ABSTACT

Insurance sector in INDIA is booming up but not to level comparative with the developed economies such as Japan, Singapore etc. The leading reinsurance company, Swiss Re & Munich Re, has projected that there would be 20-25% growth in life and health insurance market by 2015, particularly in countries like India and China. The IRDA is the major body, which is providing better opportunities for the private player in India. GIC & LIC's monopoly market approach is no more prevalent in India. The new market scenario for insurance is growing; no doubt it is a flying bird. Also with the opening of the insurance sector to theprivate players have provided stiff competition resulting into qualityproducts. Also there is a need to restructure the Indian Government owned “ Life insurance Corporation of India “ so as to maximize revenue and in turn profits. IRDA regulations and norms for theallocation of funds need to have a comprehensive look. In the phaseof declining interest rates and rising inflation the funds need to beapplied in productive areas so as to generate high returns. Also interms of clients servicing areas such as premium payments, after sales service, policy dispatch, redressal of grievances has to beamended. In the current scenario, LIC has to provide flexible productssuited to the customers requirements. Also a proper and systematicrisk management strategy needs to be adopted. After the increase interrorism and destructive events around the global world such asSeptember 11 attack on World Trade Centre, US – Taliban war, US –Iraq war etc.. an alternative to reinsurance such as asset backedsecurities is emerging out in the developed economies. Catastrophebonds is one of the alternatives for reinsurance. Finally some policiessuch as pure term and pension schemes needs to be addresseD high premium income which will help in the development and growthof the economy.

INTRODUCTION

a. INSURANCE

Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.

According to study texts of The Chartered Insurance Institute, there are the following categories of risk:

1. Financial risks which means that the risk must have financial measurement.

2. Pure risks which means that the risk must be real and not related to gambling

3. Particular risks which means that these risks are not widespread in their effect, for example such as earthquake risk for the region prone to it.

It is commonly accepted that only financial, pure and particular risks are insurable.

An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount of money to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.

The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.

POST 1991

INSURANCE SECTOR – A PREVIEW

The insurance sector in India dates back to 1818, when Oriental Life Insurance Company was incorporated at Calcutta. Thereafter, few other companies like Bombay Life Assurance Company, in 1823 and Triton Insurance Company, for General Insurance, in 1850 were incorporated. Insurance Act was passed in1928 but it was subsequently reviewed and comprehensive legislation was enacted in 1938. The nationalisation of life insurance business took place in 1956 when 245 Indian and Foreign Insurance provident societies were first merged and then nationalized. It paved the way towards the establishment of Life Insurance Corporation(LIC) and since then it has enjoyed a monopoly over the life insurance business in India. General Insurance followed suit and in1968, the insurance act was amended to allow for social control over the general insurance business. Subsequently in 1973, non-life insurance business was nationalised and the General Insurance Business (Nationalisation) Act, 1972 was promulgated.

Cause-Effect on Insurance Industry

Unlike banks that were dumbstruck by the end of third quarter in 2008 due to the unfolding saga of financial crisis, insurers have shown rather remarkable resilience and in all probability would be declaring year-end results on a positive note. First nine months of performance may see them through despite massive investment losses in the last quarter of 2008. This situation however is short-lived and Insurers are bound to feel the heat sooner than later .New construction and infrastructure projects have dried up and ongoing projects have been stalled due to inadequate cash injection in the market. Banks are not releasing installments to firms even on limits which were agreed prior to this crisis. This has impacted the engineering class of business in the insurance sector. Inquiries for CAR (Contractors’ All Risks), EAR (Erection All Risks), Machinery Breakdown and Equipment Insurance have almost dried up in the last few months. Construction, infrastructure projects by governments and energy projects by private as well as governments have either been shelved or being delayed and insurance industry will have

to live without large premiums from the project insurance for some time.

Continued recession shall have impact on property class of business too. Cost-cutting in the corporate sector may lead to reduced expenditure on insurance. Falling market prices of property shall further bring down the premium volume on property insurance. Business Interruption or Loss of Profit premiums also shall go down due to reduced profit forecasts for most corporate.

Life insurance sector is likely to see even bigger erosion in volumes and profits. Employee benefit schemes, Workmen’s Compensation, Medical Insurance, Group Life and Personal Accident Insurance, etc. are likely to take maximum hit. With the investment portfolio almost gone, most unit-linked policies, Pension Funds and other investment backed insurance products shall show negative NAV (Net Asset Value) and consumer confidence shall further nosedive. Policy holders are already requesting cancellation of their policies in order to preserve cash in this moment of crisis. All this doesn’t bode well for the insurance sector.

Retail insurance sector has similar problems. Low consumer confidence and stringent lending norms for retail customers by banks have led to reduced demand for products and services. Automobile companies are struggling to keep afloat due to negative sales growth. This directly affects motor insurance premium. Travel industry including airline companies are witnessing lower traffic resulting into reduced travel insurance premium. Reduced sale of property is resulting in reduced premium income on mortgage insurance and householders’ insurance.

Declining international trade and consequent reduction in export and imports have resulted in inflated inventories and consequent redundancy of work force has increased job loss claims. Reduced international trade has also impacted marine cargo and marine hull insurance businesses and premium incomes have dropped substantially.

There are other issues too to ponder. Insurance industry is likely to see multiple bad moral hazard cases as depressed market conditions may lead to payment defaults and corporate frauds. Such situation stimulates claims on fire losses, business interruption losses and losses arising out of Directors’ and Officers’ liability litigation. Madoff and Satyam Computers are two recent examples to prove the point.

Shareholders’ and Regulators’ role

Continued depressed market and resultant decline in premium volumes (and consequently reduced profits) is likely to put pressure on the management of insurance companies. As they struggle to satisfy their shareholders by providing similar returns as in the past, this could lead to rate cutting, imbalanced portfolio and compromised underwriting. A prudent board and shareholders of the insurance companies would do well to advise the management to concentrate on quality rather than volume business so that bottom lines are at least maintained. Regulators too, have a big role to play under such extraordinary circumstances. Supervision needs to be thorough rather than routine. Emphasis should be on ratios and reserves rather

than procedural issues. Solvency ratio and liquidity ratio must remain healthy and technical and other statutory reserves must be robust. An eye on reinsurance market and regular advisory would supplement the supervisory efforts. Countries where regulation is non-existent or weak, respective governments have to step in before it is too late. World has understood the significance of solvent insurance industry by witnessing the way US treasury handled the AIG crisis. Failing banks followed by failed insurance companies can spell doom for the entire economy.

Impact on Gulf Markets

Gulf was considered to be immune to global meltdown until the recession actually hit it. Falling oil prices have taken the shine off the GCC’s booming economy. There is a big question mark over the sustainability of petro based economies as new energy projects have become non-viable, thanks to rock bottom oil prices. Traffic suddenly looks normal on Dubai roads, real estate prices have halved across GCC states, new projects and tenders are delayed in Qatar and OPEC countries are making one production cut after another. Several announced projects have been cancelled and that has resulted in termination of various insurance policies. The ripple effect has just begun and is set to further crystallize in 2009. Middle East insurance market growth of 12% in 2007 (Swiss Re Sigma 5/2008) may be sustained in 2008 in terms of volume growth, though profitability is bound to decline due to depletion of capital and investment income, thanks to raging recession.