Insurance sector reforms, Malhotra committee 1993, Players in Indian insurance sector , Issues in Life Insurance in India

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32-MBA-2012

34-MBA-2012

35-MBA-2012

36-MBA-2012

39-MBA-2012

40-MBA-2012

42-MBA-2012

What is insurance ?

Insurance = Collective bearing of Risk Basic Human trait is to be averse to the idea

of risk taking. Insurance, whether life or non-life, provides

people with a reasonable degree of security and assurance that they will be protected in the event of a calamity or failure of any sort.

How does it help economy ?

A robust insurance sector is a boon to a country’s economy.

The sector facilitates long-term funds for infrastructure development and simultaneously strengthens the risk-taking ability of the country.

India’s rapid economic growth and development over the past decade is considered to be very significant on the global canvas.

How well it is doing in India?

Indian insurance sector is poised to mark great progress in the years the come.

Over the past few years, many foreign insurance companies have ventured into the Indian landscape in order to harness the immense untapped latent potential of this industry.

Moreover, the favorable regulatory environment ensures stability and fair play in the entire market

Indian life insurance sector collected new business premiums worth Rs 11,742.7 crore for April-May 2013, according to data from IRDA.

Life insurers collected Rs 1,07,010.7 crore (US$ 17.5 billion) worth of new premiums for the financial year ended March 31, 2013.

Meanwhile, the general insurance industry grew by 19.6 per cent in April-May period of FY14, wherein the non-life insurers collected premium worth Rs 13,552.46 crore (US$ 2.21 billion).

Road ahead for insurance sector

Industry body CII projects the growth rate for Indian insurance industry in 2013-14 at around 5 per cent.

It also projects that 60 per cent of non-life insurance companies would record an average growth of more than 10 per cent.

Increasing the FDI limit from 26 per cent to 49 per cent in the sector is being viewed as a major factor to push the insurance density in India.

Growth and Development of Insurance in India

ORIGIN OF INSURANCE ?

VARIOUS DEVELOPMENTS OVER THE PERIOD OF TIME ?

The early years

Organized business began in India in 1818.

First legislation of the British Government in 1870 did not touch the Indian Insurance.

Subsequent enactment of 1909 also did not cover Indian Insurance.

Life Insurance Companies Act 1912 . Till that time Companies Act 1866 covered all insurance companies.

The first Indian Insurance Act 1912 was modelled on Insurance Companies Act of 1870 modified by the replacing Act of 1909.

Then UK enacted Assurance Companies Act in 1946, which was applicable to the entire insurance industry. The earlier Act insisted on deposits, where as the later stipulated capital of £ 50000.

Still discrimination between Indian and British Companies continued. Indian Companies had to place a deposit with the Government where as the British companies were exempted from this requirement.

Resentment among Indian Companies.

In 1928 this was sought to be corrected.

Many companies were started and failed.

All India Life Offices Association – a collective Body of Indian Companies was started in 1928.

Sen Committee made recommendations.

Reviewed by NN Sarcar Committee and finally Bill piloted in 1937, became an act in 1938 and came into force with July 1st 1939. This was the first comprehensive legislation.

Major points of the Indian Insurance Act of 1938

Compulsory Registration of Insurance Companies Filing of return on financial statements. Norms for investment of net life funds- Indian and

foreign Prescribed securities for investment Compulsory licensing of agents Rebating made an offence Maximum rate of commission payable were

prescribed

Standardization of premium for life insurance and compulsory approval of premium rates by actuaries.

Standardization of policy forms and primary documents Amount of security deposits to be placed with the

government. Creation of Dept of Insurance in the government Many further amendments carried out during 1938-45.

Many unscrupulous companies started operating. Therefore Sir Cowasji Jehangir Commission was appointed in 1945.

The bill was taken up after independence

Developments after independence

On January 19, 1956, Life Insurance was nationalized mainly with the aim of offering insurance to the needy sections of the society.

Life Insurance Corporation of India came into being on September 1,1956 with initial capital of Rs. 5 crores and seed capital. This was to be increased to Rs. 100 crores.

