Experience of Deregulation of Insurance Sector in India

BY

Sriram Taranikanti, Executive Director

INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY

17th April, 2013 1

2

FRAMEWORK OF PRESENTATION

Evolution of Indian Insurance Market

Regulatory Architecture

India Insurance Industry Status

Gains of liberalization

Issues in liberalization

Regulatory Measures

2

EVOLUTION OF INDIAN INSURANCE MARKET

NEED FOR REGULATORY

INTERVENTION

Nationalised

Market

Regulated

Market

Free

Market

Regulated

Market

Insurance Act, 1938

LIC Act, 1956

GIBNA, 1972

IRDA Act, 1999

- No Regulations

- Plagued by

fraud

- Urban centric

-Planned Economy

--Optimum utilization

of resources

-contribution to

development of market

-untapped market

potential high

-absence of consumer

choice

-poor customer service

-Level playing field

-Consumer Protection

-Public Private

Partnership

EVOLUTION OF INSURANCE IN INDIA

Life Insurance Companies Act of 1912

Provident Fund Act of 1912

Insurance Act of 1938 and amendments

Nationalization of Life Insurance - 1955

Life Insurance Act of 1956

Social Controls on General Insurance - 1968

General Insurance Business Nationalization Act of 1972

ECONOMIC REFORMS PROCESS

Insurance Reforms

Financial Sector Reforms

Economic Reforms

Reform process initiated in 1991 Abolition of Licensing, Permits & Quotas in Industrial Sector Financial Sector Reforms Banking Sector Reforms Freeing of interest rates by the Central Bank Rationalization of priority sector lendings & lowering of directed credit

Capital Market Sector Reforms Abolition of Controller of Capital Issues and Establishment of Securities and Exchange Board of India in 1992 Issuance of regulations for mutual funds, portfolio managers, registrars, merchant bankers, depository and participants, etc

Insurance Sector Reforms

INSURANCE SECTOR REFORMS

Committee on Reforms in Insurance sector – 1994

Setting-up of Interim Insurance Regulatory Authority – May 1996

IRDA Act Passed – December 1999

Statutory Authority (IRDA) established – 19th April 2000

First set of Regulations notified – 19th July, 2000

First set of Certificate of Registration (Licenses) granted – 23rd October 2000

38 number of Regulations issued by IRDA

REGULATORY ARCHITECTURE

8 8

COMPOSITION OF AUTHORITY

• IRDA Act states that the Authority shall consist of the following members

– Chairperson

– not more than five whole-time members

– not more than four part-time members

• Presently the Authority has a complement of following members

– Chairman

– Three full-time members (Life, Non life, Finance & Investment)

– Four part-time members

• Organized in 14 departments

• 208 positions of which 150 are filled

INDIA INSURANCE INDUSTRY

10 10

Road travelled

11

2000 2012

No. of Insurers 6 52

No. of Offices 5,429 18,217

No. of Policies (in millions) 124.5 408.4

No. of Employees (in millions) 0.21 0.34

No. of Agents (in millions) 0.76 2.72

Total Annual Premium (in US$ billions) 7.5 67.8

Paid-up Capital (in US$ mns) 109.0 6,551.6

FDI (in US$ mns) 0.0 1,529.8

Investment (in US$ billions) 43.6 316.2

US$ 11.5 2.32 4.10

Insurance Density (Per Capita Premium) US$ 59.0

FOREIGN DIRECT INVESTMENT As on 31-03-2012 (in US$ mns)

FDI Indian Promoter Total

Life Insurers

Private 1264.8 3701.6 4966.4

LIC - 20 20

Total (Life industry) 1264.8 3721.6 4986.4

Non life Insurers

Private 264.8 884.4 1149.2

Public sector - 110 110

Total (Non-life industry) 264.8 994.4 1259.2

ECGC - 180 180

AIC - 40 40

GIC - 86 86

Grand Total Insurance Industry

1529.6 5022 6551.6

12

13

LIFE INSURANCE

1st YEAR PREMIUM - LIC & PVT. SECTOR (LIFE INSURERS) in US$ million

Life Cos 2001-02 2011-12

PVT 54 6,544

(54.7%)

MKT Share 1% 29%

LIC 3,918 16,303 (13.8%)

MKT Share 99% 71%

Total 3,972 22,847 (17.2%)

14 Figures in bracket represent CAGR

15

TOTAL PREMIUM – LIFE INSURERS

Details

20 01-02 2011-12

PVT LIC PVT LIC

FYP 54 3,918 6,544 16,303

Renewal 0 6,047 10,125 24,258

Total 54 9,964 16,668 40,561

in US $ millions

16

Life Insurers 1996-97 2000-01 2001-02 2011-12

Private Sector - 1 54 16,668

Public Sector 3,255 6,978 9,964 40,561

Grand Total 3,255 6,980 10,019 57,229

Av. growth 16.5% 17.2%

AVERAGE GROWTH OF TOTAL PREM – PRE & POST LIBERALIZATION

in US$ millions

LIFE INSURANCE - TRENDS

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Growth of Life Insurance industry has been exceptional as compared to

other segments of the financial sector in India for (2004-12)

