INSURANCE SECTOR IN 21ST CENTURY

Bachelor of Commerce (Banking & Insurance) Semester V (2012-13)

Submitted by JASMEET SINGH KOHLI

SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS BANDRA (W) MUMBAI-50

INSURANCE SECTOR IN 21ST CENTURY

Bachelor of Commerce (Banking & Insurance) Semester V (2012-13)

Submitted In Partial Fulfillment of the requirements For the Award of Degree of Bachelor of Commerce Banking & Insurance

By JASMEET SINGH KOHLI

SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS BANDRA (W) MUMBAI-50

SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS BANDRA (W) MUMBAI-50

CERTIFICATE (2012 2013) This is to certify that Jasmeet Singh Kohli of B.com (Banking & Insurance) Semester V (2012-13) has successfully completed the project on RURAL CREDIT IN INDIA under the guidance of DR. Ashok Vanjani.

Date: Place: - Mumbai

(Prof. Mr. Vishal R Tomar)

(Dr. Ashok Vanjani)

Course Co-ordinator

Principal

(Prof. Dr. Ashok Vanjani)

Project Guide

External Examiner

DECLARATION

Date:-

I, Mr/Miss. Jasmeet Singh Kohli the student of B.Com (Banking & Insurance) Semester V (2012-13) hereby declare that I have completed the project on INSURANCE SECTOR IN 21ST CENTURY successfully.

The information submitted is true and original to the best of my knowledge.

Thank you,

Yours faithfully,

Jasmeet Singh Kohli

ACKNOWLEDGEMENT

At the beginning, I would like to thank Almighty God for his shower of blessing. The desire of completing this dissertation was given a way by my guide Dr. A. C. Vanjani. I am very much thankful to him for the guidance, support and for sparing his precious time from a busy and hectic schedule.

I am thankful to Dr. ASHOK VANJANI, Principal of Smt. M.M.K. College. My sincere thanks to Prof. Mr. Vishal Tomar who always motivated and provided a helping hand for conceiving higher education.

I would fail in my duty if I dont thank my parents who are pillars of my life. Finally, I would express my gratitude to all those persons who directly and indirectly helped me in completing dissertation.

Jasmeet Singh Kohli

DECLARATION

Date:- 04.10.2012

I the undersigned Dr. A. C. Vanjani, have guided Jasmeet Singh Kohli for his/her project, he/she has completed the project INSURANCE SECTOR IN 21ST CENTURY successfully.

I hereby, declared that information provided in this project is true as per the best of my knowledge.

Thank you,

Yours faithfully,

Dr. A. C. Vanjani.

INTRODUCTION :
Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice. The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.

DEFINITION : General definition:

In th e wo rds of John Mag ee, Insu ran ce is a p lan b y wh ich larg e number of people associate themselves and transfer to the shoulders of all, risks that attach to individuals.

Fundamental definition:
In the words of D.S. Hansell, Insurance may be defined as a social device providing financial compensation for the effects of misfortune, the payment being made from the accumulated contributions of all parties participating in the scheme. Contractual definition: In the words of justice Tindall, Insurance is a contract in which a su m of mo n ey is p aid to the assu red as consid eration of ins u rers incurring the risk of paying a large sum upon a given contingency. Characteristics of insurance: Sharing of risks Cooperative device Evaluation of risk Payment on happening of a special event The amount of payment depends on the nature of losses incurred.

Principles
Insurance involves pooling funds from many insured entities (known as exposures) to pay for the losses that some may incur. The insured entities are therefore protected from risk for a fee, with the fee being dependent upon the frequency and severity of the event occurring. In order to be insurable, the risk insured against must meet certain characteristics in order to be an insurable risk. Insurance is a commercial enterprise and a major part of the financial services industry, but individual entities can also self-insure through saving money for possible future losses.[1]

Insurability
Risk which can be insured by private companies typically share seven common characteristics:[2]

Large number of similar exposure units:

Since insurance operates through pooling resources, the majority of insurance policies are provided for individual members of large classes, allowing insurers to benefit from the law of large numbers in which predicted losses are similar to the actual losses. Exceptions include Lloyd's of London, which is famous for insuring the life or health of actors, sports figures and other famous individuals. However, all exposures will have particular differences, which may lead to different premium rates.

Definite loss:
The loss takes place at a known time, in a known place, and from a known cause. The classic example is death of an insured person on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place or cause is identifiable. Ideally, the

time, place and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements. Accidental loss: The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be pure, in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements, such as ordinary business risks or even purchasing a lottery ticket, are generally not considered insurable. Large loss: The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses, these latter costs may be several times the size of the expected cost of losses. There is hardly any point in paying such costs unless the protection offered has real value to a buyer. Affordable premium: If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, then it is not likely that the insurance will be purchased, even if on offer. Furthermore, as the accounting profession formally recognizes in financial accounting standards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, then the transaction may have the form of insurance, but not the substance. (See the US Financial Accounting Standards Board standard number 113)

