THE UNIVERSITY OF NOTTINGHAM

Centre for Risk & Insurance Studies

Privatization of the Insurance Market in India:From the British Raj to Monopoly Raj to Swaraj

Tapen Sinha

CRIS Discussion Paper Series – 2002.X

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Privatization of the Insurance Market in India:

From the British Raj to Monopoly Raj to Swaraj

by

Tapen Sinha, Ph.D. ING Comercial America Chair Professor

Instituto Tecnológico Autónomo de México Mexico City, Mexico

and Professor, School of Business University of Nottingham, UK

tapen@itam.mx, tapen@nottingham.ac.uk

Abstract

We examine the institution of insurance in India. Over the past century, Indian insurance industry has gone through big changes. It started as a fully private system with no restriction on foreign participation. After the independence, the industry went to the other extreme. It became a state-owned monopoly. In 1991, when rapid changes took place in many parts of the Indian economy, nothing happened to the institutional structure of insurance: it remained a monopoly. Only in 1999, a new legislation came into effect signaling a change in the insurance industry structure. We examine what might happen in the future when the domestic private insurance companies are allowed to compete with some foreign participation. Because of the time dependence of insurance contracts, it is highly unlikely that these erstwhile monopolies are going to disappear. Acknowledgement: I would like to thank Rebecca Benedict and Samik Dasgupta for their input in this article without implication. The views expressed here are personal. I alone am responsible for any error.

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Introduction Insurance in India started without any regulation in the Nineteenth Century. It

was a typical story of a colonial era: a few British insurance companies dominating the

market serving mostly large urban centers. After the independence, it took a dramatic

turn. Insurance was nationalized. First, the life insurance companies were nationalized

in 1956, and then the general insurance business was nationalized in 1972. Only in 1999

private insurance companies have been allowed back into the business of insurance with

a maximum of 26% of foreign holding. In what follows, we describe how and why of

regulation and deregulation. The entry of the State Bank of India with its proposal of

bancassurance brings a new dynamics in the game. We study the collective experience of

the other countries in Asia already deregulated their markets and have allowed foreign

companies to participate. If the experience of the other countries is any guide, the

dominance of the Life Insurance Corporation and the General Insurance Corporation is

not going to disappear any time soon.

Insurance under the British Raj

Life insurance in the modern form was first set up in India through a British

company called the Oriental Life Insurance Company in 1818 followed by the Bombay

Assurance Company in 1823 and the Madras Equitable Life Insurance Society in 1829.

All of these companies operated in India but did not insure the lives of Indians. They

were there insuring the lives of Europeans living in India. Some of the companies that

started later did provide insurance for Indians. But, they were treated as "substandard"

and therefore had to pay an extra premium of 20% or more. The first company that had

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policies that could be bought by Indians with "fair value" was the Bombay Mutual Life

Assurance Society starting in 1871.

The first general insurance company, Triton Insurance Company Ltd., was

established in 1850. It was owned and operated by the British. The first indigenous

general insurance company was the Indian Mercantile Insurance Company Limited set up

in Bombay in 1907.

By 1938, the insurance market in India was buzzing with 176 companies (both

life and non-life). However, the industry was plagued by fraud. Hence, a comprehensive

set of regulations was put in place to stem this problem (see Table 1). By 1956, there

were 154 Indian insurance companies, 16 non-Indian insurance companies and 75

provident societies that were issuing life insurance policies. Most of these policies were

centered in the cities (especially around big cities like Bombay, Calcutta, Delhi and

Madras). In 1956, the then finance minister S. D. Deshmukh announced nationalization

of the life insurance business.

