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INUSRANCE INDUSTRY IN INDIA

Bachelor of Commerce

Financial Markets

Semester V

In Partial Fulfillment of the requirements

For the Award of Degree of Bachelor of

Commerce Financial Markets

Submitted by

AAYASHA JAIN

Roll No.24

H.R. COLLEGE OF COMMERCE & ECONOMICS

123, D.W. Road, Churchgate, Mumbai 400 020.

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College Name

(With Address)

CERTIFICATE

This is to certify that Shri / Miss Aayasha Jain of B.Com.-Financial Markets

Semester V (2013 - 2014 ) has successfully completed the project on INSURANCE

INDUSTRY IN INDIA under the guidance of Ms. Poonam Jain.

Course Co-ordinator Principal

Project Guide / Internal Examiner

External Examiner

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DECLARATION

I Aayasha Jain the student of B.Com.- Financial Markets Semester V (2013 - 2014

) hereby declare that I have completed the Project on INSURANCE INDUSTRY IN

INDIA

The information submitted is true and original to the best of my knowledge.

Signature of the Student

Name of the Student

Roll No.

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ACKNOWLEDGEMENT

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INDEX

Sr no. Topic Page no.

1. Executive Summary

2. Objectives of Study

3. Introduction

4. History

6. Present Scenario

7. India in the International Context

8. Indian Life Insurance Industry

9. Indian General Insurance Industry10. Microinsurance : Unlocking Indias huge insurance

potentialIRDA and its Role

Marketing Strategies of Various Insurance Companies

Changing Market Dynamics: Evolution of mindset ofthe Indian populationUnderlying growth drivers & Emerging Trends in India

Issues and Challenges

The Way Ahead

Research Methodology

Limitations of Study

Suggestions

Conclusion

Bibliography

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LIST OF TABLES & CHARTS

INSURANCE DENSITY IN SELECT COUNTRIES 2011

INSURANCE PENETRATION IN SELECT COUNTRIES-2011

PENETRATION AND DENSITY IN INDIA Market Share of all Life Insurance Companies in India

Growth in the Indian general insurance industry

Non-life Insurer Market Share

Comparison of GWP by non-life insurers

GWP Growth Percentage

Maturity model of distribution

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EXECUTIVE SUMMARY

Indian economy and industry has undergone significant transformation since 1991-

moving away from state controlled to a competitive market economy. The most

remarkable of this transformation has been noted in the financial sector, particularly,

in the Indian Insurance Industry which has opened up to all competitors- integrating

financial services to the global economy. IRDA was established in 1999 to protect

the interest of policyholders for promoting and ensuring orderly growth of the

insurance industry and for matters connected therewith and also to amend the

Insurance Act 1938, LIC Act 1956 and G.I. Business Act 1972. Under IRDA Act,

1999, Indian Insurance company means, any insurer being a company which is

formed and registered under the companies Act, 1956, in which the aggregate

holding of equity shares by a foreign company do not exceed 26% paid up equity

capital of such Indian Insurance company and whose sole purpose is to carry on life

or general or re-insurance business. Enhancement of this 26% to 49% is at higher

level discussion stage. FDI cannot be viewed from the financial perspective alone. It

brings experience sharing, technology up gradation, specialized skills, better

operational efficiency, improved perceptions by reinsurance companies, and faster

evolution of industry. The Indian insurance industry seems to be in a state of flux.While there has been a perceptible change in the market dynamics since

liberalization and economic reforms, a considerable amount needs to be done for

future growth and development of the market in an orderly and sustained manner.

Notwithstanding the strong improvement in penetration and density in the last 10

years, India largely remains an under-penetrated market. Since Indian Insurance

market is getting integrated into Global Insurance Industry, we must analyze and

understand the prospects of Insurance business in India in the light of followingtrends and also to study the challenges faced by the insurance industry and how can

we overcome them.

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OBJECTIVE OF PROJECT

To understand the prospects of Insurance business in India.

To study the Indian Life and General Insurance Industry.

To analyse the present scenario of the Insurance Industry.

To know the significance and role of IRDA in Indian Insurance Industry.

To study the growth drivers and the emerging trends in insurance sector.

To know what are the problems faced by in insurance sector in India.

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INTRODUCTION

Insurance is the backbone of a countrys risk management system. Risk is an

inherent part of our lives. The insurance providers offer a variety of products to

businesses and individuals in order to provide protection from risk and to ensure

financial security. 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. Through their participation in financial markets,

they also provide support in stabilizing the markets by evening out any fluctuations.

The insurance business is broadly divided into life, health, and non-life insurance.

Individuals, families, and businesses face risks of premature death, depletion in

income because of retirement, health risks, loss of property, risk of legal liability, etc.

The insurance companies offer life insurance, pension and retirement income,

property insurance, legal liability insurance, etc., to cover these risks. In addition,

they offer several specialized products to meet the specific needs and requirements

of businesses and individuals. Businesses also depend on these companies for

various property and liability covers, employee compensation, and marine insurance.

Insurance does influence the growth and development of an economy in several

ways. 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. In the absence of a full range of insurance products and/or deficient

products in terms of coverage and scope, the risk-taking abilities would be hampered

and chances are that the economic activities would turn out to be high-risk activities.

The implications of leaving various risks uncovered can be significant and the impact

of losses can be devastating creating a huge burden on the governments. Therefore,

a strong and competitive insurance industry is considered imperative for economic

development and growth. However, the contribution of the insurance companies is

also dependent on the fact that they are able to pool risks effectively. Only then

would it be possible to cover these risks at an affordable and reasonable cost as the

insurance provider will be able to spread the risks throughout the economy.

The insurance companies have a pivotal role in offering insurance products which

meet the requirements and expectations of the customers and, at the same time, are

affordable. The future growth of this sector will depend on how effectively the

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insurers are able to come up with product designs suitable to our context and how

effectively they are able to change the perceptions of the Indian consumers and

make them aware of the insurable risks. The future growth also depends on how

service oriented insurers are going to be. On the demand side, the rise in incomes

will trigger the growth of physical and financial assets. With the growth of

infrastructure projects, the demand for insurance to cover the project and the risks

during operations will increase. The other growth trigger is the increase in

international trade. However, servicing of the large domestic market in India is a real

challenge. Some of these challenges pertain to the demand conditions, competition

in the sector, product innovations, delivery and distribution systems, use of

technology, and regulation.

Classification of Insurance Industry

Motor VehicleFire Insurance

LIFE INSURANCE

INSURANCE

GENERAL INSURANCE

Health InsuranceMarine Insurance

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HISTORY

The history of the Indian insurance sector dates back to 1818, when the Oriental Life

Insurance Company was formed in Kolkata. The Triton Insurance Company Ltd

formed in 1850 and was the first of its kind in the general insurance sector in India.

Established in 1907, Indian Mercantile Insurance Limited was the first company to

handle all forms of Indian insurance. A new era began in the India insurance sector,

with the passing of the Life Insurance Act of 1912. The Indian Insurance Companies

Act was passed in 1928. This act empowered the government of India to gather

necessary information about the life insurance and non-life insurance organizations

operating in the Indian financial markets.

Sector Reform in Indian insurance was initiated by the formation of the Malhotra

Committee in1993. The aim of the Malhotra Committee was to assess the

functionality of the Indian insurance sector. This committee was also in charge of

recommending the future path of insurance in India. The Malhotra Committee

attempted to improve various aspects of the insurance sector, making them more

appropriate and effective for the Indian market. The recommendations of the

committee put stress on offering operational autonomy to the insurance service

providers and also suggested forming an independent regulatory body. The

Insurance Regulatory and Development Authority Act of 1999 brought about several

crucial policy changes in the insurance sector of India. It led to the formation of the

Insurance Regulatory and Development Authority (IRDA) in 2000.The goals of the

IRDA were to safeguard the interests of insurance policyholders, as well as to initiate

different policy measures to help sustain growth in the Indian insurance sector. The

Authority has notified 27 Regulations on various issues which include Registration of

Insurers, Regulation on insurance agents, Solvency Margin, Re-insurance,

Obligation of Insurers to Rural and Social sector, Investment and Accounting

Procedure, Protection of policy holders' interest etc.

