PRIVATIZATION OF INSURANCE

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 cooperate 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 insurers 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.

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Role of Insurance Sector in India

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 1980s 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 decades 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 necessary to address the need for similar reforms. In 1994, the

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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 IRDAs 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 clients 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:

Term assurance

Endowment plans

Money back plans

Endowment + whole life

Whole life money back

Pension plan

Plans at a glance

Children Policy

Investment plans

Handicapped policy

Medical Insurance

Whole life policy

High risks low premium

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

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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. 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

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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. 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 Indias 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.
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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 2 3 4 5 6 7 8 9 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. Policy documents Brochures Periodic statements Renewal notices Business cards Stationary Calendar, diaries Letters/cards Website

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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.

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.

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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 Banc assurance Postal department Selling through corporate

Partner selling

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:
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The people who require insurance call up the call centres. These call centres send their direct marketing agents who go to the customers place and sell the insurance policy. Partner Selling: Banc assurance:

Financial Services

Banking

Insurance

Banc assurance 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 tieup with Dena bank, by which former doesn't entertain banc assurance

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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.

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

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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: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:-

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Mostly consumers dont 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 these the minimum IRDA educational that qualifications well-trained and for these intermediaries. IRDA conducts examinations and then issues licenses to agents. believes informed intermediaries can service the consumers better. IRDA insured or renewed 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.

IRDA has recognized the actuarial society of India and insurance institute of India as nodal organizations responsible for actuarial and insurance
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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.

Pest Analysis

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There are several forces at work in every sector and every industry of an economy. The dynamic nature of every industry keeps the pulses of the companies operating in each sector racing. Pest refers to all political, economic, social and technological factors affecting any industry. Following are the different factors affecting the insurance sector:

Political:
FDI in Insurance Sector:

Then, the issue came of amount of FDI to be allowed by a foreign player in the insurance sector. The government had allowed the private players to have foreign equity up to just 26 %. Efforts are going on to raise this to 49 %. After the opening up of the sector, a total of 18 private sector companies have entered the life insurance business and all of them have entered with a foreign partner.

Malhotra Committee:

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The committee emphasized that in order to improve the customer services and increase the coverage of the insurance industry should be opened up to competition. But at the same time, the committee felt the need to exercise caution as any failure on the part of new players could ruin the public confidence in the industry. Hence, it was decided to allow competition in a limited way by stipulating the minimum capital requirement of rs.100 crores. The committee felt the need to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives. For this purpose, it had proposed setting up an independent regulatory body.
The Insurance Regulatory and Development Authority (IRDA):

Reforms in the insurance sector were initiated with the passage of the IRDA bill in parliament in December 1999. The IRDA since its incorporation as a statutory body in April 2000 has fastidiously stuck to its schedule of framing regulations and registering the private sector insurance companies.

Economical:
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Per Capita GDP:

According to a study by Swiss re, a leading global reinsurance company, once per capita GDP touches $10,000, life insurance premium collection takes off. Indias per capita GDP is hovering around $ 3000 but is expected to go up steeply given the economic growth projections. Also, India, despite being the second largest in terms of population and insured lives, posts a very low figure in terms of the countrys share of life insurance premium in the worlds total life premium collection about 0.8%. This shows that the insurance sector provides ample untapped market for insurers Indian Economy Growth Projections: By 2025 the Indian economy is projected to be about 60 per cent the size of the US economy. The transformation into a tri-polar economy will be complete by 2035, with the Indian economy only a little smaller than the US economy but larger than that of Western Europe. By 2035, India is likely to be a larger growth driver than the six largest countries in the Europe, though its impact will be a little over half that of the US. India, which is now the fourth largest economy in terms of purchasing power parity, will overtake Japan and become third major economic power within 10 years.

