CONTENTS

S. NO. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

TOPIC INSURANCE COMPANY IN INDIA IRDA CLASSIFICATION OF INSURANCE LIFE INSURANCE LIFE INSURANCE CORPORATION INVESTMENT LIFE INSURANCE: MAJOR PLAYER TAX RELIEF ON INCOME ISSUING THE LICENCE BARRIER IN GROWTH

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OPPORTUNITY FOR INSURANCE 8 SECTOR CONCERN OVER RISE IN ORPHAN 8 POLICY IMPACT OF GLOBAL CRISIS INCREASE IN FDI CONCLUSION1

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INSURANCE COMPANIES IN INDIAIn India, Insurance is a national matter, in which life and general insurance is yet a booming sector with huge possibilities for different global companies, as life insurance premiums account to 2.5% and general insurance premiums account to 0.65% of India's GDP. The Indian Insurance sector has gone through several phases and changes, especially after 1999, when the Govt. of India opened up the insurance sector for private companies to solicit insurance, allowing foreign direct investment up to 26%. Since then, the Insurance sector in India is considered as a flourishing market amongst global insurance companies. However, the largest life insurance company in India is still owned by the government. The history of Insurance in India dates back to 1818, when Oriental Life Insurance Company was established by Europeans in Kolkata to cater to their requirements. Nevertheless, there was discrimination among the life of foreigners and Indians, as higher premiums were charged from the latter. In 1870, Indians took a sigh of relief when Bombay Mutual Life Assurance Society, the first Indian insurance company covered Indian lives at normal rates. Onset of the 20th century brought a drastic change in the insurance sector. In 1912, the Govt. of India passed two acts - the Life Insurance Companies Act, and the Provident Fund Act - to regulate the insurance business. National Insurance Company Ltd, founded in 1906, is the oldest existing insurance company in India. Earlier, the Insurance sector had only two state insurers - Life Insurers i.e. Life Insurance Corporation of India (LIC), and2

General Insurers i.e. General Insurance Corporation of India (GIC). In December 2000, these subsidiaries were de-linked from parent company and were declared independent insurance companies: Oriental Insurance Company Limited, New India Assurance Company Limited, National Insurance Company Limited and United india Insurance Company Limited.

IRDAInsurance Regulatory & Development Authority is regulatory and development authority under Government of India in order to protect the interests of the policyholders and to regulate, promote and ensure orderly growth of the insurance industry. It is basically a ten members' team comprising of a Chairman, five full time members and four part-time members, all appointed by Government of India. The creation of IRDA has brought revolutionary changes in the Insurance sector. In last 10 years of its establishment the insurance sector has seen tremendous growth. When IRDA came into being; only players in the insurance industry were Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC), however in last decade 23 new players have emerged in the filed of insurance. The IRDA also successfully deals with any discrepancy in the insurance sector.

CLASSIFICATION OF INSURANCEThere are mainly two broad classes of Insurance Life and Non Life. Life insurance products include Term Life policies, which give pure risk coverage of only the death benefit, whereas endowment or money back policies have a risk as well as savings component i.e. death as well as maturity benefit. Also coming under the life insurance umbrella are the Unit Linked Policies in which there is a risk component and a savings component, which is invested in equity, debt or gilt funds, depending on the insurance company. Non Life insurance products include property or casualty, health insurance or house, fire, marine insurance etc. This insurance class deals with all the non-life aspects of an insured like his/her house, health, land, office, cargo, etc which might bring financial loss.

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LIFE INSURANCEIRDA was constituted as an autonomous body to regulate and develop the insurance industry. The life insurance industry in India is nationalized in1950s. The reason for nationalization of the insurance industry (LIC in 1956 and GIC in 1973) was the mismanagement and malpractice by previous private players. Insurance sector was liberalized in 1999 on the recommendation of the Malhotra committee report (1993). Insurance sector till 1999 was only dominated by government sector. After the IRDA Act 1999 it was opened for the private sector and in 2001 first private company entered in insurance sector. The life insurance and general insurance industry has been growing at 30 per cent and 22.33 per cent respectively year-on-year. In the life Insurance segment the Life Insurance Corporation of India (LIC) is the major player.

