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  • 1. I NDUSTRY ANALYSIS REPORT The Insurance Sector Submitted to Dr. T. J. Joseph 12 February, 2011 Marketing C- Group 2 Aswin S Panicker Dushyant Sareen Nehruji S Sameer Alam Sunit MishraIndustry Analysis Report! 1
  • 2. TABLE OF CONTENTS Introduction! 5 Indian insurance market! 5 Forms of insurance! 6 Players in the Indian market! 6 Life insurance! 7 General insurance! 7 Reinsurance! 8 Operation of insurance companies! 8 Premium charged! 8 Guiding principles! 9 Insurable interest! 9 Utmost good faith! 9 Indemnity! 9 Subrogation! 9 Contribution! 10 Proximate cause! 10 How insurance companies earn! 10 Industry environment! 11 Industry structure! 11 Industry concentration! 12 Herfindahl index! 12 PEST Analysis! 13Industry Analysis Report! 2
  • 3. Political factors! 13 Economic factors! 13 Social factors! 14 Technological factors! 15 Insurance at the global level! 16 Industry trends! 17 Insurance penetration! 17 Insurance density! 19 Potential demand! 21 IRDA! 23 Regulatory authority! 23 Industry conduct and practices! 24 Industry level practices! 24 Marketing intensity! 25 Working capital ratio! 26 Performance measures! 27 Profitability! 27 Growth in sales! 28 Return on sales! 29 Return on total assets! 30 Competition analysis! 31 Porter’s five forces! 31 Suppliers power! 31 Buyers power! 32Industry Analysis Report! 3
  • 4. Rivalry among competitors! 32 Threat of entry! 33 Threat of substitutes! 33 SWOT analysis! 34 Strengths! 34 Weakness! 34 Opportunities! 34 Threats! 34 Summary! 35 Future scope! 35Industry Analysis Report! 4
  • 5. IntroductionInsurance is a form of risk management primarily used to hedge against the risk of a contin-gent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, fromone entity to another, in exchange for payment. An insurer is a company selling the insurance;an insured, or policyholder, is the person or entity buying the insurance policy. The insurancerate is a factor used to determine the amount to be charged for a certain amount of insurancecoverage, called the premium. The primary forms of insurance are life and non- life insurancealso known as general insurance. Fig: Life insurance General insuranceIndian insurance marketIn India, insurance has a deep rooted history. It finds mention in the writings of Manu( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). These writings talkin terms of pooling of resources that could be re-distributed in times of calamities such as fire,floods, epidemics and famine. This was probably a pre-cursor to modern day insurance. An-cient Indian history has preserved the earliest traces of insurance in the form of marine tradeloans and carriers’ contracts. As of 2009 with India growing at 7.4% the insurance sector alsohas grown and it currently accounts for 5.2% of the GDP with 4.6% of it being contributed bythe life insurance segment and the remaining 0.6% contributed by the general insurance seg-ment. But still insurance is in its nascent stages in India and the various players are yet to lev-erage new strategies that will help them to expand their reach and cover a significant part ofthe hugely untapped rural market. Further several regulations relating to foreign investment inthe sector has also can be accounted for its not growing at a pace it is supposed to.Industry Analysis Report! 5
  • 6. FORMS OF INSURANCE Fig: Forms of insurancePlayers in the Indian market Table: Number of players in the Indian market TYPE OF G O V E R N M E N T P R I VA T E TOTAL INSURANCE P L AY E R S P L AY E R S LIFE INSURANCE 1 22 23 GENERAL INSURANCE 6 18 24 REINSURANCE 1 1Industry Analysis Report! 6
  • 7. Life insuranceLife insurance is a contract between the policy owner and the insurer, where the insurer agreesto pay a designated beneficiary a sum of money upon the occurrence of the insured individualsor individuals death or other event, such as terminal illness or critical illness. The year 1818 sawthe advent of life insurance business in India with the establishment of the Oriental Life In-surance Company in Calcutta but it failed in 1834. There are totally 23 players in the Indian lifeinsurance segment with the one government organisation LIC leading the pack partly due themonopoly powers it enjoyed in the market previously. Since most of the players are yet to evencomplete their ten year stint in the market most of the private players haven’t broken even yet. Fig: The top five players in the life insurance segmentGeneral insuranceGeneral insurance or non-life insurance policies, including automobile and homeowners poli-cies, provide payments depending on the loss from a particular financial event. General insur-ance typically comprises any insurance that is not life insurance and includes amongst otherscar, housing, health, industry insurance. The history of general insurance dates back to the In-dustrial Revolution in the west and the consequent growth of sea-faring trade and commercein the 17th century. It came to India as a legacy of British occupation. General Insurance inIndia has its roots in the establishment of Triton Insurance Company Ltd., in the year 1850 inCalcutta by the British. There are totally 24 players in the segment with 6 government playersand 18 private players. Even in the general insurance category the government organisationslead the pack in terms of net premium underwritten. Fig: The top five general insurance playersIndustry Analysis Report! 7
