The Insurance Sector in India

In India, insurance has a deep-rooted history. Insurance in various forms has been mentioned in the writings of Manu (Manusmrithi), Yagnavalkya (Dharmashastra) and Kautilya (Arthashastra). The fundamental basis of the historical reference to insurance in these ancient Indian texts is the same i.e. pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine. The early references to Insurance in these texts have reference to marine trade loans and carriers' contracts. Insurance in its current form has its history dating back until 1818, when Oriental Life Insurance Company was started by Anita Bhavsar in Kolkata to cater to the needs of European community. The pre-independence era in India saw discrimination between the lives of foreigners (English) and Indians with higher premiums being charged for the latter. In 1870, Bombay Mutual Life Assurance Society became the first Indian insurer. At the dawn of the twentieth century, many insurance companies were founded. In the year 1912, the Life Insurance Companies Act and the Provident Fund Act were passed to regulate the insurance business. The Life Insurance Companies Act, 1912 made it necessary that the premium-rate tables and periodical valuations of companies should be certified by an actuary. However, the disparity still existed as discrimination between Indian and foreign companies. The oldest existing insurance company in India is the National Insurance Company Ltd., which was founded in 1906. It is in business. The Government of India issued an Ordinance on 19th January, 1956 nationalising the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The Life Insurance Corporation (LIC) absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies245 Indian and foreign insurers in all. In 1972 with the General Insurance Business (Nationalisation) Act was passed by the Indian Parliament, and consequently, General Insurance business was nationalized with effect from 1st January, 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on January 1st 1973. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector. Before that, the industry consisted of only two state insurers: Life Insurers (Life Insurance Corporation of India, LIC) and General Insurers (General Insurance Corporation of India, GIC). GIC had four subsidiary companies. With effect from December 2000, these subsidiaries have been de-linked from the parent company and were set up as independent insurance companies: Oriental Insurance Company Limited,New India Assurance Company Limited, National Insurance Company Limited and United India Insurance Company Limited.

Insurance industry in India is on a growth path. But what are the ingredients to sustain and expand? We evaluate the current state of the insurance industry in this report. A well developed and evolved insurance sector is a boon for economic development of a country. It provides long-term funds for infrastructure development and concurrently strengthens the risk-taking ability of the country. Indias rapid rate of economic growth over the past decade has been one of the most significant developments in the global economy. The Indian insurance industry: At the crossroads of development The industry is on its way to development and a number of factors govern that growth. Some of them are:

Significantly untapped latent potential: Indias insurance industry has witnessed rapid growth during the last decade. Consequently, many foreign companies have expressed their interest in investing in domestic insurance companies, despite the Government of Indias regulation, which mandates that the foreign shareholding limit is fixed at 26% for the life as well as non-life insurance sectors. How can this potential be tapped efficiently? This report analyzes the issues of the industry and suggests methods to overcome them. Recent regulatory developments that govern the current market state: The development of the insurance industry in India is likely to be critically dependent on the nature and quality of regulation. Overall, the regulatory environment is favorable and takes care that players maintain prudent underwriting standards, and reserve valuation and investment practices. The primary objective for the current regulations is to promote stability and fair play in the market place. Our report details some major regulations by the IRDA as well as those concerning ULIPS, IPOs, among others.

What will drive market development in the Indian insurance industry? There are certain factors that need to be considered by the Indian insurance industry to ensure a seamless growth in business. Our report analyzes these factors in detail. Some of these include:

Distribution channels: The effectiveness and cost of diverse distribution strategies of different players is crucial in ensuring the success of players in the insurance business, particularly in the retail lines of business. Focus on financial inclusion: The approach to insurance must be in sync with the evolving times. The mission of the insurance sector in India should be to extend the insurance coverage over a larger section of the population and a wider segment of activities. Consumer needs and preferences: The growth in insurance industry has been spurred by product innovation, vibrant distribution channels, coupled with targeted publicity and promotional campaigns by the insurers. Innovation has come not only in the form of benefits attached to the products, but also in the delivery mechanism through various marketing tie-ups. All these efforts have brought insurance closer to the customer as well as made it more relevant.

