CHAPTER III

INSURANCE INDUSTRY AN OVERVIEW

3.1 INTRODUCTION

The growth of insurance industry is associated with the general growth

if industry, trade and commerce. Insurance industry assists the development
process of an economy. Basically, insurance industry acts as a facilitator of
savings, financial intermediary, promoter of investment activity, stabilizer of
financial market, risk manager and an agent to allocate capital resources
efficiently. Although the insurance industry has grown rapidly in the industrial
countries its growth in developing countries has neither been satisfactory nor in
tandem with the growth of other sectors of the economy. The slow growth of
insurance services in developing countries calls for an in-depth analysis of the
nature and pattern of the evolution of these services. Policies pursued to
develop the insurance industry and constraints there of also need a thorough
examination. Despite the fact that general insurance services started in India
about 150 years ago their growth has been dilatory, as well reflected by its low
insurance penetration and density. Several factors are responsible for this state
of affairs the chief being the monopoly status of the industry till recently.
Organisation structure is the source of the most cunning, premeditated and
potentially most destructive type of change resistance.1

The process of liberalisation and globalisation of the Indian economy

started in right earnest in mid 1990s. The market mechanism was the
motivating factor underlying the new economic policy. In consonance with the

1
Gorden Perchthold, Achieving Alignment Building Capability The Agile
Organisation, Insurance Chronicle, August 2004, p.48.
 31

new economic policy, insurance sector was opened up for the private sector
in 1999. The new competitive environment is expected to benefit the
customers, industry and the economy at large. The privatization and
liberalization move in India is not only in line with the reform of the economy,
including other sectors in the financial services industry, but also in line with
the governments efforts to meet international best practices in insurance
regulations and supervision.

3.2 CONTEMPORARY ISSUES IN INSURANCE

In recent years reforms in the banking sector and the stock market made
a new era in the insurance sector. Not only has the environment within which
the insurance industry undergoes a sea change, but it also accompanied changes
within the industry itself. With the growing awareness among consumers, most
significant changes within the industry necessitate transition in the pattern of
distribution and the developments of new forms of protection. The insurance
market in India has picked up really impressive prospects as India is endowed
with the huge untapped market. It is clear that the face of Life Insurance in
India is changing. But with the changes come a host of challenges. The
credible players with a long term vision and a robust business strategy alone
can yield an impact in the business pursuits.

Despite its teeming one billion populations, India still has a low
insurance penetration of 1.95 percent. It is an un-coordinated phenomenon in
India that out of saving rate of 25 percent less than 5 per cent is spent on
insurance. The confederation of Indian Industrys (CII) expert group on
insurance has estimated the aggregate insurance market at a conservative figure
of Rs.1,88,700 crores by 2009 2010. The life premiums are said to touch
Rs.1,45,000 crores by that year which constitutes a 76.8 percent of the
aggregate insurance market. The non-life premiums are said to touch
 32

Rs.38,600 crores which constitute a 20.4 percent of the aggregate insurance

market. Personal line insurance is expected to reach Rs.5,100 crores which
form a 0.02 percent of the aggregate insurance market.

The insurance sector offers the following job opportunities:

1. The Actuary
2. Professional under writers
3. Marketing of Insurance Polices
4. Soft ware Professionals
5. Investment Professionals
6. Administrative Officers
7. Development Officers
8. Insurance Brokers
9. Insurance Surveyors and
10. Insurance agents.

Therefore, the new setup will have entry of more players in the
insurance sector which offer opportunities for rapid growth of Insurance
business and massive mobilization of savings. It will also provide substantial
support to infrastructure projects involving long term investments and scope of
insurance business in rural or social sector.

The new scenario offers bonanza of opportunities for skilled and highly
motivated facilitators in Insurance Sector.

It is pertinent to note that India has reached the cross roads that
insurance companies can no longer operate with given confined national
boundaries. Companies from developing countries must align their work
culture and their policies and procedures with those of the participating
companies from developed countries. This peculiar situation now compels
 33

significant changes in areas such as their role and their ownership pattern. It
also involves the question of redesigning strategies and policies appropriate for
an open regime.

The insurance polices have to be priced correctly to ensure on the one

hand that the insured do not end up paying more. On the other hand the
insurers have sufficient funds with them to pay the claims of the insured when
the need arises. Correct pricing ensures credibility and stability in the
insurance market. This in turn reinforces the confidence of the insuring public.
The terms and conditions of the insurance offer required are to be standard,
uniform and clear enough

The ultimate objective of reforms is aimed to increase insurance density

and insurance penetration levels by designing more tailor made products for
customers both individuals and institutions. The Data exposing the Life
Insurance Density of India before liberalisation as against other countries is
shown in chart 3.1.
 34

Chart - 3.1
Life Insurance Density of Various Countries (Before Liberalization)

$1,600.00
$1,403.70
$1,400.00 $1,296.60

$1,200.00

$1,000.00

$800.00

$600.00

$400.00 $338.30
$303 $299.20
$222

$200.00 $99.80

$15.40 $26.30

$0.00
Singapore
Switzerland

Hong Kong
South Korea
USA

Malaysia
Taiwan

Thailand
India

Source: Southern Economist May 15, 2006.

The insurance density is positively correlated to the per capita income

which is quite low in India. Even on this augment it is surprising to observe
that the Indian Insurance density is lower than some of the other developing
countries whose per capita income is still lower than India.
 35

The main reason for such low penetration in India has been the
ineffective distribution and marketing game plans and due to its monopolistic
nature.

As per the figures available with IDRA for the period ended August,
2005, 13 private players have grabbed nearly 24 percent market share from LIC
in terms of premium underwritten as against 17.70 percent in August 2004.

The liberalisation of insurance sector has provided vast opportunities

with a variety of challenges to both private players and the state incumbent LIC
to prove themselves with their own innovative strategies in covering a wider
market with different segments.

