issues and challenges of insurance

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Insurance: Issues & Challenges

INTRODUCTION TO INSURANCE

INTRODUCTION :

Insurance is a tool by which fatalities of a small number are compensated

out of funds (premium payment) collected from plenteous. Insurance

companies pay back for financial losses arising out of occurrence of insured

events, e.g. in personal accident policy death due to accident, in fire policy the

insured events are fire and other allied perils like riot and strike, explosion, etc.

Hence, insurance is safeguard against uncertainties. It provides financial

recompense for losses suffered due to incident of unanticipated events, insured

within policy of insurance. Moreover, through a number of Acts of Parliament,

specific types of insurances are legally enforced in our country, e.g. third party

insurance under Motor Vehicles Act, public liability insurance for handlers of

hazardous substances under Environment Protection Act, etc.

Insurance, essentially, is an arrangement where the losses experienced by a few

are extended over several who are exposed to similar risks. Insurance is a

protection against financial loss arising on the happening of an unexpected

event. Insurance companies collect premium to provide security for the

purpose. As loss is paid out of the premium collected from the insuring public

and the insurance companies act as trustees to the amount so collected.

Insurance companies have standard proposal forms, which are to be filed up

giving the details of insurance required and presented to insurance company.

Depending upon the answers given inproposal form insurance companies

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assess the risk and quote the premium. On payment of premium and acceptance

thereof by insurance company the insurance is affected. Nonetheless, there is no

Insurance cover if premium is not paid.

MEANING OF INSURANCE

It is a commonly acknowledged phenomenon that there are countless risks

in every sphere of life. For property, there are fire risks; for shipment of goods,

there are perils of sea; for human life there are risks of death or disability; and

so on. The chances of occurrences of the events causing losses are quite

uncertain because these mayors may not take place. Therefore, with this view in

mind, people facing common risks come together and make their small/

contributions to the common fund. While it may not be possible to tell in

advance, which person will suffer the losses, it is possible to work out how

many persons on an average out of the group, may suffer losses. When risk

occurs, the loss is made good out of the common fund. In this way, each and.

everyone shares the, risk. In fact, they share the loss by payment of premium,

which is calculated on the likelihood of loss. In olden time, the contribution by

the persons was made at the time of loss. The following examples make clear

the above-stated notion of insurance.

Example I

In a town, there are 2000, persons who are all aged 60 and are healthy. It is

expected that of these 20 persons may die during the year. If the economic

value of the loss suffered by the family of each dying person were taken to be

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Rs. 50,000, the total loss would work out to Rs. 10,00,000. If each person of the

group contributes Rs. 500 a year, the common fund would be Rs. 10,00,000.

This would be enough to pay Rs. 50,000 to the family of each of the' 20 dying

persons. Thus, the risks in cases of 20 persons are shared by 2000 persons.

Example 2

In a village, there are 250 houses, each valued at Rs. 2,00,000. Every year

one house gets burnt, resulting into a total loss of 2,00,000. If all the 250

owners come together and contribute Rs. 800 each, the common fund would be

Rs. 2,00,000. This is enough to pay Rs. 2,00,000 to the owner whose house got

burnt. Thus, the risk of one owner is spread over 250 house-owners of the

village.

DEFINITION OF INSURANCE

Insurance companies bear risk in return for a fee called premium. Thus,

insurance companies are risk bearers. They accept or underwrite the risk in

return for an insurance premium. Accordingly, the term insurance may be

defined as a co-operative mechanism to spread the loss caused by a particular

risk over a number of persons who are exposed to it and who agree to ensure

themselves against that risk. Risk is, in fact, an uncertainty of a financial loss.

Risk must not be confused with loss itself that is the unintentional decline in or

disappearance of value arising from a contingency. The functions of insurance

include providing certainty, protection, risk sharing, and prevention of loss and

capital formation. Wherever there is uncertainty with respect to a probable loss

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there is risk. The insurance is also defined as a social apparatus to accumulate

funds to meet the uncertain losses arising through a certain hazard to a person

insured for such hazard.

Insurance has been defined to be that in which a sum of money as a

premium is paid by the insured in consideration of the insurer's bearing the risk

of paying a large sum upon a given contingency. The insurance, thus, is a

contract whereby:

(a) Certain sum, termed as premium, is charged in consideration,

(b) Against the said consideration, a large amount is guaranteed to be paid by

the insurer, who received the premium,

(c) The compensation will be made in a certain definite sum, i.e., the loss or the

policy amount whichever may be, and

(d) The payment is made only upon a contingency.

More specifically, Insurance may be defined as a contract wherein one

party (the insurer) agrees to pay to the other party (the insured) or his

beneficiary, a certain sum upon a given contingency (the risk) against

which insurance is required.

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The Growth and Development of the Indian

Insurance Industry

THERE has always been some form of insurance in India, though of an

informal nature. The formal insurance business as we know it today in both the

life as well as the non-life sector was introduced in India by the British in the

beginning of the 19th century. Over a period of time, the business spread,

though not adequately. Since it also suffered from some malpractices, the life

insurance business was nationalized in 1956 and the general insurance business

in 1973. Despite several achievements to its credit after nationalization, in

course of time, the industry was beleagured by certain shortcomings, which led

the government to liberalize it again. The legislative framework and important

milestones in the two sectors are briefly described below.

Life Insurance

In 1818 A British firm called the Oriental Life Insurance Company was

formed in Calcutta. This was followed by the establishment of the Bombay Life

Assurance Company in 1823 in Bombay, the Madras Equitable Life Insurance

Society in 1829 and the Oriental Government Security Life Assurance

Company in 1874.

It is a telling comment on the British view of Indians that prior to 1871;

Indian lives were treated as sub-standard and attracted an extra premium of 15

to20 percent. The Bombay Mutual Life Assurance Society, an Indian insurer

formed in 1871, was the first one to charge normal rates for Indian lives.

There were no specific regulations for the life insurance business until

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1912, when it came to be formally regulated under the provisions of the Indian

Life Assurance Companies Act, 1912. In 1928, the Indian Insurance Companies

Act was enacted, inter alia, to enable the government to collect statistical

information about both the life and the non-life insurance business, including

the provident insurance societies. All the earlier legislations were consolidated

and amended by the Insurance Act, 1938 with comprehensive provisions for the

detailed and effective control over the insurers (both life and non-life) so as to

protect the interest of the insuring public.

For administering this legislation, the newly established insurance wing

in the Government of India was made administratively responsible for deciding

policy matters. The actuarial and operational matters were looked after first by

the Actuary to the Government of India, then by the Superintendent of

insurance, a finally by the Controller of Insurance. The amended Act of 1950

made far-reaching changes, such as the requirement of equity capital for

companies in the life insurance business, ceilings on share holdings in suchcompanies, stricter controls on investments, submission of periodical returns

relating to investments and such other information as the Controller may call

for. This amended Act even carried provisions for the appointment of

administrators for mismanaged companies and ceilings on expenses of

management and agency commissions. The Act was further substantially

amended in 1999 (effective since April 2000), and today remains the main

instrument of regulation of the insurance business in India.

