12%. For the private companies it ranges from a high of 20% for AMP Sanmar and Allianz Bajaj to a low of 9% for Birla Sun Life. In the “other approved” investment category, LIC has invested 23%. Other regulatory developments The following are a few new features of the regulatory regime introduced by the IRDA: ? Insurance agents are governed by the Licensing of Insurance Agents Regulations 2000 and the Licensing of Insurance Regulations (amendment) 2002. Importantly, to ensure professional standards, the IRDA has mandated minimum educational qualifications for all agents, together with training and examination requirements. ? Through a Government of India Notification dated 11 November 1998, the Insurance Ombudsman was created to address grievances of the insured customers and protect the interest of policyholders. Twelve Ombudsmen have been appointed across the country to expedite disposal of complaints. They have jurisdiction in respect of personal lines of insurance where the contract value does not exceed INR 20 lakhs. The Ombudsman is bound to pass a judgement within three months from the receipt of the complaint. It should be noted that the system is monitored and operated through a governing body of Insurance Council comprising of representatives of insurance companies. The IRDA deals with other disputes that fall outsidethe Ombudsman’s jurisdiction. • Policyholder protection was enhanced through the enactment of the Protection of Policyholders’ Interests Regulations, 2002. It stipulates the responsibility of insurance companies to spell out clearly the terms and conditions of insurance policies as well as other details. For example, in life insurance, details of any riders attaching to the main policy have to be given to the policyholders. Market development Economic fundamentals continue to suggest that there is huge potential for the life insurance sector to attain further growth. India is one of the world’s fastest growing economies, with real GDP rising by an average annual rate of 6.1% over the last decade. Along with strong economic growth, the life insurance market has also expanded rapidly – direct life insurance premiums grew by an annual real rate of 13.1% between 1993 and 2003 (Figure 6.1). However, life insurance penetration remains modest at slightly over 2%. Considering that life insurance accounts for more than three-quarters of total insurance business, reaching these untapped markets thus holds the key to realising the growth potential of the insurance industry.
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Indian Insurance Industry
The life insurance landscape in India is undergoing major change. Closed to foreign competitionsince nationalisation in 1956, the life insurance industry had been protected from competitive pressures until the market was opened again in late 1999/early 2000. The initial years of liberalisation have continued to see the former monopoly Life Insurance Corporation of India (LIC) retaining a dominant position in the market. Nevertheless, the latest statistics show a decline in LIC’s share of new business from 98% in 2001 to 87% in 2003. In contrast, companies like ICICI Prudential Life and Birla Sun Life, which were among the first batch of private entrants, have shown the greatest success in securing new business. This is an indication that the industry’s private sector is establishing itself in the market, and is turning into a competitive force. It is possible to get an indication of where the market is heading by examining the new business written in the 2003 financial year. Direct new life business grew by 10.5% in nominal terms over the year. The distribution of premium is given in Table 6.1. The LIC has slightly more than 87% of the market, leaving the rest for the twelve private companies.28 The high share means that LIC is able to defend its dominant position in the face of heightening competition. Among the private companies, ICICI Prudential Life has the biggest market share at 4%, followed by Birla Sun Life at 2.4%. HDFC Standard Chartered and SBI Life are the only two other companies with more than a 1% market share
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VI. Non-life insurance
Market developments India’s non-life insurance industry received gross premiums of INR 161 billion in 2003, which represented a five-fold increase from INR 28 billion in 1990 and an average 6% growth in real terms over the period . Nonetheless, non-life insurance penetration, measured as premiums as a share of GDP, remained at a stable low level of 0.6%. In comparison, penetration has increased at a far brisker pace in China, from 0.4% in 1998 to 0.7% in 2002. It is estimated that 90% of the Indian population are not covered by non-life insurance, which points to significant untapped growth potential.
