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The role of Insurance in savings mobilisation a case for Indian Economy

Page 1

The role of insurance in savings mobilisationa case for

Indian economy.

BY

Prof. Sanjay D Paramar (M.A.,GSET)

Prof. Jagdish A Parmar (M.A., GSET)


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ACKNOWLEDGEMENT

First of all we would like to thank all mighty God. We would like to thank ourfamily members as well as our colleagues who have inspired us to write down this book.

We have immense pleasure to dedicate this book to

1. Dr. D.G.Ganvit

2. Dr. Manoj R Patel

3. Prof. Gaurang Desai

who have provided their precious blessing for the publication of book.


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About authors :-

Mr.Sanjaykumar Durgabhai Paramar

He obtained Post Graduate (M.A.) degree in Economics

from SardarPatel University Vallabh vidhyanagar Anand in 2007-08. He obtained a Gold Medal in Agriculture Economics. He

has qualified GSET Examination in Oct., 2011, from M.S.

University Baroda. Now he has been working in Faculty of

business Administration, Dharmsinh Desai University, Nadiad as

an Assistant Professor.

Mr.Jagdishbhai Ambalal Parmar

He obtained Post Graduate (M.A.) degree in Economics with

Gold Medal from Sardar Patel University Vallabh vidhyanagar

Anand in 2007-08. He has qualified GSET Examination in Dec.,

2008, from M.S. University Baroda. He worked as an Assistant

Professor in Tolani college of Arts and Science from 2011 to 2013.

At present he has been working in Govt. Arts and commerce

college as an Assistant Professor [GSET Class -2] at Vansda

(Gujarat).


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List of tables

Table No. Title Page

No.1 Appraisal of Insurance Market 40

2 Registered insurers in India 42

3 New policies issued -life insurance 44

4 New policies issued -non life insurance 45

5 Premium underwritten (within India) by non life

Insurers-segment wise.

49

6 Premium underwritten by life Insurers 56

List of charts and Figures.

Fig No. Title Page No.

1 Percentage contribution of respective segments of

private life insurers.

48

2 Percentage contribution of respective segment ofLIC

48

3 Percentage contribution of respective segment of Life

Insurers

48

4 Trends in life insurance business-Unit linked

Insurance Plans.

58


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Executive summary

The insurance sector in India was hitherto the monopoly of the State. Though the performance of

the public sector insurance companies - LIC and GIC was quite satisfactory, the Indian insurance

business, both life and non-life, left much to be desired as compared to international standards.

There was low penetration and general lack of efficiency. The per capita premiums were very

low when compared to the standards of both industrialised countries and other emerging markets.

With the entry of private players into the insurance business, it is expected that competition

would increase and overall functioning of the insurance sector would improve. The liberalisationprocess initiated in the insurance sector is expected to bring about better integration of the

financial markets and promote financial development of the country. Insurance, apart from acting

as an important financial instrument for risk cover, is also a major instrument for mobilisation of

long-term savings.

The savings part of insurance, if channelized efficiently into long-term investments, could play a

greater role in funding infrastructure projects with long gestation periods. With increasing

urbanisation and longer life expectancy, the demand for insurance is expected to increase

substantially in the years to come. In the liberalised scenario, the Indian insurance regulator,

Insurance Regulatory Development Authority will have to play a crucial role towards meeting the

special needs and challenges of the Indian insurance market. The regulator, besides ensuring

long-term solvency of insurers, should also promote competition among them. The development

of the Indian insurance market into a healthy and vibrant one is expected to further aid in the

economic and financial development of the country by acting as a mobiliser of savings and as a

factor of production, besides playing the usual role of providing social security.


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Table of Contents

Chapter Particulars Page

no.1 Introduction 1

1.1 Insurance and Savings 4

1.2 Insurance penetration in India as compared to global 6

standards

1.3 role of insurance in Financial Saving and GDP 8

1.4 Insurance regulation in India 8

2 Literature review 112.1 Domestic savings 11

2.2 Life Insurance and other savings 12

2.3 Flow of funds for Infrastructure 16

2.4 Insurance sector in India 20

2.5 Theoretical aspects of Insurance 25

3 Methodology

3.1 Data analysis and inferences 36

3.2 Research limitations 36

4 Findings 37

4.1 Contribution to Indian economy 40

4.2 Savings and capital formation50 53

4.3 Insurance companies performance 54

4.4 Innovations in products 57

4.5 Reforms in Insurance Industry 61

4.6 ULIPS (Unit linked Insurance Plans5 Conclusions and Recommendations 63

6 Bibliography 66


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Chapter 1. Introduction

INTRODUCTION TO INSURANCE

Human have always sought security. This quest for security was and important motivation

force in the earliest formation of families, clans, tribes, and other groups. Indeed, groups have

been the primary source both emotional and physical security since the beginning of

humankind. They ensured a less volatile source of life necessities then that which isolated

humans & families could provide & help their less fortunate members in the time of crisis.

Humans today continue their quest to achieve security & reduce uncertainty. We still rely on

groups for financial stability. The group may be our employer, the government, or an insurance

company, but concept is the same. In some ways however, we today are more vulnerable than

our ancestors. The physical & economical securities formerly provided by the tribe or extended

family diminished with industrialization. Our income dependent, wealth acquiring lifestyle

renders us and our families more vulnerable to environmental & societal changes over which

we have no control. Humans are exposed to many serious perils, such as property loss from fire

or windstorm, and personnel losses from incapacity & death. All though individual cannot

predict or completely prevent such occurrences, they can provide for their financial effects.

Encyclopedia of finance & banking defines insurance as the elimination of or protection

against risk amenable to actual calculation, voidance or reduction of losses occurring through

misfortunes such as death, fire, accident, tornado, shipwreck, etc. Insurance is a contact

between an insurer and the insured where by the insurer identifies the insured against loss due

to specific risks such as from fire, storm and death. Insurance contracts require an agreement,

considerations, capacity, legality, compliance with the statute of frauds, and delivery.

Maslow's Need Hierarchy Theory.

Making the person feel "SAFE" other expression of the need for safety occur when individuals

are confronted with real emergencies E.g., accidents, war, crime, natural disasters like waves,

floods, earthquakes etc. Once Physiological needs are met, another set of motives safety or

security needs, become motivates. The primary motivating force here is to ensure a reasonable

degree of continuity, order, structure and predictability in once environment. Maslow

suggested that the safety needs are most readily observed in infants and young children because

of their relative helplessness and dependence on adults. Security needs in the organizational

context co-relate to such factors as job security, salary increases, safe working conditions,


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unionization and lobbying for protective registration. Risk and uncertainty are part of life great

adventures accident illness, thefts, natural disaster they are all built into the working of the

universe, waiting to happen. Insurance then is man's answer to the vagaries of life. If you

cannot beat the manmade and natural calamities, wealth, at least be prepared for them and

aftermath.

Insurance is contact between two parties one is insurer (insurance company) and the insured

(the person or the entity seeking the coverage). Where the insurer agrees to pay the insured for

the financial loses arising out of any unforeseen events in return for a regular payment of the

premium. These unforeseen events are determined as "risk" and that is why insurance is called

is the risk cover. Hence the insurance is essential the means to financially compensate for loses

that life throws at people -corporate and otherwise.

Insurance is an integral part of most enterprises, risk management program. Insurance does not

prevent losses, it substitutes a small certain loss (premium) for a possible or contingent large

loss. The insured is indemnified for the amount of loss, for the insured amount, or for the face

of his policy, in return for payment of periodic premiums. The principal kinds of insurance are

the following.


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1. Life - Term, ordinary, endowment, limited payment, group industrial and annuities,

with a variety of combinations of the first four basic forms.

2. Fire & Marine - Fire, ocean marine, motor vehicle, inland navigation and

transportation, tornado and windstorm, sprinkler leakage, earthquake, riot and civil,

commotion, explosion, rain, hale, flood, aircraft, etc.

