Indian Insurance Industry-Challenges and future prospects

ORIGIN:

Insurance has a long history in India. Life Insurance in its current form was introduced in
1818 when Oriental Life Insurance Company began its operations in India. General
Insurance was however a comparatively late entrant in 1850 when Triton Insurance
company set up its base in Kolkata.

History of Insurance in India can be broadly bifurcated into three eras:

a) Pre Nationalization

b) Nationalization and

c) Post Nationalization.

Life Insurance was the first to be nationalized in 1956. Life Insurance Corporation of
India was formed by consolidating the operations of various insurance companies.
General Insurance followed suit and was nationalized in 1973. General Insurance
Corporation of India was set up as the controlling body with New India, United India,
National and Oriental as its subsidiaries.

The process of opening up the insurance sector was initiated against the background of
Economic Reform process which commenced from 1991. For this purpose Malhotra
Committee was formed during this year who submitted their report in 1994 and Insurance
Regulatory Development Act (IRDA) was passed in 1999. Resultantly Indian Insurance
was opened for private companies and Private Insurance Company effectively started
operations from 2001.
Insurance Market - Present:

The insurance sector was opened up for private participation nine years ago. For years
now, the private players are active in the liberalized environment. The insurance market
have witnessed dynamic changes which includes presence of a fairly large number of
insurers both life and non-life segment. Most of the private insurance companies have
formed joint venture partnering well recognized foreign players across the globe.

There are now 29 insurance companies operating in the Indian market – 14 private life
insurers, nine private non-life insurers and six public sector companies. With many more
joint ventures in the offing, the insurance industry in India today stands at a crossroads as
competition intensifies and companies prepare survival strategies in a detariffed scenario.

There is pressure from both within the country and outside on the Government to increase
the foreign direct investment (FDI) limit from the current 26% to 49%, which would help
Joint Venture partners to bring in funds for expansion.

There are opportunities in the pensions sector where regulations are being framed. Less
than 10 % of Indians above the age of 60 receive pensions. The IRDA has issued the first
license for a standalone health company in the country as many more players wait to
enter. The health insurance sector has tremendous growth potential, and as it matures and
new players enter, product innovation and enhancement will increase. The deepening of
the health database over time will also allow players to develop and price products for
larger segments of society.

State Insurers Continue to Dominate: There may be room for many more players in a
large underinsured market like India with a population of over one billion. But the reality
is that the intense competition in the last five years has made it difficult for new entrants
to keep pace with the leaders and thereby failing to make any impact in the market.
Also as the private sector controls over 26.18% of the life insurance market and over
26.53% of the non-life market, the public sector companies still call the shots.

The country‟s largest life insurer, Life Insurance Corporation of India (LIC), had a share
of 74.82% in new business premium income in November 2005.

Similarly, the four public-sector non-life insurers – New India Assurance, National
Insurance, Oriental Insurance and United India Insurance – had a combined market share
of 73.47% as of October 2005. ICICI Prudential Life Insurance Company continues to
lead the private sector with a 7.26% market share in terms of fresh premium, whereas
ICICI Lombard General Insurance Company is the leader among the private non-life
players with a 8.11% market share. ICICI Lombard has focused on growing the market
for general insurance products and increasing penetration within existing customers
through product innovation and distribution.

Reaching Out To Customers: No doubt, the customer profile in the insurance industry
is changing with the introduction of large number of divergent intermediaries such as
brokers, corporate agents, and banc assurance.

The industry now deals with customers who know what they want and when, and are
more demanding in terms of better service and speedier responses. With the industry all
set to move to a de tariffed regime by 2007, there will be considerable improvement in
customer service levels, product innovation and newer standards of underwriting.

Intense Competition: In a de-tariff environment, competition will manifest itself in

prices, products, underwriting criteria, innovative sales methods and creditworthiness.
Insurance companies will vie with each other to capture market share through better
pricing and client segmentation.

The battle has so far been fought in the big urban cities, but in the next few years,
increased competition will drive insurers to rural and semi-urban markets.
Global Standards: While the world is eyeing India for growth and expansion, Indian
companies are becoming increasingly world class. Take the case of LIC, which has set its
sight on becoming a major global player following a Rs.280 crore investment from the
Indian government. The company now operates in Mauritius, Fiji, the UK, Sri Lanka, and
Nepal and will soon start operations in Saudi Arabia.

