INSURANCE

Insurance is basically risk management device. The losses to assets resulting from natural

calamities like fire, flood, earthquake, accident etc. are met out of the

common pool contributed by large number of persons who are exposed to similar risks. This

contribution of many is used to pay the losses suffered by unfortunate few. However

the basic principle is that losses should occur as a result of natural calamities or

unexpected events which are beyond the human control. Secondly insured person

should not make any gains out of insurance. It is natural to think of insurance of physical

assets such as motor car insurance or fire insurance but often be forget that creator all

these assets is the human being whose effort have gone a long way in building up to

assets. In that scene human life is a unique income generating assets. Unlike physical assets

which decreases with the passage of time. The individual become more experience and

mature as he advances in age.

This raises his earnings capacity and the purpose of lifeinsurance is to protect the income

to individual and provide financial security to his family which is dependent of  his

income in the event of his pre mature death. The individual also himself also himself

also needs financial security for the old age or on his becoming permanently

disabled when his income will stop. Insurance also has an element of saving in certain cases.

Insurance is rupees 400 billion business in India and yet its spread in the country is

relatively thin. Insurance as a concept has not being able to make headway in India.

Presently LIC enjoys a monopoly in Life Insurance business while GIC enjoys

it in general insurance business. There has been very little option before the customer

to decide the insurer. A successful passage of the IRA bill have clear the way of private

sector operators in collaboration with their overseas partner. It is likely to bring in a

more professional and focuses approach. More over the foreign players would

bring sophisticated actuarial techniques with them which would facilitate the insurer

to effectively price the product. It is very important that the trained marketing

professionals who are able to communicate specific features of the policy should

shall sell the policy. In the next millennium all the activities would play a crucial role in

the overall development and maturity of the insurance industry.

General Definition of Insurance:-

In t he words o f D .S .hanse l l , “ In su rance may be de f i ned a s a soc i a l

dev i ce providing financial compensation for the effects of misfortune, the paying

being made from the accumulated contributions of all participating in the scheme.”

Characteristics of   Insurance

Sharing of risk

Co-operative device

Evaluation of risk

Payment on happening of special event

the amount of payment depends on the nature of losses incurred

Need of the Life   Insurance:-

The original basic intention of life insurance is to provide for one’ family

and perhaps others in the event of death. Originally, polices were to provide for

short periods of time, covering temporary risk situations, such as sea voyages. As life

insurance became more established. It was realized what a useful tool it was in a

number of situations, including:

1. Temporary needs threats:

The original  purpose of Life Insurance remains an important  element, namely

providing for replacement of income on death etc.

2. Regular saving:

Providing one’s family and oneself, as a medium to long term exercise

(through a series of regular payment of premiums). This has been become more

relevant in recent times as people seek financial independence from their family.

3. Investment:

Put simply, the building up of saving while safeguarding it from ravages of inflation. Unlike

regular saving products are traditionally lump is investments, where the individual

makes are onetime payment.

4. Retirement:

Provision for one’s on later years has become increasingly 

necessary.Especially in charging culture abs social environment; one can buy

a suitable insurance policy which will provide periodical payments on one’s old age.

THE   EVALUATION OF   INSURANCE   INDUSTRY IN INDIA:

Life insurance in its modern from is a western concept. The Indian insurance industry is as

old as it is insurance other part of the world. Although life insurance business has been

taking shape for the last 300 years, it came to India with the arrival of Europeans.

First Life Insurance Company was established insurance 1818 as Oriental Insurance,

mainly to provide for windows of Europeans. The companies that follow mainly catered to

Europeans and charged extra premium on Indian Lives. The first insurance company

insuring Indian Lives at standard rates was BOMBAY MUTUAL LIFE INSURANCE

COMPANY which was formed insurance 1870. This was also the year when 1 st

insurance act was passed by the British Parliament.; the years subsequent to the Swadeshi

movement saw the emergence of several insurance companies. At the end of the year

1995 there were 245 insurance companies all   t h e i n s u r a n c e c o m p a n y ’ s   w e r e

nationalized insurance 1965 and brought under one umbrella. LIFE INSURANCE

CORPORATION OF INDIA (LIC) which enjoyed monopoly of the life insurance business

until near the end of 2000. By enacting the IRDA act 1999. The Government of India

effectively ended Lick’s monopoly and opened the door for private insurance company’s

collaboration of Indian companies with foreign Companies.

