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Development
of Insurance in India
by Manoj Kumar
CPCU,
ACII, ARe, ARM, FIII, MBA
manoj@einsuranceprofessional.com
A
thriving insurance sector is of vital importance to every modern
economy. First because it encourages the savings habit, second
because it provides a safety net to rural and urban enterprises and
productive individuals. And perhaps most importantly it generates
long-term investible funds for infrastructure building. The nature
of the insurance business is such that the cash inflow of insurance
companies is constant while the payout is deferred and contingency
related.
This
characteristic of their business makes insurance companies the
biggest investors in long-gestation infrastructure development
projects in all developed and aspiring nations. This is the most
compelling reason why private sector (and foreign) companies which
will spread the insurance habit in the societal and consumer
interest are urgently required in this vital sector of the economy.
With
the nation's infrastructure in a state of imminent collapse, India
couldn't have afforded to be lumbered with sub-optimally performing
monopoly insurance companies and therefore the passage of the
Insurance Regulatory & Development Authority Bill on December 2,
1999 heralds an era of cautious optimism where stakes are high for
all parties concerned. For the Govt. of India, Foreign Direct
Investment (FDI) must pour in as anticipated; for foreign insurers,
investments must start yielding returns and for the domestic
insurance industry - their market penetration should remain intact.
On the fringe, the customer is pondering whether all the hype
created on liberalization will actually benefit him.
The IRDA Bill provides for the
establishment of an authority to protect the interests of the
holders of insurance policies, to regulate, promote and insure
orderly growth of the insurance industry and amend the Insurance
Act, 1938, the Life Insurance Act, 1956 and the General Insurance
Business (Nationalization) Act, 1972. The bill allows foreign equity
stake in domestic private insurance companies to a maximum of 26 per
cent of the total paid-up capital and seeks to provide statutory
status to the insurance regulator. The insurance business in India
is pegged at $ 6.6 Billion whereas industry leaders feel
privatization will increase it to $ 40 Billion within next 3-5
years.
Background
India,
with a population of 1 Billion offers great potential and
opportunity for the insurance industry. Currently, two state-owned
monoliths - Life Insurance Corporation and General Insurance
Corporation (GIC), run the insurance industry. The General Insurance
Corporation commands the general insurance sector along with four of
its fully owned subsidiaries viz. National Insurance Company, New
India Assurance Company, Oriental Insurance Company and United India
Insurance Company.
Malhotra
Committee,
appointed by the Government of India for conducting a study on
insurance, in its report in 1994 stated that only 22% of the Indian
population are insured. The poor reach of insurance in the country
and the sheer numbers make India a market with tremendous potential.
The following facts show how under-developed the Indian insurance
business is due to state monopoly and lack of aggressive marketing
of insurance policies:
Per
capita insurance premium in India is a mere US$ 6, one of the lowest
in the world. In South Korea, the corresponding figure is US$1,338,
in USA it is $ 2250 and in UK it is $1589.
Insurance
premium in India accounts for a mere 2 per cent of GDP compared to
the world average of 7.8 per cent and G-7 average of 9.2 per cent.
Insurance
premium as a percentage of savings is barely 5.95 per cent in India
compared to 52.5 per cent in the UK.
Nationalized
insurance companies have not been able to target niche markets that
are currently served poorly or not at all. Life insurance products
provide a good example. They compete with investment and savings
options like mutual funds. It is imperative that they should offer
comparable returns and flexibility. For instance, pure protection
products like term assurance account for up to 20 per cent of
policies sold in developed countries. In India, the figure is less
than one percent because policies are inflexible. Besides, no Indian
life assurance product is linked to non-traditional investment
avenues such as stock market indices. Therefore, returns are lower
than those on other savings instruments.
Similar
is the case with pensions. The lack of a comprehensive social
security system combined with a willingness to save means that
Indian demand for pension products will be large. However, current
penetration is very poor. By March 1998, LIC’s pension premium was
only $ 22 Million. Making pension products into attractive saving
instruments would require only simple innovations already common in
other markets. For example, their returns might be tied to
index-linked funds or a specific basket of equities. Buyers could be
allowed to switch funds before the annuities begin and to invest
different amounts at different times.