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Factors Leading to Nationalization

By 1956, as many as 154 Indian insurers, 16 non Indian insurers and 75

provident societies (in all, 245 entities) had entered the life insurance business

in India. However, the geographical spread and the number of lives covered

were rather small. In fact, insurance companies, by and large, were governed by

short-term considerations and consequently, the business was confined mainly

to cities and the more affluent segments of society .Offering insurance policies

to people with small incomes, to suit their income and financial position had not

even been attempted.,

During this period a number of malpractices occurred in the industry

causing loss to the unsuspecting public. There were also some instances of

mismanagement and misutilization of the funds collected. An objectionable and

harmful development was that the business houses which promoted these

companies were, in fact, diverting large funds for their other concerns, with no

consideration for prudence of doing so. Often, such large diversions of funds

led to a situation where the insurance companies were not in a position to

honour their commitment to their own customers. Winding up of companies

was also not totally unknown. This process gathered momentum especially after

the First World War, and between 1914 and 1920, many insurance companies

were closed down causing large losses for the small investors.The Industry wasnot playing the role expected of insurance in a modem state and efforts at

improving the standard by further legislation we felt were unlikely to be more

successful than in the past. The concept of trusteeship which should be the

corner stone of life insurance seemed entirely lacking. Indeed, most

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management had no appreciation of the clear and vital distinction that exists

between trust moneys and those which belong to joint stock companies.

In the light of these developments, the demand for stricter government

control of the industry gathered momentum and called for nationalization of the

insurance business-which almost became a foregone conclusion. Again, quoting

Dr.CD. Deshmukh, 'Misuse of power, position and privilege that we have

reasons to believe occurs under existing 'conditions is one of the most

compelling reasons that have influenced us in deciding to nationalize life

insurance'.

Although that was the immediate cause of nationalization, Dr. CD.

Deshmukh argued that the principal point about nationalization was that the

state did not have to make out a case that the private sector had failed.

Nationalization is justified on many other grounds of ideology, philosophy and

the objective of a welfare state. It was necessary in order that the interest of the

insuring public and the industry could be safeguarded, the country's economypromoted and more funds provided for economic development. These were the

considerations which persuaded the Government of India to opt for

nationalization of this industry.

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Nationalization of Life Insurance

When the Congress party at its Avadi session of 1955, formally included

in its manifesto the concept of the socialist pattern of society, it also urged the

nationalization of the life assurance business. In January 1956, the All India

Congress Committee formally resolved that the life insurance business should

be nationalized. This demand was presented more vigorously in the context of

the Dalmia affair. Accordingly, as a first step, on January 19,1956, the

management of the life insurance business of 245 Indian and foreign insurers

and provident societies, then operating in India was taken over by the central

government through he Life Insurance (Emergency Provisions) Ordinance,

l956. The Ordinance was replaced by an Act of Parliament known as the Life

Insurance (Emergency) Provisions Act, 1956.The Bill to provide for

nationalization of the life insurance business was introduced in the Lok Sabha

in February, 1956, andthe same became an Act on July 1, 1956.

In fact, prior to this Dr.CD. Deshmukh had thought of the idea of

nationalization for some time, and even asked one of his officers, H.M. Patel, to

do some preliminary exploration in this regard. The detailed plan that was pre-

pared included the action to be taken by officers to takeover various life

insurance units as soon as an Ordinance for nationalization was issued. This

Ordinance had also been kept ready for the President of India's signature andwhen the insurance business was actually nationalized on September I, 1956; it

caught many people by surprise, and was, perhaps, one of the best kept secrets

of the government. During the Parliamentary debate Dr. CD. Deshmukh, who

later became known as the architect of nationalizatison, also said 'I imagine that

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if the history of the first decade after India attained independence is correctly

written ,my name may be mentioned as that of the Finance Minister of India

who nationalized the life insurance business, when everything else is forgotten.

Progress since Nationalization

The following is a brief account of the several developments that took place

after the life insurance business was nationalized. The positive as well as the

negative points are highlighted so as to serve as a backdrop to the current dis-

cussion on the subject, especially the one relating to reforms in this sector.

The task before the LIC immediately after nationalization was

formidable, since even as it dealt with a multitude of problems, it was called

upon to build an imposing edifice on the foundations recently laid. The task had

to be completed very carefully and after the Mundhra scandal(another well

known scandal where Haridas Mundra sold fictitious shares worth12.5 million

in 6 of his companies to the LIC.), the Parliament was also watching its

performance with great vigil. The LIC had to chalk up policies on different

fronts simultaneously. As was to be expected, the first five years of its existence

were devoted to integration and consolidation work. Of these, the first few

years were devoted to the framing of rules and regulations, setting up other

administrative

procedures and streamlining the accounting procedures.Concurrently, there was a vast expansion of its network during this period. In

addition to the structural reorganization and decentralization, human resource

development was an important item in working out a new strategy, in which

training was organized on a large scale.

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In the period immediately after nationalization, unfortunately, new

business was actually adversely affected and saw some fall in terms of the

number of policies and the sum assured. This arose mainly on account of the

fact that the process of restructuring the divisional and branch offices had not

been completed and there were inadequate technical and experienced staff.

Some of the branch offices did not even have the full complement of personnel

assigned for them. The agents had not yet become accustomed to the new set

up, the procedures and methods of the corporation. In addition to this, there had

also been a substantial reduction in premium rates in 1954.

A particularly difficult year was 1957, during which the money position

in the economy was tight, investors were shy and the common man was

affected because of a steady rise in the cost of living. Agriculture was also

affected by famine conditions. In these adverse circumstances, LICs

performance during that period should be considered as reasonably good.

After this initial difficult period, LIC, over the years, made commendableprogress. At the time of nationalization, the total new business of the 245

erstwhile insurance companies was around two billion rupees of sum assured.

From a 'new' business of Rs 3.2808 billion sum assured under 0.932million

policies procured in India during the period of 16months between September I,

1956 to December 31, 1957,LIC progressed to a business of Rs 1,927.8496

billion sum assured under 22,491,304 policies on individual lives, in 2001-

2002. The first year premium received during 2001-2002 reached Rs 99.6554

billion from Rs 130.6 million in the 16-month period ending December 31,

1957.

Similarly it has grown from a level of Rs 137.5 million sum assured

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under 5.4 million policies to Rs 8,110.17 billion under 12.5876 million policies

as on March 31, 2002.The total premium, written, which represents LIC's

annual mobilization of funds and which was Rs 820 million in 1957, now

exceeds Rs 424.3344 billion. Group insurance business written in India, which

was 50 million rupees sum assured and Rs 2.1 million annuities per annum at

the time of nationalization, has, as on March 31, 2002, grown to 93,836

schemes in force, on 24.719 million lives which carry an insurance cover of Rs

1,005.9764 billion. In addition, there are 6109 superannuation schemes in force

on 0.980 million lives with annuities payable amounting to Rs 12.7194 billion

per annum.

The number of new lives covered during 2001-2002 under the 40

approved occupations pertaining to the Social Security Group Insurance

Scheme was 663,351 and the total till date was as large as 5,009,741.

The total income of LIC during 2002 was a substantial Rs 727.6991

billion, in which income from investments was as large as Rs 226.9542 billion.The life insurance business has thus seen a rising curve of growth. Its growth

rate in 2001-2002 was the best in the decade in all respects, such as policy

growth rate, sum assured, premium growth rate, and investment income. The

total life fund increased from Rs 871.760 billion in 1997, to Rs 2,270.0898

billion, as on March 31, 2002, which translates into a healthy 22.03 per cent

growth rate. It thus more than doubled during this period.