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TABLE 1 MILESTONES OF INSURANCE REGULATIONS IN THE 20TH

CENTURY Year Significant Regulatory Event 1912 The Indian Life Insurance Company Act 1938 The Insurance Act: Comprehensive Act to regulate insurance business in India 1956 Nationalization of life insurance business in India 1972 Nationalization of general insurance business in India 1993 Setting up of Malhotra Committee 1994 Recommendations of Malhotra Committee 1995 Setting up of Mukherjee Committee 1996 Setting up of (interim) Insurance Regulatory Authority (IRA)Recommendations

of the IRA 1997 Mukherjee Committee Report submitted but not made public 1997 The Government gives greater autonomy to LIC, GIC and its subsidiaries with

regard to the restructuring of boards and flexibility in investment norms aimed at channeling funds to the infrastructure sector

1998 The cabinet decides to allow 40% foreign equity in private insurance companies-26% to foreign companies and 14% to NRI’s, OCB’s and FII’s

1999 The Standing Committee headed by Murali Deora decides that foreign equity in private insurance should be limited to 26%. The IRA bill is renamed the Insurance Regulatory and Development Authority (IRDA) Bill

1999 Cabinet clears IRDA Bill 2000 President gives Assent to the IRDA Bill Sources: Various

Monopoly Raj

The nationalization of life insurance was justified mainly on three counts. (1) It

was perceived that private companies would not promote insurance in rural areas. (2)

The Government would be in a better position to channel resources for saving and

investment by taking over the business of life insurance. (3) Bankruptcies of life

insurance companies had become a big problem (at the time of takeover, 25 insurance

companies were already bankrupt and another 25 were on the verge of bankruptcy). The

experience of the next four decades would temper these views.

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Life Story of the Life Insurance Corporation

The life insurance industry was nationalized under the Life Insurance Corporation

(LIC) Act of India. In some ways, the LIC has become very successful. (1) Despite

being a monopoly, it has some 60-70 million policyholders. Given that the Indian

middle-class is around 250-300 million, the LIC has managed to capture some 30 odd

percent of it. (2) The level of customer satisfaction is high for the LIC (one of the

findings of the Malhotra Committee, see below). This is somewhat surprising given the

frequent delays in claim settlement. (3) Market penetration in the rural areas has grown

substantially. Around 48% of the customers of the LIC are from rural and semi-urban

areas. This probably would not have happened had the charter of the LIC not specifically

set out the goal of serving the rural areas.

One exogenous factor has helped the LIC to grow rapidly in recent years: a high

saving rate in India. Even though the saving rate is high in India (compared with other

countries with a similar level of development), Indians exhibit high degree of risk

aversion. Thus, nearly half of the investments are in physical assets (like property and

gold). Around twenty three percent are in (low yielding but safe) bank deposits. In

addition, some 1.3- percent of the GDP are in life insurance related savings vehicles.

This figure has doubled between 1985 and 1995.

Life Insurance in India: A World Perspective

In many countries, insurance has been a form of savings. Table 2 shows that in

many developed countries, a significant fraction of domestic saving is in the form of

(endowment) insurance plans. This is not surprising. The prominence of some

developing countries is more surprising. For example, South Africa features at the

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number two spot. India is nestled between Chile and Italy. This is even more surprising

given the levels of economic development in Chile and Italy. Thus, we can conclude that

there is an insurance culture in India despite a low per capita income. This bodes well for

future growth. Specifically, when the income level improves, insurance (especially life)

is likely to grow rapidly.

Table 2 LIFE INSURANCE PREMIUM AS PERCENTAGES OF THE GROSS DOMESTIC SAVING (GDS) AND THAT OF GROSS DOMESTIC PRODUCT (GDP) Rank Country % of GDS % of GDP 1. United Kingdom 52.50 7.31 2. South Africa 51.55 10.32 3. Japan 32.46 10.10 4. France 26.20 4.91 5. USA 25.20 3.63 6. South Korea 23.66 9.10 7. Finland 23.10 4.98 8. Switzerland 21.92 5.99 9. Netherlands 19.04 4.51 10. Israel 18.84 4.41 11. Sweden 17.88 3.51 12. Australia 17.78 3.48 13. Canada 17.05 3.04 14. Zimbabwe 15.88 6.27 15. Ireland 14.96 4.59 16. Greece 13.87 1.12 17. New Zealand 12.75 3.04 18. Taiwan 12.29 3.64 19. Denmark 12.00 2.71 20. Spain 11.68 2.23 21. Germany 11.40 2.80 22. Norway 9.57 2.33 23. Belgium 9.13 2.38 24. Portugal 8.76 1.65 25. Austria 6.96 2.10 26. Chile 6.96 1.95 27. India 5.95 1.29 28. Italy 5.60 1.13 29. Malaysia 5.35 2.30 30. Singapore 4.72 2.73 Source: Roy (1999). Figures for 1994.

