Chapter 1 1.1 Insurance Industry. Insurance is the backbone of a country s risk management system. Risk is a very inherent part of our lives. The insurance providers offer a variety of products to businesses and individuals in order to provide protection from various risks and to ensure financial security. Insurance industry contributes to the financial sector of an economy and also provides and important social security net in developing countries. They are also an important component in the financial intermediation chain of a country and are a source of long term capital for infrastructure and long-term projects. The insurance companies offer life insurance, pension and retirement income, property insurance, legal liability insurance, etc., to cover these risks. On the basis of the risk they cover, insurance policies can be classified into two categories: (a) Life Insurance (b) General Insurance Life insurance products cover risk for the insurer against eventualities like death or disability. Non-life insurance products cover risks against natural calamities, burglary, etc. The availability of insurance can mitigate the impacts of risk by providing products which help organizations and individuals to minimize the consequences of risk and has a positive effect on industry growth as entrepreneurs are able to cover their risks.
1.2 Life Insurance Industry. Life insurance has come a long way from the earlier days when it was originally conceived as a risk-covering medium for short durations of time, covering short-term risk situations, such as sea voyages. As life insurance became more established, it was realized what a useful means it was for a number of circumstances that includes temporary needs, threats, savings, investment, retirement etc. LIFE INSURANCE is an arrangement through which a person can plan for the continuation of income when uncertainties and certainties (i.e.) illness or Accident and death or old age disrupt or destroy his ability to earn his livelihood. Insurance As A Social Security Tool. United Nations Declaration of Human Rights 1948 provides: - Everyone has a right to adequate standard of living for health and well being of himself and his family, including food, clothing, housing, medical care, necessary social services and the right to security in the event of unemployment, sickness, disability, widowhood, or other lack of livelihood in circumstances beyond his control. Under a socialistic system the responsibility of full security would be placed upon the state to find resources for providing social security. In the capitalistic left to the individuals. The society provides instruments which can be used in securing this aim. Insurance is one of aim. In capitalistic society too there is a tendency to provide some social security by the state under some schemes where members are required to contribute. In India, Article 41 of our Constitution requires the State (within limits of its economic capacity and development) to make effective provision for securing the right to work, to education and to provide public assistance in case of unemployment, old age, sickness and disablement. 2
Part of the obligations under Article 41 are met by the State through the mechanism of Life Insurance. Where breadwinner of family dies, family s income stops to that extent, affecting the economic condition. Life Insurance provides such alternate arrangement as we have discussed above. Otherwise another family would have been pushed into the lower section of society. The lower strata creates a cost on society. Poor people cost the nation by way of subsidies etc. Life insurance helps in restoration of the adverse economic condition so caused. Insurance is a agreement between two parties whereby one party agrees to take on the risk of another in trade for consideration known as premium and promises to pay a fixed amount of money to the other party on happening of an uncertain event (death) or after the termination of a certain period in case of life insurance or to assure the other party on happening of an uncertain event in case of general insurance. The party bearing the risk is known as the 'insurer' or 'assurer' and the party whose threat is covered is known as the 'insured' or 'assured'. 1.3 Life Insurance Industry in India. Life insurance in its contemporary form came to India from England in 1818 with the creation of Oriental Life Insurance Company (OLIC) in Kolkata mainly by Europeans to help widows of their kin. Later, due to influence by one of its directors (Shri Babu Muttyal Seal), Indians were also covered by the company. However, it was after 1840 that life insurance actually took off in a gigantic way. By1868, 285 companies were doing trade of insurance in India. Earlier these companies were governed by Indian company Act 1866. By 1870, 174 companies ceased to subsist, when British Parliament enacted Insurance Act 1870. These companies though, insured European lives. Those Indians who were offered insurance cover were treated as inferior lives and were accepted with an extra premium of 15% to 3
20%. By the end of the 18 th century, Lloyd's had brewed sufficient business to turn out to be one of the first contemporary insurance company. It was during the swadeshi movement in the early 20 th century that insurance witnessed a huge bang in India with several more companies being set up. Not surprisingly, the Movement also touched the insurance industry leading to the formation of dozens of life insurance companies along with provident fund companies (provident fund companies are pension funds). In 1912, two sets of legislation were passed: the Indian Life Assurance Companies Act and the Provident Insurance Societies Act. There are several striking features of these legislations. They were the first legislations in India that particularly targeted the insurance sector. They did not include general insurance business. The government did not feel the necessity to regulate general insurance. They restricted activities of the Indian insurers. As these companies grew, the government began to exercise control on them. The Insurance Act was passed in 1912, followed by a detailed and modified Insurance Act of 1938 that looked into investments, expenses and management of these companies' finances. In 1914 there were only 44 companies; by 1940 this number grew to 195. Business in force during this period grew from Rs.22.44 crores to Rs.304.03 crores (1628381 polices). Life fund steadily grew from Rs.6.36 crores to Rs.62.41 crores. In 1938, the insurance business was heavily regulated by enactment of insurance Act 1938 (based on draft bill presented by Sir N.N.Sarcar in Legislative Assembly in January 1937). From here onwards the growth of life insurance was quite steady except for a setback in 1947-48 due to aftermath of partition of India. In 1948, there were 209 insurances, with 712.76 crores business in force under 3,016, 000 policies. The life fund by then grew to 150.39 crores. By the mid-1950s, there were around 170 insurance companies and 80 provident fund societies in the country's life insurance scene. 4
