Theme Paper:

Insurance: Managing the Coming Boom Amidst Multiple Challenges

∗
-Pallavi Seth, Research Fellow, BIMTECH

Introduction

Indian insurance is a flourishing industry with several national and international players
competing and growing at a rapid rate. Thanks to reforms and the easing of policy
regulations, the Indian insurance sector been allowed to flourish and as Indians become
more familiar with different insurance products, this growth can only increase, with the
period from 2010 - 2015 projected to be the 'Golden Age' for the industry. However, with
this projected growth, the industry is also facing a number of challenges like high
operating costs, need for new distribution channels, product development, high claim
ratio etc.

Seeing the growth combined with the multiple challenges of the insurance sector in India,
the theme of the conference was decided and this theme paper deals with the present
scenario of insurance industry in the country and the way forward.

Over the past two years, most sectors have been working toward only one objective—
survival. In fact, the financial services sector, the world over, has been one of the hardest-
hit due to the economic upheaval.

At the beginning of the downturn, there were many differences among the insurers but
the disparity has increased today. Those who had the right mechanism in place to protect
their assets have emerged much stronger than others.

Market opportunities have made it possible for the insurance companies to emerge
stronger from the downturn and now they can extend their market reach, increase the
product’s range and take the market share from the competitors.

Insurance industry seems to surpass the tough times in U.S with the help of support
provided by government. The insurance sector in the US seems to be emerging through
difficult times, with significant support from the government .The policymakers and
regulators of US have started strengthing the regulations on the basis of the learning from
the financial crisis. The European market is facing new threats although its fight with the
old ones still continues. At the same time, emerging economies has taken new initiatives
to safeguard their financial services sector learning from the economic crisis in the
developed economies.

The insurance industry in India seems to have come out of the de growth during the
economic crisis “Life Insurance companies have witnessed a 70 percent jump in new
premium collection during the first five months of the financial year. The increase comes
*
I wish to thank Prof. K.K.Krishnan faculty, BIMTECH for his guidance
in a period that saw the insurers trying to push sales ahead of the change in the norms of
unit-linked insurance plans (ULIPs).” (Business Standard, 29th September, 2010).

According to the data released by Insurance Regulatory Development Authority (IRDA),

insurance companies garnered Rs 52,749 crore in new business premium in the April-
August 2010 period as against Rs 31,040 crore in the corresponding period last year.

As per the LIC Chairman, Mr. TS Vijayan quoted in the newspaper Business Standard
“The industry will record a 20 percent increase in new business premium. There will be a
knee-jerk reaction to the revised norms, but we expect sales to pick up after a couple of
months”

During the initial phase of privatization of Insurance sector in India, the penetration was
very low. Indian as well as foreign companies reaped the benefits of a low base and have
reported high rate of growths in the last decade. But times have changed now and the way
forward is going to be tough. They have to start focusing on the different strategies like
customer retention strategy, operational discipline, regulatory developments and
opportunities for innovation to drive sustainable growth and profitability.

Trends

Insurance industry is facing the unique regulatory challenges today .Mr. J Hari Narayan,
the IRDA chairman, is transforming the organization. To start with, he has tightened the
norms for unit-linked insurance policies or Ulips. This may in the short term affect the
growth but the hope is that the better product will find consumer acceptance.

There are several important issues on which IRDA is working on. Firstly, the
convergence of the Indian accounting standards with the IFRS , the settlement of norms
which will relate to the issuance of IPOs (initial public offers) and M&As (mergers and
acquisitions), the establishment of a more robust system to collect and disseminate
appropriate insurance related data and several other initiatives.

As per the chairman of IRDA, “A decade has passed since IRDA was formed and the
insurance industry has moved from its infancy towards the beginning of maturity and the
regulatory architecture will respond to these changes. In the new decade, I expect the
insurance industry to grow at a slower though a healthy rate. I would expect a greater
building of trust between purchasers of insurance products and the industry and on the
whole I would expect the decade to see the building of a truly robust and dynamic
insurance industry”1

Other than this, many companies are also facing pressures because of claim inflation.
There is therefore a promising opportunity for a well-prepared claims function to play a

1
Interview with Mr J Hari Narayan published in the Mint dt 1st September 2010 “Insurance industry will
grow at a slower but healthy rate”
pivotal role in creating competitive advantage and delivering value to the bottom line of
organizations.