FUTURE SCENARIO:

Before looking insurance future prospectus of the insurance industry, we must take a

look into its past history. The independent India started with private sector insurance

companies. These companies were nationalized by the Union Govt. in 1965  to form

a monopoly known as Life Insurance Corporation of India has being under public

sector for over four decades till the govt. opened the insurance sector for private

companies in 2000.

When the insurance Industry was nationalized, it was consider a land mark and a

milestone on the way to the socialistic pattern of society that India

hadchosen after independence.  Nationalization has lent the industry solidity 

andgrowth which is unparalleled. Forever, along with these achievements there also

grew feelings of Insensitivity to the needs of the market, traditions insurance adoption

of modern practices to upgrades technical skills coupled with a scene of

lethargy which probable lead to a feeling amongst that the insurance industry

was not fully responsive to customers’ needs.

Definition of 'Privatization'

The transfer of ownership, property or business from the government to the private sector is

termed privatization. The government ceases to be the owner of the entity or business.

The process in which a publicly-traded company is taken over by a few people is also called

privatization. The stock of the company is no longer traded in the stock market and the

general public is barred from holding stake in such a company. The company gives up the

name 'limited' and starts using 'private limited' in its last name.

Potential Benefits of Privatization

1. Improved Efficiency.

The main argument for privatization is that private companies have a profit incentive to cut

costs and be more efficient. If you work for a government run industry, managers do not

usually share in any profits. However, a private firm is interested in making profit and so it is

more likely to cut costs and be efficient. Since privatization, companies such as BT, and

British Airways have shown degrees of improved efficiency and higher profitability.

2. Lack of Political Interference.

It is argued governments make poor economic managers. They are motivated by political

pressures rather than sound economic and business sense. For example a state enterprise may

employ surplus workers which are inefficient. The government may be reluctant to get rid of

the workers because of the negative publicity involved in job losses. Therefore, state owned

enterprises often employ too many workers increasing inefficiency.

3. Short Term view.

A government many think only in terms of next election. Therefore, they may be unwilling to

invest in infrastructure improvements which will benefit the firm in the long term because

they are more concerned about projects that give a benefit before the election.

4. Shareholders

It is argued that a private firm has pressure from shareholders to perform efficiently. If the

firm is inefficient then the firm could be subject to a takeover. A state owned firm doesn’t

have this pressure and so it is easier for them to be inefficient.

5. Increased Competition.

Often privatization of state owned monopolies occurs alongside deregulation – i.e. policies to

allow more firms to enter the industry and increase the competitiveness of the market. It is

this increase in competition that can be the greatest spur to improvements in efficiency. For

example, there is now more competition in telecoms and distribution of gas and electricity.

However, privatization doesn’t necessarily increase competition, it depends on the nature of

the market. E.g. there is no competition in tap water. There is very little competition within

the rail industry.

6. Government will raise revenue from the sale

Selling state owned assets to the private sector raised significant sums for the UK government

in the 1980s. However, this is a one off benefit. It also means we lose out on future dividends

from the profits of public companies.

Disadvantages of Privatization

1. Natural Monopoly:-

A natural monopoly occurs when the most efficient number of firms in an industry is one. For

example tap water has very significant fixed costs, therefore there is no scope for having

competition amongst several firms. Therefore, in this case, privatization would just create a

private monopoly which might seek to set higher prices which exploit consumers. Therefore

it is better to have a public monopoly rather than a private monopoly which can exploit the

consumer.

