Growth and survival strategy for Indian Insurance

companies in
the era of emerging global competition

Abstract

The liberalization of the Indian insurance sector has been the subject of much heated
debate for some years. The policy makers on one hand wanted competition,
development and growth of insurance sector, which is extremely essential for
channeling the investments in to the infrastructure sector. At the other end the policy
makers had also the fear that the insurance premium, which are substantial, would
seep out of the country; and thus in the nation's interest, they want to have a
cautious approach of opening for foreign participation in this sector.

After a long discussion, conferences and fraction among some political parties, IRDA
brought consensus among factions of different political parties. Though some
changes and some restrictive clauses as regards to the foreign participation were
included the IRDA has opened the doors for the private entry into insurance.

The number of potential buyers of insurance is certainly attractive but much of this
population might not be accessible as it will take a long time for us to trust on
private Sector insurance companies and this would be the only major weapon in the
hands of public sector insurance companies to move ahead .Now it would be
interesting to watch that how long domestic companies can reap the fruits of being
Indian and survive and expand in the immense competition from foreign and private
players.

Whether the insurer is old or new, private or public, expanding the market will
present multitude of challenges and opportunities.

The paper will analyze the likely impact of opening up India's insurance sector and
will also suggest growth & survival strategy for Indian Insurance companies.

Main Paper

Indian insurance is on the threshold of deep and fundamental changes. The life
insurance industry was nationalized in 1956 and the general insurance industry in
1972. Before that India had a thriving and competitive insurance industry with
hundreds of private and foreign operators. Indian companies held a 60% market
share even then. Yet, insufficient regulation also meant that there were a number of
abuses.

LIC has just about 100 million policies. This works out to an average of 1.5 policies
per individual. So, only 65 million people are policyholders in India. This translates
into just six to seven per cent of the Indian population. This clearly shows the low
penetration of insurance in India. Currently, it is very difficult to make changes in
policies once they are bought. This has to change. Moreover, to make them
attractive, insurance policies should be made more people-friendly by launching
products such as equity-linked insurance. Such policies can offer higher returns to
investors.

Business And Social Objectives

When LIC was formed in 1956 through the amalgamation of 225 private companies,
its business objectives complemented its social objectives. The main objective is to
spread life insurance to every nook and corner of the country especially rural areas,
to socially and economically backward classes and provide them reasonably-priced
financial cover against death.

Other objectives include encouraging people to save for the future by making
insurance-linked savings more attractive and secure. The funds created are then
utilized and invested for nation building. The insurance business is conducted with
the full realization that LIC is only a trustee of the insured public and priority is given
to meet the needs that arise due to change in the social and economic environments.

Even today after 50 years, the core value of social commitment has not changed.
What have changed in recent times are customers' expectations and the environment
in which the life insurance sector operates. This is due to globalization, which has
opened up the insurance sector to private players.

The liberalization of the Indian insurance sector has been the subject of much debate
for some years. The policy makers were in Dilemma. As some of the them wanted
competition, development and growth of insurance sector which is extremely
essential for channeling the investments in to the infrastructure sector. On the other
end, others had the fears that the insurance premium, which are substantial, would
move out of the country, and wanted to have a cautious approach of opening for
foreign participation in the sector. Some have opinion that large scale of operations;
public sector bureaucracies and cumbersome procedures hampers nationalized
insurers. Therefore, potential private entrants are given entry in this area so the
consumer will gain high customer service, speed and flexibility. They point out that
their entry will mean better products and choice for the consumer. The critics counter
that the benefit will be slim, because new players will concentrate on affluent, urban
customers as foreign banks did until recently.

As one of the rare occurrences the entire debate was put on the back burner and the
IRDA succeed in making political consensus among fractions of different political
parties. Though some changes and some restrictive clauses as regards to the foreign
participation were included the IRDA has opened the doors for the private entry into
insurance.

Key Issue

Whether the insurer is old or new, private or public, expanding the market will
present multitude of challenges and opportunities. But the key issues, possible
trends, opportunities and challenges that insurance sector will have still remains
under the realms of the possibilities and speculation. What is the likely impact of
opening up India's insurance sector?
Thus we would first analyze that what is exact fear for the Indian insurance sector
and is this a realistic .

Fear of declining Market share: An un Realistic Fear

An often-voiced concern is that private players, especially foreign ones, will swamp
the market, grabbing a large share. A similar threat was overplayed in the case of
basic telephone services but still the dominance and market share of DoT has remain
unaltered, even after the private players started their operations. This hypothesis
that the private players would swamp the market has been disproved in many
emerging markets worldwide not only in case of the insurance but also in numerous
different sectors (Power, Energy, Telecom, Insurance etc.). As GIC and LIC are strong
players in their respective business segments. So they may lose some market share,
but not business.

