emergining trend in insurance sector

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ContentsSr. No. Subjects Covered Pages

Project ProposedObjective of the projectMethodologySamplingLimitations

1. Introduction1.1 Introduction to insurance

1.2 Definition of insurance1.3 Pre liberalization of insurance1.4 Post liberalization of insurance

2. Trends in Insurance Sector2.1 Indian Insurance in 21 Century2.2 Emerging Trend in Indian

Insurance Sector2.3 Growth of Insurance Sector

2.4

Present Scenario of Insurance

Sector in India2.5 Technology Trend in Insurance

Sector2.6 Globalization of Life Insurance

Market3. Impact of Budget on Insurance

Sector3.1 Impact of Budget 2004

4. Private V/S Public Insurance Sector

4.1

Comparison between private andPublic Insurance sector In India

Conclusion

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INSURANCE INDUSTRY:

CLASSIFICATION

2

INSURANCE

LIFEINSURANCE

GENERALINSURANCE

Fireinsuranc

Marineinsurance

Mediclaim Motorvehicle


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Insurance = Collective bearing of

Risk

Insurance is nothing but a system of spreading

the risk of one onto the shoulders of many. While it

becomes somewhat impossible for a man to bear by

himself 100% loss to his own property or interest

arising out of an unforeseen contingency, insurance is

a method or process which distributes the burden of

the loss on a number of persons within the group

formed for this particular purpose.

Basic Human trait is to be averse to the idea of

risk taking. Insurance, whether life or non-life,

provides people with a reasonable degree of security

and assurance that they will be protected in the event

of a calamity or failure of any sort.

Insurance may be described as a social device to

reduce or eliminate risk of loss to life and property.

Under the plan of insurance, a large number of peopleassociate themselves by sharing risks attached to

individuals. The risks, which can be insured against,

include fire, the perils of sea, death and accidents

and burglary. Any risk contingent upon these, may be

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insured against at a premium commensurate with the

risk involved. Thus collective bearing of risk is

insurance.

Insurance Indemnifies Assets & Income

Every Asset has a value and generates Income to

its Owner. There is a normally expected Life-time for

the Asset during which time it is expected to perform.

If the Asset gets lost earlier, being destroyed or made

Non-functional through an Accident or other

unfortunate event the Owner is Prejudiced. Insurancehelps to reduce CONSEQUENCES of such Adverse

Circumstances which are called Risks

Insurance is the science of spreading of

the risk

It is the system of spreading the losses of an

Individual over a group of Individuals

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Insurance is a Method of sharing of

financial losses

of a few from a common fund formed out of

Contribution of the many who are equally exposed to

the same loss

What is uncertainty for an Individual becomes a

certainty for a Group. This is the basis of All

Insurance Operations. Thus insurance convert

uncertainties to certainty

DEFINITIONS

The definition of insurance can be made from two

points:

Functional definition.

Contractual definition.

Functional definition

Insurance is a co-operative device to spread the loss

caused by a particular risk over a number of persons

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who are exposed to it and who agree to insure

themselves against the risk.

General Definition

Insurance has been defined to be that in which a sum

of money as a premium is paid in consideration of the

insurers incurring the risk of paying a large sum

upon a given contingency.

In the words of John Magee, Insurance

is a plan by themselves which large number of people

associate and transfer to the shoulders of all, risks

that attach to individuals.

Fundamental Definition

In the words of D.S. Hansell, Insurance accumulated

contributions of all parties participating in the

scheme.

Contractual Definition

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In the words of justice Tindall, Insurance is a

contract in which a sum of money is paid to the

assured as consideration of insurers incurring the

risk of paying a large sum upon a given contingency.

Working of Insurance

Pre-Liberalization Scenario

Indian History: Time to turn the clock back-and open up

insurance

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Fifty years ago, India had a bustling, if somewhat

chaotic, entirely private insurance industry. The year

after Independence, 209 life Insurance companies

were doing business worth Rs712.76 crore (which

grew to an amazing Rs 295,758 crore in 1995-96).