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The General Insurance Corporation

Although efforts were made to maintain an open market for the general insurance

industry by amending the Insurance Act of 1938 from time to time, malpractice escalated

beyond control. Thus, the general insurance industry was nationalized in 1972. The

General Insurance Corporation (GIC) was set up as a holding company. It had four

subsidiaries: New India, Oriental, United India and the National Insurance companies

(collectively known as the NOUN). It was understood that these companies would

compete with one another in the market. It did not happen. They were supposed to set

up their own investment portfolios. That did not happen either. It began to happen after

29 years. The NOUN has kicked off an internal exercise to segregate the entire

investment portfolio of the GIC (in 2001).

The GIC has a quarter of a million agents. It has more than 2,500 branches, 30

million individual and group insurance policies and assets of about USD 1,800 million at

market value (at the end of 1999). It has been suggested that the GIC should close 20-

25% of its nonviable branches (Patel, 2001). The GIC has so far been the holding

company and re-insurer for the state-run insurers. It reinsured about 20% of their

business.

Two Committee Reports: One Known, One Unknown

Although Indian markets were privatized and opened up to foreign companies in a

number of sectors in 1991, insurance remained out of bounds on both counts. The

government wanted to proceed with caution. With pressure from the opposition, the

government (at the time, dominated by the Congress Party) decided to set up a committee

headed by Mr. R. N. Malhotra (the then Governor of the Reserve Bank of India).

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Malhotra Committee

Liberalization of the Indian insurance market was recommended in a report

released in 1994 by the Malhotra Committee, indicating that the market should be opened

to private-sector competition, and ultimately, foreign private-sector competition. It also

investigated the level of satisfaction of the customers of the LIC. Curiously, the level of

customer satisfaction seemed to be high. The union of the LIC made political capital out

of this finding (http://www.maoism.org/misc/india/rupe/aspects26_27/insurance.htm).

The following are the purposes of the committee. (a) To suggest the structure of

the insurance industry, to assess the strengths and weaknesses of insurance companies in

terms of the objectives of creating an efficient and viable insurance industry, to have a

wide coverage of insurance services, to have a variety of insurance products with a high

quality service, and to develop an effective instrument for mobilization of financial

resources for development. (b) To make recommendations for changing the structure of

the insurance industry, for changing the general policy framework etc. (c) To take

specific suggestions regarding LIC and GIC with a view to improve the functioning of

LIC and GIC. (d) To make recommendations on regulation and supervision of the

insurance sector in India. (e) To make recommendations on the role and functioning of

surveyors, intermediaries like agents etc. in the insurance sector. (f) To make

recommendations on any other matter which are relevant for development of the

insurance industry in India.

The committee made a number of important and far-reaching recommendations.

(a) The LIC should be selective in the recruitment of LIC agents. Train these people after

the identification of training needs. (b) The committee suggested that the Federation of

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Insurance Institute, Mumbai should start new courses and diploma courses for

intermediaries of the insurance sector. (c) The LIC should use an MBA specialized in

Marketing (a similar suggestion for the GIC subsidiaries).

(c) It suggested that settlement of claims were to be done within a specific time frame

without delay. (d) The committee has several recommendations on product pricing,

vigilance, systems and procedures, improving customer service and use of technology.

(f) It also made a number of recommendations to alter the existing structure of the LIC

and the GIC. (g) The committee insisted that the insurance companies should pay special

attention to the rural insurance business. (h) In the case of liberalization of the insurance

sector the committee made several recommendations, including entry to new players and

the minimum capital level requirements for such new players should be Rs. 100 crores

(about USD 24 million). However, a lower capital requirement could be considered for a

co-operative sectors' entry in the insurance business. (i) The committee suggested some

norms relating to promoters’ equity and equity capital by foreign companies, etc.