  • 8. ReinsuranceReinsurance is concerned with insuring the insurances of general insurance and not life insur-ance. In India there is only one organisation which can reinsure, the Government operatedGeneral Insurance Corporation (GIC). There is also a mandatory cap of 20% which must besurrendered to the GIC by all private and public operators. This helps the players to offsetsome of the risk involved and also provides a business opportunity for GIC to function as anorganisation. While in other countries the norms allow companies to even have more than80% of their insurances reinsured even by foreign companies the regulations of the insuranceregulatory authority doesn’t allow Indian companies to do so. Fig: General Insurance CorporationO P E R AT I O N OF INSURANCE COMPANIESPremium chargedThey have certain set of calculations criteria on basis of some guidelines every type of insur-ance. For instance, in life insurance, the persons age, gender, health status, medical reports andother related stuff is considered and then final premium amount is decided. If age is small, thenpremium is large and if medical reports are not good, then premium will b comparatively high.Same is case with general insurance, they check the market value of a thing and then have par-ticular percentage for premium on market value. Also if insurance is regular then there is someamount which is deducted.Insurance is the only industry in which customers would like to pay to cover their risk in orderto have some monetary security in their minds and at the same time they do not want moneyback as it is the payment for recovering from loss and loss is one thing which nobody in thisworld would wish for.Industry Analysis Report! 8
  • 9. Guiding principlesInsurable interestIt means that person has pecuniary interest in getting a thing insured and will suffer loss at ini-tial moment of any unforeseen event. This is one of the essential requirements of insurancecontract. Therefore a person can go for insurance only if he is benefitted by securing that par-ticular insured thing or will suffer a loss in case that is not insured. One major requirement ofthis principle is that ownership of the thing should be in name of person who is getting thinginsured or if not then lessee or borrower should get it insured.Utmost good faithThis means that both insurer and the person who is getting insurance should not hide anythingfrom each other. Like any other valid contract as per Indian law this is also based on good faithby both parties. The insurer should not hide anything from insuring person regarding thebenefits or the hidden cost of policy or any false claims for later stages and insuring personshould also not hide any fact regarding the thing which is getting insured. He should truly re-veal all the things whether negative or positive to the insuring company.IndemnityThis states that the person who has faced a loss should be brought back to same monetary po-sition as he was before the occurrence of the event. He should be given the claimed amountmentioned in policy in the soonest possible time so that he has financial support to be in acondition where he was prior to the occurrence of event of loss or damage.SubrogationInsurer has all the rights to step into the shoes of the person after the payment of the corre-sponding loss to the sufferer. This means that after the loss is compensated by the insurancecompany then all the rights of ownership is transferred to the insurance company. The ownerof the person who has got all the compensation for the loss of the thing cannot claim the dam-aged part back once it has got compensation regarding same. This does not apply to life insur-ance policy.Industry Analysis Report! 9
  • 10. ContributionThis principle mainly for company side i.e. the person who is getting loss compensated will getthe maximum amount which is equal to the risk covered under policy and nothing extra. Forinstance- a person gets insurance of his goods worth RS 1 lakh from 2 different insurance com-panies. Now in the case of loss of such goods or any damage to it, the owner of the goods willget maximum of Rs 1 lakh. He will not get 1 lakh from each company. The total of 1 lakh will bedivided by two companies in their premium ratio. This kind of practice helps the companies todivide the amount to be paid.Proximate causeAn insurer will only be liable to pay a claim under an insurance contract if the loss that givesrise to the claim was proximately caused by an insured peril. This means that the loss must bedirectly attributed to an insured peril without any break in the chain of causation.How insurance companies earnIt is not that the premium that insurance companies collect from their insurers is their in-come. Since they cover the risk of uncertain future i.e. any loss or damage caused to thecommodity insured, then only company has to pay back the covered loss amount under policy,and in the mean time the premium amount which they have collected do not remain idle, in-surance companies deposit them in short term or long term investments prevailing in the mar-ket. It is from the market investments that they make their profit and are able to pay out100% return to customers while collecting approximately 5% premium amount. In most cases,the excess of premium amount collected excluding the payments regarding some losses is in-vested in market.Industry Analysis Report! 10
