INSURANCE SECTOR IN INDIA: TOWARDS THE 2020 VISION
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In this case study, we will examine the critical underpinnings of the recent 2020 Vision mooted by the Planning Commission. We will show how the insurance sector will play an important role in the implementation of this Vision Statement.
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Brief history of insurance sector
The insurance sector in India has completed all the facets of competition - from being an open competitive market to being nationalized and then getting back to the form of a liberalized market once again. The history of the insurance sector in India reveals that it has witnessed complete dynamism for the past two centuries approximately.
With the establishment of the Oriental Life Insurance Company in Kolkata, the business of Indian life insurance started in the year 1818.
Important milestones in the Indian life insurance business
1912: The Indian Life Assurance Companies Act came into force for regulating the life insurance business.
1928: The Indian Insurance Companies Act was enacted for enabling the government to collect statistical information on both life and non-life insurance businesses.
1938: The earlier legislation consolidated the Insurance Act with the aim of safeguarding the interests of the insuring public.
1956: 245 Indian and foreign insurers and provident societies were taken over by the central government and they got nationalized. LIC was formed by an Act of Parliament, viz. LIC Act, 1956. It started off with a capital of Rs. 5 crore and that too from the Government of India.
The history of general insurance business in India can be traced back to Triton Insurance Company Ltd. (the first general insurance company) which was formed in the year 1850 in Kolkata by the British.
Important milestones in the Indian general insurance business
1907: The Indian Mercantile Insurance Ltd. was set up which was the first company of its type to transact all general insurance business.
1957: General Insurance Council, an arm of the Insurance Association of India, framed a code of conduct for guaranteeing fair conduct and sound business patterns.
1968: The Insurance Act improved for regulating investments and set minimal solvency levels and the Tariff Advisory Committee was set up.
1972: The General Insurance Business (Nationalization) Act, 1972 nationalized the general insurance business in India. It was with effect from 1st January 1973.
107 insurers integrated and grouped into four companies viz. the National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. and the United India Insurance Company Ltd. GIC was incorporated as a company.
Insurance industry, as on 1.4.2000, comprised mainly two players: the state insurers:
(1) Life Insurance Corporation of India (LIC) General Insurers:
(2) General Insurance Corporation of India (GIC) (with effect from Dec'2000, a National Reinsurer) GIC had four subsidiary companies, namely
i) The Oriental Insurance Company Limited
ii) The New India Assurance Company Limited
iii) National Insurance Company Limited
iv) United India Insurance Company Limited.
(With effect from Dec'2000, these subsidiaries have been de-linked from the parent company and made as independent insurance companies)
Year: 2000-2001: (From 2nd April '2000 to 31st December'2001)
Insurance Industry in the year 2000-2001 had 16 new entrants, namely:
The Insurance sector in India is governed by Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and General Insurance Business (Nationalization) Act, 1972, Insurance Regulatory and Development Authority (IRDA) Act, 1999 and other related Acts. With such a large population and the untapped market area of this population, insurance happens to be a very big opportunity in India.
Today it stands as a business growing at the rate of 15-20 per cent annually. Together with banking services, it adds about 7 per cent to the country's GDP .In spite of all this growth the statistics of the penetration of the insurance in the country is very poor. Nearly 80% of Indian populations are without Life insurance cover and the Health insurance. This is an indicator that growth potential for the insurance sector is immense in India.
It was due to this immense growth that the regulations were introduced in the insurance sector and in continuation "Malhotra Committee" was constituted by the government in 1993 to examine the various aspects of the industry. The key element of the reform process was Participation of overseas insurance companies with 26% capital. Creating a more efficient and competitive financial system suitable for the requirements of the economy was the main idea behind this reform.
Since then the insurance industry has gone through many sea changes .The competition that LIC started facing from these companies were threatening to the existence of LIC. Since the liberalization of the industry, the insurance industry has never looked back and today stand as the one of the most competitive and exploring industry in India. The entry of the private players and the increased use of the new distribution are in the limelight today. The use of new distribution techniques and the IT tools has increased the scope of the industry in the longer run.
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APPLICATION OF INFORMATION TECHNOLOGY IN INSURANCE SECTOR
There is an evolutionary change in the technology that has revolutionized the entire insurance sector. Insurance industry is a data-rich industry, and thus, there is a need to use the data for trend analysis and personalization.