LIFE INSURANCE CORPORATIONInsurance sector in life insurance division is dominated by Life Insurance Corporation, a public sector. In 1995-96, LIC had a total income from premium and investments of $ 5 Billion while GIC recorded a net premium of $ 1.3 Billion. During the last 15 years, LIC's income grew at a healthy average of 10 per cent as against the industry's 6.7 per cent growth in the rest of Asia (3.4 per cent in Europe, 1.4 per cent in the US). The LIC has 20504

branches. It is constituted in to seven Zones. Currently, there are 5, 60, 00 LIC agents in India. Life insurers grew their business by 23.3% to Rs 930 billion in 2007-08 fiscal year. Life insurers brought in around Rs 11,049 crore of extra capital last fiscal. In the developed world, the growth in life insurance premium has been an insufficient 1.5%. As compared to this, LIC despite all its handicaps has been growing at a healthy clip of around 20%.There are two legislations that govern the insurance sector- The Insurance Act- 1938 and the IRDA Act- 1999. LIC has even provided insurance cover to five million people living below the poverty line, with 50 per cent subsidy in the premium rates. LIC's claims settlement ratio at 95 per cent.

INVESTMENTAssets of insurer should be invested as 25% in Government securities (including deposit in RBI), At least 25% in Government/other approved securities; Up to 15% of the controlled fund of the insurers can be invested in other insurance; Up to 25% of the assets of GIC can be invested in other investment; No fund of policy holder can be invested outside India.

LIFE INSURANCE: MAJOR PLAYER PUBLIC SECTOR

Life Insurance Corporation of India.

Allianz Bajaj Life Insurance Co. Ltd. AMP Sanmar Assurance Co. Ltd. Birla Sun Life Insurance Co. Ltd. HDFC Standard Life Insurance Co. Ltd. ICICI Prudential Life Insurance Co. Ltd. ING Vysya Life Insurance Co. Pvt. Ltd. Max New York Life Insurance Co. Ltd.. Om Kotak Mahindra Life Insurance Co. Ltd. SBI Life Insurance Co. Ltd. Tata AIG Life Insurance Co. Ltd. TABLE 1

PRIVATE SECTOR

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New business premium collection of life insurance industry (in Rs cr)COMPANY LIC ICICI Prudential SBI Life Bajaj Allianz Reliance Life HDFC Standard Birla Sunlife Kotak Mahindra Old Mutual Tata AIG Aviva Private Total Total APR-MAR 08 Mar 09 APR-MAR 09 59182.20 8306.00 4792.86 6491.72 2752.76 2679.61 1965.00 1107.00 967.78 1059.0 33,806.00 92,988.71 52953.9 6812.52 5385.00 4491.61 3514.00 2644.00 2823.91 1343.00 1143.00 724.0 34,153.71 87,107.62(%)

-10.52 -17.98 12.35 -30.81 27.65 -1.33 43.71 21.32 18.11 -31.6 1.03 -6.32

SBI Life, which grew 12.35 per cent during 2008-09, has now emerged as the third-largest player, overtaking Bajaj Allianz, while Reliance Life has overtaken Birla Sunlife as well as HDFC Standard Life to become the fourthlargest life insurance company. LICs first premium income fell by 10.52 per cent to Rs 52,953 crore. At the same time, private insurers grew their premium collection by 1.03 per cent in 2008-09.

TAX RELIEF ON INCOMETax relief is a bad news for the insurance sector. Insurance is an instrument to save tax on income, Insurance agent sold insurance on the name of tax relief. But the budget has increased taxable income from 1.1 to 1.5, for women it raised from 1.45 to 1.8, and for senior citizen it increased from 1.95 to 2.25. Many people, who earlier fell marginally into the tax net and were forced to buy life and health insurance policies to save tax, may now opt not to take fresh policies,. Others who would have bought insurance policies, had there been no change or a decrease in the exemption limit, might decide to put their savings elsewhere. So it affects insurance sector.6

ISSUING THE LICENCEIRDA has issued 43 licenses since the insurance sector opened for private participation in 2000. According to the chairman of IRDA, there is still scope for more players and to enlarge the insurance market with diversified range of product. The state owned insurance companies have limited number of policies to offer to their subscribers while in case of private insurance companies, their policy numbers are many more and the premium amount as well as the maturity period is much competitive against those of government insurance firms. Right now the life insurance penetration is 4% in comparison to 1.77% in 2000. The private sector insurance players have started exploring the rural markets in which until recently the state-run companies had the monopoly. There are many international insurance player still want to enter in Indian market so it is vey necessary to think on that to which company the license should be issued.

BARRIER IN GROWTHThere are some rigid norms in insurance sector like Indian insurance players cannot invest their money in the international market. According to the present estimates the number of agents exeeds1.5 million but they are not well educated and trained and there are no proper facility to trained the agents. IRDA has introduced a mandatory training program of 100 hours (classroom or online) who are directly involved in selling insurance. But still a large number of agents are not well trained and a large number of agents are only high school pass.