The details of Market share of Life Insurance Insurers as on August 2005

Market Share of Private Players and LIC
ICICI Prudential 6.91
Max New York Life 1.28
HDFC Standard Life 2.98
Bajaj Alliance 4.73
Birla Sun Life 1.72
Tata AIG Life 1.66
AVIVA Life 1.08
ING Vysya Life 0.54
SBI Life 1.46
AMP Sanmar 0.46
Others 1.4
LIC 76.07
 36

6.91
1.28
2.98

4.73

1.72
1.66
1.08
0.54
1.46
0.46
1.4

76.07

ICICI Prudential Max New York Life HDFC Standard Life

Alliance Bajaj Birla Sun Life Tata AIG Life
AVIVA Life ING Vysya Life SBI Life
AMP Sanmar Others LIC

According to a study conduced by Foundation for Research Training

and Education (FORTE) 80% of the population do not have insurance in rural
areas.

Federation of Indian Chambers of Commerce and Industry (FICCI) and

ING vysya (Insurance) have conducted a survey and concluded that insurance
companies need to examine alternative and innovative marketing methods to
serve the rural markets. This study also observed that inadequate success in
establishing their credibility in rural markets has made life tough for the private
insurance players.

Insurance has undergone a massive metamorphosis in the recent years.

Insurance so far realized to be merely an instrument to avoid tax, has assumed
the status of promotional prospectus and security of ones life. Strategies have
to be adopted based on the dynamics of the market trends.
 37

The change in the structure of the nationalized insurance industry is

more conscientized with the entry of foreign companies into the Indian market
in the form of joint ventures.

Table 3.1 provides the details of Private joint venture insurance companies
with registration and date.
TABLE 3.1
PRIVATE/ JOINT VENTURE INSURANCE COMPANIES --
REGISTRATION NUMBER AND DATE
S. Regd. Regn. Origin
Company
No No. No. Indian % Foreign %
1 ICICI 105 24.11.2000 ICICI 74 Prudential(UK) 26
Prudential
2. Max New 104 15.11.2000 Max India 74 New York Life 26
York Life (New York)
3. HDFC 101 23.10.2000 HDFC 82 Standard Life 18
Standard ( UK)
Life
4. Bajaj 116 03.08.2001 Bajaj 74 Allianz 26
Alliance Holding(Germany)
5. Birla Sun 109 31.01.2001 C. K .Birla 74 Zurich Insurance 26
Life Group (Switerzerland)
6. Tata AIG 110 12.02.2001 Tata 74 American (USA) 26
Life
7. OM Kotak 107 10.01.2001 Kotak 74 Chubb(USA) 26
Mahindra Mahindra
8. AVIVA -- 01.07.2002 Dabur 74 All state(USA) 26
Life
9. ING Vysya 114 02.08.2001 Holland & 54 ING (Netherlands) 26
Life GMR Group,
Hydrabad 20
Vysya Bank
10 SBI Life 111 30.03.2001 SBI Bank 74 Cardiff SA(BNP 26
Paribas Bank)
11 AMP 121 03.01.2002 Sanmar 74 GIO (Australia) 26
Sanmar Group
12 MetLife 117 06.08.2001 MA 19 Met Life (US) 26
Chidambaram
Shapoorji & 30
Pallonji 25
J & K Bank
Source: Decan Herald, May 14, 2005 and The Economic Times, March 21, 2004.
 38

3.3 EVOLVING STRATEGIES AND EMERGING SCENARIO

Liberalisation of economy has thwarted the challenges which posed

threat to the insurance business in India. Todays insurance market scenario is
governed by the following factors.
Changing customer behaviour
Deregulation and intervention of Government
Competitive Technology
Distribution Networks
Automation
Client Relationship and Quality.

Customer profiles are changing radically due to change in Life style and
adaptation of social patterns.

The gender variations play a vital role with the attitude of customers.
Female population is 933 for every 1000 Males. Nevertheless the percentage
of insured female population is not according to the proportion of total
population. Even among the males insured the priority for insurance is
triggered for the sake of income tax exemption, rebate for housing loan and
similar purposes.

Seventy four percent of Indian population dwells in rural areas, owing to

the lack of awareness; problems related to logistics are some of the issues that
hinder developments of insurance market in rural sector. The crucial factor
that drives the majority of urban population towards insurance is tax benefit.
This factor fails to function in rural India, as the major income source of rural
population is from agricultural products which are exempted from the tax net.

Another factor that prevents rural masses from entering into the benefit
zone of insurance are their paying capacity mode of payments spread of risk
 39

etc. According to K.C. Mishra, Director NIA, probably the most important
aspect for a micro insurance scheme is the paying capacity of its members.
Affordability of premiums is a pre- requisite in any insurance scheme, but it
assumes more significance due to the economic status of the target group.
More suitably the scheme has to provide a reasonable level of benefit to its
members. Balancing these two aspects is a delicate task.

Fierce Competition is propelling the Indian Insurance Companies to

differentiate themselves from one another. But in matters of service it is
difficult to govern the situation. Typically any new services or product offered
by a company can be easily copied by competitors. Insurance is a sector where
products and services are more or less commoditized. Whenever a company
comes out with an innovative product in no time competitors launch similar
products. In such circumstances branding helps the customers choose an
insurance company over its competitors.

The rapidly changing economic scene, the political attitudes, social

values and structures, cultural pattern as well as developments in information
technology have transformed styles in urban as well as in rural areas. Their
collective impact introduces an element of uncertainty in the possible
developments in the insurance sector.

The insurance industry is already in a flux and a thorough analysis is

required to predict or the uncertainty or to assess the accuracy of the shape of
things to come.
Broadly, it is expected that the scene will be marked by the following
developments.
(1) The character of the industry will change in the wake of transition
from a controlled to a competition driven market.
 40

(2) With several new players, the foreign insurers will create a joint
venture route.
(3) The range of products and service offered will widen.
(4) Radical restructuring is inevitable for the present public sector set up.
(5) the industry will be closely regulated but not controlled and
(6) The public sector units will seriously have to set about preparing
themselves to face competition.

Replacement of reinsurance contracts by financial instruments, sale of

insurance through unconventional distribution channels and consolidation
through mergers and acquisitions are new domains of challenges of insurance
industries.

The most significant and potentially influential development since its

nationalisation is that the insurance industry in India, which until the end of
2000 was a Government monopoly is now experiencing the emergence of a
competitive market. The industry has now entered its most momentous phase
and its market dynamics are constrained to be flexible.

