C H A P T E R - 1

Introduction and purpose of study

1.0 Introduction:

Liberalisation has been a turning point in the history of insurance market in India.

Along with many other fields that existed under a public sector monopoly and are now

facing the consequences of liberalisation of the Indian economy, insurance market is at

a crossroad, waiting to make sense of the changes and to be guided towards betterment

and progress. The present research is an effort to participate in the process of review,

add the much needed scientific perspective to the process, enabling life insurance

organizations to formulate the much-needed relevant novel strategies in the new

scenario.

1.1 Significance of life insurance:

The reason why people buy life insurance is that it protects a few against financial

impact of anticipated bad luck by spreading the loss among the many that are exposed

to risk of a similar nature. It is not possible to predict which individuals among the

holders of the policy are likely to be the victims of bad luck. However, it is possible to

forecast the quantum of loss for the group. As per Ayyar, "Insurance is thus a

cooperative coming together of individuals exposed to risk and a medium to

bring them together and to administer the business".'

Life insurance is a contractual agreement for payment of a predetermined sum of

money to the person assured in the event of death or happening of any contingency

whichever is earlier. As per terms of the contract, payment of premium is one time or

periodically to the insurer by the assured. Life insurance eliminates risks and replaces

certainty for uncertainty. It comes to the aid of the family in the untimely event of

death or permanent disability of the breadwinner.

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Life insurance caters to five kinds of needs: dying young, living too long, disability,

and care for children and wealth generation. There are different kinds of insurance

policies. As per Doss they are: Whole life insurance, Term insurance. Endowment

insurance including Money-back and Annuity.^ The customer chooses the option

based on their needs. Life insurance has a host of benefits from non-term policies

which had been popular in India before liberalisation: financial protection against risk

to the policyholder, ease of payment by way of installments, raising loans against term

policies as it is an accepted form of security for commercial or home loan. It enables

policy holder to plan for cash flow to meet the future needs like buying a long term

asset, taking loans, retirement, having children and later on sending them abroad for

education or their marriage. The policy holders get periodic bonus based on the

earnings from their investment by the insurer.

There is a universal agreement that Indian life insurance industry has good growth

potential. This is based on the fact that Indian economy is amongst the most uninsured

markets in terms of penetration and spread. The markets of life insurance market in

India have become attractive due to a number of positive factors.^ Increase in

insurable population which is in the age group of 15 to 49 years will increase over

time. There has been a rise in income levels as well as a shift in purchasing power of

urban versus the rural population. There has been an increase in the percentage of rich

from rural markets. There has been increase in the awareness levels that life insurance

is beyond tax saving. The need for individual private provision of financial security

has been felt. There has been increased consumerism as well as the risk appetite has

increased.

1.2 History of life insurance in India

There have been many studies on the history of life insurance and they have traced

several developments for different periods. The following is a consolidated survey

based on some of these works.

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1.2.1 Pre-Iiberalisation phase

In 1818, life insurance came to India from England in its modern form."* Oriental Life

Insurance Company was the first life insurance company to start the business of life

insurance in India. It started its operation from Calcutta. Bombay Assurance

Company came into existence in 1823, the Madras Equitable Life Insurance Society

followed in 1829. These insurance companies insured the lives of Europeans and no

Indian was insured as per Sinha.̂ The efforts put in by eminent people like Babu

Muttylal Seal, foreign life insurance companies started insuring Indians but they

charged extra premiums of 20% or more as they were treated 'substandard'.

In 1871, Bombay Mutual Life Assurance Society started providing life insurance at

normal rates to Indians. Bharat Insurance Company in 1896 followed inspired by

nationalism. The Swadeshi Movement of 1905-07 brought more insurance companies

into the market. Swadeshi Life known as Bombay Life were some of the other

companies established during this period. Table 1.01 below summarizes some of the

milestones in India's insurance regulation pertaining to life insurance.