  • 11. I N D U S T RY ENVIRONMENTIndustry structureThe Indian insurance industry has been subjected to numerous changes over the past whichhas seen its transformation to and from various industry structures. Initially during the BritishRaj the main successful players were the British companies that operated through their re-gional branches setup in India. But there were also other Indian players. Immediately afterIndian independence there was a rapid increase in the number of players in the sector whichwere mainly provident agencies and the industry was highly unregulated and there were severalpolicies that were followed by the company that took advantage of people in unscrupulousways. An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sectorand Life Insurance Corporation came into existence in the same year. The LIC absorbed 154Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and foreign insurersin all.The LIC had monopoly till the late 90s when the Insurance sector was reopened to the privatesector and foreign players were allowed to set shop in India for insurance by forming joint ven-tures with Indian companies. Currently the industry follows an oligopolistic market structurewith the top few players accounting for a significant portion of the market. Similarly for thegeneral insurance market in 1972 with the passing of the General Insurance Business (Nation-alisation) Act, it was nationalized with effect from 1st January, 1973. 107 insurers were amal-gamated and grouped into four companies, namely National Insurance Company Ltd., the NewIndia Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India In-surance Company Ltd. The General Insurance Corporation of India was incorporated as acompany in 1971 and it commence business on January 1 1973         Fig: Industry structure through the yearsIndustry Analysis Report! 11
  • 12. Industry concentrationIndustry concentration is another factor that is used to determine the industry structure. Itshows what percentage of the market is concentrated by what number of players. There areseveral measures of measuring the industry concentration with a simple percentage calculationthrough the market share to the Herfindahl index which uses the market share to arrive upon anumber using which the concentration can be determined in the industry.Herfindahl indexThe Herfindahl index is a measure of the size of firms in relation to the industry and an indica-tor of the amount of competition among them. It is defined as the sum of the squares of themarket shares of the 50 largest firms within the industry, where the market shares are ex-pressed as fractions. The result is proportional to the average market share, weighted by mar-ket share. It ranges from 0-10000 moving from a huge number of very small firms to a singlemonopolistic producer. Increases in the Herfindahl index generally indicate a decrease in com-petition and an increase of market power, whereas decreases indicate the opposite. Table: Herfindahl index of life and general insurance HERFINDAHL C O N C E N T R AT I O N INDEX LIFE INSURANCE 3107.86 80 - 100% GENERAL INSURANCE 1093.52 50 - 80%The high herfindahl index value for the life insurance implies that a significant portion of themarket is concentrated with the players at the top. It corresponds with the fact that LICwhich is the market leader accounts for more than 70% of the life insurance market which canbe attributed to its operating as a monopoly during the pre-liberalisation period. While in thecase of the general insurance segment the four government players account for almost 60% ofthe market and the remaining 40% of the market is shared by the other 18 private players. Inthe case of the reinsurance segment the government operated General Insurance Corporationenjoys the monopoly position as it is the only player allowed to operate in the market.Industry Analysis Report! 12