In India license raj was reduced and reduced tariffs and interest rates ended many

public monopolies, allowing automatic approval of foreign direct investment in

insurance sector. India has progressed towards a free-market economy, with a

substantial reduction in state control of the economy and increased financial

liberalisation. Today there are 24 general insurance companies including the ECGC

and Agriculture Insurance Corporation of India and 23 life insurance companies

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operating in the country. The insurance sector is a colossal one and is growing at a

speedy rate of 15-20%. Together with banking services, insurance services add

about 7% to the countrys GDP. A well-developed and evolved insurance sector is a

boon for economic development as it provides long- term funds for infrastructure

development at the same time strengthening the risk taking ability of the country.

Important events in the History of Indian Insurance Industry:

1912 First piece of insurance regulation promulgatedIndian Life Insurance

Company Act,1912

1928 Promulgation of the Indian Insurance Companies Act

1938 Insurance Act 1938 introduced, the first comprehensive legislation to

regulate insurance business in India.

1956 Nationalization of life insurance business in India.

1972 Nationalization of general insurance business in India.

1993 Setting-up of the Malhotra Committee

1994 Recommendations of Malhotra Committee released

1995 Setting-up of Mukherjee committee

1996 Setting-up of an (interim) Insurance

Regulatory Authority (IRA)

1997 Mukherjee committee Report submitted but not made public

1997 The government gives greater autonomy to LIC, GIC and its subsidiaries

with regard to the restructuring of boards and flexibility in investment

norms aimed at channeling funds to the infrastructure sector

1998 The cabinet decides to allow 40% foreign equity in private sector

companies - 26% to foreign companies and 14% to non-resident Indians,

overseas corporate Bodies and foreign institutional investors

1999 The standing committee headed by Murali Deora decides that foreign

equity in private insurance should be limited to 26%. The IRA Act was

renamed the Insurance Regulatory and Development Authority (IRDA)

Act

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PRESENT SCENARIO

Indian insurance industry is a flourishing industry with several national and

international players competing and growing at rapid rates. All this can be attributed

to the reforms leading to the relaxation of the policy regulations that ignited the

growth of the Indian insurance industry. The level of awareness and consciousness

has risen among people for the need to insure them and elevation in the levels of

literacy, population and urbanisation has added fuel to the fire leading to ever

growing demand of the insurance products. The period from 2010-2015 has been

regarded as the GOLDEN AGE for the Indian insurance industry probably because

of the future prosperous growth predictions of the industry. deployed in long term

projects like infrastructure as the tenure matching becomes easy. The Indian

Insurance Sector is a colossal one and is growing at a speedy rate of 15-20%.

Together with banking services, insurance services add about 7% to the countrys

GDP. Overall insurance penetration (premium as percentage of GDP) in India has

increased from 2.3% in 2001 to 5.2% in 2011. The LIFE INSURANCE

CORPORATION OF INDIA dominated the industry till 1990s after which few private

players started entering the market. The entry of the private players in the industry

around 2000-2001 initiated the growth of the industry. A study conducted by theFederation of Indian chamber of commerce and industry and the US based Boston

Consulting Group reveals that the awareness and total penetration of insurance

services [premiums as % of GDP] in India has increased from 2.3% in 2001 to 5.2%

in 2011. The report further provided information that the number of life insurance

policies in the year 2011 was 12 times more than the last decade and number of

people taking the health insurance has risen 25 times. India is a US $41billion

industry. Currently, in India only two million people {.2% of the total population of 1billion} are covered under Mediclaim whereas in developed nations like USA about

75% of the total population are covered under some insurance scheme. As far as the

conventional plan of life insurance policies are concerned, there is a growth of 11%

in policies and 22% in premium according to the Minister of State for Finance. The

Indian health insurance market accounted for 3.2 per cent of the overall insurance

industry in the fiscal year 2011-2012. d by public-sector companies, the top six

private health insurance companies increased their cumulative market share from

17.2 per cent to 29.1 per cent during 2007 to 2011.

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At the end-September 2012, there are 52 insurance companies operating in India; of

which 24 are in the life insurance business and 27 are in general insurance

business. In addition, GIC is the sole national reinsurer. The Government has

decided to hike foreign direct investment (FDI) limit in the insurance sector to 49 per

cent from the existing 26 per cent. The move is expected to ripe benefits soon, in

terms of more foreign investments into the country.

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INDIA IN THE INTERNATIONAL CONTEXT

In the life insurance business, India ranked 10th among the 156 countries, for

which the data is published by Swiss Re. During 2011-12, the life insurance

premium in India declined by 8.5 per cent (inflation adjusted). During the same

period, the global life insurance premium declined by 2.7 per cent. The share of

Indian life insurance sector in global life insurance market stood at 2.30 per cent

during 2011, as against 2.54 per cent in 2010.

The non-life insurance sector witnessed a significant growth of 13.5 per cent

during 2011-12. Its performance is far better when compared to global non-life

premium, which expanded by a meager 1.8 per cent during the same period. The

share of Indian non-life insurance premium in global non-life insurance premium

increased slightly from 0.57 per cent in 2010-11 to 0.62 per cent in the year 2011-

12. India stood at 19th rank in global non-life premium income.

FIGURE .1 -INSURANCE DENSITY IN SELECT COUNTRIES 2011

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FIGURE .2INSURANCE PENETRATION IN SELECT COUNTRIES-2011

Penetration and Density in India

1. The potential and performance of the insurance sector is universally assessed

with reference to two parameters, viz., insurance penetration and insurance density.

These two are often used to determine the level of development of the insurance

sector in a country. Insurance penetration is defined as the ratio of premium

underwritten in a given year to the Gross Domestic Product (GDP). The insurance

penetration in India, which surged consistently till 2009-10, has slipped since 2010-

11 on account of slowdown in life insurance premium as compared to the growth rate

of the Indian economy. Life insurance penetration had consistently gone up from

2.15 per cent in 2001 to 4.60 in 2009, before slipping to 4.40 per cent in 2010 and

further slipping to 3.40 per cent in 2011.

2. However, penetration of the non-life insurance sector in the country has remained

near constant in the range of 0.55-0.75 per cent over the last 10 years (0.71 per cent

in 2010 and 0.70 in 2011).FIGURE .3 PENETRATION AND DENSITY IN INDIA

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3. Insurance density is defined as the ratio of premium underwritten in a given year

to the total population (measured in USD for convenience of comparison)( Per capita

premium). India has reported consistent increase in insurance density every year

since the sector was opened up for private competition in the year 2000. However,

for the first time in 2011, there was a fall in insurance density. The life insurancedensity in India has gone up from USD 9.1 in 2001 to USD

49.0 in 2011 though it reached the peak of USD 55.7 in 2010. The Insurance density

of non-life sector reached the peak of USD 10.0 in 2011 from its level of USD 2.4 in

2001.

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INDIAN LIFE INSURANCE INDUSTRY

Life Insurance in India was nationalised by incorporating Life Insurance Corporation

(LIC) in 1956. All private life insurance companies at that time were taken over by

LIC. In 1993 the Government of Republic of India appointed RN Malhotra Committee

to lay down a road map for privatisation of the life insurance sector. While the

committee submitted its report in 1994, it took another six years before the enabling

legislation was passed in the year 2000, legislation amending the Insurance Act of

1938 and legislating the Insurance Regulatory and Development Authority Act

of 2000. The same year the newly appointed regulator Insurance Regulatory and

Development Authority IRDA- started issuing licenses to private life insurers.