Table 1.01: Milestones in insurance regulation in the 20"* Century in India**

Year Significant regulatory events

1912 The Indian Life Insurance Company Act, 1912 1938 Insurance Act 1938 introduced, the first comprehensive legislation to

regulate insurance business in India 1956 Nationalization of life insurance business in India 1994 Recommendations of the Malhotra Committee released 1995 Setting-up of Mukherjee Committee 1996 Setting-up of an (interim) Insurance Regulatory Authority (IRA) 1997 Mukherjee Committee Report submitted but not made public 1998 The cabinet decides to allow 40% foreign equity in private insurance

companies- 26% to foreign companies and 14% to non-resident Indians, overseas corporate bodies and foreign institutional investors

1999 The Standing Committee Report headed by Murli Deora capped private insurance participation to 26%. The IRA bill is renamed as Insurance Regulatory and Development Authority (IRDA) Act

1999 Cabinet clears IRDA Act 2000 President gives Assent to the IRDA Act

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As per Kumar, 'there was no legislation regulating insurance' in India before 1912.

The first statutory measure to regulate life insurance business - Life Insurance

Companies Act, 1912 was passed. Under the Act, it became necessary to certify

premium rate tables and periodical valuations by an actuary. The Act put Indian

companies at a disadvantage by discriminating between Indian and foreign companies.

The Insurance Act 1938 provided strict state control over insurance business and was

the first legislation that applied to life and non-life insurance. The momentum to

nationalise life insurance gained ground around 1944 when a bill to amend the Life

Insurance Act 1938 was introduced in the Legislative Assembly. The Insurance

Amendment Act of 1950 abolished principal agencies. The profit motive was

eliminated and efficient service was the sole criterion. The ratio of expenses of

management to premium income for Indian insurers was 27%. This was poor

management. Besides outright frauds committed by private companies, resulted in

twenty five insurance companies going into liquidation during the period 1944 to

1954. Seventy-five other companies carrying on the business because of their

valuations were unable to declare any bonus. These companies confined themselves to

urban areas and creamy layers while neglecting the rural areas and ordinary people.

Settlement of claims was a neglected activity with companies postponing or avoiding

payment of claim. Customers had to resort to legal means and it was they who were

wrong in most cases. As per Bhattacharya and Rane 'there were clear attempts to

defraud the insuring public'. ^

There were large number of insurance companies and the level of competition was

high with allegations of unfair trade practices. The life insurance business was

nationalised though an Ordinance on 19* January, 1956, by the then Finance minister,

Dr. C. D. Deshmukh, with the objective that the business must be conducted

economically. Premium must be in as per actuarial considerations. Prudent

investments of funds to maximize yield for the policy holders while ensuring safety to

capital. Prompt and efficient service must be given to the policy holders. Spread

insurance and make it popular across the country especially, in rural and other areas

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where the reach was poor. All this was to be done by keeping in mind the interests of

insuring public as well as safeguarding the industry. With more funds available, there

could be more development which would lead to economic development of the

country.

The management of all these companies was taken over by means of an Ordinance and

later the ownership with a comprehensive bill. Life Insurance Corporation of India

(LIC) was established on 1̂ ' September, 1956 as a result of nationalisation. LIC's

objective was to spread life insurance as wide as possible especially to rural areas with

a view to reach all insurable persons in the country as well as providing them financial

cover at reasonable cost.̂

In 1974, the Administrative Reforms Commission of the Government recommended

that the objectives finalized by LIC were partially met. Era Sezhiyan Committee

(1979-80) recommended that LIC be split into five separate corporations as well as

central body called Life Insurance Board. These were dropped but reorganization of

LIC was done. As an outcome of this, a large number of new branch offices were

opened.

In 1980's, LIC implemented reorganization scheme in consultation with Prof. Ishwar

Dayal. Some salient guidelines for implementation'" at the branch level as per Doss

were: planning, budgeting and control, servicing function, monitor changes, profit

centre reporting to divisional office. All these changes were done to improve service

standards.

In 1988, LIC formally commenced Human Resource Development along with

developing various subsystems. Training was given emphasis and the focus was to

help in continuous service improvement.

In 1971, the insurance penetration was 10% of insurable population which barely

doubled by 1992, but still had a long way to go. LIC needed to be managed more

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efficiently. Most life insurance sold was on account of tax benefits and as per Kalyani

'The art of marketing was in an infancy mode'." The agents and development

officers were not taking interest in after-sales service.

