IMPACT OF LIBERALISATION OF THE INSURANCE SECTOR ON THE LIFE INSURANCE CORPORATION OF INDIA Shri. M.G. Gachchannavar*,& Dr.

Ansuya Angadi**

INTRODUCTION
The global insurance industry is facing myriad challenges coming from a wide range of sources. After the crippling effect of the attack on the World Trade Centre, the industry has only just begun to return to normalcy. Coming to the Indian scenario, the benefits of liberalisation and a competitive environment are at last hitting the market. While the leaders in the respective classes continue to lead by a wide margin, the battle lines are being redrawn. The Indian insurance industry has been plagued by different types of problems, which have been responsible for the poor growth of the sector. While India boasts of being among the strong countries of the world, when it comes to insurance penetration, (which is one indicator of economic strength), we are at a poor 51st position. One very important reason behind this strange paradox is the poor understanding of concept of insurance in India. The malady is that, most people fail to understand the basic concept of insurance and resort to buying insurance as a tax saving or investment tool that would come in handy in times of need. Unless the strengths of insurance are fully understood in their right perspective, it would be nave to believe that we have made any headway in the development of insurance sector in India. The success of life insurance companies in this milieu is crucial in stabilizing and catalyzing growth in the economy. It is now five full years since the insurance sector in India has been operating in a liberalized environment. It is time for a quick introspection. The global insurance industry is growing, and in most countries, the insurance industry is undergoing globalization at a rapid pace. Mergers and acquisitions are an everyday feature in the industry. The present article discusses the current scenario, opportunities, and challenges to LIC, which have resulted in pressures on economic parameters. Insurance has a key role to play in stabilizing the economy, trade, and commerce. Insurance is a contingent service, whose purchase is not an end in itself, but rather complementary to or required in connection with the production of goods and other services. Together with other economic services, insurance is of primary importance both in regard to national economy and international trade. This article aims to analyze the impact of liberalization of the life insurance sector on the Life Insurance Corporation of India (LIC). Concept of Insurance Every asset (living and non-living) has a value and generates income to its owner. The income has been created through the expenditure of effort, time and money. Every asset has an expected lifetime, during which it may depreciate and at the end of life period it may not be useful. Sometimes it may cease to exist or may not be able to function partially or fully before the expected life period due to accidental occurrences like burglary, collisions, earthquakes, fire, flood, theft, etc. These types of possible occurrences are known as risks. The future is uncertain; nobody knows what is going to happen. Insurance is the concept of risk management the need to manage uncertainty on account of the above stated risks. Insurance is a way of financing these risks either fully or partially.

Insurance is a contract in writing between two parties whereby one party called the insurer undertakes, in exchange for a fixed sum called premium, to pay the other party called the insured a fixed amount of money on the happening of certain event. Insurance indemnifies assets and income. Insurance business can be broadly divided into two categories, viz. life insurance and general or non-life insurance. This article focuses on life insurance. Life Insurance Life Insurance is a contract for payment of a sum of money to the person assured (or failing him/her, to the person entitled to receive the same) on the happening of the event insured against. Usually the contract provides for the payment of an amount on the date of maturity or specified dates at periodic intervals or on unfortunate death, if it occurs earlier. Among other things, the contract also provides for the payment of premium periodically, to the Corporation by the assured. Life insurance is universally acknowledged to be an institution that eliminates risk, substituting certainty for uncertainty and comes to the timely aid of the family in the unfortunate event of the death or total permanent disability of the breadwinner. Liberalisation The 1990s saw the emergence of liberalisation, which involved the lifting of government controls, permits, licenses and allowing competition to play its role in the economy. With respect to the insurance business, liberalisation meant allowing private enterprises, including Multinational Corporations (MNCs), to operate in an area hitherto monopolized by the Government of India. The Government of India appointed a committee under the chairmanship of Shri. R. N. Malhotra to recommend insurance sector reforms. The Committee, which submitted its report in 1994, recommended among after things, that the insurance sector in India be thrown open to the private sector. The Government of India accepted the recommendations and allowed private players to offer insurance cover to Indian citizens. Recommendations of the Malhotra Committee The need for greater and deeper insurance coverage in the economy, and mobilization of funds from the economy on much a greater scale for infrastructure development, were the two major reasons cited by the Malhotra Committee for the liberalization of the insurance sector. The major recommendations of the Committee are listed below. A. Structure Government of Indias stake in the insurance companies to be brought down to 50 per cent. Government of India should take over the holdings of GIC and its subsidiaries; these should now act as independent companies. All insurance companies should be given greater freedom to operate. No special concession is to be given to government companies. Increase of the capital base of LIC and GIC to Rs. 200 crores each, half to be retained by the government and the rest sold to the public at large with suitable reservations for the employees of the two organizations.