The finance ministry on 8th August 2012 approved 49 per cent foreign direct investment (FDI) in the insurance and pension sector. The current ceiling for FDI in this sector was 26 per cent. The proposal was floated when Pranab Mukherjee was the finance minister, and was sent to the cabinet for approval in May, but the decision was deferred. The Bill needs cabinet approval before it comes up in Parliament, where it will have to be approved. Domestic and foreign insurers, which have invested billions of dollars in India over the last decade, have been lobbying the government for years to raise the FDI limit to 49 per cent from 26 per cent. The cabinet had in May deferred a decision on the insurance amendment Bill, underlining the difficulty the Centre faced for driving reforms that are sorely needed to shore up weakening economic growth. Along with raising the FDI limit, the insurance amendment bill aims to strengthen regulation of the sector and allow foreign re-insurers to enter the Indian market. A parliamentary standing committee headed by Bharatiya Janata Partys Yashwant Sinha had asked the government to cap FDI in the sector at 26 per cent, confounding the government's plans to raise the limit in tandem with an opening up of the insurance sector. Insurance reform is widely seen as crucial because, according to Insurance Regulatory and Development Authority (IRDA) estimates, the sector needs a capital infusion of over $12 billion over the next five years. India has 24 life insurance companies and an equal number of general insurance companies With an annual growth rate of 15-20% and the largest number of life insurance policies in force, the potential of the Indian insurance industry is huge. Total value of the Indian insurance market (2004-05) is estimated at Rs. 450 billion (US$10 billion). According to government sources, the insurance and banking services contribution to the country's gross domestic product (GDP) is 7% out of which the gross premium collection forms a significant part. The funds available with the state-owned Life Insurance Corporation (LIC) for investments are 8% of GDP. Till date, only 20% of the total insurable population of India is covered under various life insurance schemes, the penetration rates of health and other non-life insurances in India is also well below the international level. These facts indicate the of immense growth potential of the insurance sector. The year 1999 saw a revolution in the Indian insurance sector, as major structural changes took place with the ending of government monopoly and the passage of the Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign ownership

Though, the existing rule says that a foreign partner can hold 26% equity in an insurance company, a proposal to increase this limit to 49% is pending with the government. Since opening up of the insurance sector in 1999, foreign investments of Rs. 8.7 billion have poured into the Indian market and 21 private companies have been granted licenses. Innovative products, smart marketing, and aggressive distribution have enabled fledgling private insurance companies to sign up Indian customers faster than anyone expected. Indians, who had always seen life insurance as a tax saving device, are now suddenly turning to the private sector and snapping up the new innovative products on offer. The life insurance industry in India grew by an impressive 36%, with premium income from new business at Rs. 253.43 billion during the fiscal year 2004-2005, braving stiff competition from private insurers. RNCOSs report, Indian Insurance Industry: New Avenues for Growth 2012, finds that the market share of the state behemoth, LIC, has clocked 21.87% growth in business at Rs.197.86 billion by selling 2.4 billion new policies in 2004-05. But this was still not enough to arrest the fall in its market share, as private players grew by 129% to mop up Rs. 55.57 billion in 2004-05 from Rs. 24.29 billion in 2003-04. Though the total volume of LIC's business increased in the last fiscal year (2004-2005) compared to the previous one, its market share came down from 87.04 to 78.07%. The 14 private insurers increased their market share from about 13% to about 22% in a year's time. The figures for the first two months of the fiscal year 2005-06 also speak of the growing share of the private insurers. The share of LIC for this period has further come down to 75 percent, while the private players have grabbed over 24 percent. There are presently 12 general insurance companies with four public sector companies and eight private insurers. According to estimates, private insurance companies collectively have a 10% share of the non-life insurance marets. But is all well with the Insurance sector? Slowing growth, delay in FDI decision and lower profitability have dimmed the lustre of the insurance sector, which was once seen as a panacea for the financial ills of the nation. Promoters, who looked to flip their holdings when FDI norms eased, are losing patience. In 2000, the first set of Indian promoters - banks, automakers, healthcare providers and consumer goods makers - flew into this sunrise sector expecting huge returns. Global insurance giants such as Prudential, Allianz, Standard Life and New York Life were drawn by the huge and growing market. Come 2012, some of the promoters and Western companies are having second thoughts as near-term gains look remote. The focus of promoters has shifted back to their core business. Though the term of insurance contract goes up to 20-30 years, promoters are walking out in five. Another set of promoters, who came in after 2006 such as Future Generali, Bharti AXA and DLF Pramerica, has lost focus and prefers to pump in money into core businesses such as retail, telecom and real estate. The Japanese, known for holding on to investments for eternity, are the ones who are walking in. The life insurance industry is not half as attractive as it was a decade ago. In 2000, promoters expected to break-even in 6-7 years and make 20-25% return. It has now fallen to 12-14%