The 'valuation surplus' and consequently, the bonus to policyholders (95

per cent of the surplus) and the central government's share (being 5 per cent of

valuation surplus in terms of Section 28 of the Life Insurance Corporation Act,

1956), have been steadily increasing over the years. The 31st valuation of the

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corporation's business as on March 31, 2001, excluding foreign business,

showed a surplus of Rs 75.8529 billion. For the year 2000-2001, the central

government's share of the valuation surplus amounted to Rs 3.8066 billion.

In recent years, LIC has also acquired a significant presence in the rural

sector. For instance, 1,200 out of its 2,048 branches are situated in mofussil

areas. The rural new business in 2001-2002 amounted to sum assured of Rs

254.6194 billion under 3,701,444 policies, representing 16.94 per cent of total

business in terms of policies and 13.65 per cent in terms of sum assured. These

figures are in terms of the definition of the rural! Social sector, as approved by

the IRDA.

The Rural Group Life Insurance Scheme (RGLIS) was introduced with

effect from 15 August 1995. This scheme is for the rural masses and is

administered through the Intermediate Level Panchayats (ILP). Any person

living in the jurisdiction of the ILPs can become a member of such schemes.

Under the subsidized scheme, where 50 per cent of the premium is shared bythe central and state governments in equal proportions, only one person

belonging to the family living below the poverty line is eligible to join. During

1999-2000, as many as 103,619 new lives were covered.

In its effort to include more people under the umbrella of life insurance,

LIC has endeavored to provide insurance coverage to a larger number of

individuals who have no previous insurance on their lives. During 2001-2002,

16.230 million individuals were insured for the first time for a sum assured of

Rs 1,198.5973 billion as against 14.430 million individuals for a sum assured of

Rs 843.2079 billion in the previous year. The ratio of first insurance to the total

business completed for the year comes to 74.29 per cent in respect of policies

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and 64.23 per cent in terms of sum assured.

Through its vast network of 2,048 branches, 100 divisions and seven

zonal offices spread over the country; its marketing force of 19,074

development officers and 792,645 full-time and part-time agents (of which

744,003 were active agents); LIC has reached various corners of the country

and provides sales and service of life insurance to the Indian public at their

doorsteps. LIC has also been able to reach illiterate people, those living in

interior rural areas, and even people in the marginal income group or below the

poverty line. Side by side, as seen above, group insurance activities have been

expanded through an increasing number of pensions and group superannuation

units. They not only cover the organized sector under various group schemes

but also, through some group insurance schemes, cover the unorganized sector.

Although, LIC's reach should be considered in the background of the poverty

level, literacy problems, lack of insurance awareness, prevailing social customs

and problems of communication to the deep rural areas, the fact remains that alot of ground is yet to be covered.

At this stage, it is worth noting that although LIC has virtually a monopoly over

the life insurance business, there are some other very small players viz. Postal

Life Insurance, Army Group Insurance Fund and Naval and Air Force Life

Insurance Funds. Some of the state governments also have insurance schemes

for their employees. A few pension funds are also in operation though reliable

data about these small businesses are not easily available. Additionally, 18 new

players have entered the market since October 2000, but naturally, they have

yet to gather substantial enough business.

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Benefits of Globalization

In this age of global integration, no country can operate in isolation

because in every economic, social and political activity, there is considerable

interdependence between countries. A greater integration of the market with the

rest of the world is accelerated by the breakdown of geographical barriers to the

movement of capital across countries. Each country, therefore, operating in the

international market, has to follow international norms and behaviour.

Essentially, globalization brings benefits to all participating countries.

The host country becomes a recipient of large foreign investments and foreign

investors secure access to new and developing markets. Several benefits then

flow in either direction in terms of expanding markets, improved products and

services, new marketing and production technologies, and newer concepts of

management.

So far, our participation in the global market in virtually all sectors of the

financial services sector has been only at the margin and our insurance

institutions in particular have been relatively insulated from world markets.

Now, due to the advantages of opening up that could accrue to India, business

has to operate beyond the national boundaries.

In the main, globalization will secure for India larger inflows of foreign

capital needed to sustain our GDP growth. In addition, new entrants with a

professional approach and state-of-the-art technology will revolutionize the

market by bringing about tremendous improvement in service. Moreover,

global competitors will help in building expertize with their best global

practices.

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CHALLENGES

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Major Challenges in the Insurance Sector

The process of opening up is forcing a radical change in the structure of

the nationalized insurance industry. This change is becoming even more

pronounced with the entry of foreign companies into the Indian market in the

form of joint ventures with Indian private sector partners. Consequent to this,

the integration of the Indian insurance industry more closely with the world

economy has also become inevitable. It has become clear that insurancecompanies can no longer operate within given national boundaries. Companies

from developing countries must, therefore, align their work culture and their

policies and procedures with those of the participating companies from

developed countries.

In the past, whenever there was talk of restructuring or reforms in the

public sector companies, the changes actually effected were mostly of a

cosmetic nature. The situation now compels significant changes in areas such as

their role and their ownership pattern. The depth of restructuring now goes

much beyond minor changes in inconsequential areas and is forced on them by

competition.

The private sector companies, on the other hand, had to adopt a different

approach right from the beginning, because with their large investments, they

have entered the market for conducting a profitable business. They are trying to

evolve structures which will be most suitable for carrying on business in India.

Of course, in their case, there is no question of change on the lines of the public

sector, but in the sense of moving away from or improving upon the practices

established by the nationalized sector. It also involves the question of

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redesigning strategies and policies appropriate for an open regime.

Apparently, changes will not be and cannot be limited to only some areas, but

will be comprehensive; covering an aspect, because they are so interrelated.

Many of these aspects are common to both the sectors. Thus, in respect of all

companies, significant changes will be necessary in respect of their

organizational set-up, procedures, marketing, fixation of premium rates, and

procedures for claims settlement, accounting practices, consortia arrangements,

use of sophisticated technologies, automation/information technology (IT) and

submission to regulation of business. In most cases, the starting point was

marketing strategy which needs consequential changes in all other areas. Some

of these changes will occur on account of government policies or at the

government level, while others will be at the initiative of the industry itself. The

experience in the banking sector should serve as a guide to them, as also to the

policy makers.

We first describe the changes that are called for at the industry level,comprising private and public units and then cover public sector-specific areas.

Still, a large part of our description would naturally keep on referring to the

public sector because for the last so many years, that was the only insurance

industry in India.

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POLICIES AT THE INDUSTRY LEVEL

During the long monopoly regime, the government attempted only minor,

almost superficial changes in procedures, without going to the root of the

problem, perhaps because of its reluctance to touch any vested interest. What

deregulation requires is comprehensive changes in the very character and basic

policies for the industry.

Change spreads across a vast canvas and would, in the main, cover the

following areas:

(a)Mindset.

(b)adequacy of capital

(c)Personnel

(d)market-related policies

(e)Cost consciousness

(f)Competitive strength

(g)Technology in use

(h)Accounting practices

(i)Scale of operations and

(j) Global integration.

These have to aim at creating an efficient, vibrant and viable insurance

industry after assessing its strength and weaknesses. How to affect them

efficiently and quickly is an important challenge for the existing and new

players.

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CHANGE IN THE MINDSET

The most difficult part of change is the change of attitude. No effective

change can be imposed or mandated by an outside party or from above, like the

international institutions (in relation to a national government) or the govern-

ment (in the case of the public sector). It has to spring from within and can be

effectively introduced only when there is willingness on the part of the

concerned parties to do so. If it is based on internal commitment, its depth,

reach and quality will be far better.