The economic crisis has taught many new lessons to the insurance industry and now it is
entering a new and changing world. Executives, who show ingenuity, have the courage to
take tough decisions and demonstrate their foresight to apply lessons from change will
guide their companies to success in the insurance sector. They will be the leaders, who
establish the foundation upon which the new global economy will rise.

Insurance Sector Overview: Status and Growth

After privatization, insurance industry has seen significant growth. Due to low
penetration and huge potential, many foreign and domestic players have entered the
sector. Moreover, several reforms and policy measures have provided a favorable
environment for insurance companies to flourish in the country.

The insurance sector in India is primarily divided into life and non-life, apart from a very
small segment comprising re-insurance. Both the life and non-life insurance segments,
which were nationalized in the 1950s and 1960s, respectively, witnessed an across-the-
board liberalization process in 2000. After the reforms, the number of players has
increased from one in life insurance and four in non-life insurance in 2000 to 23 players
in each segment till May 2010 (including one re-insurer in the non-life segment) (as per
the IRDA website).

The reasons for the strong foundation for insurance services in India are: growing middle
class segment, rising incomes, increasing awareness of insurance, as well as investments
and infrastructure spending. The total premium earned by the insurance industry has
grown at a CAGR of 24.6% between FY03 and FY09 to touch INR2, 523.9 billion in
FY09.

Growth in Total Insurance Premiums

Strong economic growth of India has led to increased penetration of insurance in the
country. Premium income as a percentage of GDP has increased from 3.3% in FY03 to
7.6% in FY09. However, the penetration level is still low as compared to other developed
and developing economies. Many foreign companies have shown an interest in investing
in Indian insurance companies, in spite of the FDI limit, which is fixed at 26% for the life
and non-life sectors.

The Life Insurance Council has projected 18% growth in total premium income for the
life insurance industry in the financial year 2009-10.

Although final figures, released by the Insurance Regulatory Development Authority, are
being compiled, Life Insurance Council secretary general SB Mathur told The Economic
Times in April 2010 in an interview: “During 2008-09, the life insurance segment had
mopped up a first premium income of Rs 88,000 crore while in 2009-10, there was an
approximately 10-12% growth, which means that first premium income in the year just
gone by is expected to be around Rs 1 lakh crore”.

Mr Mathur also said that the industry is estimated to have garnered a total premium
income of Rs 2.6 lakh crore at the end of 2009-10, against Rs 2.2 lakh crore in the
previous fiscal, which means an 18% growth. The Life Insurance Corporation (LIC) is
expected to have earned a total premium income of Rs 1.76 lakh crore in this FY10 under
review, against Rs 1.53 lakh crore in the previous financial year.

On the entire sector turning profitable, Mr Mathur said it is expected to take another 2-3
years before almost all companies turn profitable. As of now, almost all private sector
companies, barring a few, showed loss on their profit and loss account.

According to data released by the Insurance Regulatory Development Authority for

2008-09, total accumulated losses stood at Rs 14,421 crore while the total equity infused
by all companies put together was Rs 18,253 till March 2009.”2

2
See the article published on” http://economictimes.indiatimes.com/personal-finance/insurance/insurance-
news/Life-insurers-see-18-growth-in-total-premium-income-in-09-10/articleshow/5776191.cms” dt April
2010
Life Insurance Sector
Growth of life insurance in terms of CAGR is 25.8% between FY03 and FY09. Premium
of life insurance as a percentage of India’s GDP increased from 2.7% to 6.7% and life
insurance premium per capita grew from INR528.4 to INR1, 921.9 during the period. The
number of policies issued increased at a CAGR of 12.3% during this period.

As of May 2010, there were 23 players in the sector (1 public and 22 private). Life
Insurance Corporation of India (LIC) is the only public sector player, and held almost
65% of the market share in FY10.