3. Causality and Surety - Automobile liability, liability other than automobile workers

compensation fidelity and surety, burglary and theft, automobile property damage,

accident in health, steam boiler, machinery, plate glass, etc.

All mutual & legal reserve life insurance companies provides for a participation in dividendsby all policyholders. In this way, the cost of insurance to the insured is reduced.

Life Insurance Business of Private Companies

The insurance market was opened to the private sector in August 2000 and the initial batch of

new registrations was granted on 23rd October, 2000. During 2000-01, there were 6 registered

private life insurance companies viz., (i) Birla Sun-Life Insurance Company Ltd. (BSLIC), (ii)

HDFC Standard Life Insurance Company Ltd. (HSLIC), (iii) ICICI Prudential Life Insurance

Company Ltd. (IPLIC), (iv) Max New York Life Insurance Company Ltd. (MNYLIC), (v) SBI

Life Insurance Company Ltd. (SLIC) and (vi) TATA AIG Life Insurance Company Ltd.

(TALIC). Out of these, only 4 companies

viz., BSLIC, HSLIC, IPLIC and MNYLIC have started doing business by the end of March

2001.

1.1 Insurance and savings.

The investments of an insurance company are intended to build up reserves and not to bookshort-term profits. These reserves provide a cushion for long-term contingencies, which can be

directed towards investment in socially desirable sectors like infrastructure. The provisions of

Section 27 A of the Insurance Act, 1938 as amended from time to time have prescribed the

investment patterns for life insurance. The Malhotra Committee (1994) had recommended that

the mandated investment of funds of LIC should be reduced from the then existing level of 75

per cent to 50 per cent. Consequent to the liberalisation of the insurance sector, and as per the

notification of IRDA (Investment) Regulations, 2000 dated August 14, 2000, the life insurance

companies have to invest a minimum of 50 per cent of their total assets in government and


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other approved securities. They are also required to invest a minimum of 15 per cent in

infrastructure and social sectors, leaving the balance 35 per cent free for investment in the

capital market. The investment pattern of LIC for the period 1980-81 to 2000-01 shows that

major share of its investments were in Central and State Government securities followed by

loans to State and Central government and their Corporations and Boards.


Business and Investment of Non-Life Insurance in India

The general insurance companies mainly specialise in insurance business like fire, marine,

aviation, theft, crop, accident, health (medi-claim) etc. General insurance policies, unlike life

insurance policies are short duration contracts. Also, general insurance policies, in comparison

to life insurance policies do not mobilise savings, but they collect funds from the premiums

paid. The number of offices of GIC has more than trebled from 1272 in 1980-81 to 4177 in

2000-01 (Table 4). However, after 1992-93, this growth was either negligible or negative. As

regards the growth in the number of policies and net claims payable of GIC and its subsidiaries,

no steady pattern is observed. However, the volume of business in terms of number of policies

and net claims payable has improved substantially over the years.

The rural business of GIC and its subsidiaries form only 5.2 per cent of total domestic general

insurance premium in 1998-99 (latest available). The non-life business transacted in the rural

areas mainly relates to insurance of livestock. Major portion of this business transacted relates

to livestock cover under the Integrated Rural Development Programme (IRDP) with bank

credit linkages, where insurance is mandatory. Other rural businesses covered include

agricultural pumpsets, Janata Gramin Personal Accident, commercial poultry farms and other

businesses including pisciculture and sericulture.

Non-Life Insurance Business of Private Companies

During 2000-01, there were 4 registered private non-life insurance companies viz., (i)

IFFCOTokio General Insurance Company Ltd., (ITGIC), (ii) Reliance General Insurance

Company Ltd. (RGIC), (iii) Royal Sundaram Alliance Insurance Company Ltd. (RSAIC), (iv)

TATA AIG General Insurance Company Ltd. (TAGIC). The business of these companies

during 2000-01 was very low.


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Investments of General Insurance Companies

The provisions of Section 27 B of the Insurance Act 1938 as amended from time to time hasprescribed the investment patterns for non-life insurance. The Malhotra Committee (1994) had

recommended that the mandated investment of funds of the general insurance companies

should be reduced from the then existing level of 70 per cent to 35 per cent. In April 1995, the

Government relaxed the investment policies of GIC and its subsidiaries and they were allowed

to invest upto 55 per cent of the annual accretion of their funds in market oriented schemes as

against 30 per cent earlier. Consequent to the liberalisation of the insurance sector, and as per

the notification of IRDA (Investment) Regulations, 2000 dated August 14, 2000, the

investments of non-life insurance companies cannot be less than 30 per cent in government and


infrastructure and social sectors and a minimum of 5 per cent in the area of housing and fire

fighting. Of the balance 55 per cent, 30 per cent will be governed by prudential norms, while

25 per cent can be invested in unapproved securities including investment in equities.

The investment pattern of GIC and its subsidiaries for the period 1980-81 to 2000-01 shows

that the important avenues for its investments were in market investment followed by Central

Government securities (Table 6). Market investments of GIC and its subsidiaries increased

from 33.7 per cent in 1980-81 to 44.0 per cent in 2000-01. Whereas the investments in Central

Government securities decreased marginally from 21.3 per cent in 1980-81 to 21.0 per cent in

2000-01. The investment pattern of GIC is thus different from that of LIC, whose major

investments are in Central and State Government securities.

1.2 Insurance Penetration in India as Compared to Global Standards

Insurance density, measured in terms of premium per capita, was much lower in emerging

markets in 2000 as compared with the industrialised countries of the world. Similarly,

insurance premium as percentage of GDP i.e., insurance penetration, was lower in the

emerging markets as compared to the industrialised countries in 2000. However, South Africa

and South Korea, which figure among the emerging markets are exceptions and are among the

forerunners in insurance penetration. Of the total world insurance business in terms of

insurance premiums, nine-tenths were contributed by industrialised countries, whereas, the

emerging markets accounted for 10 per cent of total world business in insurance. However, the

growth rate of premium in 2000 in the emerging markets was higher as compared with the


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industrialised countries, indicating the growing importance of the insurance sector in the

former. India's insurance penetration was only 2.3 per cent, as against the world average of 7.8

per cent in 2000

Opening up of the insurance sector has been a key component of economic reforms put in place

in South and East Asian economies in the 1980s and 1990s. The major insurance markets in

South and East Asia are generally open indicating the impact of the reform measures. Since

liberalisation of the Korean and Taiwanese insurance markets in 1987, these markets grew at a

much faster pace than before, suggesting that liberalisation of the insurance sector facilitated

growth of insurance in these countries.

In India, the share of life insurance premium as a percentage of GDP, i.e., insurance

penetration, has increased steadily from 0.6 per cent in 1980-81 to 1.6 per cent in 200001.

However, this is much lower as compared to that of the industrialised countries. The life funds

as percentage of GDP increased from 4.6 per cent in 1980-81 to 8.9 per cent in 2000-01

reflecting an impressive performance of LIC in terms of generating premium and investment

income in excess of its expenditures and claims. The life insurance density, i.e., life insurance

premiums per capita has steadily increased from Rs. 13.1 in 1980-81 to Rs. 334.8 in 2000-01.

However, this is much lower in comparison with world standards. This again reveals the vast

scope for life insurance penetration in India. The life fund per capita which was Rs. 97.4 in

1980-81 has increased more than eighteen fold to Rs. 1819.5 in 2000-01 reflecting the

attractiveness of life insurance business.

In India, the share of gross and net insurance premiums for non-life insurance as a percentage

of GDP, i.e., non-life insurance penetration, have increased from 0.4 per cent and 0.3 per cent,

respectively in 1980-81 to 0.5 per cent and 0.5 per cent in 2000-01. However, this compares

quite unfavourably with that of the industrialised countries and other emerging markets in

general. The non-life gross and net premiums per capita (non-life insurance density) have both

steadily increased from Rs. 7.4 in 1980-81 to Rs. 105.7 in 2000-01 and from Rs. 7.1 to Rs.