The most important change that is required is in the mindset of the players vis-

-vis the customer. Experience has already shown that quality of service is the

influencing factor in the market and in fact, only those units will survive which

offer to the customer what he wants, and to his satisfaction. For the old,

established, public sector entities, it is a question of revolutionizing the veryapproach to the business. For the new players also, it means an attitudinal

change, because they have to depart from the systems, procedures and attitudes

of the public sector so that the customer will be better served.

In the restrictive mould adopted by India for almost 50 years, all the

important sectors of the economy were more or less working in a sellers'

market. That 'take it or leave it' attitude has now to give way to being more con-

cerned with the customer and the service offered to him. Even the new units,

which had no opportunity to operate in the insurance market in this country, can

make room for themselves in the market mainly by paying greater attention to

this aspect.

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Insurance is a business in which the financial stakes of both the

consumer and the seller are high and have to be based on mutual trust. The

relationship does not end with the conclusion of the transaction, but has to be

durable and of a long-term nature.

Adequacy of Capital

Capital adequacy is a matter of special attention in view of the nature of

the insurance business, where in case a contingency arises, the insurer should be

in a position to meet its long-term contractual obligations and pay up the dues

or claims. In that sense, insurance is a capital-intensive business and must be

backed by an adequate capital base on the part of the owners and the companies

should not be running their business purely on other people's money. So mini-

mum start-up amounts and long-running capital adequacy norms are absolutely

essential. In consideration of this, the Malhotra Committee suggested and

subsequently the IRDA stipulated, a minimum capital base of Rs.l billion for

any entity wanting to enter the Insurance business.

In order to spread their operations further, and to be able to face

competition, the public sector insurance industry also needed an infusion of

additional capital for improving the existing very low capital base. With that in

mind, the Malhotra Committee suggested that LIC's capital base be increased

from a mere Rs 50 million to 2 billion. This is yet to be done. In the same

manner, the Insurance Act requires every reinsurer to have a capital base of Rs

2 billion. After the LIC is able to comply with the new stipulation, another Rs 2

billion will be added to the capital base of the nationalized insurance sector.

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After initial resistance on the ground that the size of capital prescribed

was too high and the business of insurance did not require it, all the new

entrants have not only complied with the requirement, but have actually

contributed larger figures-some even double the amount prescribed. Although

the legal stipulation now is for a capital of Rs 1 billion, which can be

considered quite adequate for, setting up a new company, the new players find

that as their business grows; they actually need much larger capital infusions in

order to satisfy solvency margin requirements.

The Insurance Institute of India (March 2001), mentions that the

minimum capital base stipulated as the starting point: will not be appropriate

for measuring capital adequacy of an established insurer. Hence, the current

trend is to relate the amount of paid-up share capital to the risks inherent, in an

insurer's operations and the insurerwould be adequately capitalized to deliver

on his promises. The risk factors will include the lines of business underwritten,

rate of expansion and quality of investments. The relevant concepts are referredto as Minimum Continuing Capital and Surplus Requirements (MCCSR.) in

Canada and Risk-based capitalization (RBC) in the USA. The position that will

obtain in India is not yet clear.

Normally, the capital market should enable the raising of finance if the

performance of the units seeking funds from the capital market is considered

satisfactory by the market-but there are difficulties in tapping this source. On

the one hand, the capital of domestic insurers will need to be augmented before

they approach the capital market; and on the other, it will be increasingly

difficult to maintain the required level of return-on-capital to attract additional

capital, because under competition, the profit margins will be under pressure.

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India has a strong savings culture with the rate of savings staying around

22 per cent of the GDP, Insurance could be a good investment avenue if it is

made attractive enough, Exploiting this opportunity is going to be particularly

essential for the public sector since it is not only expected to reduce its

dependence on the government, but is expected to contribute to the government

treasury by stepping up its savings.

As seen above, there is now a greater appreciation of and insistence on

adequacy of capital of insurers. However, insurance demands vision,

entrepreneurship and dynamism, which is not a function of just massive capital

only.

Quality of Personnel-Recruitment and Training

The insurance industry in India is serviced by a big complement of

experienced staff. Thus, LIC has a large force of 792,645 agents, supervised by

19,074 development officers, spread across the country. Similarly, the general

insurance industry's sales force consists of more than 500,000 agents (not many

of whom are active and hence it is difficult to pinpoint their exact number) and

12,047 development officers. .

The total strength of employees in the insurance public sector is just

around 200,000. However, the general perception is that even this number is

excessive in relation to the requirement and thus impinges on the performance

of the nationalized industry. The new players have started off. With an

advantage in this regard in that they do not have to carry the load of an unduly

large workforce and are managing with a smaller number.

Human resources constitute the most vital segment of any organization

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and great care is needed in recruitment training, deployment, and

developmental aspects like growth and career opportunities, retention of talent

and weeding out deadwood. The insurance business demands personnel of high

quality, with a different range of skills and an emphasis on greater

professionalism. Of course, although there was some dissatisfaction about the

quality of service from the existing entities, the industry does have some

personnel with fairly good technical skills and professional talent.

However, the crucial stage is the recruitment process and high standards

and qualifications have to be set at the stage of induction of new staff. Insurers

have to attract, retain and develop people who are open to change, are creative,

Value teamwork, and have passion for service and delivering value in their

output. In fact, experience in the insurance business by itself now perhaps

counts for less than the qualities mentioned above. Many recruits, therefore,

especially at the middle and senior levels in the new companies are from other

services and often without any background in insurance.At the same time, in a sense, the new players, just because they are

recruiting afresh, do not necessarily derive any special advantage in

recruitment, because their recruits especially for middle level and senior

positions are also drawn from the same stock as that from which the present

industry sourced them. They do bring with them the legacy of their public

sector culture. A further difficulty is that the otherwise properly qualified

potential candidates do not rank the insurance industry very high on such issues

as pay (not really a constraint any more) and prestige and are not, therefore,

attracted easily to it. So the industry has to take special pains to find the right

type of people to work with them and then train them further to suit their needs

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and culture.

The ultimate cost of not recruiting persons with proper qualifications, or

of not systematically training their own personnel to match expected standards,

could be very heavy at a time of rapidly increasing competition and consumer

expectations.

Looking to the surplus staff already with the public sector, the urgent

need is to improve the quality of the existing personnel, rather than new

recruitment. The public sector must immediately identify whether and on what

scale, at least in respect of certain jobs, it is saddled with under qualified staff

unable to respond to the demand on them, and accordingly must undertake a

heavy exercise of training, retraining and redeployment.

Since training helps the companies upgrade the attitude and skills of their

workforce for maintaining standards and quality, it is an inseparable component

of any growing business. Insurance is a business where even the lowest

operating and sales levels need to be up-to-date on their products. They have tomaster the nuances of the products, particularly because they are offering a

large range of similar products and have to help the customer to make an intel-

ligent choice.

The industry has taken steps to empower its staff in terms of job

knowledge as well as customer service by organizing relevant training for them.

Already, large sums are being spent on this activity in the insurance sector, but

Its focus needs to be reoriented to make it more relevant to the needs of the

industry. The future demands a different range of skills than what was needed

and available until now. Of particular relevance would be training in actuarial

Science, management, marketing and technical subjects. For all these reasons,

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training facilities need to be substantially expanded and upgraded.