Many private sector players have entered the market to provide the highly customized
products and the prompt service to the customers. A larger number of Indian customers
have started purchasing insurance because of the aggressive marketing, innovative and
customized products as well as effective distribution channel strategies of the new private
players. Insurance industry’s growth is expected to be boosted by the role of private
sector players in the country.
However, in a fragmented industry, new players are giving high competition to the
private players. Existing small players are planning aggressively for the network
expansion as their foreign partners are seeing huge potential in the Indian Life Insurance
market.

ICICI Prudential, Bajaj Allianz and SBI Life hold almost 50% of the market in the
private life insurance segment. Seeing the potential of the industry, many banks have also
entered in the sector.
In order to keep the track of the solvency of life insurance companies, the regulator
mandates that all insurance companies file their solvency position on a quarterly basis.
This stipulation helps insurance companies to lay down their business plans and be in a
position to meet their capital requirements in a timely manner. The life insurance market
strongly emphasizes the move from the current solvency regime of keeping aside a 150%
margin over insured liabilities to risk-based capital.

Individual Life Insurance constitutes almost 80 % of the business whereas group life
insurance products form a very small segment. Unit-linked Insurance Products (ULIPs)
are preferred the most by the customers but the new regulation as well as the economic
slowdown has shifted the focus from ULIPs to traditional products.

Non-life Insurance Sector

The non-life insurance sector grew at a CAGR of 17.6% between FY03 and FY09. Non-
life insurance premium, as a percentage of the segment’s GDP, has increased from 0.6%
to 0.9% and per capita premium income has risen from INR109.4 to INR265.2 during
this period. The intense competition following de-tariffication and pricing deregulation
(initiated in FY07) resulted in the growth momentum slowing down in the sector.

Auto and health insurance have been observed as the main focus of the insurers. Out of
the total non-life insurance premiums during April–February 2010, auto insurance
accounted for 39.4% of the market. The highest growth has been shown by the health
insurance segment, with its share in the total non-life insurance portfolio increasing from
12.8% in FY07 to 21.7% for the period April–February 2010. The share of these two
sectors is expected to increase many fold in the coming years. Seeing the growth
prospectus of these two sectors, many more players are expected to enter the sector.
Standalone companies for health insurance like Star Union Alliance and Apollo Munich
and Max Bupa have already entered.

In the last decade (2000-10), it was observed that aggressive growth strategies and
capitalizing on their distribution networks have helped the insurance companies to
achieve the growth in the retail segment. It has also been clearly demonstrated that
although the products provided by the private and public sector players are similar, the
service provided by the private sector players is what differentiates them from their
counterparts in the public sector.

Underlying Growth Drivers

• Growing economy and purchasing power

Exponential growth of household savings, purchasing power, the middle class and the
country’s working population are the factors which will influence the demand of
insurance products. The working population (25–60 years) is expected to increase from
675.8 million in 2006 to 795.5 million in 2026.

Financial services sector, specifically insurance sector can tap this increased disposable
income group people.

• Favorable government and regulatory initiatives

The Insurance Regulatory and Development Authority (IRDA) has taken the following
initiatives to further regulate and develop the sector:
• De-tariffication except for auto third party liability has been introduced and now the
insurers can underwrite the type of risks which they want to underwrite at their own
desirable rates.

• Number of years after which companies can raise capital via an Initial Public Offering
(IPO) has been reduced from 10 years to 5 years.

Furthermore, the IRDA and the Government are in the process of making the following
regulatory reforms:

• With private players completing nearly a decade in Indian insurance sector, the industry
is looking at new ways to meet its capital needs. Many a times, proposals have come to
increase the share of FDI from 26% at present to 49%.

• Detailed guidelines are being formulated on IPO’s and M&A.

• Disclosure Norms and Other Recent Changes

• The IRDA is in the process of drafting mandatory disclosure of insurers’ financial

statements and investment portfolios at regular intervals, as well as their financial and
operating ratios, actual solvency margins, policy lapse ratio, current financial position,
risk management architecture, etc.

• To monitor the insurance claims, data warehouse is being set up.

• Policy and draft documents are being published in regional languages for people to
understand them better and to extend their reach.

