issues & challenges in insurance-1
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INTRODUCTION TO INSURANCE
1.1 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 toincident 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 in proposal form
insurance companies 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.
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MEANING OF INSURANCE
2.1
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 majors 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 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
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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.
2.2 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 function of insurance includes providing certainty, protection, risk
sharing, prevention of loss and capital formation. Wherever there is uncertainty with
respect to a probable loss 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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3. THE GROWTH AND DEVELOPMENT OF 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 insurance 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 beleaguered 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 AssuranceCompany 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 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 alias, 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
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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, an 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 such companies, 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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4. FACTOS LEADING TO NATIONALISATION
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 custom-
ers. 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 was not 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 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.
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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 economy promoted 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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5. NATIONALISATION OF LIFE INSURANCE
When the Congress party at its Avadi session of 1955, formally included in itsmanifesto the concept of the socialist pattern of society, it also urged the
nationalization of the life assurance business. In January 1956, the All India Con-
gress Committee formally resolved that the life insurance business should be
nationalized. This demand was presed 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, and the 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 prepared
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 and when 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 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.
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6. PROGRESS SINCE NATIONALISATION
The following is a brief account of the several developments that took placeafter 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.
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
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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 commendable
progress. 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 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. Groupinsurance business written in India, which was 50 million rupees sum assured and
Rs 2.1 million annuity 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
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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 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 mofussilareas.
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 interms 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 by the 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 endeavoured to provide insurance coverage to a larger number of individuals
who have no previous insurance on their lives. During 2001-2002, 16.230 million
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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 and 64.23 per cent in terms of
sum assured.
Through its vast network of 2,048 branches, a 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 a lot 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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7. BENEFITS OF GLOBALISATION
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 theadvantages 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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8. CHALLENGES
8.1 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 insurance
companies 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, intheir 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 redesigning strategies and
policies appropriate for an open regime.
. Apparently, changes will not be and cannot be limited to only some areas, but will
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8.3 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 government (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-a.-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 very approach 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 concerned 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.
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.
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8.4 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 minimum 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 thenationalized insurance sector.
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
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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 insurer hould 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 referred to 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 retum-on-capital to attract additional capital, because
under competition, the profit margins will be under pressure.
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 thegovernment, 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 insur-
ance 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
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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 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
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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 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 underqualified
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 to master thenuances of the products, particularly because they are offering a large range of simi-
lar products and have to help the customer to make an intelligent 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, 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
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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 Centres; and (d) training centres 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.
Many countries, -in recognition of the importance of training, require all
insurers to spend a prescribed percentage of their income or gross salary cost ontraining of human resources.
The insurance iTIdustry 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
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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 employment
opportunities, not just in Indian companies, but also with foreign insurers wanting to
operate in this country.
upgradation 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. Sincethe 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.
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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:
8.5 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 indicated 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, legal matters is another area in which training will have to bearranged. 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.
As technologies advance, the process of loss measurement and assessment
becomes more complicated, requiring a greater degree and variety of expertize
which will have to be specifically built up through tailor-made courses.
Actuarial science is the very basis of insurance and it is unthinkable to carry
on the insurance business without deploying actuarial and forecasting techniques on
an increasing scale- Actuaries are particularly required for purposes such as
estimating the long-term implications of changing mortality' rates, trends in
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investment earnings and expenses incurred, for interpreting the effects of changing
market conditions, for product development, and most importantly, for calculating the
surplus that results from operations and determining the solvency margin.
The actuary plays an essential role in life insurance business, particularly in product
development, determination of premium rates, study of mortality experience and
construction of mortality tables, laying down underwriting standards, valuation of
liabilities and distribution of surplus. The actuary can also be useful in investment
management.
These actuarial tasks cannot be achieved merely by prescribing and insisting on
adherence to certain accounting practices. They have to be completed only by
qualified actuaries.
8.6 Market-related policies
Marketing, which was very low key in the nationalized life sector and virtually
did not exist in the nationalized non-life insurance companies, will be the most
crucial function in the new conditions. Hence a host of changes are called for.