Calculable loss: There are two elements that must be at least estimable, if not formally calculable: the probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable as a result of the claim. Limited risk of catastrophically large losses: Insurable losses are ideally independent and non-catastrophic, meaning that the losses do not happen all at once and individual losses are not severe enough to bankrupt the insurer; insurers may prefer to limit their exposure to a loss from a single event to some small portion of their capital base. Capital constrains insurers' ability to sell earthquake insurance as well as wind insurance in hurricane zones. In the US, flood risk is insured by the federal government. In commercial fire insurance, it is possible to find single properties whose total exposed value is well in excess of any individual insurer's capital constraint. Such properties are generally shared among several insurers, or are insured by a single insurer who syndicates the risk into the reinsurance market. Legal When a company insures an individual entity, there are basic legal requirements. Several commonly cited legal principles of insurance include: Indemnity the insurance company indemnifies, or compensates, the insured in the case of certain losses only up to the insured's interest. Insurable interest the insured typically must directly suffer from the loss. Insurable interest must exist whether property insurance or insurance on a person is involved. The concept requires that the

insured have a "stake" in the loss or damage to the life or property insured. What that "stake" is will be determined by the kind of insurance involved and the nature of the property ownership or relationship between the persons. The requirement of an insurable interest is what distinguishes insurance from gambling. Utmost good faith the insured and the insurer are bound by a good faith bond of honesty and fairness. Material facts must be disclosed. Contribution insurers which have similar obligations to the insured contribute in the indemnification, according to some method. Subrogation the insurance company acquires legal rights to pursue recoveries on behalf of the insured; for example, the insurer may sue those liable for insured's loss. Causa proxima, or proximate cause the cause of loss (the peril) must be covered under the insuring agreement of the policy, and the dominant cause must not be excluded Mitigation - In case of any loss or casualty, the asset owner must attempt to keep loss to a minimum, as if the asset was not insured. Indemnification To "indemnify" means to make whole again, or to be reinstated to the position that one was in, to the extent possible, prior to the happening of a specified event or peril. Accordingly, life insurance is generally not considered to be indemnity insurance, but rather "contingent" insurance (i.e., a claim arises on the occurrence of a specified event). There are generally three types of insurance contracts that seek to indemnify an insured: a "reimbursement" policy, and a "pay on behalf" or "on behalf of" policy, and an "indemnification" policy. From an insured's standpoint, the result is usually the same: the insurer pays the loss and claims expenses.

If the Insured has a "reimbursement" policy the insured can be required to pay for a loss and then be "reimbursed" by the insurance carrier for the loss and out of pocket costs including, with the permission of the insurer, claim expenses. Under a "pay on behalf" policy, the insurance carrier would defend and pay a claim on behalf of the insured who would not be out of pocket for anything. Most modern liability insurance is written on the basis of "pay on behalf" language which enables the insurance carrier to manage and control the claim. Under an "indemnification" policy the insurance carrier can generally either "reimburse" or "pay on behalf of" whichever is more beneficial to it and the insured in the claim handling process. An entity seeking to transfer risk (an individual, corporation, or association of any type, etc.) becomes the 'insured' party once risk is assumed by an 'insurer', the insuring party, by means of a contract, called an insurance policy. Generally, an insurance contract includes, at a minimum, the following elements: identification of participating parties (the insurer, the insured, the beneficiaries), the premium, the period of coverage, the particular loss event covered, the amount of coverage (i.e., the amount to be paid to the insured or beneficiary in the event of a loss), and exclusions (events not covered). An insured is thus said to be "indemnified" against the loss covered in the policy. When insured parties experience a loss for a specified peril, the coverage entitles the policyholder to make a claim against the insurer for the covered amount of loss as specified by the policy. The fee paid by the insured to the insurer for assuming the risk is called the premium. Insurance premiums from many insureds are used to fund accounts reserved for later payment of claims in theory for a relatively few claimants and for overhead costs. So long as an insurer maintains adequate funds set aside for anticipated losses (called reserves), the remaining margin is an insurer's profit.

Indian Insurance sector poised for its next stage of growth The insurance sector in India has grown at a fast rate postliberalization in 1999. In the last decade, total premium grew at a CAGR of 25% and reached a total of $67 billion in 2010. Indian Life insurance industry (which contributes 88% of total Life and General insurance premium in India) has emerged as the 9th largest life insurance market in the world. Yet, Insurance penetration (measured as ratio of premium underwritten to GDP) was only at 5.2 % in 2010 significantly lower than Asian peers like South Korea, Taiwan, Japan and Hong Kong which boast an insurance density greater than 10%. With low insurance penetration levels, growth potential remains promising. More importantly, the pace and nature of growth will likely see a change where new behaviors and dynamics of demand and supply will apply. On the demand side, growth is being fuelled by the growing population base, rising purchasing power, increased insurance awareness, increased domestic savings and rising financial literacy. The suppliers are correspondingly playing a market making role as competition heightens and differentiation become necessary for profitable growth. In the new order, innovating across the business lifecycle has become a necessity.