In 1968, the Insurance Act was substantially amended to bring in social control of General Insurance. GIC came into being in 1972 based on General Insurance Business (Nationalization) Act 1971- merging 107 companies into one or other of the 4 major subsidiaries of GIC- i.e. National Insurance Co., New India Assurance Co., Oriental Insurance Co., United India Insurance Co.

Malhotra committee 1993

Indian Economy was undergoing a pace of liberalization, which led to the opening up of the financial sector to private players.

It was felt that this should also include the insurance sector.

Hence a Committee was formed under the chairmanship of the retired RBI governor R.N Malhotra to study the insurance sector and propose the necessary modifications.

The committee broadly touched on Regulation of the insurance business Restructuring of the existing insurance

organizations Liberalization of insurance industry for

global integration

Terms of reference Of Malhotra Committee

To examine the structure of Insurance industry-its existing framework and its strengths and weaknesses with the objective of creating an efficient and viable insurance industry- providing efficient services and mobilizing financial resources for development.

To make suitable recommendations for changes in its structure

To make suggestions for improvement of LIC and GIC

To review and make suggestions for improvement of the regulations to be in tune with the requirements.

To review and make recommendations on the roles of surveyors, intermediaries and other ancillaries of the insurance sector.

To make recommendations for the health and long term development of the insurance sector.

Malhotra Committee Major Recommendations :On liberalization

Pvt sector to be allowed to enter business.

- competition will improve customer service

- improve quality and price of products

-better inroads into the market

- Other wings like Banks and MFs were also exposed

- Public desired competition

- Public sector was already well established. No fear of competition.

No composite co- separate for life and general No of entrants to be controlled

Minimum paid up capital Rs. 100 crores. Could be lower for state level co-op Institutions.

Promoters equity not to exceed 40% or to be brought within that level.

Promoters equity not to go below 26%. No singe holder other than promoter to have

more than 1% share. For pension funds the net worth should be Rs

50 cr.

Obligation to do business in rural areas and for weaker sections of the community

Selective entry to foreign companies- to float an Indian co as joint venture.

Industry to develop and improve effective customer service and claims management

Income tax concessions to individual pension schemes.

Privatization of LIC and GIC:

Establishment of an Insurance Regulatory Authority on the lines of SEBI.

Malhotra Committee Major Recommendations

Insurance Regulatory Authority : IRDA was established by enactment of the IRDA Bill in 1999.

Comprised of a Govt nominee and a member each from Life insurance and general Insurance industries.

Primary task to frame suitable regulations Control opening of offices , licensing of

intermediaries etc. Also to develop insurance industry and train

and develop professionalism.

Monitoring the activities of Tariff Advisory Committee , divesting GIC of its authority to transact non-life business and designating it as Reinsurer.

IRDA started with N Rangachary as the first chair person, with 4 full time directors , 2 part time directors and with a 25 member advisory council.

Mission of IRDA

To protect the interest of and ensure fair treatment to policy holders

To ensure speedy and orderly growth of insurance industry

To set, promote and monitor high standards

To ensure that insurance customers receive correct information

To ensure speedy settlement of genuine claims

To promote fairness, transparency and orderly conduct in financial markets

To take suitable actions where failures are observed

To bring about optimum self regulation

Work carried out by IRDA

Under the regulations by IRDA, only Indian Co.s registered under Indian Co.s Act 1956 are eligible to be registered.

Hence foreign co.s have to have Indian partners- joint ventures.

Foreign co.s can have 29% equity in the joint ventures.

Before permitting a foreign co. verification is done of the foreign co through local regulator of the country in which it is registered. Local co is also required to produce an income tax clearance.

Foreign Direct Investment (FDI) is now riased to 49%

After liberalization many private insurance co.s have started operations in India.

Now private insurance co.s have a market share of approximately 12%.

They make impressive strides in the pension markets.

Top ten insurance players

1 |Life Insurance Corporation of India (LIC)

Corporate Office – Mumbai, Maharashtra | Employees - 115900+ |

Business – Financial services | Establishment – 1956 |

Website – www.licindia.in

Details – Best Insurance Company in India dominating the market since then it established in market. In other word, It is the synonyms of Insurance in India, most important they have best settlement ratio.