Health
insurance is another segment with great potential because existing
Indian products are insufficient. By the end of 1998, GIC’s
Mediclaim scheme covered only 2.5 per cent of total population.
Indian products do not cover disability arising out of illness or
disability for over 100 weeks due to accident. Neither do they cover
a potential loss of earnings through disability.
Retail
segment or personal lines insurance, especially in general insurance
is another area unexplored. Currently personal insurance, including
health, householders, shopkeepers, personal accident, travel
insurance and professional indemnity covers, constitute only 12 per
cent of Indian general insurance premium. This poor figure is
largely due to the lack of adequate distribution channels rather
than a lack of products. By tapping such under-served niches, new
entrants can expand the market substantially. Since service and
speed will be valued, a price premium is also possible.
Premium
rates are at present set most unscientifically with very little
attempt to fine tune the risk attached to different categories of
businesses. The result is that they penalize the low risk category,
which is in majority. This can be seen in the failure to
differentiate between smokers and non-smokers in fixing premium for
life and personal accident covers or between flood-prone areas and
dry lands for fire and allied perils cover. This results in a great
deal of cross-subsidization. Low premium rates in one area
necessitate higher premium elsewhere. Mortality tables are not
revised for ages and no effort is made at all to re-evaluate the
rating of other classes based on recent loss experiences.
Need
for Global Integration
Recent
economic liberalization started few years ago have started bringing
in new investments from global giants and the government was hard
pressed to facilitate global integration by lowering trade barriers
for the free flow of technology, intellectual and financial capital.
Additionally, reforms are essential if the Indian economy is to
achieve and sustain a growth rate of 7 to 8 per cent per annum.
Reaching a faster growth path also implies attracting foreign direct
investment inflows of $ 10 Billion every year, up from the current
level of $ 3 to $ 3.5 Billion. Thus liberalization of insurance
creates an environment for the generation of long term contractual
funds for infrastructural investments.
The
Rakesh Mohan Report
on Infrastructure says that 85% of funds for infrastructure
development have to come from the domestic industry. It further says
that India would need $ 100 Billion over the next five years to meet
its infrastructure needs. Given the rate of savings in India, there
is much more room to grow and one can expect an additional revenue
of about $ 10 Billion a year entering the market to enhance
infrastructure. Insurance is definitely going to be one area that
will assist in mobilization of these funds.
Multinationals'
interest
Multinational
insurers are indeed keenly interested in emerging insurance because
their home markets are saturated while emerging countries have low
insurance penetrations and high growth rates. International insurers
often derive a significant part of their business from multinational
operations. As early as 1994, many of the UK’s largest life and
general insurers derived 40 per cent to 60 per cent of their total
premium from outside their home markets. The figure at Commercial
Union was 76 per cent in that year.
While
the impact of global operations on their business may be large,
typically foreign insurers take only a small share of an individual
country’s market. In Taiwan for example, foreign companies took
only a 3 per cent share even seven years after opening up. In Korea,
their share was 1 per cent after 20 years. In China, a large and
complex market like India, private insurers have not made much
headway.
Yet,
new entrants find insurance attractive because even a small share of
a large and growing market can be profitable. The Korean insurance
market for example, was only the 30th largest market in the world by
premium volume in 1971. It moved up to 6th largest in 1996. In any
case, in India multinational insurers will be restricted to a
minority shareholding in new companies. The new entrants will
therefore be private Indian companies.
The
other reason why these large MNCs are interested in India is the
economies of the insurance market. Insurance companies survive on
the principle of spreading of risk. No matter what the size of each
player, an insurer cannot afford to operate in a niche market.
Operating in a particular region would expose them to the economic
downtrends in the region and derail their profits.
Insurance
companies, being long-term players, also have to avoid sudden dips
in earnings to inspire confidence among investors to invest
long-term funds. This can be achieved by spreading their operations
over a wide geographical area. Moreover, for them, big is not just
beautiful, but essential for survival. Which brings us to the
avenues for growth.