B. Competition Private companies to be allowed to enter the insurance sector with a minimum paid up capital of Rs. 1 billion. No company should deal in both Life and General Insurance through a single entity. Foreign insurance companies may be allowed to enter the industry by floating an Indian company as joint venture with an Indian partner. Postal Life Insurance should be allowed to operate in the rural market. Only one State-Level life insurance company should be allowed to operate in each State.

C. Regulatory Body Establishment of a strong and effective insurance regulatory body in the form of a statutory autonomous board on the lines of SEBI. Controller of Insurance to be made independent.

I. Table 1: Private Players in the Life Insurance Business Date of Name of the Registration Company 23.10.2000 HDFC Standard Life 15.11.2000 Max New York Life 24.11.2000 ICICI Prudential Life 10.01.2001 Om Kotak Mahindra 31.01.2001 Birla Sunlife 12.02.2001 Tata AIG 30.03.2001 SBI Life 02.08.2001 ING Vysya Owners (in percentage) Standard Life , UK 18, HDFC 82 New York Life 26, Max India 74 Prudential, UK 26, ICICI Bank - 74 Old Maruthi , South Africa 26, Kotak Mahindra 74 Sun Life of Canada 26, Birla Capital 74 AIG , US 26, Tatas 74 Cardif SA, France 26, State Bank of India 74 ING, Holland 26, GMR Group, Hyd 54, ING Vysya Bank 20 Allianz AG, Germany 26, Bajaj Auto 74 Metlife , US 26, Shapoorji Pallonji 30, J & K Bank 25 AMP, Australia 26, Sanmar Group, Chennai 74 Aviva PLC, UK 26, Dabur Investments 74

03.08.2001 06.08.2001 03.01.2002 ***

Allianz Bajaj Metlife AMP Sanmar Aviva

Source: 1) Indian Insurance Sector: A Report, The Analyst, July 2002. 2) Cover Charge: An Economic Times Exclusive on Insurance, The Economic Times, Bangalore, January 2003.

D. Investments Mandatory Investments of LIC Life Fund in government securities to be reduced from 75 per cent to 50 per cent. GIC and its subsidiaries are not to hold more than five per cent in any company (the current holdings to be brought down to this level over a period of time)

E. Customer Service LIC should pay interest on delays in payments beyond 30 days. Insurance companies must be encouraged to set up unit linked pension plans. Computerisation of operations and updating of technology to be carried out in the insurance industry.

Why Liberalisation? Till the liberalization of the insurance sector, the Indian insurance market was monopolized by the State-run LIC and GIC. GIC has provided high ratio (approx. 97%) of claims settled to claims made, yet the reach of the state-run insurance companies has remained limited to urban areas. Even in urban areas, the companies have not been able to generate awareness about the needs and benefits of insurance. Lack of awareness in urban areas and low penetration levels in rural areas have restricted the range of products suited to every class of customers. This means that there is a yawning gap between the needs of customers and the products being offered by the stateowned companies. Thus, there is a need to educate customers and provide multiple innovative products that lead to better customer service from existing state-owned players. All this would have been possible only by increasing competition, which in turn, was possible only with liberalization. Current Scenario 1. Several leading private sector companies have entered the insurance sector, both in life and nonlife insurance. Several MNCs have started operations in a big way, in joint ventures with Indian private sector firms. Table 1 provides the registration and date of registration of all private players in the field of life insurance business. Various private players have tieup arrangements with banks to market their products. HDFC Standard Life has tied up with Indian Bank and UCO Bank in the Eastern region and it has also entered into Memorandum of Understanding (MOU) with Peerless Bank, as the corporate branches will help provide real reach for the insurance company. The market share of all private players as on 2003 is 10.29 per cent during five-month period of the last financial year (2002). 2. Growth of LIC of India: LIC of India has traveled a long way, and it has grown by leaps and bounds. The growth is shown in Table 2. 3. Opportunities of LIC: Opening up of the insurance sector to private players was necessary in the context of liberalization of financial sector. Particularly opening of life insurance sector

is very significant due to the continuation of monopoly power of Life Insurance Corporation of India (LIC). Opportunities and Challenges facing LIC Is liberalization beneficial to LIC or not? Its impact on LIC has been studied under opportunities and challenges.