• In the 2010–11 budget, the Finance Minister, Mr. Pranab Mukherjee, decided to roll
back the Government’s decision to tax the unrealized gains of non-life insurance
companies.

Demand for health insurance has been increased due to the increase in the demand for
better health care services and the new medical technology. The following regulatory
initiatives have been initiated to promote the health insurance segment:

• IRDA has given the recommendation to the Government to change the capital
requirements from INR1, 000 million to INR500 million for standalone health insurance
companies

• The Government has raised budgetary support for the health sector during the Eleventh
Five Year Plan (2007– 2012) to INR 1,360 billion.

The Insurance regulator IRDA has made many changes in the ULIP plans like
capping of the charges, increased lock-in period and a minimum guarantee for such plans,
which are hybrid products that combine the features of insurance and investment in
equities.

Effect of ULIP Changes: “The minimum ticket size of new ULIPs could be slightly
higher than the old ones, but a larger portion of the premium payment would go towards
investment under the new rules, benefiting customers. Policyholders will get most of their
money back even if they exit prematurely, unlike in the old ULIPs regime when charges
for the early surrender of a policy could be as high as 100% of premium paid.

Customers will no longer be required to pay agent commissions of up to 40% in the first
year of the policy. Such commissions may drop to around 18%.

Though the new rules will benefit policyholders, reduce the first-year agent commission
and help in curbing rampant mis-selling, insurance firms will be required to underwrite
more losses, infuse more capital and cut costs to sustain ULIPs sales.”3

“The industry is grappling with the task of motivating agents to sell ULIPs with relatively
lower commissions, compared with the pre-September 2010 period. Generally, the
agents' commission has come down by over 2 per cent on an average, on sale of new
ULIPs (from 7-8 per cent to 5-6 per cent) in September, Mr Mallik (Chief Marketing
Officer, Future Generali India Life Insurance) said.-It is a volume game now. Our agents
have sold more products last month than earlier. That way, they will not suffer any loss in
average commission.

According to IRDA data, the first year premium of all 23 life insurers registered 75 per
cent growth in the first quarter of the current fiscal year at Rs 25,521 crore, compared
with Rs 14,456 crore in the year ago-period.

While LIC's new business premium grew 108 per cent to Rs 18,740 crore, the private
sector clocked a 25-per cent growth in its new business to Rs 6,781 crore. Over 65 per
cent of this growth came from ULIPs”.4

“There are a number of positives from the regulatory changes. One of them is the higher
minimum premium. We have increased our minimum premium to Rs 20,000. Risk
premium collection will be higher as mortality premiums will increase.

Another positive is the lock-in period of policies which is an in-built dissuasion of

surrender. In case a policy holder surrenders, he will not get money back immediately.
The money will go to a fund and will get it back only after 5 years.

3
See “New Ulips to change industry, Irda image” published in the Mint dt 31 August 2010
4
See “ULIP sales under new norms yet to gain pace” in The Hindu Business Line dt 08 October 2010
 In the in-force policy, there is an option of switching between funds. You will lose this
benefit if you do not pay this premium on time. This will encourage buying if you are
serious. This will improve persistency levels.”5
The Non-Life Scenario

• Launch of innovative and customized products

Many innovative and customized products have been launched after the liberalization of
the sector. While ULIPs were an innovative concept in earlier years, they soon caught the
fancy of consumers and distributors alike, to become their mainstay. The last years have
seen that capital guarantee products and premium guaranteed plans — primarily in
response to the changing scenario in capital markets. Also the combi products having the
combination of Unit Linked Health Plans that collate health insurance and investment
have been introduced. New products like “Pay As You Motor Insurance (PAYM)” has
been launched in the general insurance market by Future Generali General Insurance.
Many more innovative products are expected to come seeing the customer preferences.

• Rising demand for auto insurance with increasing passenger car sales

Increase in the disposable incomes of the customers has led to the increase in the number
of passenger’s cars; auto sector has seen a CAGR of 15.6 % during FY03–FY10. Auto
Insurance has seen a growth of 21.4 % in the last three years; (FY06–FY09).It had the
largest share in the non-life insurance market in April–February 2010 (39.4%). However,
the industry is struggling with the rising claim ratio of Motor Third Party Pool. An
affirmative action to bring down the claims ratio and improve the performance would go
a long way in achieving the espoused objective of the creation of the pool.