Growing Premiums:

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Growing premiums are obviously attracting the new players. During the financial 2004 05 alone, the life insurance premium grew by 35% to over us $ 13.5 billion in 2004-05. According to Mumbai based research agency crystallise research, over the next five years, crystallise believes this figure to zoom past the US $ 33.5 billion mark. Banc assurance: Banc assurance - selling life insurance through bank branches - has also driven life insurance business over the two years. Heres why. First, banks deposits as a percentage of total financial assets of the household sector have gone down from about 46% in 1980 to about 30% now. This means that banks have to seek other avenues, beyond just interest income, to remain profitable. Banks have found that selling life insurance policies is a great way to make profits.
Tax Benefits:

Payment of insurance premium had also been included in the service tax net in the 2004 budget. Although 2004 seemed to be a dampener for individuals insured, the budget 2005 was a delight. Section 88 benefits have been scrapped. This means that tax rebate under section 88 will not be applicable to an individual anymore. It has now been replaced by section 80c. Under section 80c, one can now invest a sum of up to Rs 100,000 in investment avenues like NSC, PPF, infrastructure bonds and/or life insurance and the same will be deducted from an individuals taxable income.

Social:
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Life Expectancy and Mortality Rate:

The life expectancy is defined as the number of years for which a newborn baby will live in the prevailing mortality condition ns of that particular year. The mortality or crude death rate refers to the number deaths per thousand people. Both these factors are very important as they are used to derive the premium of a particular policy. All the insurance companies follow a set standard table referring to which they decide upon the premium rates. The government generally prescribes this. Following is the life expectancy and death rate in India:

Demographics: One of the major influences on the premiums or prices charged by insurance companies is on the basis of the demographics. Premium rates largely depend on the age, sex of the individual insured. All the insurance policies have a different rate of premiums to be paid. This is mainly due to the difference in the risk involved of different individuals insured.

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PRIVATIZATION OF INSURANCE Religion Islam:

In its modern form, insurance was introduced in Muslim countries when many of them were occupied by western powers, or when they came under western influence. In some cases, its introduction was delayed in a country until its international business flourished. Like every thing that came with a colonial or western colour, Muslim scholars with grave suspicion first viewed insurance. A verdict of disapproval was common to most things thought to be introduced by non-Muslims.
Improving Standard of Living:

If, by 2030 ad 50% Indian population reaches the level of middle class, Indian market for insurance sector will reach the level of 600 million from conservatively estimated present level of 100 million. Even at the present level of 100 million, Indian market is big enough by global standards for vigorous development as the premium density is only 0.6% as compared to 3 to 5% for developed markets. Prospects for conventional insurance development in Indian market in 21st century are bright provided its transformation takes place in the right form and right type of strategy is developed to transform hidden potential into business.
Consumer Attitude and Preferences:

People as a safety net always viewed insurance. Indians specially are very emotional as far as family members; security, social status and other such issues are concerned. The insurance industry is primarily based on the fact that people live their family their belongings and hence want them to be with them forever. This is the basic attitude of people towards insurance. The

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Indians, hence, are more vulnerable and tend to pay more attention towards the insurance advertisements and insurance products. Technological: Computerization: Initially, in the late 1950s the insurance companies used unit record machines (electro magnetic machines) to process data punched into cards. Computers were introduces in the mid 1960s and by the 1980s the unit phased machines were phased out and the entire process was computerized. This brought about greater efficiency and quick service delivery. Internet: Internet usage has drastically improved in the last decade. There was a tremendous increase in the use of technology by LIC during the late 1990s. The company launched its website www.licindia.com in the mid 1990s to offer basic services such as modifying policies (change of address, change of nominee, etc) and querying the status of the policy.
Electronic Clearance Service (ECS):

Almost all the big organizations today provide the ECS facility to its customers. A policyholder having an account in any bank, which is a member of the local clearinghouse, can opt for ECS debit to pay premiums. The advantage here is that once the option is exercised, the policyholder need not visit a branch for paying the premium or collecting the receipts. On the day indicated by the policyholder, the premium amount will be directly

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debited to the bank account of the policyholder and the designated branch office will issue the receipt.
Bank ATMs:

Many insurance companies have a tie-up with commercial banks so as to enable policyholders to use the facility of paying premiums through the bank ATMs. ICICI prudential has a tie up with ICICI bank; LIC has a tie-up with corporation bank and UTI bank.