Opportunities 1) Untapped Market: Only 22 per cent of life insurance market is covered. Rural and health care insurance, which presently is untapped, will contribute significantly to the growth of insurance business. In India less than one percent of the population is under health cover, when compared to US where three out of four people are covered by health insurance. According to Shunu Sen, CEO, Quadra Advisory, rural insurance should be looked upon as an opportunity and not as an obligation. It is important to take advantage of the immense potential that resides in the rural sector. Stuart Purdy, CEO, Dabur CGU Life Insurance, says it is essential to address the issues of social security policies and risk management both in the urban and rural sectors of India. 2) Customer Credibility & Brand Equity: LIC has an edge over private players in terms of trust and brand equity, since it is Indias trusted service brand as per annual brand survey 2003 conducted by The Economic Times and ORG Marg. The company can take this as an advantage. It should become proactive, aggressive and reach out to the people. After all LIC knows India better and why not this advantage be put to use? 3) Wider Agency NetWork: Although LIC has a wide network of branches and agents, their reach is restricted and the business generated by the agents fits into the Pareto analysis, i.e. only 5 per cent of agents generate as much as 80 per cent of business and 95 percent of agents account for just 20 per cent of business. Making these 95 per cent agents productive is an opportunity to maintain market leadership. 4) Deep Rural Reach: LIC of India can reach rural areas by making use of available wider agency network. For private players it may not possible to reach rural areas and get untapped business. LIC can take the weakness of private players as an opportunity. 5) Premium Charged can be lowered: Policyholders perceive LIC policies as costly (high premium before liberalization). Of course it might be charging a high premium, since it was the only company offering life insurance. Charging reasonable premium and attracting customers may be difficult for new players. But it is easy for LIC and it must (required by liberalisation) lower the premium on policies and take this as opportunity for the growth of business. 6) Ability to Pay High Bonus on With Profit Policies: LIC is an old company enjoying monopoly and it has been running under high profit track record. At present it can offer a higher bonus on profit schemes when compared to new private players, for whom it is very difficult to pay high bonus. 7) Spread of Risk: LIC has the advantage of spreading the risk over its policies, since it is the market leader with sale of more policies. It can therefore absorb any loss. For example, terrorist attacks and consequent deaths and spread the loss over the policies. This advantage is not available for other players, since their market share is low. 8) Strong Infrastructure: Internet-based business has great potential in life insurance

business in coming years due to its convenience, but it will depend on the development of the basic infrastructure. LIC being an old company with good infrastructure and IT award winner (second largest PC user in the country and best IT user in the Insurance Sector for the year 2002 by NASSCOM and indiatimes.com) it can develop its future business. It is an opportunity which LIC can take advantage of. 9) Varishtha Pension Plan: LIC of India can view this scheme as an opportunity and it could continue to command a huge market share, since LIC is the only company that is allowed to sell Varishtha Pension Bima, a pension scheme for senior citizens offering an assured return of 9 percent. Though the scheme is designed, promoted and guaranteed by the Center, private players are not allowed to market it. LICs 47 per cent of new premium income in April September 2003 came from this scheme alone. Hence, it is a great opportunity for LIC to increase the market share since it is having huge potential. 10) Economies of scale: LIC of India has the benefit of economies of scale when compared to private players. It has a large corpus of funds for investment, and the ability to act as reinsurer. 11) Emerging Indian Middle Class: With development of the economy, the middle class has grown in size and has large surplus funds. These surpluses may motivate them to go in for life insurance policies. Hence, LIC has to take this as an opportunity to maintain the market leader position or to increase the market share. Challenges facing LIC Apart from the above mentioned opportunities, LIC will have to face a number of challenges in the liberalized market, some of which are listed below. a. Expectation of the Consumers: At present, LIC has about 60 products and only a few of them are suitable to consumer needs. Hence, LIC will have to offer innovative products to the customers. The consumers are particularly expecting health plans, term insurance and investment products like unitlinked insurance, from the life insurers. Hence, LIC has to come up with innovative products that are suitable for various customers. b. Consumer Education: Since liberalisation, the market is flooded by a large number of insurers operating in the Indian market. Even with the limited range of products offered by the LIC, customers are confused. Their confusion will further increase in the face of a large number of products, which are offered by the new players. The existing level of awareness of the customers for insurance products is very low, mainly because only 62 per cent of the population of India is literate and less than 10 per cent are well-educated. Even educated customers are ignorant about the various products of insurance. Hence, it is necessary that LIC should undertake an extensive plan for education of customers. This will result in increasing the awareness of the need for insurance, which leads to expansion of market. c. Brand Building: Branding is the new key challenge in the financial services industry. LIC has been successful in creating a strong brand. In rural India, the LIC is especially synonymous with insurance. But in the wake of competition it has to do a considerable brand building exercise at least in urban India since new players are entered in the market. For brand building the LIC may incorporate four fundamental building blocks, such as legitimacy, distinctiveness, relevancy and consistency. Brand building is not easy but companies have to take this as a challenge. d. EService: Internet has brought about a revolution in the way business is done and insurance is no exception to this. According to a recent research by Tower Group, e