Marketing functions encompass expanding existing markets or tapping new markets
and the industry needs to undertake measures which will be conducive to both these
objectives. The main thrust would be on bringing the customer to the centre-stage,
improvement of service and designing new products, There has to also be a shift
from the idea of just creating sheer volumes to rendering better quality of service
and making the unit profitable.
Most of our present policies, procedures, and practices pertaining to writing
of policies, sales and claims settlement are borrowed from the West, but in the days
ahead, the Indian industry will be compelled to develop its own models, innovative
practices and flexibility in decision making. Suitable changes can be contemplated in
the following areas-marketing practices; brand building, customer segmentation;
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product design/packaging; fixation premium rates; claims settlement; accounting
practices; consortia arrangements; adoption of new technologies; automation; and
the use of IT.
8.7 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, 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 deploymentof 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-added
activities 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
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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 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.
Deepak Satawalekar, Managing Director and CEO of HDFC Standard Life
Insurance (2001), stressed the importance of cost control when he averred, 'Our
focus is on good investment performance and keeping a tight control on costs so as
to generate good long-term maturity valuefor the customers'.
Claims minimization can also occur if the importance risk management is
impressed on the customer. In the long run, with the adoption of proper preventive
measures the number of claims and their amounts can be reasonably controlled,
which is really in the interest of the insurer because it reduces its liability in claims
should such an occasion arise.There are certain fraud-prone areas in every business, and even more so in
insurance, where the element of subjective judgement is more present. These relate
primarily to: fraudulently obtaining cover after the loss; exaggeration of the loss;
attendant falsification of documentation; submitting
false claims and the like. The LIC too is not free from such malpractices. In
the past few years, for instance, the incidence of early death claims, (death of
policyholders within two years from the commencement of the policies), has been on
the rise and is causing concern for LIC. It is as high as around 27 per cent of the
total death claims. Looking to the high rate of deaths due to accidents and heart
disease, there is room for suspicion of fraudulent claims.
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With a critically balanced profitability, fraud control is extremely critical for any
insurer. Controlling these pove difficult because of various factors, viz. difficulty in
obtaining evidence of fraud, difficulty in convincing the authorities about a fraud, and
most importantly, some amount of connivance or even collusion on the part of the
supervisors.
It is really difficult to eliminate fraud; but modern technology can help in
detecting and minimizing the risk of fraud to some extent. This will become possible
by building up a database for monitoring and checking possible frauds. Most claims
follow a certain pattern and technology can be used for identifying those that deviate
from the pattern and decide whether they are fraudulently made.
The techniques used to deal with frauds by insurers abroad include
background searches and cross-checks. For example, it is possible for an insurer to
check if an individual filing a work-related disability claim has ever filed a similar
claim in the past. It is possible that an individual with a history of such claims is
faking the disability. Such types of practices where reliability can be ensured, need
to be developed for the Indian market.
Of course, claims in such categories must be analyzed over a fairly long
period to accurately detect fraud. For instance, in a health insurance claim, a claim
for a particular surgery simply cannot be filed twice. Once such measures are inplace, they can substantially reduce costs and enable companies to lower their
prices which would give them a competitive edge.
From a statistical angle, high volumes in this business assume importance,
since they help spread risks wider, allowing a lowering of rates and raising of profits.
With a wider base, the probabilities become more predictable, and with system-wide
risks balanced out, there is a possibility of improving profits. Thus, increasing the
volume of business is an important measure of bringing down per unit costs.
The Indian market insists on advance payment of premiums. It is at times
suggested that this system of premium collection should be changed in order to
increase market access. However, there is really no case for issuance of policies on
credit for unlimited periods, i.e., for issuance of contracts
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without receipt of due consideration. Advance payment helps insurers to
honour their claims promptly and avoid the uncertainties of the recovery of
outstanding premiums. It also helps in the enhancement of investment returns.
Hence there is every reason to continue the present practice. The collection of
premium on time is of the utmost importance because no insurer can assume risk
unless the premium is received in advance.