All the companies are not outsourcing training. Many have set up their

own training facilities for intensive coaching. In order to meet the demand on a

large enough scale, there 18 a need to build a cadre of professional trainers

within the organizations as well as to tap the market for expertize and other

facilities. However, total dependence on in-house training arrangements may

not suffice and hence some outsourcing becomes essential. To combine

quantity and quality, companies have their own training modules added on to

the IRDA-stipulated minimum 100 hours of training. They are mostly

company-specific programmes. Their agents are being trained more as financial

advisors.

Insurance training in India is at present organized through:

(a) the National Insurance Academy, Pune, which caters to the

requirements of senior level executives of both LIC and general insurance

companies.(b)the Insurance Institute of India and its College of Insurance.

(c)LIC's Management Development Centre, its seven Zonal Training

Centres and 27 Sales Training Centres and around a 100 Divisional Training

Centers and

(d)Training centers of each general insurance company.

The Corporate Training Centre of individual companies focus on

intensive training of direct recruit officers and specialist and functional training

programmes, while their Regional Training Centres impart induction training.

In a few cases, the LIC arranges for the training of agents through some

approved branch offices.

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Many countries, -in recognition of the importance of training, require all

insurers to spend a prescribed percentage of their income or gross salary cost on

training of human resources

The insurance industry in India has a system under which each company

provides a budgetary allocation of around 1 per cent of the net premium income

every year. However, there is no compulsion in this regard and there is no

guarantee that the sums provided are actually spent. The UK has adopted a

system of Continuous Professional Development which requires a professional

to update himself with developments in techniques with the help of

programmes such as seminars. The Indian industry too will have to think of

such programmes.

In view of the constraint of time and in the absence of any formal training

courses available in the country, it is difficult for newcomers to build up a large

and qualified cadre by creating and augmenting their own in-house facilities.Therefore, in addition to training organized through special training

establishments set up by the industry itself, there is a need for introducing

formal university education with specialized courses for insurance or insurance-

related matters. Unfortunately, in the country at present, there is no university

which offers any insurance-specific course at any level, leading towards a

diploma or a degree.

Some of the management institutes have recently started offering courses

on a limited scale in this area. This puts severe limitations on the availability of

candidates with a basic knowledge of insurance. Therefore, their training has to

start off with these basic inputs. The introduction of formal courses will widen

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employment opportunities, not just in Indian companies, but also with foreign

insurers wanting to operate in this country.

Up-gradation of Organizational and Technical Skills

The insurance business requires organizational and insurance-related

technical skills. Organizational skills refer to the functions of marketing,

distribution systems, customer service, and expense management. These

functions are, of course, common to all businesses. However, they have not

received the attention they deserved in the public sector operating under

monopolistic conditions. Since the new players are ahead of others in this

regard, the existing insurers must devote special efforts for the same.

Insurance skills refer to the functions of underwriting, claims processing/

adjudication, fraud control, funds management and reinsurance. Being a service

provider, insurance companies must pay attention to product innovation,

appropriate pricing, and speedy settlement of claims. However, because of its

Public sector character, the insurance industry in India never felt the urge to

improve itself in these areas. These aspects now deserve closer attention if it

wants to maintain its strong position in the market.

The public sector insurers are now making modest efforts to inculcate

these skills at different levels; but an additional channel could be the joint

ventures with established and reputed foreign partners, because these qualities

cannot be taught in the conventional sense, but have to be absorbed on the job

itself. This exposure in a real-life situation can be very effective:

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Training of Specialists

Since the insurance industry has to identify and train people across

different professions, the emphasis has now to shift from training only in

insurance subjects, to several other disciplines relevant for introducing

professionalism in the industry. The disciplines likely to be covered are indi-

cated below.The insurance sector needs a greater involvement of other professionally

qualified experts as well, either as employees or as consultants. This' includes

doctors, veterinarians, engineers, environmental specialists, accountants, and

financial experts. Their expertise is very relevant for drawing up plans for new

products, for scrutinizing some claims, for settlement of certain disputes and for

some policy decisions. Similarly, insurers draw up policy contracts, which are

necessarily quite complex. They need to be drafted carefully and demand

special skills, and, therefore, a legal matter is another area in which training will

have to be arranged. Simultaneously, some insurance-related training for these

experts is also in order because the professionals will need to be given exposure

to the working and problems of the insurance industry to enable them to

respond to special problems arising therein.

Cost Consciousness

At the stage of entry into the market, the insurance companies may not

be ready with totally new products and services. Naturally, initial competition

will be more in the form of prices charged, as all companies, public and private,

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fight for gaining or retaining a share of the market already developed. The

companies must, therefore, adopt appropriate cost control measures; Cost

leadership implies tight control systems, minimization of overhead costs, and

pursuit of economies of scale. The two important areas where costs can be

reduced or controlled would be administration and claims.

Controlling administration and establishment costs is the most difficult

and yet an essential task that any organization must undertake. These costs can

be kept within limits by exercising care in the initial recruitment and subsequent

deployment of staff as also the emoluments made to them. In the case of the

public sector, which is known to be over-staffed, costs can be brought down by

down-sizing, accompanied by better utilization of the workforce-both extremely

difficult in the public sector mould-but there are no options for doing so.

Cost reduction cannot be attempted solely by the traditional across the

board cost-cutting methods. Efforts have to be made on several fronts

simultaneously. Thus, on the operational side, it would pay if non-value-addedactivities are curtailed to avoid waste of effort and excess cost in the business.

Re-engineering to simplify work-flows and automating manual tasks are the

other two cost reduction strategies that need to be pursued.

Claims costs can be controlled through two methods: claims minimization

and fraud control. In the first category, the aim would be to minimize the

number of claims lodged with the insurer, of course, not by declining to accept

them, but by persuading the customer to take adequate precautionary measures,

Claims minimization can be best explained by referring to health insurance. The

company can analyze its claims data to determine those medical service

providers who provide low-cost treatment. It can then provide financial

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incentives to its customers to make use of their services. Or alternatively, the

company can either negotiate lower rates with high-cost service providers, or

discourage its customers from using their services. With the discouraging

experience of the government companies in the health insurance, cost control

needs to be attended to with even greater vigil by the new entrants.

Maintaining/Acquiring a Competitive Edge

In order to be able to acquire and maintain a competitive edge in the

market, it is important to follow the concept of competitive market intelligence

and to anticipate the pattern of operations and the game-plan the new entrants

are likely to follow. In particular, it is necessary to find out what new products

and policies others are likely to offer and then suitably design their own

strategies. The basic prerequisite for the government companies (which

virtually never faced any competition) would be to cover their flanks by

examining where private entrants will hit and then be prepared for it when

competition actually materializes.

The new players have not entered an entirely virgin area but in an area

dominated by a well-entrenched set-up in the public sector. The challenge for

them is, therefore, to offer, in addition to the established products, something

new and innovative.

Making their operations cost effective through leaner establishments,

more efficient procedures, and greater and more focused use of technology are

going to be chief factors for the nationalized companies in acquiring a

competitive strength. Computerization is going to be of particular relevance in

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this context.