P.S. Palande, R.S. Shah and M.L. Lunawat (2003) have observed that
one can foresee tremendous development of the sector interms of the market,
the number of players, the products and services offered by them, market
innovation and professionalism It is but natural that a common man expects
better service from the insurer, no matter whether he is in the private or the
public sector.

As rightly observed by P.S. Palande, R.S. Shah and M.L. Lunawat

(2003) Increased competition is breaking down the conventional barriers
between institutions like insurance, banking, development banking and stock
market transactions. All the services are offered through one agency or by
 41

different entities but through one window or under one roof as an integrated
package a sort of one stop service. Sellers of various non insurance services
will also try to weave in an element of insurance to cover in their transactions.
Moreover, the insurance companies may no longer remain just life or non-life
insurance companies.

3.4 EMERGENCE OF BANCASSURANCE:

Bancassurance, a French term for the selling of insurance by banks, is
catching up in some European countries. The concept involves merging the two
activities of banking and insurance. In the U.K. bancassurance has grown at an
average annual compound growth rate of 21 percent per annum in the last five
years. In future bancassurance could be an important factor in promoting the
growth of life insurance industry. The insurance industry has to face this
challenge since bancassurance is currently being considered as a possibility in
India too. Life insurance companies deal with savings and investment and so
do the banks. Thus there is a potential synergy between their operations. The
ability to distribute its products at an economical rate is crucial to the insurance
business and this is where Indian banks with their wide network of branches
have tremendous strength. The bigger banks have branches spread across the
length and breadth of India, distribution through which can be less costly than
through the traditional agency force. The large banks rekindle a great deal of
trust and hence bancassurance could offer a new opportunity for them to
improve the productivity and profitability of their branches. A branch
manager, especially of a rural or semi urban branch is often regarded as an
investment consultant and this relationship can be leveraged for selling
insurance.

Distributing insurance is not as easy as it may appear on the face of it.

Insurance products, especially life insurance need to be sold rather than bought,
for which strong selling skills are required.
 42

Managing insurance business requires very high technical and

management skills. One handicap with the banks is that most of them lack
experience in developing products, face-to-face selling and setting claims. The
core competency necessary for this enterprise undoubtedly needs a long
gestation period and necessitates patience and capability to lockup large
resources for a long period of time.

As banks do not have any strength in managing liabilities, it is

advantageous for banks to tie up with reputed insurance companies, rather than
enter the business of their own. The customer base, reputation and distribution
channels of the banks provide added vigour to this arrangement.

Marketing has never been a strong point in the Indian Insurance

Industry or in any public sector unit. Unfortunately, all these years, because of
its monopoly status, the industry has only been selling and not marketing its
products. Most of the business in the non-life sector, for instance, arises on
account of statutory compulsions and as a Government monopoly. Hence, the
market network of Indian insurers, though extensive, remained weak in terms
of effort.

The nationalised insurance entities have arrived to the evolutionary cross

roads and they are bound to reform their marketing setup and strategies, flight
of business. The areas of their weakness are offering opportunities for the new
players. Market considerations will dictate even structural changes. Most of
the present policies, procedures, practices pertaining to marketing were
borrowed from the west. Many of the covers are also modelled on the pattern
of products available in the U.K. In the changing scenario, with the ever
changing market conditions, the Indian industry is put to severe compulsions to
indigenise its own models, by blending sufficient flexibility.
 43

The anticipated changes are in the following realms.

Marketing Practices
Fixation of Premium Rates
Claims Settlement
Accounting Practices
Consortia Arrangements
Adoption of New Technologies
Automation and the use of Information Technology

The marketing of insurance has some unique features. It has to identify

uncertainties in the lives of individuals and groups and in the functioning of an
economic system and offer suitable insurance covers for them. The
requirements of different groups of insurance seekers are diverse in nature.
Consumers require insurance-linked savings with reasonable returns to take
care of their consumer needs, old age and some periods of uncertainty in their
lives. Social regulations require employers to secure the life of their employees
by obtaining group life insurance covers for them. Credit institutions demand
insurance protection for the economic activities supported by them. With such
a multiplicity of situations, uniform policies cannot fully render service to the
masses.

In the life style of Indians, insurance buying is not an item of priority in

an individuals budget. Even the commercial establishments buy insurance
more out of compulsions of the financing agencies or out of statutory
requirements. If Indian masses are left free, individuals or groups or
corporations would rather carry risks than buy insurance, because they do not
like to anticipate misfortune or disaster. Hence, it is pronounced as a dictum
that insurance is always sold rather than bought.
 44

Keeping to the market realities, a good marketing strategy would do

well to research the products range and the channels of distribution available
and determine the right blend of distribution mechanism for pushing their
product line. Whatever the customers want they must get. It is up to the good
marketers to choose the channel to deliver the desired service at the doorstep of
customers. There are more selling efforts necessary in insurance market than
in any comparable service market.

Rural India provides a large and latent consumer base. Rural India
constitutes 70% of Indias population and 12% of the world population. The
rural market in spite of its huge potential has attracted little attention and the
resultant is poor insurance penetration.

The opening up of the sector and the entry of private players has resulted
on the consumer becoming more aware of the need for insurance. From the
customer point of view declining interest rates have made investments in fixed
deposits and other traditional savings products less attractive. The stock
market has continued to be volatile and safety of investments has been a key
concern for investors. Insurance companies on the other hand are offering
good investment options with the added benefit of risk management. All these
factors have resulted in an attitudinal shift in the need for insurance among the
Indian masses.

Insurance is increasingly viewed by the consumers as a complete wealth

management tool. Consequently consumers opt for different products from a
large menu, in accordance with their varying needs and the stage of life they
are in.

When private life insurers first entered the market, they introduced
simple familiar products; subsequently companies like ICICI Prudential
 45

launched more flexible feature laden products that were designed to meet
specific needs. This has led the insurance market to a more matured level of
product sophistication.

The insurers have come forward to take their obligations under the rural
and social sectors seriously. Insurers have introduced concepts like
gramsevaks in different villages across the country to act as their sales arm.

Easy term policies are being offered at very low rates of premium to
provide life cover. These methods with their warrants will be adopted in the
coming years, promise well for the development of this special market.

Management expenses of public sector insurance companies have

continued to exceed the statutory prescribed ceilings. This has been attributed
by the companies to the increase in salaries of officers and staff.