Foreign insurers had a large market share 40 per cent

for general insurance but there were also plenty of

Indian companies, many promoted by business

houses like the Tatas and Dalmias. The first Indian-

owned life insurance company, the Bombay MutualLife Assurance Society, was set up in 1870 by six

friends. It Insured Indian lives at the normal rates

instead of charging a premium of 15 to 20 percent as

foreign insurers did. Its general insurance

counterpart, Indian Mercantile Insurance Company

Ltd., opened in Bombay in 1907.

A plethora of insufficiently regulated players was a

sure recipe for abuse, especially because there was

no separation between business houses and the

insurance companies they promoted. The Insurance

Act, 1938, introduced state controls on insurance,

including mandatory investments in approvedsecurities, but regulation remained ineffective. In

1949, Purshottamdas Thakurdas, chairman of the

Oriental Assurance Company, admitted: "We cannot

deny that, today, there is a tendency on the part of

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insurance companies in general to make illicit gains.

Can we overlook the cutthroat competition for

acquiring business? And still worse is the dishonest

practice of adjusting of accounts." After a 1951

inquiry, the government was dismayed that

companies had high expense and premium rates,

were speculating in shares, and giving loans

regardless of security. No wonder that between 1945

and 1955, 25 insurers went into liquidation and 25

transferred their business to other companies.

This reckless record stoked the pro-nationalization

fires. The 1956 life insurance Nationalization was a

top-secret intrigue; for fear that unscrupulous

insurers would siphon funds off if warned. The

government resolved to first take over the

management of life insurance companies by

ordinance, then their ownership. The then finance

minister C.D. Deshmukh later wrote: 'Seth

Ramakrishna Dalmias extraction of Rs.225 crore

(misappropriation by the Bharat Insurance Company)

was a heaven-sent opportunity. We were ready to

nationalize, with every detail worked out." On 19January 1956, the news was announced on the radio,

though even the director- general of AIR was not

shown the speech. The next morning, at 9 am, while

executives were frantically seeking details over the

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trunk telephone, says Deshmukh in his

autobiography, our officers walked into the

respective insurance offices, showed their authority

and then took over the business. I believe this will be

regarded as one of the best kept secrets of the

Government of India in all times to come." The

ordinance transferred control of 245 insurers to the

government. LIC, established eight months later, took

over their ownership. General Insurance had its turn

in 1972, when 107 insurers were amalgamated intofour companies headquartered in the four metros,

with GIC as a holding company. Nationalization

brought some benefits. Insurance spread from an

urban-oriented, high-end business to a mass one.

Today, 48 per cent Of LIC's new business is rural. Net

premium income in general insurance grew from

Rs222 crore in 1973 to Rs 5,956 crore in 1995- 96.

Yet, rigid controls hamper operational flexibility and

initiative so both customers service and work culture

today are dismal. The frontier spirit of the early

insurers has been lost. Insurance companies have

also been timid in managing their investment

portfolios. Competition between the four GIC

subsidiaries remains illusory. If Nationalization ever

had a purpose, it has been served. It's now time to

turn back the clock in some respects, and open up the

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sector again. The government already intends to

insist on large minimum capital requirements, a

strong regulator, and a healthy distance between

insurers and industry. To ensure that history doesn't

repeat itself

Post Liberalization Scenario

While no aspect of the reform process in India has

gone smoothly since its inception in 1991, no

individual initiative has stirred the proverbial hornets'

nest as much as the proposal to liberalize the

country's insurance industry. However, the political

debate that followed the submission of the report by

the Malhotra Committee has presumably come to an

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end with the ratification of the Insurance Regulatory

Authority (IRA) Bill both by the central Cabinet and

the standing committee on finance. This section

traces the evolution of the life insurance companies

in the US from firms underwriting plain vanilla

insurance contracts to those selling sophisticated

investment contracts bundled with insurance

products. In this context, it brings into focus the

importance of portfolio management in the insurance

business and the nature and impact of portfoliorelated regulations on the asset quality of the

insurance companies. It also provides a rationale for

the increased autornatisation of insurance

companies, and the increased emphasis on agent-

independent marketing strategies for their products.