100.8, respectively during the same period. However, this is much lower in comparison with

world standards. This reveals the vast scope for non-life insurance penetration in India.

1.3 Role of Insurance in Financial Saving and GDP

Insurance is an important financial saving instrument of the households. The saving component

of life insurance competes with the savings of the households in other financial instruments


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such as bank deposits, mutual funds and equities. The total life insurance in India comprises

three components viz., life insurance, postal and state insurance. The life insurance business is

almost in the hands of the LIC. Its share ranged between 85 per cent and 95 per cent of the total

insurance fund during 1980-81 through 2000-01. The share of insurance, which constitutes a

significant part of gross financial savings of the household sector, has gone up from 7.6 per

cent in1980-81 to 12.8 per cent in 2000-01. During the period 199192 to 2000-01, this share

has remained above 10 per cent, barring the three years from 1992-93 to 1994-95. The average

share of insurance in gross financial savings which was 7.6 per cent in the 1980s increased to

10.3 per cent in the 1990s. The share of insurance in GDP has shown a consistently rising trend

and more than doubled from 0.7 per cent in 1980-81 to 1.6 per cent in 2000-01.

The average share of insurance as a percentage of GDP increased from 0.8 per cent in the

1980s to 1.2 per cent in the 1990s.

The share of insurance in real GDP i.e., insurance as a percentage of real GDP during the

period 1981-82 to 2000-01 was below 1 per cent. The insurance sector has been only a

marginal contributor to the country's GDP. This is despite the country's vast population and

immense potential for growth of insurance. One of the reasons attributable to this could be the

lack of effective competition due to the monopoly position enjoyed by the public sector.

Opening up of the insurance sector may augur well for the growth in income from this sector.

1.4 Insurance Regulation in India

Insurance regulation in India started with the passage of the Life Insurance Companies Act,

1912 and the Provident Fund Act, 1912. The first comprehensive legislation was introduced

with the Insurance Act, 1938 which provided strict State control over insurance business in the

country under the supervision of the Controller of Insurance. Subsequently, the Insurance Act,

1950 was enacted to check malpractices in the insurance business and also to exercise more

control over the operations of the insurance companies. With the nationalisation of the life

insurance industry in 1956 and the general insurance industry in 1972, the role of the

Controller of Insurance diminished over a period of time. On account of the monopoly status of

the public sector units viz., LIC and GIC in the area of insurance, prior to liberalisation of this

sector, regulation was perceived to be of less interest due to the inbuilt procedures in place. The

phased globalisation of the Indian economy that started in the early 1990s began to have its

impact on the monopolistic structure of the Indian insurance industry. Further, the liberalisation


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of insurance markets was among the objectives of the Uruguay round negotiations conducted

under the auspices of General Agreement on Trade and Tariff (GATT). These negotiations

included trade in services and insurance in the context of financial services (UNCTAD Report,

January 1993). In 1993, the Government appointed a Committee headed by Shri R.N. Malhotra

to examine the reforms required in the insurance sector. The Committee in its report submitted

in 1994 recommended inter alia the opening up of the insurance sector to players other than

State- Owned ones. These recommendations were accepted by the Government and the

Insurance Regulatory and Development Authority (IRDA) Act, 1999, consequent amendments

to the Insurance Act, 1938, Life Insurance Corporation Act, 1956 and the General Insurance

Business Act, 1972 were passed in the year 2000, paving the way for opening up of theinsurance sector.

The important functions of the IRDA as per the IRDA Act 1999, include the following:

i) Licensing and regulating the insurance sector by acting as an independent and

regulatory body.

ii) Specifying requisite qualifications, code of conduct and practical training for insurance

intermediaries and agents.

iii)Protecting the interests of the policyholders in matters concerning assigning of policy,

settlement of insurance claim etc.

iv) Regulating investment of funds by insurance companies.

v) Calling for information from, undertaking inspection of, conducting enquiries and

investigations including audit of the insurers and other organisations connected with the

insurance business.

vi) Regulating maintenance of margin of solvency of the insurer.

vii) Adjudication of disputes between insurers and intermediaries or insurance

intermediaries.

viii) Supervising the functioning of the Tariff Advisory Committee.

ix) Promoting efficiency in the conduct of insurance business.

Efforts are underway to bring about internationalisation of regulations in the insurance sector

on the lines of the banking sector so as to take care of development and health of the insurance


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sector. This concern had resulted into the establishment of International Association of

Insurance Supervisors (IAIS), head quartered at Basle in Switzerland. More than 100 regulators

of insurance industries worldwide are members of this Association and India is also one

amongst them. The underlying objective of this organisation is to bring about a degree of

standardisation in regulatory procedures adopted by different countries. The Advisory Group

on Insurance Regulation (Chairman: Shri R. Ramakrishnan) appointed by the Standing

Committee on International Financial Standards and Codes (Chairman: Dr. Y.V. Reddy), stated

that Indian insurance regulations are, by and large, in consonance with international standards.

Customer Protection:

Insurance Industry has Ombudsmen in 12 cities. Each Ombudsman is empowered to redress

customer grievances in respect of insurance contracts on personal lines where the insured

amount is less than Rs. 20 lakhs, in accordance with the Ombudsman Scheme. Addresses can

be obtained from the offices of LIC and other insurers.

Chapter 2. Literature review

2.1 Types of Domestic Savings

There are basically three types of private domestic saving, each with their own different

determinants, namely: voluntary saving; involuntary saving and forced saving. Voluntary

saving relates to the voluntary abstinence from consumption by private individuals out of

personal disposable income and by companies out of profits. Involuntary saving is saving

brought about through involuntary reductions in consumption. All forms of taxation and

schemes for compulsory lending to governments (including national insurance contributions)

are forms of involuntary saving. Forced saving is saving that comes about as a result of rising

prices and the reduction in real consumption that inflation involves if consumers cannot (or donot) defend themselves. Rising prices may reduce real consumption for a number of reasons.

Firstly, people may suffer money illusion. Secondly, they may want to keep constant the real

value of their money balance holdings, so they accumulate more money and spend less as

prices rise (the real balance effect). Thirdly, inflation may redistribute income to those with a

higher propensity to save, such as profit earners. Inflation initiated by monetary expansion will

certainly redistribute income to the government as the issuer of money. This is the notion of the

inflation tax. As Keynes once said '[inflation is] a form of taxation that the public finds hard to

evade and even the weakest government can enforce when it can enforce nothing else' (Keynes,


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1923). It is believed, however, that in certain circumstances there is a case for mild demand

inflation initiated by government as a stimulus to investment. The empirical evidence across

countries (Thirlwall 1974a, 1974b; Sarel, 1996; Bruno and Easterly, 1998) suggests a positive

relation between inflation and growth up to 6-8 percent inflation, and only when inflation

exceeds 10 percent do the consequences for growth become seriously detrimental.

Voluntary saving depends on the capacity to save and the willingness to save. The capacity to

save depends on three main determinants: the level of per capita income; the growth of income,

and the distribution of income. The willingness to save depends, in turn, on: the rate of interest;

the existence of financial institutions; the range and availability of financial assets, and the rate

of inflation. One of the most important innovations that Keynes made in his General Theory of

Employment, Interest and Money (1936) was to link, for the first time, consumption (and

therefore saving) to the level of income through the concept of the consumption (or savings)

function. More explicitly, there is the suggestion that the consumption or savings function is

non-proportional; that is, that the rich (people or countries) consume proportionately less, and

save proportionately more, of their income than the poor. One way of expressing this idea is to

start with the savings function: S/P = -a1 + b1 (Y/P) (3) where S/P is the level of savings per

head of population (P), and Y/P is per capita income. The negative constant term means that

the marginal propensity to save is above the average, so raising the average as Y/P rises. To

convert this function so that the savings ratio is the dependent variable, multiply both sides of

the equation by P and divide by Y. This gives :S/Y = b1 - a1 (Y/P)-1 (4) where the savings

ratio is a non-linear function of per capita income i.e. as Y/P rises, S/Y rises but at a decreasing

rate to the asymptote b1. This is broadly the pattern observed across countries (Hussein and

Thirlwall, 1999). The savings ratio is lower in poor countries than in rich countries, but does

not rise linearly as income increases. It increases at a diminishing rate and then levels off (at

approximately 25 percent of national income).