Mukherjee Committee

Immediately after the publication of the Malhotra Committee Report, a new

committee (called the Mukherjee Committee) was set up to make concrete plans for the

requirements of the newly formed insurance companies. Recommendations of the

Mukherjee Committee were never made public. But, from the information that filtered

out it became clear that the committee recommended the inclusion of certain ratios in

insurance company balance sheets to ensure transparency in accounting. But the Finance

Minister objected. He argued (probably on the advice of some of the potential entrants)

that it could affect the prospects of a developing insurance company.

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Insurance Regulatory Act (1999)

After the report of the Malhotra Committee came out, changes in the insurance

industry appeared imminent. Unfortunately, instability in Central Government, changes

in insurance regulation could not pass through the parliament.

The dramatic climax came in 1999. On March 16, 1999, the Indian Cabinet

approved an Insurance Regulatory Authority (IRA) Bill that was designed to liberalize

the insurance sector. The bill was awaiting ratification by the Indian Parliament.

However, the BJP Government fell in April 1999. The deregulation was put on hold

once again.

An election was held in late 1999. A new BJP-led government came to power.

On December 7, 1999, the new government passed the Insurance Regulatory and

Development Authority (IRDA) Act. This Act repealed the monopoly conferred to the

Life Insurance Corporation in 1956 and to the General Insurance Corporation in 1972.

The authority created by the Act is now called IRDA. It has ten members.

New licenses are being given to private companies (see below). IRDA has

separated out life, non-life and reinsurance insurance businesses. Therefore, a company

has to have separate licenses for each line of business. Each license has its own capital

requirements (around USD24 million for life or non-life and USD48 million for

reinsurance).

Some Details of the IRDA Bill

On July 14, 2000, the Chairman of the IRDA, Mr. N. Rangachari set forth a set of

regulations in an extraordinary issue of the Indian Gazette that details of the regulation.

Regulations

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The first covers the Insurance Advisory Committee that sets out the rules and

regulation.

The second stipulates that the "Appointed Actuary" has to be a Fellow of the

Actuarial Society of India. Given that there has been a dearth of actuaries in India with

the qualification of a Fellow of the Actuarial Society of India, this becomes a requirement

of tall order. As a result, some companies have not been able to attract a qualified

Appointed Actuary (Dasgupta, 2001). The IRDA is also in the process of replacing the

Actuarial Society of India by a newly formed institution to be called the Chartered

Institute of Indian Actuaries (modeled after the Institute of Actuaries of London).

Curiously, for life insurers the Appointed Actuary has to be an internal company

employee, but he or she may be an external consultant if the company happens to be a

non-life insurance company.

Third, the Appointed Actuary would be responsible for reporting to the IRDA a

detailed account of the company.

Fourth, insurance agents should have at least a high school diploma along with

training of 100 hours from a recognized institution. More than a dozen institutions have

been recognized by the IRDA for training insurance agents (the list appears online at

http://www.irdaonline.org/press.asp).

Fifth, the IRDA has set up strict guidelines on asset and liability management of

the insurance companies along with solvency margin requirements. Initial margins are

set high (compared with developed countries). The margins vary with the lines of

business (for example, fire insurance has a lower margin than aviation insurance).

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Sixth, the disclosure requirements have been kept rather vague. This has been

done despite the recommendations to the contrary by the Mukherjee Committee

recommendations.

Seventh, all the insurers are forced to provide some coverage for the rural sector.

(1) In respect of a life insurer, (a) five percent in the first financial year; (b) seven

percent in the second financial year; (c) ten percent in the third financial year; (d) twelve

percent in the fourth financial year; (e) fifteen percent in the fifth year (of total policies

written direct in that year). (2) In respect of a general insurer, (a) two percent in the first

financial year; (b) three percent in the second financial year; (c) five percent thereafter (of

total gross premium income written direct in that year).

New Entry

Immediately after the passage of the Act, a number of companies announced that

they would seek foreign partnership. In mid-2000, the following companies made public

statements that they already were in the process of setting up insurance business with

foreign partnerships (see Table 3). However, not all the partnerships panned out in the

end (see below).

