4.1 INSURANCE SECTOR IN INDIA – BRIEF HISTORY

4.2 GROWTH OF INSURANCE INDUSTRY

4.3 RECENT DEVELOPMENTS

4.4 INDUSTRY DYNAMICS

4.5 KEY STATISTICS

4.6 NEW DEVELOPMENTS/ PRODUCT LAUNCHES

4.7 GOVERNMENT INITIATIVES & IRDA REGULATIONS

4.8 CHALLENGES AND OUTLOOK FOR FUTURE

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4.1 Insurance Sector in India – Brief History

The Life Insurance market in India was an underdeveloped market that was only

tapped by the state owned LIC till the entry of private insurers. Insurance industry, as

on 1.4.2000, comprised mainly two players: the state insurers – Life Insurance

Corporation of India and General Insurers, the General Insurance Corporation of

India.

In India, insurance is generally considered as a tax-saving device instead of

its other implied long term financial benefits. Indian people are prone to investing in

properties and gold followed by bank deposits. They selectively invest in shares also

but the percentage is very small. Even to this day, Life Insurance Corporation of

India dominates Indian insurance sector. The penetration of life insurance products

was 19 percent of the total 400 million of the insurable population. The state owned

LIC sold insurance as a tax instrument, not as a product giving protection. Most

customers were under- insured with no flexibility or transparency in the products.

With the entry of the private insurers the rules of the game have changed. 1

Private sector players backed by foreign expertise have made the Indian

insurance market more vibrant. The growing popularity of the private insurers shows

in other ways. Twenty three Life Insurance Companies have been registered since

the year 2000 till now. They are coining money in new niches that they have

introduced. The state owned companies still dominate segments like endowments

and money back policies. But in the annuity or pension products business, the

private insurers have already wrested over 33 percent of the market.2 And in the

1 Garg, S.C., ‘Insurance Education: Challenges and Opportunities’, The Journal of Insurance Institute of India, Mumbai, July-December, 2006, p.9. 2 Trieschmann, Hoyt and Sommer, ‘Risk Management and Insurance’, Thomson South-Western, a Division of Thomson Learning Inc., New Delhi, 2007, p.484.

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popular unit-linked insurance schemes they have a virtual monopoly, with over 90

per cent of the customers.

4.2 Growth of Insurance Industry

With an annual growth rate of 15-20% and the largest number of life insurance

policies in force, the potential of the Indian insurance industry is huge. Total value of

the Indian insurance market (2004-05) was estimated at Rs. 450 billion (US$10

billion). According to government sources, the insurance and banking services'

contribution to the country's gross domestic product (GDP) is 7% out of which the

gross premium collection forms a significant part. The funds available with the state-

owned Life Insurance Corporation (LIC) for investments are 8% of GDP. The

following table shows the total growth in the Insurance.

Table 4.1 Premium collected in the years from 2001-02 to 2008-09

(Rs. In Crores) 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 221791.26 201351.41 156075.84 105875.76 82,854.80 66653.75 55747.55 50094.46 Source: IRDA Journal July 2008

4.3 Recent Developments

The future of the Indian insurance sector looks bright. The sector which stood at a

strong US$ 72billion in 2012 has the potential to grow to US$ 280 billion by 2020.

This growth is driven by India’s favourable regulatory environment which guarantees

stability and fair play. This environment has given rise to an insurance market which

encourages foreign investors to tap into the sector’s massive potential.3

Ever since the Indian government liberalised the insurance sector in 2000 and

opened the doors for private participation, the sector has gone from strength to

strength. The resultant competition has provided the consumer with a never-before-

seen range of products and providers, and also enhanced service levels markedly.

3 “Potentials & Challenges Of Insurance Sector” Article published in the Business Line print edition dated January 7, 2014)

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The health of the insurance sector reflects a country’s economy. This sector

not only generates long-term funds for infrastructure development, but also

increases a country’s risk-taking capacity. India’s economic growth since the turn of

the century is viewed as a significant development in the global economy. This view

is helped in no small part by a booming insurance industry.4

4.4 Industry Dynamics

Consistent growth in the insurance sector depends on a few factors. Some of these

are:

• Effective distribution channels – The efficiency and cost of the various

distribution strategies used by companies are significant to their success in

the insurance business. This particularly holds true for the retail business.

• Focus on overall financial inclusion – As time evolves, so must the approach

of the insurance sector in India. The objective of the insurance sector should

ideally be to offer a broader range of activities to a wider populace.