2. Public Interest

There are many industries which perform an important public service, e.g health care,

education and public transport. In these industries, the profit motive shouldn’t be the primary

objective of firms and the industry. For example, in the case of health care, it is feared

privatizing health care would mean a greater priority is given to profit rather than patient

care. Also, in an industry like health care, arguably we don’t need a profit motive to improve

standards. When doctors treat patients they are unlikely to try harder if they get a bonus.

3. Government loses out on potential dividends.

Many of the privatized companies in the UK are quite profitable. This means the government

misses out on their dividends, instead going to wealthy shareholders.

4. Problem of regulating private monopolies.

Privatizations create private monopolies, such as the water companies and rail companies.

These need regulating to prevent abuse of monopoly power. Therefore, there is still need for

government regulation, similar to under state ownership.

5. Fragmentation of industries.

In the UK, rail privatization led to breaking up the rail network into infrastructure and train

operating companies. This led to areas where it was unclear who had responsibility. For

example, the Hatfield rail crash was blamed on no one taking responsibility for safety.

Different rail companies have increased the complexity of rail tickets.

6. Short-Termism of Firms.

As well as the government being motivated by short term pressures, this is something private

firms may do as well. To please shareholders they may seek to increase short term profits and

avoid investing in long term projects. For example, the UK is suffering from a lack of

investment in new energy sources; the privatized companies are trying to make use of

existing plants rather than invest in new ones.

History of Indian Insurance

Insurance in India started without any regulation in the Nineteenth Century. It Was a typical

story of a colonial era: a few British insurance companies dominating the market serving

mostly large urban centers. After the independence, it took a dramatic turn. Insurance was

nationalized. First, the life insurance companies were nationalized in 1956, and then the

general insurance business was nationalized in 1972. Only in 1999 private insurance

companies have been allowed back into the business of insurance with a maximum of 26% of

foreign holding. In what follows, we describe how and why of regulation and deregulation.

The entry of the State Bank of India with its proposal of bancassurance brings a new

dynamics in the game. We study the collective experience of the other countries in Asia

already deregulated their markets and have allowed foreign companies to participate. If the

experience of the other countries is any guide, the dominance of the Life Insurance

Corporation and the General Insurance Corporation is not going to disappear any time soon.

Insurance under the British Raj

Life insurance in the modern form was first set up in India through a British company called

the Oriental Life Insurance Company in 1818 followed by the Bombay Assurance Company

in 1823 and the Madras Equitable Life Insurance Society in 1829. All of these companies

operated in India but did not insure the lives of Indians. They were there insuring the lives of

Europeans living in India. Some of the companies that started later did provide insurance for

Indians. But, they were treated as "substandard" and therefore had to pay an extra premium of

20% or more. The first company that had policies that could be bought by Indians with "fair

value" was the Bombay Mutual Life Assurance Society starting in 1871.

The first general insurance company, Triton Insurance Company Ltd., was established in

1850. It was owned and operated by the British. The first indigenous general insurance

company was the Indian Mercantile Insurance Company Limited set up in Bombay in 1907.

By 1938, the insurance market in India was buzzing with 176 companies (both life and non-

life). However, the industry was plagued by fraud. Hence, a comprehensive set of regulations

was put in place to stem this problem (see Table 1). By 1956, there were 154 Indian

insurance companies, 16 non-Indian insurance companies and 75 provident societies that

were issuing life insurance policies. Most of these policies were centered in the cities

(especially around big cities like Bombay, Calcutta, Delhi and Madras). In 1956, the then

finance minister S. D. Deshmukh announced nationalization of the life insurance business.

Monopoly Raj

The nationalization of life insurance was justified mainly on three counts.

(1) It was perceived that private companies would not promote insurance in rural areas.

(2) The Government would be in a better position to channel resources for saving and

investment by taking over the business of life insurance.

(3) Bankruptcies of life insurance companies had become a big problem (at the time of

takeover, 25 insurance companies were already bankrupt and another 25 were on the verge of

bankruptcy). The experience of the next four decades would temper these views.