• Emergence of new distribution channels such as bancassurance, brokers and e

-channels, with enhanced reach

Industry has seen the emergence of new distribution channels like bancassurance, direct
selling agents, brokers, online distribution, corporate agents such as nonbanking financial
companies (NBFCs) and tie-ups of para-banking companies with local corporate
agencies, e.g., NGOs, in remote areas.

Critical Issues and Challenges

• Need to raise foreign direct investment (FDI) in insurance from 26% to 49%

Joint venture with the foreign partner gives easy access to capital to the domestic
partners. But today, the FDI in the insurance sector is restricted to 26% which is a huge
deterrent to growth in the industry. It is more difficult for the smaller players to expand
their business which require significant capital.

5
See the article published in the Business Line dt 08.10.2010 “Reliance Life expects to break even this
year”
 Many economists have spoken about the importance of FDI in the insurance sector in
India at many forums over the last decade. The sector is highly capital-intensive, since its
development period is long. It requires capital infusion at regular intervals, especially in
an insurance market where there is a high growth potential, such as in India. Fixed costs
are also high due to India’s the vast geographic spread.

Many players, especially the smaller ones with limited access to capital, do not have
adequate funds to make such large investments in their businesses at the regular intervals.

An increase in FDI will help weaker players (looking for more capital to grow their
businesses) as the foreign partners will invest the capital so that they can tap the highly
potential insurance sector of India. It can be seen as the win-win joint venture as the
domestic partner will get the required capital and the technical expertise of the foreign
partner , and the foreign partner would be able to secure a strong foothold in a rapiadly
growing insurance market.

• High Expense Ratio

Expense ratio is very high in the insurance sector, especially for the private players. In
FY09, the private sector life insurance segment had an expense ratio (operating expense
and commission expense) of 30.6%, while the non-life insurance sector registered 30.1%.
Since, public sector companies have been in existence for a couple of decades, and hence,
have managed to reduce their expenses over time.

The ratio should be around 10-15 % from a long-term sustainability and profitability
perspective. A high expense ratio directly impacts profitability. Since the insurance
industry is still at a nascent stage, many companies are yet to break even and rising
expenses can further delay this process. Furthermore, low sales are making the task of
covering costs a challenge for companies.

• Need to Strengthen Core Product Proposition

Although, the life insurance sector has shown rapid growth over the last few years, low-
margin single-premium products and potentially volatile ULIPs have accounted for most
of the growth. These products are proven to be easily sold, but merely focusing on these
could weaken the growth and long-term profitability for India’s life insurers. Single-
premium policies doubled their share of overall industry new business premium (NBP)
from 24 per cent in 2005 to 48 per cent in 2007. With low charge structures, single-
premium product profitability is marginal. Unit-linked policies accounted for as much as
49 per cent of NBP in 2007, a substantial increase from 9 per cent in 2004. The total non
unit-linked (and hence long-term) investible asset base of the Indian life insurance
industry as a percentage of GDP is only 16 per cent, against 40 to 70 per cent in
developed European markets such as the United Kingdom and France. Life insurers
should learn from the example of more developed markets, where, as customer awareness
increased, tax advantages eroded or stock market conditions turned unfavorable, life
insurance premiums moved into other, more cost-effective or better managed, investment
classes. For example, in the United States, the insurance industry’s market share of life
and pension assets under 401(k) plans fell by 34 percentage points (from 44 to 10 per
cent) between 1998 and 2004, with asset managers grabbing the bulk of assets under
management.

• Opportunity to Professionalise the Agency Channel

As in many markets, the agency channel accounts for the 85 per cent of new business
premiums. The agency force in India has grown rapidly from approximately 1 million in
2000 to close to 1.9 million in 2007. But the overall inactivity and attrition rates are quite
high which are estimated to be 50 to 55 per cent, significantly higher than global
benchmarks of about 25 per cent. With recruitment aimed at just growing the base,
productivity has suffered.

