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With over a billion people, India is fast becoming a global economic power. With a relatively
youthful population, India will become an attractive insurance market over the next decades.
This paper examines the Indian insurance industry. It highlights the importance of the rural
sector – where the majority of the Indians still live. It shows how the recent privatization is
playing out in the market. Based on recent economic estimates, the paper provides
projections of segments of the market for 2025.
India is among the important emerging insurance markets in the world. Life insurance will
grow very rapidly over the next decades in India. The major drivers include sound economic
fundamentals, a rising middle-income class, an improving regulatory framework and rising
risk awareness. The fundamental regulatory changes in the insurance sector in 1999 will be
critical for future growth. Despite the restriction of 26% on foreign ownership, large foreign
insurers have entered the Indian market. State-owned insurance companies still have
dominant market positions. But, this would probably change over the next decade. In the life
sector, new private insurers are bringing in new products to the market. They also have used
innovative distribution channels to reach a broader range of the population. There is huge in
the largely undeveloped private pension market. The same is true for the health insurance
business. The Indian general insurance segment is still heavily regulated. Three quarters of
premiums are generated under the tariff system. Reinsurance in India is mainly provided by
the General Insurance Corporation of India, which receives 20% compulsory cessions from
other general insurers. Finally, the rural sector has potential for both life and general
insurance. To realize this potential, designing suitable products is important. Insurers will
need to pay special attention to the characteristics of the rural labor force, like the prevalence
of irregular income streams and preference for simple products.
Question 1: Discuss the evolution of the Indian
insurance industry over the decades and critically
comment on LIC's products and pricing practices. Why
do you think the average Indian insurance customer has
largely been a buyer of money back and endowment
policies?
In 1912, two sets of legislation were passed: the Indian Life Assurance Companies Act and
the Provident Insurance Societies Act. First, they were the first legislations in India that
particularly targeted the insurance sector. Second, they left general insurance business out of
it. In 1938, the Insurance Act was passed which covered both life and general insurance
companies.
➢ Evolution of Insurance during Nationalized Era: 1956-
2000
Before 1956, insurance was private with minimal government intervention. In 1956, life
insurance was nationalized and a monopoly was created. In 1972, general insurance was
nationalized as well. There were 107 general insurance companies operating at the time. The
reason for this was that insurance is a “cooperative enterprise,” under a socialist form of
government; therefore, it is more suited for government to be in insurance business on behalf
of the “people”. Second, those Indian companies are excessively expensive. Third, argued
that private competition has not improved services to the “public” or to the policyholders.
After the report of the Malhotra Committee came out, changes in the insurance industry
appeared imminent. On December 7, 1999, the new government passed the Insurance
Regulatory and Development Authority Act. Starting in early 2000, the Insurance Regulatory
and Development Authority started granting charters to private life and general insurance
companies. By the end of 2003, there were thirteen life insurance companies had charters to
operate, one public (the old monopoly) and twelve private companies. All of the private
companies had foreign partners in life business. Almost all general insurance companies also
have foreign partners.
By buying such policies one can receive income at regular intervals other than the risk
cover it provides. Also a good amount of bonus on the full sum assured is quite a
good bargain.
Money back life insurance policies offer the dual benefits of insurance and
redemption of money at regular intervals.
These policies fit perfectly in the scheme of things of traditional savings, for people
who seek financial instruments that provide insurance and savings elements, coupled
with low risk element and guaranteed returns.
a) On untimely death of the insured: In this situation, a benefit can be received on the death
of the person insured under the policy. This receipt is tax free in the hands of the dependants
who actually receive the insurance benefit. This means that under Section 10 (10D) of the
Income Tax Act the amount received on death from an insurance policy will not be included
in the taxable income calculations.
b) On maturity: In this case, the amount would be received at maturity of the policy. It
would include bonus and other benefits. This happens when the policyholder actually lives
through the entire policy period, for example, in money back policies or endowment policies.
In this case too the receipt is completely tax-free in the hands of the investor.
Example
Consider a case where a customer takes a policy with a sum assured of Rs 10 lakh cover. At
maturity after 20 years, the total amount including bonus comes to Rs 21 lakh. The bonus is
accumulated at different rates for the years over the life and this works out to Rs 11 lakh
totalling to an overall figure of Rs 21 lakh; this entire amount is tax free.
While that is true, one of the reasons for endowment and money back policies to be more
popular than others is also the fact that Life Insurance Corporation of India (LIC) agents
pushed them vigorously. The reason - commission on these products is higher than other
products. As a result the market is not aware about other usual products that are in LIC's
portfolio. Thus due to the above advantages Indian customers preferred LIC’s money back
and endowment policies.
The new private insurer focused on providing customized product - product that contain
innovative feature- to the customers for this the company conducted extensive market
research to figure out what types of products would appeal to consumers .
The most significant innovation of the Birla Sun Life and AMP Sanmar is that it has
provided social security -insurance cover to the rural and society's poorer sections. In
the rural and non-traditional business, these two have rightfully claimed distinction
for product innovation. The products include insurance cover, with a very low rate of
premium, for livestock, poultry, ducks, fishery, horticulture, sericulture, agriculture,
pump sets, gramin personal accident, hut insurance, tribal welfare, etc., whereas such
facilities were not made available by GIC nor LIC till 2002.
