Globalisation

of insurance
sector:
The experience a
fter independenc
e in insurance se
ctor showed that
the ultimate obje
ctiveremained
largely unfulfilled
due to the
relatively low
spread of
insurance in the
country
theefficient and
quality
functioning of the
public sector
insurance
companies and
the
untapped potentia
l for mobilizing
long
term financial
resources to
finance the
growth of
infrastructure,
thegovernment set
up an insurance
returns Committee
in April, 1993
under the
chairmanship of
R. N. Malhotra, to
suggest reforms in
the insurance
sector including
improving the
functioningof the
LIC, GIC and
strengthening the
regulatory system.
The committee
submitted its
report tounion
finance minister
on 7-01-1994,
recommending a
phased program
of liberalization
andcalled for
a private sector
entry
and restructuring
of LIC and GIC.
The subsequent
governmentmove
d an insurance
bill but it was not
passed, the next
government
moved on
insurance
billagain in 1998,
which was
referred back to a
select committee
of parliament
afterwards
thegovernment in
troduced the insu
rance regulatory
Development aut
hority (IRDA) Bi
ll in
parliament with
some changes
in the original
structure
the government
of India created
historyon October
private sector
companies.
Penetration of
insurance
sector in India:
Insurance is a Rs.
400 billion
business in Indias
and together with
banking services
adds about7% to
Indias gross
domestic product
(GDP) gross
premium
collection is about
2 percent of
GDPand growing
between 15 and
20 percent per
annum. India
also has highest
number of
lifeinsurance poli
cies in force in th
e world.
Yet more than th
ree fourth
of Indias insuran
ce population has
no life insurance
cover the
penetration of
insurance is very
low in India
thefollowing
indices support
this contention.
While per capita
insurance
premium in
developedcountri
es is very high, it
is quite low in
India per capital
insurance
premium in India
in 1999 wasonly
$8 while it was $
4800 for Japan, $
1000 for Republic
of Korea, $ 887
for Singapore, $
823for Hong
Kong and $ 144
for Malaysia. The
insurance
Premium as a
Percentage of
GDP was14% for
Japan, 13% for
south Africa,
12% for Korea,
9% for UK and
less than 2% in
India in1999
Similarly the
insurance
Premium as a
percentage of
Gross Domestic
saving (GDS)
was52% for U.K,
35% for other
European and
American
countries,it was
only 9% for India
in 1999The share
of India in the
World market in
terms of Gross
insurance
premium is again
very 1000.For
instance, While
Japan has 31%,
European Union
25%. South
Africa 2.3%,
Canada
1.7%share of the
global insurance
premium, it is
only 0.3% for
India.
Insurance
sector -
Hurdles:
The insurance
industry has been
growing between
15 and 20
percent, but it
lags far behind
itsglobal
counterparts.This
was due to the
following reasons.
.1.Insurance
companies create
products and go
out to find
customers. They
do not
create products
that the market
wants.2. Insuranc
e awareness
among the
general public is
low.3.Term-
Insurance Plants
are not
promoted.4.Unit
-linked
assurances are
not available.
5.
Insurance covers
are expensive.
Inefficient
management and
low investment
yield
areresponsible for
the high premium
charged by Indian
Insurance
companies
Investmentrestrict
ions have been
responsible for
10w
yields.6. Returns
from Insurance
Products are
low.7.There is a
dearth of
innovative and
buyer-friendly
insurance
products.
2
Globalization
of Insurance
Sector -Issues:
The three key
issues that
impinge
on liberalization
of insurance in
India are: why
liberalize,
whatmarket
structure to have
finally and what is
the role for
regulator. :
(i) Reason for
opening up the
Insurance
Industry:
An insurance pol
icy protects
the buyer at som
e cost against fin
ancial loss arisin
g from aspecified
a risk. Different
situation and
different people
require different
mix of risk
costcombinations
. Insurance comp
any thereby offer
s schemes of diff
erent kinds. Amo
ng theemerging
economies, India
is one of the least
insured countries,
but the potential
for further growth
is phenomenal.