Untapped Opportunities: The Strength for Nationalized Insurance

There is no doubt that the potential market for the buyers of insurance is significant
in India and offers a great scope of growth. While estimating the potential of the
Indian insurance market we often tempt to look at it from the perspective of macro-
economic variables such as the ratio of premium to GDP, which is indeed
comparatively low in India. For example, India's life insurance premium as a
percentage of GDP is 1.3% against 5.2% in the US, 6.5% in the UK or 8% in South
Korea. But the fact is that the large part of the India's (the number of potential
buyers of insurance) is certainly attractive. However, this ignores the difficulties of
approaching this population. Much of the demand may not be accessible because of
poor distribution, large distances or high costs relative to returns.

Benefit of being nationalized

1.Distribution: Since distribution will be a key determinant of success for all

insurance companies regardless of age or ownership. The nationalized insurers
currently have a large reach and presence. New entrants cannot-and does not-expect
to supplant or duplicate such a network. Building a distribution network is expensive
and time consuming. This will restrict new entrants to penetrate in the market easily.

2.Variety of Product: The product policies of Nationalized Insurance companies are

varied and focus the need of Indian customer. Thus even in small village there is a
Nationalized policyholder. New entrant can-not at the initial stage expect the
penetration and variety of product as the small amount of policies will increase their
carrying cost.

3.Trust and Faith: Being government owned subsidiary and existent since 1956,
people of India have real faith and are confident in parting their valuable savings
with Nationalized Insurance Companies.

4.Large Work force of Agent: Being in operation from 1956,Nationalised Insurance

companies have large and scattered human resource, which is very important for
targeting huge mass. The same will not be possible for the new private entrants in
the initial years, and if so they will lack in experience and patience, which is foremost
quality of an agent.
Despite of the above benefit there are many other areas in insurance sector where
with planned strategy the new entrants can penetrate themselves in the market.

Opportunities for New entrants

The new entrants would be best served by micro-level pronged strategies.

1. They can introduce innovative products offering a right mix of

flexibility/risk/return depending which will suit the appetite of the customers

2. They can target specific niches, which are poorly served or are not served
at all.

3. Being the agrarian economy again there are immense opportunities for the
new entrants to provide the liability and risks associated in this sector like
weather insurance, rainfall insurance, cyclone insurance, crop insurance etc.

4. The financial sector is aggressively targeting retail investors. Housing

finance, auto finance, credit cards and consumer loans all offer an opportunity
for insurance companies to introduce new products like creditor insurance etc.
Similarly, organized sector sales of TVs, refrigerators, washing machines and
audio systems. Only a negligible portion of these purchases is insured.
Potential buyers for most of this insurance lie in the middle class. This may be
huge market for new private entrants.

5. The lack of a comprehensive social security system combined with a

willingness to save in India will lead to a large demand for pension products.
However, current penetration is poor. Making pension products into attractive
saving instruments would require only simple innovations already prevalent in
other markets. For example, their returns might be tied to index-linked funds
or a specific basket of equities. Buyers could be allowed to switch funds
before the annuities begin and to invest different amounts at different times

6. Health insurance is another segment with great potential because existing

Indian products are insufficient. By the end of the GIC's Mediclaim scheme
covered only 2.5 million people. Indian products do not cover disability arising
out of illness or disability for over 100 weeks due to accident. Neither do they
cover a potential loss of earnings through disability.

Growth of Insurance Sector Since Private sector entry

The gains are obvious for anyone who has been closely monitoring the Indian
insurance scene. The total premium collected by the insurers both life and non-life in
the year 2003-2004 is Rs.82, 415 crores (Rs.66, 288 crores in life and Rs. 16,127
crores in non-life) compared to Rs. 44, 985 crores (Rs.34, 898 crores in life and Rs.
10,087 crores in non-life) during the year 2000-2001. This represents an 83%
increase in the last three years over the base year 2000-01. This is what we have
witnessed after the opening up of the sector. If we take the three year block prior to
the opening of the sector, we find that the total premium collected in 1997-98 was
Rs.27, 089 crores (life: Rs.19354 crores; non-life Rs.7735 crores) which has grown
to Rs.44, 985 by 2000-2001 representing an increase of 66%. Insurance sector has
obviously started growing at a rapid pace after the sector was opened up. The
private sector accounts for nearly 13% of the first year premium market. The market
share of the private players has to be seen in the context of this enlarged market.
There is also evidence to show that the rate of growth of public sector undertakings
had not shown any decline after the entry of the private sector companies. All of
them are obviously having a share of a larger market. The Credit for enlarging the
market should however, go to the private sector as they came up with an aggressive
marketing strategy to establish their presence.