The government now encourages participation of private sector in the

insurance market and permits limited foreign ownership of local insurance
firms. With rigid licensure, solvency, investment and accounting requirements
insurance firms now focus on how to increase their operating efficiency and
financial soundness for long term success in the Indian Market.

The deregulated and liberalized market environment pressurizes insurers

to increase their efficiency and be more competitive while such a competition
does not necessarily lead to market distortion.

The insurance industry plays an important role for the economy that is
placed in transition towards a liberalised and competitive economy.
 46

3.5. PRICE BEHAVIOUR

The present system of fixing premium rates is almost inflexible and

needs to be oriented towards the market. In the case of LIC, there is atleast an
actuarial basis for determining the rates. In the case of non life Insurance
companies, the rates appear to be decided almost on an adhoc basis. There is
no doubt that the pricing structure itself will undergo a major change. To put it
in a nutshell in an open market, price driven costing will replace todays cost
driven pricing. The companies will be compelled to reduce prices in an effort
to increase their market share. Such lowering of prices yields an important
benefit of competition for the customer.

The three main factors that decide the premium rates under a life
insurance plan are mortality, expenses and interest. Significant changes in any
one of them result in a revision of premium rates. Other aspects like bonus
loading, taxation and inflation also contribute to the pricing exercise. Despite
the ground reality of premium rates the life company has to take special care to
keep costs under control. Inspite of lowered premium rates for without profit
policies and an increase in the bonus amount for life policies, consumers are
still of the opinion that the cost of insurance is high.

The factors of general insurance product pricing are claims cost,

business acquisition costs, management expenses, reserves and margin for
fluctuations in claims, governance and profit. The general perception is that in
this arrangement the consumer unnecessarily has to pay higher prices for non-
life products. Tariff also warrant rigidity in the market and are seldom revised
in response to changes in the market.

The present Marketing Strategy has driven the insurers to redefine the
organisational focus on innovation and differentiation, international expansion,
risk management, proliferation of delivery channels, process re-engineering
 47

and create an environment for innovation and collaboration and e-leadership

and in creating virtual teams and empowering best brains as decision makers.

The business environment of insurance has undergone substantial

change in the years after the economy was thrown open for integration with
global economy. The economic reforms have given birth to the era of
consumerism.

The insurance business in India is in a transition stage. The insurers

need to focus on transition facilitation. Appropriate strategies must be arrived
on the basis of happening at all levels.

The following are the emerging new trends in servicing.

(a) One can pay premium at any branch office and the premium will be
accounted in the policy records.
(b) One can pay future premiums in advance and enjoy a discount too.
(c) Premium payment through internet.
(d) Premium payment through ATMs
(e) Loan facility is introduced in money back policies.
(f) Accident benefit has been increased to fifty lakh rupees.
(g) Survival benefit claims are paid without insisting on policy bonds.
(h) Claims are settled earlier i.e. before the commencement of due date.
(i) Bench marks are fixed and revised for various servicing aspects
voluntarily and citizens charter is declared.
(j) effective grievance redressal machinery is introduced
(k) Customer relations manager was appointed.

The above list is not exhaustive but contains dominating factors that fine
tune the relationship between the insurer and the customer.
 48

3.6 INSURANCE SECTOR REFORMS

When the insurance business was thrown open in the year 2000 to the
private sector and foreign insurance companies there was high hope and great
expectations in the market.

The Insurance Regulatory Development Authority of insurance was

first conceptualised. It is basically the unforeseen contingencies of human life
that has given a totally new look to the insurance industry. Gradually as
competition increased the benefits given by the industry to its customers
improved by leaps and bounds.

The journey of insurance liberalisation process in India is now over

seven years old. The first major mile stone on this journey has been the
passing of Insurance Regulatory and Development Authority Act, 1999. This
along with amendments to the Insurance Act, 1938, LIC & GIC Acts paves the
way for the entry of private players and possibility for privatisation of the lither
to public monopolies LIC & GIC. Opening of insurance to private sector
including foreign participation has resulted into various opportunities and
challenges.

According to the Malhotra committee report, the reforms were aimed

at, Creating more efficient and competitive financial system suitable for the
requirements of the economy keeping in mind the structural changes currently
underway and recognizing that insurance is an important part of the overall
financial system where it was necessary to address the need for similar
reforms.

The committee strongly felt that in order to improve the customer

services and increase the coverage of the insurance industry should be opened
up to competition. But at the same time, the committee felt that the need to
 49

exercise caution as any failure on the part of new players could ruin the public
confidence in the industry. Hence, it was decided to allow competition in a
limited way by stipulating the minimum capital requirement of Rs.100 crores.
The committee felt the need to provide greater autonomy to insurance
companies in order to improve their performance and enable them to act as
independent companies with economic motives. For this purpose, it had
proposed setting up an independent regulatory body.

The decade of ninety will go in the annals of India as the era of

economic crisis and reforms. Like many economies in the world today, Indian
government also is adopting policies for a new economy. The government and
its principal actors are quite genuine about the goal of such policies. They are
persuaded that their policies will get the country to the desired goal of growth
and economic welfare of the larger section of the nation. These policies are
contained in a package known as economic reforms. The latest economic
reforms had begun in 1991. The main theme and thrust of the economic reform
is generally described as

Liberalisation
Privatisation and
Globalisation

The economic crisis of Ninety fueled the drastic steps to bring the
economy on the track. The main causes were
1. Share increase in the gross fiscal deficit

2. The inflationary pressure

3. The fall of foreign exchange reserver

The economic reform measures aimed at short and long term objectives
consisted of securing stability by financial measures. The long term objectives
aimed at structural changes in economy. It consisted of changes in industrial,
 50

financial and commercial policies. Having taken the efforts on liberalization

followed by privatisation, the reform process has led to the most vital phase
viz., linking the Indian economy with the global market. Unless initiatives
under the aspect also were devised and implemented there was no guarantee to
reap the benefits of the economic reforms. The economic rationale behind this
reform was to enrich our commodity competitiveness in the world market and
to earn the much needed foreign exchange, to match the fiscal deficits of the
national economy.