If politicized, regulations have potential to adversely

affect the pricing of risks, especially in the non-life

industry, and hence the viability of the insurance

companies. Finally, the backdrop of US experience

provides some pointers for Indian policymakers

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Chapter 2

Trends in

Insurance

Sector

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INDIAN INSURANCE IN 21ST

CENTURY:

2000: IRDA starts giving licenses to private insurers:

ICICI prudential and HDFC Standard Life

insurance first private insurers to sell a policy

2001: Royal Sundaram Alliance first non life insurer

to sell a policy

2002: Banks allowed selling insurance plans. As TPAs

enter the scene, insurers start setting non-life

claims in the cashless mode

2007: First Online Insurance portal, https:/// set up by

an Indian Insurance Broker, Bonsai Insurance

Broking Pvt Ltd.

The Government of India liberalized the insurance

sector in March 2000 with the passage of the

Insurance Regulatory and Development Authority

(IRDA) Bill, lifting all entry restrictions for private

players and allowing foreign players to enter the

market with some limits on direct foreign ownership.

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Minimum capital requirement for direct life and Non-

life Insurance company is INR1000 million and that for

reinsurance company is INR 2000 million. In the 2004-

05 budgets, the Government proposed for increasing

the foreign equity stake to 49%, this is yet to be

effected. Under the current guidelines, there is a 26

percent equity cap for foreign partners in direct

insurance and reinsurance Company.

Emerging Trend in Indian Insurance

Sector

Market by 2015, particularly in countries like India

and China. The IRDA is the major body, which is

providing better opportunities for the private player

in India. GIC & LIC's monopoly market approach is no

more prevalent in India. The new market scenario for

insurance is growing; no doubt it is a flying bird.

Change is the eternal law of nature. Everything is

changing according to the need of the time. Economic

growth and social development in present scenario is

due to sudden change in industrial policy and

economic planning. Globalization has been the basic

mantra after 1991, so every one thinks of being

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global. Liberalization, privatization and globalization

is the basic concept of success in all aspect of

development. Competition is tough now due to

globalization. Business has positioned the entire

economy, and industrialists think about making

things global. There are no stringent rules or

regulations for making any business house or

industry. Government gives more emphasis on export

and entrepreneurship. This is a changing world.

Everyone has to compete for better success.Marketing is the major concept for developing any

type of business. After globalization, marketing has

taken a new dimension and it is the most challenging

task now. The new horizon of marketing in the field of

finance and insurance in present scenario is a good

sign of development.

Globalization - "The Dynamic Force"

Many people consider globalization nothing new -

societies have been interconnected for years. The

world has never experienced globalization at this

level of intensity before, or the speed at which it is

transforming and integrating societies.

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Herman E. Daly, an analyst of Global Policy Forum,

characterizes globalization as, "Global integration of

many former national economies into global economy,

mainly by free trade and free mobility, but also by

easy or uncontrolled economic purposes." He further

clarifies that globalization is not internationalization -

globalization brings about a single, integrated, global

economy, while internationalization is a federation of

nations cooperating as sovereign units to advance the

national interest of all members. Though globalizationhas become a broad heading for a multitude of global

interactions, ranging from the expansion of cultural

influences across borders to the enlargement of

economic and business relations throughout the

world, it has different dynamic force for different

person. For the economist, globalization is essentially

the emergence of a global market. For a historian, it

is an epoch dominated by global capitalism.

Sociologists see globalization as the celebration of

diversity and the convergence of social preferences in

matters of life style and social values. To the political

scientist, it represents the gradual erosion of state

sovereignty. But discipline specific studies explain

only a part of the phenomenon.

From a multi-disciplinary angle, globalization may be

treated as a phenomenon, a philosophy and a

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process, which affects human beings as profoundly as

any previous event. Several factors have been

responsible for this phenomenon. This study confines

its attention to four growth-enhancing facets of

globalization that have been among its key drivers,

namely trade, finance, communication and transport.

