Impact of Privatization On Insurance Sector

IMPACT OF PRIVATIZATION ON INSURANCE SECTOR
Introduction
Every risk involves the loss of one or other kind. The function of insurance
is to spread the loss over a large number of persons who are agreed to co-
operate each other at the time of loss. The risk cannot is averted but loss
occurring due to a certain risk can be distributed amongst the agreed
persons. They are agreed to share the loss because the chances of loss, i.e.
the time, amount, to a person are not known. Anybody of them may suffer
loss to a given risk so; the rest of the persons who are agreed will share the
loss. The larger the number of such persons, the easier the process of
distribution of loss.
They infact share the loss by payment of premium, which is calculated on

the probability of loss. In olden time, the contribution by the persons was
made at the time of loss. The insurance is also defined as a social device to
accumulate funds to meet the uncertain losses arising through a certain risk
to a person insured against a risk.
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Insurance may be described as a social device to reduce or eliminate risk of

life and property. Under the plan of insurance, a large number of people
associate themselves by sharing risk, attached to individual.
Definition
Insurance is a contract whereby, in return for the payment of premium by the

insured, the insurers pay the financial losses suffered by the insured as a
result of the occurrence of unforeseen events. With the help of insurance,
large number of people exposed to a similar risk makes contributions to a
common fund out of which the losses suffered by the unfortunate few, due to
accidental events, are made good.
General Definition: in the words of John Magee, “insurance is a plan by

which large 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. Hansel, “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 sum of money is paid to the assured as consideration
of insurer’s incurring the risk of paying a large sum upon a given
contingency.”
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History of Insurance in India
Some important milestones in the life insurance business in India

are:
 1818: the first life insurance company known as the oriental life
insurance company was established
 1912: Indian life assurance companies act – first statute to regulate the
life insurance business.
 1928: Indian insurance companies act – government to collect statistical
information about both life and non-life insurance business.
 1938: protecting the interest of the insuring public.
 1956: 245 Indian and foreign insurers and provident societies – central
government and nationalized
Some important milestones in the general insurance business in

India are:
 1907: the Indian mercantile insurance ltd. – transacts all classes of

general insurance business.
 1957: general insurance council – frames a code of conduct.
 1968: the insurance act – regulates investment & set minimum solvency
margins.
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Functions of Insurance
1) Insurance Provides Certainty: -

Insurance provides certainty of payment at the uncertainty of loss.
Better planning and administration can reduce the uncertainty of loss. But
the insurance relieves the person from such difficult task. Moreover if the
subject matters are not adequate, the self-provision may prove costlier. There
are different types of uncertainty in the risk. The risk will occur or not, when
will occur, how much loss will be there? In other words there are uncertainty
of happening of time and the amount of loss. Insurance removes all these
uncertainty and the assured is given certainty of the payment of the loss. The
insurer charge premium for providing the said certainty.
2) Insurance Provides Protection: -

The main function of the insurance is to provide protection against
the probable chances of loss. The time and amount of loss are uncertain and
at the happening of risk, the person will suffer loss in absence of insurance.
The insurance guarantees the payment of loss and thus protects the assured
from sufferings. The insurance cannot check the happening of risk but can
provide for losses at the happening of the risk.
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3) Risk-Sharing: -
The risk is uncertain, and therefore, the loss arising from the risk is
also uncertain. All the persons who are exposed to the risk share when risk
takes place the loss. The risk sharing in ancient time was done only at the
time of damage or death; but today, on the basis of probability of risk, the
share is obtained from each and every insured in the shape of premium
without which the insurer does not guarantee protection.
4) Prevention of Loss: -
The insurance join hands with those in situation which are
engaged in preventing the losses of the society because the reduction in loss
causes lesser payment to the assured and so more saving is possible which
will assist in reducing the premium. Lesser premium invites more business
and more business cause lesser share to be assured. So again premium is
reduced to, which will stimulate more business and more protection to the
masses. Therefore the insurance assist financially to the health organization,
fire brigade, educational institutions, and other organization, which are
engaged in preventing the losses of the masses from death or damage.
5) Insurance Provides Capital: -

The insurance provides capital to the society. The accumulated
funds are invested in productive channel. The dearth of capital of the society
is minimized to a greater extent with the help of investment of insurance.
The industry, the business and the individual are benefited by the investment
and loans of the insurers.
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6) Insurance Improves Efficiency: -

The insurance eliminates worries and miseries of the losses of death
and destruction of property. The carefree person can devote his body and
soul together for better achievement. It improves not only his efficiency, but
the efficiencies of the masses are also advanced.
7) Insurance Economic Progress: -