3.7. LIFE INSURANCE

Indian Insurance industry has a vast growth potential. The Indian

economy is among the most underinsured markets in terms of spread and
penetration. Factors such as the changing demographic profile, growth of
economy, economic reforms called into play, ever changing nature of risks in
the wake of technological advancements, play a vital role with the insurance
industry. It is of imperative importance to study the impact of social factors,
economic reforms, and its consequent influence in the mindsets of the masses
with regard to the choice for and attraction of insurance to various sections of
society. It need to be perceived that owing to several factors endowed with
uncertainty that influence the insurance sector, it is virtually impossible to
assess the quantum of the exact dimension of this potential.

The growth of the insurance sector is governed largely by external

factors. The following factors are pivotal in influencing the insurance market:
Government Policies
Population growth
Changing age profile
Income-wise distribution of the population
Level of insurance awareness
 51

The general price level

The economic reforms of the country
The psychological complexities for risk
The social and political features of the country
Growth scenario in the world

As far as India is concerned the factors that could generate the growth in
insurance industry would include the following rising income levels in the
wake of rapid industrialization, agricultural prosperity and economic reforms
risks arising in connection with the new technologies, introduction of new
products, consumer friendly services systems, improving level of literacy and
education, increasing financial status of the middle class, changing pattern of
family due to cross-cultural factors, professional opportunities, increasing
number of women entering the professional work force and new pattern
formation of life.

3.8 ECONOMIC GROWTH AND LIFE INSURANCE BUSINESS

Economic growth is a key determinant of the growth of the insurance

business. There is always a positive correlation between economic reforms and
its consequent economic development and the amount people spent on
insurance. Economic growth enjoyed by the masses is not just a quantitative
growth but the quality of growth which also influences the demand.

It is pertinent to note that not every factor from the realm of the
economy is supportive of growth in insurance business. There are certain
factors which will adversely affect the insurance business. High inflation for
instance would tend to reduce the life insurance business, if high inflation is
prevalent then the real value of the money paid back to the policyholder on
maturity of the policy would go down and would therefore reduce its attraction
for the investor. In contrast the insuring public may prefer pure risk plans or
 52

term insurance which bears a low premium outlay. A very high inflation rate
can pose threat for the non-lie insurance also because of the difficulty in
assessing the replacement value of an asset over a period of time.

In an atmosphere of high inflation, client would prefer policies where

the savings portion is periodically returned, whereas the risk portion is
maintained for the duration of the contract. Those who opt risk protection are
likely to opt for long term policies which may have a low savings element.

3.9. SOCIAL TRANSFORMATION AND LIFE INSURANCE

BUSINESS
The rising aspirations of an emerging middle class in the changing
scenario of economy are another vital factor. Consumer activism, the
popularity of public interest litigation and a free press makes the demands of
the insuring middle class, unavoidable. The unique problem in India with
regard to insuring attitude is that there is a high percentage of those who are not
adequately insured. This change would take place when economic reforms are
effectively administered.

Growth of the economy should normally imply growth in employment.

Consequently this creates its own demand for insurance. Since, growth in
employment accompanies a rise in income levels; it will prompt a further rise
in the demand for insurance. Rising income levels also means a desire for a
developed life style which has its own influence on insurance demand.

Moreover the disposal income in the hands of the growing Indian

Middle class with strength of more than 300 million has been increasing and
has included some of them to invest in life insurance. At the same time the
rural subsistence economy is changing into a consumption economy a very
significant transformation. Therefore, after the middle class, the new customer
case is likely to be found in the rural masses.
 53

Another important aspect is the distribution of urban and rural

population over the years there has been an increasing shift in the urban
percentage and to that extent insurable population in shooting up higher job
opportunities and income levels in urban areas always result in a higher
percentage of urban population which can stabilize the insurance premium
payment capacity.

A relatively prosperous economy cases some of the pressures on

expenses in corporations and leads to an improved market for insurance. The
increase in industrial production necessitates the demand of more insurance
services. As the assets of people and of business enterprises increase with the
growth of economy, the demand for insurance increases. Various new types of
services are now entering the Indian Market and demands insurance of a
different type on an increasing scale.

3.10 ECONOMIC REFORMS AND IMPERATIVES OF INSURANCE

Economic policy reforms started during late eighties and speeded up in
nineties are the context in which liberalization of insurance sector happened in
India. It is appropriate to note that the liberalization of productive and financial
sector of the economy has to go hand in hand. It is fitting that these sectors are
consistent with policies of each other. Unless and until the sectors as well as
the policies both function efficiently and are in equilibrium it would remain as
a difficult task to ensure appropriate economic advancements. In the light of
these facts liberalization of both sectors bound to proceed simultaneously.

Indian economic system has been developed on the paradigm of mixed

economy in which public and private enterprises are allowed to maintain co-
existence. The past strategies of development built upon socialistic thinking
were focusing on the premises of restrictions, regulations, and control and less
on incentives and market driven forces. This affected the development process
 54

in the country in a serious way. With the advent of economic liberalization the
paradigm shifted from central planning, command and control to market driven
development. Deregulation, decontrol, privatisation, delicensing, globalisation,
became the key strategies to implement the new framework and encourage
competition. The social sectors have realized the impact of this change. The
governance of Government expenditure, which became a key tool to manage
fiscal deficits in early 1990s affected the social sector spending on major way.

The compulsion for liberalization of the insurance sector was the need for
long term financial resources on sustainable basis for the development of
infrastructure sector such as roads, transport etc. It needs to be perceived that
during the course of economic liberalization the flow of funds for the
development of infrastructure also became a major consultant. In these
investments the benefits are more social than private. The primary concern
was how these finances can be made available at low costs. In the recent part
the development of the social sector was funded using government channeled
funds through various semi government financial institutions.

The financial sector, which consists of banks, financial institutions,

insurance companies provident fund schemes and mutual funds were all under
government controls. Government had significant control on the policies of
these insurance companies that could offer and utilize the resources mobilized
by insurance companies. One can widen that most of the life insurance
products promoted as mere mechanism to improve the savings and tax shelters
rather as risk coverage instruments. Other segments of the insurance products
grew because of the statutory obligations under various acts. The management
and organization of insurance sector companies remained less developed and
they neglected new products development and marketing. The chief object of
opening the insurance sector was that the private and foreign companies would
rapidly develop the sector and improve average of the population with
 55

insurance using new products and better governance. The signing of WTO by
India has compelled the opening of the insurance sector.