Downfall started from the life insurance sector of India where the major and most trusted
companies have not recorded much impressive premium income. To start with, Life
Insurance Corporation of India (LIC) has reported the growth rate of 4.45% in FY09
collecting total Rs.1.56 trillion as its premium income. The decline is also seen in the
current year‟s first quarter as the private life insurance player like ICICI Prudential Life
has shown the downfall of 49% in its growth in June quarter. Meanwhile SBI Life, the
life insurance PSU has also recorded the premium income of Rs.1,072.72 crore in the
same quarter against the last year‟s same quarter premium income of Rs.1,148.64 crore.

With life insurance premiums being just 2.5% of GDP and general insurance premiums
being 0.65% of GDP, the opportunities in the Indian market place is immense.

The future of insurance sector will be challenging but those that can build scale and
market share will survive and prosper

From the above, It is very important to mention here that, the scope of the insurance
business today is absolutely depends on the role played by the top agents namely MDRT,
Chairman club Members, capable and dynamic development officers in Life insurance
sector.
Insurance Market - Future:

In India as such there is not even single website that sells insurance products directly to
customers ie., internet is used as channel for getting customers. But in developed
countries, insurance can be subscribed through online. So in future “Insurance will be
bought, not sold” will be the paradigm of online insurance distribution.

Combination of health insurance and life insurance may occur which will attract people
to get insurance. This is the concept that is followed in US and other developed countries.
The competition among the insurance companies will be heavy. This will decrease the
strength of state owned insurance companies.

The size of the existing insurance market is very large and is growing at the rate of 10%
per year. Only 10% of the market share has been tapped by LIC and GIC and the balance
90% of the market still remains untapped. This vast potential can be tapped only by a
large number of insurers. To serve 110 crores of population, Indian insurance market
offers tremendous opportunities to prospective insurers. To this the regulator is issuing
licenses to a large number of insurers, if the insurance market has to grow at a fast rate.

With the increase in the life span of individuals and disintegration of the joint family
system, each Individual now has arranged insurance cover for himself and for his family.
Hence, coverage of insurers, which was around 7% of the population in 1999, has grow
very fast. In fact all the citizens in the middle class, estimated around 314 million can
afford insurance from their own financial resources. The remaining population has to be
given subsidized insurance with the help of the government as well as the insurers. The
huge fund from insurance investments can be utilized for financing the infrastructure
industry as well as a support to other industries in the country. Hence insurance industry
is likely to play a key role in changing the economic landscape of the country. However
the success of the insurance industry will primarily depend upon meeting the rising
expectations of the consumers who will be the real king in the liberalized insurance
market in future.

The most important issue is brokerage for the agents. This is regarding IRDA proposal on
ULIP‟s ie., the agent that bring leads has to collect their brokerage fee from the
customers. This will be a challenge for the agents as well as insurers.

Awareness among Indians is low about insurance. Letting the people to know about
benefits insurance, both life and non-life insurance is the toughest barrier among the
insurers. The insurance companies should take steps in promoting the benefits of
insurance as such that “insurance should become as basic need for a person like food,
water, shelter and clothes”.

The underwriting techniques have to be developed. When we compare Indian

underwriting procedures, we are far behind from developed nations. For example in
U.S.A, the underwriting process is highly scientific and systematic. They even maintain
records of the seasons like the rainfall amount, time and other related factors. They
consider all possible factors while underwriting is done. Advanced underwriting
procedures will help insurance companies to enter to new markets (Blue Sea).

The foreign direct investment will be increasing since IRDA is issuing licenses to private
insurance companies. All the privates companies that are entering the market are joint
ventures. The capital structure of the private companies is comprised of 26% is through
foreign players where as the rest 74% is by local player. If IRDA allows 49% of capital
structure by foreign player, the foreign direct investment will increase in India.

The following table shows the future premiums of life insurance and non-life insurance;
 Life insurance Non-life insurance

INR m, constant 2009 INR m, constant 2009

INR m prices INR m prices
1 983
2010 051 1 485 832 496 953 372 350
1 983
2011 051 1 688 756 572 727 408 690
2 804
2012 561 1 905 996 651 736 442 924
3 326
2013 543 2 153 072 734 778 475 578
3 947
2014 899 2 433 546 828 433 510 659
avg
growth 18.10% 12.50% 15.10% 9.60%
Source: Swiss Re Economic Research & Consulting

While the macro-economic backdrop remains favorable to growth, there are still major
hurdles to overcome in order for India to realize this growth potential. The following are
a few challenges:

On the regulatory side, there are outstanding issues concerning solvency regulations,
further liberalizing of investment rules, caps on foreign equity shareholdings5 as well as
the enforcement of price tariffs in the non-life insurance sector.