The insurance by protecting the society from huge losses of
damage, destruction and death, provides an initiative to work hard for the
betterment of the masses. The next factor of the economic progress, the
capital is also immensely provided by the masses. The property, the valuable
assets, the man, the machine and the society cannot lose much at the disaster.
Role of Insurance Sector in India
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 Protection from
Risks arising Out of
Natural Calamities
Insurance has also been playing important role in protecting the industry and
commercial activities from natural calamities like fire, marine losses, floods,
earthquakes, cyclones etc.
 Protection from the Risks Caused by Human Beings

Insurance provides protection against risks caused by human beings such as
strikes by workers, their negligence in carrying out work, theft and dacoity,
evil disturbances and many other such acts. In addition to the issue of
policies against such causes, insurance also issues policies to protect the
industry and commercial institutions from the loss of money in transit.
 Protection against Statutory Liabilities

Insurance also plays the role of protecting the industry and commerce in
fulfilling statutory liabilities towards the workers, arising out of industrial
accidents. The employer is bound to compensate such workers under the
provision of workers' compensation act. In case the employer obtains an
accidental policy in favor of employees; the money to be paid as
compensation to the accident victims, can be chimed from the insurance
company.
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 Financial Security
Insurance provides financial security also to industry and commerce.
Exports of goods to other countries by sea, storage of goods in safe godowns
and various other kinds of financial losses are secured by insurance policies.
 Protection from Loss of Profits

Insurance' also has extended its role of prot6cting different industrial and
commercial activities, it provides protection against losses arising from
shops or factories. It also undertakes to indemnity the loss of profits from
business functions. This way, the loss of profits and property / both are
protected.
 Protection of Debts
A trader can protect himself by taking appropriate policy against the credit
sales or property kept on security against goods or property. Thus, the
insurance protests the trader even in case the debtor dies or of damages to
the goods.
 Provides stability in commercial and industrial activities

Insurance companies extend various kinds of assistance to business
enterprise to run the business regularly and continuously. It plays important
role in partnership business by insuring the life of partners so that in case of
death of any partner, the claim received from the insurance company can be
used for meeting payment to the dependents of deceased partner.
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Meaning of Privatization
Privatization in narrow sense implies the introduction of private ownership

in public owned enterprises but in the broader sense, besides private
ownership, the introduction of private management and control in the public
sector enterprise. The transfer of ownership of property or businesses from a
government to a privately owned entity. The transition from a publicly
traded and owned company to a company which is privately owned and no
longer trades publicly on a stock exchange.
When a publicly traded company becomes private, investors can no longer

purchase a stake in that company. Privatization of publicly owned operations
is the estimated increases in efficiency that can result from private
ownership. The increased efficiency is thought to come from the greater
importance private owners tend to place on profit maximization as compared
to government, which tends to be less concerned about profits.
Most companies start as private companies funded by a small group of

investors. As they grow in size, they will often access the equity market for
financing or ownership transfer through the sale of shares. In some cases, the
process is subsequently reversed when a group of investors or a private
company purchases all of the shares in a public company, making the
company private
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Definition
Barbara Lee and John Nellis defines the concept of privatization as

“privatization is the general process of involving the private sector in the
ownership or operation of the state owned enterprises”
History of Privatization
Privatization gathered momentum around mid 1980’s and since then has
become the hallmark of new wave of economic reforms sweeping
across the world. Today more than 10000 states owned enterprise has
been privatized in over 90 countries. The trends towards privatization
have been observed in developed and the developing economies, in
market oriented and socialist including communist countries.
The basic reason for privatization is the growing disappointment with the
functioning of the public sector undertaking and state owned enterprises.
Besides Uk, Argentina, Brazil, Germany, France, Italy, Japan, Mexico,
Nigeria, Spain, turkey etc has announced the policy of privatization. As far
as India is concerned it has deregulated or liberalized the industrial sector in
varying degree.
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Privatization of Insurance Sector
The millennium has exposed the insurance sector to new challenges of

competition and struggle for survival in this era of privatization,
liberalization, deregulation and globalization. The government nationalized
private insurance companies in 1956 Life Insurance Corporation of India
(LIC) followed by general insurance 1972 to bring this sector under
government control.
Two governments fell over the liberalization of insurance sector. After 40

years of government Protestantism of this massive sector, the new
government initiated the process of opening this sector to private Indian
business houses as well as international players. Although the growth of
Indian industry has been slow for the last decade’s the state owned insurance
companies have grown creating only inefficiency. Gradually as competition
increased, the benefits given by the industry to its customers improved by
leaps and bounds. The opening up of the sector has posed new challenges for
the public sector insurance companies.
Prior to liberalization, the regulatory environment was primarily based on

consolidated provision of the insurance act 1938 and the controller of
insurance had wide raging powers. After nationalization, much of the powers
of the controller of insurance were abridged for operational convenience of
state owned LIC and GIC. In 1993, Malhotra committee was constituted to
review insurance regulations and carry reforms.
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Benefits of Privatization
1. Creation of Jobs
New insurance companies are expected to help in expanding the
employment resulting in more employment opportunities. Greater the market
expands, higher the opportunity for new employment.
2. New and Innovative Business