Life Story of the Life Insurance Corporation

The life insurance industry was nationalized under the Life Insurance Corporation (LIC) Act

of India. In some ways, the LIC has become very successful.

(1) Despite being a monopoly, it has some 60-70 million policyholders. Given that the Indian

middle-class is around 250-300 million, the LIC has managed to capture some 30 odd percent

of it.

(2) The level of customer satisfaction is high for the LIC (one of the findings of the Malhotra

Committee, see below). This is somewhat surprising given the frequent delays in claim

settlement.

(3) Market penetration in the rural areas has grown substantially. Around 48% of the

customers of the LIC are from rural and semi-urban areas. This probably would not have

happened had the charter of the LIC not specifically set out the goal of serving the rural areas.

One exogenous factor has helped the LIC to grow rapidly in recent years: a high saving rate

in India. Even though the saving rate is high in India (compared with other countries with a

similar level of development), Indians exhibit high degree of risk aversion. Thus, nearly half

of the investments are in physical assets (like property and gold). Around twenty three

percent are in (low yielding but safe) bank deposits. In addition, some 1.3- percent of the

GDP are in life insurance related savings vehicles. This figure has doubled between 1985 and

1995.

Life Insurance in India: A World Perspective

In many countries, insurance has been a form of savings. Table 2 shows that in many

developed countries, a significant fraction of domestic saving is in the form of (endowment)

insurance plans. This is not surprising. The prominence of some developing countries is more

surprising. For example, South Africa features at the number two spot. India is nestled

between Chile and Italy. This is even more surprising given the levels of economic

development in Chile and Italy. Thus, we can conclude that there is an insurance culture in

India despite a low per capita income. This bodes well for future growth. Specifically, when

the income level improves, insurance (especially life) is likely to grow rapidly.

Table 2 LIFE INSURANCE PREMIUM AS PERCENTAGES OF THE GROSS DOMESTIC SAVING (GDS)

AND THAT OF GROSS DOMESTIC PRODUCT (GDP)

The General Insurance Corporation

Although efforts were made to maintain an open market for the general insurance industry by

amending the Insurance Act of 1938 from time to time, malpractice escalated beyond control.

Thus, the general insurance industry was nationalized in 1972. The General Insurance

Corporation (GIC) was set up as a holding company. It had four subsidiaries: New India,

Oriental, United India and the National Insurance companies (collectively known as the

NOUN). It was understood that these companies would compete with one another in the

market. It did not happen. They were supposed to set up their own investment portfolios. That

did not happen either. It began to happen after 29 years. The NOUN has kicked off an

internal exercise to segregate the entire investment portfolio of the GIC (in 2001). The GIC

has a quarter of a million agents. It has more than 2,500 branches, 30 million individual and

group insurance policies and assets of about USD 1,800 million at market value (at the end of

1999). It has been suggested that the GIC should close 20- 25% of its nonviable branches

(Patel, 2001). The GIC has so far been the holding company and re-insurer for the state-run

insurers. It reinsured about 20% of their business.

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

Liberalization of the Indian insurance market was recommended in a report released in 1994

by the Malhotra Committee, indicating that the market should be opened to private-sector

competition, and ultimately, foreign private-sector competition. It also investigated the level

of satisfaction of the customers of the LIC. Curiously, the level of customer satisfaction

seemed to be high. The union of the LIC made political capital out of this finding

The following are the purposes of the committee.

(a) To suggest the structure of the insurance industry, to assess the strengths and weaknesses

of insurance companies in terms of the objectives of creating an efficient and viable insurance

industry, to have a wide coverage of insurance services, to have a variety of insurance

products with a high quality service, and to develop an effective instrument for mobilization

of financial resources for development.

(b) To make recommendations for changing the structure of the insurance industry, for

changing the general policy framework etc.

(c) To take specific suggestions regarding LIC and GIC with a view to improve the

functioning of LIC and GIC.

(d) To make recommendations on regulation and supervision of the insurance sector in India.

(e) To make recommendations on the role and functioning of surveyors, intermediaries like

agents etc. in the insurance sector.