The puzzle of untapped potential:

While the growth in Insurance industry has been at 25% in the past decade, a closer look suggests that this growth has come at a cost. Private insurance companies have incurred high expenses in the last decade in increasing awareness about the need of insurance, developing brand strength, establishing distribution channels and setting-up branch network and other infrastructure. Most insurers initial plans of breaking-even within first 7 to 9 years of operations has been fraught with challenges. Some of the challenges can be characterized as growing pains, while others are more fundamental and intrinsic to how players have approached market making. To begin with, awareness levels of insurance offerings are low (e.g. compared to banking products) except for products like motor

insurance where insurance is mandatory. Even when awareness of insurance products exists, the perceived value of buying insurance remains low for reasons like high expectations on returns (which other financial products may offer) and the belief that risk coverage is not needed. Hence, insurance remains a push rather than a pull product in India. Even among those who do buy insurance, the lapse ratios are high (average ~25% lapse ratio for top 13 players as per IRDA 2010 annual report) and many buyers lose interest due to mismatch between expected returns and actual benefits. In order to attract customers, the insurers have (especially in non-life insurance, post de-tariffing) resorted to premium discounting which may have impacted the profitability and quality of risks underwritten. Reaching out to the potential willing buyers and servicing them is also a challenge considering the sparsely spread population, especially outside the metros and Tier-I cities. The industry has faced challenges in acquiring and retaining (internal and external) channel teams considering the huge gap between the demand and the supply of dependable and skilled personnel, resulting in high cost of customer acquisition and operations. In our view, despite the latent potential, in the short term, Insurers will continue to be confronted by a multitude of challenges in their quest to achieve top-line as well as bottom-line performances. Besides struggling to maintain growth, insurers are called upon to meet the increasing dynamic needs of price- and service- conscious customers, meet regulatory demands, enhance risk management capabilities, reevaluate business partnerships and distribution models and at the same time build capabilities in a more enabling technology environment. Due to above challenges, in our view, accessing the next wave of growth would require different strategies from those applied during the first wave. Players will need to innovatively improve primarily two aspects of business value proposition to customers (to improve customer acquisition) and operational performance (to improve profitability).

INSURANCE SECTOR A PREVIEW : The insurance sector in India dates back to 1 8 1 8 , w h e n Oriental Life Insu ran ce Co mp an y was incorpo rated at Calcutta. T h e r e a f t e r , f e w o t h e r companies like Bombay Life Assurance Company, in 1823 and Triton Insurance Company, for General Insurance, in 1850 were incorporated. Insurance Act was passed in1 9 2 8 but it was subsequently r e v i e w e d a n d c o m p r e h e n s i v e legislation was enacted in 1938. The nationalization of life insurance business took place in 1956 when 245 Indian and Foreign Insurance provident societies were first merged and then nationalize d. It paved th e way towards th e estab lish men t of Life Insu ran ce Co rp o ration ( L I C ) a n d since then it has enjoyed a monopoly over the l i f e insurance business in India. General Insurance followed suit and in1968, the insurance act was amended to allow for social control over th e g en eral insu ran ce busin ess. Subsequ en tly in 1973 , no n -lif e insu ran ce bu sin ess was n ation alised and th e Gen eral Insu ran ce Business (Nationalisation) Act, 1972 was promulgated. The General Insurance Corporation (GIC) in its present form was incorporated in

1972 and maintains a very strong hold over the non-life insurance business in India. Due to concerns of (a) Relatively low spread of insurance in the country.(b) Th e eff icient and qu ality fun ction ing of th e Pub lic Secto r insurance companies(c) The untapped potential for mobilizing long-term contractual savings funds for infrastructure the (Congress) government setup an Insurance Reforms committee in April 1993.The Committee submitted its report in January 1994, recommended aphased program of liberalization, and called for private sector entry an d restru ctu ring of th e LIC and GIC. But no w the p arliamen t h as given a nod to the Insurance Regulatory and Development Authority(IRDA) bill with some changes in the original structure.

How big is the insurance market ?

Insu ran ce is a Rs.400 billion bu sin ess in India, and tog eth er with bank ing serv ices adds ab out 7% to Indias GDP. Gross p re miu m collection is about 2% of GDP and has been growing by 15-20% per annum. India also has the highest number of life insurance policies inforce in the world, and total investible funds with the LIC are almost8 % o f G D P . Y e t more than three-fourths of Indias insurable population has no life insurance or pension cover. Health insurance of any kind is negligible and other forms of non-life insurance are much below international standards. To tap the vast insurance potential and to mobilize long-term savings we need reforms which include revitalizing and restructuring of the public sector companies, and opening up the sector to private players. A statutory body needs to b e mad e to regulate th e mark et and pro mo te a h ealth y mark et structure. Insurance Regulatory Authority (IRA) is one such body, which checks on these tendencies.

INDIVIDUAL LIFE INSURANCE COVERAGE INDEX, 1994 COUNTRY PERSONS Indonesia Philippines India Thailand Malaysia Hong Kong South Korea Taiwan Singapore Japan NO. OF POLICIES PER 100

2.0 5.6 12.4 14.7 35.5 69.4 70.5 75.2 112.6 198.4

Source:Charted Financial Analyst May 1999. (Insurance in Asia:The financial times, quoted from Tillinghast study)

Future course of Insurance Business:

One of the main differences between the developed economies and the emerging economies is that insurance products are bought in the former while these are sold in latter. Focus of insurance industry is changing towards providing a mix of both protection / risk over and long-term investment opportunities. Some of the major international players in the insurance business, which might try to enter the Indian market, are Sun Life of Canada, Prudential of the United Kingdom, S t a n d a r d L i f e , a n d Allianz etc. Although the insurance sector is officially open to private players, they still need a lic ense from the IRDA, wh ich will ann oun ce its gu id elin es in May 20 00 .