MNCs - "The New Path Maker"

After globalization, so many MNCs are the major path

maker for economic growth. The world-class MNCs

constantly pursued their strategy of gaining access to

every promising market world over, which had sound

growth potentialities, in order to expand their

network and control over the respective local

economies. The consequence was that some of the

markets, particularly in developing countries like

China and India, adopted some sort of self-

protectionist mechanisms by imposing certain

deliberate politico-legal restrictions in order to

restrict the entry of capital goods of these MNCs into

their markets.

Insurance being an integral part of financial service

could not claim immunity to the impact of the

globalization process and opened up to private and

global players world over, including India. So many

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MNCs are now entering into the insurance sector

which is now a booming sector.

New Horizons of Insurance Market after

Globalization

After 1970, insurance sector has become more

prosperous. For a long time, the two most important

insurance players were LIC & GIC. Now so many MNCshave entered into the same sector like Bajaj Allianz,

Aviva, Birla Sunlife, ICICI Prudential, etc. Insurance is

now acting on two dimensions, i.e., the element of

investment and the element of protection. The

Economic Value Addition (EVA) has taken the major

concern of the same business.

Marketing after globalization has

become: -

More customer oriented

Mostly better service oriented

More competitive

Better satisfaction, more value addition and strategic

development can help any insurance sector to sustain

in the present era.

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New Market Scenario & Insurance

Insurance market in present scenario though is a

booming sector, but the market has changed fromsimpler to complex, less challenging to more

challenging. Going domestic to international is a very

difficult task. Understanding market synergy and

cognisation of perception of customer in the

insurance field is very difficult. The Regulatory Board

like 'IRDA' is playing a very crucial role for the benefit

of the insurance holder. The premium and interest

rate can't be violated for better profit and

development. The market is becoming tougher

gradually.

Globalization of Insurance Market

Historically, insurance has been an integral part of

financial services system and recognized as a corner-

stone of a country's financial health and symbol of

progress. Insurance provides for the financial security

of citizens and their families. It offers valuable

investment advice and serves as an effective step

towards both individual and national financial

stability.

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After the terrorist attack on the World Trade Center

in September 2001, the momentum of growth of

world economy suffered some temporary setback.

According to 3rd Annual Globalization Index Report of

World Watch Institute, the growth rate fell sharply

from 4% in 2000 to 1.3% in 2001. But the world had

become stabilized after that and the economic growth

was back with entry of so many MNCs and insurances.

Triggered by the sound fundamentals in global

economy and internationalization of world markets,

several countries turned towards free market regimes

in banking and insurance, putting an end to several

decade-old state-owned controlled markets. The

insurance market in China & India is brighter. The

leading reinsurance company like Swiss Re & Munich

Re has projected 20-25% growth in life and health

insurance market by 2015, particularly in countries

like India & China

Growth of Insurance

GROWTH OF LIFE INSURANCE SOME FACTS

(MAY 2008):

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Global Industry Statistics

HOW THEY STACK UPPremium income of life insurers in Rs crore

April - June Growth

%Total

Share (%)2007 2008

LIC 8580.84 7524.56 -12 52.55

ICICI Prudential 1056.45 1,590.27 51 11.11Bajaj Allianz 731.85 829.24 13 5.79

SBI Life 426.39 1,148.67 169 8.02

HDFC Standard 355.93 490.40 38 3.42

Max New York 289.74 501.16 73 3.50

Reliance Life 204.10 557.33 173 3.89

Birla Sun Life 174.63 501.53 187 3.50

Total Private 3930.95 6,795.64 73 47.45

Total Market 12511.80 14,320.20 14 100.00

Emerging Markets

(Total Premium, figures in $billion)

Taiwan 17.3China 13.4India 7.2Hong Kong 6.1

Israel 5.8Singapore 5.0

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Present Scenario of the Insurance

Sector in India

As per the findings of a survey carried out in 2003-04,

the Indian insurance market ranked 5th in the Asian

continent after Japan, South Korea, China & Taiwan,

and 19th

In India, the process of liberalization and opening ofinsurance sector to private and foreign players

started taking shape as part of the series of financial

and economic reforms brought in by the Government

in the late 1990s, in accordance with the

recommendations made by R. N. Malhotra Committee

constituted by the Government in April 1993. By

amending the relevant provisions of the Insurance

Act, 1938, and passing the IRDA Act, 1999, by an Act

of Parliament, Insurance Regulatory and Development

Authority (IRDA) was established in the year 2000,

which marked the opening act of the insurance sector

to private participation and foreign investment.