OPPORTUNITY FOR INSURANCE SECTORAs per the various estimates, only 20% of the insurable Indian population is insured. So there is huge chance of growth. Sixty-three percent of Indian population is in the age group of 15-64 and as per UN estimates the group will constitute 68 percent of the population by 2035. India's insurance sector may touch a level of Rs 2 lakh crore in the next two years in view of aggressive marketing techniques adopted by private insurance companies from current level of Rs5000 crore. According to the National Council for Applied Economic Research, households having income in the Rs. 2-5 lakh range are expected to grow by 6 per cent in 2006-10. The Indian life insurance industry is expected to grow by about 15 per cent in the current financial year to touch a total premium income of Rs 2, 55,000 crore in 2009-10. The industry had garnered Rs 2, 21,688 crore of total premium in 2008-09. In the first six months of this fiscal, the insurance industry has already mopped up Rs 1, 01,976 crore of premium registering a growth of 18 per cent over the year-ago period.

CONCERN OVER RISE IN ORPHAN POLICY7

Rise in orphan policy (i.e. where an agent has left the company and the policyholder is without an agent) is a big concerning matter for the IRDA. There is 35% increase in orphan policy in this fiscal from previous year. The main reason of the orphan policy is the attrition of agents. IRDAs annual report of 2007-08 shows high lapse ratio in most companies, the highest (80 per cent) being registered by Aviva Life Insurance, while the ratio in LIC (6 per cent) was among the lowest. Over the five years of investigation period, industry lapse rate by number of policies increased from 5.62% (2002-03) to 7.8% (2004-05) and decreased to 6.64% (2006-07). However, lapse rate by premium increased from 4.40% to 6.95%, slowly increasing year by year except for a small decrease in 2006-07. Lapse rate for seven companies out of sixteen exceeded the industry average (simple arithmetic mean) of 18% (lapse rate by number) and 11.9% (lapse rate by premium amount). If an agent left his job then it is the responsibility of insurance company to help customer and manage all future assistance.

IMPACT OF GLOBAL CRISISMany insurance players are associated with private bank like ICICI, HDFC, and many. The pinch is felt mostly by the private life who Insurers are witnessing minus 15 per cent growth since April up to September 20 '09 and hence companies are going in for innovative products not only to attract customers, but also to provide safety and more benefits for the investment. Because of global crisis Japans Yamato Life Insurance become bankrupt with $2.7 billion in liabilities. The Indian life insurance sector has hit the speed breaker with the industry witnessing a premium fall of nearly 38 per cent in October over the September figures in 2008. Even the number of policies sold by the industry players has gone down by 407,494 in October as compared to the previous month. The life insurance sector earned a new premium of Rs.50.87 billion (Rs.5,087 crore) selling 33,35,418 policies in October, against Rs.81.48 billion (Rs.8,148 crore) from 37,42,912 policies in September. The average premium per policy (APPP) for the industry in October is Rs.15, 252, down from Rs.21, 770 the month before. The Asian life insurance giant Life Insurance Corp of India (LIC) sold 22,45,317 policies and earned around Rs.27.82 billion (Rs.2,782 crore) in October as against a premium of around Rs.47.31 billion (Rs.4,731 crore), selling 24,42,202 policies the previous month. LIC's APPP in October was Rs.12, 393, down from Rs.19, 373 the previous month.

INCREASE IN FDIIndian government has approved hike FDI in insurance sector from 26% to 49%. Insurance sector growth is 46% and to sustain this growth it become necessary to increase FDI in insurance sector. The raising of FDI limit in insurance from 26 per cent to 49 per cent might increase the total FDI in the8

life insurance industry by almost 2.5 times from the current levels of around Rs 2500 crore. The expected inflow is likely to create 3 lakh jobs in the sector as more companies are planning to use the additional funds mainly to execute their expansion plans. Increasing FDI would also help the insurance sector to further expand, launch innovative distribution channels, upgrade technology, enhance the current product portfolio and bring global best practices.

CONCLUSIONOver the past three years, around 40 companies have expressed interest in entering the sector and many foreign and Indian companies have arranged anticipatory alliances. The threat of new players taking over the market has been overplayed. As is witnessed in other countries where liberalization took place in recent years we can safely conclude that nationalized players will continue to hold strong market share positions, but there will be enough business for new entrants to be profitable. Opening up the sector will certainly mean new products, better packaging and improved customer service. Both new and existing players will have to explore new distribution and marketing channels. Potential buyers for most of this insurance lie in the middle class. New insurers must segment the market carefully to arrive at appropriate products and pricing. Recognizing the potential, in the past three years, the nationalized insurers have already begun to target niches like pensions, women or children.9

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