Proprietary survey conducted by the consultancy firm, Mckinsey of Indian life insurance
agents in eight cities indicates that proper strategies are not implemented while selecting
the agency force in a life insurance market. It shows, about 20 per cent of agents recruited
fail certification and/or leave immediately after initial training, without selling a single
policy. Most of the agents, approximately, more than two- thirds of agents, part-time and
full-time, have had no selling experience before becoming agents. As a result, their
success depends heavily on the training provided to them by the life insurance
companies. While many agents, about 70 to 80 per cent, say they undergo sales and
product- related training, this does not seem to translate into superior sales skills. Even
the result suggests, agents with two and three years’ experience are not more productive
than agents who are just one year into the job. This is because unit managers usually
focus only on tenured and higher performing agents. Only 30 per cent of agents surveyed
felt that their unit manager motivates them to perform better.

• Scope to Boost Alternate Channels

Customers prefer bancassurance channel (after the agency channel) as compared to the
other channels like non-bank finance companies, brokers, or direct channels such as the
telephone or internet. Given the high penetration of banking products, bancassurance
could be the single most important channel for insurers to rapidly acquire new customers.
However, cross-sell rates in Indian banking are significantly lower than those in
developed markets. In developed economies like Spain, Italy and France, between 12 and
24 per cent of a bank’s customers would have bought insurance through the bank. In
India, this number is estimated to be less than 0.5 per cent for public-sector banks, 1 to 2
per cent for private-sector banks and 2 to 4 per cent for foreign banks. Indian
bancassurance faces several challenges. Bank employees have high variance in selling
skills, and banks in the public-sector typically face low operating flexibility in creating a
true sales culture. Insurers usually do not invest in systematic training, a problem
compounded by product complexity. In many cases, low technological capability and
lack of process integration also results in poor service.
 • Delayed Break-even for Private Insurance Companies

Break-even point is achieved in the insurance industry when the new business premium is
equal to the renewal premium. However, as the Indian industry is growing, the volume of
new premiums is much more than the renewal premiums. Globally, life insurance
companies break-even in six to eight years but in India , it has not been achieved and it
may take another one or two years due to the recent financial crisis in the world.

Other reasons for delayed break-even are the high operating expenses like management
costs, real estate prices, salaries, distribution cost and technology expenses, which are
higher than what was accounted for in the original business plans of insurers. Moreover,
the capital-intensive nature of the life insurance segment has extended this process by a
couple of years.

• High Claims Ratio in Health Insurance

High claim ratio in the health insurance industry in India is really a bottleneck for the non
life insurance industry. High healthcare costs,, fraudulent claims, inefficient claims
management processes, etc. are the factors which lead to the high claim ratio of the
sector. The claims ratio in FY 09 was approximately 105.9%, as compared to 107% in
FY08. When viewed in isolation, the claims ratio was 116.6% in the public sector as
compared to 85.3% in the private sector. This is impacting the profitability of non life
insurance players significantly.

Opportunities For Growth

• High Potential Demand for Insurance Products

Rise in household savings, a growing middle class, as well as an increasing working

population, and consequently, higher purchasing power are the factors which will lead to
the higher demand of life insurance. Since more than two-thirds of India’s population
lives in rural areas, micro-insurance and micro health insurance is seen as the most
suitable means of reaching the socially disadvantaged sections of society.

Low awareness of insurance products, high transaction costs, as well as inadequate

regulations and understanding of client needs and expectations has restricted the demand
for micro-insurance products. However, with the development of rural health insurance
regulations and growing awareness about micro insurance products, the focus of many
private players has shifted to these areas.

• Newly Emerging Bankable Class

The “aspirers” (annual household income of Rs. 90,000 to Rs2 lacs) will comprise 46 per
cent of the population or 107.7 million households by 2012, representing a formidable
emerging bankable class. Insurance is seen as long term savings instrument by this
segment of the society providing higher return at low risk, given the lack of alternative
investment options. Key challenges in this segment are managing profitability due to low
ticket sizes and high underwriting risk.