Life Insurance penetration has increased from 1.77% in 2000 to 3.40%

in 2011 and density from USD 7.60 in 2000 to USD 49 in 2011

The equity capital in life insurance industry stands at US$ 4.98 bns

Life insurance industry is a significant investor in capital market

Insurance Industry continues to mop retail household savings, which in

turn contribute to Capital Market

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GENERAL INSURANCE

General Insurers 2001-02 2011-12

PVT Sector 94 4,846

(43.3%)

Mkt Share 4 % 41.5%

PSU 2,383 6,825 (10%)

Mkt Share 96 % 48.5%

Total 2,477 11,671 (15.1%)

GROSS WRITTEN PREMIUM – GENERAL INSURERS

Note: Figures in brackets represents CAGR

in US$ millions

19

20

General Insurers 1996-97 2000-01 2001-02 2011-12

Private Sector - 1 94 4,846

Public Sector 1,469 1,960 2,383 6,825

Grand Total 1,469 1,961 2,477 11,671

Av. Growth 5.9% 15.1%

AV GROWTH OF TOTAL PREM – PRE & POST LIBERALIZATION

in US$ millions

GENERAL INSURANCE - TRENDS

Sustained Underwriting Losses – comfort of cross subsidy between

business segments no more available

Unsustainable dependence on Investment Incomes

High fixed Cost – a matter of concern due to high and increasing

expenses & commissions

Strain on Profitability Position

Deficit in 3rd Party Motor Pool. Creation of declined risk pool.

GAINS AND ISSUES OF LIBERALIZATION

TRENDS IN LIFE INSURANCE

Year GDP at Market

Prices Rate of GDS ^^

Total Insurance Premium

(Life)

Penetration of Life

Insurance

Proportion of Life Insurance

in Savings

Million USD % Million USD (%) (%)

1956-57 52560 11.9 139 0.26 2.23

1972-73 72246 14.3 516.2 0.71 5.01

1991-92 288567 21.5 2836 0.98 4.56

2000-01 467804 23.7 7766 1.66 6.99

2010-11 1727111 32.3 63948 4.40 11.46

^^ Handbook of Statistics on Indian Economy, RBI.

Source for data on Insurance Premium

1956-57, 1972-73, & 1991-92: Tapan Sinha paper.

the exchange rate for 1956-57 has been assumed as 2.5

exchange rate for the remaining years: Handbook of Statistics on Indian Economy, RBI

23

0

2

4

6

8

10

12

14

1956-57 1972-73 1991-92 2000-01 2010-11

PER

CEN

T

YEAR

Penetration of Life Insurance Proportion of Life Insurance in Savings

Year GDP at Market

Prices

Gross Direct

Premium (NL)

Penetration of

Non Life

Insurance

Million USD Million USD

1991-92 288567 1542.67 0.53

2000-01 467804 2750* 0.59

2010-11 1727111 9951.21 0.58

^^ Handbook of Statistics on Indian Economy, RBI.

Source for data on Insurance Premium

1956-57, 1972-73, & 1991-92: Tapan Sinha paper.

the exchange rate for 1956-57 has been assumed as 2.5

exchange rate for the remaining years: Handbook of Statistics on Indian Economy, RBI

* is the premium figure of 2001-02

TREND IN NON-LIFE INSURANCE

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

1991-92 2000-01 2010-11

PER

CEN

T

YEAR

Penetration of Non Life Insurance

GAINS OF LIBERALIZATION

Flow of Foreign Direct Investment in India

Growth of insurance business

Competition for benefit of consumer

Multiple distribution channels for wider reach

Variety of new innovative products to meet customer needs

Significant improvements in policyholder servicing

Wider rural reach and financial inclusion

Increasing use of technology to increase efficiency and productivity

Significant flow of funds to infrastructure sector

Imparting of new management skills and capabilities

ISSUES IN LIBERALIZATION

Market misconduct and mi-selling adversely affecting image of the industry

Margins under pressure due to excessive competition amongst market players

Loss making motor third party premium rates

ULIPs/ Non Standard Product Issues

Challenges in distribution of insurance products in a cost-effective manner

Clamour for profitable geographies

Availability of reliable and accurate data

Capacity building and need for skill up-gradation

Supervisory challenges in Regulation

Challenges in group wide supervision

REGULATORY MEASURES

REGULATORY MEASURES

• Increasing the Insurance awareness among the customers

• Financial Literacy measures

• New guidelines for better product design

• Close supervision on underwriting design

• Bancassurance Regulations

• Fraud Analytics/Establishment of Insurance Information Bureau (IIB)

• Automation of regulatory processes

• Rural and Social Sector Regulations

• Supervision of Financial Conglomerates

• Exposure to supervisory staff and periodic meetings with insurers/ stakeholders

• Off-site and on-site supervision

Current Focus Areas

• Insurance Penetration

• Reach to Rural and Remote Areas

• Insurance Education

• Consumer Education and Protection

• IT initiatives – Insurance Repositories, ETASS, Analytics etc.

• Convergence with other Financial Sectors

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THANK YOU

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