2.2 Life Insurance vs. Other Savings

Life insurance in India made its debut well over 100 years ago. In a country, which is one of

the most populated in the world, the prominence of insurance is not as widely understood, as it

ought to be.

Protection:


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Savings through life insurance guarantee full protection against risk of death of the saver. Also,

in case of demise, life insurance assures payment of the entire amount assured (with bonuses

wherever applicable) whereas in other savings schemes, only the amount saved (with interest)

is payable.

Aid to Thrift:

Life insurance encourages 'thrift'. It allows long-term savings since payments can be made

effortlessly because of the 'easy instalment' facility built into the scheme. (Premium payment

for insurance is monthly, quarterly, half yearly or yearly). For example: The Salary Saving

Scheme popularly known as SSS provides a convenient method of paying premium each month

by deduction from one's salary.

In this case the employer directly pays the deducted premium to LIC. The Salary Saving

Scheme is ideal for any institution or establishment subject to specified terms and conditions.

Liquidity:

In case of insurance, it is easy to acquire loans on the sole security of any policy that has

acquired loan value. Besides, a life insurance policy is also generally accepted as security, even

for a commercial loan.

Tax Relief:

Life Insurance is the best way to enjoy tax deductions on income tax and wealth tax. This is

available for amounts paid by way of premium for life insurance subject to income tax rates in

force. Assessees can also avail of provisions in the law for tax relief. In such cases the assured

in effect pays a lower premium for insurance than otherwise.

Money When You Need It:

A policy that has a suitable insurance plan or a combination of different plans can be

effectively used to meet certain monetary needs that may arise from time-to-time. Children's

education, start-in-life or marriage provision or even periodical needs for cash over a stretch of

time can be less stressful with the help of these policies.

Alternatively, policy money can be made available at the time of one's retirement from service

and used for any specific purpose, such as, purchase of a house or for other investments. Also,


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loans are granted to policyholders for house building or for purchase of flats (subject to certain

conditions).

Private Players, Foreign Equity and Profitability

The Union Government had opened up the insurance sector for private participation in 1999,

also allowing the private companies to have foreign equity up to 26 per cent. Following the

opening up of the insurance sector, 12 private sector companies have entered the life insurance

business. Apart from the HDFC, which has foreign equity of 18.6%, all the other private

companies have foreign equity of 26 per cent. In general insurance 8 private companies have

entered, 6 of which have foreign equity of 26 per cent. Among the private players in generalinsurance, Reliance and Cholamandalam does not have any foreign equity.

Competition in the Insurance Sector

Even after the liberalization of the insurance sector, the public sector insurance companies have

continued to dominate the insurance market, enjoying a bigger per cent of the market share. In

fact, the LIC, which is the only public sector life insurer, enjoys a lion's share percentage of the

market share in Life insurance.

Given the huge market share enjoyed by the public sector companies, the argument, which is

often made by advocates of greater liberalization, that the entry of private players would bring

down the cost of insurance due to enhanced competition, does not seem to be convincing. The

price making capacity of the market leaders in the public sector is likely to remain intact for the

time being. The foreign insurance companies do have the reputation of charging less premium

compared to the risks involved and promising abnormally high returns, in order to grab greater

market share. Such competition, however, although capable of bringing down the 'cost' of

insurance for a while, has often led to gigantic frauds and bankruptcies.

Moreover, as is the case in other markets, the initial flurry of entries into the Indian insurance

market would invariably be followed by a phase of mergers and acquisitions that would lead to

cartelisation, precluding the possibility of competition driving down the costs in the medium

run. In the long run, other forms of non-price competition like aggressive advertisement wars

are likely to lead to increasing costs, eventually harming the interests of the consumers. These

phenomena in the insurance market have been observed in several advanced countries. If the

public sector companies start imitating the strategies of the foreign insurance companies in


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order to defend their market shares, it would be at the cost of undermining their important

social objectives, which they have been fulfilling so impeccably till date.

Implications for Resource Mobilization

A major role played by the insurance sector is to mobilize national savings and channelize

them into investments in different sectors of the economy.

However, no significant change seems to have occurred as far as mobilizing savings by the

insurance sector is concerned, following the liberalization of the insurance sector in 1999. Data

from the RBI show that the trend of the savings in life insurance by the households to GDP

ratio, while showing a clear upward trend through the 1990s signifying increasing business for

the insurance sector, does not show any structural

break after 1999.

It can be inferred therefore that the foreign capital which flowed in after the opening up of the

insurance sector has not been accompanied by any technological innovation in the insurance

business, which would have created greater dynamism in savings mobilization. Ratio of

Savings in Life Insurance by Household to GDP

Ratio of Savings in Life Insurance to GDP Ratio of Savings in Life Insurance to

GDP

Far from expanding the market for the insurance sector, the business activities of the private

companies are limited in urban areas, where a fairly good market network of the public sector

insurance companies already exists. The glaring evidence for this is the composition of agents

operating in the insurance sector. According to the IRDA Annual Report the number of

insurance agents in urban and rural India was in 100:76 ratio in the public sector companies, in

2001-02. For the private insurance companies this ratio was

100:1.4. Due to their urban-biased operational activity, the private insurance companies can

neither increase the insurance base of the economy significantly, nor lead to substantial

employment generation. Given this scenario, further increase in foreign participation is only

going to lead to Intensified competition for the urban insurance markets, rather than leading to

a growth in overall savings.


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It was also argued that competition will expand market and the foreign insurers will bring

better products. This has simply not happened. The size of the market has remained by and

large the same and from this market the private companies are picking up the creamy sections

in the metros seriously eroding the ability of public sector to cross subsidize its products in the

rural areas.

2.3 Flow of funds for infrastructure

Life insurance is all about mobilizing the savings for long term investment in social and

infrastructure sectors. The opening up of insurance market would enable huge flow of funds

into infrastructure but the record of private companies on this is dismal. More than fifty percent

of the policies they sell are unit-linked insurance where the decision on investment of savings

element in insurance is taken by the policyholders. A bigger percentage of policies sold by

almost all the life insurance companies are unit-linked policies . Under these schemes, nearly

50 percent of the funds are invested in equities thus limiting the fund availability for

infrastructural investments.

Raising the FDI cap also does not seem justifiable as far as channelizing savings into

investments are concerned. The life insurance sector invested a total of Rs. 31335.89 crores inthe infrastructure sector in 2002-03. Out of this the contribution of the LIC was Rs. 30998.16

crores, which was 98.92 per cent of the total investment in infrastructure by the entire life

insurance sector. The figures provided by the IRDA Reports further suggest that the share of

the public sector life and non-life insurance companies in investment in infrastructure is greater

than their market share. Despite the FDI cap being set at 26%, the investment from the

insurance sector to the infrastructure sector was predominantly from the public sector

companies.

Therefore, the argument that raising the FDI cap in the insurance sector would help in

mobilizing resources for infrastructure, does not hold. On the other hand, greater foreign

control is more likely to lead to a decline in the share of investment of the private insurance

companies into the infrastructure sector, given the record of the foreign insurance companies in

siphoning resources for speculative financial ventures. It is also worth mentioning that the only

insurance company involved in insuring Indian exports is the Export Credit Guarantee

Corporation of India, which provides insurance cover to export credit. The ECGC has been in

existence since 1957. It is functioning under the United India Insurance Co. No private player

with foreign partnership has ventured into this area. Moreover, the LIC and other public sector


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units are the only ones to undertake overseas operations, as reported by the Annual Reports of

the IRDA. Foreign participation has also not helped in marketing Indian insurance products

abroad.