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TABLE 3 INDIAN COMPANIES WITH FOREIGN PARTNERSHIP Indian Partner International Partner Alpic Finance Allianz Holding, Germany Tata American Int. Group, US CK Birla Group Zurich Insurance, Switzerland ICICI Prudential, UK Sundaram Finance Winterthur Insurance, Switzerland Hindustan Times Commercial Union, UK Ranbaxy Cigna, US HDFC Standard Life, UK Bombay Dyeing General Accident, UK DCM Shriram Royal Sun Alliance, UK Dabur Group Allstate, US Kotak Mahindra Chubb, US Godrej J Rothschild, UK Sanmar Group Gio, Australia Cholamandalam Guardian Royal Exchange, UK SK Modi Group Legal & General, Australia 20th Century Finance Canada Life M A Chidambaram Met Life Vysya Bank ING Source: U.S. Department of State FY 2001 Country Commercial Guide: India

Three days before the deadline that the IRDA had set upon itself (October 25, 2000),

it issued three companies with license papers:

(1) HDFC Standard Life. This will be jointly set up by India's Housing Development

Finance Company - the largest housing finance company in India and the Scotland

based Standard Life.

(2) Sundaram Royal Alliance Insurance Company. It is a partnership created by

Sundaram Finance and three other companies of the TVS Group of Chennai (Madras)

and the London based Royal & SunAlliance.

(3) Reliance General Insurance. This company is fully owned by Mumbai based

Reliance Industries which has operations in textile, petrochemicals, power and

finance industries.

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There are three other companies with "in principal" approvals:

(1) Max New York Life. It is a partnership between Delhi based pharmaceutical

company Max India and New York Life, the New York based life insurance

company.

(2) ICICI Prudential Life Insurance Company. This is a joint venture between Mumbai

based Industrial Credit & Investment Corporation and the London based Prudential

PLC.

(3) IFFCO Tokio General Insurance Company. It is a joint venture between Indian

Farmers' Fertiliser Cooperative and Tokio Marine and Fire of Japan.

To date (end of April 2001), the following companies have thus been granted

licenses: ICICI -Prudential, Reliance General, Reliance Life, Tata-AIG General, HDFC-

Standard Life, Royal-Sundaram, Max-New York Life, IFFCO-Tokio Marine, Birla-

SunLife, Bajaj-Allianz General, Tata-AIG Life, ING-Vyasa, Bajaj-Allianz Life, SBI-

Cardiff Life. Note that all of these companies are either in the life insurance business or

in the non-life insurance business. No license has been granted for reinsurance business

so far (the size of the reinsurance business can be 10-20% of the total revenue). No

stand-alone health insurance company has been granted license so far.

Enter the Dragon On December 28, 2000, the State Bank of India (SBI) announced a joint venture

partnership with Cardif SA (the insurance arm of BNP Paribas Bank). This partnership

won over several others (with Fortis and with GE Capital). The entry of the SBI has been

awaited by many. It is well known that the SBI has long harbored plans to become a

universal bank (a universal bank has business in banking, insurance and in security). For

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a bank with more than 13,000 branches all over India, this would be a natural expansion.

In the first round of license issue, the SBI was absent.

There were several reasons for this delay. First, the SBI was seeking a foreign

partner to help with new product design. Second, it did not want the partner to become

dominant in the long run (when the 26% foreign investment cap is eventually lifted). It

wanted to retain its own brand name. Third, it wanted a partner that is well versed in the

universal banking business. This ruled out an American partner (where underwriting

insurance business by banks have been strictly forbidden by law). Cardif is the third

largest insurance company in France. More than 60% of life insurance policies in France

are sold through the banks. Fourth, the Reserve Bank of India (RBI) needed to clear

participation by the SBI because in India banks are allowed to enter other businesses on a

"case by case" basis.

Over the course of the next twelve months, the SBI will sell insurance in 100

branches. Over a period of 2-3 years it will expand operation in 500 branches. Initially it

will hold 74% ownership of the joint venture company with Cardif. Over time, it will

dilute its holding to 50-60%.

The SBI entry is groundbreaking for several reasons. This was the first for a bank

to enter the insurance market. This kind of synergy between a bank and an insurance

company is extremely rare in many parts of the world. In Continental Europe, it is called

bancassurance (in France) or allfinanz (in Germany). Second, even though the regulators

have said that banks would not (generally) be allowed to hold more than 50% of an

insurance company, the SBI was allowed to do so (with a promise that its share would be

eventually diluted).