  • 13. PEST AnalysisPolitical factorsThe Indian government plays a significant role in the operations of the insurance segment. In1914, the Government of India started publishing returns of Insurance Companies in India.The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate lifebusiness. In 1928, the Indian Insurance Companies Act was enacted to enable the Governmentto collect statistical information about both life and non-life business transacted in India byIndian and foreign insurers including provident insurance societies. In 1938, with a view to pro-tecting the interest of the Insurance public, the earlier legislation was consolidated andamended by the Insurance Act, 1938 with comprehensive provisions for effective control overthe activities of insurers. The Insurance Amendment Act of 1950 abolished Principal Agencies.There were also allegations of unfair trade practices.This was followed by nationalisation in 1956. In 1993, the Government set up a committee un-der the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendationsfor reforms in the insurance sector. It recommended that the private sector be permitted toenter the insurance industry. They stated that foreign companies be allowed to enter by float-ing Indian companies, preferably a joint venture with Indian partners.Economic factorsThe Indian economy exhibited good recovery in 2009-10 and recorded a Gross DomesticProduct (GDP) growth rate of 7.4 per cent, higher than the growth of 6.7 per cent of the pre-vious year. There was also an increase in Gross Domestic Savings to 32.5% in 2008-09. TheGDS is an important factor to be considered in the case of insurance as it is the savings whichgoes into the purchase of instruments like insurance.GDS: Public Sector : 1.4% + Private Sector: 31.1 %= Total : 32.5 %The introduction of ULIP (Unit Linked Insurance Plans) which provide returns to the insur-ance that is purchased also increased the chances of the consumer going in for insurance byconsidering it as an alternative to other returns providing financial instruments such as invest-ing in the stock market or mutual funds. As the operations of the life insurers stabilise, theirinvestment base gets strengthened, resulting in investment income forming a larger proportionof their total income. In the case of LIC, the investment income including capital gains washigher at `1,12,425 crore in 2009-10 compared to `42,804 crore in 2008-09Industry Analysis Report! 13
  • 14. Social factorsFor a country like India it is very important to consider the social factors. The bar chart belowshows that over 63.5% of those who have not been covered by any form of insurance have saidthat non affordability is the main reason. The other factors like not having considered it care-fully, not being interested, not understanding how it works or the fact that they have not beenexplained the benefits by somebody, shows a lack of awareness amongst those who can affordinsurance. This is a market that can be tapped by organisations through proper channels andmarketing. Though insurance penetration and density has been growing over the years, the be-low poverty line (BPL) families and low income, small town population, are yet to benefit sig-nificantly by the insurance industry to provide coverage to those who are in dire need of healthinsurance. This can be seen through the chart which shows the difference between rural andurban India in terms of people insured. Fig: Geographical distribution of life insurance customersIndustry Analysis Report! 14
  • 15. Fig: Reasons for avoiding insuranceTechnological factorsAs the banking industry has benefitted by process simplification as a result of automation sohas the insurance. Due to computerisation there has been heavy reduction in the amount ofpaper work that is done. The facilitation of selling insurance through the internet and otherdirect response technologies has increased the number of potential takers and also has encour-aged repeat purchases. Technology has also facilitated better better Customer RelationshipManagement solutions. The technological factors can also be seen under new forms of insur-ance instruments that are currently available in the market to cater specifically to certain seg-ments. There are schemes that are being tailor made to suit the requirements of certain groupsof people. Government organisations like Export Credit Guarantee Corporation of India Ltd.,(ECGC) which is a specialised insurer underwriting business in export credit insurance and theAgricultural Insurance Company of India (AIC)are specialised general insurance organisationswhich cater to a specific segment.Industry Analysis Report! 15
  • 16. Insurance at the global levelAs per World Insurance Report published by reinsurance major Swiss Re, the global insurancepremium for the calendar year 2009 was USD 4066 billion, which is 1.1 per cent ( inflation-adjusted) lower than USD 4220 billion reported during the previous calendar year 2008. Theshare of life insurance business was 57 per cent in total premium collection. While life insur-ance business collected USD 2331 billion as premium, the same for non-life business was USD1735 billion. During 2009, the premium in life insurance business fell by 2 per cent on accountof double digit decline in premium collection in USA and UK. However, compared to 2008,when life insurance premium fell by 5.8 per cent, this is an improvement on account of the im-proved sentiment in the calendar year 2009.On a product basis, investment-linked insurance products continued to perform worse thantraditional products with guaranteed returns. Meanwhile, premiums in most emerging marketcountries, particularly in Asia, continued to grow, albeit at a slower pace. As major investors,life insurers profited