LIST OF LIFE INSURANCE COMPANY IN INDIA

1. Aegon Religare Life Insurance Co. Ltd.

2. Aviva Life Insurance Co. India Ltd.

3. Bajaj Allianz Life Insurance Co. Ltd.

4. Bharti AXA Life Insurance Co. Ltd.

5. Birla Sun Life Insurance Co. Ltd.

6. Canara HSBC Oriental Bank of Commerce Life Insurance Co.Ltd.

7. DLF Pramerica Life Insurance Co. Ltd.

8. Edelweiss Tokio Life Insurance Co. Ltd

9. Future Generali India Life Insurance Co. Ltd.

10. HDFC Standard Life Insurance Co. Ltd.

11. ICICI Prudential Life Insurance Co. Ltd.

12. IDBI Federal Life Insurance Co. Ltd.

13. IndiaFirst Life Insurance Co. Ltd

14. ING Vysya Life Insurance Co. Ltd.

15. Kotak Mahindra Old Mutual Life Insurance Ltd.

16. Life Insurance Corporation of India

17. Max Life Insurance Co. Ltd.

18. PNB MetLife India Insurance Co. Ltd.

19. Reliance Life Insurance Co. Ltd.

20. Sahara India Life Insurance Co. Ltd.

http://en.wikipedia.org/wiki/956http://en.wikipedia.org/wiki/956http://en.wikipedia.org/wiki/Life_insurancehttp://www.aegonreligare.com/http://www.aegonreligare.com/http://www.avivaindia.com/http://www.avivaindia.com/http://www.allianzbajaj.co.in/http://www.allianzbajaj.co.in/http://www.bharti-axalife.com/http://www.bharti-axalife.com/http://www.birlasunlife.com/http://www.birlasunlife.com/http://canarahsbclife.com/http://canarahsbclife.com/http://www.dlfpramericalife.com/http://www.dlfpramericalife.com/http://www.edelweisstokio.in/http://www.edelweisstokio.in/http://www.futuregenerali.in/http://www.futuregenerali.in/http://www.hdfcinsurance.com/http://www.hdfcinsurance.com/http://www.iciciprulife.com/http://www.iciciprulife.com/http://www.idbifederal.com/http://www.idbifederal.com/http://www.indiafirstlife.com/http://www.indiafirstlife.com/http://www.inglife.co.in/http://www.inglife.co.in/http://www.kotaklifeinsurance.com/http://www.kotaklifeinsurance.com/http://www.licindia.com/http://www.licindia.com/http://www.maxlifeinsurance.com/http://www.maxlifeinsurance.com/http://www.metlife.co.in/http://www.metlife.co.in/http://www.reliancelife.com/http://www.reliancelife.com/http://www.saharalife.com/http://www.saharalife.com/http://www.saharalife.com/http://www.reliancelife.com/http://www.metlife.co.in/http://www.maxlifeinsurance.com/http://www.licindia.com/http://www.kotaklifeinsurance.com/http://www.inglife.co.in/http://www.indiafirstlife.com/http://www.idbifederal.com/http://www.iciciprulife.com/http://www.hdfcinsurance.com/http://www.futuregenerali.in/http://www.edelweisstokio.in/http://www.dlfpramericalife.com/http://canarahsbclife.com/http://www.birlasunlife.com/http://www.bharti-axalife.com/http://www.allianzbajaj.co.in/http://www.avivaindia.com/http://www.aegonreligare.com/http://en.wikipedia.org/wiki/Life_insurancehttp://en.wikipedia.org/wiki/956

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21. SBI Life Insurance Co. Ltd.

22. Shriram Life Insurance Co. Ltd.

23 Star Union Dai-Ichi Life Insurance Co. Ltd.

24. Tata AIA Life Insurance Co. Ltd

MARKET SHARE OF DIFFERENT INSURANCE COMPANIES IN INDIA FOR

THE FINANCIAL YEAR 2012

Figure .4 Market Share of All Life Insurance Companies

Premium

For the first time in 12 years, the life insurance industry witnessed a decline in the

first year premium collected in FY12, which declined from INR1,258 billion in FY11

to INR1,142 billion, a drop of approximately 10%. There is a perceptible shift in the

life insurance market as the sales of Unit Linked Insurance Plans (ULIP) products

witnessed a drop in sales and customer move toward traditional products.Indian life

insurance sector collected new business premiums worth Rs 11,742.7 crore (US$

1.92 billion) for April-May 2013, according to data from IRDA. Life insurers collected

Rs 1,07,010.7 crore (US$ 17.5 billion) worth of new premiums for the financial year

ended March 31, 2013.

http://www.sbilife.com/http://www.sbilife.com/http://www.shriramlife.com/http://www.shriramlife.com/http://www.sudlife.in/http://www.sudlife.in/http://www.sudlife.in/http://www.shriramlife.com/http://www.sbilife.com/

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Key Trends of 2012

Private bank led insurers have fared much better than insurers dependent on

agency distribution in volumes (2) Share of single premium policies, which had

inched up after the new ULIP guidelines, has reversed now as new ULIP schemes

have stabilised. (3) Overall ticket sizes have remained flat for private insurers in

FY12 but bank led insurers have done better with growth in average ticket sizes

aiding overall volumes.

Performance of the Key Market Players:

The insurance companies have seen a higher profit margin for financial year 2012-

13, as compared to the previous fiscal. Life insurance industry, in particular, whichhas seen a slowdown in new business premium collection, has also fared better in

terms ofprofitability.The largest player in the private life insurance industryICICI

Prudential Life Insurance, the life insurance arm ofICICI Bankposted a 8.09% rise in

profit after tax for the full year ended March 2013. The private life insurer posted net

profit of Rs 1,496 crore compared to Rs 1,384 crore for full year ended March 2012.

In terms of premiums, ICICI Lifes annualised premium equivalent (APE) increased

by 13% to Rs 3,532 crore in FY2013 from Rs 3,118 crore in FY2012. The assetsunder management at March 31, 2013 were Rs 74,164 crore (US$ 13.7 billion). SBI

Life Insurance posted profit of Rs 622 crore for financial year 2012-13, an increase of

12% over the previous fiscal. Atanu Sen, MD & CEO, SBI Life Insurance had said

that despite the continued tough environment, they were able to change the

business mix and sustain a profitable growth primarily due to their brand strength,

multi distribution model and high productivity of our retail channels. Bancassurance

has been a major driver of growth for the insurance companies. Insurers, backed by

bank partners have seen not just higher premiums, but also an increase in profit

margins. IDBI Federal Life Insurance, which achieved break-even in its fifth year

operation in FY2012-13 has about 74% of its premium coming from its bank

channel.Another leading life insurer HDFC Life has seen a 66.5% growth in net profit

and posted net profit of Rs 451 crore in financial year 2012-13. The company

recorded 16% positive growth in new business premium income (Individual

business) and 11% growth in total premium income. Further, Max Life Insurance

reported a net profit of Rs 423.4 crore for the financial year 2012-13.Rajesh Sud,

CEO & Managing Director, Max Life Insurance had said, "Our continued focus on

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fundamentals and efforts to differentiate in the market place based on our advice

based sales, diversified distribution architecture and comprehensive product portfolio

helped us achieve a profitable growth in a tough year for the industry." (Business

Standard)

Products offered by Indian Insurance Industry

Term Insurance Policies- The basic premise of aterm insurancepolicy is to

secure the immediate needs of nominees or beneficiaries in the event of sudden

or unfortunate demise of thepolicyholder. The policy holder does not get any

monetary benefit at the end of the policy term except for the tax benefits he or

she can choose to avail of throughout the tenure of the policy. In the event of

death of the policy holder, the sum assured is paid to his or her beneficiaries.

Term insurance policies are also relatively cheap to acquire compared to other

insurance products.

Money-back Policies- Money back policies are basically an extension of

endowment plans wherein the policy holder receives a fixed amount at specificintervals throughout the duration of the policy. In the event of the unfortunate

death of the policy holder, the full sum assured is paid to the beneficiaries. The

terms again might slightly vary from one insurance company to another.

Unit-linked Insurance Policies (ULIP) - Unit linked insurance policies again belong

to the insurance-cum-investment category where one gets to enjoy the benefits of

both insurance and investment. While a part of the monthly premium pay-out

goes towards the insurance cover, the remaining money is invested in various

types of funds that invest in debt and equity instruments. ULIP plans are more or

less similar in comparison to mutual funds except for the difference that ULIPs

offer the additional benefit of insurance.

Pension Policies-Pension policies let individuals determine a fixed stream of

income post retirement. This basically is a retirement planning investment

scheme where the sum assured or the monthly pay-out after retirement entirely

depends on the capital invested, the investment timeframe, and the age at which

one wishes to retire. There are again several types of pension plans that cater to

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different investment needs. Now it is recognized as insurance product and being

regulated by IRDA.