1.2.2 Phases of Liberalisation of insurance industry

The move towards liberalisation of insurance industry: In the budget speech of

1993-94, the then Finance Minister stated that as banking and capital market reforms

were underway the insurance industry should have similar reforms aimed at having a

more competitive environment backed by suitable regulation and supervision.

Step 1: Malhotra Committee: A committee on reforms in the insurance sector

headed by R. N. Malhotra was set up to examine the structure of the insurance

industry. It reconmiended changes to make the insurance sector more efficient and

competitive as there were structural changes in other parts of the financial system of

the economy. The areas covered were: regulation of insurance business, restructuring

of existing insurance organization and liberalisation of insurance industry for global

integration.

In January 1994, Report of the Committee on Reforms in the Insurance Sector'^

recommended the opening up of insurance sector to competition. It was found

desirable even though the nationalized insurance had done a creditable job in

extending their presence and services throughout the country and was handling large

volumes of business. The areas of concern were that they were not up to the mark in

terms of service, products and price. The committee felt that competition would result

in better customer service, a wider range of products and lower prices of insurance

products.

The Committee felt that there was immense potential untapped and many lines of

businesses were under-developed. The arrival of new players would speed up the

spread and reach of life insurance. Moreover, LIC was financially strong with a

requisite pool of professional talent, marketing and service networks from which they

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inferred that LIC was in a position to face competition. Even though there was

enhanced competition in the banking sector with a number of players like nationalised

banks, co-operative banks, private banks both of Indian and foreign origin. The private

banks were active in merchant banking, leasing and non- banking financial services.

The domestic players were doing well. The committee felt that there was no reason to

keep insurance monopoly. Hence, they recommended that private players should be

allowed to enter life insurance business.

The Committee recommended some prudent measures. To prevent mushrooming of

small private players, the minimum start up capital was fixed at one billion rupees as

well as meeting the expectations of insurance regulatory authority. Those companies

that would insure life cannot deal in general insurance through the same entity. The

insurance regulatory authority would ensure adequate solvency as well as see that the

funds are invested prudently in conformity to law. Moreover, the insurers would

maintain transparency. The promoters should have 40% stake but at no point of time it

shall be less than 26%. No shareholders other than promoters would have more than

1% of company's equity. The new entrants would have to write a specified portion of

their business in rural areas as well ensure that they also write small policies so that

profit is not the only motive of private players.

LIC must automate its operations with suitable technology quickly to face competition

with an effective management information system. The organizational structure should

be changed to make it more efficient and effective.

The Committee recommended a few steps to be completed before competition was

introduced namely setting up of Insurance Regulatory Authority as a separate entity

with regulatory powers under the Insurance Act. In view of globalization, the foreign

companies would be permitted to enter India by floating an Indian company as a joint

venture with an Indian partner. Insurance companies must be encouraged to start unit-

linked plans. They recommended that LIC should introduce regular term assurance

plans as well as unit-linked plans with uniform risk cover to its existing product range.

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The zonal committee of LIC should also review the repudiated claims as well

strengthen itself by inducting professionals. At the proposal stage, the insurance

companies must examine allowing conditional assignments of life insurance policies.

Step 2: Establishment of IRA, the interim volmitary body: After the Malhotra

Contmiittee report, a cabinet resolution was passed as per Kalyani 'to form an interim

voluntary body''^ called the Insurance Regulatory Authority in January 1996. Setting

this up was the first expression that the reform process had been initiated in insurance

industry.

Step 3: Mukherjee Committee: The first step was the path breaker which was the

implementation of the Malhotra committee report. There were a lot of measures

preceding the passing of IRDA Bill. This faced tough opposition from various sections

of the industry as each one had their own motive. After the publication of Malhotra

Committee report, Mukherjee committee was set up to make plans for the requirement

of the newly formed insurance companies. Recommendations were never made public.

This committee in order to have transparency in accounting recommended to include

certain ratios in insurance company balance sheet. The Finance Minister did not

implement this. It was probably done on the advice of some potential entrants who

shared that it could affect their prospects as it would be introduction stage of business.