There is a gross imbalance between fixed management expenses and the
cost of procuring business. The statute prescribes a permissible limit of cost to the
insurance companies at approximately 19.5 per cent of their Gross Direct Premium.
This includes the cost of intermediaries. All the existing insurers are working at costs
slightly exceeding this limit, but they will be compelled to work within the stipulated
cost limits within a given timeframe. Although the existing players will find it difficult
to bring down their fixed costs primarily through rationalization of manpower, there is
no escape from it. This issue is becoming complicated because even as the costs
need to be brought down, there will be an increase in costs as an increase in the
commission levels is inevitable when the industry tries to attract the right kind of
people in a bid to build up a professional agency force. This is bound to putadditional pressure on the already high-cost ratio. . .
8.8 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 prereq-
uisite 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
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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 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 inrelation 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.
. .
8.9 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. Fortunately, resort to
automation by even one entity exerts a wholesome pressure on others to adopt the
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same, thereby raising the general level of technology in the 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.
The three most important segments of technology relate to computerization,
automation and information technology. Computerization in particular, is very
important because of the large data which the insurers must generate and handle for
product development and pricing, apart from the need for prompt and effective
customer service.
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, inclinations, andpreferences 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 speedily which 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
communication technology.
Sophisticated computer programmes will also assist underwriters, agents,
brokers and financial planners. Thus, whereas today, for writing insurance, the
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customer has to be approached personally, in future the interface with him could be
through computers rather than face-to-face. The agent, who, through automation
can be in constant communication with his company's files, will have an obvious
competitive edge in the marketplace.
In addition to front-line computerization, there is also some behind the scene
automation to take care of-functions such as dispensing of forms, folding and
stacking of papers, franking, and reconciliation. These also increase the overall
efficiency of the system.
Computers with expert systems could be used increasingly for such tasks as
insurance underwriting and claims adjusting , medical reports, and 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.
Another benefit of IT is that it not only helps in better customer service, but
also provides better control mechanisms.
10.9 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
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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 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.
lt should just be bought is a decision that will vary from unit to unit.
The adoption and spread of technology are also dependent on the
infrastructure provided which is almost entirely controlled by the government.
Without adequate good quality infrastructure (primarily power and
telecommunications) the efforts of the industry would be hampered. In fact, these
are problems that already acutely plagued the entire economy, posing serious
difficulties for the trade and industry. There is no good reason why infrastructure
supply should remain a prerogative only of the government. Therefore, in the true
spirit of liberalization and deregulation, it is incumbent on the government to open up
infrastructure also to the private sector so that not only will the availability improve,but its quality as well.
It is difficult to predict a specific time frame for technological changes in
insurance, which earlier, as public sector entities, had not been under very heavy
pressure to change. Even otherwise, the initial adoption of such a technology
anywhere in the world is always slow and gains momentum only after it reaches a
certain critical mass. However, at this juncture in India, there is just no time to waste
and action on this front must commence as early as possible,
8. 10 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.
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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 amongst
technically 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 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 such programmes on a fairly large
scale.However,with the increased and effective use of information technology, the
personalized touch in insurance services will diminish because technology, cannot
replace the personal touch in providing professional service. This is of particular
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relevance in a country like India where the consumer would feel morecomfortable in
a face-to-face interaction.
8.11 ACCOUNTING PRACTICES:
The necessity oftransparency in the accounts ofinsurance companies cannot
be overstated. The regulations laid down by the IRDA insist on sound accounting
standards and disclosure practices, so that the true financial position of the
insurance companies is reflected in the accounts, The likely reliance oftheinsurers
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 not be any difficulty in meeting the transparency and disclosure
standards.
8.12 Scale of Operations
Being a game of big numbers, the insurance business requires a very large capitalbase and substantial financial resources. Its profitability is heavily influenced by its
size and in advanced countries, efforts are oftenmade to create as large units as
possible. In this context, the United Nations Conference on Trade and Development
(UNCTAD) observed two trends, not necessarily contradictory to each other, in
different parts ofthe world. On the one hand, monopolistic and oligopolistic market
structures are being broken up in view oftheir unwieldy size. On the other, a view is
gaining ground that fragmented markets, in which a multitude ofsmall 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
ofthe customers to have fewer but stronger companies, notleast because the latter
would have a better longer term financial viability,
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Ofcourse, it is noteasy forcompanies to reach a large enough size on their
own and in the routine course, in view of the economic barriers to organic growth.