• Consumer needs and preferences – The growth of India’s insurance industry

can be attributed to product innovation, dynamic distribution channels, and

vibrant publicity and promotional campaigns run by insurance companies.

Benefits attached to the products and the manner in which they are delivered

(through various marketing tie-ups) have helped bring customers and

insurance companies closer to each other and made the latter more relevant.

Health insurance is an up-and-coming segment in this sector. Currently, it

caters for 10 per cent of the overall US$ 30 billion healthcare expenditure in India.

Consequently, there is plenty of scope for players in this area.

4. Article by Jagendra Kumar, ‘Success of Indian Insurance Brokers: A Bubble waiting to Burst’, The Journal of

Insurance Institute of India, Mumbai, January-June, 2007, p.35.

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The life insurance segment contributes about 4 per cent to India’s gross

domestic product (GDP) in terms of total premiums underwritten annually. There are

23 private companies in the segment. The state-owned Life Insurance Corporation

(LIC) dominates the field, with about 71 per cent of the market share, according to

Insurance Regulatory and Development Authority (IRDA). 5

4.5 Key Statistics

• During the financial year 2011-12, Life Insurance Industry went through a

transition phase that has changed the dynamics and approach of the

insurance players. With the new ULIP guidelines, the industry focus has

shifted towards customer centricity, persistency, innovation and efficiency.

New regulations were largely in interest of the policy holders with more

customer friendly products emphasizing on long term benefits. In financial

year 2011-12, the industry has seen a de growth of 9.21% in new business

premium income. Insurers focusing on customers to remain invested for

longer term resulted in improved persistency ratio for the industry. With low

insurance penetration as compared to the large Indian population base, there

is tremendous scope for the life insurers to capitalize on. New business

premium had fallen from ` 125,826 crores of the previous year to ` 114,233

crores in the financial year 2011-12, showing a de growth of 9.21%. Private

sector had also shown a de growth of 16.92%. Private sector claims 28.64%

of total new business premium market share in financial year 2011-12.

• India’s life insurance segment collected new business premiums worth Rs

11,742.7 crore (US$ 1.84 billion) for April–May 2013. Indian insurance

5 Garg, S.C., ‘Insurance Education: Challenges and Opportunities’, The Journal of Insurance Institute of India, Mumbai, July-December, 2006, p.9.

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companies collected a combined Rs 107,010.7 crore (US$ 16.85 billion) worth

of new premiums for FY 2012–13, according to data released by IRDA.

• Meanwhile, the general insurance industry grew by 19.6 per cent in April–May

period of FY 2013–14. Non-life insurers collected premiums worth Rs

13,552.46 crore (US$ 2.13 billion) in the first two months of the current year,

as compared to Rs 11,333.54 crore (US$ 1.78 billion) during the

corresponding period of the previous year.

Table 4.2 DETAILS OF LIFE INSURANCE COMPANIES OPERATING IN INDIA

Insurers Foreign Partners

Year of Operation

Life Insurance Corporation of India

------- 1956-57

HDFC Standard Standard Life Assurance, UK 2000-01 Max New York New York Life, USA 2000-01 ICICI-Prudential Prudential Plc, UK 2000-01 Kotak Mahindra Old Mutual Old Mutual, South Africa 2001-02 Birla Sun Life Sun Life, Canada 2000-01 TATA-AIG American International

Assurance Co., USA 2001-02

SBI Life BNP Paribas Assurance SA, France

2001-02

ING Vysya ING Insurance International B.V., Netherlands

2001-02

Bajaj Allianz Life Allianz, Germany 2001-02 Metlife India Metlife International Holdings

Ltd., USA

2001-02

Reliance --- 2001-02 AVIVA Aviva International Holdings

Ltd., UK

2002-03

Sahara --- 2004-05 Shriram Sanlam, South Africa 2005-06 Bharti AXA AXA Holdings, France 2006-07 Future Generali India Generali, Italy 2007-08 IDBI Federal Ageas, Europe 2007-08 Canara HSBC OBC HSBC, UK 2008-09 AegonReligare Aegon Netherlands 2008-09 DLF Pramerica Prudential of America, USA 2008-09 Star Union Dai-ichi Dai-ichi Mutual Life

Insurance,Japan 2008-09

IndiaFirst Legal & General Middle East Limited, UK

2009-10

Source: www.irda.gov.in

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Table 4.3 NUMBER OF LIFE INSURANCE COMPANIES IN INDIA

Particulars 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001

Public Sector 1 1 1 1 1 1 1 1 1 1 Private Sector 22 21 17 15 14 13 12 12 11 4 Total 23 22 18 16 15 14 13 13 12 5