(f) To make recommendations on any other matter which are relevant for development of the

insurance industry in India.

The committee made a number of important and far-reaching recommendations.

(a) The LIC should be selective in the recruitment of LIC agents. Train these people after the

identification of training needs.

(b) The committee suggested that the Federation of Insurance Institute, Mumbai should start

new courses and diploma courses for intermediaries of the insurance sector.

(c) The LIC should use an MBA specialized in Marketing (a similar suggestion for the GIC

subsidiaries).

(d) It suggested that settlement of claims were to be done within a specific time frame

without delay.

(e) The committee has several recommendations on product pricing, vigilance, systems and

procedures, improving customer service and use of technology.

(f) It also made a number of recommendations to alter the existing structure of the LIC and

the GIC.

(g) The committee insisted that the insurance companies should pay special attention to the

rural insurance business.

(h) In the case of liberalization of the insurance sector the committee made several

recommendations, including entry to new players and the minimum capital level

requirements for such new players should be Rs. 100 crores (about USD 24 million).

However, a lower capital requirement could be considered for a co-operative sectors' entry in

the insurance business.

(i) The committee suggested some norms relating to promoters’ equity and equity capital by

foreign companies, etc.

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.

Insurance Regulatory Act (1999)

After the report of the Malhotra Committee came out, changes in the insurance industry

appeared imminent. Unfortunately, instability in Central Government, changes in insurance

regulation could not pass through the parliament.

The dramatic climax came in 1999. On March 16, 1999, the Indian Cabinet approved an

Insurance Regulatory Authority (IRA) Bill that was designed to liberalize the insurance

sector. The bill was awaiting ratification by the Indian Parliament. However, the BJP

Government fell in April 1999. The deregulation was put on hold once again.

An election was held in late 1999. A new BJP-led government came to power. On December

7, 1999, the new government passed the Insurance Regulatory and Development Authority

(IRDA) Act. This Act repealed the monopoly conferred to the Life Insurance Corporation in

1956 and to the General Insurance Corporation in 1972. The authority created by the Act is

now called IRDA. It has ten members. New licenses are being given to private companies

(see below). IRDA has separated out life, non-life and reinsurance insurance businesses.

Therefore, a company has to have separate licenses for each line of business. Each license has

its own capital requirements (around USD24 million for life or non-life and USD48 million

for reinsurance).

Some Details of the IRDA Bill

On July 14, 2000, the Chairman of the IRDA, Mr. N. Rangachari set forth a set of regulations

in an extraordinary issue of the Indian Gazette that details of the regulation.

Regulations

The first covers the Insurance Advisory Committee that sets out the rules and regulation.

The second stipulates that the "Appointed Actuary" has to be a Fellow of the Actuarial

Society of India. Given that there has been a dearth of actuaries in India with the qualification

of a Fellow of the Actuarial Society of India, this becomes a requirement of tall order. As a

result, some companies have not been able to attract a qualified Appointed Actuary

(Dasgupta, 2001). The IRDA is also in the process of replacing the Actuarial Society of India

by a newly formed institution to be called the Chartered Institute of Indian Actuaries

(modeled after the Institute of Actuaries of London). Curiously, for life insurers the

Appointed Actuary has to be an internal company employee, but he or she may be an external

consultant if the company happens to be a non-life insurance company.

Third, the Appointed Actuary would be responsible for reporting to the IRDA a detailed

account of the company.

Fourth, insurance agents should have at least a high school diploma along with training of

100 hours from a recognized institution. More than a dozen institutions have been recognized

by the IRDA for training insurance agents (the list appears online at

http://www.irdaonline.org/press.asp).

Fifth, the IRDA has set up strict guidelines on asset and liability management of the

insurance companies along with solvency margin requirements. Initial margins are set high

(compared with developed countries). The margins vary with the lines of business (for

example, fire insurance has a lower margin than aviation insurance).