service will play a vital role in facilitating the process of servicing insurance products. At present, 60 to 70 per cent of online consumers use the Internet to reach insurance companies and products. The group also expected a significant growth in online sales by 2005, for which Generation Y will be the major contributor. It also expected the personal line property and causality (P&C) premium resulting from online sales to grow significantly by 2005, approaching 3 to 4.5 per cent, which is more than the current industry estimates of only 2 per cent premium resulting from online sales for 2002. LIC needs to take advantage of eservice to serve the consumers online and ensure that its activities are more than mere marketing drives. A better service could, in the course of time, pave the way for better selling, but companies require a good infrastructure for this. LIC may need to add additional infrastructure for using eservice as a way to increase sales. Hence, LIC has to take this as a challenge and try to go for eservice. e. Use of Technology: Technology will play strategic role in providing a competitive edge be it in aiding design and administering of products, or in building lifelong customer relationships. Technology will facilitate and help create brand positioning says Ritu Nanda, Chairperson & CEO, RNIS College of Insurance and Indias top notch LIC agent. Insurance industry is used to having sophisticated mathematical models and statistics to gauge the risk factor involved in insurance. Now, at a time when every business is using technological devices for upgradation of business, the insurance sector cannot be too far behind. f. An Alternative to Reinsurance: Companies are competitive after the liberalization of the insurance industry. New players are offering or proposing to offer customers various insurance products. This benefits consumers, as competition will drive down their prices. How will companies manage this? The answer is reinsurance. Reinsurance is a process by which private insurers transfer some part of their risk to reinsurers. That is, the reinsurer reimburses the private insurer any sum paid to the policyholders against the claims lodged. The need for reinsurance assumes importance given the increasing uncertainty faced by individuals and businesses. g. Concentration on Rural areas: The Malhotra Committee advised that new entrants in life insurance should be required to transact a certain minimum business in rural areas. Besides that advice, there is a lot of untapped market in rural areas. There is need to spread life insurance much more widely to rural areas, and to the socially and economically backward classes with a view to reaching all insurable persons in the country and providing them adequate financial cover against risks at a reasonable cost. Rural and health care insurance, which is presently untapped, will contribute significantly to the growth of insurance business. It is important to take advantage of the immense potential that resides in the rural sector. LIC as a major player in life insurance business with 48,930 rural agents can definitely take this as an opportunity. At the same time this sector provides a number of challenges. h. Poor Service: Most customer complain that agents are interested only in the first premium. Hence, LIC has to motivate their agents to carry out after sales follow-up. Another complaint is about the inflexibility of policies. i. Problems of Surveyors: Shortage of trained surveyors, dishonest practices and instances of collusion, can affect the trust placed in the company. If these problems can be solved, customers can get better service.