3.11. THE IMPACT OF THE INSURANCE REGULATORY AND

DEVELOPMENT AUTHORITY

The Government has established Insurance Regulatory and

Development Authority (IRDA) which is the statutory body for regulating the
whole insurance industry. Granting licences to private companies and
regulating the insurance business is vested with the IRDA. As IRDA is at the
threshold level its pioneer effort is expected to be crucial. IDRA will need to
evolve mechanisms by which it applies some kind of statute in place that
private insurance companies do not skim the market by focusing only on rich
and upper clan clients. Consequently, this would result in the neglect of a
major section of Indias population. Companies with a vision must tailor
products for the poorer segments of the community. Vast scope is available for
the government companies in catelysing new products for the poor and lower
middle class. The regulator also enjoys the opportunities of involving NGOs,
Co-operative Societies, Self Help Groups to enter into the insurance business
and develop products for the poor and middle class. Since India does not
possess a large organized sector of employment the only portion for insurance
is to develop it through co-operative associations and unions.

While examining the relationship between Economic reforms and

insurance, economic reforms have been taken up in the sense of growth
implying sustained increase in the GDP / per capital GDP of the country. The
growth of GDP is a function of host of factors, which can be grouped into the
following four categories.
 56

Human resources (Labour, education, decrypting motivation etc.)

Natural resources (land, Minerals fuch, climate etc.)
Capital formation (machines, factories, roads etc)
Technology (science, engineering, management etc.)

The relationship between capital formation and insurance of the world

has been quite perceived and significant.

3.11. GENERAL INSURANCE BUSINESS

Initially General Insurance business was transacted by British and other

foreign insurance companies through their agencies in India. General
Insurance business in India came into the hands of public sector under the
caption of General Insurance Corporation on India and its four subsidiaries
Viz., National Insurance Company Ltd., New India Assurance Company Ltd,
Oriental Insurance Company Ltd, and United India Insurance Company Ltd in
1972. General insurance is a type of insurance which is not taken on the life of
any person i.e. it consists of insurance of risks involved in property i.e. risks
like burglary theft, flood, conditions of a physique of a person. A proposer of
the general insurance can take out a policy based on the actual or the market
value of the asset.

In 1957, the General Insurance Council, a wing of the Insurance

Association of India framed the code of conduct. This code of conduct
addressed fair conduct and sound business practices in the general insurance
industry. Consequently, in 1968, the Insurance Act was amended again to offer
for the extension of social control over insurers, transacting the general
insurance business.
 57

The general insurance business has grown in spread and volume after
nationalization. The GICs equity capital increased from the original capital of
Rs. 215 million to Rs. 2.15 billion through bonus issues in 1982, 1986, 1990
and 1994.

The four companies continued to expand their activities. By

2001 2002 they operated through 2,699 branch offices, 1360 divisional
offices and 92 regional offices spread all over the country. The gross premium
income of the non-life insurance business grew from Rs.2.04 bullion in 1973 to
Rs.118.08 billion in 2002.

With the conservative approach towards investments after fully

providing for technical and other reserves, the industry has always made
profits. It grew from Rs.380 million in 1973, 8.74 billion in 2000 but came
down to Rs.5.1740 billion in
2001.

After nationalization, general insurance continued to show a bias towards

the city based trade and industry for a number of years. Its emphasis has now
shifted and from a virtual nil premium base in 1973, its rural and non-
traditional business rose to Rs.3.3614 billion in 1998.

Despite all these advancements, coverage by General insurance is still

lower in India as compared with other countries. The low coverage is
attributed to the following factors.
 58

The awareness level is low for general insurance products.

Non attractive commission structure
Distributive channels not responsive to customer needs.
In adequate knowledge
Void of customer centered services
Personal lines of business did not get adequate attention.

The purpose of establishing the General Insurance Company as a

holding company is superintending, controlling and carrying on the business of
general insurance. Its functions as enshrined in the Act 1972 are as follows.

The carrying on of any part of the general insurance

business as deemed desirable.

Aiding, assisting and advising the companies in the

matter of setting up of standards of conduct and sound
practice in general insurance business and in rendering
efficient customer service.

Advising the acquiring companies on the matter of

controlling their expenses including the payment of
commission and other expenses.

Advising the acquiring companies on the matter of the

investment of funds and

Issuing directions to acquiring companies on relation to

the conduct of the general insurance business.

With these objectives in view General insurance company laid down the
policy guidelines and monitored the functioning of the subsidiary companies in
order to spread non-life insurance cover to a variety of risks over larger
geographical areas.
 59

3.13. ORGANIZATION OF GENERAL INSURANCE IN INDIA

The General Insurance Corporation of India (GIC) is a holding company

of non-life insurance companies in India since January 1, 1973. Prior to
nationalization, around 100 companies, including branches of foreign insurance
companies, operated in India. Under the General Insurance Business
(Nationalization) Act 1972, these companies were amalgamated and grouped
into four operating companies, namely. The National Insurance Company Ltd,
Calcutta; (NIC), The New India Assurance Company Ltd, Mumbai; (NIA), The
Oriental Insurance Company Ltd, New Delhi; (OIC) and United India
Insurance Company Ltd, Chennai; (UIC). They became subsidiaries of the
holding company namely General Insurance Corporation of India(GIC) which
came into being on January 1,1973. The General Insurance Industry Structure
in India has given in Chart 3.2
Chart - 3.2
GENERAL INSURANCE INDUSTRY STRUCTURE IN INDIA

G.I.C

Subsidiaries

National New India Oriental United India

Insurance Co. Assurance Insurance Insurance
Ltd., Co. Ltd., Co. Ltd., Co. Ltd.,
H.O. Calcutta H.O. Mumbai H.O. New Delhi H.O. Chennai
 60

GIC is fully owned and administered by Government of India and the

four subsidiary companies are fully owned and administered by GIC. All the
five entities are thus Government companies, registered under the Companies
Act, although established under the act of Parliament. All the five companies
have Boards of Directors. The GIC Board has a full time Chairman assisted by
two Managing Directors. The Chairman and Managing Directors are members
of the Board. The Additional Secretary (Insurance Division) is ex-officio
nominee member on the Board. There are part-time members on the Board
nominated by Government from among Chief Executives of Financial
Institutions (LIC, State Bank, Exim Bank, IDBI) and prominent representatives
of special interest, social and economic groups. The Chairman-cum-Managing
Directors of the four companies are permanent invitees on the Board.