Date Base

• The total premium underwritten by

life insurance companies in the country during FY2004 was Rs 18,66,939.69

lakh ($4 billion) towards 286.26 lakh policies, recording a growth in premium
and policies underwritten of 10.24 per cent and 12.83 per cent, respectively
over the previous year.

• The non life insurance market grew by about Rs 1,820 crore ($392.8 million)
(13 per cent) to record a premium of Rs 16,130 crore ($3.4 billion), a lot of
which was because of the Rs 1,700 crore ($367 million) (17 per cent) growth
in the miscellaneous business such as motor, health, liability and aviation.
• The spectacular premium driver, motor grew by Rs 1,020 crore ($220 million)
(20 per cent); health by Rs 270 crore ($58.3 million) (27 per cent); liability
by Rs 165 crore ($35.6 million) (100 per cent); aviation by Rs 90 crore
($19.4 million) (25 per cent).
• The traditional fire business grew by Rs 195 crore ($42 million) (6.5 per cent)
and engineering grew by Rs 36 crore ($7.7 million) (5 per cent).

Growth Strategy for Nationalized Insurance Companies

Most of the opportunities and challenges that we have discussed apply equally to
existing and new insurers. It must be emphasized that the opening of the insurance
market is far from a bad thing for nationalized insurers. With a strong presence, a
wide network and considerable brand equity, they are in a good position to tap the
very same segments profitably, while improving their product and service offerings.
The Indian company should Leverage information technology to service large
numbers of customers efficiently and bring down overheads. Technology can
complement or supplement distribution channels cost-effectively. It can also help
improve customer service levels considerably.

Besides this, other areas can be focused to grow and survive in the Indian Market

1. Understanding Customer needs: Use data warehousing, management and

mining to gauge the profitability and potential of various customer and
product segments and ensure effective cross selling. Understanding the
customer better will allow insurance companies to design appropriate and-
customized products, determine pricing correctly and increase profitability.

2. High-level Training and Development: Ensure high levels of training and

development not just for staff but also for agents and distribution
 organizations. Existing organizations will have to train staff for better service
and flexibility, while all companies will have to train employees to cope with
new products and an intensive use of information technology.

3. Alliance&Tieup: The importance of alliances and tie-ups means that

companies will have to integrate related but separate providers into their
systems to ensure seamless delivery.

4. Agent Relationship: Build strong relationships with intermediaries such as

agents.

5. Market Segmentation: They must segment the market carefully to arrive at

the appropriate products and pricing and should cater the needs of every
individual.

6. Revamped Marketing Strategy: Worldwide, insurance products move along

a continuum from pure service products to pure commodity products then
they could be sold through the medical shops, groceries, novelty stores etc.
Once commodization, popularity and awareness of the products are attained
then the products can move to remote channels such as the telephone or
direct mail. In the UK for example, retailer Marks & Spencer now sells
insurance products. At this point, buyers look for low price. Brand loyalty
could shift from the insurer to the seller.

Conclusion

Despite innumerable delays the sector has finally opened up for private competition.
The threat of private players shaking and giving the run for incremental market
share for the Public Sector mammoths has been overplayed. The number of potential
buyers of insurance is certainly attractive but much of this population might not be
accessible for the new insurers. Since distribution will be a key determinant of
success for all insurance companies regardless of age or ownership, Indian Insurance
companies should broden the distribution network. As the product move towards the
mature stages of commodization (increased awareness and popularity) they could
then a host of new channels like grocery stores, direct mails. Regulators must
formulate strong and fair guidelines and ensure that old and new players are subject
to the same rules and at the same time the government should ensure that the IRDA
does not become yet another toothless tiger like CEA or TRAI.

In a reopened Indian insurance market, regulators must formulate strong fair and
transparent guidelines and make sure that old and new players are subject to the
same rules. Companies meanwhile must be prepared to set and meet high standards
for themselves. The big challenge for both companies and regulators is to ensure
that they replicate the benefits of the past while eliminating its ills.

References

www.irda.com
www.licindia.com
www.icicipru.org
www. www.indiainfoline.com/view/1807.html
www.birlasunlife.com/insurancenet
Insurance and risk management by Gupta P K