GDP & Insurance

Though potentially insurance is more than Rs. 500

Billion business in India, and together with banking, it

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adds slightly more than 7.5% to the GDP, of the

country, the gross premium collection has been

hardly 2% of the GDP, not withstanding its growth

between 15-20% annually, during the decade

preceding the opening up of insurance market for

private and foreign players in the year 2000. As the

insurance premium database of various developed

and developing countries for the year 1999 indicates,

the per capita premium of India was just around $ 8

as against the same having been very high in thedeveloped countries. In other words, and in terms of

percentage of GDP, it was 14% for Japan, 12% for

Korea and 9% for UK as against the same staggering

below 2% for India for the fiscal year 2000-2001.

In the new economic reality in globalization,

insurance companies in 21st century face a dynamic

global business environment. Radical changes are

taking place owing to the internationalization of

activities. The appearance of new risks, new types of

cover to match with new risk situation,

unconventional and innovative ideas on customer

service, low growth rates in developed markets,changing customer needs and the uncertain economic

conditions in the developing world are exerting

pressure on insurers resources while testing their

ability to survive. The existing insurers are facing

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difficulties from non-traditional competitors that are

entering the retail market with new approaches and

through new channels. The basic premise of

globalization is opening up of new service markets to

provide the developing countries with new

opportunities for the expansion of trade and

economic growth.

The rapidly changing economic scene, the political

attitude, social values and structures, cultural

patterns, developments in IT have transformed

lifestyles in urban and rural areas. Developments in

other parts of the world, which are witnessing

sweeping changes in terms of convergence of

financial and insurance markets through banc

assurance, replacement of reinsurance contracts by

financial instruments, sale of insurance through

mergers and acquisitions will also have their impact

on Indian Insurance Industry.During the long

monopoly regime, the government attempted minor

changes in the procedures without going into the root

cause. The deregulation requires comprehensive

changes in the character and basic policies of theindustry.

Till the year 2000, the insurance industry was a

government monopoly and is now experiencing cut-

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throat competition because a number of players have

entered into the Indian market in the form of Joint

ventures with Indian private sector partners.

Consequently, Indian Insurance Industry has closely

integrated with world economy thereby making

crucial for insurance companies to operate outside

national boundaries.

India Insurance sector after globalization has

brighter future. The economic status of people is

changing. So many new government policies andeconomic reforms are impetus for insurance sector.

The firmament of economic growth is vast and never

ending but the insurance as a bird have to fly. No

doubt insurance market after globalization is "A

flying bird"!

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TECHNOLOGY TREND IN INSURANCE

MARKET ARE AS FOLLOWS

Computerization:

Initially, in the late 1950s the insurance

companies used Unit Record Machines (Electro

Magnetic Machines) to process data punched into

cards. Computers were introduces in the mid 1960s

and by the 1980s the Unit Phased Machines were

phased out and the entire process was computerized.This brought about greater efficiency and quick

service delivery

Internet:

Today, the internet has completely changed the

service delivery process. Internet is today used toeven sell insurance policies. Internet is, in fact,

proving to be one of the widely used distribution

networks for selling insurance policies. Also internet

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is used for sending premium notices to policy holders

through e-mails

Companies like LIC (www.licindia.com), ICICI

(www.iciciprudential.com) all have websites from

which people can get the information about their

products, prices, various schemes, and lots of other

information. People can also purchase the product

through this website.

Electronic Clearance Service (ECS):

Almost all the big organizations today provide

the ECS facility to its customers. A policy holder

having an account in any bank which is a member of

the local clearing house can opt for ECS debit to pay

premiums. The advantage here is that once the

option is exercised, the policy holder need not visit a

branch for paying the premium or collecting the

receipts. On the day indicated by the policy holder,

the premium amount will be directly debited to the

bank account of the policyholder and the receipt will

be issued by the designated branch office.