The decade gone by

Since the opening of the sector in 2001, Indian life insurance industry has gone

through two cycles -- the first one being characterised by a period of high growth

(CAGR of approx. 31 percent in new business premium between 2001-10) and a flat

period (CAGR of around 2 percent in new business premium between 2010-12).

During this period, there has been increase in penetration (from 2.3 percent in FY01

to 3.4 percent in FY12), increased coverage of lives, substantive growth through

multiple channels (agency, banc-assurance, broking, direct, corporate agency

amongst others) and increased competitiveness of the market (from four privateplayers in FY01 to 23 private players in FY12).The sluggish period being

experienced today by the Indian life insurance companies brings to fore the big

challenge of profitability. The industrys participants have been struggling to achieve

profitability in the face of high operating losses primarily on account of distribution

and operating models. Cumulative losses for private life insurers are in excess of

INR 187 billion till March 2012, majority of which have gone towards funding losses

rather than for meeting solvency requirements.

Figure.5 represents the equity in the business vis--vis the balance in the profit and

loss during FY02 and FY12. The trend line represents the first year premium earned

by private life insurance companies.

FIGURE .5 PERFORMANCE OF PRIVATE SECTOR IN LIFE INSURANCE COMPANIES

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The period FY05 to FY10 was primarily dominated by linked life insurance business

especially in case of the private sector insurance players. Performance of the Linked

plans is directly linked to primary capital markets. The period FY06 to FY08

witnessed boom in the countrys capital market which benefited the insurance

companies in turn. FY09 and FY10 witnessed slow down in the economy and

thereby impacted the sale of policies.

IRDA during July 2010 (and with modification in September 2010) came up with Unit

Linked Insurance Plan (ULIP) guidelines capping upfront charges, returns and the

commission pay-outs impacting the basis on which ULIPs were developed.

Immediately following these guidelines, during FY11 and FY12, the industrywitnessed a shift in the product mix from linked products to non-linked or commonly

known traditional products. The premiums fell at an annual rate of around 19 percent

(Exhibit 1) during FY11 and FY12. Currently, the premium mix of the industry is at a

similar mix as of FY04 depicting almost a reset of the life insurance business.

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INDIAN GENERAL INSURANCE INDUSTRY

In India, The General Insurance Business (Nationalisation) Act, 1972 nationalized

107 general insurance companies business. Accordingly the General Insurance

Corporation of India functioned with the following subsidiaries.

General Insurance Company Ltd.

- New India Assurance Company Ltd.

- United India Insurance Company Ltd. &

- Oriental Insurance Company Ltd.

After the implementation of the Insurance (Amendment) Act 2002, private players

have been allowed to conduct insurance business in India. The public sector units in

the general insurance industry have a good past performance: they have a reliable

profit and dividend paying record accompanied by a steady growth in financial

resources. They have contributed enormously to the development of the country by

investments in the Government and socially oriented sectors. They are collectively

recognized as one of the largest financial institutions in the country. The ventures

initiated by the industry in the area of Mutual Funds and Housing Finance have done

exceedingly well in recent years.

Any insurance other than Life Insurance falls under the classification of General

Insurance. It comprises of :-

Insurance of property against fire, theft, burglary, terrorism, natural disasters etc

Personal insurance such as Accident Policy, Health Insurance and liability

insurance which covers legal liabilities.

Errors and Omissions Insurance for professionals, credit insurance etc.

Policy covers such as coverage of machinery against breakdown or loss or damage

during the transit.

Policies that provide marine insurance covering goods in transit by sea, air,

railways, waterways and road and cover the hull of ships.

Insurance of motor vehicles against damages or accidents and theft

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All these above mentioned form a major chunk of non-life insurance business.

General insurance products and services are being offered as package policies

offering a combination of the covers mentioned above in various permutations and

combinations. There are package policies specially designed for householders,

shopkeepers, industrialists, agriculturists, entrepreneurs, employees and for

professionals such as doctors, engineers, chartered accountants etc. Apart from

standard covers, General insurance companies also offer customized or tailor-made

policies based on the personal requirements of the customer.

Historical developments in the Indian general insurance industry

The overall general insurance industry growth has kept pace with the GDP

growth in the country and general insurance penetration has varied in a

narrow band

After liberalisation of the Indian insurance industry in the year 1999- 2000, the Indian

general insurance industry has witnessed rapid growth. The industry, in terms of

gross direct premium, has grown from INR 11,446 crore in FY02 to INR 57,964 crore

in FY12, which corresponds to a compounded annual growth rate (CAGR) of 17.6

percent. Insurance density, which is defined as the ratio of premium underwritten in a

given year to the total population, has increased from USD 2.4 in 2001 to USD 10 in

2011. The growth in the general insurance industry has kept pace with the nominal

GDP growth rate resulting in general insurance penetration remaining stable in the

range of 0.55% to 0.75% over the last 10 years.

Figure .6- Growth in the Indian general insurance industry

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LIST OF GENERAL INSURANCE COMPANIES IN INDIA

1. Bajaj Allianz General Insurance Company Limited

2. IFFCO Tokio General Insurance Company Limited

3. HDFC ERGO General Insurance Company Limited

4. ICICI Lombard General Insurance Company Limited

5. The New India Assurance Company Limited

6. The Oriental Insurance Company Limited

7. Max Bupa Health Insurance Company Limited

8. Royal Sundaram Alliance Insurance Company Limited

9. United India Insurance Company Limited

10. SBI General Insurance Company Limited

11. Tata AIG General Insurance Company Limited

12. Reliance General Insurance Company Limited

13. Cholamandalam MS General Insurance Company Limited

14. National Insurance Company Limited

15. Shriram General Insurance Company Limited

16. Bharti Axa General Insurance Company Limited

17. Future Generali India Insurance Company Limited

18. Agriculture Insurance Company of India

19. Star Health and Allied Insurance Company Limited

20. Apollo Munich Health Insurance Company Limited

21. Universal Sampo General Insurance Company Limited

22. Export Credit and Guarantee Corporation of India Limited

23. Raheja QBE General Insurance Company Limited

24. L&T General Insurance Company Limited

25. Liberty Videocon General Insurance Company Limited

26. Magma HDI General Insurance Company Limited

27. Religare Health Insurance Company Limited

MARKET SHARES

Market continues to be dominated by PSUs, including Agriculture Insurance

Company (AICI) and Export Credit & Guarantee Corp. (ECGC) at 58% and the

rest is divided between private players. Pie A, shows the split of four PSUs, AIC,

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ECGC and all private sector general insurers as a block at 42%. Pie B, further

elaborates the respective market shares of various private players, notable

among which are ICICI Lombard, BAGIC, ITGI and HDFC ERGO with market

shares of 9%, 6%, 4% and 4% respectively. Others in the chart include Star

Health, SBI General, Universal Sompo, Apollo Munich, L&T General, Max Bupa,

Raheja QBE, Religare and Magma HDI.

Figure .7- Non-life Insurer Market Share

Performance of key market players (2012-13):

The insurance companies have seen a higher profit margin for financial year 2012-

13, as compared to the previous fiscal. The general insurance arm of ICICI Bank has

also performed better than financial year 2011-12. The gross premium income of

ICICI Lombard increased by 19.8% to Rs 6,420 crore in FY13 from Rs 5,358 crore in

FY12. ICICI Lombard General Insurance posted a net profit of Rs 306 crore for year

ended March 2013 compared to a loss of Rs 416 crore for FY2012.The commercial

third party motor pool was dismantled from April 2012 and a declined risk pool wasput in place. This has led to reduction in losses for general insurers, who had made

high provisioning for this segment. With an increase in premiums, it is expected that

this loss will be brought down further. Bajaj Allianz General Insurance, for example,

saw a 138.6% growth in net profit in FY13 over previous fiscal. Public general

insurers have also seen a significant rise in profitability, apart from a double digit

increase in annual premium growth. New India Assurance posted profit after tax

(PAT) of Rs 843.6 crore for financial year 2012-13, compared to net profit of Rs

179.3 crore posted in FY12. The company collected total premiums of Rs 10,038

crore in India, recording a growth rate of 18%.Similarly, private general insurer

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HDFC ERGO General Insurance posted net profit of Rs 154.49 crore for the year

ended March 31, 2013 as compared to a net loss of Rs 39.69 crore posted in the

previous fiscal. (Business Standard)

GROSS WRITTEN PREMIUM

As per latest statistics released by the Insurance Regulatory and Development

Authority (IRDA), the Gross Written Premium (GWP) figures for the period April to

November FY2012-13 for the General Insurance (non-life and health) industry in

India was INR44,451 Crores (USD8,386 Million). The corresponding figure for the

last fiscal (FY2011-12) was INR37,235 Crores (USD7,025 Million).