Privatization leads to the development of new and innovative products in the
field of life & general insurance. Entry of foreign players with their
professional approach and innovative temperament will accelerate the trend
of introducing tailor-made, need-based business.
3. Greater Management Skill

Entry of global insurance giants with much more risks management skills
and greater risk absorbing capacity will ensure introduction of products
having deeper and wider insurance converge. New entrants will like to focus
on their new area and thus opting to offer products with new coverage.
4. Greater Operation of Freedom
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Investment managers in private sector enjoy greater operational freedom

than their counterparts in the public sector and consequently the private
companies can expect to obtain a better yield on investments than life
insurance & general insurance corporations.
5. Customer Needs and Service

This impetus of liberalization will see the industry transforming approach
towards its customer. Unfortunately in recent past there have been much lip
talks on this than any actual improvement coming up from public sector
insurers. Relieved from bureaucratic shackles, industry could become more
sensitive towards customer-needs and service.
6. Expansion of Insurance Market

Greater the expansion of insurance market, higher the opportunity for so
many other sector of the economy to grow. This can provide a sustained
market for a variety of businesses like, market for hardware and software
products, training institutes and professional services such as legal,
consultancy, financial, intermediary.
7. Social Security
The new era of liberalized insurance sector will ensure over all economic
growth of the country and bring more and more people under the coverage
of insurance. This will ensure extending the benefits of social security to
large sections of our population. The left trade unions have expressed some
reservation and apprehensions in allowing private entry on the following
grounds.
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Two Committee Reports: one known, one unknown
Although Indian markets were privatized and opened up to foreign

companies in a number of sectors in 1991, insurance remained out of bounds
on both counts. The government wanted to proceed with caution. With
pressure from the opposition, the government (at the time, dominated by the
congress party) decided to set up a committee headed by
Mr. R. N. Malhotra (the then governor of the reserve bank of India).
Malhotra Committee Recommendation on Privatization
R. N.Malhotra
In 1993, Malhotra committee- headed by former finance secretary and RBI

governor r.n. Malhotra- was formed to evaluate the Indian insurance industry
and recommend its future direction. The Malhotra committee was set up
with the objective of complementing the reforms initiated in the financial
sector. The reforms were aimed at creating a more efficient and competitive
financial system suitable for the requirements of the economy keeping in
mind the structural changes currently underway and recognizing that
insurance is an important part of the overall financial system where it was
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necessary to address the need for similar reforms. In 1994, the committee
submitted the report and some of the key recommendations included:
I) Structure
Government should take over the holdings of GIC and its subsidiaries so that
these subsidiaries can act as independent corporations. All the insurance
companies should be given greater freedom to operate.
II) Competition
Private companies with a minimum paid up capital of rs.1billion should be

allowed to enter the sector. No company should deal in both life and general
insurance through a single entity. Foreign companies may be allowed to
enter the industry in collaboration with the domestic companies.
III) Regulatory body
The insurance act should be changed. An insurance regulatory body should

be set up. Controller of insurance- a part of the finance ministry- should be
made independent
IV) Investments
Mandatory investments of LIC life fund in government securities to be

reduced from 75% to 50%. GIC and its subsidiaries are not to hold more
than 5% in any company (there current holdings to be brought down to this
level over a period of time)
V) Customer service
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LIC should pay interest on delays in payments beyond 30 days. Insurance

companies must be encouraged to set up unit linked pension plans.
Computerization of operations and updating of technology to be carried out
in the insurance industry the committee emphasized that in order to improve
the customer services and increase the coverage of insurance policies,
industry should be opened up to competition.
Mukherjee Committee
Immediately after the publication of the Malhotra committee report, a new

