Product pricing
Pricing of insurance products, as empirically available in India, shows that pricing is not in consonance with market realities. Life Insurance premia are generally perceived as being too high while general insurance (especially motor insurance) is priced too low.
LIC has, over a period of time, affected price reduction. For instance on 'without profit policies' (that is, those which are not eligible for bonuses), the premium rates were reduced between 2 percent to 7 percent during the 1970's. Subsequently in 1986, the premium rates were further reduced by 17% for such policies. Practices, such as charging extra premium on female insurance, were also discontinued. However, these instances are an inadequate response to the changes taking place in the market.
One of the most significant changes has been the improvement in Life Expectancy of individuals. For males this has improved from 41.89 years in 1961 to 62.80 years in recent times. Similarly, female life expectancy has improved from 40.55 years in 1961 to 64.20 years.
The problem faced by LIC in incorporating the trends in life expectancy in to their actuarial calculation has been partly technological and partly organizational. Recognizing this LIC has indicated in its corporate plan 1997-2007 that they hope to put in place a year to year revision of mortality rates in the calculation of premia.
Currently, the LIC uses the 1970-73 mortality tables for most of the premium calculations and for "without profit policies", the 1975-79 mortality rates are used.
In the case of general insurance the issue of product pricing can be grouped into two categories.
§ Those that fall under tariff regulations and controlled by Tariff Advisory Committee (TAC)
§ Those that fall outside tariff regulations.
Investment of Insurance Funds
Any reform of the insurance sector must necessarily consider aspects related to the investment of insurance funds. Under sec 27A of the insurance act and its application in the LIC act, the manner in which LIC can deploy its funds is stated.
Under the current guidelines, the LIC is required to invest 75% of the accretions through a controlled fund in certain approved investments. 25% of accretions may be invested by LIC for investments in private corporate sectors, loans to policyholders, construction and acquisition of immovable assets.
These stipulations have resulted in the lack of flexibility in the optimization of its risk and profit portfolio. It has been reported that the government is planning to offer greater autonomy to LIC through the following:
It is proposed that the deployment of the balance of 50% of the funds will be left to discretion of LIC.
Similarly, it is proposed that the GIC will be subject to the following guidelines:
Capital norms for New Insurance Companies
One of the contentious issues raised by foreign companies seeking an entry into the insurance sector in India is the minimum paid up capital requirements. The Malhotra committee (1994) recommended Rs 100 crores as the norm. The multilateral insurance working group (an industry forum representing most of the interested foreign and Indian companies seeking an entry into the insurance sector) has recommended Rs. 50 crore.
The IRA is also reported to considering a graded pattern for capitalization of the companies keeping in mind the volume of business likely to be handled by them.
Pricing of insurance products, as empirically available in India, shows that pricing is not in consonance with market realities. Life Insurance premia are generally perceived as being too high while general insurance (especially motor insurance) is priced too low.
LIC has, over a period of time, affected price reduction. For instance on 'without profit policies' (that is, those which are not eligible for bonuses), the premium rates were reduced between 2 percent to 7 percent during the 1970's. Subsequently in 1986, the premium rates were further reduced by 17% for such policies. Practices, such as charging extra premium on female insurance, were also discontinued. However, these instances are an inadequate response to the changes taking place in the market.
One of the most significant changes has been the improvement in Life Expectancy of individuals. For males this has improved from 41.89 years in 1961 to 62.80 years in recent times. Similarly, female life expectancy has improved from 40.55 years in 1961 to 64.20 years.
The problem faced by LIC in incorporating the trends in life expectancy in to their actuarial calculation has been partly technological and partly organizational. Recognizing this LIC has indicated in its corporate plan 1997-2007 that they hope to put in place a year to year revision of mortality rates in the calculation of premia.
Currently, the LIC uses the 1970-73 mortality tables for most of the premium calculations and for "without profit policies", the 1975-79 mortality rates are used.
In the case of general insurance the issue of product pricing can be grouped into two categories.
§ Those that fall under tariff regulations and controlled by Tariff Advisory Committee (TAC)
§ Those that fall outside tariff regulations.
Investment of Insurance Funds
Any reform of the insurance sector must necessarily consider aspects related to the investment of insurance funds. Under sec 27A of the insurance act and its application in the LIC act, the manner in which LIC can deploy its funds is stated.
Under the current guidelines, the LIC is required to invest 75% of the accretions through a controlled fund in certain approved investments. 25% of accretions may be invested by LIC for investments in private corporate sectors, loans to policyholders, construction and acquisition of immovable assets.
These stipulations have resulted in the lack of flexibility in the optimization of its risk and profit portfolio. It has been reported that the government is planning to offer greater autonomy to LIC through the following:
It is proposed that the deployment of the balance of 50% of the funds will be left to discretion of LIC.
Similarly, it is proposed that the GIC will be subject to the following guidelines:
Capital norms for New Insurance Companies
One of the contentious issues raised by foreign companies seeking an entry into the insurance sector in India is the minimum paid up capital requirements. The Malhotra committee (1994) recommended Rs 100 crores as the norm. The multilateral insurance working group (an industry forum representing most of the interested foreign and Indian companies seeking an entry into the insurance sector) has recommended Rs. 50 crore.
The IRA is also reported to considering a graded pattern for capitalization of the companies keeping in mind the volume of business likely to be handled by them.