FIGURE .8- WP (BUSINESS FIGURES)

Source: IRDA

BAGIC: Bajaj Allianz General TAGIC: Tata AIG General

As earlier, the PSU general insurers continue to lead, with ICICI Lombard and BAGIC close behind them.

GROWTH RATES

The GWP growth rates for general insurers ranked over premium collected is shown

in the following graph. During the period April to November FY2012-13 the non-life

industry registered a growth of 19.4% against a growth of 23.9% in FY2011-12 for

the same period.

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Figure .9- GWP Growth Percentage

Changes in the regulatory environment substantially impacted the industry

dynamics

Apart from macro-economic, social, and demographic growth drivers, the

evolving regulatory landscape had a significant impact on the growth and

profitability trends in the industry. The most notable of them was the price

detariffication in 2007 which significantly impacted the premium rates and growth

for commercial lines and health insurance. Though the overall insurance

penetration has remained in a narrow range, coverage of underlying risks has

increased considerably

The insurance penetration statistics may not represent the true perspective on

coverage of the underlying risk due to changes in the premium rates across

segments which were significantly influenced by the regulations. In our estimates,

the risk coverage has grown at an annual growth rate of approximately 25

percent. For example, in the health insurance segment, the number of persons

covered has increased from approximately 80 lakhs in FY04 to approximately 7.3

crore without taking into consideration the Rashtriya Swasthya Bima Yojna(RSBY) which has additionally covered more than 16 crore people by FY12.

Even in commercial lines business, the premium growth over the years indicates

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considerable increase in the underlying risk coverage, especially considering the

impact of price detariffication. Overall, while the industry achieved significant

growth over the past 5 years, the profitability of industry deteriorated sharply

Factors affecting the profitability of industry

A multitude of factors adversely impacted the industry profitability over the last five

years

Price detariffication provided freedom to general insurance companies to decide

the premium rates in most of the product segments

Between FY06 and FY12, 10 new companies have entered the general insurance

business. Intensifying competition and focus on growth by the new entrants led to

competitive pricing pressure

Focus on growth by the insurers across the industry led to higher bargaining power

of the intermediaries and limited control on the claims cost

Limited or no increase in the TP premium rates for a number of years coupled with

issues pertaining to third party liability caps as under The Motor Vehicles Act, led to

extraordinarily high claims ratio in the segment which impacted the overall

profitability and solvency requirements for the general insurance companies.

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MICROINSURANCE

Unlocking Indias huge insurance potential

Microinsurance refers to insurance products which are designed to provide risk cover

for low-income people. Generally, these products are focused towards providing

adequate coverage to this customer segment with flexible payment schedules for the

lower premiums. Although there are various benchmarks to distinguish

microinsurance from insurance, product design (size of premium and risk cover) and

access are key differentiators for microinsurance products. Simple products which

are easily accessible through an efficient distribution process to keep the overall cost

of products low are qualified under microinsurance.

Global overview and comparison with India

The last decade witnessed strong growth in the microinsurance sector worldwide

with emergence of three strong growth regions Asia, Latin America and Africa. The

growth in Asia, which accounts for roughly 80 percent of the global microinsurance

market, is driven by large and dense populations, interest from public and private

insurers, penetration of distribution channels and active government initiatives. WhileIndia and China have been at the forefront, other Asian countries, such as

Bangladesh, the Philippines and Indonesia are also witnessing rapid growth in

microinsurance.1 Latin America and Africa, which account for 15 percent and 5

percent of the global microinsurance, respectively, are other promising growth

markets for the sector. The following table depicts the growth of the microinsurance

sector during the last decade.

Table: Estimated outreach of microinsurance: millions of risks covered

Note: *Data for 100 poorest countries only

Source: 'Protecting the poor: A Microinsurance compendium,' vol. II, Munich Re, Microinsurance

Network and International Labor Office, 2012, p11.

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Insurers are increasingly making an effort to cover the population by introducing

need-based and easy-to-understand products. In Central and Eastern Europe,

growth in microinsurance has not been as swift as compared to Asian and Latin

American regions.

Microinsurance in India

The microinsurance business took its roots in India with a few schemes launched by

non government organizations (NGOs), micro finance institutions (MFIs), trade

unions, hospitals and cooperatives to create an insurance fund against a specific

peril. These schemes were outside the ambit of the regulations and operated more

on good faith of these institutions.

The microinsurance landscape changed with the first set of regulations published in

2002 entitled the Obligations of Insurers to Rural Social Sectors. The regulations

essentially promulgated a quota system to force new private sector insurers to sell a

percentage of their insurance policies to de facto low-income clients.

The Government of India formed a consultative group on microinsurance in 2003 to

look into the issues faced by the microinsurance sector. The group highlighted the

apathy of insurance companies towards microinsurance business, non-viability ofstandalone microinsurance programmes and huge potential of alternative channels

amongst others. The Reserve Bank of India allowed regional rural banks (RRBs),

which have good distribution reach in rural areas, to sell insurance as corporate

agent, in 2004.

In order to support the development and facilitate the growth of the sector, the

insurance regulator Insurance Regulatory Development Authority (IRDA) came up

with the microinsurance regulation in 2005. It was a pioneering approach which put

India among the few countries to draft and implement specific microinsurance

regulations. While the microinsurance regulations had a relatively narrow scope,

focussing only on the partner-agent model, it nonetheless relaxed some of the

conditions to facilitate distribution efficiency and perpetrated the view to extend

microinsurance from a social perspective to a commercial business opportunity.

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The Indian microinsurance market is marked by various players operating a number

of schemes:

Figure 1.0- Number of policies & New business premium

Distribution channels

Distribution of microinsurance products is dependent on factors such as

collaboration, relationship and trust with the low-income group while holding down

associated costs. MFIs, NGOs, Regional Rural Banks, Self-help groups (SHGs) and

their federations and cooperatives are the most-preferred distribution channels led

by their vast established networks and proximity to the target market. The selection

of the right channel mix primarily depends on the region and product segment. In

India and the Philippines, MFIs are predominately being used to distribute

microinsurance products, while, in Brazil, utility and telecom companies are

increasingly being used. However, insurers are continuously innovating and

introducing distribution channels that are not only cost efficient but also have a wider

reach.

Technology is being extensively used to distribute microinsurance products more

efficiently and effectively. For example, mobile banking is gaining prominence as it is

not only an enabler of client communications, but is also helpful in premium and data

collection. However, the channel has limitations where face-to-face interaction is

required.

Key regulations: Rural and social obligations, 2002 and Microinsurance

regulations, 2005

In order to promote mass insurance coverage, the regulator established obligationsof insurers to rural or social sectors in 2002 and has since amended it. While the

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rural sector obligations aim to cover the hinterland which is predominantly agrarian,

the social sector includes unorganised, informal sector comprising economically

vulnerable classes across rural and urban areas.

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What Is IRDA, What Is Their Role In The Indian Insurance Industry?

In 1999, the IRDS was set up under the IRDA Act. Companies, aspiring to carry on

insurance and reinsurance business in India, are required with IRDA, which is the

sole authority for granting license to agents. IRDA is an abbreviation of the Insurance

regulatory and Development Authority which is a financial sector in industrial market

in India. This is a body that was specifically put in place to regulate and at the same

time ensure that the insurance business in India is being developed. One of the

major roles of the IRDA body is to make sure that the interest of those holding

insurance policies has been protected. There are a number of duties, roles and

responsibilities that are assigned to the IRDA team so as to bring the insurance

awareness to the policy holder and the service providers in India.