Committee (called the Mukherjee committee) was set up to make concrete
plans for the requirements of the newly formed insurance companies.
Recommendations of the Mukherjee committee were never made public.
But, from the information that filtered out it became clear that the committee
recommended the inclusion of certain ratios in insurance company balance
sheets to ensure transparency in accounting. But the finance minister
objected. He argued (probably on the advice of some of the potential
entrants) that it could affect the prospects of a developing insurance
company.
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Entrepreneurial Opportunities After Privatization
The insurance industry in India has seen lot of changes since the opening of
this sector for private population. Innovation on the service front include
providing call centre facilities, providing personalized planning looks,
servicing of product and the most recent one is the introduction of third party
administrations.
The various insurance intermediaries from and marketers perspective is:
(1) brokers.
(2) third party administrators
Brokers
IRDA’s annual report 2001-2002 describes brokers an “insurance brokers”,
as are expected to fill the void in of providing for specific insurance needs of
the clients by assessing the risk on behalf of client, advise on the mitigation
of the specified risk, identifying the optimal insurance policy structure,
being together the insured and the insures, carry out work preparatory to
insurance contracts and where necessary to assist in the administration and
performance of such contracts, in particular when the claim arises.
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As per the said guidelines brokers are divided into following categories;
(1) Direct broker
(2) Reinsurance broker
Direct Broker
Direct broker means an insurance broker who for the time being
licensed by the authority to act as such, for the remuneration carries out
the function as specified under the regulation in the field of life insurance
or on behalf of his clients.
Functions of direct broker

 Obtaining detailed information of the client’s business and risk
management philosophy.
 Rendering appropriate insurance cover and terms.
 Maintaining detailed knowledge of available insurance markets, as
may be applicable.
 Assisting in negotiation of the claims
 Maintaining proper records of claims
Re-insurance Broker
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Re-insurance broker means “an insurance broker who, for

remuneration, arranges reinsurance for direct insurers with insurance and
re-insurance companies”
Functions of Re-insurance Broker

 Familiarizing himself with the clients business and risk retention
philosophy.
 Rendering consultancy and risk management services for reinsurance
 Selecting and recommending a reinsurer or group of re-insurers
 Negotiating with a reinsurer on the client behalf
Third Party Administrators

These are new breed of intermediaries in the life insurance
sector, which facilitate the access of the policyholders to a network of
hospitals. Third party administrators maintains the databases of
policyholders and issue them identity cards with unique identification
number and handle all the post policy issues including claim settlements.
They run a 24-hour toll-free number, which can be accessed form anywhere
in the country .third party administrators license is granted to companies
registered under companies’ act, 1956 having a minimum paid up capital of
Rs 1.00 crores with foreign participation not exceeding 26%. License is
usually granted for period of three years.
Marketing Challenges before Entrepreneurs

1) Life Insurance
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Product:
Endowment
plans
Term Money
assurance back plans
Whole life Endowment +

money back whole life
Pension Plans at a Children

plan glance Policy
Investment Handicapped
plans policy
Medical High risks low

Insurance premium
Whole life
policy
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 at specified dates at
periodic intervals or an 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, which eliminates risk, substituting certainty for
uncertainty and comes to the timely aid of the family in the unfortunate
event of the death of the breadwinner.
2) Pricing
In the insurance business the pricing decisions are concerned with:
 The premium charged against the policies.
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 Interest charged for defaulting the payment of premium and credit

facilities,
 Commission charged for underwriting and consultancy activities.
With a view of influencing the target market or prospects the
formulation of pricing strategy becomes significant .in a developing
country like India where the disposable income in the hands of
prospects is low, the pricing decision also govern the transformation
of potential policyholders into actual policyholders.
 The strategies may be high or low pricing keeping in view the level or
standard of customers or the policyholders. The pricing in insurance is
in the form of premium rates. The three main factors used for
determining the premium rates under a life insurance plan is mortality,
expense and interest.
 The premium rates are revised if there are any significant changes in
any of these factors.
3) Promotion
The insurance services depend on effective promotional measures. The
magnitude of dependence in case of insurance services is high. Creation of
awareness is found very much instrumental in the generation of impulsing
buying. In a country like India the rate of illiteracy is very high and the rural
economy has dominance in the national economy. It is essential to have both
personal and impersonal promotion strategies. The selection of agents and
rural career agents and imparting them proper training facilities to create
impulse buying is important.
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4) Physical Distribution
Distribution is a key determinant of success for all insurance companies.
Today the nationalized insurers have large reach and presence in India. New
entrants cannot duplicate such a network. Building a distribution network is
very expensive and time consuming. If the insurers are willing to take
advantage of India’s large population and reach a profitable mass of
customers then new distribution avenues and alliance will be necessary. This
is true for nationalized corporation which have to find fresh avenues to reach
new and existing customers.
5) Physical Evidence
Physical evidence is the environment in which the service is delivered and
where the company and the customers interact and any tangible goods that
facilitate the performance and communication of the service. Services are
intangible and heterogeneous. Intangibility means that services cannot be
displayed, physically demonstrated or illustrated; heterogeneity means that
consumers cannot be certain about performance on any given day. It plays a
major role in enhancing customers’ perception of the service quality.
However, in case of insurance sector, the customer rarely visits the insurance
company. The customer comes mostly only in contact with the service
provider.
Insurance service Tangibles as physical evidences
1 Policy documents
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2 Brochures
3 Periodic statements
4 Renewal notices
5 Business cards
6 Stationary
7 Calendar, diaries
8 Letters/cards
9 Website
5) Process
The process should be customer friendly in insurance industry. The speed
and accuracy is of great importance. The processing method should be easy
and convenient to the customers. Installment schemes should be streamlined
to cater the ever-growing demands of the customers. It and data warehousing
will smoothen the process flow. Information technology will help in
servicing large number of customers efficiently and bring down overheads.
Technology can either complement or supplement the channels of
distribution cost effectively; it can also help to improve customer service
levels.
6) People
Understanding the customer better allows designing appropriate products.
Being a service industry, which involves a high level of people interaction, it
is very important, to use this resource efficiently in order to satisfy
customers. Training, development and strong relationships with
intermediaries are the key areas to be kept under consideration. Training the
employees, use of information technology for efficiency both at the staff and
agent level is one of the important areas to look into.
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7) Place
Place mix can be defined as the “physical distribution i.e. the delivery
of goods/ services at the right time at the right place to the
customers.” Place decisions involve building relationships with the
wholesalers, retailers and through these intermediaries building
relationships with the customers. Products and services must be at the
right place, at the right time in order to be consumed. Probably the
best way to perceive place is to think of the flow of products from
manufacturer through intermediaries to the consumer or user. This
flow can be thought of as a channel used to move goods and services.
The channel of distribution is a component of the place mix:
Channels:
According to Philip Kotler, “channels are sets of interdependent
organizations involved in the process of making the product or service
available for use or consumption” marketing channel decisions are
among the most critical decisions facing the management.”
The channels chosen intimately affect all the other marketing
decisions.
In case of insurance sector, the following channel of distribution is followed

