Globalisation of Insurance Sector

8/12/2019 Globalisation of Insurance Sector

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Globalisation

of insurance

sector:

The experience after independence in insurance sector showed thatthe ultimate obje


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ctiveremainedlargely unfulfilleddue to the

relatively lowspread of

insurance in thecountry

theefficient andquality


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functioning of thepublic sectorinsurance

companies andthe

untapped potential for mobilizing

longterm financial


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resources tofinance thegrowth of

infrastructure,thegovernment set

up an insurancereturns Committee

in April, 1993under the


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chairmanship ofR. N. Malhotra, tosuggest reforms in

the insurancesector including

improving thefunctioningof the

LIC, GIC andstrengthening the


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regulatory system.The committeesubmitted its

report tounionfinance minister

on 7-01-1994,recommending a

phased programof liberalization


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andcalled fora private sectorentry

and restructuringof LIC and GIC.

The subsequentgovernmentmove

d an insurancebill but it was not


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passed, the nextgovernmentmoved on

insurancebillagain in 1998,

which wasreferred back to a

select committeeof parliament


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afterwardsthegovernment introduced the insu

rance regulatoryDevelopment aut

hority (IRDA) Bill in

parliament withsome changes


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in the originalstructurethe government

of India createdhistoryon October

private sectorcompanies.


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Penetration of

insurance

sector in India:

Insurance is a Rs.400 billionbusiness in Indias

and together withbanking services


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adds about7% toIndias gross

domestic product

(GDP) grosspremium

collection is about2 percent of

GDPand growingbetween 15 and


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20 percent perannum. Indiaalso has highest

number oflifeinsurance poli

cies in force in the world.

Yet more than three fourth


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of Indiasinsurance population hasno life insurance

cover thepenetration of

insurance is verylow in India

thefollowingindices support


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this contention.While per capitainsurance

premium indevelopedcountri

es is very high, itis quite low in

India per capitalinsurance


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premium in Indiain 1999 wasonly$8 while it was $

4800 for Japan, $1000 for Republic

of Korea, $ 887for Singapore, $

823for HongKong and $ 144


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for Malaysia. TheinsurancePremium as a

Percentage ofGDP was14% for

Japan, 13% forsouth Africa,

12% for Korea,9% for UK and


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less than 2% inIndia in1999Similarly the

insurancePremium as a

percentage ofGross Domestic

saving (GDS)was52% for U.K,


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35% for otherEuropean andAmerican

countries,it wasonly 9% for India

in 1999The shareof India in the

World market interms of Gross


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insurancepremium is againvery 1000.For

instance, WhileJapan has 31%,

European Union25%. South

Africa 2.3%,Canada


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1.7%share of theglobal insurancepremium, it is

only 0.3% forIndia.

Insurancesector -

Hurdles:


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The insuranceindustry has beengrowing between

15 and 20percent, but it

lags far behinditsglobal

counterparts.Thiswas due to the


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following reasons..1.Insurancecompanies create

products and goout to find

customers. Theydo not

create productsthat the market


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wants.2. Insurance awarenessamong the

general public islow.3.Term-

Insurance Plantsare not

promoted.4.Unit-linked


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assurances arenot available.5.

Insurance coversare expensive.

Inefficientmanagement and

low investmentyield


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areresponsible forthe high premiumcharged by Indian

Insurancecompanies

Investmentrestrictions have been

responsible for10w


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yields.6. Returnsfrom InsuranceProducts are

low.7.There is adearth of

innovative andbuyer-friendly

insuranceproducts.


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2

Globalization

of InsuranceSector -Issues:

The three keyissues thatimpingeon liberalization


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of insurance inIndia are: whyliberalize,

whatmarketstructure to have

finally and what isthe role for

regulator. :


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(i) Reason for

opening up the

Insurance

Industry:An insurance pol

icy protectsthe buyer at som

e cost against financial loss arisin


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g from aspecifieda risk. Differentsituation and

different peoplerequire different

mix of riskcostcombinations

. Insurance company thereby offer


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s schemes of different kinds. Among theemerging

economies, Indiais one of the least

insured countries,but the potential

for further growthis phenomenal.