With increased competition among insurers, service has become a key issue. Moreover, customers are getting increasingly sophisticated and tech-savvy. People today don't want to accept the current value propositions, they want personalized interactions and they look for more and more features and add ones and better service.
The insurance companies today must meet the need of the hour for more and more personalized approach for handling the customer. Today managing the customer intelligently is very critical for the insurer especially in the very competitive environment. Companies need to apply different set of rules and treatment strategies to different customer segments. However, to personalize interactions, insurers are required to capture customer information in an integrated system.
With the explosion of Website and greater access to direct product or policy information, there is a need to developing better techniques to give customers a truly personalized experience. Personalization helps organizations to reach their customers with more impact and to generate new revenue through cross selling and up selling activities. To ensure that the customers are receiving personalized information, many organizations are incorporating knowledge database-repositories of content that typically include a search engine and let the customers locate all the document and information related to their queries of request for services. Customers can hereby use the knowledge database to manage their products or the company information and invoices, claim records and histories of the service inquiry. These products may also be able to learn from the customer's previous knowledge database and to use their information when determining the relevance to the customers search request.
In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor R.N. Malhotra, was formed to evaluate the Indian insurance industry and recommend its future direction.
The Malhotra committee was set up with the objective of complementing the reforms initiated in the financial sector. The reforms were aimed at "creating a more efficient and competitive financial system suitable for the requirements of the economy keeping in mind the structural changes currently underway and recognizing that insurance is an important part of the overall financial system where it was necessary to address the need for similar reforms."
In 1994, the committee submitted the report and some of the key recommendations included:
- Government stake in the insurance Companies to be brought down to 50%.
- Government should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as independent corporations.
- All the insurance companies should be given greater freedom to operate.
- Private Companies with a minimum paid up capital of Rs.1bn should be allowed to enter the industry.
- No Company should deal in both Life and General Insurance through a single entity.
- Foreign companies may be allowed to enter the industry in collaboration with the domestic companies.
- Postal Life Insurance should be allowed to operate in the rural market.
- Only One State Level Life Insurance Company should be allowed to operate in each state.
3) Regulatory Body
- The Insurance Act should be changed.
- An Insurance Regulatory body should be set up.
- Controller of Insurance (Currently a part from the Finance Ministry) should be made independent.
- Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%.
- GIC and its subsidiaries are not to hold more than 5% in any company (There current holdings to be brought down to this level over a period of time).
5) Customer Service
- LIC should pay interest on delays in payments beyond 30 days.
- Insurance companies must be encouraged to set up unit linked pension plans.
- Computerization of operations and updating of technology to be carried out in the insurance industry. The committee emphasized that in order to improve the customer services and increase the coverage of the insurance industry should be opened up to competition.
But at the same time, the committee felt the need to exercise caution as any failure on the part of new players could ruin the public confidence in the industry. Hence, it was decided to allow competition in a limited way by stipulating the minimum capital requirement of Rs.100 crores. The committee felt the need to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives. For this purpose, it had proposed setting up an independent regulatory body.
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Independent Regulatory Body - IRDA
Insurance sector has been opened up for competition from Indian private insurance companies with the enactment of Insurance Regulatory and Development Authority Act, 1999 (IRDA Act). As per the provisions of IRDA Act, 1999, Insurance Regulatory and Development Authority (IRDA) was established on 19th April 2000 to protect the interests of holder of insurance policy and to regulate, promote and ensure orderly growth of the insurance industry.
IRDA Act 1999 paved the way for the entry of private players into the insurance market which was hitherto the exclusive privilege of public sector insurance companies/ corporations. Under the new dispensation Indian insurance companies in private sector were permitted to operate in India with the following conditions:
- Company is formed and registered under the Companies Act, 1956;
- The aggregate holdings of equity shares by a foreign company, either by itself or through its subsidiary companies or its nominees, do not exceed 26%, paid up equity capital of such Indian insurance company.
- The company's sole purpose is to carry on life insurance business or general insurance business or reinsurance business.
- The minimum paid up equity capital for life or general insurance business is Rs.100 crores.
- The minimum paid up equity capital for carrying on reinsurance business has been prescribed as Rs.200 crores.
The Authority has notified 27 Regulations on various issues which include Registration of Insurers, Regulation on insurance agents, Solvency Margin, Re-insurance, Obligation of Insurers to Rural and Social sector, Investment and Accounting Procedure, Protection of policy holders' interest etc. Applications were invited by the Authority with effect from 15th August, 2000 for issue of the Certificate of Registration to both life and non-life insurers. The Authority has its Head Quarter at Hyderabad.