The Government of India nationalized the life insurance forming Life Insurance Corporation of India (LIC), which started functioning from 01.09.1956. After completing the arduous task of integration of about 245 life insurance companies, LIC of India gave an exemplary performance in achieving various objectives of nationalization. For years thereafter, insurance remained a domination of the public sector. It was only after seven years of forethought and ponder that R. N. Malhotra Committee report of 1994 became the first stern document calling for the re-opening up of the insurance segment to private players. The sector was finally opened up to private players in 2001.The Insurance Regulatory and Development Authority, an independent insurance regulator set up in 2000, has widespread powers to supervise the insurance industry and standardize in a manner that will uphold the interests of the insured. Year Important Regulatory Event 1818 Establishment of the Oriental Life Insurance Company in Kolkata. 1912 The Indian Life Insurance Companies Act passed as the first ruling to standardize the life insurance business. 1928 The Indian Insurance Companies Act enacted to facilitate the government to accumulate statistical information about both life and non-life insurance businesses. 1938 Earlier legislation combined and amended by the Insurance Act with the purpose of guarding the interests of the insuring public. 1956 245 Indian and foreign insurers and prophetic societies taken over by the Central government and nationalized. LIC formed by an Act of Parliament, viz. LIC Act,1956, with a principal contribution of Rs. 5 crore from the Government of India. 1972 Nationalization of general insurance business in India. 1993 Positioning up of Malhotra Committee. 1994 Suggestions of Malhotra Committee. 5
1995 Positioning up of Mukherjee Committee. 1996 1996 Setting up of (interim) Insurance Regulatory Authority and Recommendations of the IRA. 1997 The Government gives more sovereignty to LIC, GIC and its subsidiaries with regard to the streamlining of boards and flexibility in investment standards aimed at channeling funds to the infrastructure sector. 1998 The cabinet decides to permit 40% foreign equity in private insurance companies-26% to foreign companies and 14% to NRI s, OCB s and FII s. 1999 The Standing Committee lead by Murali Deora decides that foreign equity in private insurance should be limited to 26%. The IRA bill is renamed the Insurance Regulatory and Development Authority (IRDA) Bill 1999 Cabinet clears IRDA Bill. 2000 President gives consent to the IRDA Bill and domination of Public Sector Insurance company marks an end and Private companies make a start. Table 1.3.1: Important Milestones in Life Insurance Regulations in India 1.4 Competition in Life Insurance sector in India. Life Insurance is the fastest growing sector in India since 2000 as Government allowed Private players and FDI up to 26%. There are currently in total 24 Public and Private firms in India's insurance market with state-owned Life Insurance Corp of India (LIC) still holding a stranglehold in India s life insurance industry. 6
Worldwide insurers are now permitted to put up and register a domestic company in array to write business in India. However, regulations specify that they have a capital foundation of at least US $ 20 million, and their investment in such company is capped at 26 percent. Thus, to take part in the market, they must form a corporation with an Indian associate that is capable to invest the remaining funds. On March 2014 new Insurance Bill has been passed and the FDI limit has been increased to 49%.The expected Investment is Rs. 60,000cr. Life insurance policy in India is growing speedily ever since the sector opened up for the private and overseas players. The industry is in the age of aggressive market forces. Unlike several industries like telecommunication and oil industry, insurance is not a high capital cost industry. This industry is assembled up on a good will and on admittance of distribution network. 7
Figure 1.4.1 : The 24 Life Insurance Companies licensed by IRDA. 8
Data released by insurance sector regulator IRDA shows that the first year premium of the life insurers for the period of December, 2010 is again predominantly in favor of LIC. Herein mentioned are some statistics given by IRDA regarding the individual single premium of several life insurers in December 2010. 1. Bajaj Allianz - 77.26 crore 2. ING vyasa - 2.58 crore 3. Reliance Life - 80.26 crore 4. SBI life - 248.54 crore 5. Tata AIG - 14.02 crore 6. HDFC standard - 136.72 crore 7. ICICI prudential - 251.97 crore 8. Birla Sunlife - 9.73 crore 9. Aviva - 21.57 crore 10. Max New York - 25.15 crore 11. Met Life - 33.86 crore 12. Shriram Life - 44.90 crore 13. IDBI federal - 21.11 crore 14. Star Union Dai-ichi - 44.98 crore 15. LIC - 1774.43 crore IRDA Source: FY 2010-11 LIC is still the market leader, with 72.7 per cent share in FY13. Figure 1.4.2: Comparison of Market Shares (Source: IRDA Journal) 9
