4.1 INSURANCE SECTOR IN INDIA BRIEF HISTORY 4.2 GROWTH OF INSURANCE INDUSTRY 4.6 NEW DEVELOPMENTS/ PRODUCT LAUNCHES

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1 4.1 INSURANCE SECTOR IN INDIA BRIEF HISTORY 4.2 GROWTH OF INSURANCE INDUSTRY 4.3 RECENT DEVELOPMENTS 4.4 INDUSTRY DYNAMICS 4.5 KEY STATISTICS 4.6 NEW DEVELOPMENTS/ PRODUCT LAUNCHES 4.7 GOVERNMENT INITIATIVES & IRDA REGULATIONS 4.8 CHALLENGES AND OUTLOOK FOR FUTURE

2 4.1 Insurance Sector in India Brief History The Life Insurance market in India was an underdeveloped market that was only tapped by the state owned LIC till the entry of private insurers. Insurance industry, as on , comprised mainly two players: the state insurers Life Insurance Corporation of India and General Insurers, the General Insurance Corporation of India. In India, insurance is generally considered as a tax-saving device instead of its other implied long term financial benefits. Indian people are prone to investing in properties and gold followed by bank deposits. They selectively invest in shares also but the percentage is very small. Even to this day, Life Insurance Corporation of India dominates Indian insurance sector. The penetration of life insurance products was 19 percent of the total 400 million of the insurable population. The state owned LIC sold insurance as a tax instrument, not as a product giving protection. Most customers were under- insured with no flexibility or transparency in the products. With the entry of the private insurers the rules of the game have changed. 1 Private sector players backed by foreign expertise have made the Indian insurance market more vibrant. The growing popularity of the private insurers shows in other ways. Twenty three Life Insurance Companies have been registered since the year 2000 till now. They are coining money in new niches that they have introduced. The state owned companies still dominate segments like endowments and money back policies. But in the annuity or pension products business, the private insurers have already wrested over 33 percent of the market. 2 And in the 1 Garg, S.C., Insurance Education: Challenges and Opportunities, The Journal of Insurance Institute of India, Mumbai, July-December, 2006, p.9. 2 Trieschmann, Hoyt and Sommer, Risk Management and Insurance, Thomson South-Western, a Division of Thomson Learning Inc., New Delhi, 2007, p

3 popular unit-linked insurance schemes they have a virtual monopoly, with over 90 per cent of the customers. 4.2 Growth of Insurance Industry With an annual growth rate of 15-20% and the largest number of life insurance policies in force, the potential of the Indian insurance industry is huge. Total value of the Indian insurance market ( ) was estimated at Rs. 450 billion (US$10 billion). According to government sources, the insurance and banking services' contribution to the country's gross domestic product (GDP) is 7% out of which the gross premium collection forms a significant part. The funds available with the stateowned Life Insurance Corporation (LIC) for investments are 8% of GDP. The following table shows the total growth in the Insurance. Table 4.1 Premium collected in the years from to (Rs. In Crores) , Source: IRDA Journal July Recent Developments The future of the Indian insurance sector looks bright. The sector which stood at a strong US$ 72billion in 2012 has the potential to grow to US$ 280 billion by This growth is driven by India s favourable regulatory environment which guarantees stability and fair play. This environment has given rise to an insurance market which encourages foreign investors to tap into the sector s massive potential. 3 Ever since the Indian government liberalised the insurance sector in 2000 and opened the doors for private participation, the sector has gone from strength to strength. The resultant competition has provided the consumer with a never-beforeseen range of products and providers, and also enhanced service levels markedly. 3 Potentials & Challenges Of Insurance Sector Article published in the Business Line print edition dated January 7, 2014) 74

4 The health of the insurance sector reflects a country s economy. This sector not only generates long-term funds for infrastructure development, but also increases a country s risk-taking capacity. India s economic growth since the turn of the century is viewed as a significant development in the global economy. This view is helped in no small part by a booming insurance industry Industry Dynamics Consistent growth in the insurance sector depends on a few factors. Some of these are: Effective distribution channels The efficiency and cost of the various distribution strategies used by companies are significant to their success in the insurance business. This particularly holds true for the retail business. Focus on overall financial inclusion As time evolves, so must the approach of the insurance sector in India. The objective of the insurance sector should ideally be to offer a broader range of activities to a wider populace. Consumer needs and preferences The growth of India s insurance industry can be attributed to product innovation, dynamic distribution channels, and vibrant publicity and promotional campaigns run by insurance companies. Benefits attached to the products and the manner in which they are delivered (through various marketing tie-ups) have helped bring customers and insurance companies closer to each other and made the latter more relevant. Health insurance is an up-and-coming segment in this sector. Currently, it caters for 10 per cent of the overall US$ 30 billion healthcare expenditure in India. Consequently, there is plenty of scope for players in this area. 4. Article by Jagendra Kumar, Success of Indian Insurance Brokers: A Bubble waiting to Burst, The Journal of Insurance Institute of India, Mumbai, January-June, 2007, p