IRDA has so far granted registration to 12 private life insurance companies and 9 general insurance companies. If the existing public sector insurance companies are included, there are currently 13 insurance companies in the life side and 13 companies operating in general insurance business. General Insurance Corporation has been approved as the "Indian reinsurer" for underwriting only reinsurance business. Particulars of the life insurance companies and general insurance companies including their web address are given below:
India Insurance Policies at a Glance
Indian insurance companies offer a comprehensive range of insurance plans, a range that is growing as the economy matures and the wealth of the middle classes increases. The most common types include: term life policies, endowment policies, joint life policies, whole life policies, loan cover term assurance policies, unit-linked insurance plans, group insurance policies, pension plans, and annuities. General insurance plans are also available to cover motor insurance, home insurance, travel insurance and health insurance.
Due to the growing demand for insurance, more and more insurance companies are now emerging in the Indian insurance sector. With the opening up of the economy, several international leaders in the insurance sector are trying to venture into the Indian insurance industry.
Insurance business is divided into four classes:
1) Life Insurance
2) Fire Insurance
3) Marine Insurance and
4) Miscellaneous Insurance.
Life Insurers transact life insurance business; General Insurers transact the rest. No composites are permitted as per law.
LEGISLATION (as on 1.4.2000):
Insurance is a federal subject in India. The primary legislation that deals with insurance business in India is:
- Insurance Act, 1938, and
- Insurance Regulatory & Development Authority Act, 1999.
INSURANCE PRODUCTS (as on 1.4.2000):
Life Insurance -
Popular Products: Endowment Assurance (Participating) and Money Back (Participating). More than 80% of the life insurance business is from these products.
General Insurance -
Fire and Miscellaneous insurance businesses are predominant. Motor Vehicle insurance is compulsory.
Tariff Advisory Committee (TAC) lays down tariff rates for some of the general insurance products
New products have been launched by life insurers in 2001. These include linked-products like Unit Linked Insurance Policies (ULIPS).
Protection of the interest of policy holders:
IRDA has the responsibility of protecting the interest of insurance policyholders. Towards achieving this objective, the Authority has taken the following steps:
- IRDA has notified Protection of Policyholders Interest Regulations 2001 to provide for: policy proposal documents in easily understandable language; claims procedure in both life and non-life; setting up of grievance redressal machinery; speedy settlement of claims; and policyholders' servicing. The Regulation also provides for payment of interest by insurers for the delay in settlement of claim.
- The insurers are required to maintain solvency margins so that they are in a position to meet their obligations towards policyholders with regard to payment of claims.
- It is obligatory on the part of the insurance companies to disclose clearly the benefits, terms and conditions under the policy. The advertisements issued by the insurers should not mislead the insuring public.
- All insurers are required to set up proper grievance redress machinery in their head office and at their other offices.
- The Authority takes up with the insurers any complaint received from the policyholders in connection with services provided by them under the insurance contract.
THE 2020 VISION
Government of India has set out a goal where it would be in 2020 in different dimensions. India has professed to commit itself to a long term goal: quadrupling real Gross Domestic Product (real GDP) by the year 2020 (Planning Commission, 2003). To make this vision a reality, simple arithmetic shows that it requires a 7%-8% growth in real GDP. The ask rate is critically dependent on how the economy is able to absorb macroeconomic shocks.
How realistic is this vision?
In 2003, economists at Goldman and Sachs used a routine model of economic growth to project the total GDP for a number of countries up to 2050. In the following table, we have reproduced a selection of those up to 2020. The simple conclusion is that total real GDP in India will be on par with France and the UK by 2020 and somewhat smaller than Germany.
Projected GDP in 2000 US dollars -
Saving, Investment and Economic Growth
A positive element for India is the direction of saving and investment. Economic growth comes from higher saving rate leading to higher investment (capital formation) leading to economic growth. The causality of higher saving leading to higher GDP cannot be theoretically settled but in case of India, however, preliminary analysis have shown that indeed higher saving leads to higher economic growth.
The Role of Insurance and Risk Management
What is the fundamental role of insurance? Insurance has the fundamental role of smoothing out fluctuation of cash flows. For households, life insurance can reduce the drastic fall in income of the family if the insured person dies. Through pension plans, a fall in retirement income can also be mitigated. Similarly, companies may be able to avoid bankruptcy through the use of risk management in general and insurance in particular.