List of Private Companies in Life Insurance

India's savings patterns are shifting, with far-reaching implications for the economy and

financial system. The downward plunge of the Indian stock market has hurt the fortunes of

thousands of investors, big and small. It will also have broader implications for India's financial

system and the future of savings and investment patterns. Over the past few years, cautious

investors had started to diversify away from bank deposits and cash, moving into equities,mutual funds and insurance products. But the market turmoil is driving them back to the safety

of bank deposits, reducing the amount of capital available to other instruments and possibly

retarding the growth of the financial-services industry as a whole.

India's high savings rate has been a crucial driver of its economic boom, providing productive

capital and helping to fuel a virtuous cycle of higher growth, higher income and higher savings.

Since the 1990s, the gross domestic savings rate has risen steadily from an average of 23% to

an estimated high of 35% in the 2006/07 fiscal year (April-March). The latter rate comparesvery favorably not only with developed economies (the US and the UK have savings rates of

around 14%), but also with other emerging economieswith a few exceptions such as

Malaysia (38%) and Chile (35%). Yet India's household sector (including some small

businesses) continues to account for the lion's sharesome 70%of savings. The last five

years have seen a surge in corporate savings as companies became more competitive and

increased their profitability. That has been accompanied by a rise in public-sector savings on

the back of increased fiscal prudence. However, the current economic situation is putting

pressure on both corporate profitability and the public finances, ensuring that savings in these

two sectors are unlikely to grow as rapidly as in the past. Household savings will therefore

remain crucial to sustaining a strong savings rate.

Savings trends

As real GDP growth climbed and the economy opened up, many worried that increasingly

prosperous Indians would spend more and save less, breaking the cultural habits of decades.

Those fears turned out to be unfounded; prosperity has only increased the savings rate. One

reason for this is the woeful inadequacy of India's social-security system. Only around 10% of


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India's working population is covered by a retirement-benefit scheme. With increased urban

migration, the joint family system (where several generations live together) is declining,

reducing traditional old-age support from families. Health-insurance coverage is very low.

Lastly, many Indians remain averse to taking loans. Personal savings remain vital to meet long-

term needs such as home buying, children's education, retirement and healthcare.

All this suggests that India's large fund of household savings, which stood at Rs9.85trn

(US$192bn) in 2006/07, will remain available to fuel domestic growth. Yet much of Indians'

physical savings is still locked up in unproductive physical assetssuch as houses, durables

and jewellerythat households are only slowly converting into financial assets. As a result,

India's government is keen to find new ways to encourage that shift while increasing savings.

The government would like to channel household savings into the country's debt, equity and

infrastructure-finance markets. This would not only deepen and stabilise the financial markets

but also reduce the government's future social-security burden.

The government already plays an important role in changing investor preferences. Indian

investors are highly tax sensitive; a small tax change can move billions of rupees from one

avenue into another. Such tax changes, coupled with solid economic growth and the emergence

of new investment channels as a result of private participation in the insurance and mutual-fund

industries, are slowly changing the composition of household savings.

There have been some particularly interesting changes within the roughly 50% of the

household savings pool that goes into financial assets. Bank deposit growth declined markedly

in the decade to 2005, after the government began offering tax benefits that gave post office

deposits and other small savings instruments much higher tax-adjusted returns than banks

deposits. However, bank deposit growth then accelerated significantly, and deposits climbed

back up from 36% of household financial assets in 2005/06 to 55% in 2007/08. One reason wasthat banks faced much greater demand for credit and stepped up their deposit-mobilization

efforts, while raising deposit rates. Also, the government extended the tax benefits already

available on post office deposits to bank deposits with maturities of over five years.

Along with the rise in bank deposits, the funds raised through the capital markets and by

mutual funds have simultaneously increased substantially. However, this share of savings

changes quickly, responding to the volatility, risk and returns of the markets themselves. Here,

too, tax benefits have played an important role. The government has made all dividends


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including those from mutual funds tax-free in the hands of investors. Investments in equity and

in equity-oriented mutual funds are exempt from long-term capital gains; the latter are also

exempt from dividend distribution tax.

Private participation

Financial-sector liberalization has been an important driver of these changes. The government

permitted private participation in the mutual-fund industry in 1993, unleashing substantial

growth and structural change. By end-March 2008, total assets under management stood at

Rs5trn, up from Rs3trn a year earlier, and private-sector players held more than 80%. In the

insurance industry, private participation was approved in 2000, leading to a rise in penetrationand market size. By March 2008 the private insurers had taken a combined market share of

36% and 40% of the life and non-life insurance markets, respectively, and the share of life

insurance in household financial assets had climbed to 18%.

The increased availability of these options has contributed to a decline in the share of other

contractual savings, such as provident and pension funds. However, as the government's

pension reforms gain momentum and the insurance industry continues to increase coverage and

penetration, those types of savings will likely increase.

Outlook

In the medium term, these trends are likely to continue. The number of Indians in the working-

age group of 15-64 years is forecast to rise from 63% of the population in 2006 to 68% in

2026. Public-sector employment, with its social-security guarantees, is declining; private-sector

employment, with its higher salaries but lower job security, is increasing rapidly. That can only

boost demand for new financial products and the need for Indian investors to remain in charge

of their own savingspresenting opportunities for both the government and financial-services

providers to channel those savings productively

2.4 Insurance Sector in India

Insurance sector in India is one of the booming sectors of the economy and is growing at the

rate of 15-20 per cent annum. Together with banking services, it contributes to about 7 per cent

to the country's GDP. Insurance is a federal subject in India and Insurance industry in India is

governed by Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and General


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Insurance Business (Nationalisation) Act, 1972, Insurance Regulatory and Development

Authority (IRDA) Act, 1999 and other related Acts.

The origin of life insurance in India can be traced back to 1818 with the establishment of the

Oriental Life Insurance Company in Calcutta. It was conceived as a means to provide for

English Widows. In those days a higher premium was charged for Indian lives than the non-

Indian lives as Indian lives were considered riskier for coverage. The Bombay Mutual Life

Insurance Society that started its business in 1870 was the first company to

charge same premium for both Indian and non-Indian lives. In 1912, insurance regulation

formally began with the passing of Life Insurance Companies Act and the Provident Fund Act.

By 1938, there were 176 insurance companies in India. But a number of frauds during 1920s

and 1930s tainted the image of insurance industry in India. In 1938, the first comprehensive

legislation regarding insurance was introduced with the passing of Insurance Act of 1938 that

provided strict State Control over insurance business. Insurance sector in India grew at a faster

pace after independence. In 1956, Government of India brought together 245 Indian and

foreign insurers and provident societies under one nationalised monopoly corporation andformed Life Insurance Corporation (LIC) by an Act of Parliament, viz. LIC Act, 1956, with a

capital contribution of Rs.5 crore.

The (non-life) insurance business/general insurance remained with the private sector till 1972.

There were 107 private companies involved in the business of general operations and their

operations were restricted to organised trade and industry in large cities. The General Insurance

Business (Nationalisation) Act, 1972 nationalised the general insurance business in India with

effect from January 1, 1973. The 107 private insurance companies were amalgamated and

grouped into four companies: National Insurance Company, New India Assurance Company,

Oriental Insurance Company and United India Insurance Company. These were subsidiaries of

the General Insurance Company

(GIC).

In 1993, the first step towards insurance sector reforms was initiated with the formation of

Malhotra Committee, headed by former Finance Secretary and RBI Governor R.N. Malhotra.


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The committee was formed to evaluate the Indian insurance industry and recommend its future

direction with the objective of complementing the reforms initiated in the financial sector.

Key Recommendations of Malhotra Committee

Structure

Government stake in the insurance Companies to be brought down to 50%.