• Rising Affluents

The number of the affluent “global” (annual household income greater than Rs.10 lacs)
will be 2.3 million households strong by 2012 and will earn almost 12 per cent of the
country’s aggregate disposable income. Going forward to 2025, this segment will swell to
9.5 million households earning 22 per cent of total disposable income. This segment has a
relatively low need for risk protection, being self-insured with high investment balances.
Insurance is viewed primarily as an investment vehicle and an estate management tool.
Primary influencers for this segment are wealth or relationship managers, rather than
insurance agents, as the former also provide third-party investment products, brokerage,
and other advisory services.

• Under- penetrated Health Insurance Sector

The health insurance sector is one of the booming sectors of the insurance industry as
people are becoming more aware about the health insurance and their health care so
taking advantage of this, private sector insurers are more aggressive in this segment. Life
insurance companies are likely to primarily target the young population to amortize the
risk over the policy term.

• Growing Demand for Indian Insurance Off shoring Business

After the recent financial crisis, insurance companies want to reduce their costs and
outsourcing some of the non core processes like claims processing, policy management,
etc., can help them to reduce their costs and focus on the core processes. India is seen as
one of the favorable partners for the outsourcing business. Services such as analytics and
decision support are likely to be the higher-end, billing rate-based services that will drive
value growth for BPO organizations.

The industry is expected to obtain more business from the European market — from 24%
of the total global business in FY07 to 36% by FY10. Employment is also expected to
more than double — from 41,600 in FY06 to around 100,500 in FY10.

• Growing Pension Sector

According to the Old Age Social and Income Security (OASIS Report, 1999), there will
be 113 million Indians over 60 years of age by 2016 and 179 million by 2026. On the one
hand, this is good news as the life expectancy has increased but on the other hand, it has
also increased the risk that people will outlive their savings. Indians will have an
expected life span of 80 years, i.e., live a full 20 non-earning years. Healthcare costs have
also increased many folds eroding retirees’ purchasing power.
Savings and investment risks are intensifying, with rising inflation or steep market
declines.

Social security provided by the Government of India is very limited; in fact that less than
4% of the population is covered under any social security scheme. Only Government
employees are entitled to pension benefits after retirement. Opening up of the pension
sector and the establishment of a new pension regulator have made this segment highly
attractive. Hence, insurance products are being considered as the next best option to
secure the future.

To facilitate insurance and social security cover for the economically weaker sections of
society, the Pension Fund Regulatory and Development Authority (PFRDA) has
launched a low-cost pension scheme, since April 2010, for rickshaw-pullers, barbers,
daily wage laborers etc

• Movement from Solvency I Norms to Solvency II Norms by 2012 to Increase

the Demand for Actuaries and Risk management Professionals

The transition from Solvency I norms to Solvency II norms by 2012 is likely to increase
the demand for actuaries and risk management professionals. The regulator has also
asked insurance companies to get their risk management systems and processes audited
every three years by an external auditor to ensure the solvency of private sector
companies. Hence, the need for professionals is expected to rise. Furthermore, insurance
companies will now be able to calculate risk better, bringing enhanced stability in their
operations and transparency in the sector.

Way forward

The life insurance segment is a major attraction for private and foreign players — the
fi---rst year premiums collected by life insurance companies declined from INR929.8
billion in FY08 to INR871.1 billion in FY09, only to grow back to INR 1,092.9 billion in
FY10.

Insurance companies are in the process of establishing their niche distribution channels.
Till, most large players rely heavily on the agency channel, primarily because of ease of
scalability, easy access to the micro insurance segment of society as well as the
complexity of the life insurance products. Most bank-backed insurers have been building
bancassurance as their primary channel of distribution to penetrate banks’ customer bases
in the most-cost effective manner. Other models of distribution including direct
marketing and the internet have been in vogue, but none of them have achieved a scale
that will enable them to become a mainstream channel.

After de-tarrification, the non-life insurance sector has witnessed a slowdown in premium
growth. As witnessed in other countries, the industry is likely to grow at a stable rate
during the next three or four years. The health and auto insurance sectors are both highly
promising and are expected to increase their share significantly in coming years.