According
to the Sigma report on global insurance brought out by the world’s
second largest reinsurer Swiss Re - the international market is
completely saturated. In the developed world, the growth in life
insurance premium has been a meager 1.5%. As compared to this, LIC
despite all its handicaps has been growing at a healthy clip of
around 20%.
Nationalized
Sector: A Performance Review
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).
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 and GIC's at 74
per cent are higher than that of global average of 40 per cent.
Compounded annual growth rate for Life insurance business has been
19.22 per cent per annum and for General insurance business it has
been 17
per cent per annum.
However,
there is other side of the coin too. Their large scale of
operations, public sector bureaucracies and cumbersome procedures
hampers nationalized insurers. The field staff and the agents of the
GIC and its four wholly owned subsidiary companies have seldom
bothered to venture out into the rural hinterland to sell crop or
any other personal line insurance. Given the woeful lack of
penetration of the rural market by the GIC subsidiaries, it is
hardly surprising that a growing number of farmers across the
country are resorting to the extreme remedy of suicide when their
usually uninsured crops fail
The
highest paid employees of the public sector, the estimated
half-a-million employees of the nationalized insurance companies,
are characterized by abysmal productivity, utter ignorance of the
basic principles of the insurance business, endemic corruption,
gross indiscipline and sheer laziness.
Dominating
the inevitably weak management of the nationalized insurance
companies, the militant and strongly unionized employees of the
nationalized monopoly insurance companies have transformed Indian
insurance from volume-driven into class-based business.
The
domestic insurance companies, despite meeting their social
objectives of going into the deepest interiors of the country, have
lagged behind in meeting customer expectations in products and
services.
Privatization:
Start Up Strategy
Potential
private entrants therefore expect to score in the areas of customer
service, speed and flexibility. They point out that their entry will
mean better products and choice for the consumer. Critics counter
that the benefit will be slim, because new players will concentrate
on affluent, urban customers as foreign banks did until recently.
This
might seem a logical strategy from the point of view of new players.
Start-up costs-such as those of setting up a conventional
distribution network-are large and high-end niches offer better
returns. However, in the long run 'middle-market' offers the
greatest potential as in terms of it is the second largest market in
the world. This may still be an urban market but goes beyond the
affluent segment.
Insurance,
even more than banking, is a volume game. A very exclusive approach
is unlikely to provide meaningful numbers. Therefore, private
insurers would be best served by a middle-market approach, targeting
customer segments that are currently untapped.
Regulatory
Issues
The
IRDA Bill lays down that the Indian promoter must dilute the stake
in the private insurance firms from 74 per cent to 26 per cent in
ten years. The bill stipulates tough solvency margins -- Rs
500 million for life insurance firms, Rs 500 million or a sum
equivalent to 20 per cent of net premium income for general
insurance and Rs 1 billion for reinsurance business.
The
insurer has to maintain separate accounts relating to fund of
shareholders and policyholders. The funds of policyholders should be
retained within the country but does not cover repatriation of
profits and dividends. Insurance companies under the new regime will
have to have exposure to rural and social sectors. Foreign
investment in insurance, the bill states, is crucial to financing
infrastructure and better insurance cover.
The
key to success in opening up the insurance sector in India is
regulation. An example of how poor regulation can destroy a market
is the mutual fund industry. A combination of improper marketing
practice and unfullfilable promises has resulted in a loss of
investor faith in that industry. Incidentally, the insurance
industry in India itself has gone through the same phase.
One
of the reasons for nationalization of the insurance industry (LIC in
1956 and GIC in 1973) was the mismanagement and malpractice of
erstwhile private players. But if the statements of IRA officials
are anything to go by, the new regulations are expected to be on the
right track. N I Rangachary, chairman, IRA, has already provided the
time table for the changes once the Bill is passed. The IRA has
already indicated that it will have tough norms for new
participants.
Repositioning
by Nationalized Sector
Floodgates
of competition opened up by the privatization of insurance industry
did throw a challenge to the well-protected nationalized sector and
it seems they have picked up the gauntlet. LIC and GIC, both are
trying to reposition themselves by having re-engineering done on the
structure and operations of their respective organizations.