In the context of global competition, it is sometimes argued that the

labour-intensive nature of a service like insurance, particularly in respect of

distribution, should give India, with its abundance of low-cost labour resources,

a competitive edge. However, with the present productivity of this asset, the

above premise is questionable. The provision of insurance services requires

high technical skill and competence in such areas as risk assessment, risk

control, loss assessment, and actuarial science, which can only be acquired by

investing in professional education and proper training. Since obviously, such a

professional cadre will demand and secure a high level of compensation, it will

no longer remain particularly cheaper in relation to the wage levels in other

countries. All the same, the industry cannot shy away from professionalizing its

staff since it has to be less concerned with absolute figures of wages, and more

with lowering of the per unit cost of production.

. .

Technological Upgradation

Technology has led to dramatic changes in India financial landscape and

this wave has also had an impact on the insurance industry though the level of

technology currently in use is still quite low. Therefore, it can no longer afford

to postpone upgrading its technologies to the levels prevalent in other countries.

The trend towards its greater use is just emerging though there are still

problems to be overcome, mainly the mind set of the potential users. Fortu-

nately, resort to automation by even one entity exerts a wholesome pressure on

others to adopt the same, thereby raising the general level of technology in the

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industry.

The insurance industry stands to benefit immensely from technological

advance which has an impact on how business is managed and transacted. The

main benefit would obviously be in terms of increased efficiency levels, higher

customer satisfaction, leaner establishments, cost-effective operations, handling

of tremendous volumes of work, cost-effective channels of distribution and on

the whole, a modem work culture, which is the need of the hour. Technology is

critical not only in day-to-day management of the business, but also in areas

such as product development, cost control and marketing.

For designing new products and services, a tremendous database

comprising demographic data, income level and distribution, regional

disparities and peculiarities, products, customer profile, demand pattern, incli-

nations, and preferences needs to be built up. Demographic data related to age

and sex composition, health, birth and death longevity, incidence of disease,

etc., has to be carefully documented, stored, retrieved and processed speedilywhich is just not possible without high powered computers. Computerization

does not mean just collection and storing of data, but interpretation and

meaningful organization of it to present it in the form of information. Computer

networking facilitates the exchange of business information between

companies, and access to each other's database and communication via

electronic mail systems. This also provides access to information at the

international level. These functions call for a more effective use of communica-

tion technology.

Computers with expert systems could be used increasingly for such

tasks as insurance underwriting and claims adjusting, medical reports, and

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Investment performance. Expert systems is a kind of software that collects

together a large amount of data on a given subject and organizes it in a way that

enables a computer to analyze problems and suggest decisions by a process of

elimination, using programmed criteria

The IT capabilities of a service sector like insurance need tremendous

strengthening because it relies heavily on it. Information technology

encompasses computers, telecommunication, multimedia, relational database

management systems (RDBMS) and image technology. Some of the important

applications of IT are data processing, and Management Information Systems

(MIS).

Customer Activated Terminal (CAT) also called a Kiosk, is an interactive

multimedia display unit-free standing or housed in a small enclosure-in which

the customer gets the benefit of one-stop shopping at a convenient location

while being able to draw upon the full range of services.

The Importance of Government policies

The government's approach to this question is of critical importance,

because its policy will decide the ease with which technology can be imported.

Since the compatibility of technologies and systems imported will govern the

spread of technology, it would be better if the users are given the freedom to

decide which technology should be imported and from where, within given

parameters.

Since no private company in India desiring to enter the insurance business

has had the opportunity to participate in the insurance sector, it is not likely to

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be thoroughly acquainted with technology used in this sector. In order,

therefore, not to remain behind in the race, technological know-how is being

acquired from foreign insurers with whom they have collaborated. For those

who have no joint venture arrangements, the latest technology would still have

to be imported, possibly through technology tie-ups. Whether this should be in

the form of a joint venture or whether it should just be bought is a decision that

will vary from unit to unit.

Implications of Technology for Insurance

The introduction of technology inputs in the working of the insurance

industry has certain implications for it. For instance, the mere installation of

hardware or just automating manual work is not what is implied by the

increased use of technology. The adoption of new technology demands radical

changes in the work culture itself and means organizational restructuring and

streamlining, and a review of the existing systems and procedures (in other

words, business process re-engineering). Such sophistication will produce

certain other consequences such as on employment for recruitment,

replacement, training and retraining at various levels.

Recruitment at various levels will, hereafter, strictly be from amongsttechnically qualified persons, and in some cases even under-qualified or non-

qualified people may be replaced. Those who are otherwise promising could be

moulded for the jobs by training, and those who have some technical skills

could be upgraded through the process of re training. All the same, it could

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certainly mean unemployment for some. Yet, in the long-term, it will open up

new opportunities thereby augmenting employment.

Technological advance in other sectors can also produce an indirect

benefit for insurance. For instance, the strengthening of materials used in

construction and the extension of life resulting from medical advances may

mean lower losses for insurers in the long run.

On the darker side, computerization also implies a certain risk in terms of

security and integrity of data. The confidentiality of information, prevention of

data corruption and prevention of fraud are matters of concern and need to kept

in mind while deciding upon the area in which it is to be put to use.

Computers support competent people to perform their functions more

effectively and efficiently. Initial efforts, therefore, will have to be to improve

the skill level so as to assimilate these technologies. For achieving this, the

industry will have to arrange computer-related training on a large scale.

Fortunately, all the public sector insurance outfits have already undertaken suchprogrammes on a fairly large scale.However, with the increased and effective

use ofinformation technology, the personalized touch in insurance services will

diminish because technology, cannot replace the personal touch in providing

professional service. This is ofparticular relevance in a country like India

where the consumer would feel morecomfortable in a face-to-face interaction.

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ACCOUNTING PRACTICES:

The necessity of transparency in the accounts of insurance companies

cannot be overstated. The regulations laid down by the IRDA insist on sound

accounting standards and disclosure practices, sothat the true financial position

of the insurance companies is reflected in the accounts, The likely reliance of

theinsurers on financial institutions and the capital market for raising funds in

the future will further enforce such transparency and discipline in operations,

thereby putting the customer in a better position tochoose between one insurer

and another. Fortunately, the accounts in the public sector insurance industry in

India are considered tobe much more transparent than in many other countries

and hence there should notbe any difficulty in meeting the transparency and

disclosure standards.

Scale of Operations

Being a game of big numbers, the insurance business requires a very large

capital base and substantial financial resources. Its profitability is heavily

influenced by its size and in advanced countries; efforts are often made tocreate as large units as possible. In this context, the United Nations Conference

on Trade and Development (UNCTAD) observed two trends, notnecessarily

contradictory to each other, in different parts of the world. On the one hand,

monopolistic and oligopolistic market structures are being broken up in view of

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their unwieldy size. On the other, a view is gaining ground that fragmented

markets, in which a multitude of small companies operate, often under

conditions of cut-throat competition, cannot provide the high quality and

reliable services required by a modem economy. A higher degree of

concentration may, therefore increase their efficiency, It may thus be in the

interest of the customers to have fewer but stronger companies, not least

because the latter would have a better longer term financial viability,

Other factors inducing mergers and acquisitions include the following-a

desire to capture an increased market share; acquire improved width and depth

of product range; expand distribution channels; increase cross-selling

Opportunities, and diversify from product lines and geographical markets with

limited growth potential; achieve spread ofdevelopment risk; obtain access to

new markets; reach economies of scale; and achieve reduced expense ratio.

Alliances can take different forms. Some experts believe that alliances related

todistribution rather than toproducts or technology will prove most valuable in

the long run.