Liberalisation has become the key to unlocking this potential. The Insurance Regulatory and Development Authority (IRDA) Act of 1999 puts an end to the monopolistic positions that had hitherto been assumed by the state-owned GIC group of subsidiaries, and makes way for private sector participation in the market. This, together with the establishment of the IRDA as the industry’s prudential supervisor, has paved the way for India to fully realise the growth potential of its insurance sector. India’s non-life insurance industry was previously dominated by the state-owned GIC and its four subsidiaries. Since liberalisation, eight private sector insurers have entered the market, with all but one being joint ventures between overseas insurance companies and large Indian companies and institutions. These companies (including the Export Credit Guarantee Corporation Limited) received premiums totalling INR 161 billion in the 2002 financial year, representing a 13% jump from the previous year. Preliminary data suggest that their premiums for the 2003 financial year should grow by another 13%.
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Indian Insurance Industry
Detariffication
Despite a promising start, rising competitive pressure has exposed weaknesses within the industry that will require stronger ongoing supervisory attention. Considerable rigidities still exist which adversely impact profitability and deter new initiatives. The prevalence of market tariffs and the cap on foreign ownership are two of the major liberalisation issues India will have to tackle. Various reasons have been put forward to justify these restrictions, including to protect consumers and to preclude capital outflows. However, international experience suggests that a liberal insurance regime caters to these concerns much better than a restrictive one, while at the same time helping the local economy to reap the full benefit of insurance. One controversial aspect of India’s non-life insurance industry is its tariff regime, which dates back to the 19th century and is still very much in evidence today. The Tariff Advisory Committee (TAC) was established in 1968, and in 1999 became the rating arm of the IRDA. At present, the tariff rates set by the TAC cover major lines like motor and fire insurance, and are applied to around 70% of general insurance premiums. While the tariff system has been praised on the grounds of market stability and consumer protection, it has also been blamed for market distortions. Where price competition is pre-empted by tariffication, the insurers engage in non-price forms of competition from which consumers do not benefit.
VII. Summary of Deregulation of the Industry
While effecting reforms in the banking sector and capital markets during the 1990s, the GoI also recognized the importance of insurance as an important part of the overall financial system where it was necessary to undertake similar reform measures. In April 1993, the GoI appointed a Committee on Reforms in the Insurance Sector (the Malhotra Committee). The Committee, which submitted its report in January 1994, recommended that the insurance
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business in India be opened up to private players, and laid down several guidelines for managing the transition. The decision to allow private companies to sell insurance products in India rests with Indian Parliament. Opening up the insurance sector required crossing at least two legislative hurdles. These were the passage of the Insurance Regulatory Authority (IRA) Bill, which would make IRA a statutory regulatory body, and amendment of the LIC and GIC Acts, which would end their respective monopolies. Subsequently, in pursuance to the announcement made by the Union Finance Minister in his Budget Speech of 1998-99, the Insurance Regulatory & Development Authority (IRDA) Bill, 1999, was passed by both Houses of Parliament. The Bill was assented to by the President and notified on December 29, 1999. With the Insurance Regulatory and Development Authority Act, 1999 coming into force, the insurance industry has been opened up for the private sector. The Act provides for the establishment of a statutory IRDA to protect the interests of insurance policy holders and to regulate, promote and ensure orderly growth of the insurance industry. The IRDA was formed by an Act of Parliament on April 19, 2000. Under the IRDA Act, an ‘Indian insurance company’ will be allowed to conduct insurance business provided it satisfies the following conditions: • It must be formed and registered under the Companies Act, 1956; • The aggregate holdings of equity shares by a foreign company, either by itself or through its subsidiary companies or its nominees, should not exceed 26% paid up equity capital of the Indian insurance company; In the last budget, though the Government has proposed an enhancement in the FDI limit from 26% to 49% but this is yet to be notified in the Insurance Regulatory & Development Act (IRDA). • Its sole purpose must be to carry on the life insurance business or general insurance business or reinsurance business. • To operate the insurance business in India, the Indian insurance company has to obtain a certificate of registration from IRDA. t has also been provided in the IRDA Act that on or after the commencement of the IRDA Act, no insurer will be allowed to carry on the life and general insurance business in India, unless it has a paid up equity capital of Rs. 1 billion. For carrying on the reinsurance business, the minimum paid up equity capital has been prescribed as Rs. 2 billion. The Reserve Bank of India (RBI) has also issued guidelines for banks’ entry into the insurance business. For banks, prior approval of the RBI is required to enter into the insurance business. The RBI would give permission to banks on a case-by-case basis, keeping in view all relevant factors. Banks having a minimum net worth of Rs. 5 billion and satisfying other criteria in respect of capital adequacy, profitability, non-performing asset (NPA) level and track record of existing subsidiaries can undertake insurance business through joint ventures, subject to certain safeguards. However, banks need not obtain prior approval of the RBI for engaging in insurance agency business or referral arrangement without any risk participation, subject to certain conditions.