Potentials for Private Players

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.

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PRIVATIZATION OF INSURANCE 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.

The economy has grown at the rate of 5.6 per cent per annum during 1990s. 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.

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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; therefore, the private sector will work according to the guidelines given to them.

Swot Analysis of Insurance

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1) Potential Strengths
Consumer Grievance Redressal

The insurers have to face the redressal of the consumers, grievances for deficiency in products and services. The insurance regulatory development authority (IRDA), the regulatory body has already appointed ombudsman for looking into the grievances of the policyholders. His judgment will be binding on the insurers. Further under consumer protection act, 1986, the consumer courts are operating at the district, state and national levels. This is a major strength from the consumer point of view as they could easily fight for their rights.
Rural Customers are a must

As per the regulator IRDA, all the companies incorporated should at least do 5% of its business in the rural parts of the country. If not, the regulator would not allow the company to function anywhere within the country. So this is a great advantage for not only the rural population but also the newly formed companies since most of the revenue could be earned from the rural India. Weaknesses:
New Insurers

The new insurers will have to invest a minimum capital of Rs. 100 crores. The normal gestation period is of 5 years. The generation of profit normally starts in the sixth year. Hence the new insurers have to lock up their capital for at least 5 years.
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Outdated Products

Today, LIC has more than 60 products and GIC has more than 180 products to offer in the market. But most of them are outdated, as they are not suitable to the needs of the consumers. Hence old as well as new insurers have to offer innovative products to the consumers and bringing more products would require good amount of capital investment.

Opportunities:
Vast Country

India is a vast country with more than 5, 76,000 villages having a population of at least 500-600 per village. The companies could recognize the fact that if it takes the whole zilla as one, it would consist a population more than 5000-10000. One zilla could give them a good amount of business. The company could have this opportunity and tap it and reap revenues.
Job Opportunities

Since the sector has opened up, many new companies have already started its operation and few are just about to begin, major areas of employment in this sector are the agents. A company can appoint any number of agents anywhere within the country on commission basis. Moreover, the professional staff and the peons and clerks appointment also increase. Thus this sector has tremendous scope on employment.

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Threats:
Lack of Awareness

Very soon the market will be flooded by a large number of products by a fairly large number of insurers operating in the Indian market. Even with limited range of products offered by LIC and GIC, there is chaos as far as the consumers are concerned. Their confusion will further increase in the face of a large number of products in the market. The existing level of awareness of the consumers for insurance products is very low. This is because only 62% of the population of India is literate and only 10% are well educated. Even the educated consumers are ignorant about the various products of insurance. With new companies coming in the market, the products would be comparatively more, which would again create confusion in the minds of the customers so as to which policy best suits the needs.

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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 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.

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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. 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.

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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 Indias largest housing finance provider-HDFC and Europes largest mutual life assurance company-the standard life assurance company (UK). HDFC 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, moodys and standard & poors.

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Products Offered (i) (ii) (iii) Endowment assurance plan Money back policy 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 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.

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CURRENT SCENARIO OF PRIVATE PLAYERS

The government of India liberalized the insurance sector in March 2000 with 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. Under the current guidelines, there is a 26 percent equity cap for foreign partners in an insurance company. There is a proposal to increase this limit to 49 percent. The opening up of the sector is likely to lead to greater spread and deepening of insurance in India and this may also include restructuring and revitalizing of the public sector companies. In the private sector 12 life insurance and 8 general insurance companies have been registered. A host of private insurance companies operating in both life and non-life segments have started selling their insurance policies since 2001. The insurance landscape in India is undergoing major change. Closed to foreign competition since nationalization in 1956, the life insurance industry had been protected from competitive pressures. Now, with the re-opening of the sector, several new players have entered the scene. The game is old but the rules are new and still developing. Ensconced in a monopoly run from the nationalization days beginning in 1956, the insurance industry has indeed awakened: to a deregulated environment in which several private players have partnered with multinational insurance giants.