Government should take over the holdings of GIC and its subsidiaries so that these

subsidiaries can act as independent corporations.

All the insurance companies should be given greater freedom to operate.

Competition

Private Companies with a minimum paid up capital of Rs.1billion should be allowed to

enter the industry.

No Company should deal in both Life and General Insurance through a single Entity.

Foreign companies may be allowed to enter the industry in collaboration with the

domestic companies.

Postal Life Insurance should be allowed to operate in the rural market.

Only one State Level Life Insurance Company should be allowed to operate in each

state.

Regulatory Body

The Insurance Act should be changed.

An Insurance Regulatory body should be set up.

Controller of Insurance should be made independent.

Investments

Mandatory Investments of LIC Life Fund in government securities to be reduced from

75% to 50%.


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GIC and its subsidiaries are not to hold more than 5% in any company. Customer

Service

LIC should pay interest on delays in payments beyond 30 days

Insurance companies must be encouraged to set up unit linked pension plans.

Computerisation of operations and updating of technology to be carried out in the

insurance industry.

Malhotra Committee also proposed setting up an independent regulatory body - The InsuranceRegulatory and Development Authority (IRDA) to provide greater autonomy to insurance

companies in order to improve their performance and enable them to act as independent

companies with economic motives.

Insurance sector in India was liberalized in March 2000 with the passage of the Insurance

Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for private

players and allowing foreign players to enter the market with some limits on direct foreign

ownership. There is a 26 percent equity cap for foreign partners in an insurance company.

There is a proposal to increase this limit to 49 percent. The opening up of the insurance sector

has led to rapid growth of the sector. Presently, there are 16 life insurance companies and 15

non-life insurance companies in the market. The potential for growth of insurance industry in

India is immense as nearly 80 per cent of Indian population is without life insurance cover

while health insurance and non-life insurance continues to be well below international

standards.


Insurance : The Indian Experience

As a part of the financial sector reforms, the insurance sector has been liberalised recently.

With this, the stage has been set for major changes in the insurance market in India with regard

to innovations in product, pricing and distribution. This will also necessitate effective

regulation to meet the new challenges this sector is likely to encounter in the liberalised

environment. In this context, the paper attempts to make an overview of the insurance system


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in India. The paper also attempts to evaluate the insurance penetration achieved in the country

as compared to world standards and traces future scope for this sector as a facilitator for

economic and financial development of the country.

The economic reforms initiated in the country since mid-1991, have been aimed at increasing

efficiency by expanding the role of the private sector along with inflow of investment and

technology, while allowing a greater role of market forces. Insurance being one of the key

components of the financial sector, reforms in the financial sector would encompass insurance

sector reforms also. In the liberalised environment, with increased sophistication and

innovation, insurance is seen as a key segment of the financial market. Insurance is therefore an

area, which holds immense potential, especially for an emerging economy like India. A

Committee on Reforms of the Insurance Sector (Chairman: R.N. Malhotra) was appointed by

the Government of India in April 1993 to examine the regulation and structure of the insurance

industry. Based on the Report submitted by the Committee in January 1994, concrete steps

have been taken by the Government in 1999, after much deliberation, towards liberalisation of

the insurance sector. The paper traces the evolution of the insurance market in India. Section I

of the paper deals with the theoretical aspects of insurance. Section II traces the historical

perspectives of insurance in India. Sections III and IV deal with the business and investments

of life and non-life insurance in India, respectively. In Section V, an assessment of insurance

penetration in India is made in comparison with world standards. Section VI discusses the role

of insurance in financial savings of the household sector. Section VII covers regulation of

insurance in India and Section VIII gives concluding observations.


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2.5 Theoretical Aspects of Insurance

From the definitional angle, the term insurance can be best understood by referring to the two

important schools of thought on the subject viz., (i) transfer school and (ii) pooling school.

According to the transfer school, "Insurance is a device for the reduction of uncertainty of one

party, called the insured, through the transfer of particular risks to another party, called the

insurer, who offers a restoration, at least in part, of economic losses suffered by the insured"

(Pfeffer Irving, 1956). On the other hand, according to the

'pooling' school, ".............. the essence of insurance lies in the elimination of the uncertain

risk of loss for the individual through the combination of a large number of similarly exposed

individuals" (Manes Alfred, 1935). Thus, in the case of an individual, insurance is a transfer

mechanism through which he passes on risk to the insurer. Whereas, for the insurer, insurance

is a pooling mechanism by which he reduces risk in the context of his business. Insurance

markets are generally characterised by asymmetric or imperfect information. In such markets,

there is uncertainty about the actual behaviour of the insured. The insured possesses better

information about himself or his risk type than the insurer. The high-risk insurees have

incentives to hide their true state and present themselves as low risk types. The difficult

problem faced by the insurance companies is the exact evaluation of risk and to adjust the

premium accordingly at the time of signing of the insurance contract. In other words, the

insurer will have to fix up the price and the amount of insurance the customer can buy at that

price. Higher premium will attract a pool of more risky insurance applicants and will lead to

the problem of 'adverse selection', while the applicants with small risks will drop out. Higher

insured values may lead to 'moral hazard' problems, as it will create an incentive for the insuree

to take increased risks than he would otherwise take. The problem of moral hazard, though

unimportant in the case of life insurance (as no one would try to take his own life in normal

circumstances), can be severe in the area of non-life insurance. It is therefore necessary for the

insurance companies to strike a correct balance between the premium and the extent of risk

covered.


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The role of Insurance in savings mobilisation a case for Indian EconomyAn

Historical Perspective

One of the main features of the pre-nationalised insurance sector was the utilisation of the

insurance sector as a backup or extension by the well known industrial houses of India. There

are mainly two forms of insurance in India viz., life and non-life. Life insurance provides

protection to a household against the risk of premature death of its income-earning member.

Non-life insurance can be grouped under three heads viz., fire, marine and miscellaneous

insurance. Life Insurance Corporation of India carries on life insurance business and the

General Insurance Corporation and its four subsidiaries deal with non-life insurance. After

liberalisation of the insurance sector in 1999, private players have entered both life and non-

life business in India. The Insurance Regulatory and Development Authority (IRDA) was

constituted in April 2000 as an autonomous body to regulate and develop the business of

insurance and re-insurance in the country in terms of the Insurance Regulatory and

Development Authority Act, 1999.

Life Insurance

The life insurance business was first introduced in India by a British firm in 1818. Initially,

higher premiums were charged for insuring Indian lives as against non-Indian lives. The

Bombay Mutual Life Assurance Society, an Indian insurer, set up in 1871 was the first to

charge same premium for both Indians and non-Indians. The decades of 1920s and 1930s

witnessed rapid growth of life insurance in India. In order to regulate the life insurance

business, the Indian Life Assurance Companies Act, 1912 was enacted. The enactment of the

Insurance Act, 1938 introduced effective State control over the insurance business in the

country. After independence, Indian companies came into their own. In 1956, the LifeInsurance Corporation of India was formed when the Government of India brought together the

insurance business of 2451 Indian and foreign insurers and provident societies, under one

nationalised monopoly corporation called Life Insurance Corporation (LIC). Since

nationalisation, LIC developed a vast network of branches and expanded its business. LIC also

extends pension cover to the insured apart from life cover. Acting on the recommendations of

the Committee on Reforms in the Insurance Sector (1994), private players were allowed into

the Life insurance business in 2000.

During 2000-01, there were 6 registered private companies engaged in the business of life

insurance.