The demand for
insurance is
likely to increase
with rising per
capitalincomes,
rising literacy
rates and increase
of the service
sectors. After
Korean and
Taiwaneseinsuran
ce sectors were
liberalized, the
Korean market
has grown 3
times faster than
GDP andTaiwan
the rate of growth
has been almost 4
times than that of
its GDP. Further,
opening of
thesector to
private firms will
foster
competition,
innovation and
variety of
products. It will
alsogenerate
greater awareness
on the need for
buying insurance
as a service and
not merely for
taxexemption,
which is currently
done.
(ii) Market
Structure:
What is the
appropriate
market structure
for insurance
markets? Should
it be monopoly
(state
or regulated) or
should there be
unlimited private
entry or should
there only be a
few
regulated players
? The answer is
quite obvious.
When traditional
public sector
businesses like
banking, power,
telecom, airlines
and even postal
services have
been allowed
private entry,
why
mustinsurance
remain a state
monopoly? State
monopoly had
little incentives to
offer a wide range
of products with
more complex
and extensive risk
categorization,
better technology
and
better customer s
ervice including f
aster settlements.
Keeping in view
the recommenda
tions of insuranc
e reforms commi
ttee that a limited
number of high
capital private co
mpanies belicens
ed, and no firm be
allowed to operate
both in life and
non-life
insurance, IRDA
has
grantedlicenses to
three private
companies on
October 24, 2000
- Reliance Fire
and General
Insurance,HDFC
Standard Life
Insurance and
Royal Sundaram
Alliance
Insurance, to set
up the shop andto
get into business.
2
(iii) Role of IRDA
IRDAs primary
function is to pr
otect consumer i
nterests. This me
ans ensuring pro
per disclosure,
keeping prices
affordable but
also insisting on
some mandatory
products, and
mostimportantly
making sure that
consumers get
paid by insurers.
Further, ensuring
the solvency
of insurers is a
very
important function
of regulatory
authority.IRDA
has evolved a set
of operational
guidelines to deal
with maintaining
the solvency
of insurers.
Growth of
insurance
business entails
better education
and production to
customers,creatin
g better
incentives for
agents and
intermediaries. It
has evolved
guidelines on the
entryand
functions of such
intermediaries.
Licensing of
agents and
brokers are
required to check
their indulgence
in activities such
as twisting,
fraudulent
practices, rebating
misappropriation
of funds.
Insurance
Sector -
Emerging
Areas:
Some of the
emerging areas
for insurance
sector in India are:
1. Demand for P
ension Plans:
Two relatively
modern trends
affect life
insurance business
in India
significantly. The
first one isthe
joint family
system which
worked like an
insurance
arrangement.
With more and
morenuclear
families becoming
the rule, there it a
greater demand
for life insurance
cover the
secondtrend is
that elderly are
increasingly
having to fend for
themselves. In
1990, India had
about 54million
people above the
age of 60. This
number is
expected to
increase to 100
million by
2004,and to
almost 10% of
the total
population by
2010. Thus future
senior citizens
look
towards planning
for their own old
age and the need
for pensions and
annuities. These
two trends
portenda large and
growing market
for life insurance
in India.

2.
Separateness of
Banking and
Insurance:
There is lot of
speculation
whether banks
should be allowed
to operate in the
insurance
sectors.The reaso
ns for
allowing banks a
re
competition wou
ld enhance
efficiency and be
nefitconsumers,
public-men enjoy
a One- Stop
Financial Service
Paradigm, banks
could recoupsome
of the lost
business to
securities firms
and there would
be synergies in
operating
insuranceand
banking. The
reasons against
are - it would
create unhealthy
concentration of
market
power,it would e
xpose banks to a
dditional and
unnecessary risks
and banks would
have
unfair advantages
since they have
detailed
information on
their customers
financial position.
Thisdebate is far
from settled and
we are likely to
see some
restructuring in
operations of
bankingand
insurance.
3.
Role of
Information
Technology :
2
The Business of
selling life insura
nce requires asse
ssing the profile
of the customer a
ndassigning
the right
policy. This
process is
facilitated
by a database
and is completely
driven byinformat
ion technology. If
it uses this
network of
database to offer
their products, it
would have better
utilized this vastly
underutilized
capacity.
4.
Using Postal
Network:
2