STRATEGIC MANAGEMENT-II

what is Insurance and How Insurance Work?

According to the U.S. Life Office Management Association Inc. (LOMA), life insurance is defined as follows: “Life insurance provides a some of money if the person who is insured dies whilst the policy is in effect”.

‘Insurance’ is basically a sharing device. The losses to assets resulting from natural calamities like fire, flood, earthquake; accidents, etc. are mate out of the common pool contributed by large number of person who is exposed to similar risks. This contribution of many is used to pay the losses suffered by unfortunate few. However the basic principle is that loss should occur as a result of natural calamities or unexpected events, which are beyond the human control. Secondly insured person should not make any gain out of insurance.

Introduction:Insurance in India can be traced back to the Vedas. For instance, yoga kshema, the name of Life Insurance Corporation of India's corporate headquarters, is derived from the Rig Veda. The term suggests that a form of "community insurance" was prevalent around 1000 BC and practiced by the Aryans.

Milestone of Indian life insurance industry:-The business of life insurance in India in its existing form started in India in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. Some of the important milestones in the life insurance business in India are:

1912: The Indian Life Assurance Companies Act enacted as the first statute toregulate the life insurance business.

1928: The Indian Insurance Companies Act enacted to enable the government tocollect statistical information about both life and non-life insurance businesses.

1938: Earlier legislation consolidated and amended to by the Insurance Act with theobjective of protecting the interests of the insuring public.

1956: 245 Indian and foreign insurers and provident societies taken over by thecentral government and nationalized. LIC formed by an Act of Parliament, viz. LICAct, 1956, with a capital contribution of Rs. 5 crore from the Government of India.

Need for Life Insurance:

The above definition captures the original, basic, and intention of life insurance: i.e. to provide for one’s family and perhaps others in the event of death, especially premature death. Originally, policies were to provide for short periods of time, covering temporary risk situations, such as sea voyages. As life insurance Strategic Analysis of Indian Life

Insurance Industry 10 becomes more established, it was realized what a useful tool it was for a number of situation including:

i. Temporary needs/ threats:The original purpose of life insurance remains an important element, namely providing for replacement of income on death etc.

ii. Regular Savings:Providing for one’s family and oneself, as a medium to long-term exercise (through a series of regular payment of premiums). This has become more relevant in recent times as people seek financial independence from their family.

iii. Investment:Put simply, the building up of savings while safeguarding it from the ravages ofinflation. Unlike regular saving products, investment products are traditionally lumpsum investments, where the individual makes a one-time payment.

iv. Retirement:Provision for one’s own later years become increasing necessary, especially in achanging culture and social environment. One can buy a suitable insurance policy,which will provide periodical payments in one’s old age. This simple exampleillustrates the impact premature death can have on a family, where the main earnerhas no life cover.

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. Since being set up as an independent statutory body the IRDA has put in a framework of globally compatible regulations. In the private sector 12 life insurance and 6 general insurance companies have been registered.

Types of Insurance

I. Life Insurance - Insurance guaranteeing a specific sum of money to a designated beneficiary upon the death of the insured, or to the insured if he or she lives beyond a certain age.

II. Health Insurance - Insurance against expenses incurred through illness of the insured.

III. Liability Insurance - This insures property such as automobiles, property and professional/business mishaps.

Challenges facing Insurance Industry

I. Threat of New Entrants: The insurance industry has been budding with new entrants every other day. Therefore the companies should carve out niche areas such that the threat of new entrants might not be a hindrance. There is also a chance that the big players might squeeze the small new entrants.

II. Power of Suppliers: Those who are supplying the capital are not that big a threat. For instance, if someone as a very talented insurance underwriter is presently working for a small insurance company, there exists a chance that any big player willing to enter the insurance industry might entice that person off.

III. Power of Buyers: No individual is a big threat to the insurance industry and big corporate houses have a lot more negotiating capability with the insurance companies. Big corporate clients like airlines and pharmaceutical companies pay millions of dollars every year in premiums.

IV. Availability of Substitutes: There exist a lot of substitutes in the insurance industry. Majorly, the large insurance companies provide similar kinds of services – be it auto, home, commercial, health or life insurance.

In most developing countries, it is common to hear that foreign insurance companies can be a threat to the domestic industry. This is the so-called infant industry argument: if we allow foreign companies to come in, they will wipe out the domestic industry.

In this regard, it is instructive to examine the experience from other countries in the region where foreign companies have been allowed to operate. In most countries, foreign presence has not eliminated domestic players. In India, the story remains the same for banks. Even though there are many foreign banks operating in India, their combined market share is barely in the double digits. By most accounts, the effects of the presence of the foreign banks have been positive. They have forced local banks to improve their services.