5 The life insurance segment contributes about 4 per cent to India s gross domestic product (GDP) in terms of total premiums underwritten annually. There are 23 private companies in the segment. The state-owned Life Insurance Corporation (LIC) dominates the field, with about 71 per cent of the market share, according to Insurance Regulatory and Development Authority (IRDA) Key Statistics During the financial year , Life Insurance Industry went through a transition phase that has changed the dynamics and approach of the insurance players. With the new ULIP guidelines, the industry focus has shifted towards customer centricity, persistency, innovation and efficiency. New regulations were largely in interest of the policy holders with more customer friendly products emphasizing on long term benefits. In financial year , the industry has seen a de growth of 9.21% in new business premium income. Insurers focusing on customers to remain invested for longer term resulted in improved persistency ratio for the industry. With low insurance penetration as compared to the large Indian population base, there is tremendous scope for the life insurers to capitalize on. New business premium had fallen from ` 125,826 crores of the previous year to ` 114,233 crores in the financial year , showing a de growth of 9.21%. Private sector had also shown a de growth of 16.92%. Private sector claims 28.64% of total new business premium market share in financial year India s life insurance segment collected new business premiums worth Rs 11,742.7 crore (US$ 1.84 billion) for April May Indian insurance 5 Garg, S.C., Insurance Education: Challenges and Opportunities, The Journal of Insurance Institute of India, Mumbai, July-December, 2006, p.9. 76

6 companies collected a combined Rs 107,010.7 crore (US$ billion) worth of new premiums for FY , according to data released by IRDA. Meanwhile, the general insurance industry grew by 19.6 per cent in April May period of FY Non-life insurers collected premiums worth Rs 13, crore (US$ 2.13 billion) in the first two months of the current year, as compared to Rs 11, crore (US$ 1.78 billion) during the corresponding period of the previous year. Table 4.2 DETAILS OF LIFE INSURANCE COMPANIES OPERATING IN INDIA Insurers Foreign Partners Year of Operation Life Insurance Corporation of India HDFC Standard Standard Life Assurance, UK Max New York New York Life, USA ICICI-Prudential Prudential Plc, UK Kotak Mahindra Old Mutual Old Mutual, South Africa Birla Sun Life Sun Life, Canada TATA-AIG American International Assurance Co., USA SBI Life BNP Paribas Assurance SA, France ING Vysya ING Insurance International B.V., Netherlands Bajaj Allianz Life Allianz, Germany Metlife India Metlife International Holdings Ltd., USA Reliance AVIVA Aviva International Holdings Ltd., UK Sahara Shriram Sanlam, South Africa Bharti AXA AXA Holdings, France Future Generali India Generali, Italy IDBI Federal Ageas, Europe Canara HSBC OBC HSBC, UK AegonReligare Aegon Netherlands DLF Pramerica Prudential of America, USA Star Union Dai-ichi Dai-ichi Mutual Life Insurance,Japan IndiaFirst Legal & General Middle East Limited, UK Source: 77

7 Table 4.3 NUMBER OF LIFE INSURANCE COMPANIES IN INDIA Particulars Public Sector Private Sector Total Source: Table 4.4 TABLE SHOWING STATE WISE INDIVIDUAL NEW BUSINESS UNDERWRITTEN (LIFE INSURANCE) State / Union Territory No. of policies Premium No. of policies Premium Andhra Pradesh Arunachal Pradesh Assam Bihar Chattisgarh Goa Gujarat Haryana Himachal Pradesh Jammu & Kashmir Jharkhand Karnataka Kerala Madhya Pradesh Maharashtra Manipur Meghalaya Mizoram Nagaland Orissa Punjab Rajasthan Sikkim Tamil Nadu Tripura Source: IRDA Annual Reports from to

8 Table 4.5 COMPANY WISE LIFE INSURANCE OFFICES (As on 31st March) Insurer Bajaj Allianz Birla Sun life HDFC Standard ICICI Prudential ING Vysya Max New York MetLife Reliance SBI Life TATA AIG Private Total LIC Industry Total Source: IRDA Annual Reports from 2002 to New Developments/ Product Launches Insurance companies will now have more freedom to invest in sectors such as IT and pharmaceuticals. IRDA has increased the sector specific exposure limit for investments to 20 per cent of the insurer s total investment, from the previous 15 per cent. The electronic know-your-customer (e-kyc) services used by the Unique Identification Authority of India (UIDAI) will be accepted as a valid verification process for insurance, according to IRDA. Through e-kyc, insurance companies can conduct electronic identity verification. The agencies can obtain an electronic identity document of the customer which is digitally signed by the UIDAI. This service enables a quicker and more efficient process for the customer as well as the insurance company. Private player Cognizant Technology Solutions has successfully acquired Value Source, which is a subsidiary of KBC Group, a Belgium-based multi- 79