It is the role of the IRDA to provide the certification and registration to the service

provider of the insurance products. The process of certificate registration for the

insurance company, withdrawals, renewals, modifications, suspension and as well

cancellation is done by the IRDA. The same body is in the front t line to come up with

the guidelines that specifies the qualifications in the requisite. It also foresees that all

the code of conduct by the insurance company and as well the policy holders are

followed to the latter. The same body is responsible for all the practical assessment

for the agents in an insurance firm. It is the duty of the IRDA body to look into

training issues that concerns he intermediaries and the agents of a given insurance

company. To avoid conflicts that normally arise in the curse of surveyors analyzing

and assessing losses that the insured has suffered, it provides an extensive

guidance to the code of conducts that should be followed. In the process of making

assessment and surveys as well as the conducting of the insurance activity

efficiency is put in place by IRDA.

It is the role of the Insurance Regulatory and development Authority to take care,

monitor and offer guidance to all the activities that relate the professional

organizations with the companies that offer insurance service to consumers.

Moreover, it ensures that all the transactions by the insurance companies have been

levied accordingly and all the fees paid. It gives mandate or it takes the roles of

forming enquiries so as to make investigations in the issues that affect the service

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providers of the insurance. In the above ways, they are playing a vital role in the field

of insurance industry of India

The Insurance regulatory and Development Authority (IRDA), batted for a hike in the

foreign direct investment (FDI) limit to 49 per cent in the sector from the present 26

per cent.I am in favour of hike in the FDI limit for the insurance sector. Unless we go

for 49 per cent, we will not have the kind of capital required to underpin the growth of

the industry. This sector requires a lot of money, IRDA Chairman J. Hari Narayan

said on the sidelines of a summit here.

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MARKETING STRATEGIES OF VARIOUS INSURANCE COMPANIES

LIC

In India people mostly take insurance as an investment rather than risk cover. LICthough enjoying the first mover advantage continuously revamps its strategies to

maintain a firm position in the industry. Being in the industry for more than 50 years

experience definitely improves performance of the company.

LIC has taken following steps to increase its market competitiveness and retain its

dominant position in the insurance market:

1. Product development -Every year by taking market review it introduces new

innovative plans and also withdraws those plans which have less market response.

For example LIC observed that there is a top potential for the health insurances

business. So in the year 2007-08 it had started one Health Insurance Department

and the first product Health Plus was launched on 4 February, 2008. People also

welcomed it.

2. Agents- LIC very well understands the pivotal role of the agents in selling of

insurance policies. To promote them the corporation also gives stipends at the startof their career and to enable them to settle down in the profession. As on 31-03-2008

there were 17,684 urban career agents and 22,324 rural career agents.

3. Microinsurance Plan- The LIC of India, not only concentrates on celebrity

marketing and rich class segment but also launches insurance plan under a separate

business vertical to extend security to the less privileged section of the society under

business vertical Jeevan Madhur plan that was launched in Sept. 2006 by the LIC.

It was observed that within 2.5 years it had provided 4.3 cover to the approx 2.5

million lives.

TATA AIG

This company thrives on some of the salient features that include:

force for 10 years or more, if payable on death or maturity

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Availability of doctors, SMS campaigns, help lines, e commerce, network marketing,

portal services plus crystal claim services, etc. are the other few marketing strategies

of the company.

IDBI FEDERAL LIFE INSURANCE COMPANY LIMITED

The company has come up with a really beautiful ad for the promotion of its

childsurance product with the tag line plan jo fail na ho which attracted nationwide

attention. It is also engaging its personnel and actuaries to come up with novel,

innovative and mind boggling products to attract and retain its loyal customers and

increase its market share or in other words its reach. So that everyone gets

maximum out of whatever minimum they have.

SBI LIFE INSURANCE COMPANY LIMITED

The company adopted both a reactive and proactive strategy that would fit the long

term and short term at the same time. They were selling insurance policies across

India to create goodwill for their products. Before finding a solution to the

circumstances and business problems, the company tries to assess whether it is in

house or out of shelf problem and tries to fit what is best for them but seldom go they

reinventing the wheel. The company tried to go nearer to point of sale and offer more

self service options by opening more number of retail outlets.

HDFC STANDARD LIFE INSURANCE

They continuously focus on developing new channels for distribution of their

products. They provide commission for the increased business brought by the sales

force. Continuous monitoring, focused efforts, cost variabalization , outsourcing

initiatives, reducing operating expenses to strengthen marketing channels and other

promotional programmes are some of the initiatives taken by the company.

All the companies operating in the industry offer almost the same kind of products

with little modifications done here and there. This has led to intensifying the

competition in the industry. So the point which should now be emphasised by the

firms in the industry should be in terms of penetration of masses and service

aspects.

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CHANGING MARKET DYNAMICS:

EVOLUTION OF MINDSET OF THE INDIAN POPULATION

There has been a radical change in the mindset of people in the last 10- 15 years

regarding the insurance policies and its use. People earlier used to take this just as a

means of protection but now people try to grab the multiple benefits which the

products promise to provide ranging from security to investments to tax benefits to

additional income and what not. The reason can be attributed to the level of

illumination caused in the mindset of people owing to the region wide literacy and

sector reforms initiated by the government. Other reasons are the increased level

cover and additional premiums provided to the beneficiary, rising per capita income

of the country, urge among people to protect their dependents, ensure high quality of

life proof from any uncertainty, pricing and promotional strategies used by the

companies, rising population, marital status of the people, changing buying and

expenditure pattern of people owing to changing trends and western influence not

only on terms of attire but also to copy their entire lifestyle, illustrating the example

that more than 80% of people in the U.S are insured. Sometimes, reference group

influence, technical aspects of the product which is the reliability, durability, comfortand convenience of the product also acts as a strong motivation to buy and use the

new and evolving insurance policies and become a part of the so called elite and

educated crowd. The above mentioned factors have definitely provided the industry

a new shape and provided enormous development and growth opportunities for

various companies existing in the industry. The only point of concern here is that

how can the companies turn this changing and evolving mindset into their benefit.

The only thing which can be done here is to touch the emotional part of the

individuals which will ignite the buying thrive in the individuals to purchase and use

the insurance products. India is a country that can provide home to multiple

companies in the industry, the reason can only be because of the innumerable

benefits that the government is providing in addition to the huge and tremendous

domestic demand that may also restrict the firms to go to international borders to

maintain their profit margins. The urge of increased demand created by the more

liberalised and radical mindset of the population is an incentive for the industry.

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UNDERLYING GROWTH DRIVERS IN INDIA

Despite strong improvement in penetration and density in the last 10 years, India

largely remains an under-penetrated market. The market today is primarily

dependent on push, tax incentives and mandatory buying for sales. There is very

little customer pull, which will come from growing financial awareness and increasing

savings and disposable income.In the long run the insurance industry is still poised

for a strong growth as the domestic economy is expected to grow steadily. This will

lead to rise in per capita and disposable income, while savings are expected to be

stable.

1. Growing economy and purchasing power

The demand for insurance products is likely to increase due to the exponential

growth of household savings, purchasing power, the middle class and the countrys

working population. The working population (2560 years) is expected to increase

from 675.8 million in 2006 to 795.5 million in 2026. Increased incomes are expected

to result in large disposable incomes, which can be tapped by the financial sector in

general and the insurance sector in particular.

2. Rising focus on rural market

More than two-thirds of Indias population lives in rural areas without proper access

to insurance products. Micro insurance is seen as the most suitable channel to

ensure coverage in these areas.

Poor insurance literacy and awareness high transaction costs and inadequate

understanding of client needs and expectations has restricted the supply for

micro-insurance products. As a result, the market remains significant

underserved, creating a vast opportunity to reach a considerable number of

customers.

From a modest beginning, micro insurance was able to grow to a respectable

size with a total premium of INR15.43 billion collected under life and non-life

micro insurance portfolios in 2011; life insurance premium contributed INR11.49

billion and nonlife insurance premium contributed INR3.93 billion to the overall

amount.