from the recovery of stock and credit markets. Profitability and risk capi-tal also improved as capital markets rebounded, but have not yet returned to their pre-financialcrisis levels.As the global recession of 2007 subsided in sixty-six per cent of the countries, insurance grewfaster than GDP, which shows the robustness of the industry. Further, as credit and stock mar-kets recovered in 2009, the industry was able to restore its capital base. Investment results andoverall profitability also improved during the period. During the financial crisis, the insuranceindustry continued to provide cover and pay claims, reflecting the industry’s robustness. Unlikethe banking sector, insurers did not receive government support in the form of capital or guar-antee, except in a few cases. Thus, the insurance industry was largely not impacted by the fi-nancial crisis in the same way as banking sector had been although asset values showed adecline in line with the overall trends across world economies. Table: Real percentage growth in premium in 2009 - 10Industry Analysis Report! 16
  • 17. I N D U S T RY TRENDSInsurance penetrationInsurance penetration is defined as the ratio of premium underwritten in a given year to thegross domestic product (GDP). The insurance penetration was 2.32 per cent (Life 1.77 per centand Non life 0.55 per cent) in the year 2000 when the sector was opened up for private sector.It had increased to 5.20 per cent in 2009 (Life: 4.60 per cent and Non- life: 0.6 per cent). Themeasure of insurance penetration and density reflects the level of development of insurancesector in a country. Insurance penetration is measured as the percentage of insurance premiumto GDP. Since opening up of Indian insurance sector for private participation, India has re-ported increase in both insurance penetration and density. But, the increase has been almostentirely contributed by the life insurance sector. Fig: Insurance penetration in India through the yearsIndustry Analysis Report! 17
  • 18. This graph shows the insurance penetration in select countries through out the world. WhileTaiwan and the Unite Kingdom lead the pack, the presence of the USA just above the worldaverage corresponds with the huge demand for the health insurance bill which was stalled for along time but was finally recently by president Obama. The relative contribution of life insur-ance is high in the case of India but the overall values of penetration are well below the worldaverage which offers a lot of room for improvement. Fig: Insurance penetration across the worldIndustry Analysis Report! 18
  • 19. Insurance densityInsurance density is defined as the ratio of premium underwritten in a given year to the totalpopulation. The insurance density stood at USD 54.3 in 2009 (Life USD 47.7 and Non-life USD6.7) from USD 9.9 in 2000 (Life USD 7.6 and Non-life USD 2.3). The measurement is made inUS dollars to facilitate an easier comparison in the global level. Insurance density is calculatedas the ratio of premium to population (per capita premium). Since opening up of Indian insur-ance sector for private participation, India has reported increase in both insurance penetrationand density. But, the increase has been almost entirely contributed by the life insurance sector.Comparing this graph with that of the insurance penetration graph we find that the generalinsurance segment has not contributed significantly to either of them. While this shows a rela-tive laxness amongst the consumer to not go in for general insurance products over life insur-ance it also presents a huge opportunity for the marketer in insurance companies to developnew products that will attract the consumer to go in for non- life insurance. Fig: Insurance density in IndiaIndustry Analysis Report! 19
  • 20. The graph shows the comparison of insurance density of countries throughout the world. Itshould be noted that the United Kingdom ranks consistently high on both insurance densityand penetration. Even in comparison of the world average the insurance density of India isvery low with a very low contribution from the non- life insurance segment. Fig: Insurance density across the worldIndustry Analysis Report! 20
  • 21. Table: Insurance penetration and density over the years in IndiaPotential demandPositive development for insurance products has been observed to be particularly robust in thefirst quarter of 2010. This potential demand will also drive innovation in the sector as it hashappened specifically in the health insurance segment and will ultimately help in increasing theinsurance penetration and density, With increasing demand, the health insurance industry hascome up with innovative products to enable policyholder to plan comprehensive protectionagainst health eventualities by combining hospitalisation indemnity products with supplemen-tary covers or additional policies to meet specific needs of the policyholder.From the bar chart below which shows the potential demand for life insurance amongst exist-ing and new customers is seen. The obvious conclusion is that the demand for life insurance isgreater amongst the first time buyers which is a huge untapped market. Notable observationsfrom the graph include the case of Assam where the potential of existing customers is greaterthan that of the new customers which can be attributed to the problems created by ULFA(United Liberation Front of Assam) prevalent in those areas and the fact that most people arealready insured for the first time which justifies the low value of the potential of new custom-ers. On the other hand the under developed states like Orissa, Jharkhand, some of the NorthEast states have a high potential from new customers as development occurs in these places.Industry Analysis Report! 21