Global Integration

Dramatic changes are taking place in international markets owing to the

internationalization of activities, the appearance of new risks, new types of

covers to match with new risk situations, and unconventional ideas on customer

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service. In differing ways, depending upon their history, culture, and structure

of their economy, countries are contending with increasing globalization of the

world economy.

India's participation in the global market so far has been only at the

margin and its financial institutions have been relatively insulated from the

international markets. Their greater integration with the rest of the world as a

logical step has already started and is accelerated by the breakdown of

geographical barriers to the movement of capital across countries. The industry

is sure to benefit immensely from this interaction and exposure. Such

integration will call for some changes in the structure and policies of the Indian

companies especially because of the need for compliance with international

standards and practices.1t also has to prepare itself to face competition in the

global arena by making its operations efficient and cost effective.

Therefore, while welcoming global integration, one has also to be awareof the danger to the stability of the system, for which preventive measures will

be needed.

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ISSUES

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CONTEMPORARY ISSUES IN INSURANCE

I. Increased Pension Coverage:

A few years back FICCI conducted a study on Pension as a social security

scheme. It concluded that the lack of comprehensive social security system in

the country, coupled with willingness to save, means that India, demand for

pension products would be very large. However, unfortunate the present

penetration of pension coverage is poor. By March 1988, the Life Insurance

Corporation of India's (LIC) pension premium was only Rs. 100 crore. Thestudy further concluded that making pension products into attractive saving

instruments would require only simple innovations which are already common

in some other markets.

The fact is that in the Indian context, building of retirement benefits in a

structured manner remained confined to only the employed sector, and the

social security benefit in a small measure is available only to the destitute above

65 years of age. Currently, pension benefits are available to employees in

organized sectors like the government and private. At present, there is no

pension benefit for self-employed and Agricultural workers in the unorganised

sector.

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In India at present about 89% of population, that is, the informal sector

workers have been kept out of the pension schemes so far. The Social Security

measures till now are state controlled by and large in this country and Insurance

has very less role to play bearing a few schemes.

THE BRITISH GOVERNMENT, states that the State takes care of its

citizen from cradle to the grave. They have the National Health Scheme which

underwrites the health of the members of the public and they have also got

Pension scheme which takes care of the widows, orphans and the old.

In India, there is no such system of social security exists. India has the

highest number of people above 60 years of age among the 14 countries in the

World. The main reason being the coverage of pension plan in India covers

only 8% of the working population.

The Scheme's basic purpose is to bring this class under the purview of

pensions. There are four areas under the present system:

(a) Contribution collection;

(b) Record-keeping;

(c) Assets Management; and

(d)Annuity Payment.

There has been a pressing need for a funded retirement plan defined

contribution to be implemented in India. It will address the long pending need

for a strong pension system for the country. The private sector players in the

insurance sector are now in the process of studying the potential of the pension

market. The scope of pension funds if enlarged by the Government will

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definitely provide a real competition in the Insurance Sector.

Present Position

The Insurance Regulatory Development Authority in its pension report has

projected an exponential growth in the post-reforms pension sector with the

aggregate market size estimated to touch Rs. 4,06,500 crore in year 2025. The

market, currently, stands at Rs. 56,100 crore. The IRDA had said that the

aggregate pension market would grow to Rs. 1,16,600 crore in 2005, Rs.

1,56,900 crore (2010), Rs. 2,15,400 crore (2015) and Rs. 2,98,600 crore (2020).

The pension market includes the Employees' Provident Fund (EPF), Employees'

Pension Scheme (EPS), Government Provident Fund (GPF), Public Provident

Fund (PPF) and the Voluntary Contributions through the future schemes in the

individual and group pension categories. The regulator also suggested setting

up a single integrated domestic pension system by October 2001. While

suggesting stripping of regulatory powers of the existing Employees' Provident

Fund Office, it recommended that IRDA monitor this sector as well.

The report had also not laid any restrictions on the number of players and

said that foreign equity should be allowed in the sector. It had also suggested

that minimum returns must be linked in the bank rate initially and payouts

should be exclusive preserve of Life Insurance Companies.

2. Convergence of Insurance and Banking Industry:

It was the evolution of banks entering into the Insurance Sector and

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Selling

Products across the counter that saw an increasing reach into the rural areas.

Many new players were hesitant of such possibilities, stating that the rural India

reflected huge numbers in terms of lives to be insured, business volumes would

be negligible. It was not until some insurers decided to tap Micro-Insurance

possibilities and came out with special products for the rural masses that

insurance penetration to rural India actually took.

Bancassurance is equally a major factor and plus point for spreading

insurance to rural areas. Even state or public sector entities, which till then had

depended solely on the tied agents, capitalised on the branch network of public

sector banks. Insurance spread across the country as banks offered to cross sell

products. The concept of Universal Banking is now taking a shape in Indian

Financial Sector and the very scope of Insurance business will be widened. For

example, SBI Life Insurance Company Ltd. and other Banks with their Joint

Venturers have started making a dent into rural business. This was not muchpossible earlier and is the result of entry of private players into the Insurance

Sector.

Bancassurance:

Public Sector banks in India can emerge as leading players in the

distribution of Insurance products across all parts of the country. With their net

work of 60000 branches two-thirds of which are in rural areas and their 117

million customer accounts, insurance companies would be well advised to use

them as a channel for their products,

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Bancassurance in India has a great future. Funds generated through the

Bancassurance model will play a pivotal role in mobilising savings particularly

in rural areas and short and long-term funds mobilised could, in turn, be used

for developmental activities. PSU banks will however, have to gear themselves

adequately to undertake this task as it would entail adequate training in well

designed products. With the emergence of Private Banks, PSU banks have

realized that customers' expectations have risen dramatically in the past few

years.

3. Alternate Channels of Distribution:

Nowadays there is thinking in the Insurance Sector about alternative

channels of distribution like Internet and Bancassurance. Many insurers are

willing to take advantage of these changes. As far as the Internet is concerned,

most people are using the net for information, to see whether the numbers

quoted by the agent are accurate. For the purchase they turn to the agent as

there is no price difference for the buyer. It is a fact now that all companies are

looking at the Internet and banks. But Life Insurance is a personal decision. In

banks, staff is changed occasionally and when you visit the bank branch again,

the earlier person is not there and the new person has no idea why one has

purchased the policy in the first instance.

Multiple distribution channels help insurers reach out to different sectors

of society, with Trade Unions or post offices being focal points of sale. Many

companies in the private sector have now tied up with the trade unions of

railways, and have provided them with customized products to suit the needs of

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the employees.

Intermediaries and Distribution Channels

In the light of one of the important contemporary issues of Insurance

Sector, the modern set-up of Intermediaries and distribution channel now

comprises the following.

(I)Direct Response: includes telephone, off the page, mail and TV. Etc.

(ii)High Street: includes bank branches, finance houses, kiosks, retail

. Stores. Etc.(iii)Electronic: includes Internet, interactive TV, etc.

(iv)Agency:includes Issues, conduct, quality, demand for exclusivity,

Cost, etc.

(v) Financial Advisors: includes among others, independent financial

Advisors, stock and securities brokers.

Prior to entry of private players in the insurance sector, there were no

alternative channels of distribution. It is the result of information technology

which provided new channels of distribution and liberalisation provided new

intermediaries to Insurance.