The proliferation of banc assurance is rapidly changing the way insurance products are
distributed in India. This will also have strong implications on the process of financial
convergence and capital market development in India.
Health insurance is still underdeveloped in India but offers huge potential, as there will
be increasing needs to purchase private health cover to supplement public programmes.
Likewise, the deficiencies in current pension schemes should offer significant
opportunities to private providers.

With the majority of the population still residing in rural areas, the development of rural
insurance will be critical in driving overall insurance market development over the longer
term.

India‟s low level of insurance penetration and density has to be viewed in the context of
the country‟s early stage of economic development.

The mix of non-life business in India resembles most other developing regional
economies. Motor and fire policies are the backbone of non-life business in India. They
also contributed the most to overall premium growth in the last five years. Compared to
other markets, personal lines insurance is relatively well-developed in India. This is
mainly manifested in personal motor and private residential fire policies. In comparison,
even though motor and fire are also the key lines of non-life business in China, they are
mainly purchased by corporations. In fact, among emerging markets with a similar level
of per capita income, India has the highest share of personal lines business.

Future changes in insurance law

Changes to the insurance law in India became enormously complicated during the
twentieth century. Just a few years ago it would have been difficult to anticipate that the
Insurance Act, 1938, would be re-enforced through the IRDA Act, 1999. This
juxtaposition of laws produced some important anomalies. In order to streamline
regulations and eliminate these anomalies, the Law Commission was entrusted with
examining these matters for future amendments.25 A key proposal of the Law
Commission is to merge some of provisions of the IRDA Act and the Insurance Act. This
will facilitate market practitioners in understanding the role of IRDA while putting all the
provisions in one place. This will also help to make revisions easier in future, in
accordance to changes in market conditions. The main suggestions of the Law
Commission are summarized below.

(1) The Insurance Act, 1938, is a piece of colonial legislation. Therefore, it contains
terminology like “provident societies” and “mutual insurance companies” that are
not relevant in the modern context. Such terminology has to be deleted.

(2) The IRDA Act, 1999, inserted some provisions into the Insurance Act, 1938, to
nullify existing provisions. The latter have not been deleted, thus giving rise to
anomalies.

(3) References in the Insurance Act, 1938, to older enactments have to be replaced by
references to the corresponding new legislations that have replaced such
enactments. For example, references to the Indian Companies Act, 1913, have to
be replaced by references to the Companies Act, 1956

(4) Insurance companies have developed a wider range of products with more riders.
Hence, a reclassification of insurance businesses is necessary. For instance,
insurance business may broadly be classified as „life‟ and „non-life‟ or „short-
term‟ and „long-term‟ insurance business. For this purpose, the definition of the
term „insurance‟ and „insurer‟ would have to be amended.

(5) The IRDA, while regulating the business activities of insurers, exercises quasi-
judicial powers, in addition to its administrative powers, eg issue, renewal and
cancellation of registration certificates to insurers, order with regard to
 investigation of the affairs of the insurers, making applications to the court for the
winding-up of the insurance companies etc. It is felt necessary that there must be
a provision of appeal against the decisions of the IRDA to an independent body
constituted under the Act itself.

(6) When consumers are dissatisfied with an insurance company, particularly in the
area of claims settlement, they can go to the Ombudsman under the redressal of
Public Grievances Rules, 1998. They can also appeal under the Consumer
Protection Act, 1986. Consumer courts are called upon to interpret the provisions
of the Insurance Act 1938, which is a complex piece of legislation. If a special
body of law develops, then a special tribunal is necessary to deal with insurance
cases. This provision would parallel the Securities Appellate Tribunal functioning
under the SEBI Act, 1992.

(7) The principle of uberrimae fidei (of absolute good faith) governs both parties to a
contract of insurance. Specific statutory enumerations are required for protecting
the interest of policyholders so that unintended minor mistakes in disclosure do
not lead to a loss of coverage. Such a provision is missing.

(8) Provisions regarding investments, loans and management need constant review
and revision. The IRDA has devised detailed investment regulations, hence
provisions will need to be revised so as to eliminate inconsistencies and
duplication. For example, the term “approved securities” requires revision in the
context of new economic policy and business practices.

(9) IRDA has defined regulations for the determination of the amount of liabilities,
solvency margin and valuation of assets. But the provisions regarding solvency
 margins still have to address the extent of appropriate matching of assets and
liabilities.

The legal framework of insurance regulation in India is still evolving. Issues regarding
compulsory insurance, non-life tariffs and foreign equity shareholdings could see further
realignments in the future. Nevertheless, the IRDA has successfully established itself as a
progressive and efficient regulator, while remaining unbiased even with its wide,
sometimes potentially conflicting, and spectrum of responsibility.

Insurance can be summed up as “Praying for the best and being prepared for the worst”.