The GIC as a holding company is responsible for governing, controlling

and carrying on the business of general insurance. The four subsidiaries carry
on direct business operations on all India basis. The GIC does not carry on
direct insurance operations excepting Aviation Insurance of the National
Carriers. It has reinsurance arrangements with the four subsidiaries where
under 20 per cent of their business is ceded by the subsidiaries to GIC

3.14 DISTRIBUTION OF GENERAL INSURANCE

The ultimate objectives of reforms is to increase insurance density and

insurance penetration levels by designing more tailor made products for
customers both individuals and institutions.

With the wide network to distribute insurance products, facilitators will

help further sale of insurance products besides promotion of better risk
management practices. Insurance needs, which previously meant merely
obtaining a life insurance policy through the ubiquitous agent, have gradually
grown to seeking protection for ones health, assets and business. This trend
 61

complemented by quality service sparked off by increased competition among

insurers to retain customers has been transforming general insurance into a
steadily growing industrial sector.

Private Sector insurance players with a 9.4 per cent market share
increased their premium income nearly 200 percent. The driving force behind
the record growth of the industry is the increasing demand for specialized
covers by customer. The customer profile is put to a change with the
introduction of a large number of private participants, divergent intermediaries
such as agents, brokers, corporate agents and bancassurance partners. With
increasing buying capacity, asset procurement has been on the rise. This in
tern has set the trend for increasing demand to protect assets against
eventualities, including natural calamites.

Distribution plays a key role for the success of any product and service.
Although the Indian insurance market has witnessed a steady and phenomenal
growth interms of the policies sold, it is unfortunate that the real spread of
insurance awareness has not been achieved. With the arrival of new
distribution channels into the industry, one hopes that people would assimilate
the real benefits of insurance sooner than later. In this regard the persons in
charge of distribution are vital. The incidence of the distributor playing as
essential role is less manifest in the case of perceivable products for oblivious
reasons. The distributor plays prominent role in ultimately ensuring that the
service is delivered. When it comes to insurance, the role is much more
complicated as compared to that of other services. Distribution of insurance
policies in India has been totally agent centred and one has to commend his
role in having done it successfully over such a long period with such an
amazing thrust and reach.
 62

Despite this massive formation of marketing network the penetration of

general insurance industry in the lower end of the marketing stands
unsatisfactory. The four companies generate a gross direct premium of about
9,000 crores of which only 2% are from the rural insurance products like cattle,
JPA, GPA, Kissan packages etc. There are 2.5 million mediclaim policy
holders in India. Despite the ever increasing rate of road accidents in the
country awareness for accident insurance remains to be very low and personal
accident policies are not yet popularized amongst the lower and middle class.

At the time of nationalization, the Government of India planned that low

cost mass based insurance schemes should be popularized. Nevertheless this
has not happened in reality. One of the reasons attributed to our failure is the
poor retail network and skewed service conditions of development officers in
the nationalized industry. It is well known that the need of general insurance
products is inextricably linked to the world of finance. Hence, the army agents
were deprived of income by servicing a large segment of business emanating
through banks, NBFCs, project finance, hire purchase and leasing etc.

The actual implementation of marketing policy of the general insurance

industry has been responsible for keeping the clientele from the household and
personal insurance sector neglected. While 50% of the policy holders of LIC
come form rural sector the common man failed to get the flavour of the general
insurance service. There has been no strategic co-operation between LIC and
GIC. They both have failed to synergies their mutual strengths.

The so called low cost mass insurance schemes failed to pickup

paradoxically. The sales officials did not feel motivated to mop up individual
policies as the average premium collection per document did not offer them
enough income. However, the industry as a whole, sold a large number of
group accident schemes to low income groups, like fishermen, agriculture
 63

workers, municipal workers, railway passengers, railway policemen, village

artisans and organised groups in housing societies etc. Some enlightened
employers have also group JPA / GPA accident insurance schemes and various
health insurance group policies for their employees. Nevertheless the vast
majority of unorganised labour have remained outside the benefits of such
schemes. Even traders shop keepers, self employed have not been adequately
protected by insurance.

It is pertinent to note some schemes which are tailored with good

intention have also failed to pick ups owing to the absence of potential
intermediaries. For example Suhana Safar a low cost personal insurance
scheme for domestic travelers in groups, could not be launched in the market as
the industry, did not permit under its rules agency license to the travel agents.

Besides the other reasons for slow development has been the
cumbersome procedure for claim settlement. It is a sad commentary on the
management of nationalized industry that it has failed to simplify the procedure
for a mass market despite the much allowed goal of nationalization.

Having sensed the deficiencies of marketing under the nationalized set

up, the newly licensed insurance companies are now faced with the challenge
of appropriate channels of distribution. It is note worthy that no good model
exists in the matter of agency system in non-life market. The public sector
companies relied on a variety of distribution system like direct marketing from
office to office, development officer as a semi wholesaler and part time agents
as casual retailers and distributors. Thus, the entire distribution machinery in
non life remain unfocussed.
 64

3.15. UNIQUENESS OF GENERAL INSURANCE

Unlike, life insurance business, non life insurance is unique in the
sense that the products or business is non-homogeneous. The range of product
could vary from a small business or risk like poultry farm to the highly
complex systems like communication satellite and petro chemical units. Such a
variety of market cannot possibly be handled by a single kind of intermediary.
Therefore, world wide brokers have been acknowledged as the right medium of
distribution. Because brokers alone could aggregate the variety of risks in the
market, pre-process the requirements of the mixed clientele and the place the
business proposals into appropriate underwriters. In such an arrangement, the
customers are satisfied that they are obtaining their right advice at their
doorstep and the delivery mechanism is rather prompting accurate and
customer centered.

Neither in the pre-nationalized period nor after nationalization broking

was ever introduced as a credible distribution channel. Insurance officers were
expected to offer expert advice and guidance through development officers.
But the monopoly insurance services fell short of the desired level of the
satisfaction, in the absence of customer centered approach.