Sixth, the disclosure requirements have been kept rather vague. This has been done despite

the recommendations to the contrary by the Mukherjee Committee recommendations.

Seventh, all the insurers are forced to provide some coverage for the rural sector.

(1) In respect of a life insurer,

(a) five percent in the first financial year;

(b) seven percent in the second financial year;

(c) ten percent in the third financial year;

(d) twelve percent in the fourth financial year;

(e) fifteen percent in the fifth year (of total policies written direct in that year).

(2) In respect of a general insurer,

(a) two percent in the first financial year;

(b) three percent in the second financial year;

(c) five percent thereafter (of total gross premium income written direct in that year).

New Entry

Immediately after the passage of the Act, a number of companies announced that they would

seek foreign partnership. In mid-2000, the following companies made public statements that

they already were in the process of setting up insurance business with foreign partnerships

(see Table 3). However, not all the partnerships panned out in the end (see below).

Three days before the deadline that the IRDA had set upon itself (October 25, 2000), it issued

three companies with license papers:

(1) HDFC Standard Life. This will be jointly set up by India's Housing Development Finance

Company - the largest housing finance company in India and the Scotland based Standard

Life.

(2) Sundaram Royal Alliance Insurance Company. It is a partnership created by Sundaram

Finance and three other companies of the TVS Group of Chennai (Madras) and the London

based Royal & SunAlliance.

(3) Reliance General Insurance. This company is fully owned by Mumbai based Reliance

Industries which has operations in textile, petrochemicals, power and finance industries.

There are three other companies with "in principal" approvals:

(1) Max New York Life. It is a partnership between Delhi based pharmaceutical company

Max India and New York Life, the New York based Life Insurance Company.

(2) ICICI Prudential Life Insurance Company. This is a joint venture between Mumbai based

Industrial Credit & Investment Corporation and the London based Prudential PLC.

(3) IFFCO Tokio General Insurance Company. It is a joint venture between Indian Farmers'

Fertiliser Cooperative and Tokio Marine and Fire of Japan. To date (end of April 2001), the

following companies have thus been granted licenses: ICICI -Prudential, Reliance General,

Reliance Life, Tata-AIG General, HDFC Standard Life, Royal-Sundaram, Max-New York

Life, IFFCO-Tokio Marine, Birla-SunLife, Bajaj-Allianz General, Tata-AIG Life, ING-

Vyasa, Bajaj-Allianz Life, SBICardiff Life. Note that all of these companies are either in the

life insurance business or in the non-life insurance business. No license has been granted for

reinsurance business so far (the size of the reinsurance business can be 10-20% of the total

revenue). No stand-alone health insurance company has been granted license so far.

Enter the Dragon

On December 28, 2000, the State Bank of India (SBI) announced a joint venture partnership

with Cardif SA (the insurance arm of BNP Paribas Bank). This partnership won over several

others (with Fortis and with GE Capital). The entry of the SBI has been awaited by many. It

is well known that the SBI has long harbored plans to become a universal bank (a universal

bank has business in banking, insurance and in security). For a bank with more than 13,000

branches all over India, this would be a natural expansion. In the first round of license issue,

the SBI was absent. There were several reasons for this delay. First, the SBI was seeking a

foreign partner to help with new product design. Second, it did not want the partner to

become dominant in the long run (when the 26% foreign investment cap is eventually lifted).

It wanted to retain its own brand name. Third, it wanted a partner that is well versed in the

Universal banking business. This ruled out an American partner (where underwriting

insurance business by banks have been strictly forbidden by law). Cardif is the third largest

insurance company in France. More than 60% of life insurance policies in France are sold

through the banks. Fourth, the Reserve Bank of India (RBI) needed to clear participation by

the SBI because in India banks are allowed to enter other businesses on a "case by case"

basis. Over the course of the next twelve months, the SBI will sell insurance in 100 branches.