Following might be the future strategies of insurance companies:

(1)The new entrants cannot compete with the state owned LIC on p rice alon e. Du e to its size, LIC op erates at v ery lo w costs and their premium on policies that offer pure protection are on par with comparable schemes across the globe. What the new insurance companies will probably offer is higher returns than t h e annualized 9-10% one can hope to earn from L I C s policies. This will put pressure on LIC to offer more attractive returns. (2)Consumers can also expect product innovations. For instance, at p resen t, LIC p rovides cover fo r per man en t disability and wh at th e n ew co mp anies cou ld off er is temp o rary d isab ility insurance as well. (3)Apart from the basic term insurance, most insurance products worldwide are sold as long-term investment opportunities with t h e p r o t e c t i o n c o m p o n e n t b e i n g c l e a r l y s p e l t o u t i n t h e scheme.

(4)LICs policies are not flexible according to t h e c u s t o m e r s needs. New entrants have planned to offer universal life and variable life insurance products that allow the holder flexibility in deciding how his premium are split between protection and s a v i n g s . N e w p r o d u c t s w o u l d a l s o e n a b l e p r o d u c t combinations that allow greater customisation. (5)Private insurers would compete furiously o n t h e s e r v i c e platform. These would not only include faster claims settlement and other after-sales service but there agents would be trained i n p r e - s a l e s i n t e r a c t i o n t o u s h e r i n a c u s t o m e r - o r i e n t e d approach. They would be better qualified in assisting clients infinancial planning. (6 ) Foreign co mp an ies would also u se sup erior software (lik e A P E X ) t h a t w i l l g i v e t h e m a n e d g e o v e r t h e i n - h o u s e L I C software. This technology will help private insurers in product development and customising products to suit individual needs. (7)The foreign players will probably introduce a lot of innovation and competition on Surrender value. LIC pays surrender value on ly after th ree years b ut p rivate insu rance co mp an ies are likely to offer sops by way of better and timely surrender value to clients. (8)Access to insurance too will probably become more widespread. Role of intermediaries would decrease and sale of insurance through direct channels and banks would increase. Simple products like term insurance might be sold through the telephone or direct mail to high net worth clients. (9)In reaction to foreign players strategies one might expect LIC to react and drop its premia and upgrade its services.

OPENING UP OF INSURANCE SECTOR : Indian History: Time to turn the clock back -and o p e n u p insurance. For two years, around 30 foreign insurers have eagerly explored the nationalized Indian insurance market, preparing to leap in when private participation is allowed. But it seems they have an endless wait before the sector is opened up. That's ironical: in 1947,many of these insurers were firmly established here. BAT subsidiary Eagle Star, for example, opened offices in Calcutta in 1894. By 1921,it was doing business with Brooke Bond and the Birlas. Prudential's first Asia office was opened In India in 1923. Fifty years ago, India h a d a bustling, if somewhat chaotic, entirely private i n s u r a n c e industry. The year after Independence, 209 life Insurance companies w e r e d o i n g b u s i n e s s w o r t h R s 7 1 2 . 7 6 c r o r e . ( w h i c h g r e w t o a n amazing Rs. 295,758crore in 1995-96). Foreign insurers had a large market share 40 per cent for general insurance but there were also plenty of Indian companies, many promoted by business houses liket h e Tatas and Dalmias. The first Indian-owned l i f e i n s u r a n c e company, the Bombay Mutual Life Assurance Society, was set up in1870 by six friends. It Insured Indian lives at the normal rates instead of charging a premium of 15 to 20 percent as foreign insurers did. Its general insurance counterpart, Indian Mercantile Insurance Company Ltd., opened in Bombay in 1907. A plethora of insufficiently regulated players was a sure recipe for abuse, especially because there was no separation between business houses and the insurance companies they promoted. The Insurance Act, 1938, introduced state controls o n i n s u r a n c e , i n c l u d i n g mandatory investments in approved s e c u r i t i e s , but regulation remained ineffective. In 1 9 4 9 . Pu rsho ttamd as Th aku rd as, chairman of the Orien tal Assu ran ce Company, admitted: "We cannot deny that, today, there is a tendency on the part of insurance companies in general to make illicit gains.

Can we overlook the cutthroat c o m p e t i t i o n f o r a c q u i r i n g business?

And still worse is the dishonest practice of adjusting of accounts." After a 1951 inquiry, the government was dismayed that companies had high expense and premium rates, were speculating in shares, and givin g lo ans reg ardless of secu rity. No wond er th at between 1 945 and 19 55 , 25 in su rers went into liquid ation and 25 transferred their business to other companies. This reckless record s t o k e d t h e p r o nationalisation fires. The 1956 life insurance Nationalisation was a top-secret intrigue; for fear that unscrupulous insurers would siphon funds off if warned. The government resolved to f irst take over th e man ag emen t of lif e insu ran ce co mp an ies b y ordinance, then their ownership. The ordinance transferred control of 245 insurers to the government. LIC, established eight months later, took over their ownership. General Insurance had its turn in 1972,w h e n 1 0 7 insurers were amalgamated into four c o m p a n i e s headquartered in the four metros, with GIC as a holding company. Nationalization brought some benefits. Insurance spread from an urban-oriented, high-end business to a mass one. Today, 48 per cent O f LIC's new business is rural. Net premium income in g e n e r a l insurance grew from Rs.222crore in 1973 to Rs.5,956crore in 1995-96. Yet, rigid controls hamper operational flexibility and initiative so b o t h c u s t o m e r s s e r v i c e a n d w o r k c u l t u r e t o d a y a r e d i s m a l . T h e frontier spirit of the early insurers has been lost. Insurance companies h a v e a l s o b e e n t i m i d i n m a n a g i n g t h e i r i n v e s t m e n t p o r t f o l i o s . Competition between the four GIC subsidiaries remains illusory.