over a 10-year period. "Industry is not half as exciting as it was in 2000," said a CEO of a large life insurance company. "It might be even worse." Losses have gone through the roof. Companies like Bharti AXA, which entered in the second phase, have an accumulated loss of 1,748 crore, higher than the decade-old Birla Sun Life and HDFC Life. Insurance companies start making profit once expense overrun is wiped out. Break-even of companies has extended to beyond 10 years, thanks to competition and restrictions. "Profitability is a concern due to both lower volumes and margins, which have fallen sharply due to a change in the economic environment and regulations," said GV Nageswara Rao, MD & CEO, IDBI Federal. The changing economic situation is making people take flight to safety. The ultimate beneficiary is Life Insurance Corporation of India, which has increased its market share in the past couple of years. Indian promoters expected to cash in on the higher FDI of 49%. Most foreign shareholders agreed to increase the foreign direct investment limit as and when the regulations were eased and local partners wanted an exit option to monetise their investment. There are 47 companies in the life and non-life insurance business. "To expect long-term commitment from foreign insurance companies at 26% stake is unfair and frustrating. You need a higher level of stake to take a 20-year view," said Sandeep Ghosh, MD and CEO of Bharti AXA Life Insurance. The slew of operational challenges, agent attrition and regulatory flip-flops are forcing companies to take a re-look at the viability of the business. The first set of global insurance companies such as New York Life and ING have said they are selling out due to trouble in their home countries, but many say that it is partly due to frustration over rigid stakeholding limits. "To compete in this market, promoters need to keep pumping in money. Earlier, Indian promoters expected JV partners to bail them out. Unless FDI is increased to 49%, foreign promoters don't see the strategic rationale for staying invested," said Ravi Trivedy, an independent insurance consultant. There are three downsides to the industry that is fast losing sheen - low margins, contraction in business and declining quality. Margins on life insurance policies in India are the lowest in Asia - a result of competition and a drop in sales. For example, margins on unit-linked products have fallen to 4%, while most Asian countries have 6-8% margin on Ulips. "Our margins on products like single premium and Ulips are lower than most Asian and western countries. Before the regulator changed the Ulip structure, margins were at 8-12%," said P Nandagopal, MD and CEO, IndiaFirst Life Insurance. Second, the industry has been contracting over the past few years because of the change in product structure and a slowdown in the economy. After the outcry over the dubious sale of Ulip, the focus of companies and intermediaries has moved to traditional products like moneyback where low commissions act as a deterrent for agents to sell.

The industry grew at a compounded annual growth rate of more then 30% for the first 7-8 years as shareholders focussed on topline. On the other hand, the non-life insurance sector is going through its own set of problems: underwriting losses, low-investment income and third-party motor pool. Companies that started operation in 2000-01 had seven years of tariff pricing. But those who entered in 2006-07 had to face competitive intensity and fresh capacity, leading to a sharp cut in prices. To conclude, there is still a lot to work upon and a lot to look forward to in the this esteemed sector of our nation.

BIBLIOGRAPHY 1. http://en.wikipedia.org/wiki/Insurance_in_India 2. http://www.ey.com/IN/en/Industries/Financial-Services/Insurance/Indianinsurance-sector

3. http://profit.ndtv.com/news/corporates/article-finmin-clears-49-fdi-in-insurancepension-309727

4. http://www.rncos.com/Report/FM033.htm 5. http://articles.economictimes.indiatimes.com/2012-0627/news/32441345_1_insurance-sector-bharti-axa-life-insurance-promoters