Over a period of 2-3 years it will expand operation in 500 branches. Initially it will hold 74%

ownership of the joint venture company with Cardif. Over time, it will dilute its holding to

50-60%. The SBI entry is groundbreaking for several reasons. This was the first for a bank to

enter the insurance market. This kind of synergy between a bank and an insurance company

is extremely rare in many parts of the world. In Continental Europe, it is called bancassurance

(in France) or allfinanz (in Germany). Second, even though the regulators have said that

banks would not (generally) be allowed to hold more than 50% of an insurance company, the

SBI was allowed to do so (with a promise that its share would be eventually diluted).

Lessons from China

China is the most populous country in the world (at 1.2 billion); India is a close second (just

over a billion). Both have followed the path of deregulation and privatization - China started

it in 1979 and India in 1991. Comparisons of these processes are described in Sinha and

Sinha (1997). In this section, I will concentrate only on the insurance industry in the two

countries. The insurance business in India has a premium volume of $8.3 billion in 1999

whereas in China the premium volume is $16.8 billion in 1999. However, premium per capita

is not all that dissimilar: $13.7 per person in China and $8.5 in India in 1999. As a percent of

GDP, insurance is 1.93% in India and 1.63% in China in 1999 (all data from Sigma, 2000).

In China, the People's Insurance Company of China (PICC) had a monopoly between 1949

and 1959. In 1959, insurance business was deemed capitalistic and all forms of insurance

were suspended (and the insurance business was taken over by the Peoples Bank of China).

The insurance business reopened in 1979, the PICC reassumed its old role as the monopoly.

There are many differences in the way China and India have handled deregulation. First, in

China, the China Insurance Regulatory Commission (CIRC) was set up in November 1998,

well after the first Insurance Law was promulgated in 1995. In India, the IRDA was launched

first with the authority to issue licenses. It took almost a year before it issued licenses for the

first set of private insurance companies. Second, in China, foreign insurers need to have a

representative office for three years before they can submit a proposal for operation (in

practice, this has been reduced to two years in some cases). In India, there is no such

requirement. Third, foreign insurers can only own 25% of the total value of the market

(although, in reality, it has been much less than that in Shanghai). In India, the limit is set at

26% per company. In China, there is no limit at the company level. Thus, a foreign company

can own 100% of an approved insurance company in China. Fourth, in India, the licenses are

national. A company with a license can operate in any part of the country. In China, on the

other hand, foreign companies are restricted to operation in two metropolitan areas: Shanghai

and Guangzhou. Fifth, the IRDA is a law-implementing body. It can only interpret the laws

that have been passed by the Indian Parliament. On the other hand, it seems that the CIRC

has been a lawmaking body, it is setting up rules as it sees fit. Sixth, China seems to have

been forced to issue insurance licenses to a host of foreign companies by the end of 2000

simply because it wanted an assured entry into the World Trade Organization (WTO). In

India, there is no such pressure as India is already a part of the WTO.

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.

Insurance Policies: Types

Two main types: General and Life

1) General Insurance

General Insurance = Every Insurance plan EXCEPT life insurance plan

Name Sub categories

Personal Insurance policiesmedical insurance, accident, property and

vehicle insurance

Rural Insurance policiesprotection against natural and climatic disasters for

agriculture and rural businesses

Industrial Insurance policiescoverage for project, construction, contracts, fire,

equipment loss, theft, etc.

Commercial Insurance policiesprotection against loss and damage of property during

transportation, transactions, marine insurance etc.

2) Life Insurance Types

Whole life plan

You pay the premium till you retire or till the term of the policy.

Your family will get money ONLY after you die.

You MUST DIE to get back the money.

Endowment

Insurance company collect premium form the insured for the

certain period of time like 15, 20, 25, 30 years.

If you die within that term, the company will pay huge money to

your family.

If you don’t die within that term, company will return the

premium you paid + some interest or bonus on it.

So, you DONOT NEED TO DIE to get back the money.

Term Plan

You keep paying premium for given period (5,10,20 etc. years)

If you die within that period, your family gets huge money.

But if you don’t die within that period, you will not get a single

penny from the company.

So, you MUST DIE to get back the money.