Why Liberalize, What Market structure to have finally, What Role for Regulator? Introduction : The decision to allow private companies to sell i n s u r a n c e products in India rests with the lawmakers in Parliament. These are the passage of the Insurance Regulatory Authority (IRA) Bill, which will make IRA a statutory regulatory body, and amending the LIC and GIC Acts, wh ich will end their resp ective mo nop olies. In 1994 th e gov ern men t appo inted a committee on insu ran ce secto r refo rms (which is known as the Malhotra Committee) which recommended that in su rance bu sin ess be open ed u p to p riv ate players and laid down several guidelines for orchestrating the transition. In particular, we do not address many other related questions such as whether foreign (and not just private) players should be allowed, what cap sh ou ld there b e on fo reig n equ ity o wn ersh ip , wh ether b anks an d other financial institutions should be allowed to operate in the insurance business, whether firms should be allowed to sell both life and -non-life insurance, and so on. The three questions that we address are (a) Why should insurance be opened up to private players? (b) If opened up, what should be the appropriate market structure(many unregulated players or a few regulated players); and finally, (c) What is the role of the regulator in insurance business?

Why allow entry to private players? Th e choice b etween public and p riv ate mig ht a mo un t to choo sing between the lesser of two evils. An insurance contract is a "promise to pay" contingent on a specified event. In the case of insurance and bank ing , smo o th fun ctio ning of bu siness d ep ends h eavily o n th e con tinu ation of the trust and confidence th at p eop le place on th e solvency of these financial institutions. Insurance products are of little v alu e to consu mers if th ey can not trust th e co mp an y to k eep its promise. Furthermore, banking and insurance sectors are vulnerable to the "bank run" syndrome, wherein even one insolvency can trigger p an ic amo n g consu mers lead ing to a widesp read and co mp lete b reakdo wn . Th is imp lies th e n eed fo r a pub lic regulato r, and no t public provision of insurance. Indeed in India, insurance was in the p r i v a t e s e c t o r f o r a l o n g t i m e prior to independence. T h e L i f e Insurance Corporation of India (LIC) was formed in 1956, When the Gov ern men t of India b rough t tog eth er ov er two hu nd red odd private life insurers and provident societies, under one nationalized m o n o p o l y c o r p o r a t i o n , i n t h e w a k e o f s e v e r a l b a n k r u p t c i e s a n d malpractices'. Another important justification for Nationalisation was to raise the much-needed funds for rapid industrialization and self- reliance in heavy industries, especially since the country had chosen the path of state planning for development. Insurance provided theme ans to mobilize household savings on a large scale. LIC's stated mission was of mobilizing savings for the development of the country. The non-life insurance business was nationalized in 1972 with the formation of General Insurance Corporation (GIC). Thus the fact that insurance is a state monopoly in India is an artifact of recent history the rationale for which needs to be examined in the context of liberalization of the financial sector. If traditional infrastructure and" semi-public goods" industries such as banking, airlines, telecom, power, and even postal services (courier) have significant, private s e c t o r p r e s e n c e , c o n t i n u i n g a s t a t e

m o n o p o l y i n p r o v i s i o n o f insu ran ce is ind efen sib le. Th is is not to d en y that th ere a re so me valid grounds for being cautious about private sector entry. Some of these concerns are: (a) That there would be a tendency of private companies to "skim" the mark ets; th us p rivate p layers wo uld con centrate on th e lucrativ e mainly urban segment leaving the u n p r o f i t a b l e s e g m e n t t o t h e incumbent LIC. (b) That without adequate regulation, the funds generated may not be deployed in sectors (which yield long-term social benefits), such as infrastructure and public goods; similar without regulation, private firms may renege on their social sector investment o b l i g a t i o n s . Meeting these concerns requires a strong regulatory body. Another commonly expressed fear is that there would be massive job losses in the industry as a whole due to computerization. This however does not seem to be corroborated by the countries' experience'. Moreover, apart from consideration based on theoretical principles alone, there is sufficient evidence that suggests that introduction of private players in insurance can only lead to greater benefits to consumers. This can b e seen fro m th e fact th at the spread in insu ran ce in India is lo w c o m p a r e d t o international benchmarks. The two convention measures of the spread of insurance are penetration and density. The former measure (premiums per unit) of GDP, and the latter, premiums per capita. Less than 7% of the population in India has life insurance cover. In Singapore, around 45 per cent of the people are covered an d in Jap an , this is close to 10 0 p er cen t. In th e US, ov er 81 p er cent the households have insurance cover. India has the biggest life insurance sector in the world if we go by the number of policies sold, b u t t h e n u m b e r o f p o l i c i e s s o l d p e r 1 0 p e r s o n s i s v e r y l o w . T h e d eman d fo r insu ran ce is lik ely to increase with risi ng p er-cap ita incomes, rising literacy rates and increase of the service sector, as h a s b e e n s e e n from the example of several other developing countries. In fact, opening up of the insurance sector is an integral part of the liberalization process being pursued by many