Life
Insurance Corporation is at present going through presentations from
top management consultants. These consultants have been asked to
narrate their experiences in countries where the insurance sector
has been opened up for private competition so that the public sector
player can draw lessons. Based on these, LIC will appoint a
consultant which can provide them broad terms of reference on what
changes are required to tackle the impending competition.
GIC
has already identified the areas that need to be activated and given
a shape through the four subsidiary companies. Foremost is the area
of providing health insurance services. A change in the GIC Act will
enable the corporation to float a joint venture company for health
insurance. Other areas that the GIC is looking at are savings-linked
insurance products and use of alternate distribution channels
including bancassurance. Also in progress is the co-ordination of
all foreign operations of the group.
Even
state-owned entities, SBI and UTI have serious plans for insurance
sector as the banks have unsurpassed advantages over any other
player. The intermediaries are also getting more organized with a
little nudging from the IRA. The Reinsurance Consultants Association
is planning to convert itself into the Insurance Brokers Association
of India in anticipation of the laws being amended to allow
insurance broking.
Cross
Border Experience
Cross-country
experience shows that nowhere in the world has the entry of foreign
firms threatened the position of domestic companies. Whether it is
Malaysia, where the insurance sector has been open for more than 50
years and foreign companies account for about 10 per cent of market
penetration or it is Indonesia, Thailand, China or the Philippines,
where the market has been opened more recently, the total market
share of foreign companies is less than 10 per cent except in
Indonesia where it is about 20 per cent. Closer home, we have the
experience of the banking sector where despite the presence of 42
foreign banks, their share in total banking assets is less than 10
per cent.
Today
hardly 20 per cent of the population in India is insured and
insurance premium (life as well as non-life) account for just 2 per
cent of GDP as against the G-7 average of 9.2 per cent.
Consequently, the fear that new companies will displace public
companies is misplaced. There is room for more for not only the
existing companies but also for any number of competitors.
In
China, insurance premium accounted for just over 1 per cent of
China's GDP in 1995 but in the four years since the market has been
liberalized (albeit partially), spending on insurance has grown at a
compound annual rate of 33 per cent. It is not just foreign
companies alone that have grown but also the national PICC as well.
The story is no different in S Korea. There, the opening of the
sector saw the Big Six domestic players, who initially controlled
the entire market, increase their business from 7 to 37 trillion won
by 1997. Meanwhile foreign companies were not able to capture more
than a miniscule 0.7 per cent of the market.
Future
Possibilities (Next 5-10 Years)
Job
opportunities are likely to increase manifold. The number of people
working in the insurance sector in India is roughly the same as in
the UK with a population that is 1/7 India's; the US with a
population 1/4 the size of India has nearly 4 times the number. In
the emerging markets, the picture is no less encouraging. In S
Korea, the no of full time employees more than doubled over a ten
year period. Thailand added 50 per cent more jobs in four years.
The
liberalization of the insurance sector promises several new jobs
opportunities for those employed in the finance sector who are
equipped with degrees in finance. Finance professionals who had
witnessed a slump in the job market would be a much-relieved lot to
hear about the privatization of the insurance sector.
Let
us look into the type of jobs that will be created once the private
players come on the scene. Certainly, it won't be far different from
the traditional streams in any other industry. There will be demand
for marketing specialists, finance experts, human resource
professionals, engineers from diverse streams like the petrochemical
and power sectors, systems professionals, statisticians and even
medical professionals. Apart from this, there will be high demand
for professionals in the streams like Underwriting and claims
management and actuarial sciences.
There
could be a huge inflow of funds into the country. Given the
industry's huge requirement of start-up capital, the initial years
after opening up are bound to see a strong inflow of foreign
capital. Moreover, given that the break-even, typically, comes much
later than in the case of other sectors, odds are that the first
remittance of dividend will not happen before a good 10-15 years.