1.5 Dominance of LIC in prevalent Market. 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). LIC has huge investment and financial strength. Owing its bigger size it has the best advantage of pricing as well as getting better investment returns which can subsidize its original insurance product. Therefore, Like SBI continues to be market leader despite of so many private banks coming, LIC is still the big player. It is now over ten years since the insurance industry was opened up to competition and it is to LIC s credit or perhaps to the inability of private insurers to make much headway in a competitive environment where LIC holds supreme or even to the inherent nature of life insurance business where trust and credibility count for much more than in other businesses At no point in the history of post-privatization life insurance industry in India has the market share of LIC dipped below 60.89% (in 08-09) in first year premium and 70.52% (also in 08-09) in number of policies. In the year (2011-12) which witnessed a decline in performance, for LIC and the private players, the market share of LIC increased to 71.35% (from 68.70% in the previous year) in first year premium and an even more impressive 80.90% ( from 76.91%) in number of new policies issued. Applying a positive strategy, the phenomenal growth of single premium business, especially of LIC, in the last few years has completely changed the traditional perception of life insurance which was intended to be an accumulation of small amounts of savings paid as premium, over extended periods of time in quarterly, half-yearly or annual installments. The popularity of long term traditional products ensured a close relationship between policyholder and agent who received a handsome commission every time the premium got paid. The insurer (mostly LIC), in turn, saw 10
its renewal premium growing and the community of life insurance agents also prospered. LIC has further strengthened its already established credibility through a much better performance in the area of customer service which in life insurance business will ultimately mean the speed and alacrity with which the company settles claims of its policyholders, especially death claims. As per IRDA ANNUAL REPORT 2010-11(Page 18) LIC paid 97.03% of its death claims as against the private insurers 86.04% as on 31st.March 11.; similarly the private companies repudiated 8.90% of the death claims received by them while for LIC the percentage of repudiated claims was a very low 1%. It is therefore not surprising that with every passing year LIC is able not only to retain its market share but to improve upon it. One need not have knowledge of rocket science to state that the private insurance companies will have to improve their claims performance very substantially to be able to take on LIC and become credible players in the Indian market. The total market size of India's insurance sector is projected to touch US$ 350-400 billion by 2020 from US$ 66.4 billion in FY13. Article is - Shri N.C. SHARMA, ex M.D.LIC 0f INDIA Figure 1.5.1: Market Share of LIC 11
Dominance of LIC in prevalent Market. LIC is said to have a prevailing position in insurance market and the factors leading to deformation in level playing field are as follows :- 1. Sovereign Guarantee 2. Distribution system 3. Other factors LIC has sovereign guarantee from central government. By sovereign guarantee, government gives the policy holders of LIC a promise that it will accomplish all the promises made by the company. In 1956, when life insurance industry was nationalized, Parliament directed LIC to take the significance of Life insurance to every part of the country. It also directed the government to pledge the sums assured under all policies issued as well as taken over by the corporation (section 37 of LIC act). LIC enjoys this dominance because it is noticeable that investors want a assurance of their money irrespective of cycles of market. They recognize that it would be a secure play to invest in LIC as the government guarantee to bail out in case of any misfortune. This denies the life insurance market from a rank playing field to the competitors. This absolutely helps them grow their market size because of the trust people lay in them being a state owned venture. Through the LIC Act of 1956, government provides sovereign guarantee to LIC which reassures approximately 16 crore policy holders and its pulling out would entail an amendment to the LIC Act,1956. 12
The distribution system is mainly important in Insurance Industry. Therefore it is building its market on benevolence and access on distribution network. The industry covers approx. 3% of the population of our country. The market has a huge scope to nurture. This can be enhanced by more inventive channels like a super market, a bank, a post office, an ATM, departmental store etc. these could be used to augment channels of insurance. But such growth in channels shall boost with time. Till then agents seem to be the most significant distribution channel in this industry. Agents bond with people and persuade them to buy any insurance policy. For the same such agents charge commission on the policies they get for the company. Such a policy leads to enhancement of distribution network. This plays as an benefit for LIC. In life insurance, the LIC has two important elements in its support which are as follows:- The LIC has vast distribution network in the rural and semi rural urban areas. This would be hard to duplicate. One potential way to duplicate it could be increasing other distribution network like banc assurance. Also, since LIC started with 100% of market share, it will drop market share simply because of growth of market itself and less because of loss of existing customers. LIC has attempted to broaden the distribution channels to assemble a real marketing surroundings by involving cooperatives and panchayats in its market areas. LIC has more than 11 lakh agents who are supposedly to grow more in upcoming days which in comparison to private players is mammoth. 13
Another important truth cannot be denied in terms of LIC is that it has been reported numerous times through several journals that each time the stock market falls stridently; government asks LIC to step in as a buyer to limit the fall in the market. LIC has to follow the guidelines of IRDA and there is a appropriate system to take investment decisions. There has been occurrence where it seems that LIC gets offers from big companies as well to pump in money in market when they are in requirement of cash. This gives LIC a dominant position as it acts as a saviour during catastrophe due to its surplus liquid cash reserve. People invest more with a confidence that their investment is guaranteed to come back if not by LIC then by government. 14