developing coun tries. After Ko rean an d Taiwan ese insu ran ce sectors were liberalized, the Korean market has grown three times faster than GDP and in Taiwan the rate of growth has been almost 4 times that of its GDP. Philippines opened up its insurance sector in 1992. There are several other factors that call for private sector presence. Firstly, a state monopoly has little incentive to innovate or offer a wider range of products. This can be seen by a lack of certain products from LlC's p o rtfolio , and lack of exten siv e risk catego rization in sev eral GIC products, such as health insurance. In fact, it seems reasonable to conclude that many people buy life insurance just for the tax benefits, since almost 35 per cent of the life insurance business is in March, the month of financial closing. This suggests that insurance needs to be sold more vigorously. More competition in this business will spur firms to offer several new products, and more complex and extensive r i s k categorization. The system of selling insurance t h r o u g h commission agents needs a better incentive structure, which a state monopoly tends to stifle. For example LIC pays out only 5 per cent of its income as commissions, whereas this share in Singapore is 16 per c e n t , a n d i n M a l a y s i a i t i s c l o s e t o 2 0 p e r c e n t . P r i v a t e s e c t o r presence will also mean that the current investment norms, which tie-up almost 75 per cent of insurance funds in low yielding government secu rities, will h ave to go . This will resu lt in mo re p ro activ e and market oriented investment of funds. This needs to be tempered by prudential regulation to ensure solvency'. Of course, this also implies that cross-subsidizing across policyholders of different types that is seen bo th in lif e and non -lif e ins u ran ce will d imin ish . Sin ce pub lic secto r fir ms are requ ired to sell subsidized insu ran ce to weak er sections of society, a separate subsidy mechanism will have to be designed. The India Infrastructure Report (GOI, 1996) estimates that the funds required in the next two decades are more than Rupees4 00 0 billion. Fin ally, p riv ate secto r entry into insuran ce mig ht b e simp ly a fiscal necessity. Since larg e scale fund s fo r m long term contractual savings need to be mobilized, especially for

investment in infrastructures the option of not having more (private) players in the insurance sector is too costly.

RESTRUCTURING OF LIC AND GIC : In the insurance sector as of today and in all probabilities for a longt i m e t o c o m e , L I C a n d G I C w i l l f o r m a v e r y s i g n i f i c a n t p a r t . T h e reasons for these are many. Firstly, they have been in business for a long time and therefore, arein position to know business conditions better than any new entrant. Secondly, the network of branches and agents is large, deep and penetrating, which will take a long time for any o t h e r e n t r a n t t o replicate. Thirdly, (especially the LIC), has a kind of government backing whichin stills faith in all would-be policy holders, much more than a private c o m p a n y c a n h o p e t o g e n e r a t e . T h e e n v i s a g e d p r i v a t e s e c t o r participation in the insurance sector is unlikely to take this advantage away f ro m LI C and GIC. In th e sh ort run at least. LIC and GIC will continue to command a very high market presence and in the long run it will take a very good market player to dislodge LIC and GIC f r o m t h e i r p r i m e positions. This also means that the reform in insurance sector will necessarily mean the reform of LIC and GIC.

Redefining Customer Value Proposition:

To improve customer acquisition, a closer examination of the strategic components Core Product features, Positioning, Communication and Distribution channels is warranted (refer figure 1). Innovation and developments of these components and their interplay will be critical to developing distinguishing and sustaining propositions.

Core Product Features

Risk coverage, benefits, price/premium and associated services form the key components of core features of an insurance product. The product design teams need to configure innovative combinations of these components to address specific segments needs and remove deterrents to buying insurance products. Globally, insurers have designed innovative products targeted at specific ages, types of groups, professionals or people with disease at different stages. Instances of products with innovative coverage and benefits include wellness programs, access to preferred providers, reward and loyalty programs, provision of emergency services and guaranteed NAV ULIPs. Products with innovative pricing include pay as you drive for motor insurance and co-payment claim products for health insurance. Globally, some players are experimenting with use of telematics to offer driving behavior-based pricing for motor insurance products. However, the insurers will have to take caution against innovation that leads to more complicated products and design products which are simple and focused on offering the value desired from insurance by the customers.

Figure 1: Components of Customer Value Proposition

Positioning
Positioning the product is equally important to improve the perceived core proposition of the product. Positioning involves communicating key highlights or proposition of the product through messages which the target segment easily appreciates and connects

with. Insurers have positioned their products as ones which provide prevention of disease, education for child, complete car solutions, with you for life to position their products utility or establish an emotional connect. Innovative positioning will require understanding the potential and existing customers stated and unstated needs and responding to changing socio-economic scenarios across the target geographies. With changing lifestyles and increasingly demanding customer segments, the players will have to position their products around concepts like lifestyle products, quick & easy or chose your coverage.

Customer Segmentation
Understanding customers and inherent customer behavior is a vital element in developing a value proposition which resonates with the customers unmet needs. However, there is a need to look beyond the traditional segmentation strategies around income, wealth, geographies and life stage. Segmenting the customers according to their insurance needs and behavior characteristics provides better customer insights which are more likely to create a satisfied customer. Developing that level of a refined understanding of the customer will enable insurers to adapt their product offerings, marketing campaigns and sales force alignment to suit their niche segments.