What role does the insurance sector play in this story of saving and investment in India? In general, saving is channeled into several specific financial institutions. For most countries, a substantial proportion is invested in banks. Some of it is invested in longer term markets for capital such as stocks and bonds. In many cases, a significant portion goes to the insurance sector. It could take the form of life insurance, pension plans, health insurance and others.
In general, when various components of the insurance market develop, insurance sector takes on a bigger share of the GDP. A tentative conclusion is that a rise of one percent of real GDP leads to a rise of two percent of rise insurance demand in the context of India. Thus, rough estimates would suggest that quadrupling of GDP in India by 2020 will lead to an eight-fold rise in insurance demand. Of course, this rise in demand will not be spread equally across different segments of the market. For example, there will be bigger impact on the life and pension markets. This effect will be tempered by a smaller rise in fire, auto, marine and fire insurance sub-sectors.
Where will the Indian market be in 2020?
Vision 2020 identified the following factors as the engines of economic growth in India:
- Rising education level,
- Rates of technological innovation,
- Cheaper and faster communication,
- Availability of information, and
It makes no mention of the financial sector. Economic growth does not take place in vacuum. There are two critical ingredients needed. First, there has to be a well-defined legal environment. Legal framework has big impact on the development of the financial sector. As a result, it also has a huge impact on economic growth. Second, there has to be a well functioning financial market.
Vision 2020 document mentions "insurance" eight times in the 108 pages. On the other hand, it mentions banking only once! Given that services sector will become the largest in India, both insurance and banking will play a critical role along with the stock market.
This document does, however, contain a paragraph about a particular area of insurance: health insurance. "Health insurance can play an invaluable role in improving the overall health care system. The insurable population in India has been assessed at 250 million and this number will increase rapidly in the coming two decades. This should be supplemented by innovative insurance products and programs by panchayats with reinsurance backup by companies and government to extend coverage to much larger sections of the population." (Planning Commission, 2003, page 55).
At present, health insurance is not being discussed much. But, Indians spend close to 5% of their income out of pocket for health related issues. Thus, it is easy to see why this is an easy pick. So is the pension market. At present, private pension is its infancy in India. It will not remain so in the coming decades.
The insurance business is at a critical stage in India. Over the next two decades we are likely to witness high growth in the insurance sector for three reasons.
- Financial deregulation which always speeds up the development of the insurance sector.
- Growth in income also helps the insurance business to grow.
- In addition, increased longevity and aging population will also spur growth in health and pension segments.
Dr D. Raghuram, President (Bicycles and Fitness), Tube Investments of India Ltd.
Dr D. Raghuram is passionate when it comes to cycling. He himself rides a BSA FoldmanSpring and cycles enormous distances - sometimes the 20 km from his home to the TI factory on the outskirts of Chennai or to his club where he plays tennis and cycles back home. A Ph.D. in thermo sciences from the University of California, Berkeley, Raghuram abandoned academia for consulting before he joined TI Cycles and is now a passionate marketer.
He has made it very evident that bicycles are not only his profession but cycling is his greatest passion. He has also shared few of his thoughts regarding cycling and bicycle industry on his Companies' website:
Benefits of cycling
There's neither an impact on the knees nor wear and tear; secondly, it exercises the largest muscle in your body, the thigh muscle - if you need to burn calories, you need to exercise your largest muscle; the next largest one is your brain!
Growing Ladies segment
Growing Ladies segment is one aspect that is clearly stating the social changes that are happening. And these changes are helping sales, without any doubt. Growth is upwards of 35 per cent in the ladies segment.
Growth in the men's segment though is very small but the base is larger. Three of us (TI, Hero and Atlas) hold 80-85 per cent of the market so we need to drive the market. We are approximately at 30 per cent share each.
On Chinese cycle brands
Progressively, the cost differential between Chinese and Indian products is narrowing in the mass segment in the developed countries on a landed cost basis. The cost structure is reflecting the true costs now. Because of the anti-dumping duties that Chinese products attract, on a landed cost basis we are competitive now.
On new materials for the cycles
Manufacturers are using new materials, from steel to aluminum to carbon, for more efficient cycles. An entire cycle made from carbon now weighs 6.5 kg. The indications are that we should be able to significantly bring down the price points in top-end cycles through local manufacture.
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