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In the life insurance sector, individuals generated new business premium worth

INR1.30 billion under 3.6 million policies, the group business amounted to

INR1.55 billion under 15.3 million lives. LIC contributed most of the business

procured in this portfolio by garnering INR1.23 billion of individual premium from

2.95 million lives and INR1.38 billion of group premium under 13.3 million lives.

There has been a steady growth in the design of products catering to the needs

ofthe poor, with LIC leading the race.

IRDA has been endeavoring to improve penetration of micro insurance through

multiple initiatives and believes that there is tremendous scope for growth.

According to the regulator, ways to increase penetration include the

following:

Insurers need to innovate to reduce per policy costs as ticket size is small.

One way is to go for group schemes due to their low cost of distribution, low

overhead costs, easy underwriting norms, and support of nodal agency in

remittance of premiums and claims.

This is easily accessible through community leadership.

Insurers should use latest technological innovations such as mobile-based

communications and internet to increase insurance penetration and

reduce cost of operations.

Currently, eligibility for micro- insurance agency is limited to MFIs,SHGs, NGOs.

This needs to be

expanded to grocery stores, embedded into various farm equipments etc. to bring

in a variety of ways to distribute them as it besets the most.

3. Rising demand for motor insurance

During FY03FY10, the number of passenger cars has increased at a CAGR of

15.6%. This trend is likely to continue due to strong growth in the auto segment,

resulting from an increase in consumer income levels due to which more than 28

million policies were sold in FY10. During FY11, motor insurance accounted for

42.7% of the non-life insurance segment reporting a growth of 28.2% over the

previous year.

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4. Robust growth in health insurance

Evolving medical technology and increasing demand for better health care has

resulted in a significant rise in the demand for health insurance. The Indian health

insurance industry was valued at INR99.4 billion as of FY11. From the period

FY03FY10, the industry has grown at a CAGR of 32.59%. Share of health

insurance was 26% of the total non-life insurance premium in FY11. Health

insurance premiums are expected to increase to INR300 billion by 2015.

Under the social security schemes, the Government of Indias Rashtriya Swathya

Bima Yojna (RSBY) launched in 2007 for families below poverty line in the

unorganized sector has gained significant in the recent years. By bearing an

expense of INR30, families are insured for INR30,000. With 75% funding comingfrom the Government of India, the scheme ensure cashless coverage of health

services through smartcard and also provides a transport allowance

with an upper limit of INR1,000. Public or private insurers, based on a bidding

process, can opt for providing health insurance in the state for a particular

district/set of districts. IRDA has also relaxed certain requirements with respect to

solvency ratio of such insurers, in a view to promote health insurance in the

country. As of end July 2011, five states had implemented the scheme with 23.6million cards being issued at a total expenditure of INR100 billion.

The demand for insurance products is likely to increase due to the exponential

growth of household savings, purchasing power, the middle class and the countrys

working population. Listed below, are the various underlying growth drivers for

Indias insurance industry:

Growing of the financial industry as a whole

Growth of life and non-life industry

Promoting innovation and removing inefficiency

Competition and orderly growth

Growth of specific insurance segments such as motor insurance

5. Emerging trends

Multi-distribution- To increase market penetration, insurance companies need toexpand their distribution network. In the recent past, the industry has witnessed

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the emergence of alternate distribution channels. The typical distribution

channels used by insurance companies now include bancassurance, direct

selling agents, brokers, online distribution, corporate agents such as non-banking

financial companies (NBFCs) and tie-ups of para-banking companies with local

corporate agencies (for example NGOs) in remote areas. Agencies have been

the most important and effective channel of distribution hitherto. According to the

industry, the role of agents has started evolving from merely a prospecting and

selling role to an advisory and service related one. Bancassurance in India has

taken a different and perhaps an increased involvement in distributing insurance

products with banks becoming joint venture partners of insurers. This makes

them more committed to use theircustomer base and infrastructure. A few

alternative distribution channels have evolved in the recent years such as:

Online/internet: The internet penetration in India has been on the rise, whereby

increased number of people have access to internet both through computers as

well as through mobile phones, including population in tier-2 and tier-3 cities.

Direct Marketing and telemarketing: With increasing telecom penetration in India,

the use of direct marketing via database marketing is growing. Direct access tothe customer and savings in intermediary cost make it an attractive option for the

companies and is the key in development of the channel.

NGOs and affinity groups (SHGs)- With IRDA allowing NGOs/SHGs to distribute

micro insurance, insurers can access the untapped areas at relatively lower

costs using the existing relationships of such entities. Globally, various insurance

markets are at different stages of development, which is also reflected in their

insurance distribution networks. Where insurance penetration is low, face-to-face

interaction in the form of agents is required to educate customers. As the

insurance penetration develops, other distribution channels such as independent

financial advisors (IFAs), brokers, bancassurance and electronic channels come

to the fore to supplement the agency model. The following figure explains the

evolution of the insurance distribution network across countries

For sustainable growth, various markets have developed alternative distribution

channels, including extensions of the career and tied agency system such as

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brokerage, along with bancassurance, financial advisors and electronic channels.

Among the alternative channels, bancassurance has grown rapidly in the past

few years, especially in Asia. The global downturn has had insurers analysing the

profitability of their bancassurance business and taking a re-look at their

organizational relationship with the bank. For insurers in strategic alliances with

integrated models, the bancassurance business has been more successful

compared to businesses where the bank is a pure product distributor.

Concentrating on retaining and strengthening the tied agency system during

these times of uncertainty is a focused strategy being adopted across various

markets.

Product innovation- With customers asking for increasedlevels of customization,

product innovation is one of the best strategies forcompanies to increase their

market share. This also creates increased efficiency as companies can maintain

reduced unit costs, offer improved services, commissions and generate higher

sales. Regulatory changes, especially those with respect to health insurance

portability and micro insurance, offer considerable potential for insurance

companies tobe more innovative, while others suchas product design guidelines

is likely to stifle innovation, if not conceived and implemented in an appropriate

manner. Micro insurance is important not only from social and economic

perspective but also from insurers perspective for new avenues for sustainable

profitable growth in future. Even the pension sector, due to its inadequate

penetration (only 10% of the working population is covered), offersavenues for

innovation.

Claims management- Timely and efficient management of claims is crucial for

performance in the industry. Delay in claim settlement generally results in higher

claims cost. The incurred claims ratio, which measures the claims incurred to the

premiums earned in the same period, stood at 97% for public insurers and 87%

for private insurers in FY11 for the non-life insurance business. In the life

insurance business, LIC paid benefits constituting 55% of premiums underwritten

while the figures for private insurers stood at 35%. Some insurers have managed

to limit the claims ratio by deploying in-house team of surveyors, engineers etc.,

stringent and sophisticated underwriting policy, geographical focus in certain

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segments and higher reinsurance cession especially for more complex lines of

business.

Profitable growth-In the period following the liberalization ofthe insurance sector

(FY00FY05), most insurers were heavily inclined to achievegrowth at the cost

of profitability. In recent years, most players have shifted from the philosophy of

growth versus profitability to profitable growth by focusing on expanding

product range, developing innovative products and building robust distribution

channels. Profitability continues to be a big concern and insurers have now

shifted their focus on their bottom line to avoid exerting pressure on solvency and

share capital. In the last two years, most private insurers have been reducing

their operating expenses in a move toward profitability. The life insurance

industry reported a net profit of INR 26.57billion in FY11 against a loss of

INR9.89 billion in FY10. At the same time the non-life insurance industry posted

loss of INR10.18 billion in FY11 against a profit of INR 12.04 billion in FY10.