Communication and Distribution Channels

The identified product positioning requires appropriate communication channels which can reach geographically di1spersed and socio-economically diverse target customer segments. The distribution channels contribute by delivering on the promise made through the communications during the customer acquisition and servicing cycle. Insurers will need to deploy innovative distribution channels to significantly improve the ability to reach target customers and communicate the value proposition at optimal cost. Insurers are increasingly using communication and distribution channels like social media, self-help web-portals, bundling services with mobile service providers and alliance with malls. Work-site marketing,

groups like co-operative housing societies and unrelated products distribution channels are increasingly being leveraged by insurers to improve distribution reach. For example, an experiment by a leading insurer in South Africa of distributing insurance products through a retail clothing store has been successful. Insurers have also leveraged Self-Help Groups (SHGs) and Business Correspondent outlets of banks in rural areas to distribute micro-insurance products.

Aligning the Value Proposition with Customer segments

To ensure effectiveness of innovatively re-defined customer value proposition, insurers will need to address specific segments of customers. Insurers will need to segment the potential customers on dimensions of how Aware and Convinced are the customers (refer figure 2) about insurance products and services to better choose which components of value proposition to leverage. The segment under quadrant Addressable opportunity is a sweetspot which could be serviced with minimal efforts, but most of the insurers would be chasing this segment, making it a competitive space to operate in. It is important to retain acquired customers by understanding their needs and serving them well. Addressing such customers requires: (a) innovative differentiation of product / services from other players; (b) innovative service delivery model and (c) the ability to cross-sell other products. The segment under the quadrant titled Hidden opportunity may have only blurred to little understanding of insurance products but may be willing (or are easier to convince) to buy insurance once they are made aware about the features and benefits in greater detail. Addressing this segment requires innovative promotions, campaigns, communications and bundling with other/associated products. For example, low ticket or bundled health policies were launched to introduce the products to identify those who respond positively (as

they are willing buyers) and then increase the ticket-size and crosssell more products. Innovative channels could also play an important role in increasing potential buyers affinity with products to explore and serve the convinced buyers. Figure 2: Customer Segments

The unconvinced segment is the informed segment which does not perceive the need to buy insurance or had bad experiences in past. Addressing this segment requires innovative product design, aligned pricing and customized servicing. Players will need to assess the possible reasons for this segment being unconvinced to refine the pricing, alter the product ticket-size upward or downward and change the rigor of service levels and available channels. The future opportunity segment should be monitored for future potential and revisited periodically depending on the untapped potential available in the other quadrants. The population under

future opportunity could also move towards the other quadrants by itself as product awareness and perceived need for insurance improves due to external parameters like larger media exposure, improvement in quality of life, word-of-mouth and large natural / human-made disasters. The challenge in undertaking the above however is the ability to map the population along the four quadrants. This could be achieved by primary research, focused group interactions and stakeholder (e.g. healthcare providers in case of health insurance) feedback. On-going industry-wide research on consumer behavior and perception towards insurance products sponsored by the insurance players, councils or the regulator could also provide significant insights. Insurers who invest in incremental innovation across the insurance value chain and not just in disruptive innovation are more likely to benefit as the market stabilizes. Incremental innovation is not likely to cost a lot (compared to existing cost structures of players), as it involves rejigging existing business and operating model to deliver better and is easier to implement. Insurers investing in redesigning products and processes, smarter marketing, finer customer segmentation are more likely to gain a disproportionately high share of market growth and market share.

Improving Operational Performance:

Apart from addressing the challenge of customer acquisition, the other big challenge for Indian insurers has been improving operational performance to achieve profitable growth. Many Insurers in past have resorted to tactics like high commission payment to distributors, focusing more on new premium rather than renewals, high premium discounting and focusing only on growth rather than also focusing on improving operational maturity. The result has been high customer acquisition costs, low channel productivity, low customer-centric service excellence, reduced ability to detect frauds, difficulty in implementing risk-based pricing, challenges in acquiring and retaining talent and poor quality of data.

The insurers will need to innovatively alter the operating models, business processes, channel management and human resource strategy to control the operating expenses and the combined ratios. Insurers have implemented innovations like over-the-counter products, autounderwritten and straight-through processed products to improve the speed of service and reduce processing costs. However, with increasing customer sophistication, growing scale of operations, larger diverse workforces and greater need to increase reach, the players will need to bring in rapid innovations across business functions.

Key challenges in leveraging Innovation:

While there have been instances of innovative products and business models deployed by insurers in India, there are challenges internal and external to the insurers organizations which inhibit greater innovation. Firstly, in the first decade of privatization, the focus was more on expanding and stabilizing the business applying the prevailing business models rather than on innovation. With a decade of learning about the consumer behavior and channel economics, the players may now be better equipped to implement successful innovations relevant in India. The imperatives for innovation too are now higher than in the early years of privatization. Secondly, the management teams have so far been more oriented to design, deploy and maintain systems and processes rather than bring in innovation. The ability to innovate which involves taking risks may also have been hindered by the fact that the players are constrained by low margins of error on account of lower profitability and high capital requirements. Lastly, some of the product and distribution innovations prevailing in other markets (e.g. Insurers offering insurance along with other services like health programs) are not permitted in the Indian regulatory environment. While the regulator has supported insurers to implement innovative practices through steps like product de-tariffing in general insurance and permitting Health plus life combo products, regulator has been cognizant of prevailing challenges. With realization of mis-selling instances and low consumer awareness, the regulator has avoided propagating drastic variations in core product parameters or the distribution channels