Good part- Term Plans have cheaper premium than other plans.

ULIP(Unit Linked

Insurance Policy)

You pay regular premium to the company.

Company invests it in Debt and Equity markets. [click Me to

know more about Debt and Equity Markets]

The profit generated by this investment, will be given to you no

matter you die or not.

Thus you get the benefit of risk cover as well as the investment

gains.

You DONOT NEED TO DIE to get back the money.

They pay higher return than Endowment.

Nationalization of Insurance business

In 1972, Government  of India passed of the General Insurance Business (Nationalisation)

Act,

With this Act, Government  took control of all the private insurance companies of India

and created 4 companies

National Insurance Company Ltd General Insurance.HQ: Kolkata

New India Assurance Company Ltd General InsuranceHQ: Mumbai

Oriental Insurance Company Ltd General InsuranceHQ: New Delhi

United India Insurance Company Ltd. General InsuranceHQ: Chennai

Foreign Direct Investment in Insurance

up to 26% is allowed.Update: 49% allowed after Mamta Left the UPA alliance.

For example “Bajaj Allianz Life Insurance Company Limited” is a joint venture between

The Indian Company Bajaj (that scooter maker, has 74% stakes in this company.)

The Foreign Company Allianz AG (German Company, has 26% stakes in this

company)

Similar arrangement was present in “Max New York Life Insurance Company”

But the New York Life sold its stakes and left the game hence the new name

of the company is Max Life Insurance Company. [You might have seen the ads on

TV about its name change.]

Reform in Insurance sector already done by IRDA

If an Insurance company has been in business for 10 years, it can launch IPO.

Mobility / Portability in Health Insurance= if you’re unhappy with your Health

(Medical) insurance company, you can change it.

LIC

Life Insurance Corporation of India

100% owned by Government.

Started in 1956

HQ: Mumbai

Motto: “Yogakshemam Vahamyaham” (taken from Gita, meaning “I carry what you

require”.)

Provides Life Insurance, Health Insurance

GIC- Reinsurer

Suppose LIC sells 1000 life insurance policies, each with a 1 crore policy limit (e.g. I, the

customer pay Rs.10,000 premium every year and If I die my family should get 1 crore-

that type of Policy).

Theoretically, the LIC could lose 1000 crores in a day, if every customer dies on the same

day!

So to prevent itself from such a loss, LIC itself should take some insurance from a third

insurance company (GIC).

for example “I, the LIC Manager shall continue to pay the GIC 1 lakh every month, and in

return GIC insures that if my company LIC has to pay more than 100 crores in policy

claims within 1 week, then GIC will cover the cost.

So, This third party, General Insurance Corporation of India (GIC) = Reinsurer.

GIC is the ONLY Reinsurer in India.

Types of Insurance

Companies which provide Life insurance in India

Public Sector

Life Insurance Corporation of India

Private Sector

AEGON Religare Life Insurance

Edelweiss Tokio Life Insurance Co. Ltd

Aviva India

Shriram Life Insurance

Bajaj Allianz Life Insurance

Bharti AXA Life Insurance Co Ltd

Birla Sun Life Insurance

Canara HSBC Oriental Bank of Commerce Life Insurance

Star Union Dai-ichi Life Insurance

DLF Pramerica Life Insurance

Future Generali Life Insurance Co Ltd

HDFC Standard Life Insurance Company Limited

ICICI Prudential Life Insurance Company Limited

IDBI Federal Life Insurance

IndiaFirst Life Insurance Company

ING Life Insurance

Kotak Life Insurance

Max Life Insurance

PNB MetLife India Life Insurance

Reliance Life Insurance Company Limited

Sahara Life Insurance

SBILife Insurance Ltd.

TATA AIA Life Insurance

Conclusions

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 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. From Table 4, we observe that the openness of the market did not mean a

takeover by foreign companies even in a decade. Thus, it is unlikely that the same will

happen in India, especially when the foreign insurers cannot have a majority shareholding in

any company.