2 | SBI Life InsuranceCorporate Office – Mumbai, Maharashtra | Employees – 7300+ |Business – Insurance | Establishment – 2001 |Website -www.sbilife.co.inDetails -State bank of India life insurance is a joint venture between BNP Paribas Cardif holding 74:26 ratios. It has great hold in Indian market as far as concern of Finance and banking sector, best in insurance sector after LIC.

3 | Birla Sunlife Insurance Corporate Office – | Employees – 133000+ |Business – Financial services | Establishment – 2000 |Website -www.birlasunlife.comDetails - It is finacial and Insurance company, a Joint venture of Aditya Birla and Sun life Insurace. Company offers life insurance products including health, wealth and retiral plans.

4 | Reliance Life Insurance (RLIC)Corporate Office – Navi Mumbai,Maharashtra | Employees – 1000+ |Business – Insurance | Establishment – 2001 |Website -www.reliancelife.comDetails – Company is group company of Reliance, among of top insurance company in India. In year 2011 Nippon life insurance, Japan acquired 26% share in this company.

5 | ICICI Prudential Life InsuranceCorporate Office – United Kingdom | Employees – 15000+ |Business – Life Insurance | Establishment – 2000 |Website -www.iciciprulife.comDetails – ICICI prudential is a joint venture between ICICI and prudential Plc, United kingdom. ICICI Prudential offers wide range of Insurance Products including health, wealth, life insurance, medical insurance and retiral solutions.

6 | Tata AIG Life Insurance Corporate Office – Mumbai, Maharashtra | Employees – — |Business – Insurance | Establishment – 2001 |Website -www.tataaiginsurance.inDetails – Tata AIG is a joint venture between Tata and AIG, It is flagship company of Tata group. Started insurance business in year 2001, company launched many insurance products such as Motor, travel, health and accidental insurance.

7 | ING Vysya Life Insurance Corporate Office – Bangalore, Karnataka | Employees – 7800+ |Business – Insurance | Establishment – 2001 |Website -www.inglife.co.inDetails – ING vysya is a insurance company offers insurance policies and retiral plans. It has been serving in more than 200 cities in India and almost 10 lacs customer base.

8 | Bajaj Allianz Life InsuranceCorporate Office – Pune | Employees – 1000+ |Business – Insurance | Establishment – 2001 |Website -www.bajajallianz.comDetails – It is a private Insurance company offers many insurance plan & policies including ULIP, pension plans and term Insurance.

9 | Max Life InsuranceCorporate Office – New Delhi | Employees – 8000+ |Business – Financial Services | Establishment – 2000 |Website -www.maxlifeinsurance.comDetails – Max life insurance is another private company offers Insurance plans for everyone.

10 | HDFC Standard Life InsuranceCorporate Office – Mumbai, Maharashtra | Employees – 15500+ |Business – Insurance | Establishment – 2000 |Website -www.hdfclife.comDetails – Group company of giant Housing development finance corporation, it is joint venture with Standard life Insurance.

Issues of life insurance in India

Need to raise FDI in insurance High expense ratio/ operating cost Need to strengthen core product

proposition Delayed break even for private insurance

companies Lack of professional agency channel Promotion of banc assurance Other global insurance issues

Need to raise FDI in insurance

Importance of FDI in the insurance sector is well recognized by the experts and also referred at many forums over the last years.

The sector is highly capital intensive, since its development period is too long.

It requires capital infusion at regular intervals and particularly in India the need for capital infusion is highly necessary to reduce fixed cost and to cover India’s the vast geographic spread.

But at present, the FDI in the insurance sector is restricted to 26% which is a huge deterrent to growth in the industry.

High expense ratio/ operating cost

Both expense ratio and operating ratio is very high in the Indian insurance sector, especially for the private players.

In FY 09, the private sector life insurance segment had an expense ratio (operating expenses & commission expenses) of 30.6%.

