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REPORT ON LIFE

INSURANCE
BY
PAWAN KUMAR
GITAM INSTITUTE OF INTERNATIONAL
BUSINESS

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CONTENTS

S. NO. TOPIC PAGE


NO.
1. INSURANCE COMPANY IN INDIA 2
2. IRDA 3
3. CLASSIFICATION OF INSURANCE 3
4. LIFE INSURANCE 4
5. LIFE INSURANCE CORPORATION 5
6. INVESTMENT 5
7. LIFE INSURANCE: MAJOR PLAYER 6
8. TAX RELIEF ON INCOME 7
9. ISSUING THE LICENCE 7
10. BARRIER IN GROWTH 8
11. OPPORTUNITY FOR INSURANCE 8
SECTOR
12. CONCERN OVER RISE IN ORPHAN 8
POLICY
13. IMPACT OF GLOBAL CRISIS 9
14. INCREASE IN FDI 10
15. CONCLUSION 11

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INSURANCE COMPANIES IN INDIA
In 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), and

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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.

IRDA
Insurance 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 INSURANCE
There 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 INSURANCE
IRDA 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 CORPORATION

Insurance 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 2050

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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.

INVESTMENT
Assets 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.
PRIVATE SECTOR
• 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

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New business premium collection of life insurance industry (in Rs
cr)
COMPANY APR-MAR 08 Mar 09 APR-MAR (%)
09
LIC 59182.20 52953.9 -10.52

ICICI Prudential 8306.00 6812.52 -17.98

SBI Life 4792.86 5385.00 12.35

Bajaj Allianz 6491.72 4491.61 -30.81

Reliance Life 2752.76 3514.00 27.65


HDFC Standard 2679.61 2644.00 -1.33

Birla Sunlife 1965.00 2823.91 43.71

Kotak Mahindra Old 1107.00 1343.00 21.32


Mutual

Tata AIG 967.78 1143.00 18.11

Aviva 1059.0 724.0 -31.6

Private Total 33,806.00 34,153.71 1.03

Total 92,988.71 87,107.62 -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 fourth-
largest life insurance company. LIC’s 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 INCOME
Tax 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.

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ISSUING THE LICENCE
IRDA 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 GROWTH
There 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 SECTOR
As 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 POLICY

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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. IRDA’s 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 CRISIS
Many 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 Japan’s 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 FDI
Indian 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 the

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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.

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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