General Insurance

The first general insurance company viz., Triton Insurance Company Ltd. was established in

Calcutta in 1850. Its shareholders were mainly British. The first Indian company for General

Insurance business was the Indian Mercantile Insurance Company Ltd., set up in 1907 in

Mumbai. The general insurance business in India was nationalised with effect from January


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1973 by the General Insurance Act, 1972. As a result, 107 insurers (including both Indian and

foreign companies) were amalgamated and grouped into four companies viz., the National

Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance

Company Ltd. and the United India Insurance Company Ltd. General Insurance Corporation

(GIC) was incorporated as a company in November 1972 and it commenced business on

January 1, 1973. GIC has been acting as the Indian reinsurer2 since then. GIC has also been

accepting overseas reinsurance business. For regulation of product pricing of general

insurance, a Tariff Advisory Committee (TAC) started functioning since 1968 headed by the

Controller of Insurance. After the nationalisation of GIC in 1972, the management of TAC was

delegated to GIC. Acting on the recommendations of the Committee on Reforms in the

Insurance Sector (1994), private players were allowed into the non-Life insurance businessalso in 2000. During 2000-01, there were 4 registered private companies engaged in the

business of non-life insurance.

Business and Investments of Life Insurance Companies

Since nationalisation of the life insurance business in India in 1956 and non-life business in

1972, rapid strides have been made in the development of the insurance sector. The Life

Insurance Corporation has introduced different types of policies to suit different income groups

and age groups over the years. These insurance policies include term, whole life, endowment,

annuity, individual, group and pension plans. This has afforded reasonable variety of

investment schemes to the investors. The number of offices of LIC increased from 889 in

1981-82 to 2048 in 2000-01 (Table 1). The number of policies grew from 3.7 per cent in 1981-

82 to 12.0 percent in 2000-01. This growth, which peaked at 12.8 per cent in 1990-91, could

not be maintained in the subsequent years. The growth in the sum assured which was 14.7 in

1981-82, peaked to a high of27.4 per cent in 198990, but eventually declined to 20.3 per cent

in 2000-01.The rural new business of LIC as a percentage of its overall new business has

grown well during the 1980s and 1990s. The penetration in the rural areas was more

pronounced in the 1990s than in the 1980s

The share of rural to total new business in terms of number of policies has increased from 32.8

per cent in 1981-82 to 55.5 percent in 2000-01. In terms of sum assured, this share increased

from 26.6 per cent in 1981-82 to 47.8 per cent in 2000-01. The Committee on Reforms in the

Insurance Sector (Malhotra Committee) had recommended that it should be made mandatory

for insurance companies to transact a minimum business in rural areas and they should not be

allowed to avoid small policies. With improving rural infrastructure, rising incomes and

greater awareness among the rural people regarding the importance of life cover, further

growth in rural insurance business can be achieved.

Life Insurance Business of Private Companies


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The insurance market was opened to the private sector in August 2000 and the initial batch of

new registrations was granted on 23rd October, 2000. During 2000-01, there were 6 registered

private life insurance companies viz., (i) Birla Sun-Life Insurance

Company Ltd. (BSLIC), (ii) HDFC Standard Life Insurance Company Ltd. (HSLIC), (iii)

ICICI Prudential Life Insurance Company Ltd. (IPLIC), (iv) Max New York Life Insurance

Company Ltd. (MNYLIC), (v) SBI Life Insurance Company Ltd. (SLIC) and (vi) TATA AIG

Life Insurance Company Ltd. (TALIC). Out of these, only 4 companies

viz., BSLIC, HSLIC, IPLIC and MNYLIC have started doing business by the end of March

2001.

The investments of an insurance company are intended to build up reserves and not to book

short-term profits. These reserves provide a cushion for long-term contingencies, which can be

directed towards investment in socially desirable sectors like infrastructure. The provisions of

Section 27 A of the Insurance Act, 1938 as amended from time to time have prescribed the

investment patterns for life insurance. The Malhotra Committee (1994) had recommended that

the mandated investment of funds of LIC should be reduced from the then existing level of 75

per cent to 50 per cent. Consequent to the liberalisation of the insurance sector, and as per the

notification of IRDA (Investment) Regulations, 2000 dated August 14, 2000, the life insurance

companies have to invest a minimum of 50 per cent of their total assets in government and


infrastructure and social sectors, leaving the balance 35 per cent free for investment in the

capital market. The investment pattern of LIC for the period 1980-81 to 2000-01 shows that

major share of its investments were in Central and State Government securities followed by

loans to State and Central government and their Corporations and Boards.

Business and Investment of Non-Life Insurance in India

The general insurance companies mainly specialise in insurance business like fire, marine,aviation, theft, crop, accident, health (medi-claim) etc. General insurance policies, unlike life

insurance policies are short duration contracts. Also, general insurance policies, in comparison

to life insurance policies do not mobilise savings, but they collect funds from the premiums

paid. The number of offices of GIC has more than trebled from 1272 in 1980-81 to 4177 in

2000-01 (Table 4). However, after 1992-93, this growth was either negligible or negative. As

regards the growth in the number of policies and net claims payable of GIC and its

subsidiaries, no steady pattern is observed. However, the volume of business in terms of

number of policies and net claims payable has improved substantially over the years.

The rural business of GIC and its subsidiaries form only 5.2 per cent of total domestic general

insurance premium in 1998-99 (latest available). The non-life business transacted in the rural

areas mainly relates to insurance of livestock. Major portion of this business transacted relates

to livestock cover under the Integrated Rural Development Programme

(IRDP) with bank credit linkages, where insurance is mandatory. Other rural businesses

covered include agricultural pumpsets, Janata Gramin Personal Accident, commercial poultry

farms and other businesses including pisciculture and sericulture.


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Non-Life Insurance Business of Private Companies

During 2000-01, there were 4 registered private non-life insurance companies viz., (i)

IFFCOTokio General Insurance Company Ltd., (ITGIC), (ii) Reliance General Insurance

Company Ltd. (RGIC), (iii) Royal Sundaram Alliance Insurance Company Ltd. (RSAIC), (iv)

TATA AIG General Insurance Company Ltd. (TAGIC). The business of these companies

during 2000-01 was very low.

Investments of General Insurance Companies

The provisions of Section 27 B of the Insurance Act 1938 as amended from time to time has

prescribed the investment patterns for non-life insurance. The Malhotra Committee (1994) hadrecommended that the mandated investment of funds of the general insurance companies

should be reduced from the then existing level of 70 per cent to 35 per cent. In April 1995, the

Government relaxed the investment policies of GIC and its subsidiaries and they were allowed

to invest upto 55 per cent of the annual accretion of their funds in market oriented schemes as

against 30 per cent earlier. Consequent to the liberalisation of the insurance sector, and as per

the notification of IRDA (Investment) Regulations, 2000 dated August 14, 2000, the

investments of non-life insurance companies cannot be less than 30 per cent in government and


infrastructure and social sectors and a minimum of 5 per cent in the area of housing and fire

fighting. Of the balance 55 per cent, 30 per cent will be governed by prudential norms, while

25 per cent can be invested in unapproved securities including investment in equities.

The investment pattern of GIC and its subsidiaries for the period 1980-81 to 2000-01 shows

that the important avenues for its investments were in market investment followed by Central

Government securities (Table 6). Market investments of GIC and its subsidiaries increased

from 33.7 per cent in 1980-81 to 44.0 per cent in 2000-01.

Whereas the investments in Central Government securities decreased marginally from 21.3 per

cent in 1980-81 to 21.0 per cent in 2000-01. The investment pattern of GIC is thus different

from that of LIC, whose major investments are in Central and State Government securities.

Insurance Penetration in India as Compared to Global Standards

Insurance density, measured in terms of premium per capita, was much lower in emerging

markets in 2000 as compared with the industrialised countries of the world. Similarly,

insurance premium as percentage of GDP i.e., insurance penetration, was lower in the

emerging markets as compared to the industrialised countries in 2000. However, South Africa

and South Korea, which figure among the emerging markets are exceptions and are among the

forerunners in insurance penetration. Of the total world insurance business in terms of

insurance premiums, nine-tenths were contributed by industrialised countries, whereas, the

emerging markets accounted for 10 per cent of total world business in insurance. However, the

growth rate of premium in 2000 in the emerging markets was higher as compared with the

industrialised countries, indicating the growing importance of the insurance sector in the


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former. India's insurance penetration was only 2.3 per cent, as against the world average of 7.8

per cent in 2000

Opening up of the insurance sector has been a key component of economic reforms put in

place in South and East Asian economies in the 1980s and 1990s. The major insurance markets

in South and East Asia are generally open indicating the impact of the reform measures. Since

liberalisation of the Korean and Taiwanese insurance markets in 1987, these markets grew at a

much faster pace than before, suggesting that liberalisation of the insurance sector facilitated

growth of insurance in these countries.