according to the target market:
Channels
Direct selling  Agents
 Financial advisors
 Call centres
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Partner selling  Banc assurance

 Postal department
 Selling through corporate
Direct Selling:
 Agents:
The agents are selected and recruited by the development officer of
the insurance company. These agents inform the customers about the
various insurance policies offered by the company and convince them
to buy these policies.
 Financial Advisors:
The customers regarding their financial matters also consult the
financial advisors. These advisors suggest their clients to get their
goods insured against any calamity or risk. Hence they act as a
channel in distribution of insurance.
 Call Centres:
The people who require insurance call up the call centres. These call
centres send their direct marketing agents who go to the customer’s
place and sell the insurance policy.
Financial Services
Partner Selling:
 Banc assurance:
Banking Insurance
Banc assurance
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Bancassurance
With the evolution of interconnected financial services, banks are

converting themselves into ‘one stop financial supermarkets’. This
has promoted two big classes of financial institutions: banks and
insurance companies to combine and deliver an innovative product
i.e. Banc assurance. In banc assurance, the insurance products are sold
through the banks network of branches. Om Kotak Mahindra has tie-
up with Dena bank, by which former doesn't entertain banc assurance
with any other bank and the latter also doesn't distribute policies of
any other insurance company
Primary Factors Influencing Purchase Decisions

Consumers of insurance products are mainly
influence by various social, psychological and demographical factors but
here are some primary factors about the insurance purchasing decisions.
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Brand: -
The consumers give most preference to the popular brand that has achieved
the highest safety in the insurance market. Consumers feel trust about the
popular brands and more inclined towards them among the surveyed mostly
people are branding aware and the most recalled brand was LIC after that
ICICI Prudential, Birla Sun Life, Bajaj Allianz were the few one.
Life stage: -
Life stage plays an important part in the purchasing decision of the customer
as youngsters are more inclined towards short term policies while middle
age people are inclined towards family safety.
Service:-
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General image about the service of the insurance companies plays an

important part in the decision-making. Companies with higher customer
satisfaction and hassle free claims get maximum market share.
Advice:-
Mostly consumers don’t believe in the advisors but believe in their close
friends and wife. In fact wife plays an important part in decision making.
Product:-
After evaluating all these criteria people evaluate product feature. The
product having most customer needs satisfying features sells the more.
Price:-
Price plays an important role in purchasing behavior of consumers. Insurer
with competitive price and more coverage with fewer premiums take the
maximum market share.
Regulation Governing Insurance
Some of the important acts, which have been passed in India to regulate
insurance industry, are mentioned here:
Insurance Act 1938:
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It was the first comprehensive piece of insurance legislation in the country

governing both life and non life insurance business. It was aimed to prevent
the growth of mushrooming companies and to prevent misappropriation of
funds and to protect assets. This act had a strict control over the insurance
business and was amended from time to time. Till 1945, it was amended 6
times. Under the chairmanship of Shri Kavasji Jahangir, a committee was
appointed to investigate all the misconduct of insurance business. According
to this act, the central government had control over the insurance business
through the controller of insurance. The insurance companies must follow
the rules and regulations else they would be penalized.
To prevent the growth of insurers of small financial resources, this act