9 channel bank insurance organisation. Under the initial five-year agreement, the Indian company will provide a number of services to KBC, including application development and maintenance, and software testing. United India Insurance Co Ltd (UIICL), the second largest general insurance company in India, intends to open 530 new offices domestically in As of now, UIICL has 1,340 offices in the country, as per their website. In FY , the company collected total premiums worth Rs 9,266 crore (US 1.45 billion) and has set a target of Rs 11,000 crore (US$ 1.73 billion) for FY Table 4.6 Indian Scenario on Life Insurance Source: Article in Business Today 4.7 Government Initiatives & IRDA Regulations Insurance Regulatory and Development Authority (IRDA) is an autonomous apex statutory body which regulates and develops the insurance industry in India. It was constituted by a Parliament of India act called Insurance Regulatory and Development Authority Act, 1999 and duly passed by the Government of India. The agency operates from its headquarters at Hyderabad, Andhra Pradesh where it shifted from Delhi in 2001.IRDA batted for a hike in the foreign direct investment 6. Potentials & Challenges Of Insurance Sector Article published in the Business Line print edition dated January 7,

10 (FDI) limit to 49 per cent in the insurance sector from the erstwhile 26 per cent. The FDI limit in insurance sector was raised to 49% in July History of IRDA The IRDA Act, 1999 was passed as per the major recommendation of the Malhotra Committee report (1994) which recommended establishment of an independent regulatory authority for insurance sector in India. Later, It was incorporated as a statutory body in April, The IRDA Act, 1999 also allows private players to enter the insurance sector in India besides a maximum foreign equity of 26 per cent in a private insurance company having operations in India. The FDI limit in insurance sector was raised to 49% in July It serves as 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. IRDA role is to protect rights of policy holders & they provides registration certification to life insurance companies & responsible for renewal, modification, cancellation & suspension of this registered certificate. 7 The Government of India has passed the Pension Fund Regulatory and Development Authority (PFRDA) bill that allows foreign investors to hold 26 per cent stake in the insurance sector. The primary objective of the bill is to provide pension cover to a greater percentage of the country s population. The PFRDA bill would also provide subscribers a wider range of investment choices. The bill will provide better regulation of the sector and provide more confidence to investors, according to Mr,Yogesh Agarwal, Chairman, PFRDA. Aviation insurance is likely to emerge as an important segment in the near 7. IRDA JOURNAL January 2013, pp 54 to 57 81

11 future with new players in the market operations and existing players seeking to increase fleet size, according to industry officials. At present, the current market size of aviation insurance hovers around Rs.500 crore (US$ million), a figure that is almost certain to grow as the industry develops further. In order to enhance financial inclusion in the country and develop bancassurance as a business, IRDA has facilitated banks to sell insurance policies. Application for the license required to act an insurance broker can only be obtained after prior approval from the Reserve Bank of India (RBI). Banks would be required to apply under the direct broker category. The license will be valid for three years Challenges and outlook for future The insurance business in India is projected to reach Rs. 4 trillion (US$ billion) in FY , according to Mr TS Vijayan, Chairman, IRDA. Total premiums collected by the general and the life insurance industry in FY amounted to Rs.3.75 trillon (US$ billion). The chairman believes that insurance penetration in India has the potential to rise to 5 6 per cent from the current 3.86 per cent. Life Insurance Council, the industry body of life insurers in the country, has projected a compounded annual growth rate (CAGR) of per cent over the next five years for the segment. India s insurable population is expected to grow to 750 million by 2020, with life expectancy projected to reach 74 years around the same period. The council believes that this favourable Indian demography would result in more people seeking out life insurance. Also, the council predicts life insurance penetration percentage of insurance premium to GDP to reach 5 per cent by 2020 from its current 3.2 per cent. 8 IRDA JOURNAL July 2013, pp

12 Confederation of Indian Industry (CII) projects the growth rate for India s insurance industry in FY to be around 5 per cent. It also anticipates 60 per cent of non-life insurance companies to record an average growth of more than 10 per cent. The raising of the foreign direct investment (FDI) limit from 26 per cent to 49 per cent in the sector is viewed as a key element to promote the insurance industry in India. Exchange Rate Used: INR 1 = US$ as on November 12, According to Santosh Kushwaha in an article on Business Today life insurance enforced by the insurance regulator from 2010 curbing the scope of the Unit Linked industry in India is in crisis. The broad market is shrinking. Life insurance penetration in India was always low, but, worryingly enough, it has been falling even lower for two consecutive years now. New regulations Insurance Plans (ULIPs) are partly responsible for the development. 9 9 Kushwaha, Santosh Life Insurance Potentials and Challenges Business Today, January

13 Figure 4.1 Total Life insurance premium collected and percentage growth or decline Source: Article in Business Today 84

14 Figure 4.2 Ratio of Premium to GDP and growth rate Source: Article in Business Today Figure 4.3 Growth in number of new life insurance policies Source: Article in Business Today 85

15 Figure 4.4 Trend in growth of ULIPs Source: Article in Business Today Figure 4.5 Life Insurance Density A comparison Source: Article in Business Today 86