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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 (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.

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Case Study Insurance sector grew 83% after privatization

The insurance industry has grown by 83 per cent since the opening up of the sector. Remarking on the performance of the insurance industry, c s Rao, chairman, insurance regulatory & development authority, said public sector players have not suffered with the opening up of the sector. Insurance premium income has risen to Rs 82,415 crore (Rs 824.15 billion) in 2003-04, against Rs 45,000 crore (Rs 450 billion) in 2000-01. Rao expects premium income in the life insurance sector to rise further by 15-16 per cent and non-life insurance premium by 14 per cent in 2005-06. The growth comes on the back of healthy demand from the manufacturing sector. "There has been no reduction in growth rates as seen in the case of the life insurance corporation of India. It is able to hold on to its existing share in terms of business growth. Market share is bound to stand reduced as some business goes to the private players," said Rao. "The health insurance sector is expected to grow by 10-15 per cent," Rao said at a one-day seminar on 'growth of insurance industry in India' organized by the Indian merchants' chamber in Mumbai on Friday.

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If the cap on foreign direct investment is increased to 49 per cent from the current 26 per cent, the industry can expect greater entry of players. But this, said Rao, should not be seen as a threat to public sector players.

SBI life insurance is one of the leaders among the fast growing private life insurance players

Current Milestones 1st in "lives covered" amongst private players - 2.8 million at last count 1st in the group insurance segment

4th in terms of premium income, with Rs 600 crores in 2004-05 companies by brand equity, the economic times

Ranked as one of the most trusted brands amongst life insurance

Starting out in 2001 with an enviable pedigree, SBI life insurance is a joint venture between state bank of India - Indias largest bank, and Cardiff - the insurance arm of Bnp Paribas. Cardiff is the largest 'banc assurance' company globally, and Bnp Paribas is one of top ten global banks.

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With our combined strengths and successes, we symbolize the virtues of 'security' and 'sustainability' in a business, where relationships with customers can span up to 25 years. Our financial solidity, ethical practices and domain expertise truly mean - with us you are sure.

Our distribution channels enable us to reach all customer segments:

Banc assurance - through SBI group's 14000 branches

Agency channel - through a growing network of insurance advisors Corporate agents and brokers - in major cities Corporate & institutional sales

Credit life - tie ups with companies offering life insurance along with their home loan and vehicle loan schemes Nri sales - reaching out to non-resident Indians through SBI'S Nri/ Nre accounts

With so many strengths, we are uniquely placed to achieve our mission: "to emerge as a leading company offering a comprehensive range of life insurance and pension products at competitive prices, ensuring high standards of customer satisfaction, and world class operating efficiency and become a model firm in the liberalized life insurance industry in India."

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Conclusion
It seems unlikely that the LIC and the GIC will shrivel up and die

within the next decade or two.

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.

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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- 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."

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BIBLIOGRAPHY

BOOKS:

Mathew M.J. : Insurance, RBSA Publishers Jaipur Handa Sunil : Insurance, Sheel Write Well (P) Ltd., Jaipur A.Vijaykumar : Indian Insurance Sector in 21st Century Chiranjeev Ph.d : Insurance Business and Management

MAGAZINES:
India Today Business World Business Economics

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REFERENCES:

Websiteswww.sbiindia.co.in www.sbilife.co.in www.irdaindia.org www.liccouncil.org www.businessconnect.com www.google.co www.scribd.com ttp://en.wikipedia.org/wiki/consumer_psyche

NEWSPAPER:
The Economics times Times of India Business line D.N.A

OTHERS:
IRDA annual report, 2006-07and 2007-08 Manual of Insurance by Bharat Law House

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