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INSURANCE AND BANKING

FDI and Indian Government policy


related to Insurance

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OBJECTIVE OF THE PAPER


India is the third most attractive foreign direct
investment destination in the world. The Indian
insurance companies offer a comprehensive range of
insurance plans. Due to the growing demand for
insurance, more and more insurance companies are
now emerging in the Indian insurance sector. The
present paper aims to study the pattern of FDI in
Insurance Sector and the Government regulation in
the said sector. The paper studies current trend in
Insurance sector, the challenges and the prospects
ahead
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INSURANCE REGULATION IN INDIA


Insurance in India started without any regulations
in the nineteenth century
After the independence, the Life Insurance
Company was nationalized in 1956, and then the
general insurance business was nationalized in
1972
Only in 1999 private insurance companies were
allowed back into the business of insurance with a
maximum of 26 per cent of foreign holding
(World Bank Economic Review 2000).
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Contd.
Insurance in India used to be tightly regulated and
monopolized by state-run insurers.
The Insurance Regulatory and
Development Authority (IRDA)
Act of 1999 was passed
The insurance business was
opened on two fronts
Firstly, domestic private-sector
companies were permitted to
enter both life and non-life insurance business
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RegUlaTion conTd
Secondly, foreign Companies were allowed to
participate, albeit with a cap on shareholding at
26%
Since its inception IRDA has been taking steps
to promote insurance sector and also protect
interest of people
A number of reforms have been introduced by
IRDA regarding regulation of agents,deciding
about premium, marketing strategies etc
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Milestones of insurance
regulations in the 20th Century
1912 First piece of insurance regulation promulgated
Indian Life Insurance Company Act, 1912
1928 Promulgation of the Indian Insurance Companies
Act
1938 Insurance Act introduced, the first comprehensive
legislation to regulate insurance business in India
1956 Nationalisation of life insurance business in India
1972 Nationalisation of general insurance business in
India
1993 Setting-up of the Malhotra Committee
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1994 Recommendations of Malhotra Committee released


1995 Setting-up of Mukherjee Committee
1996 Setting-up of an (interim) Insurance Regulatory
Authority (IRA)
1997 Mukherjee Committee Report submitted but not made
public
1997 The Government gives greater autonomy to LIC, GIC
and its subsidiaries with regard to the restructuring of boards
and flexibility in investment norms aimed at channellizing
funds to the infrastructure sector

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1998 The cabinet decides to allow 40% foreign equity in


private insurance companies 26% to foreign companies and
14% to non-resident &investors (FIIs)
1999 The Standing Committee headed by Murali Deora
decides that foreign equity in private insurance should be
limited to 26%
The IRA Act was renamed as the Insurance Regulatory and
Development Authority (IRDA) Act
1999 Cabinet clears IRDA Act
2000 President gives assent to the IRDA Act

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INSURANCE IN INDIA
Insurance in India remains at an early stage of development
It can be postulated that by 2014 the penetration of life
insurance in India will increase to 4.4% and that of non-life
insurance to 0.9%
Indian insurance market is the 19th largest globally and ranks
5th in Asia
The public sector Insurance companies have continued to
dominate the insurance market
Enjoying over 90 per cent of the market share. In fact, the
LIC, which is the only public sector life insurer, enjoys over
98 per cent of the market share in Life insurance

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Type of
Business

NOS OF PUBLIC
SECTOR
COMPANIES

NOS OF PRIVATE
SECTOR
COMPANIES

TOTAL

Life insurance

01

12

13

General
insurance

06

08

14

Reinsurance

01

01

Total

08

20

28

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10

Market Share of Life and non-Life Insurance Sectors


INSURANCE SECTOR

LIFE INSURANCE

2001-2002

PRIVATE
SECTOR
PUBLIC
SECTOR

GENERAL
INSURANCE

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PRIVATE
SECTOR
PUBLIC
SECTOR

2002-2003

0.54

1.99

99.46

98.01

3.68

8.64

96.32

91.36

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Contd..
The Indian insurance market it accounts for only
2.5% of premiums in Asia, it has the potential to
become one of the biggest insurance markets in the
region
India is among the most promising emerging
insurance markets in the world

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FDI IN INSURANCE

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India is the third most attractive foreign


direct investment destination in the
world
The present figure of FDI in insurance
sector is 26%
The proposal to hike that figure to 49%
India received approximately US$25
billion worth of FDI in 2007-2008; that
number increased to US$27 billion in
2008-2009
While no target has been fixed for the
financial year 2009-10, so far FDI
inflows for April and May 2009 have
surpassed US$4.4 billion
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The SWOT Analysis Of Indian