The phased globalization of the Indian economy started in the early 1990s. Gupta et

al., stated 'liberalisation of insurance was one of the objectives of the Uruguay Round

Negotiations'''* conducted as a part of General Agreement on Trade and Tariff

(GATT). GATT was finalized in December 1993 and became effective from April 1,

1995.

Many countries are moving away from protectionism and state control. They have

adopted market driven approach especially in the insurance and financial services as

they have opened up their markets to foreign companies. A major break through

happened in 1997. An agreement of liberalisation of financial services was signed in

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which 102 countries including India committed to remove entry barriers and liberalise

their markets. General Agreement on Trade in Service was the first to bring the

services sector within the multilateral trading system. This agreement offers legal

security and protection to global insurance players. It lays down rights of parties

notwithstanding other provisions, to protect investors, policy holders to ensure

integrity and stability of the financial services. This agreement presents a challenge for

players like LIC to compete with the best.

Step 4: The Insurance Regulatory and Development Act 1999: The Insurance

Regulatory and Development Act of 1999 sought 'To provide the establishment of an

Authority to protect the interest of the holders of the insurance policies, to regulate,

promote and ensure orderly growth of the insurance industry".'^ The relevant part of

IRDA Act as applicable to life insurance has been dealt with. IRDA deals with matters

connected with or incidental to and amend the Insurance Act, 1938 and Life Insurance

Corporation Act, 1956 for meeting the objectives stated to nurture the industry through

a period of change and to ensure its healthy growth for the betterment of the society

and economy.

The setting up of IRDA was done with the objectives of defining and setting up

appropriate framework for the insurance industry to operate. This has been initiated

well. The initiatives between IRDA and Actuarial Society of India have led to

actuarial input in the business context of this fast changing financial world, and as per

Khan "has made a mark on its own"'^ which will play a major role for a stable and

healthy industry.

The IRDA regulates the entry and exit, capital norms and maintain a vigil on equity

and solvency of the insurers. IRDA functions include monitoring and ensuring that

insurer has adequate solvency, invest funds prudently in conformity to law as well as

maintain transparency. IRDA has to develop the industry through a period of change

and to ensure its healthy growth for the betterment of the Indian economy. The Act

states the requirements for an insurer as well as the renewal. The life insurance

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company should have a minimum paid up equity capital of Rs.lOO crore. The

insurance business can be carried out by a public company incorporated in India under

the Companies Act, 1956. The Indian promoter may invest either wholly or enter into

a joint venture with a foreign insurance company. The Foreign Direct Investment is

capped at 26%. As per company law, this is sufficient for the foreign partner to have a

say on any significant item and can veto any resolution that is not in line with its

poHcies.

IRDA monitors the solvency ratio of insurance companies. The insurer appoints

actuary on company roles who is a Fellow of Actuarial Society of India. The actuary

provides accounts of the company to IRDA. The financial health is tracked. The

players have to follow the investment regulations of life business as per IRDA norms

including the type of investment with the specified percentage for each. The new

players have to do a specified portion of their business in rural areas. They have to

cater to policies for social purposes as profit is not the only motive. The regulator

observed that their was a not a proper compliance of the obligations of insurers to rural

or social sectors so it issued a clarified that lives means only new lives insured during

the financial year.

There are necessary qualifications as well as the code of conduct with training for

insurance intermediaries and agents to ensure professional standards. This has started

yielding results. Adjudication of disputes between insurer and intermediaries is

another role of the IRDA. They deal with disputes which fall outside the preview of

Ombudsman. Ombudsman looks after the interest of insured customers and protects

the interest of the policy holders. IRDA role occurs when the contract value exceeds

rupees twenty lakhs or the complaint is not settled within three months. This is

monitored by a governing body of Insurance Council comprising of representatives of

insurance companies.

Thus, the Indian regulator has a supervisory as well as a developmental role to play.

Development of the industry is not confined to allowing entry of new players who are

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financially strong but also conduct business along ethical lines as well as ensure

customer satisfaction.