Source:www.irda.gov.in

Table 4.4 TABLE SHOWING STATE WISE INDIVIDUAL NEW BUSINESS UNDERWRITTEN (LIFE INSURANCE)

State / Union Territory

2009-10 2009-10 2008-09 2008-09

No. of policies Premium No. of policies Premium

Andhra Pradesh 5033973 5572.37 4661915 4912.54 Arunachal Pradesh

21475 40.74 14774 26.30

Assam 1147104 1392.92 1068332 1090.30 Bihar 2874562 2768.78 2551196 2235.68 Chattisgarh 735256 718.33 746858 585.12 Goa 121306 431.96 152811 366.76 Gujarat 2508343 5286.79 2938482 4686.39 Haryana 964886 1485.97 802335 1285.51 Himachal Pradesh

571106 959.56 418696 690.05

Jammu & Kashmir

312365 592.89 202105 436.57

Jharkhand 1046319 1454.22 1014194 1227.13 Karnataka 3385546 4714.64 3374040 4238.31 Kerala 2435371 4635.06 2513726 4073.22 Madhya Pradesh

2044796 3172.47 2029821 2552.70

Maharashtra 5471792 12476.44 6034206 10929.95 Manipur 82840 108.12 83361 69.75 Meghalaya 27639 84.53 32044 76.62 Mizoram 9418 48.14 10905 60.21 Nagaland 33066 72.56 30064 47.55 Orissa 1826498 2061.39 1607331 1653.33 Punjab 1404191 2543.22 1304873 2351.72 Rajasthan 2612195 3371.59 2121980 2694.09 Sikkim 19893 38.58 21198 35.53 Tamil Nadu 3892855 6032.66 3896649 5315.17 Tripura 133017 224.08 108267 161.15

Source: IRDA Annual Reports from 2008-09 to 2009-10

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Table 4.5 COMPANY WISE LIFE INSURANCE OFFICES (As on 31st March)

Insurer 2010 2008 2006 2004 2002

Bajaj Allianz 1151 1007 567 49 17 Birla Sun life 652 538 97 41 19 HDFC Standard

568 569 150 26 4

ICICI Prudential

1921 1958 175 69 14

ING Vysya 254 265 68 26 4 Max New York

705 194 84 33 15

MetLife 255 94 43 16 3 Reliance 1247 745 157 48 17 SBI Life 494 200 46 19 5 TATA AIG 439 283 72 26 6 Private Total 8768 6391 1645 416 116

LIC 3250 2522 2220 2196 2190 Industry Total

12018 8913 3865 2612 2306

Source: IRDA Annual Reports from 2002 to 2010

4.6 New Developments/ Product Launches

• Insurance companies will now have more freedom to invest in sectors such as

IT and pharmaceuticals. IRDA has increased the sector specific exposure limit

for investments to 20 per cent of the insurer’s total investment, from the

previous 15 per cent.

• The electronic know-your-customer (e-KYC) services used by the Unique

Identification Authority of India (UIDAI) will be accepted as a valid verification

process for insurance, according to IRDA. Through e-KYC, insurance

companies can conduct electronic identity verification. The agencies can

obtain an electronic identity document of the customer which is digitally

signed by the UIDAI. This service enables a quicker and more efficient

process for the customer as well as the insurance company.

• Private player Cognizant Technology Solutions has successfully acquired

Value Source, which is a subsidiary of KBC Group, a Belgium-based multi-

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channel bank insurance organisation. Under the initial five-year agreement,

the Indian company will provide a number of services to KBC, including

application development and maintenance, and software testing.

• United India Insurance Co Ltd (UIICL), the second largest general insurance

company in India, intends to open 530 new offices domestically in 2013. As of

now, UIICL has 1,340 offices in the country, as per their website. In FY 2012–

13, the company collected total premiums worth Rs 9,266 crore (US 1.45

billion) and has set a target of Rs 11,000 crore (US$ 1.73 billion) for FY 2013–

14. 6

Table 4.6 Indian Scenario on Life Insurance

Source: Article in Business Today

4.7 Government Initiatives & IRDA Regulations

Insurance Regulatory and Development Authority (IRDA) is an autonomous apex

statutory body which regulates and develops the insurance industry in India. It was

constituted by a Parliament of India act called Insurance Regulatory and

Development Authority Act, 1999 and duly passed by the Government of India. The

agency operates from its headquarters at Hyderabad, Andhra Pradesh where it

shifted from Delhi in 2001.IRDA batted for a hike in the foreign direct investment

6. Potentials & Challenges Of Insurance Sector” Article published in the Business Line print edition dated January 7, 2014

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(FDI) limit to 49 per cent in the insurance sector from the erstwhile 26 per cent. The

FDI limit in insurance sector was raised to 49% in July 2013.