In
the areas of reinsurance, huge capacity is likely to be created with
players like Swiss Re and Munich Re keenly observing the unfolding
saga of liberalization of insurance industry in India. Not only the
outward reinsurance will reduce, it is bound to attract inward
reinsurance from the neighboring countries and regions. If the
regulator is forward looking and legislature is supportive, this
trend may well lead to the creation of a Lloyds like market for the
direct as well as reinsurance businesses.
However,
increased competition is very likely to result in rate reductions in
certain classes of business, but in those areas that have so far
been cross subsidized, an increase in rates may be possible.
Overall, the rate reductions may outweigh the increases, thus
bringing down the re-insurance premium volume available.
Apart
from pure re-insurance activities, which is providing insurance
protection, a revolution will come in service related fields like
training, seminars, workshops, know-how transfer regarding risk
assessment and rating, risk inspections, risk management and
devising new policy covers, etc. Also, with more players in the
market, there will be significant increase in advertising, brand
building, and keen pricing not ridiculous pricing and this will
benefit whole lot of ancillary industries.
Another
effect of de-regulation will be that, projects, especially
mega-projects where one needs the capacities of the international
re-insurance market, will get exposed to international trends to an
even greater extent than is the case today. This will affect rates
too. Areas like the personal lines segment, where we also expect to
see substantial growth as also new types of covers, would usually
not be affected by international trends in the same way as, there is
much less need for global re-insurance support.
Substantial
shift in the distribution of insurance in India is likely to take
place. Many of these changes will echo international trends.
Worldwide, insurance products move along a continuum from pure
service products to pure commodity products. Initially, insurance is
seen as a complex product with a high advice and service component.
Buyers prefer a face-to-face interaction and place a high premium on
brand names and reliability.
As
products become simpler and awareness increases, they become
off-the-shelf, commodity products. Sellers move to remote channels
such as the telephone or direct mail. Various intermediaries, not
necessarily insurance companies, sell insurance. In the UK for
example, retailer Marks & Spencer now sells insurance products.
In some countries like Netherlands and Japan, insurance is marketed
using post office's distribution channels. At this point, buyers
look for low price. Brand loyalty could shift from the insurer to
the seller.
In
other markets, notably Europe, this has resulted in bancassurance:
banks entering the insurance business. The Netherlands led with
financial services firms providing an entire range of products
including bank accounts, motor, home and life insurance, and
pensions. Other European markets have followed suit. In France over
half of all life insurance sales are made through banks. In the UK,
almost 95% of banks and building societies are distributing
insurance products today.
In
India too, banks hope to maximize expensive existing networks by
selling a range of products. Various seminars and conferences on
bancassurance are taking place and many bankers have clearly shown
their inclination to enter insurance market by leveraging their
strengths in the areas of brand image, distribution network, face to
face contact with the clients and telemarketing coupled with
advanced information technology systems. The mergers of Citibank
with Travellers in USA and of
Winterthur, the largest Swiss Co. with Credit Suisse are recent
examples of the phenomenon likely to sweep India too.
Insurers
in India should also explore distribution through non-financial
organizations. For example, insurance for consumer items such as
refrigerators can be offered at the point of sale. This piggybacks
on an existing distribution channel and increases the likelihood of
insurance sales. Alliances with manufacturers or retailers of
consumer goods will be possible. With increasing competition, they
are wooing customers with various incentives, of which insurance can
be one.
Another
potential channel that reduces the need for an owned distribution
network is worksite marketing. Insurers will be able to market
pensions, health insurance and even other general covers through
employers to their employees. These products may be purchased by the
employer or simply marketed at the workplace with the employer’s
co-operation.
Worldwide
interest in E-commerce and India's predominant position in
information technology and software development is also likely to be
a major factor in the marketing of insurance products in the
immediate future. The internet account is increasing in arithmetic
progression and the trend has already been set by some of the
leading insurers and insurance brokers worldwide.
Finally,
some potential Indian entrants into insurance hope to ride their
existing distribution networks and customer bases. For example,
financial organizations like ICICI, HDFC or Kotak Mahindra intend to
tap the thousands of customers who already buy their deposits,
consumer loans or housing finance. Other hopeful entrants anticipate
specific alliances such as with hospitals to provide health cover.
Conclusion
Over
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.
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