The insurance industry is going through an interesting phase in its lifecycle. The IRDA is
finalizing its norms for IPOs and some companies are likely to come up with their IPOs
this year. Companies are also likely to focus on consolidation to sustain them in this
competitive environment.

The reinsurance industry is likely to increase its pricing rates in the light of increasing
claims and a fall in the value of investment income after the financial crisis. Opening up
of the market as a whole, and the insurance sector in particular, has created the potential
for Indian companies to secure additional funds to support other capital –intensive
sectors. The market needs to ensure that domestic companies increase their own
capacities and introduce strict guidelines as firsthand risk carriers. Insurance companies
need to establish business relations with their reinsures to prevent the worldwide re
insurance cycle from affecting their capacity and stability. Furthermore, it is reported that
foreign reinsurance companies such as Swiss Re plan to commence operations in India
soon.

“The recently released data on industrial output are significant in two ways. During July,
industrial growth accelerated to 13.8 per cent from 7.2 per cent in the corresponding
month last year. Secondly, and perhaps more relevant in a contextual sense, the Index of
Industrial Production reinforces the optimism that characterised the Central Statistics
Office's estimate of 8.8 per cent GDP growth during the first quarter of 2010-11. The
growth drivers of the first quarter have continued into July. During the first quarter
(April-June 2010) industry as a whole grew by 11.4 per cent and manufacturing by
12.4.The corresponding figures for 2009-10 were 4.6 per cent and 3.8 per cent
respectively. The IIP figures have been boosted by the spectacular performance of capital
goods and consumer durables sectors, which expanded by 63 per cent and 22.1 per cent
respectively”6 As the figures denote a strong economic growth, non life insurance sector
can be expected to grow at a very good rate.

In future, insurance companies are likely to compete on a number of parameters,

including price, products, underwriting and innovative sales methods. The abolition of
market barriers will permit the entry of specialist suppliers, banks and foreign insurers.
Poorly managed companies, with a weak capital base, are expected to either drop out of
the market or become uncompetitive on premium rates and profits. For insurance
companies, profit from innovation will be the key to success, and technology will help
private insurers to develop and customize products to suit individual needs.

Boom: A Distinct Possibility

The recently introduced regulatory change in the ULIPs and other matter by IRDA has
been interpreted differently by stakeholders. The buyers would be entitled to better; more
cost efficient products and now have better rights. This should increase the demand in the
6
See the article “ Economic growth gets stronger, real” , The Hindu dt 14 September 2010
future. The increase in the sum assured provision will push up the ticket size of the
average size of the ULIP product sold. The same beneficial effect can be expected from
more generous surrender provisions and cap in expenses, the most prominent one being
in clipping of the agency commission rates in ULIPs. The agent will have to produce
more to maintain the past earning level. The boom in the housing sector will generate a
larger number of mortgage linked life policies. The expected surge in the GDP and the
industrial growth in particular will drive group life and non-life product sales. The boom
in the micro-lending sector will also boost rural life insurance sales. “The coming boom”
is thus a distinct possibility.

References:

Article http://economictimes.indiatimes.com/personal finance/insurance/insurance-news/Life-insurers-

see-18-growth-in-total-premium-income-in-09-10/articleshow/5776191.cms” on April 2010

“Economic growth gets stronger, real” published in The Hindu on 14 September 2010

“Insurance Industry Retrospection and opportunities” –A report by Earnest & Young and
CII-June 2010

“India Life Insurance 2012: FORTUNE FAVOURS THE BOLD A Summary by

Mckinsey and Company”

Interview with Mr. J Hari Narayan published in the Mint dt 1st September 2010
“Insurance industry will grow at a slower but healthy rate”

IRDA website: www.irdaindia.org

IRDA website: www.irda.gov.in

“New Ulips to change industry, IRDA image” published in the newspaper Mint on 31
August 2010

“Reliance Life expects to break even this year”, article published in the Business Line
on 08 October 2010

“ULIP sales under new norms yet to gain pace” published in the Business Line on 08
October 2010

www.economywatch.com/indianeconomy/india-insurance-sector