j. Organizational Structure: Management of a bureaucratic, top-heavy organization, an unwieldy and difficult-to-manage agency network, powerful and militant trade unions, and a fall in the number of actuaries - all these may be a challenge to LIC of India. Table 2: Insurance Business of LIC New Business All India Rural Year No. of No. of Sum No. of Sum No. of Sum offices policies assured policies assured policies assured (in (Rs. cr) (in (Rs. cr) (in (Rs. cr) lakhs) lakhs) lakhs) 1981- 889 236 23,998 21 3,479 6.9 927 82 1982- 958 243.8 26,264 22.3 3,974 7.3 1,038 83 1983- 1,023 252.7 30,266 23.7 4,387 8.3 1,260 84 1984- 1,107 264.8 33,785 27 5,376 9.5 1,570 85 1985- 1,197 279.9 40,404 32.9 7,056 12.2 2,177 86 1986- 1,280 298 47,906 38.7 9,068 14.8 2,916 87 1987- 1,353 323.5 58,798 46.9 12,435 18.3 3,997 88 1988- 1,427 360.8 74,129 59.8 17,223 24.1 5,818 89 1989- 1,528 403.4 94,408 73.9 23,220 30.5 8,086 90 1990- 1,651 455.1 1,18,651 86.5 28,139 36.8 10,295 91 1991- 1,774 508.6 1,45,929 92.4 32,064 41.3 12,440 92 1992- 1,906 566.1 1,77,268 99.6 35,957 44.4 14,085 93 1993- 2,008 608 2,07,601 107.3 41,814 48.6 16,680 94 1994- 2,021 654.5 2,53,333 108.7 55,229 49 21,571 95 1995- 2,024 708.8 2,94,336 110.2 51,816 52.6 21,264 96 1996- 2,023 776.7 3,43,018 122.7 56,741 60.3 24,279 97 1997- 2,046 849.2 3,98,959 133.1 63,618 68.4 27,551 98 1998- 2,048 916.4 4,57,435 148.4 75,316 81.2 35,373 99 1999- 2,048 1,013.00 5,24,589 169.7 91,214 97 44,169 Business in Force - All India

00 2000- 2,048 01

1,130.20 6,43,241 196.6

1,24,772 109.1

59,641

Table 3: Performance of Private Life Insurance Players (April 2002 - March 2003) No. of Policies Issued ICICI Prudential 2,46,827 Birla Sun Life 1,45,000 HDFC Standard Life 1,42,857 Max New York Life 1,43,000 SBI Life Insurance 18,000 Tata AIG Life Insurance 91,500 Allianz Bajaj 69,656 Om Kotak Mahindra 36,836 ING Vysya 25,000 Aviva Life 20,000 AMP Sanmar 16,000 Met Life 8,686 Total 245,29,946 Conclusion To conclude, what is now required is an assessment of the true insurance needs of the insured, with a priority towards cheap, pure term insurance. This is one sure way of guarding against policy lapses in this long-term contractual commitment. The excessively high commission, skewed in favour of highpremium, returnrelated products, must be dismantled forthwith. Insurance for the sake of insurance must be the mantra, thereby also reducing the influence of taxes that drive insurance. These misconceptions and ethical malpractices by insurance distributors and advisors must be done immediately, before the thrust into the rural markets begins. Only then will the premium inflows be stable and sustainable. References Ajit R. and Rajeev A. (1999): Life Insurance in India: Emerging Issues, Economic and Political Weekly Business India (2002): Precious Life, October 28 November 10 Business Standard: September 20th 2000 and August 12th 2003 Chartered Secretary (2002): The Insurance (Amendment) Bill, 2002, July. Dipen. R. (1998): Foreign Capital in Insurance Sector, The Management Accountant, July Economic Times: January 2003, October 15th 2003, November 5th & 26th 2003 Jawaharlal, U. (2002): Insurance Industry Emerging Trends, The Institute of Charted Financial Analysis of India, Hyderabad Jawaharlal U. (2005): Insurance Industry: The Current Scenario Life Insurance Corporation of India (1991): The LIC Story: Tryst with Trust Malhotra, R.N. (1994): Report of the Committee on Reforms in the Insurance Sector, Ministry of Finance, Government of India Company Premium (Rs.cr) 364.9 170 132.7 76.8 72.8 59.8 53.8 34 17 25 8.3 4 9,688.87

Reddy G. Sudarsana & S. Raghunatha Reddy (2004): Liberalisation of Insurance Sector: Reflections on LIC, Southern Economist, May 15th The Analyst, (2002): Indian Insurance Sector: A Report, July *Shri. M.G. Gachchannavar (M.Com, M.Phil) is Head, Dept. of Commerce, at K.R. Bellad College, Mundargi, Gadag **Dr. Ansuya Angadi. (M.Com.,M.Phil.,Ph.D.) S.S.L. in Commerce, SUBN Theosophical Womens College, Hospet, Dist. Bellary.