GroupA06 Final

8/2/2019 GroupA06 Final

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Submitted by:

Group A06

Aditi Parikh 2011005Ashish Kapil 2011012

Dheeraj Jain 2011016

Dikshit Jain 2011018

Mondit Moyur Mahanta 2011032

Prakhar Saikia 2011041


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Objective To determine the relationship between development of the insurance market andeconomic growth within the context of various economic factors prevailing in the Indian

economy.

Aspect of economic environment/policy measure to be examined

Two important measures of development of insurance sector are:

Insurance Penetration: measured as the percentage of insurance premium to GDP

Insurance Density: calculated as the ratio of premium to population (per capita premium)

Economic environment: GDP growth, interest rates, inflation

Policy measures: Regulations imposed by IRDA and Insurance act Investmentrules, regulations on price tariffs and solvency margins.

0.0

2.0

4.0

6.0

8.0

10.0

Asia India World

Life

Non-life

Total

MotivationThe Indian insurance market happensto be a mega opportunity with annualgrowth rate of around 15-20 per cent.The key changes in regulations andmacroeconomic variables are affectingthe growth of the sector.

The figure represents the real growth inpremium during 2010-11


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What needs to be added: Major players market shares

Market concentration and foreign shares Mix of life/non-life business

Key catalysts driving non-life business rising household income and riskawareness

Demand for health, motor and private insurance

Contribution of each segment for non-life

Trend Products offered before and after deregulation

Insurancemarket

Lifeinsurance

(24)

Public (1)Private

(23)

Generalinsurance

(24)

Public (6)Private

(18)

Re-insurance

(GIC)

Market Structure


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Focus: The study only focuses on various variables (economic, demographic, policy) within thecontext of Indian Economy

The period of study is 1993-2010, in order to establish a comparison of pre and post liberalization

of insurance sector Selection of variables - Based upon secondary research and group discussions , we selected the

below variables for our study

Data Collection: The data is predominantly collected from World Bank - World DevelopmentIndicators

Dummy variable: There is one institutional/market structure variable which represents the affect ofopening up of Indian insurance sector for private players. This happened in year 1999, hence,Dummy variable is assigned value 0 and 1 accordingly.

Method - Multiple regression analysis method with the use of dummy variable to determine theextent and validity of the relationship.

Limitation This model does not take into consideration the supply side determinants ofinsurance market, e.g. distribution of insurance products, agents or Bancassurance channels.

Variable Type Reason for selection (Hypothetical relation)

Insurance Premium Dependent Indicator of spending on insurance products

GDP per capita Independent, Economic This variable represents the household income(+)

Gross Savings percapita

Independent, Economic This variable represents the householdsavings (+)

Inflation Independent, Economic Affects household savings decision (-)

Interest Rate Independent, Economic Affects household savings decision (+)

Life Expectancy atBirth Independent,Demographic Affects insurance consumption over the years(+)


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After performing the series of regression and transforming some of the variables mentioned in the above slideswe

observed that there are four most significant variables displayed below explained 98.9 percentage of penetratiin Insurance Premium. The regression model is significant as p value is 0. The final Regression Equation stand

as:

Dummy variable is introduced to verify the categorical effect due to liberalization in 2000 that may beexpected to shift the outcome. We observed that the estimated slope coefficient of dummy variable is

not significant as its p value is 26.5 %.

Total Insurance Premium = -11083 + 2.43 GDP per Capita + 153 Life Expectancy atBirth+ 74 Inflation (GDP Deflator) + 344 log (Real Interest Rate)


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Initiation of Reforms: Formation of Malhotra committee in 1993 to assess thefunctionality of the sector and take charge of recommendations for future path.

It ultimately led to formation of Insurance Regulatory and Development Authority

(IRDA) in 2000* Some of the key functions of IRDA

Registration of Insurers

Regulation on insurance agents

Solvency Margin

Re-insurance

Obligation of Insurers to Rural and Social sector Investment and Accounting Procedure

Protection of policy holders' interest

Entry of private players in insurance market with FDI up to 26%

With growth of banking in India, Bancassurance becoming the primary distributionchannel of insurance products.

Establishment of Insurance Ombudsman in 2005 to handle complaints of aggrievedinsured customers.

Detarrification of all insurance products in 2007 where in premiums will be risk basedinstead of tariff based.

Micro insurance regulation in 2005 to expand the reach of insurance at affordablecost to Bottom of pyramid.

* This was a major reform, hence, represented by dummy variable in our regression


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The study of development of Indian insurance market with the help of regressionanalysis and tracking policy measures led to following key observations:

GDP per capita is the major indicator of development of insurance sector in the

context of Indian Economy. This represents the household income, hence, a pattern ofincreased insurance consumption can be seen with rise in the income.

The growth of insurance market has been significant post-liberalization of insurancesector i.e. year 2000. However, this cannot be explained by the regression analysis.

The rapid growth of insurance sector can be attributed to key regulations changeswhich constantly aimed at sustaining the growth of the sector.

The other variables such as interest rates, inflation, life expectancy rates are not muchsignificant in context of Indian economy.

0

500

1000

1500

2000

2500

3000

35004000

Insurance Premium (Rs. Cr.)


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Political

Regulator/Government has

been proactive in its policiestowards insurance sector

Private insurers can tap the IPOmarket, Introduction of healthinsurance portability, scrappingof common pool (Indian motorthird party pool system),bancassurance draft reforms

DTC impact

Economical

With increase in economic

growth ,the level of disposableincome has increase ,resultingin higher rate of insurancegrowth

Infrastructure bottleneckscrippling investment

Social

High population growthrate(1.3%) and age distribution(demographics )contributing to

a large pool of prospectivecustomers

Increasing level of literacyleading to insurance awareness

The customers view insurancemore as an investment toolthan risk coverage

Rural insurance

Technology

Automation of insuranceleading to personalizedfacilities to the customers

Mobile application to compareinsurance products andpremium rates

Use of technology forpaperless insurance


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Defining the scope and method of study

should be the primary step for doing anenvironmental analysis as there can bemultiple ways to do it.

Review of literature for empirical

relationships can be a good starting point forselecting the environmental variables.

Identification of key policy measures and

mapping their impact on performance of thesector is one of the most difficult andsignificant task in doing the environmentanalysis.

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GroupA06 Final