provided for registration of all insurers and a substantial deposit in the RBI.
Further under this act, no person shall, after the commencement of this act,
begin to carry any class of insurance business in India and no insurer
carrying on any class of insurance business in India shall after the expiry of
3 months from the commencement of this act, continue to carry on any such
business unless he obtained the certificate of registration for the particular
class of insurance business.
Life Insurance Corporation Act 1956
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Life insurance business in India was nationalized with effect from January
19, 1956.on the date, 16 non Indian insurers operating in India and 75
provident societies were taken over by government of India. This act came
into effect from July 1st 1956. Life Insurance Corporation of India
commenced its functioning as a corporate body.
Under this act, LIC shall be a body having perpetual succession and a
common seal with power, subject to the provisions of this act to acquire,
hold and dispose of property and may by its name sue and be used.
The original capital of the corporation shall be Rs 5 crores provided by the
government and the terms and conditions relating to the provisions of capital
shall be determined by the central government.
It is the general duty of the corporation to carry on life insurance business
whether in India or outside, and the corporation shall exercise its powers
under this act towards the development of life insurance business to the best
of the advantage of the community.
Insurance Regulatory and Development Authority (IRDA)
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Reforms in the insurance sector were initiated with the passage of the IRDA
bill in December 1999. It was set up as an independent body and it has been
able to frame globally compatible legislations. The IRDA was set up to
protect the interests of holders of insurance policies, to regulate, promote
and insure orderly growth of the insurance industry and for matters
connected therewith or incidental thereto.
This act extends to whole of India. With the establishment of this act,
government amended insurance act 1938, life insurance act 1956 and general
insurance act 1972.irda was formed on the recommendations of Malhotra
committee. In 1999 government of India has set up Malhotra committee to
examine the structure of insurance industry and recommend changes, under
R.N Malhotra –former governor of RBI.
Role of IRDA.
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 IRDA is the sole authority for awarding licenses. There is no restriction

in the number of licenses it can issue, but licenses for life and non-life
business are to be issued separately. Licenses are issued only on a
national basis. The new players should commence business within 15-18
months of getting the license. A new applicant has to pay a registration
fee of Rs. 50,000. At the time of renewal of registration every year, a fee
of 0.20 per cent of 1 per cent of the gross premium or Rs 50,000
whichever is higher, is levied on the insurers carrying out insurance
business in India.
 All insurance intermediaries, such as agents and corporate agents, have to

undergo compulsory training prior to their obtaining a license. IRDA also
specified the minimum educational qualifications for these
intermediaries. IRDA conducts examinations and then issues licenses to
these agents. IRDA believes that well-trained and informed
intermediaries can service the consumers better. IRDA insured or re-
newed 1,18,154 agents licenses by the end of March 2001.
 The insurance association and life insurance and general insurance

councils have been revived and they are responsible for setting the norms
for market conduct, ethical behavior of the insurers, and breach of
regulations. Continuous training has been stipulated to enhance the
efficiency of the intermediaries. New players have set up call centres,
which are functioning on 24/7 basis.
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 IRDA has recognized the actuarial society of India and insurance institute
of India as nodal organizations responsible for actuarial and insurance
education. IRDA has drafted separate bills of the actuarial society of
India and the institute of surveyors and loss assessors in order to grant
them statutory status.
 IRDA has also entered into an mod with the Indian institute of
management, Bangalore, to further its objective of insurance research and
education. It has set up a risk management resource centre in Bangalore.
 IRDA has come out with the insurance advertisement and disclosure
regulations to ensure that the insurance companies adhere to fair trade
practices and transparent disclosure norms while addressing the
policyholders or the prospects.
Potentials for Private Players
33
 Size of the Market.

The potential market is estimated at 312 million people. Some
estimates suggest that only 25 percent insurable population has taken up the
insurance policies. According to national council for applied research, 50
million people have the capacity to pay an annual premium of Rs. 10,000,
100 million have the capacity to pay annual premiums of Rs. 7,000 and
another 50 million have the capacity to pay Rs. 3,500 per annum. Thus, there
is a huge market to be tapped.
 Low Penetration Ratio.