  • 22. Fig: Potential demand for life insurance across India in millionsIndustry Analysis Report! 22
  • 23. IRDAFollowing the recommendations of the Malhotra Committee report, in 1999, the InsuranceRegulatory and Development Authority (IRDA) was constituted as an autonomous body toregulate and develop the insurance industry. Incorporated in April, 2000, the key objectives ofthe IRDA include promotion of competition so as to enhance customer satisfaction throughincreased consumer choice and lower premiums, while ensuring the financial security of theinsurance market. Fig: Insurance regulatory and Development AuthorityThe IRDA opened up the market in August 2000 with the invitation for application for regis-trations. Foreign companies were allowed ownership of up to 26%. Currently talks are on toallow foreign companies to increase their stake by another 23%Regulatory authorityThe mission of the IRDA is “To Protect the interests of the policyholders, to regulate, pro-mote and ensure orderly growth of the insurance industry and for matters connected therewithor incidental thereto”. To illustrate how the IRDA regulates the industry, the new norms in theindustry that allows insurance companies to tap the capital markets through Initial Public Of-ferings in the stock markets can be seen. The norms laid by the IRDA state that the playershould have been in operation for at least 10 years and must have a definite amount of eco-nomic capital.The institution of Insurance Ombudsman was created by a Government of India Notificationdated 11th November, 1998 with the purpose of quick disposal of the grievances of the insuredcustomers and to mitigate their problems involved in redressal of those grievances. This insti-tution is of great importance and relevance for the protection of interests of policy holders andalso in building their confidence in the system. The institution has helped to generate and sus-tain the faith and confidence amongst the consumers and insurers.Industry Analysis Report! 23
  • 24. I N D U S T RY CONDUCT AND PRACTICESIndustry level practicesThe distinction of channels in the developed markets is: personal distribution systems and di-rect response systems. Personal distribution systems include all channels like agencies of dif-ferent models agents, banks, brokers, and work site marketing. Direct response distributionsystems are the method whereby the client purchases the insurance directly. This segment, util-izes various media such as the internet, telemarketing, direct mail, call centres. Life insuranceproducts like whole life, endowment or money-back policies have two components: savingsand protection.Further when the following graph is split to two graphs as to the new business premium forindividuals and groups separately, we find that the greatest portion of new business premiumfor individual life insurers is contributed by individual agents while in the case of group newbusiness premium the greatest contribution is through direct selling. This gives a good pictureof how various channels can be leveraged to the advantage of the company. It can also be notedthat the insurance mammoth LIC still relies on the traditional individual agents for a signifi-cant share of the premium while the private players are trying to leverage all possible channelsin order to grow. Fig: New business premium of life insurers across distribution channelsIndustry Analysis Report! 24
  • 25. Marketing intensityInsurance is primarily considered as a product that has to be forced to consumers hence mar-keting plays an important role in convincing the consumer to go in for it. The marketing inten-sity is a measure of the marketing and advertising expenses as a percentage of the net sales ofthe organisation. The graph shows that due to its wide popularity and its having operated inthe industry for more than five decades LIC has the least marketing intensity while the otherprivate players have significant marketing expenditure. It is the highest in the case of HDFC,which has operated in losses for the past 5 years and recently went on with a massive rebrand-ing campaign and rebranded itself as HDFC life from its earlier name HDFC standard life in-surance.Industry Analysis Report! 25