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4. Uniform Tax Concessions:

There are certain sections of the Income Tax Act, 1961 which provide

some concessions to Life Insurance Corporation of India, viz. Sections 80CC(I), 88, 193, 194A and Section 36(V) of the Income Tax Rules, which are

not available to recently joined private sector Insurance Companies. At present,

tax rebate is granted on repayment of Loans taken from LIC, for the purchase

and construction of residential houses under Section 88 of the Income Tax Act.

L I.C. interest earnings are also exempted from withholding of tax under section

193 and 194A of the Income Tax Act. Currently, the Gratuity and Super-

annuation policies purchased from LIC are eligible for deduction under Section

36(V) of the Income Tax Rules. At present investment upto Rs. 10,000 P.A. in

LIC's pension Product gets a rebate of 20% under section 80CC(1) of the

Income Tax Act.

The Private Life Insurers have also demanded a "Level Playing Field"

with the Life Insurance Corporation of India on the above tax concessions.

Thus, there are three areas which require changes in the Income Tax Act, 1961

and these are:

(a) Tax rebate on re-payment of loans.

(b) Exemption from withholding tax on interest earned.

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(c) Deduction of employer's contribution to gratuity and super annuation

Policies.

Many companies in the Private Sector such as Prudential ICICI Life,

HDFC Standard Life, SBI Life, Om Kotak Life, Tata AIR, Birla Sun Life, Bajaj

Allianz Life, and Ing-Vysya Life have already started Life Insurance business

in a big way. These companies are awaiting the necessary changes in the

Income Tax Act and Rules that grants certain benefits to LIC. They are now

referring to the Budget statement of Finance Minister for ensuring "Level

Playing field for Private Companies."

A tax concession on uniform basis in the Insurance Sector has become a

very important issue. Unless it is settled and made uniform, the private sector

companies cannot compete for a longer period with the Life Insurance

Corporation of India. This issue therefore, requires urgent action on the part of

the Government of India so that the insured may take the maximum benefit of

various Insurance Products being offered by the Insurers.

5. Cost and Competitiveness:

Life Insurance Corporation's monopoly has been broken with new players

entering the Life Insurance Sector. Almost for three decades the LIC was the

unchallenged master. But now it is facing a challenge from Private Sector

players who may cut on the business of LIC. For the customers who now want

to have life covers for which there are many providers. All the new players

offer endowment schemes and money back schemes which are based on the

model of LIC, at different premiums.

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Different Companies follow a different system of calculating the bonus.

There are other special deals offered by several companies. For example, some

companies offer a special premium in cases of accidental deaths. Some others

also offer a waiver of premium if a person is unemployed. There is a different

set of documentation which is followed by these companies. The claim

settlement period also differs with all these different rules of their

administration cost of life covers also differs. A comparative Table showing

cost of Life Cover to various Insurers is given here below

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From the above table, it is clear that there are different costs for different

Insurance Providers, which has a bearing on their profitability. The cost factor

is equally important for creating competition in between the various insurers.

More people would be looking to the insurer who provides Insurance at fewer

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Cost of Life

Cover

Policy Company Age of Premiu

mTotal slim

Assured (Rs.) at maturity

(P.A.) (Rs.)

1. Endowment Policy (20

yrs.)LIC 27 4852 2,75,000

TATA-AIG 27 7144 3,16,663HDFC-Standard

Life27 4805 N.A.

ICICI Prudential

Life27 4450 2,41,171

Max New York

Life27 N.A. N.A.

2. Endowment Policy (30

yrs.)

LlC. 39 3702 3,51,000

TATA AIG 39 4973 5,25,243

HDFC Standard

Life39 3586 N.A.

ICICI Prudential

Life39 3079 3,74,531

Max New York

Life39 N.A. N.A.


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premiums. This cost and competition factor will ultimately affect the quantum

of business of different Insurers besides increasing the total Insurance business

in the country. The rate of premium, service and incentives also has a bearing

on the non-life business in the country. Therefore, various components of cost

of Public Sector Insurance providers and those of the Private Sector would be

different, making it one of the major issues, which have to be kept in view

always. This provides an insight into the opportunities which will now be

available to the new Insurers vis--visthe old one.

6. Exposure Norms for Public and Private Sector:

The Insurance Regulatory Development Authority came up with the stiff

exposure norms for the private sector companies .It stipulates that investments

by any insurance company could not exceed 10% of the total subscribed share

capital, free reserves, debentures and bonds of the investee company or 10 per

cent of the controlled funds in the case of life insurers, whichever was lower.

The IRDA's revised investment regulations also said that for the public

sector insurance companies, the investment exposure can not at any point

exceed 20 per cent of the subscribed share capital, debentures and bonds of the

investee company or 5 per cent of controlled funds of the life insurer .

The regulator has also barred life insurance companies from entering into

reinsurance treaty arrangements with its promoter company or any other

associate or group companies without prior approval. The regulations direct

companies to draw up an independent programme of reinsurance of their own.

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It also said that the efforts of each company while making the reinsurance

programme should be to maximise retention of premium earned within the

country.

7. Entry of Financial Institutions into the Insurance Business:

In view of the interest evinced by some of the All-India Financial

Institutions (FIs), falling within the regularity and supervisory domain of RBI,

in entering the Insurance business, the guidelines for entry of the financial

institutions into insurance business have since been formulated. The FIs

desirous of entering into insurance business and meeting the following criteria

may make an application to the IRDA along with the necessary particulars duly

certified by their statutory auditors.

A. Insurance Business without Risk Participation:

1. FI having net owned fund of Rs. 2 crore would be permitted to undertake

Insurance Business agent of Insurance Companies of fee basis, without any risk

participation.

B. Insurance Business with Risk Participation:

2. The FIs which satisfy the eligibility criteria given below will be

permitted to set-up a joint venture company for undertaking insurance business

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with risk participation, subject to safeguards.

The maximum equity contribution that the FI can hold in the joint venture

company will normally be 50 per cent of the paid-up capital of the Insurance

Company. On a selective basis, the Reserve Bank of India may permit a higher

equity contribution by a promoter FI initially, pending divestment of equity

within the prescribed period. The eligibility criteria for joint venture participant

will be as under, as per the latest available audited balance sheet.

(i) The owned fund of the FI should not be less than Rs. 500 crore. The owned

fund for the purpose should be computed as per the definition of 'net owned

fund' under section 45-1A of the RBI Act, 1934.

(ii) The CRAR of the PI should be not less than 15%;

(iii) The level of net non-performing assets should be not more than 55 of the

total outstanding loans and advances;

(iv) The FI should have earned net profit for the last three continuous years;(v) The track record of the performance of the subsidiaries, if any, of the

concerned PI should be satisfactory; and

(vi) Regulatory compliance with the RBI guidelines for raising of resources by

the Fls should be demonstrated.

3. In case where a foreign partner contributes 26 per cent of the equity with the

approval of Insurance Regulatory Development Authority /Foreign Investment

Promotion Board, more than one FI may be allowed to participate in the equity

of the insurance joint venture. Since such participants will also assume

insurance risk, only those FIs which satisfy the criteria given in paragraph 2

above would be eligible.

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4. No FI would be allowed to conduct insurance business with risk participation,

departmentally. A subsidiary or a company in the same group of the FI or of

another FI engaged in non-banking or banking business will not normally be

allowed to join the insurance company on risk participation basis.

5. FIs, falling within the regulatory and superv

issues and challenges of insurance

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