1.3 Players who have entered life insurance after liberalisation

Fourteen private players made their foray in life insurance after liberalisation. The

partners of Indian and foreign origin are detailed in Tablel.02.

Table 1.02: Entry of private insurers in life insurance in India

Sr.

No

1

2

3

4

5

6

7

8

9

10

11

12

13

14

Company

HDFC Standard Insurance Life Company Ltd.

Max New York Life Insurance Company Ltd. ICICI Prudential Life Insurance Company Ltd. Kotak Mahindra Old Mutual Life Insurance Company Ltd.

Birla Sun Life Insurance Company Ltd.

Tata AIG Life Insurance Company Ltd. SBI Life Insurance Company Ltd.

ING Vyasa Life Insurance Company Private Ltd.

Bajaj Allianz Life Insurance Company Ltd. Met Life Insurance Company Ltd. AMP Sanmar Life Insurance Company Ltd. Aviva Life Insurance Company Pvt. Ltd. Sahara India Insurance Company Ltd. Shriram Life Insurance Co. Ltd.

Origin

Indian

HDFC

Max

ICICI

Kotak Mahindra

Birla Sun Life

Tata AIG

SBI

Vyasa Bank

Bajaj

MA Chidambaram Sanmar Group

Dabur

Sahara

Shriram

Origin

Foreign

Standard Life, UK

New York Life, USA Prudential, UK

Old Mutual, South Africa

Sun Life, Canada

AIG, USA

Cardiff SA, France

ING Insurance, Netherlands

Allianz, Germany MetLife, USA

AMP, Australia

CGU Life, UK

Registration

Date

23.10.2000

15.11.2000

24.11.2000

10.01.2001

31.01.2001

12.02.2001

30.03.2001

02.08.2001

03.08.2001

06.08.2001

03.01.2002

14.05.2002

6.02.2004

17.11.2005

(Compiled from official website of IRDA www.irdaindia.org/hist.htm)

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1.4 The Research Problem, Objectives and Hypothesis

1.4.1 The Research Problem

The research problem studied has been the effects of liberalisation on the marketing

mix'' namely product, price (premium) , promotion, place, people, process and

physical evidence of life insurance players, during the period 1999-2005.

1.4.2 Objectives of the Study

1. To study the impact of liberalisation on major companies in the life insurance

business.

2. To understand the reasons for change and to isolate the environmental factors.

3. To survey the insider's perspectives at an operational level

with respect to the 7 Ps about the impact of liberalisation.

4. To assess the level of customer satisfaction - pre and post liberalisation.

5. Develop a new operational framework for marketing of life insurance services in

the changed scenario/environment.

1.4.3 Hypothesis

Hypothesis 1. Liberalisation of Insurance sector in India has affected (positively)

marketing of life insurance.

Hypothesis 2. The effects of liberalisation necessitates a new operational framework

for marketing of life insurance.

Scope of study: For the purposes of study, the theoretical framework of elements of

services marketing mix was reframed as relevant to life insurance. Only individual life

insurance is under focus. The study did not focus on group life insurance. The study is

based for the most part on urban data. The data is collected from Pune city. The period

taken up for study is 1999-2005.

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1.5 Chapter Plan

An overview of the subsequent chapters of the study is detailed below:

Chapter - 2: Literature review: discusses the theoretical review of literature as

pertinent to the study a well as reviews the literature in life insurance in India in terms

of consumer, environmental factors, competition, product, price, promotion, place,

people, process, physical evidence, customer service and satisfaction.

Chapter - 3: Research methodology: details the process used in compilation of

secondary and primary data. It also deals with research design, methodology,

hypotheses as well as process of development of operational framework as well as

pretesting.

Chapter - 4: Secondary data analysis: analyses the secondary data to get a more

meaningful insight in the period of the study.

Chapter - 5: Impact of liberalisation on marketing of life insurance: An analysis

of the field survey: analyses the perception of customer, agent and executive and

these are compared to get more insight into the various impacts of liberalisation on all

the aspects studied in literature review keeping the hypothesis and objectives of the

study.