Improving the Innovation Quotient

Fuelling the innovation engine
Innovation management is all about people management. To begin with, the organizations should commit themselves to deploying innovation and creating a culture in which implementation of new

ideas is a part of the core strategy. Secondly, the management should communicate to the stakeholders, the extent of role that innovation is expected to play the Innovation Quotient in the growth journey of the organization. Accordingly, the management should propagate the culture of risk taking within the set boundaries. The participants of innovation process could either be the entire organization or a focused team which could include various functions (sales, marketing, distribution, operation, strategy). The human resources strategy and policies should be aligned to Innovation Quotient in terms of appropriateness of job roles, reporting structure, Key Result Areas (KRAs) and incentives to encourage innovative behaviors. Integration of stakeholders outside the organization customers, channel partners, regulators is also critical to source and implement innovations in the organization. Lastly, the organizations should develop capabilities to assess the extent of success and Return of Investment (RoI) achieved through innovation. Ability to Innovate also requires parameters external to the players to be conducive. For example, the regulatory regime should allow and encourage innovation in areas like products and distribution. The related sectors like healthcare, housing, motor dealers and government should be receptive and agile to participate with insurers to offer innovative products and deploy processes and technology to improve sales process and customer servicing.

Understanding the Innovation Levers

There are several Innovation Levers which may be applied by insurers in the context of environment developments which are likely to considerably change their business prospects over the next few years. Insurers which are better organized around harnessing and adapting these Innovation Levers will be better positioned to realize their potential by deploying their capital financial, managerial, technological as well as physical. A select list of illustrative Innovation Levers have been detailed below.

Innovation process

Innovation process begins with generation of ideas by the identified stakeholders. Organizations need to put in place, process which enables collation of ideas through modes like formal meetings and workshops, suggestions boxes or technology enabled idea banks. Figure 3: Innovation Process

The desired stakeholders and the modes of seeking ideas depend on the scope of innovation (e.g. product innovation or operational improvement) and frequency of innovation (one time vs ongoing). The goals for seeking ideas and scope of idea generation should be defined when inviting the ideas (refer figure 3). The generated ideas need to be selected for implementation using a matrix which accommodates imaginative exploration but also evaluates expected returns and risks involved through critical

judgment. The ideas need to be further elaborated and converted into products and services definitions in the context of the organizations business and socio-economic environment. In the final stage, the selected products and services need to be defined and delivered as projects by engaging the stakeholders and closely monitoring the benefit realization. The process of innovation can take two forms Incremental or Breakthrough (refer figure 4). Breakthrough innovation is generally less frequent, disruptive, more strategic with high revenue potential and initiated at organization level with close involvement of the top management.

Figure 4: Forms of Innovation

Breakthrough strategy enables creation of growth strategies, new product categories, services or business models that change the game and generate significant new value customers and the corporation. Breakthrough innovations are often managed as one-off large projects in the organizations. Incremental Innovation involves successfully utilizing a new technology, undertaking small process improvements or launching product variants, which bring incremental improvement. In the short term, Incremental innovation has relatively low to medium impact on the revenues or the expenses incurred by the organization. They may not bring large, dramatic or game changing improvements in short span, but often lead to long term growth of the organization. Incremental innovation is often managed through imbibing idea generation, selection, conversion and diffusion steps in the regular responsibilities of the functional leaders of the organization.

Conclusion:
Insurance industry in India has now been through a cycle involving high growth and more recent moderation. The next wave of growth will be of different nature and complexity, led by players who change the market dynamics through innovation. With a decade of experience and learning about customer behavior and business economics, Indian insurers are well-placed to select and diffuse innovative ideas. However, this would require that insurers bring about fundamental difference in mindset on how they perceive the role of innovation in achieving profitable growth. The insurers will need to align the people strategies to create a culture of generating new ideas and implementing those using optimal resources. Insurers have the choice of adopting innovation and leap ahead or lag behind.

Need for Corporate Governance in Insurance Sector

Insurance industry bears a fiduciary relationship with policyholders and long term performances. The honesty and integrity of insurers are paramount important as the industry has financial functions. Officers and employees can break the regulatory measures and enjoy the money of policyholder. No insurer will be successful unless his integrity is tested as sound and useful for the effective performances of the functions. The need of corporate governance is realized for confidence building change-management, investment and viability.

Confidence
Insurance is based on confidence. New insurance companies can develop only if the old insurance companies have demonstrated honestly and integrity. For example, LIC has proved the insurance has sore reign guarantee. Long term contract is built only on confidence. Insurance particularly life insurance is long-term contract. There should be benchmark standards against which insurers should demonstrate public image.

Insurance companies are facing several changes in the society. They have to cope with changes and come forward to challenge the changes. It has been observed that insurance industry is growing faster than GDP. Specialized insurance companies are entering in the market. Many foreign companies have entered in India to conduct insurance business. Health insurance is becoming a need of the hour. The insurance companies have to manage themselves for maintaining safety and solvency. Non- insurers are growing in detarrified era challenging their fair play, policyholders servicing and transparency.

Investment
Insurance companies manage their funds through investment which involves safety solvency risk management and protection of policyholders interest. The actuarial experiences also help decide insurance expansion. It grapples greater challenges such as increasing number of good governance standard against which the companies conduct and performance would get measured against these backdrops. They have to live up with securities market and governing rules. SEBI has formulated several rules and regulation which have to be followed by the insurer.

Viability

The insurers have to prove their viability. Many new and existing companies now enter in the insurance business. Foreign, insurance companies have to prove their viability. Public sector insurers have proved their viability and private sector insurers have to operate in a safe and sound manner and in accordance with the applicable rules and regulations.