  • 26. Working capital ratioThe working capital is the difference between the current assets and the current liabilities ofan organisation. It represents the ability of a firm to meet its immediate liabilities. Hence it isimperative to maintain a positive working capital ratio which is the working capital as a per-centage of the total sales. But from the graph it can be observed that only LIC maintains apositive working capital throughout the past five years and other companies are striving tomaintain positive working capital.Industry Analysis Report! 26
  • 27. PERFORMANCE MEASURESProfitabilityThe profitability is performance measure which measures the Profit after tax as a percentageof the net sales. Since the private players have all been in operation for less than a decade mostof them are yet to break even and turn profitable. Hence the profitability of these organisa-tions is negative. LIC and SBI life have managed to be profitable through the last five yearswhile SBI dropped to the red during the global recession in 2008.Industry Analysis Report! 27
  • 28. Growth in salesThe growth in sales graph shows the trend over the past five years as to how insurance compa-nies have grown in terms of their net sales. All companies have registered positive growththrough out the period with LIC having the greatest sales. It should also be noted that as sev-eral companies are operating in losses there is no visible relationship between the sales growthand other industry conduct and practices such as the marketing intensity. Once all companiesturn profitable, comparisons then made would bear direct relations to each other.Industry Analysis Report! 28
  • 29. Return on salesThe return on sales and total assets are two ratios primarily considered by investors to invest ina company. But Indian insurance companies have not been allowed to have their own IPOs inthe stock market. But return on sales also provides an insight into the operating efficiency andabout the quality of investments made by the insurance companies as they have a direct impactin the profit before interest, depreciation and tax.Industry Analysis Report! 29
  • 30. Return on total assetsThe return on total assets is a measure of the profit before interest depreciation and tax as apercentage of the total assets. The returns on total assets is an important measure consideredby long term investors wanting to invest in a company. It would hold more weightage once in-surance companies are allowed to have their own listing and be traded in the secondary mar-kets. The return is highly negative for HDFC and Bajaj Allianz while it is with in the range of+2 to -2 for the other three companies. LIC SBI life ICICI Prudential 3 2.25 PBT/Total Assets 1.5 0.75 0 -0.75 -1.5 2008-09 2009-10 2006-07 2007-08 2005-06 Financial yearIndustry Analysis Report! 30
  • 31. COMPETITION A N A LY S I SPorter’s five forcesPorter’s model helps to derive five forces that determine the competitive intensity and there-fore the attractiveness of a market. Attractiveness in this context refers to the overall industryprofitability. The five forces are analysed below: Fig: Porter’s five forcesSuppliers power Partly due to the regulation in the industry and limiting the foreign investment and prevent-ing foreign banks to start their insurance services the number of actuaries is limited. With fewplayers in the market the existing players can try to seize the market to the extent possible. In order to hedge the risk involved in the insurance reinsurance is provided through the gov-ernment operated General Insurance Corporation which is the only reinsurer in India. There isa mandatory cession where the insurance companies have to surrender 20% of the insuredamount to GIC. The development in the fields of Information Technology and its ability to assist in the in-surance business has been effectively used by the companies. It has resulted in simplification ofprocesses and avoidance of several expenditures on the organisation’s front for processes likeKYC (Know Your Client),Industry Analysis Report! 31
  • 32. Buyers power The customers are now presented with the offerings of over 40 companies including boththe life insurance and the general insurance segment and they have a wide range of products tochoose from, products which would fit their budget and their type of use. As seen in the graph under distribution channels insurance companies are effectively leverag-ing various distribution channels in order to facilitate a wider target audience and for the cus-tomer these channels present an easier way to buy the product. India has a lot of price sensitive buyers. Hence the insurance companies are forced to comeup with schemes that are more affordable and yet provide maximum returns to the buyer inorder to attract more customers. Bancassurance describes the partnership or relationship between a bank and an insurancecompany whereby the insurance company uses the bank sales channel in order to sell insuranceproducts. This helps in a greater reach to potential customers for the company andRivalry among competitors LIC which has been in operations for nearly five decades enjoys a greater penetration in themarket. LIC also single handedly accounts for over 70% of the life insurance market which makes itthe single largest player and competitor in the market. Partly due to the monopoly position it enjoyed in the market