Therefore, besides the usual method ofrevising the capital structure upwards, in the
developed countries, acquisitions and mergers are also considered seriously and
many organizations are beginning to gear up their internal machinery to manage
them. As a result, in many countries, consolidation has almost become a way of life
in the industry.
. Other factors inducing mergers and acquisitions include the following-a desire
to capture an increased market share; acquire improved width and depth ofproduct
range; expand distribution channels; increase cross-selling Opportunities, and
diversify from product lines and geographical markets with limited growth potential;
achieve spread of development risk; obtain access to new markets; reach
economies ofscale; and achieve reduced expense ratio. Alliances can take different
forms. Some experts believe that alliances related to distribution rather than to
products or technology will prove mostvaluable in the long run.
8.13 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 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
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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.
Of course, at the same time, as a result of this interdependence, there are
some attendant risks also, since any adverse developments in any major financial
market can be transmitted to the linked markets very quickly. The sensitive stock
markets in the world have experienced this often in recent times. The September 11,
attacks on targets in the USA also caused many ripple effects which spread to
virtually all the markets in world, including the insurance business.
Therefore, while welcoming global integration, one has also to be aware of
the danger to the stability of the system, for which preventive measures will be
needed.
.
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9. ISSUES
CONTEMPORARY ISSUES IN INSURANCE
9.1. 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. The study further concluded that
making pension products into attractive saving instruments would require only
simple innovations which is 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 socialsecurity benefit in a small measure is available only to the destitute above 65 years
of age. Currently, pension benefits are available to employees in organised sectors
like the government and private. At present, there is no pension benefit for self-
employed and Agricultural workers in the unorganised sector.
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.
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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 Insurance Regulatory and Development Authority (IRDA) has recently
recommended a new, voluntary pension regime for everyone, including the
unorganised sector, according to the Dave Committee implementation report. The
report submitted now by IRDA to the Finance Ministry, suggests wide-ranging
reforms for this sector. The report, however, does not mandate any minimum annual
contribution or the spacing of contribution across time. In short, an individual will be
able to access the collection points at any time and will have complete freedom to
transfer a part or the full asset from one scheme to another with the same or
different provider company. .
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 definitely provide a real
competition in the Insurance Sector.
Present Position
The Insurance Regulatory Development Authority in its pension report has
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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.
9.2. Convergence of Insurance and Banking Industry
It was the evolution of banks entering into the Insurance Sector and 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 insuranceto 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
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Insurance Company Ltd. and other Banks with their Joint Venturers have started
making a dent into rural business. This was not much possible earlier and is the
result of entry of private players into the Insurance Sector.
Thus, the State owned Insurance Sector could not earlier make much use of
bank branch network in the country for insurance business, which has now become
possible. This contemporary issue of participation of banks in marketing/selling of
insurance products in the country is of much significance. The Insurance business
had the less number of insured due to the above reasons which is going to be
increased now manifold and that too with qualitative products and services" Many of
the banks are now entering into MOU with Insurance Companies to sell their
insurance products through network of their bank branches.
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,
Bancassurance in India has a great future. Funds generated through theBancassurance 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.
9.3. Alternate Channels of Distribution
Nowadays there is a 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 number quoted by the agent are
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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 the
employees.
Thus, new channels of distribution and marketing have seen the emergence of
customization of Insurance covers tailored out to meet the various needs of specific
groups. Even nowadays sugar co-operatives have also become a high selling point
of products
especially among the farmers and farm labourers. The distribution channels
have, therefore, to playa vital role in increasing the quantum of Insurance business.
It is one of the important factor of internal environment for any Insurance Company
as more and innovative channels of distributions will always have an edge overothers.
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,
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cost, etc.
(v) Financial Advisors: includes among others, independent financial
advisors, s