6. Regulatory trends

The IRDA has mandated regulatory changes in order to promote a competitive

environment in both the lifeand non-life insurance sectors.With Health insurance

portability being introduced, insured persons are likelyto get credits for the covered

term across the industry and will be limited to a specific insurance company. The

regulator envisaged that this initiative will compel the insurance industry to act

toward standardization of costs incurred on treatments, fix accountability and

transparency about costs and push insurers to think about product innovations to

survive competition. The IRDA has recently dismantled the third-party liability pool inmotor insurance and replaced it with the declined risk pool. While it is likely to have

widespread implications on the size and loss ratio of the pool, the move is expected

to drive the industry toward risk-based pricing. Recent regulations pertaining to cap

on ULIP charges and increase in the lock in period, translated to reduction in overall

distributor payouts, which in turn reduced the overall contribution of ULIPs to new

business premium. With a cap on surrender charges, insurers showing profits due to

release of lapse reserves will need to develop long term efficiencies to be able to

sustain the market. Other recent regulatory developments include changes in the

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Finance Act 2012 impacting tax exemption of life insurance policies and service tax

liability, proposed guidelines for the design of life insurance products, servicing of

orphan policies and standardization of the proposal form, all of which have far

reaching consequences for the industry. There is enough potential for positive

growth of the Indian insurance industry given the focused, synergistic efforts of the

regulator, government and industry players in the backdrop of rising demand for

insurance. The industry does, however, face numerous challenges primarily on the

product designing, distribution and regulatory front. The following sections throw light

on typical challenges faced by the life and non-life industry.

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ISSUES & CHALLENGES

The Indian insurance industry seems to be in state of flux. While there has been a

perceptible change in the market dynamics since liberalization and economic

reforms, a considerable amount needs to be done for future growth and development

of the market in an orderly and sustained manner. Notwithstanding the strong

improvement in penetration and density in the last 10 years, India largely remains an

under-penetrated market.

Life insurance: Issues and Challenges

In FY12, the life insurance industry witnessed a decline in the first year premium

collected which dropped from INR1, 258 billion in FY11 to INR1, 142 billion, a drop of

approximately 10%. This was owing to the following challenges that the industry

faced in

1. Governance and regulatory issues -There are a number of regulatory changes

and their likely implications on the growth of the life insurance industry.

Cap on ULIP charges & increase in lock in period

Restriction on high distribution partner Payouts

Reduction in overall contribution of ULIPs to new business premium

Compulsory purchase of annuity in pension plan-Even in case the policy is

surrendered, 2/3 of accumulated funds will be used to purchase an annuity.

Registration of referral agents

There have been a slew of regulations around turnover criteria to be a referral

partner and cap on referral fee income as well as share of income through

referral business.

Training of tele-callers has been made mandatory.

Guidelines around agents

Persistency norms: The regulation stipulates a minimum level of persistency to

be achieved by each licensed agent. This is expected to reduce the agencyforce in the industry.

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License renewal: IRDA has mandated a minimum business requirement norm

for licensing agent. This is expected to reduce part-time agents thus improve

customer service

Despite the regulatory mandating changes in the life insurance industry with the

intention to protect the interests of policy holders, the changes were too sudden for

the industry to sustain, leading to de-growth. Changes related to ULIP and pension

plans have caused a negative impact on the respective product segments. Similarly,

the agency business has become unattractive due to the recent changes. The

industry players need to incorporate numerous modifications to sustain the impact of

the regulatory changes.

2. Taxation- The insurance industry is facing challenges with respect to taxation on

both the demand and supply side. On one hand, the service tax charged to

insurance companies has been increased to 12% from the existing 10% rate on

life insurance policies where entire premium is not toward risk covered increased to

3% for the first year and maintained at 1.5% for subsequent years policies at a time

when mutual funds are exempt from such tax. On the other hand, the 2012 Budget

mandated that the sum assured be at least 10 times the premium (from the existing

5 times), compulsory service tax has been levied on all insurance. Further, with

effect with effect from April, 2012, benefits under thenational pension schemes will

not be clubbed under the one lakh benefit under section 80C making it an

unfavourable avenue for long term savings. The age of senior citizens for the

purpose of tax benefits on insurance premium or returns has been reduced from 65

years to 60 years.

3. Products strategy and design- At a time when the highest NAV guaranteed

ULIP were selling aggressively in the market, the IRDA banned the product in order

to keep a tab on life insurers resorting to riskier fund management to conform to their

commitment of guaranteed returns. Not only did these products attract an increased

premium, but they also offer little protection to policyholders. According to IRDA,

customers are being lured with the promise of a decent maturity benefit, but in case

of claims the benefit or amounts are sometimes lower than the premiums. The basic

underlying principle of a life insurance policy is it should have sufficient risk cover.

The regulator is keen to oversee the product design more closely to better protect

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policyholders falling prey to low or insignificant life risk covers. The challenge for

insurers, therefore, is to develop innovative products without crossing the boundaries

of insurability. While the changes in ULIP guidelines resulted in a significant decline

in the products share of industry sales and pension guidelines continue to be

restrictive leading to a vacuum in this product line, the proposed changes in product

design for life insurance products could further adversely impact the already

declining fortunes of the sector in a considerable manner. The changes in product

design being envisaged through these guidelines, if not implemented in

an appropriate manner after conducting detailed impact assessments and

establishing credible timelines, is likely to result in diminishing the scope for product

innovation, increasing commoditization, as well as substantial product

alterations/withdrawals resulting in increased lapsation.

4. Customer service- Mis-selling has grabbed the attentionof the industry in recent

times. Each distribution channel was faced with typical challenges in customer

servicing. There is a gap between the managements perception of customer

expectation and the actual customer expectation. Life insurers need to adequately

understand what the customer really expects from his life insurance policy by

obtaining regular feedback, conducting key client studies and tracking customer

complaints to develop a product according to customer expectations. Customer

grievance includes any dissatisfaction expressed by customers regarding service

delivery, product expectations or any other aspect of business. The Grievances Cell

of the Authority was set up by the regulator to receive grievances from the

policyholders. In FY11, a total of 9,656 complaints were received; 27% from LIC and

balance from private insurers. Insurers should lay down a detailed customer

grievance handling process, which includes efficient tracking, quality of resolution,

timely tracking and accurate reporting. Complaints received should be analyzed to

check adherence and effectiveness of the process laid down. Further, they need to

be analysed with the intention to bring about modifications to existing processes.

5. Prospects and challenges of distribution various channels- The use of

internet to distribute life insurance products has only emerged recently, but has not

made a significant impact so far, partly because of the substantial advisory

component of most life insurance products. While most companies have adopted a

multi-distribution approach, share of direct channel, brokers and other alternate

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channels remains low. Most companies are seen to be focusing on cost efficient

channels, therefore there has been an increased focus on these channels for select

product classes, which are low involvement, e.g., protection covers and health

insurance. While direct selling and other modes have remained steady, the growth in

market share may be attributed to the universal banking model of selling savings and

investment products under one umbrella and increased customer trust in the

institutional form of selling.

6. Compensation- There are numerous compensation-related challenges for the

efficiency of the their distribution models to deliver on objectives. Specific to tied

agents, the compensation framework does not provide for treating a tenured and

high performing agent as different from others and allow payment of highercommission rates or support allowances to encourage such agents. Also, there is no

mechanism, which allows compensation to an individual agent for any other services

rendered by him to the insurer. Further, the regulatory compensation structure does

not differentiate between a retail agent and an organized distributor such as a

corporate agent or a broker. They are paid similar commissions. In addition the

commission rate decreases after 10 years of existence of an insurer, which imposes

further burdens. Corporate agents also help reduce the distribution expenses of an

insurer through provision of infrastructure, manpower supply and assistance in

marketing but are not permitted to be compensated beyond the stipulated

commission structure. Low penetration continues to be a critical hurdle for insurers.

To increase the reach, insurers need to tap rural and semi-urban areas. As the cost

of setting up operations in rural/semi-urban areas is far lower as compared to those

in metros and urban areas, adopting suitable and cost-effective strategies to tap

these areas will not only help increase penetration but also manage distribution.

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Non-life insurance: Issues and Challenges

The non-life insurance industry has been growing in excess of 20% over the last two

years however the penetration was as low as 0.7% of the GDP in FY10.

1.Product pricing, innovation and simplicity

Innovation primarily involves showcasing the unique value proposition to survive

the competitive market. Regulatory restrictions, pressure of performance, lack of

maturity of markets and constant risk of mis-selling make innovation challenging

in the Indian insurance industry. Ironically, however, with more or less all market

players offering similar prices, innovation is the only differentiating factor. Lack of

maturity of markets