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Establishment of Liaison Offices in India by Foreign Insurance Companies The Government has since decided to grant general permission to establish liaison offices in India to insurance companies incorporated outside India, which have obtained prior approval from IRDA to establish liaison offices in India subject to the necessary terms and conditions as mentioned in the circular No. 39 dated 25 of April, 2005 and the other conditions that may be stipulated by the IRDA from time to time. Market Structure following Deregulation Following the passage of the IRDA Act, private players were allowed into the insurance business in 2000. At present, the life insurance business in India is conducted by 14 companies – one public sector company (LIC) and 13 private sector players. The general insurance business in India is carried out by 14 companies – six PSUs (including the old four PSUs, and recent entrants such as AICIL and Export Credit Guarantee Corporation of India Ltd. Or ECGC), and eight registered companies in the private sector. Although private insurance companies have commenced operations since FY 2001, the nationalized insurance companies are expected to dominate the market in the near future, especially in long-term savings products such as life insurance. During FY 2003, the premium income of private sector life insurance companies was only Rs. 1,096 million, as companied with Rs. 546,285 million for LIC. In the general insurance business, the gross direct premium income (GDPI) in India of private sector companies was Rs. 13,416 million during FY 2003, as compared with Rs. 129,311 million for the five PSUs (excluding AICIL). During FY 2003, the private sector players had a market share of 2% (in terms of premium income) in life insurance, and a market share of 9.4% (in terms of GDPI in India) in general insurance. The limiting factor for prospective private insurers will be the extensive and costly distribution structure required. Building and servicing a distribution network large enough to generate economies of scale are likely to be critical. At least during the next few years, the new entrants cannot expect to replicate the extensive distribution network of the nationalized insurance companies. Building a distribution network is expensive and time consuming. Private insurers are expected to follow a strategy similar to that of the foreign banks i.e. starting from the affluent segment and gradually building up the distribution network to reach out to the middle-income (even if urban) segment. In villages and semi-urban areas, insurance companies have introduced a number of innovative schemes to strengthen their distribution channels and expand operations. Players are also tapping the extensive banking network in the country. Subsequent to the enabling legislative framework being put in place by IRDA allowing Bancassurance, insurers have started offering products through this strategic channel.
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Indian Insurance Industry
Deregulation and Competition The Indian insurance market has witnessed considerable deregulation over the past few years. This has facilitated an increase in the levels of competition, entry of reputed international insurers, expansion of the market, and adoption of more innovative approaches to distribution and product development. Significantly, however, despite the entry of large global players, the Indian market continues to be dominated by the incumbent public sector companies. Despite the low penetration of insurance in the country, the monopolization of the insurance sector by the public sector companies had till recently prevented the Indian insurance market from achieving its full growth potential. Deregulation has gained widespread acceptance in Asia. Countries like China, Malaysia, Indonesia and Thailand, which opened their insurance markets to foreign players, displayed significant increases in growth rates. The rank of South Korea, which opened its insurance sector in 1971, in global premium mobilization improved from 30 in 1971 to 7 in 2003. The scenario in India is also likely to change following the deregulation of the Indian insurance industry, which has resulted in global majors such as the Allianz Group, ING, Prudential, AIG Group, Aviva, MetLife, Chubb, Royal Sun Alliance and Lombard setting up operations in India in association with established domestic business houses. The newer players are expected to contribute towards the development of newer products and delivery systems, and focus on creating a greater awareness about insurance as a protection and risk management device. These efforts are expected to result in an expansion of the market over a period of time, and increased competition for public sector companies. While public sector players are likely to lose market share, the would continue to hold a strong market position on account of their well-established brand equity and distribution network. However, at the same time, it must be noted that major public sector banks such as State Bank of India, Bank of Baroda, Punjab National Bank and other large public-sector banks also have established brand equity and distribution strength. Banc-assurance is likely to catch on in India, the same way it has done globally.
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