History of IRDA

The IRDA Act, 1999 was passed as per the major recommendation of the Malhotra

Committee report (1994) which recommended establishment of an independent

regulatory authority for insurance sector in India. Later, It was incorporated as a

statutory body in April, 2000. The IRDA Act, 1999 also allows private players to enter

the insurance sector in India besides a maximum foreign equity of 26 per cent in a

private insurance company having operations in India. The FDI limit in insurance

sector was raised to 49% in July 2013. It serves as an Authority to protect the

interests of holders of insurance policies, to regulate, promote and ensure orderly

growth of the insurance industry and for matters connected therewith. IRDA role is to

protect rights of policy holders & they provides registration certification to life

insurance companies & responsible for renewal, modification, cancellation &

suspension of this registered certificate.7

• The Government of India has passed the Pension Fund Regulatory and

Development Authority (PFRDA) bill that allows foreign investors to hold 26

per cent stake in the insurance sector. The primary objective of the bill is to

provide pension cover to a greater percentage of the country’s population.

The PFRDA bill would also provide subscribers a wider range of investment

choices. The bill will provide better regulation of the sector and provide more

confidence to investors, according to Mr,Yogesh Agarwal, Chairman, PFRDA.

Aviation insurance is likely to emerge as an important segment in the near

7. IRDA JOURNAL January 2013, pp 54 to 57

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future with new players in the market operations and existing players seeking

to increase fleet size, according to industry officials. At present, the current

market size of aviation insurance hovers around Rs.500 crore (US$ 78.76

million), a figure that is almost certain to grow as the industry develops further.

• In order to enhance financial inclusion in the country and develop

bancassurance as a business, IRDA has facilitated banks to sell insurance

policies. Application for the license required to act an insurance broker can

only be obtained after prior approval from the Reserve Bank of India (RBI).

Banks would be required to apply under the direct broker category. The

license will be valid for three years.8

4.8 Challenges and outlook for future

The insurance business in India is projected to reach Rs. 4 trillion (US$ 63.01 billion)

in FY 2013–14, according to Mr TS Vijayan, Chairman, IRDA. Total premiums

collected by the general and the life insurance industry in FY 2012–2013 amounted

to Rs.3.75 trillon (US$ 59.07 billion). The chairman believes that insurance

penetration in India has the potential to rise to 5–6 per cent from the current 3.86 per

cent. Life Insurance Council, the industry body of life insurers in the country, has

projected a compounded annual growth rate (CAGR) of 12–15 per cent over the next

five years for the segment. India’s insurable population is expected to grow to 750

million by 2020, with life expectancy projected to reach 74 years around the same

period. The council believes that this favourable Indian demography would result in

more people seeking out life insurance. Also, the council predicts life insurance

penetration – percentage of insurance premium to GDP – to reach 5 per cent by

2020 from its current 3.2 per cent.

8 IRDA JOURNAL July 2013, pp 45-48

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Confederation of Indian Industry (CII) projects the growth rate for India’s

insurance industry in FY 2013–14 to be around 5 per cent. It also anticipates 60 per

cent of non-life insurance companies to record an average growth of more than 10

per cent. The raising of the foreign direct investment (FDI) limit from 26 per cent to

49 per cent in the sector is viewed as a key element to promote the insurance

industry in India. Exchange Rate Used: INR 1 = US$ 0.0158 as on November 12,

2013.

According to Santosh Kushwaha in an article on Business Today life

insurance enforced by the insurance regulator from 2010 curbing the scope of the

Unit Linked industry in India is in crisis. The broad market is shrinking. Life insurance

penetration in India was always low, but, worryingly enough, it has been falling even

lower for two consecutive years now. New regulations Insurance Plans (ULIPs) are

partly responsible for the development.9

9 Kushwaha, Santosh “Life Insurance – Potentials and Challenges” Business Today, January 2014

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Figure 4.1 Total Life insurance premium collected and percentage growth or

decline

Source: Article in Business Today

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Figure 4.2 Ratio of Premium to GDP and growth rate

Source: Article in Business Today

Figure 4.3 Growth in number of new life insurance policies

Source: Article in Business Today

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Figure 4.4 Trend in growth of ULIPs

Source: Article in Business Today

Figure 4.5 Life Insurance Density – A comparison

Source: Article in Business Today