Call Centres and SMS services :

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http://www.licindia.com/http://www.iciciprudential.com/http://www.licindia.com/http://www.iciciprudential.com/


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Almost all the insurance companies have their

own call centres which cater to the phone based

queries of the policyholders. This service is 24x7 and

they have the Interactive Voice Response (IVR)

systems at all the branches

Globalization of Life Insurance Market

SOME GENERAL INFORMATION ABOUT

LIFE INSURANCE IN INDIA

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The Life Insurance market in India is an

underdeveloped market that was only tapped by the

state owned LIC till the entry of private insurers. The

penetration of life insurance products was 19 percent

of the total 400 million of the insurable population.

The state owned LIC sold insurance as a tax

instrument, not as a product giving protection. Most

customers were under- insured with no flexibility or

transparency in the products. With the entry of the

private insurers the rules of the game have changed.

Life Insurance

GDP penetration

of 4.1%

Significant channel for

household savings into capital

formation

2nd largest

financial service

in India after

banking

Total Assets Under Management

of Life Insurance Cos. as on

March 31, 2008- Rs. 8,50,000

crores

Total number oflives insured and

on books as on

March 31, 2008-

22 Crs

Statutory

requirements to

provide reach

to rural areas

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The 12 private insurers in the life insurance

market have already grabbed nearly 9 percent of the

market in terms of premium income. The new

business premium of the 12 private players has

tripled to Rs 1000 crore in 2002- 03 over last year.

Meanwhile, state owned LIC's new premium business

has fallen.

Innovative products, smart marketing and

aggressive distribution. That's the triple whammycombination that has enabled fledgling private

insurance companies to sign up Indian customers

faster than anyone ever expected. Indians, who have

always seen life insurance as a tax saving device, are

now suddenly turning to the private sector and

snapping up the new innovative products on offer.

The growing popularity of the private insurers

shows in other ways. They are coining money in new

niches that they have introduced. The state owned

companies still dominate segments like endowments

and money back policies. But in the annuity or

pension products business, the private insurers have

already wrested over 33 percent of the market. And

in the popular unit-linked insurance schemes they

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have a virtual monopoly, with over 90 percent of the

customers.

The private insurers also seem to be scoring big

in other ways- they are persuading people to take out

bigger policies. For instance, the average size of a life

insurance policy before privatisation was around Rs

50,000. That has risen to about Rs 80,000. But the

private insurers are ahead in this game and the

average size of their policies is around Rs 1.1 lakh toRs 1.2 lakh- way bigger than the industry average.

Buoyed by their quicker than expected success,

nearly all private insurers are fast- forwarding the

second phase of their expansion plans. No doubt the

aggressive stance of private insurers is already

paying rich dividends. But a rejuvenated LIC is also

trying to fight back to woo new customers

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Market Share of Private Sector life

Insurance Companies

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Chapter 3

Impact of

Budget on

Insurance

Sector

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IMPACT OF BUDGET 2004

The finance ministers reform to strengthen risk

management in banking The Finance Bill has some

brilliant promises to offer and yet there are adverse

to the financial service sector.

The decision to permit 49 per cent foreign direct

investment (FDI) in insurance is welcome. The

industry will agree that there is an acute need for it

to grow and to write more business. If one were to

analyze the growth of some new private sector

insurance players the underlying strength seems to

be their ability to get more capital and meet the

solvency requirement perform, write more business

and grow faster. Lets not forget that these insurance

companies will be able to tap the capital market in

two to three years.

The best performer in the sector have also expanded

their capital to about Rs. 700 to 800 crore. A look at

the non performers suggests that they do not have

adequate capital to grow. Hence the increase in the

FDI limit would help. More importantly, this will give

greater control to the foreign partners in areas of

management control and governance. They will now

be more willing to bring in their expertise in product

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development, technology, and implement best

practices.

The striking future of the Finance Bill is that the

government has accepted defined contribution as the

way forward for pension reforms, particularly for new

government employees.