Economy For Insurance Sector
The present increase in FDI would benefit Indian
economy
There are vast opportunities in Indian market both for
domestic and foreign players
The insurance sector in India is slated to grow to beyond
Seventy Billion Dollars by the fiscal year 2011
Despite the formidable success achieved by LIC, the
government has noted that only by bringing in more FDI
can they create an environment for Investment in
insurance by the average middle class Indian and
otherwise
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SWOT ANALYSIS
STRENGHTS

WEAKNESS

A range of new products had been


launched to cater to different
segments of the market, while
traditional agents were
supplemented by other channels
including the Internet and bank
branches
These developments were
instrumental in propelling
business growth, in real terms, of
19% in life premiums and 11.1%
in non-life premiums between
1999 and 2003.

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India is among the lowest-spending


nations in Asia in respect of purchasing
insurance (China, which spent USD 36.3
per capita on insurance products &
Indian spent USD 16.4)
Even after the liberalization of the
insurance sector, the public sector
Insurance companies have continued to
dominate the insurance market
In the long run, other forms of non-price
competition like aggressive
advertisement wars are likelyTo lead to
increasing costs, eventually harming the
interests of the consumers.

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SWoT conTd
STRENGHTS

WEAKNESS

India has a large population


with an increase in its per
capita income
Indias middle income is
rapidly increasing emerging
as a profitable market

A key challenge for Indias


non-life insurance sector will
be to reform the existing tariff
structure. From a pricing
perspective, the Indian non-life
segment is still heavily
regulated
Reinsurance is only provided
by GIC
While the insurance business is
highly concentrated in India,
the share of foreign companies
is low

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OPPORTUNITIES

THREATS

Indias improving economic


fundamentals will support
faster growth in per capita
income in the coming years,
which will translate into
stronger demand for insurance
products
Strong growth can be sustained
for 3040 years before the
market reaches saturation

Between 1985 and 2003,


economic losses in India due
to natural catastrophes
averaged around USD 1.2
billion or 0.4% of GDP every
year
Floods were the main peril,
accounting for 40%
ofcumulative losses over the
period, followed by storms
(35%) and earthquakes (20%)

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OPPORTUNITIES

THREATS

there is plenty of room for


growth in personal accident,
health and other liability
classes
Rising household income and
risk awareness will be the key
catalysts to spurring more
demand for these lines of
business in the future
Health insurance could
potentially have an important
role in driving insurance
market development forward

CUMALATIVE CATASTROPHIC
LOSES 1985-2003

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the largely underserved rural


sector holds great promise
for both life and non-life
insurers

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strong growth prospects


pose pressure on the
industry, and the economy at
large, to better manage the
exposure to natural perils
Questionable Reputation of
the Foreign Partners

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SUGGESTIONS
To begin with, India needs to further liberalize investment
regulations on insurers to strike a proper balance between insurance
solvency and investment flexibility
Furthermore, both the life and non-life insurance sectors would
benefit from less invasive regulations
In addition, price structures need to reflect product risk. Obsolete
regulations on insurance prices will have to be replaced by riskdifferentiated pricing structures
There is huge untapped potential, for example, in the largely
undeveloped private pension market. At the moment, less than 11%
of the working population in India is eligible for participation in any
formal old-age retirement scheme. Private insurers will have a key
role to play in serving the large number of informal sector workers.

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conTd..
Price liberalization will be needed to improve underwriting
efficiency and risk management
International reinsurance

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CONCLUSION
On the regulatory side, there are outstanding issues concerning
solvency regulations, further liberalizing of investment rules,
caps on foreign equity shareholdings5 as well as the
enforcement of price tariffs in the non-life insurance sector
The proliferation of bancassurance is rapidly changing the
way insurance products are distributed in India. This will also
have strong implications on the process of financial
convergence and capital market development in India
Health insurance is still underdeveloped in India but offers
huge potential, as there will be increasing needs to purchase
private health cover to supplement public programmes

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CONCLUSION.
Likewise, the deficiencies in current pension schemes should
offer significant opportunities to private providers
With the majority of the population still residing in rural areas,
the development of rural insurance will be critical in driving
overall insurance market development over the longer term

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THANK YOU

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