In India, the share of life insurance premium as a percentage of GDP, i.e., insurance

penetration, has increased steadily from 0.6 per cent in 1980-81 to 1.6 per cent in 200001.

However, this is much lower as compared to that of the industrialised countries. The life funds

as percentage of GDP increased from 4.6 per cent in 1980-81 to 8.9 per cent in 2000-01

reflecting an impressive performance of LIC in terms of generating premium and investment

income in excess of its expenditures and claims. The life insurance density, i.e., life insurance

premiums per capita has steadily increased from Rs. 13.1 in 1980-81 to Rs. 334.8 in 2000-01.

However, this is much lower in comparison with world standards. This again reveals the vastscope for life insurance penetration in India. The life fund per capita which was Rs. 97.4 in

1980-81 has increased more than eighteen fold to Rs. 1819.5 in 2000-01 reflecting the

attractiveness of life insurance business.

In India, the share of gross and net insurance premiums for non-life insurance as a percentage

of GDP, i.e., non-life insurance penetration, have increased from 0.4 per cent and 0.3 per cent,

respectively in 1980-81 to 0.5 per cent and 0.5 per cent in 2000-01. However, this compares

quite unfavourably with that of the industrialised countries and other emerging markets in

general. The non-life gross and net premiums per capita (non-life insurance density) have both

steadily increased from Rs. 7.4 in 1980-81 to Rs. 105.7 in 2000-01 and from Rs. 7.1 to Rs.

100.8, respectively during the same period. However, this is much lower in comparison with

world standards. This reveals the vast scope for non-life insurance penetration in India.

Role of Insurance in Financial Saving and GDP

Insurance is an important financial saving instrument of the households. The saving component

of life insurance competes with the savings of the households in other financial instruments

such as bank deposits, mutual funds and equities. The total life insurance in India comprises

three components viz., life insurance, postal and state insurance. The life insurance business is

almost in the hands of the LIC. Its share ranged between 85 per cent and 95 per cent of the

total insurance fund during 1980-81 through 2000-01. The share of insurance, which

constitutes a significant part of gross financial savings of the household sector, has gone up

from 7.6 per cent in 1980-81 to 12.8 per cent in 2000-01. During the period 199192 to 2000-

01, this share has remained above 10 per cent, barring the three years from 1992-93 to 1994-

95. The average share of insurance in gross financial savings which was 7.6 per cent in the


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1980s increased to 10.3 per cent in the 1990s. The share of insurance in GDP has shown a

consistently rising trend and more than doubled from 0.7 per cent in 1980-81 to 1.6 per cent in

2000-01.

The average share of insurance as a percentage of GDP increased from 0.8 per cent in the

1980s to 1.2 per cent in the 1990s. The share of insurance in real GDP i.e., insurance as a

percentage of real GDP during the period 1981-82 to 2000-01 was below 1 per cent. The

insurance sector has been only a marginal contributor to the country's GDP. This is despite the

country's vast population and immense potential for growth of insurance. One of the reasons

attributable to this could be the lack of effective competition due to the monopoly position

enjoyed by the public sector. Opening up of the insurance sector may augur well for the growth

in income from this sector.

Insurance Regulation in India

Insurance regulation in India started with the passage of the Life Insurance Companies Act,

1912 and the Provident Fund Act, 1912. The first comprehensive legislation was introduced

with the Insurance Act, 1938 which provided strict State control over insurance business in the

country under the supervision of the Controller of Insurance. Subsequently, the Insurance Act,

1950 was enacted to check malpractices in the insurance business and also to exercise morecontrol over the operations of the insurance companies. With the nationalisation of the life

insurance industry in 1956 and the general insurance industry in 1972, the role of the

Controller of Insurance diminished over a period of time. On account of the monopoly status

of the public sector units viz., LIC and GIC in the area of insurance, prior to liberalisation of

this sector, regulation was perceived to be of less interest due to the inbuilt procedures in place.

The phased globalisation of the Indian economy that started in the early 1990s began to have

its impact on the monopolistic structure of the Indian insurance industry. Further, the

liberalisation

of insurance markets was among the objectives of the Uruguay round negotiations conducted

under the auspices of General Agreement on Trade and Tariff (GATT). These negotiations

included trade in services and insurance in the context of financial services (UNCTAD Report,

January 1993). In 1993, the Government appointed a Committee headed by Shri R.N. Malhotra

to examine the reforms required in the insurance sector. The Committee in its report submitted

in

1994 recommended inter alia the opening up of the insurance sector to players other than

State- Owned ones. These recommendations were accepted by the Government and the

Insurance Regulatory and Development Authority (IRDA) Act, 1999, consequent amendments

to the Insurance Act, 1938, Life Insurance Corporation Act, 1956 and the General Insurance

Business Act, 1972 were passed in the year 2000, paving the way for opening up of the

insurance sector.

The important functions of the IRDA as per the IRDA Act 1999, include the following:


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i) Licensing and regulating the insurance sector by acting as an independent and

regulatory body.

ii) Specifying requisite qualifications, code of conduct and practical training for insurance

intermediaries and agents.

iii)Protecting the interests of the policyholders in matters concerning assigning of policy,

settlement of insurance claim etc.

iv) Regulating investment of funds by insurance companies.

v) Calling for information from, undertaking inspection of, conducting enquiries and

investigations including audit of the insurers and other organisations connected with theinsurance business.

vi) Regulating maintenance of margin of solvency of the insurer.

vii) Adjudication of disputes between insurers and intermediaries or insurance

intermediaries.

viii) Supervising the functioning of the Tariff Advisory Committee.

ix) Promoting efficiency in the conduct of insurance business.Efforts are underway to bring about internationalisation of regulations in the insurance sector

on the lines of the banking sector so as to take care of development and health of the insurance

sector. This concern had resulted into the establishment of International Association of

Insurance Supervisors (IAIS), head quartered at Basle in Switzerland. More than 100

regulators of insurance industries worldwide are members of this Association and India is also

one amongst them. The underlying objective of this organisation is to bring about a degree of

standardisation in regulatory procedures adopted by different countries. The Advisory Group

on Insurance Regulation (Chairman: Shri R. Ramakrishnan) appointed by the Standing

Committee on International Financial Standards and Codes (Chairman: Dr. Y.V. Reddy),

stated that Indian insurance regulations are, by and large, in consonance with international

standards.

Chapter 3. Research methodology

The research relied entirely on the qualitative data because of its macro nature. Data from

major insurance companies such as Life Insurance Company of India and General Insurance

Company of India was analyzed. The statistics from the annual reports of Insurance Regulatory

Development Authority of India the regulator body for insurance business was studied and

analyzed.

The secondary sources of data were the various websites and insurance manuals. This mainly

provided information about the insurance sector and the company profiles. These helped in

gaining knowledge about the industry. These sources are listed in references.

Other sources of data such as Internet, books, magazines and other relevant publications were

studied.


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3.1 DATA ANALYSIS AND INFERENCE:

Tables, pie charts, bar charts and percentage analysis and other statistical methods were used to

analyze and present data in a more clear way.

3.2 RESEARCH LIMITATIONS:

1. It was not possible to get all the data especially primary data as the subject is very wide.

2. Data on savings was not readily available.

3. There was difficulty in filtering of secondary data because of the macro nature of the

project.

the role of insurance in savings mobilisation a case for _1

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