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The demand forinsurance islikely to increase

with rising percapitalincomes,

rising literacyrates and increase

of the servicesectors. After


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Korean andTaiwaneseinsurance sectors were

liberalized, theKorean market

has grown 3times faster than

GDP andTaiwanthe rate of growth


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has been almost 4times than that ofits GDP. Further,

opening ofthesector to

private firms willfoster

competition,innovation and


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variety ofproducts. It willalsogenerate

greater awarenesson the need for

buying insuranceas a service and

not merely fortaxexemption,


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which is currentlydone.(ii) Market

Structure:What is the

appropriatemarket structure

for insurancemarkets? Should


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it be monopoly(stateor regulated) or

should there beunlimited private

entry or shouldthere only be a

fewregulated players


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? The answer isquite obvious.When traditional

public sectorbusinesses like

banking, power,telecom, airlines

and even postalservices have


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been allowedprivate entry,why

mustinsuranceremain a state

monopoly? Statemonopoly had

little incentives tooffer a wide range


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of products withmore complexand extensive risk

categorization,better technology

andbetter customer s

ervice including faster settlements.


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Keeping in viewthe recommendations of insuranc

e reforms committee that a limited

number of highcapital private co

mpanies belicensed, and no firm be


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allowed to operateboth in life andnon-life

insurance, IRDAhas

grantedlicenses tothree private

companies onOctober 24, 2000


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- Reliance Fireand GeneralInsurance,HDFC

Standard LifeInsurance and

Royal SundaramAlliance

Insurance, to set


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up the shop andtoget into business.

2

(iii) Role of IRDA

IRDAsprimary

function is to protect consumer i

nterests. This means ensuring pro


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per disclosure,keeping pricesaffordable but

also insisting onsome mandatory

products, andmostimportantly

making sure thatconsumers get


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paid by insurers.Further, ensuringthe solvency

of insurers is avery

important functionof regulatory

authority.IRDAhas evolved a set


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of operationalguidelines to dealwith maintaining

the solvencyof insurers.

Growth ofinsurance

business entailsbetter education


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and production tocustomers,creating better

incentives foragents and

intermediaries. Ithas evolved

guidelines on theentryand


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functions of suchintermediaries.Licensing of

agents andbrokers are

required to checktheir indulgence

in activities suchas twisting,


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fraudulentpractices, rebatingmisappropriation

of funds.

Insurance

Sector -

Emerging

Areas:


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Some of theemerging areasfor insurance

sector in India are:1. Demand for P

ension Plans:Two relatively

modern trendsaffect life


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insurance businessin Indiasignificantly. The

first one isthejoint family

system whichworked like an

insurancearrangement.


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With more andmorenuclearfamilies becoming

the rule, there it agreater demand

for life insurancecover the

secondtrend isthat elderly are


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increasinglyhaving to fend forthemselves. In

1990, India hadabout 54million

people above theage of 60. This

number isexpected to


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increase to 100million by2004,and to

almost 10% ofthe total

population by2010. Thus future

senior citizenslook


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towards planningfor their own oldage and the need

for pensions andannuities. These

two trendsportenda large and

growing market


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for life insurancein India.

2.

Separateness of

Banking andInsurance:

There is lot ofspeculation


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whether banksshould be allowedto operate in the

insurancesectors.The reaso

ns forallowing banks a

recompetition wou


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ld enhanceefficiency and benefitconsumers,

public-men enjoya One- Stop

Financial ServiceParadigm, banks

could recoupsomeof the lost


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business tosecurities firmsand there would

be synergies inoperating

insuranceandbanking. The

reasons againstare - it would


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create unhealthyconcentration ofmarket

power,it would expose banks to a

dditional andunnecessary risks

and banks wouldhave


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unfair advantagessince they havedetailed

information ontheir customers

financial position.Thisdebate is far

from settled andwe are likely to


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see somerestructuring inoperations of

bankingandinsurance.

3.

Role of

InformationTechnology :


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2

The Business ofselling life insura

nce requires assessing the profile

of the customer andassigning

the right


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policy. Thisprocess isfacilitated

by a databaseand is completely

driven byinformation technology. If

it uses thisnetwork of


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database to offertheir products, itwould have better

utilized this vastlyunderutilized

capacity.4.

Using PostalNetwork:


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Globalisation of Insurance Sector