It is observed that the CAGR of operating expenses for LICI is 13.06 % (03-04 to 9-10) while this is 42.29 % for other private players

Public sector companies have been in existence for a couple of decades and hence, have managed to reduce their expenses over time.

However, experts on insurance field (Seth, 2010) believed that the expenses ratio should be around 10-15% from long term sustainability & profitability perspectives.

A high expense ratio directly impacts profitability. Since the insurance industry is still at a nascent stage, many companies are yet to break down & rising expenses can further delay this process.

Need to strengthen core product proposition

Although the life insurance sector has shown rapid growth over the last few years, low margin single premium products & potentially volatile ULIPs have accounted for most of the growth.

These products are proven to be easily sold, but merely focusing on these could weaken the growth and long term profitability for India’s life insurers.

Delayed break even for private insurance companies

Breakeven point is achieved in the insurance industry when the new business premium is equal to the renewal premium.

However, as the Indian industry is growing, the volume of new premiums is much more than the renewal premiums.

Globally, life insurance Company’s break even is six to eight years but in India, it has not achieved & it may take another couple of years due to recent financial crisis in the world.

Other reasons for delayed breakeven are the high operating expenses like management costs, real estate prices, salaries, distribution expenses and technology expenses which are higher than what was accounted for in the original business plans of insurers.

Moreover, the capital –intensive nature of the life insurance segment has extended this process by a couple of years.

Lack of professional agency channel

In the distribution of products, agency channel accounts nearly 80-85% of new business.

The agency force in India has also grown rapidly but the overall inactivity and attrition rates are quite high which are estimated to be 50-55% which are significantly higher than the global benchmarks of about 25%.

It is reported (McKinsey Global Survey, 2011) that proper strategies are not implemented while selecting the agency forces in a life insurance market in India.

Lack of professional agency channel and other alternative channels of insurance business hinders the growth of Indian insurance market.

Promotion of banc assurance

It is further observed from the survey of existing literature that customers prefer banc assurance channel next to agency channel.

Given the highest penetration of banking products, banc assurance could be the single most important channel for insurers to rapidly acquire new customers.

However, cross-sell rates in Indian banking are significantly lower than those in developed markets.

In developed economics like Spain, Italy & France, between 12 & 24% of a bank’s customer would have brought insurance through the bank. In India, this number is estimated to be less than 0.5% for Public sector banks, 1 to 2 % in private sector banks and 2to 4 % for foreign banks .

A lot of factors are responsible for such low rate of banc assurance namely high variance in selling skills, low operational flexibility in respect to develop sell culture, low technological capabilities , lack of process integration etc.

Other global insurance issues

There are several important issues on which IRDA is working on.

The convergence of the Indian Accounting Standards with the IFRS , the settlement of norms which will relate to the issuance of IPOs and M&As, the establishment of amore robust system to collect and disseminate appropriate insurance related data and several other initiatives are the main issues of global insurance issues.

CONTRIBUTION TO GROWTH

Currently, the insurance sector size is estimated at Rs.500 billion.

On account of intense marketing strategies adopted by private insurance players, the market share of state owned insurance companies like GIC, LIC and others have come down to 70% in last 4-5 years from over 97%.

 The private insurance players despite the sector is still regulated has been offering rate of return (RoR) to its policy holders which is estimated at about 35% as against 20% of domestic insurance companies.

LIC and GIC have limited number of policies to offer to their subscribers

Private insurance companies offer many policies and the premium amount as well as the maturity period is much competitive as against those of government insurance companies.

 The private sector insurance players have started exploring the rural markets in which until recently, the state owned companies had the monopoly.

India’s life insurance premium, as a percentage of GDP is 1.8%

FUTURE OF THE SECTOR

Indian insurance sector is likely to register unprecedented growth of 200% and attain a size of Rs. 2000 billion by 2009-10

A private sector insurance business will achieve a growth rate of 140% as a result of aggressive marketing technique being adopted by them against 35-40% growth rate of state owned insurance companies.

In rural markets, the share of private insurance players would increase substantially as these have been able to generate a faith among their rural consumers.

Thank you…!!