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Broken Marriages

Several partnerships broke down during the year 2000. Probably the most

dramatic breakdown took place between Hindustan Times (a newspaper group) and the

Commercial Union of the UK. The management of Hindustan Times realized that they

are heavily reliant on a steady daily cash flow (Kumari, 2001). Insurance is a completely

different business. Their shareholders would revolt if they faced large one-time losses

(common in insurance business).

Similarly, by the end of July 2000, Kotak-Mahindra and Chubb declared their

divorce. Dabur Group and Allstate also parted company. Allianz and Alpic broke their

partnership.

Re-pairing of Partners

A curious trend has developed by the end of 2000. Several divorced partners

have come back to the field to tie knots to some other partners. Dabur has decided to tie

the knot with another divorcee - Commercial Union. Allianz has announced a new

partnership with the giant Indian scooter-maker Bajaj.

Back to the Future: Mostly Swaraj with a Foreign Twist

At present, 312 million middle class consumers in India have enough financial

resources to purchase insurance products like pension, health care, accident benefit, life,

property and auto insurance. Only 2.5 per cent of this insurable population, however,

have insurance coverage in any form. The potential premium income is estimated at

around US $80 billion. This will place India as the sixth largest market in the world

(after the US, Japan, Germany, UK and France).

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Lessons from China

China is the most populous country in the world (at 1.2 billion); India is a close

second (just over a billion). Both have followed the path of deregulation and

privatization - China started it in 1979 and India in 1991. Comparisons of these

processes are described in Sinha and Sinha (1997). In this section, I will concentrate only

on the insurance industry in the two countries. The insurance business in India has a

premium volume of $8.3 billion in 1999 whereas in China the premium volume is $16.8

billion in 1999. However, premium per capita is not all that dissimilar: $13.7 per person

in China and $8.5 in India in 1999. As a percent of GDP, insurance is 1.93% in India and

1.63% in China in 1999 (all data from Sigma, 2000).

In China, the People's Insurance Company of China (PICC) had a monopoly

between 1949 and 1959. In 1959, insurance business was deemed capitalistic and all

forms of insurance were suspended (and the insurance business was taken over by the

Peoples Bank of China). The insurance business reopened in 1979, the PICC reassumed

its old role as the monopoly.

There are many differences in the way China and India have handled

deregulation. First, in China, the China Insurance Regulatory Commission (CIRC) was

set up in November 1998, well after the first Insurance Law was promulgated in 1995. In

India, the IRDA was launched first with the authority to issue licenses. It took almost a

year before it issued licenses for the first set of private insurance companies. Second, in

China, foreign insurers need to have a representative office for three years before they

can submit a proposal for operation (in practice, this has been reduced to two years in

some cases). In India, there is no such requirement. Third, foreign insurers can only own

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25% of the total value of the market (although, in reality, it has been much less than that

in Shanghai). In India, the limit is set at 26% per company. In China, there is no limit at

the company level. Thus, a foreign company can own 100% of an approved insurance

company in China. Fourth, in India, the licenses are national. A company with a license

can operate in any part of the country. In China, on the other hand, foreign companies

are restricted to operation in two metropolitan areas: Shanghai and Guangzhou. Fifth, the

IRDA is a law-implementing body. It can only interpret the laws that have been passed

by the Indian Parliament. On the other hand, it seems that the CIRC has been a law-

making body, it is setting up rules as it sees fit. Sixth, China seems to have been forced

to issue insurance licenses to a host of foreign companies by the end of 2000 simply

because it wanted an assured entry into the World Trade Organization (WTO). In India,

there is no such pressure as India is already a part of the WTO.

Quo Vadis, Insurance?

In this section, we gaze into the future of the insurance industry in India. A

number of trends are already emerging.

Convergence

In many other regions around the world, one sure sign is emerging in the

insurance business. Different parts of the financial sectors are converging. This

happened first in European Union (with the so-called Third Directive). It is now

happening in the United States with the effective repealing of the Glass-Steagall Act of

1933. In India, it will surely come. Not everybody in India, however, believes so. For

example, the Insurance Regulatory Development Authority (IRDA) chairman N.