The penetration ratio is extremely low in India. Per capita
insurance premium in India, in 1999, was $ 8 only as against $ 4,800 in
Japan. In the year before that the per capita long term insurance was
estimated at $ 5 (Rs. 202) only. The life insurance premium was only 1.4
percent of GDP. The penetration of non-life business is still lower at Rs.
81.26 or 0.56 per cent of GDP. LIC and GIC have been able to tap only 10
per cent of the market and 90 per cent of the market is still untapped.
 Growth in Economy & Insurance Business.
34
The economy has grown at the rate of 5.6 per cent per annum during 1990’s.
The gross domestic savings are around 25 per cent, which has the potential
to grow to 45 per cent. The insurance business life and non life has been
showing growth rate of 17 and 12 percent respectively. Therefore, there is
need to have more players in the field.
 Good Prospects for Rural & Social Sector.

The break through its notification has ensured that the insurers do not ignore
the rural and social sectors. Since, they have statutory obligation to do
business in these sectors. The two sectors will get benefit.
 Funds for Development of Economy.

Insurance funds are a good source for long-term needs of funds in an
economy. The untapped market has great potential for providing funds for
the long-term projects, particularly, in the infrastructure.
 The Regulatory Framework.

The government in 1998 opened the insurance sector. The requisite
regulatory framework has been put in place by IRDA, through various
notifications. The IRDA and advisory committee have started functioning;
35
therefore, the private sector will work according to the guidelines given to
them.
New Innovative Products
Unit linked plans
ULIP stands for unit linked insurance plan. It provides for life insurance
where the policy value at any time varies according to the value of the
underlying assets at the time. ULIP is life insurance solution that provides
36
for the benefits of protection and flexibility in investment. The investment is

denoted as units and is represented by the value that it has attained called as
net asset value (NAV). ULIP came into play in the 1960s and is popular in
many countries in the world. The reason that is attributed to the wide spread
popularity of ULIP is because of the transparency and the flexibility which it
offers.
The main intent of the guidelines was to ensure that they lead to greater
transparency and understanding of these products among the insured,
especially since the investment risk is borne by the policyholder. It is the
endeavor of IRDA to enable the buyer to make the most informed decision
possible when planning for financial security. We hope the following faqs
will enable a better insight to all buyers about the character and features of
unit linked products.
Conditions for Success of Private Insurers
 Constantly analyze the challenges and market opportunities in order to

estimate the targets
 Introduce simple new products, which should be economical, and result
oriented.
37
 Provide new economical products with competitive prices.

 Focus on aggressive advertising
 Provide proper training facilities to the intermediaries in order to enhance
their efficiency
 Appoint trained and professional agents as intermediaries to develop and
expand insurance market.
 Provide after sales services at the time of processing a claim,
documentation and settlement of claims.
 Build up a large network of office in order to take insurance close to the
insuring public.
 Use innovative technology to design and administer insurance products.
 Emphasis on the sale of wants satisfying utilities.
 Focus on direct selling or use bank network in order to sell insurance
products.
Private Life Insurance Players
1) HDFC-Standard Life
HDFC standard life insurance company is a joint venture between India’s

largest housing finance provider-HDFC and Europe’s largest mutual life
assurance company-the standard life assurance company (UK). HDFC
38
standard life insurance company limited is the first private sector life
insurance company to be granted a license
Foreign Partner;
Standard life, UK founded in 1825, has been at the forefront of the UK
insurance industry for 175 years by combining sound financial judgment
with integrity and reliability. It is the largest life insurance company in
Europe and has total assets of Rs 5,50,000 crore. It is the very few insurance
companies in the world to have achieved ‘AAA’ rating from form two of the
leading international credit rating agencies, moody’s and standard & poor’s.
Products Offered
(i) Endowment assurance plan
(ii) Money back policy
(iii) Development insurance plan
1) ICICI Prudential Life Insurance
ICICI prudential life insurance is a joint venture between the ICICI

group and prudential plc of the UK. ICICI started off its operations in
39
1955 with providing finance for industrial development, and since

then it has diversified into housing finance, consumer finance, mutual
funds to being a virtual universal bank and its latest venture life
insurance.
Foreign Partner
Established in 1848, prudential plc, of UK has grown to be the largest
life insurance and mutual fund company in UK. Prudential PLC has
had its presence in Asia for the past 75 years catering to over 1 million
customers across 11 Asian countries. Prudential is reputedly the
largest life insurance company in the United Kingdom.
Future Prospect of Private Insurance Players
With the initiation of the deregulation in the Indian insurance market, the
monopoly of big public sector companies in life insurance as well as general
40
(non-life insurance) market has been broken. New private players have
entered the market and with their innovative approaches and better use of
distribution channels and technology, they are eating in to the shares of
established public sector companies in Indian insurance market.
Since the deregulation has been put in to place, the market share of LIC has
come down to 71.4% in life insurance market while the private players have
captured around 17% market in the general insurance segment. Having said
that, public sector insurance companies such as LIC and new India assurance
are registered impressive double-digit growths, which reflects on the overall
health of the Indian insurance sector. India is currently undergoing rapid
changes mainly because of the liberalization of the economy. Along with the
economic changes, political attitudes, social values, cultural patterns and
social structures are also rapidly changing and affecting one another.
Conclusion
 It seems unlikely that the LIC and the GIC will shrivel up and die
within the next decade or two.
41
 The IRDA has taken a "slowly" approach. It has been very cautious in
granting licenses. It has set up fairly strict standards for all aspects of
the insurance business (with the probable exception of the disclosure
requirements). The regulators always walk a fine line.
 Too many regulations kill the incentive for the newcomers; too
relaxed regulations may induce failure and fraud that led to
nationalization in the first place.
 India is not unique among the developing countries where the