Chapter - 6: Developing a new Operational framework for marketing of

life insurance and it's Pretesting: explains the components of the framework with

rationale and pretesting.

Chapter - 7: Summary, findings and scope for future research: summarizes the

findings of the study, and offers suggestions. The limitations of the study and areas of

further research have been identified.

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1.6 Conclusions

The chapter highlights the basic need of life insurance from the customer's point of

view. Subsequently, the history with the regulation has been tracked, mainly to

understand the background of the development. Most importantly, this chapter

captures the key changes leading to liberalisation from the Malhotra Committee

Report (1993) and the formation of the IRDA (1999) which laid the foundation for

liberalisation of life insurance. Finally, this chapter highlights the possible impact of

liberalisation, economic as well as structural impact on the life insurance market.

The next chapter reviews the literature and has used topic-based approach related to

the various aspects of life insurance marketing as identified by the researcher. The

topics include the consumer, environmental factors, competition, the 7 Ps of services

marketing: product, premium, promotion, place, people, process, physical evidence,

and customer service and satisfaction. These topics have been included based on the

research objectives and hypothesis of the study.

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Chapter 1

References

' Sesha V. Ayyar, "Behind the Life Insurance Policy", IRDA Journal, IRDA, Hyderabad, February, 2003, p. 15.

G. Steward Doss, "Service Quality in Life Insurance Corporation of India"-Unpublished thesis, University of Pune, December, 1998, pp. 52-54. ^ P.S. Palande, R. S. Shah and L. M. Lunawat, "Insurance In India: Changing Policies and Emerging Opportunities," Response Books, Delhi, 2003, pp. 165-174. * "XrV Insurance Congress Of Developing Countries 2004 held at New Delhi from 7* -10* March 2004", The Economic Times .Supplement, March 9* 2004, p. 4. ^ Tapen Sinha, "Privatization of the Insurance Market in India: From the British Raj to Monopoly Raj to Swaraj" CRIS Discussion Paper Series-X, Centre for Risk & Insurance Studies, University of Nottingham, 2002.

Tapen Sinha, "The Indian insurance industry: Challenges and prospects," Monograph, Swiss Re, Swiss Reinsurance Company Limited, Hk. 2005, p. 24. ^ Kumar Dharmendra, "India Insurance: The Historical Perspective", Indian Insurance Report: Series I, Birla Institute of Management Technology, Greater Noida, 2005, pp. 7 7-5S. ^ Arun Bhattacharya & Neil O' Rane, "Nationalisation of Insurance," India Centre for Civil Society, 2000, pp. 380-383. ^ U. Jawaharlal, "Insurance in Retrospect", Insurance Chronicle, The Icfai University Press, Hyderabad, September, 2005, p. 14. '° Steward G. Doss, "Service Quality in Life Insurance Corporation of India," Unpublished thesis submitted to University of Pune, December, 1998, pp. 62-65. " Nitya K. Kalyani, "Insurance, for the insurance customer", IRDA Journal, IRDA, Hyderabad, December, 2002, p. 26. '̂ Report of the Committee on Reforms in the Insurance Sector, Government of India, Ministry of Finance Department of Economic Affairs , Insurance Division, Lok Nayak Bhawan, Delhi, January, 1994, p. 90. '̂ Nitya K. Kalyani, "A Decade " IRDA Journal, IRDA, Hyderabad, January, 2006, p. 4. ''̂ Hima Gupta, Sudhir Gupta and Naresh Aggarwal, "Growth of Life Insurance Sector", Insurance Chronicle, The Icfai University Press, Hyderabad, May, 2004, pp. 28-29.

The Insurance Regulatory Development Authority, Act, 1999 with IRDA Regulations, 2000, Bare Act 2003, Law Publishers (India) Pvt. Ltd. '̂ Liyaquat Khan, "Growing with the Industry", IRDA Journal, IRDA, Hyderabad, December, 2003, p. 18. '̂ B. H. Booms and M. J. Bitner, "Marketing Strategies and Organisation Structure for Service Firms" in J. Donnelly and W.R. George (Eds), Marketing of Services, American Marketing Association, Chicago, IL, 1981, pp. 47-51.

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