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Rangachari said that India is not yet ready for the convergence of all financial sectors

under one supervisory authority as suggested by the banking division of the finance

ministry. The RBI (Reserve Bank of India) has erected a firewall between banks and

insurance companies to protect investor interests.

With the insurance sector transforming from total regulation to being opened up

after 35 years, fears have been expressed on how it would move. However, the

convergence is already happening on the ground in a “curious way” as 10 out of 12

insurance proposals received for license by the IRDA have come in from companies who

are in the pure or applied finance sector. It may appear curious, but clearly the

companies who want to enter the insurance sector see some kind of a synergy between

their existing business and insurance.

Monitor Group Report

How would the insurance market be divided up between the incumbent Life

Insurance Corporation and the newcomers? The Monitor Group (from Boston) has

published a study at the end of 1999 (reported in Business Today, 2000). It estimates that

the $5 billion market of life insurance in India (figure for 1998) will become a $23 billion

market by 2008. The report estimates that the LIC will have some 70-80% of the market

whereas the new companies will share some 20-30%. The bright prognostics for the LIC

come from several key observations. (1) The LIC has a vast distribution network in the

rural and semi-urban areas. This would be hard to duplicate. (2) The LIC has had a real

annual growth rate of 8% over the last decade. This is much larger than industrial

growth. Therefore, the LIC has a head start. (3) As life insurance benefits accrue over

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time, it becomes more expensive to switch - because switching would mean a loss of

accrued benefits.

The general insurance business is expected to grow from USD 1.8 billion (1998)

to 12 billion in 2008. The Monitor Group Report predicts that the private companies

would have an easier access to the general insurance business. The market share of the

newcomers will be 40-50% of the total market. The cause for better market penetration

for the new companies come from the fact that it makes no difference for the insured to

switch companies. Unlike life insurance, it is not expensive to switch insurers. However,

the lack of good data would hamper the newcomers (see below).

Reinsurance

The GIC has decided to spin off its reinsurance business as a separate company to

be called Indian Reinsurer. The insurance business in India is less than USD $1 billion at

present (2000). In the near term (three to five years), it is expected to double in size for

two simple reasons. (1) Under the new regime, the reinsurance requirements are higher

(as a percentage of total insurance business). (2) Privately run non-life insurance

companies have a higher reinsurance requirement in the early years.

Aftermath of the Gujarat Earthquake

On January 26, 2001, an earthquake measuring 6.9 on the Richter scale hit parts

of Gujarat. Many buildings toppled. An estimated 20,000 persons were killed - most of

them in Bhuj district of Gujarat (around 18,000). Estimated damage was in the order of

magnitude of USD 5 billion - most of it uninsured.

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The disaster was once in a lifetime event. In a curious way, it will help the new

entrants in the insurance industry in India. It is well known in the psychology literature

that disasters make people more aware of their insurance needs. Given what happened in

Gujarat, most Indians will now have a higher awareness about buying an insurance policy

than they would have otherwise. No amount of advertisement by the insurance

companies (both life and general) could have achieved this.

Ironically, India's national insurance companies began to exclude earthquake

cover in the new policy forms adopted from 1 April 2000 and began to offer the

protection as a buy-back on the recommendation of the Tariff Advisory Committee

(TAC) report. Many policyholders were unaware of the change and so the relatively few

individuals and companies that have been prudent enough to buy insurance may discover

that, in the case of the Gujarat event, they are uninsured.

Some Areas of Future Growth

Life Insurance

The traditional life insurance business for the LIC has been a little more than a

savings policy. Term life (where the insurance company pays a predetermined amount if

the policyholder dies within a given time but it pays nothing if the policyholder does not

die) has accounted for less than 2% of the insurance premium of the LIC (Mitra and

Nayak, 2001). For the new life insurance companies, term life policies would be the

main line of business.

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Health Insurance

Health insurance expenditure in India is roughly 6% of GDP, much higher than

most other countries with the same level of economic development. Of that, 4.7% is

private and the rest is public. What is even more striking is that 4.5% are out of pocket

expenditure (Berman, 1996). There has been an almost total failure of the public health

care system in India. This creates an opportunity for the new insurance companies.