3.16. GENERAL INSURANCE POST LIBERALIZATION PERIOD

Two years since liberalization the private players have made

considerable advancements in the insurance industry. There exists a vast
hidden market in insurance, which needs to be tapped. According to the
projections by confederation of Indian Industry expert group expects in general
insurance premium income to double by 2004-2005. Traditionally, the life
insurers have been banking solely on the agency distribution force. On the
contrary general insurance business has depended totally on the development
officers. Most of the major general insurance business written in the country
 65

has been the outcome of direct marketing efforts through executives called the
development officers.

After liberalization, the insurance industry has realized the potential and
need for selling insurance through banks. In the year 2004 11 life and non-life
insurance companies had entered into tie-ups with 21 banks. But all these
banks and insurance companies are not implementing the same model for
distribution.

The ultimate objective of reforms is to increase insurance density and

insurance penetration levels by designing more tailor made products for
customers both individuals and institutions. The selling of insurance products
by banks of reputation gives a seal of credibility in the minds of the individual.

Unlike life insurance where all policies necessarily result in claims

either on maturity or on death in general insurance not all policies result in
claim. Approximately around 15% policies in general insurance result in
claim.
In the case of general insurance, the yearly premiums have gone up from
Rs.11, 605 crores in 2001-2002 to Rs.13, 879 crores in 2002-2003. This
captures a healthy growth of 19.60%.

3.17. GENERAL INSURANCE REAL PERSPECTIVE

The real perspectives of general insurance over a period of time could be

evaluated interms of parameters such as growth of gross and net premium
geographical spread of the business, strata wise distribution of business
underwriting results, reinsurance operations, investment income, free and
technical resources, net worth, overall profitability etc. In this concluding
section, the growth of the general insurance has been examined in the context
of above parameters.
 66

The net claim payable was at Rs.7,586 crores in 1999 where as it is

Rs.1123 crores in 1973 accounting for 81% to net premium. The expenses
including management expenses commission and other outgo which were Rs.
68 crores in 1973 increased to Rs.2510 crores in 2000. The expenses of the
management amounted to 22.7% of gross premium income and 24.1% of net
premium. The total investment increased by about 47 times. The compound
annual growth in investible funds was about 17%. The average annual gross
yield on mean funds amounted to about 13% with regard to the stratawise
distribution of business the fire, miscellaneous and marine accounted for 24%,
66% and 10% in 2000 respectively. The net incurred claim ratios were 41%,
99% and 70% in fire, miscellaneous and marine business in 2000 respectively.
In miscellaneous portfolio motor business which is a loss making business has
steadily grown over a period of time and accounted for 32% of the total
business of the industry. The Geographical spread of the premium written in
India indicates that the maximum i.e. about 40% was generated from west
region and minimum i.e. about 9% from the eastern region. The Northern and
Southern region contributed about 26% and 24% of gross premium in 2000
respectively. The under writing profit of the industry was Rs.18 crore in 1973.
However, over a period of time underwriting operations have resulted into
losses and these losses amounted to Rs.1215 crores in 2000 accounting for 13%
net premium income.

Although the total number of insurance products in the general

insurance industry is around 175 only a few 40 to 50 products have dominated
the market controlling about 75% to 80% of the total market. Rest of the
products have not been popular as they lack mass base may be due to poor
publicity and marketing, lack of awareness, higher premium rates, and might
have been introduced without adequate base.
 67

The rural and non traditional business which was practically nil in 1973,
has gradually increased over a period of time. The premium collected through
this business was only about Rs.425 crores in 2000 constituting only 4% of the
total gross premium income. It demands for innovating new products for the
rural population suiting to different income groups and marketing them
aggressively. If the total policies issued by office in rural areas are taken into
account, the premium from rural areas will account for about 30%.

Despite the fact that the industry has grown after nationalization in terms
of premium income, introduction of new products, wide coverage of
individuals and organizations, innovating new covers for weaker sections of
society, investment in social sectors, creating infrastructure at grass roots level
etc several weakness have also come to surface during the years of post
liberalization. They are

Low level of insurance penetration

Low level of insurance density
Poor quality of insurance services
Lack of Qualitative and Quantitative insurance products
Low productivity
Inadequate application of Information Technology

The opening up of insurance sector offers ample opportunities to both

existing as well as new players to penetrate into untapped areas. Insurance
penetration broadly measures the significance of insurance industry in relation
to a country is entire economic productivity. It indicates the importance of
insurance industry in building the national economy. More vitally insurance
density reflects upon the countrys insurance purchasing power.
 68

After liberalization of the insurance industry there has been substantial

growth of insurance market on a sustained basis. The general insurance
business in India has grown at the rate ranging between 10 to 20 percent over a
period of time. The average growth rate of gross domestic premium in India
amounts to 16 percent per annum. There is scope for accelerated growth rate
of premium in the country which will be in tune with the world trend where
insurance sector has been opened up both for domestic and foreign players.
One can assume and estimate on the basis of the track record, the growth rate
would be ranging between 16% to 20% per annum.

If the market grows at an average rate of 16% per annum the total gross
direct premium in India will be Rs.24320.11 crores in the year 2005-2006. If
the market grows at the rate of 20% per annum the total gross direct premium
income in India would be around Rs.24838 crores by 2005-06.

Though the shift from monopoly to completive market is realized as an

opportunity it poses challenge to both existing as well as to new firms. The
challenge will be in the light of ever growing awareness of the consumers, the
quality of services offered under the umbrella of global competition, policy
conditions, time parameter in the delivery of policy documents, pricing of
products, settlement of claims etc. Thus, the competition while offering ample
opportunities to the firms to widen the horizon of the market are also subjected
to serious challenges due to increased sensitiveness of consumers to the quality
of customers services. There will be change from sellers to the buyers
market in the insurance industry.
 69

It is concluded that every life or non-life insurance company is looking

for ways to expand their operations in India. Insurance companies are spending
a huge amount to identify the needs of the customers and are providing a
variety of products to attract them. The top most public sector insurance
players are also identifying new ways to satisfy the needs and will be
competing with the private players in the near future. As more new players
enter the fray there will be ample scope for growth and the industry will
become highly competitive.