BMP ASSIGNMENT

INSURANCE INDUSTRY

Submitted by,

Mirza Shadab Baig

09020541129
System & Finance
INSURANCE INDUSTRY
Insurance sector in India is one of the booming sectors of the economy and is growing at the

rate of 15-20 per cent annum. Together with banking services, it contributes to about 7 per cent to the

country's GDP. Insurance is a federal subject in India and Insurance industry in India is governed by

Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and General Insurance Business

(Nationalisation) Act, 1972, Insurance Regulatory and Development Authority (IRDA) Act, 1999 and

other related Acts.

The origin of life insurance in India can be traced back to 1818 with the establishment of the

Oriental Life Insurance Company in Calcutta. It was conceived as a means to provide for English

Widows. In those days a higher premium was charged for Indian lives than the non-Indian lives as

Indian lives were considered riskier for coverage. The Bombay Mutual Life Insurance Society that

started its business in 1870 was the first company to charge same premium for both Indian and non-

Indian lives. In 1912, insurance regulation formally began with the passing of Life Insurance

Companies Act and the Provident Fund Act.

By 1938, there were 176 insurance companies in India. But a number of frauds during 1920s

and 1930s tainted the image of insurance industry in India. In 1938, the first comprehensive

legislation regarding insurance was introduced with the passing of Insurance Act of 1938 that

provided strict State Control over insurance business.

Insurance sector in India grew at a faster pace after independence. In 1956, Government of

India brought together 245 Indian and foreign insurers and provident societies under one nationalised

monopoly corporation and formed Life Insurance Corporation (LIC) by an Act of Parliament, viz.

LIC Act, 1956, with a capital contribution of Rs.5 crore.

The (non-life) insurance business/general insurance remained with the private sector till

1972. There were 107 private companies involved in the business of general operations and their

operations were restricted to organised trade and industry in large cities. The General Insurance

Business (Nationalisation) Act, 1972 nationalised the general insurance business in India with effect

from January 1, 1973. The 107 private insurance companies were amalgamated and grouped into four

companies: National Insurance Company, New India Assurance Company, Oriental Insurance
Company and United India Insurance Company. These were subsidiaries of the General Insurance

Company (GIC).

In 1993, the first step towards insurance sector reforms was initiated with the formation of

Malhotra Committee, headed by former Finance Secretary and RBI Governor R.N. Malhotra. The

committee was formed to evaluate the Indian insurance industry and recommend its future direction

with the objective of complementing the reforms initiated in the financial sector.

Government legislation prevents them or encourages them to enter the industry. Legislation

prevents them or encourages them to enter the industry.

Market Potential of Insurance Industry

Life Insurance

The traditional life insurance business for the LIC has been a little more than a savings policy. Term
life (where the insurance company pays a predetermined amount if the policyholder dies within a
given time but it pays nothing if the policyholder does not die) has accounted for less than 2% of the
insurance premium of the LIC (Mitra and Nayak, 2001). For the new life insurance companies, term
life policies would be the main line of business.

Health Insurance

Health insurance expenditure in India is roughly 6% of GDP, much higher than most other countries
with the same level of economic development. Of that, 4.7% is private and the rest is public. What is
even more striking is that 4.5% are out of pocket expenditure (Berman, 1996). There has been an
almost total failure of the public health care system in India. This creates an opportunity for the new
insurance companies. Thus, private insurance companies will be able to sell health insurance to a vast
number of families who would like to have health care cover but do not have it.

Pension

The pension system in India is in its infancy. There are generally three forms of plans: provident
funds, gratuities and pension funds. Most of the pension schemes are confined to government
employees (and some large companies). The vast majority of workers are in the informal sector. As a
result, most workers do not have any retirement benefits to fall back on after retirement. Total assets
of all the pension plans in India amount to less than USD 40 billion.
Therefore, there is a huge scope for the development of pension funds in India. The finance minister
of India has repeatedly asserted that a Latin American style reform of the privatized pension system in
India would be welcome (Roy, 1997). Given all the pros and cons, it is not clear whether such a
wholesale privatization would really benefit India or not (Sinha, 2000).

Other Non-Life Insurance

The flurry of activities of the new companies in the life insurance market has not been repeated in
other types of insurance. The reason is basic: lack of data. Unless the new companies have access to
reliable data on accidents of different kinds under Indian conditions, it would be hard to offer a
competitive menu of policies.

PORTERS FIVE-FORCE OF INSURANCE INDUSTRY

Competitive rivalry :-

 There is cut thought competitions among rivals in life insurance industry

 There are mainly 13 private organizations and 1 public organization in life insurance
competition

 Insurance companies deal in identical policies as service levels offered are similar

 Ministry of finance controls all the insurance companies that are in the industry at present
hence there are less chance of exit.

Power of suppliers :-

 Policy designer tend to have less leverage to bargain over premium

 Insurance is tax exempted so that suppliers bargaining power increases

 Solvency of private players is not certain

Threat of Substitutes : -

 Customers deposit their amount in bank

 Purchase of gold and silver

 Investment in government securities

 Money market investment

 Capital market investment

Power of buyer : -

 Market is highly segmented

 Insurance industry very return oriented and switches easily

 High switching cost creates buyers lock in and makes a buyers bargaining power

 Exercise bargaining leverage over premium

Threat of new entrants : -

 Life insurance industry entry barriers is moderate

 The Indian market is highly brand oriented ,so it is difficult to introduce new brand

 The acceptability of new brand is also very low

 Economies of scale is difficult to find in the initial stage of entry in to market

 Special permission is required from the government to enter in the insurance sector

Challenges

 Lack of proper infrastructure

 Improvement in Health and life expectancy

 Uneconomical premiums in respect of population over 55 years of age

 Lack of affordable medical and health facilities in most part of the country

 Difficulty of penetration in rural market

 Lack of product suitable to rural, semi urban and urban – one size does not fit all

 Lack of faith in insurers that they will settle their claims

 Potential to cheat insurance companies increasing

Conclusion

Insurance is a peculiar product. It is all about selling a paper of ASSURANCE and buying the
CONFIDENCE of the customer. Unless the public perceive the contract to be beneficial to them, there
is no market for Insurance.

IT IS THEREFORE WINNING THE CONFIDENCE OF THE PUBLIC MORE THAN SELLING INSURANCE