for several years it has becomesynonymous with insurance and enjoys the greatest amount of awareness amongst people. Regulation in the industry by limiting the foreign investment in the currently existing jointventures with the foreign players can also restrict competition as it can be seen from thegraphs that most of the companies have negative working capital and not allowing them to gofor an IPO also restricts them from pursuing an aggressive expansion strategy. In terms of pricing in insurance it is difficult to differentiate and communicate the differenceto the customer in an effective manner. This is a potential challenge to the insurance playerwhich must direct its marketing towards establishing and driving home a point of difference inthe minds of the customer.Industry Analysis Report! 32
  • 33. Threat of entry The currently existing FDI cap in the insurance sector at 26% creates a huge entry player forforeign players who wish to setup their business in India. If the negotiations currently going onin IRDA towards allowing an additional 23% of investment in the insurance companies by for-eign players are finalised this could attract more players into the market who might find thejoint venture more attractive and have a greater cash base for operations. With IPO constraints and limited foreign investments the companies are not highly liquidwhich presents a more unattractive picture of the industry and discourages the entry of severalnew players. The requirements for reaching a greater customer base is dependent to a greater extent onthe setting up elaborate distribution channels, expanding into which requires a lot of capital.This again acts as an entry barrier.Threat of substitutes As seen under the social factors there is a certain percentage of people who do not find in-surance as an attractive option for investment as it doesn’t provide adequate returns. The pres-ence of other financial instruments which provide greater returns is considered as a better al-ternative to insurance. Insurance is not always tax deductible and it is dictated by the type of insurance productsuch as group health insurance etc.. Hence several other tax saving instruments where the cus-tomer’s gross savings can be directed to also act as substitutes. Rural Indians are dependent mostly on their children and do not lead an independent whichcreates a picture of the non- requirement of insurance for such people. But this trend ahs beenchanging over the years with the breaking up of the traditional Indian joint families to morenuclear families. Emerging substitutes also pose a threat to the already existing insurance products in themarket.Industry Analysis Report! 33
  • 34. SWOT analysisStrengths Premium rates are increasing and so are commissions. The variety of products is increasing. Prospects expect more services from their brokersWeakness Insurance companies are often slow to respond to changing needs. There is an increasing trend of financial weakness among the companies. There are more competitors for agencies to compete with banks and internet playersOpportunities The ability to cross sell financial services is barely being tapped. Technology is improving to the point that paperless transactions are available. The client’s increasing need for an “insurance consultant” can open new ways to service theclient and generate incomeThreats The increasing cost and need for insurance might hit a point where a backlash will occur. Government regulations on issues like health care, mold and terrorism can quickly changethe direction of insurance. Increasing expenses and lower profit margins will hit hard on thesmaller agencies and insurance companies. Increasing expenses and lower profit margins will hit hard on the smaller agencies and insur-ance companies.Industry Analysis Report! 34
  • 35. Summary) )Thus we have seen the various components of the Indian insurance industry, the external fac-tors that majorly impact the industry, the various trends such as insurance penetration and in-surance density along with the potential demand for insurance across India and comparedthem with the world figures which gave an understanding of what the current plight of theIndian insurance industry is. The industry conduct and practices were analysed and the per-formance measures of the top 5 operators in the insurance industry according to the new pre-mium collected in a year were comparatively studied and analysed.Future scopeUsing Porter’s five forces model and the eventual SWOT analysis, several conclusions can bedrawn along with action plans for the future. The allowing of insurance companies to havetheir own IPO’s could be a game changing move for the industry. LIC’s IPO is expected to beone of the largest ever IPO’s of a government firm in the Indian stock market. This could giveprivate players the much needed working capital in order to expand distribution channels andreach and cater to a wider audience. New norms about allowing additional foreign investmentis also something the industry has to watch out for as this could take competition to an all newmagnitude.Industry Analysis Report! 35