One could have expected some clarity on the subject

of multiple regulators for pension. Though there be

some benefits having a separate pension regulator,

one supposes that there would be a strong case for

just one regulator both the pension and insurance

sectors. The government must examine the confusion

that may arise on account of having multiple

regulators.

Banking and insurance companies are significant

players in the securities market today. Midsize public

sector banks may have made a turnover of about Rs.

40,000 crore on securities trade and larger banks

would have made two to three times the number. The

transaction tax of a 0.15 per cent would certainly eat

away a good part of banks profits.

Likewise, all services rendered by banks (except the

fund based assistances) would attract service tax.

Banks would be able to conveniently pass on some of

these costs to the customers. So, each time an

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individual goes and gets a demand draft or pay order,

they will end up paying much more than the existing

rates. However, if competition becomes acute, banks

would have to bear it, which is bad news for the

banking companies.

Chapter 4

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Private V/S

Public

Insurance

Sector

PRIVATE V/S PUBLIC INSURANCE

SECTOR

Private players in the life insurance business are

growing at a scorching pace. Within three years of

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their inception, they have seized about 14 per cent of

the market.

Compare this to new generation private-sector banks,

which took nine years for 20 per cent share in the

Indian banking industry. And after seven years in the

industry, in 2000, private mutual funds accounted for

just 9 per cent of a market that had been dominated

by the Unit Trust of India.

There's another dimension to the insurance numbersgame. While the private insurance companies have

attained 13 to 14 per cent share of the overall

insurance market, their share in the key metros

(Mumbai and Delhi) is as high as 30 to 40 per cent.

"We have to struggle to complete a deal in the metros

now, because policyholders are comparing products

and asking for better deals," says S B Mathur,

chairman of the Life Insurance Corporation of India.

Private insurance companies are essentially joint

ventures with global insurance companies holding a

maximum of 26 per cent stake. The foreign partners

are investing heavily in the Indian market and,

thereby, driving sales, because they see India

emerging as one of the biggest markets in the Asian

region.

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"India will become the biggest market for us in the

next three to four years," predicts Dan Bardin,

Prudential Corporation Asia managing director south

Asia and greater China.

Private players have certainly done their bit to

increase the penetration levels of insurance, mainly

by creating alternative distribution channels--such as

associations with banks, brokers and corporate

agents.

"Our bancassurance channel--with tie-ups with four

banks--contributes almost 70 per cent of our total

sales," says Aviva CEO Stuart Purdy.

OM Kotak Mahindra Life, which is ranked eighth

among private players, is also leaning towards

alternative distribution channels that will contribute

to 45 per cent of total sales, in line with the

contribution from its tied agency force.

In sharp contrast, most of the LIC's policies continue

to be sold through its tied-agency network. The state

life corporation acknowledges that it is unable to

maintain its lead in some metros: penetration by the

private-sector insurers has come of age and they are

giving the LIC a run for its money.

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The multi-channel approach adopted by private

insurance companies has proved to be a boon in

terms of costing and their ability to capture business.

Earlier, most private insurance companies focused

their energies on the top 20 cities. Today they are

moving to smaller cities.

"The potential in smaller cities is increasing and

companies are moving to smaller cities and towns

because these are increasingly becoming more

prosperous with a rise in agricultural income. With

the increase in buying power, this has fuelled growth

opportunities for us," says Max New York Life CEO

Anuroop Tony Singh.

AMP Sanmar, another private player, has tied up with

various chit funds and transport finance companies in

the country, where it is selling life policies on the

back of fixed deposits and bonds. A senior company

official cites the example of Vijaywada where a

significant portion of the income is derived from

farming activities.

"The rural populace is managing their money well and

no longer keeping it under their beds. They have

mobile phones and have opened bank accounts. They

are not very different from their urban counterparts

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when it comes to purchasing life insurance covers,"

he points out.

And that's making the private sector optimistic about

its future in the Indian insurance market. "We

[private insurers] are becoming an alternative to LIC.

If a customer has already bought an LIC plan, his

second policy is likely to be bought by the private

insurance sector on account of various reasons--more

specifically flexibility and transparency," says OM

Kotak Mahindra Life CEO Shivaji Dam.