Thus, private insurance companies will be able to sell health insurance to a vast number

of families who would like to have health care cover but do not have it.

Pension

The pension system in India is in its infancy. There are generally three forms of

plans: provident funds, gratuities and pension funds. Most of the pension schemes are

confined to government employees (and some large companies). The vast majority of

workers are in the informal sector. As a result, most workers do not have any retirement

benefits to fall back on after retirement. Total assets of all the pension plans in India

amount to less than USD 40 billion.

Therefore, there is a huge scope for the development of pension funds in India.

The finance minister of India has repeatedly asserted that a Latin American style reform

of the privatized pension system in India would be welcome (Roy, 1997). Given all the

pros and cons, it is not clear whether such a wholesale privatization would really benefit

India or not (Sinha, 2000).

23

Other Non-Life Insurance

The flurry of activities of the new companies in the life insurance market has not

been repeated in other types of insurance. The reason is basic: lack of data. Unless the

new companies have access to reliable data on accidents of different kinds under Indian

conditions, it would be hard to offer a competitive menu of policies.

Conclusions

It seems unlikely that the LIC and the GIC will shrivel up and die within the next

decade or two. The IRDA has taken a "slowly slowly" approach. It has been very

cautious in granting licenses. It has set up fairly strict standards for all aspects of the

insurance business (with the probable exception of the disclosure requirements). The

regulators always walk a fine line. Too many regulations kill the incentive for the

newcomers; too relaxed regulations may induce failure and fraud that led to

nationalization in the first place.

India is not unique among the developing countries where the insurance business

has been opened up to foreign competitors. From Table 4, we observe that the openness

of the market did not mean a takeover by foreign companies even in a decade. Thus, it is

unlikely that the same will happen in India, especially when the foreign insurers cannot

have a majority shareholding in any company.

24

TABLE 4 RESULTS OF OPENNESS AND FOREIGN PENETRATION OF INSURANCE IN ASIA Country Years Years Market Open Foreign Penetration 0-5 6-10 11+ 0-10% 11-20% China X (partial) X Malaysia X X Taiwan X X Korea X X Indonesia X X Japan X X Source: Speech by Lawrence P. Moews, CEO, Allstate International, International Insurance Society Conference, Sydney, Australia, 1997.

The insurance business is at a critical stage in India. Over the next couple of

decades we are likely to witness high growth in the insurance sector for two reasons.

Financial deregulation always speeds up the development of the insurance sector.

Growth in per capita GDP also helps the insurance business to grow.

25

References

Berman, Peter. "Rethinking Health Care Systems: Private Health Care Provision in India." Harvard School of Public Health Working Paper, November 1996.

Business Today. "The Monitory Group Study on Insurance I and II." March 22 and April

7, 2000. Dasgupta, Samik. "RSA, Iffco-Tokio yet to appoint actuaries," Economic Times, January

23, 2001. Kumari, Vaswati, "India Insurers Seek Perfect Partners." National Underwriters, March

5, 2001, 38-39. Mitra, Sumit and Nayak, Shilpa. "Coming to Life." India Today, May 7, 2001. Patel, Freny. "Centre wants GIC to merge unviable outfits before recast." Business

Standard, April 13, 2001. Roy, Abhijit. "Pension fund business in India." The Hindu, July 16, 1997, p. 25. Roy, Samit. "Insurance Sector: India." Industry Sector Analysis, National Trade and

Development Board, US Department of State, Washington, DC, December 1999. Sigma. "World Insurance in 1999." No. 9/2000. Published by SwissRe. Available at

www.swissre.com. Sinha, Tapen. Pension Reform in Latin America and Its Implications for International

Policymakers. Boston, USA, Huebner Series Volume No. 23, Kluwer Academic Publishers, 2000.

Sinha, Tapen and Sinha, Dipendra. "A Comparison of Development Prospects in India

and China." Asian Economies, Vol. 27(2), June 1997, 5-31. U.S. Department of State FY 2001 Country Commercial Guide: India. Commercial

Guide for India was prepared by U.S. Embassy New Delhi and released by the Bureau of Economic and Business in July 2000 for Fiscal Year 2001.