LIFE INSURANCE CORPORATIOMN INDIA:

VISION

"A trans-nationally competitive financial conglomerate of significance to societiesand Pride of India".

MISSION"Explore and enhance the quality of life of people through financial security by providing products and services of aspired attributes with competitive returns, and by rendering resources for economic development."

In life insurance, the Life Insurance Corporation has three important elements in its favor.

(1) The Life Insurance Corporation has a vast distribution network in the rural and semi-urban areas. This would be hard to duplicate. One potential way to duplicate it would be through bancassurance – selling insurance through banks. Some insurance companies have already embarked on this road.

(2) Since the Life Insurance Corporation started with 100% of the market share, it will lose market share simply because of expansion of the market itself and less because of loss of existing customers. The Life Insurance Corporation is the only financial institution in the top 50 trusted brand names in India by a survey of the Economic Times newspaper

(3) As life insurance benefits accrue over time, it becomes more expensive to switch - because switching would mean a loss of accrued benefits. With the rapid expansion of life insurance, the market share of the Life Insurance Corporation could fall below the 50% mark in five years time.

Customer satisfaction: -Since the customer is the focus of any service industry, every such industry continuously strives for greater variety and better quality of products, improvement in its delivery system, cost effectiveness, easy access, and quick response to perceived needs – in short qualitatively superior service. Indian life insurance companies alreadyhave a sizable line up of the products. The difference between them and the foreign operators perhaps lies in the service provided, because there is still not enough

Concern on the part of the Indian companies, with customer satisfaction, on time renewals, claims settlements, etc. if high standards have been achieved else where, itis not impossible to attain the same in India too. The concept of “sales” is now redefined as a long – standing relationship. The relationship does not end with the conclusion of

the transaction, but has to be durable and of a long term nature. Hence, improved in performance of the company will not be synonymous with only basic cost reduction or larger business, but the new measure of performance will be set in terms of service to the customer. One can anticipate greater insistence from pressure groups like customer forums to keep customer satisfaction at the top of the list of priorities of the insurers.

Top 10 Life Insurance Companies in India (Market Share)

LIC (Life Insurance Corporation of India) still remains the largest life insurance company accounting for 64% market share. Its share, however, has dropped from 74% a year before, mainly owing to entry of private players with innovative products and better sales force.

ICICI Prudential Life Insurance Co Ltd is the biggest private life insurance company in India. It experienced growth of 58% in new business premium, accounting for increase in market share to 8.93% in 2007-08 from 6.97% in 2006-07.

Bajaj Allianz Life Insurance Co Ltd has reported a growth of 52% and its market share went up to 6.98% in 2007-08 form 5.66% in 2006-07. The company ranked second (after LIC) in number of policies sold in 2007-08, with total market share of 7.36%.

 SBI Life Insurance Co Ltd in terms of new number of policies sold, the company ranked 6th in 2007-08. New premium collection for the company was Rs 4,792.66 crore in 2007-08, an increase of 87% over last year.

 Reliance Life Insurance Co Ltd Total collected was Rs 2,792.76 crore and its market share went up to 2.96% from 1.23% a year back. It now ranks 5th in new business premium and 4th in number of new policies sold in 2007-08.

 HDFC Standard Life Insurance Co Ltd with an  income of Rs 2,680 crore in FY2007-08, registering a year-on-year growth of 64%. Its market share is 2.88% and it ranks 6 th among the insurance companies and 5th amongst the private players.

 Birla Sun Life Insurance Co Ltd market share of the company increased from 1.22% to 2.11% in 2007-08. The company moved to the 7th position in 2007-08 from 8the a year before, pushing down Max New York Life insurance company.

 Max New York Life Insurance Co Ltd has reported growth of 73% in 2007-08. Total new business generated was Rs 641.83 crore as against Rs 387.51 crore. The company was pushed down to the 8th position from 7th in 2007-08.

 Kotak Mahindra Old Mutual Life Insurance Ltd the fiscal 2007-08, the company reported growth of 80%, moving from the 11th position to 9th. It captured a market share of 1.19% in 2007-08. Last year the company doubled its branch network to 150 from 74.

 Aviva Life Insurance Company India Ltd ranking dropped to 10th in 2007-08 from 9th last year. It has presence in more than 3,000 locations across India via 221 branches and close to 40 bank assurance partnerships. Aviva Life Insurance plans to increase its capital base by Rs 344 crore. With the fresh investment, total paid-up capital of the insurer would go up to Rs 1,348.8 crore.

Conclusions:

The insurance business is at a critical stage in India. Over the next two decades we are likely to witness high growth in the insurance sector for three reasons. Financial deregulation always speeds up the development of the insurance sector.

Growth in income also helps the insurance business to grow. In addition, increased longevity and Aging population will also spur growth in health and pension segments.