Perhaps this partly explains why the LIC has

increased its advertising spend multifold since the

insurance sector was privatized. Its ad spend more

than doubled to Rs 81 crore (Rs 810 million) in fiscal

2003, against Rs 37 crore (Rs 370 million) in 1999-

2000, prior to the industry being privatized.

Of course, the private insurance sector has also been

steadily increasing its ad spend, from Rs 29 crore (Rs

290 million) in fiscal 2001 when the industry opened

up, to Rs 92 crore (Rs 920 million) the following year.

In fiscal 2003, private insurers spent Rs 143 crore (Rs

1.43 billion) on advertising.

But it's not the increased spend on advertising alone

that has helped private players in grabbing market

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share. One of the key differential factors responsible

for their growing market is the 150,000-odd life

insurance advisors of the private insurance

companies.

"The private insurance agents sell better than their

counterparts at the LIC. Life insurance advisors of

private sector insurance companies adopt the need-

based selling approach, unlike the LIC's agency force

that pushes the number of policies," says Dam.

This also gets reflected in the average sum assured

by private insurance companies being higher than

that of the LIC. Policies sold by the private players

tend to be of a higher value.

For instance, Birla Sun Life's average premium stands

at Rs 24,500, while that of OM Kotak Mahindra Life is

equally high at Rs 20,400. Against this is the LIC's

average premium of Rs 3,200.

Of course, there's also a difference in the target

client of the private and the state-run insurance

companies. While the private players are targeting

the upper middle-class and high net-worth

individuals, the LIC aims for the masses through its

2,048 branches spread across semi-rural and rural

towns.

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Meanwhile, private insurance companies are

capitalizing on global relationships. "Business deals

are often a call away since we capitalize on AIG's

global relationship with multinational companies such

as GE and Kodak," says Tata AIG Life Ian Watts.

OM Kotak has gone a step further and tied up with

Swiss Life International so that it can capitalize on

the latter's relationship with 300 multinational

subsidiaries and affiliates.

But it's not as if LIC has lost out on group insurance.

The insurance major's group business reached new

heights in fiscal 2004, recording a 119 per cent

growth in new premium income and 50 per cent

increase in the number of lives covered.

Still, new business income for private companies has

grown at 146 per cent in fiscal 2004, compared to the

18 per cent average industry growth in new premium

income for the same period.

"The key in product sales lies in offering unbundled

and transparent products that give customer value,"

points out Dam.

The biggest draw in insurance in fiscal 2004 was unit-

linked plans. Ninety-five per cent of the policies sold

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by Birla Sun Life and over 80 per cent of the 436,000

policies sold by ICICI Prudential were unit-linked

plans.

And even though the LIC was late (January 2004) in

pushing its unit-linked product "Bima Plus", it

managed to mop up a premium income of Rs 373

crore (Rs billion) with the sale of just under 1.7-lakh

unit-linked policies, the highest sales figure in the

industry.

The advantage with unit-linked plans is that they

offer policyholders transparency in terms of costs,

annual returns and bonus calculations. With many

companies guaranteeing the capital investment

(some like Birla Sun Life even guarantee 3 per cent

assured returns on its unit-linked plans), the interest

in unit-linked plans only increased.

And the switch from traditional products to unit-

linked plans gained momentum as the Sensex climbed

higher: the returns on such policies are linked to the

equity market.

"The stock market has helped to a certain extent and

has contributed to our growth and performance,"

agrees Birla Sun Life CEO Nani Javeri.

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Aviva has shown a compounded aggregate growth

rate of 36 per cent since the inception of its fund.

Returns on OM Kotak's balanced and growth funds

stand at 31.79 to 43.25 per cent respectively.

Dam claims that OM Kotak has sold several policies of

Rs 25-50 lakh (Rs 2.5-5 million) since the "savvy

investor thinks it best to invest in unit-linked

products." He adds: "Growth is coming faster in

insurance companies with unit-linked plans."

Chapter 5

emergining trend in insurance sector

Documents