LIC has done a reasonably good job of introducing a couple of new products over the
last two-three years, but there has been very little innovation in the sector in general.
The majority of the products available today are also skewed more towards
investment return rather than death benefit. With the advent of competition, many
new products will be introduced in the market and customers will benefit from more
value and options as a result.
If we observe the trend of ULIPS in insurance market, after the insurance sector is
opened, private players, came up with aggressive marketing strategies to establish
their presence. ‘Modern’ products, which are unit-linked life insurance policies
where the investment risks is borne by the policyholder. The LIC hardly took any
step for this purpose until recently.
Falling interest rates [The last five years saw interest rates fall dramatically by 400
basis points]. This was also initiated by the private players owing to cut throat
competition. The liberalization was also accompanied by wider product offerings by
the insurers [ex. Endowment plan, pension plans etc] as compared to the products of
LIC.
An insurance company should know with reasonable accuracy the chance of death at
each age. A mortality table gives an estimate of how many, out of the members of a
group starting at a certain age, are expected to be alive at each succeeding age. It is
used to compute the probability of dying in or surviving through any period. The
mortality table should be appropriate to the group of lives being insured. The
mortality table used by LIC was old, outdated and obsolete, whereas new companies
calculated their premiums on the basis of revised and recently updated mortality
tables.
In a Whole life policy, the sum assured with bonus is paid out either on death or
survival till a pre-determined age. Whole life policies expire at age 100. A few expire
earlier. Whole life insurance policies are valuable because they provide permanent
protection and accumulate cash values for emergencies or bequeaths. Since it is
unrealistic to expect the policyholders to keep paying level annual premiums beyond
certain age, most insurance companies provide an option to the policyholders to pay
their premiums over a shorter term called premium-paying term. LIC stands nowhere
near this mark of cover of 100years by Tata AIG. Again, we find that there is only
one non-participating whole life policy available in the Indian market.
Question 3: Critically comment on LIC's decision to
shuffle its portfolio in response to the product/pricing
moves of the new companies. Do you think that the
private players would be able to make a significant
difference to the market with their strategies in the long
run? Give reasons to support your stand.
In addition to the new launches LIC also made changed to its product portfolio by
withdrawing certain scheme and bringing down return on some others. In March
2002, the company withdrew “Jeevan Sanchay” a children’s growth scheme and the
children’s money back policy due to the falling yield on investment. It also brought
down the assured return on its newly launched scheme following a 0.5% rate cut by
the RBI and the depressed sentiments in the market. In late 2001, LIC launched a
special campaign to revive people’s interest in its policies, which now carried
customer friendly incentives. A 30% waiver on late fees was offered along with
relaxation in the procedure of mandatory self declaration of good health and offered
for revival facility.
So are we going to see LIC struggling? Not necessarily, given LIC's known and hidden
strengths. And if the corporation can get its act together to meet the competition, it can be a
very tough adversary. In fact, LIC is not perturbed by the likely competition, while waking up
to the emerging reality. Conversely, it believes that it is the new players who will have to
seek cover if the Indian public sector giant flexes its huge financial muscle!
In spite of its strengths and advantages, LIC has a couple of holes in its shield that new
players would try to exploit. For instance, with intelligent pricing, HDFC Standard Life along
with HDFC could eat into LIC's individual assurance market It may be noted that LIC derives
sizeable business through its housing finance subsidiary, LIC Housing Finance Ltd., as its
insurance policy doubles as a collateral for the housing loan.
Further, new players will design products that cannot be directly compared with LIC's
products, at least during the initial years, to capture some market. Similarly, they could target
the group assurance schemes, individual and group annuity schemes, the segments LIC didn't
focus on intensively all these years.
"Competition will be severe in the group assurance schemes, more so in the case of gratuity-
assurance as compared to term-assurance schemes." Unit-linked insurance products is yet
another area which LIC has not tapped extensively due to restrictions placed by the Insurance
Act on investments of the Life Fund and also due to LIC's own diffidence.
Savvy marketing is another area where the new companies would score over LIC if the latter
continues its current style of functioning. For example, when NBFCs and even nationalised
banks deliver their fixed deposit certificates inside a plastic folder, LIC sends its policies –
to be preserved for decades -- in a brown envelope.
The flashy office and the glossy product literature of private insurers are sure to attract
customers and will immensely aid their marketing teams. On the other hand, LIC agents
depend entirely on their personal skills without any product literature to support.
On its costs side, LIC has to keep an eagle eye. "While its first year premium cost is the
lowest in the world at 65 per cent, it is not so in the case of renewal premium. Good global
companies have their renewal premium cost at eight per cent whereas for LIC it is around 13
per cent," he remarks. In fact, premium procurement costs will go up further if LIC decides to
pay agency commission as per the Insurance Act to retain its top-notch agents.
But for these small hitches, the LIC juggernaut is standing on a solid wicket.