insurance business has been opened up to foreign competitors. The
openness of the market did not mean a takeover by foreign companies
even in a decade.
 Competition will surely cause the market to grow beyond current

rates, create a bigger "pie," and offer additional consumer choices
through the introduction of new products, services, and price
options.
 Public and private sector companies will be working together to

ensure healthy growth and development of the sector.
 The market is now in an evolving phase where one can expect a lot
of actions in coming days. The current impediments for foreign
participation – like 26% equity cap on foreign partner, ill defined
regulatory role of (insurance regulatory development authority-
42
the watchdog of the industry) in pension business etc.—are

expected to be removed in near future.
 The early-adopters will then have a clear advantage compared to

laggards in gaining the market share and market leadership. The
will need to make sure right now that their entire infrastructure is
in place so that they can reap the benefit of an "unlimited
potential."
BIBLIOGRAPHY
 REFERENCES:
43
Websites-
www.sbiindia.co.in
www.sbilife.co.in
www.irdaindia.org
www.liccouncil.org
www.businessconnect.com
ttp://en.wikipedia.org/wiki/consumer_psyche
44

Impact of Privatization On Insurance Sector

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IMPACT OF PRIVATIZATION ON INSURANCE SECTOR

They infact share the loss by payment of premium, which is calculated on

Insurance may be described as a social device to reduce or eliminate risk of

Insurance is a contract whereby, in return for the payment of premium by the

General Definition: in the words of John Magee, “insurance is a plan by

Fundamental Definition: in the words of D.S. Hansel, “insurance may be

Contractual Definition: in the words of JUSTICE TINDALL, “Insurance

History of Insurance in India

Some important milestones in the life insurance business in India

Some important milestones in the general insurance business in

 1907: the Indian mercantile insurance ltd. – transacts all classes of

1) Insurance Provides Certainty: -

2) Insurance Provides Protection: -

5) Insurance Provides Capital: -

6) Insurance Improves Efficiency: -

7) Insurance Economic Progress: -

Role of Insurance Sector in India

 Protection from the Risks Caused by Human Beings

 Protection against Statutory Liabilities

 Protection from Loss of Profits

 Provides stability in commercial and industrial activities

Privatization in narrow sense implies the introduction of private ownership

When a publicly traded company becomes private, investors can no longer

Most companies start as private companies funded by a small group of

Barbara Lee and John Nellis defines the concept of privatization as

Privatization of Insurance Sector

The millennium has exposed the insurance sector to new challenges of

Two governments fell over the liberalization of insurance sector. After 40

Prior to liberalization, the regulatory environment was primarily based on

2. New and Innovative Business

3. Greater Management Skill

4. Greater Operation of Freedom

Investment managers in private sector enjoy greater operational freedom

5. Customer Needs and Service

6. Expansion of Insurance Market

Two Committee Reports: one known, one unknown

Although Indian markets were privatized and opened up to foreign

Malhotra Committee Recommendation on Privatization

In 1993, Malhotra committee- headed by former finance secretary and RBI

Private companies with a minimum paid up capital of rs.1billion should be

III) Regulatory body

The insurance act should be changed. An insurance regulatory body should

Mandatory investments of LIC life fund in government securities to be

LIC should pay interest on delays in payments beyond 30 days. Insurance

Immediately after the publication of the Malhotra committee report, a new

Entrepreneurial Opportunities After Privatization

Functions of direct broker

Re-insurance broker means “an insurance broker who, for

Functions of Re-insurance Broker

Third Party Administrators

Marketing Challenges before Entrepreneurs

Whole life Endowment +

Pension Plans at a Children

Medical High risks low

Life insurance is a contract for payment of a sum of money to the person

 Interest charged for defaulting the payment of premium and credit

Insurance service Tangibles as physical evidences

In case of insurance sector, the following channel of distribution is followed

Partner selling  Banc assurance

With the evolution of interconnected financial services, banks are

Primary Factors Influencing Purchase Decisions

General image about the service of the insurance companies plays an