CASE STUDY OFINTERNATIONALBUSINESS Submitted By:- Chudasama Rajdeep(51) Charvi pathak(52) Mehta Pooja(48) Palak Jaisval(20) Neel Thobhani(15)
Sun Life Financial and Indian Economic Surge1.Case Analysis – International Business The entry of Sun Life Financials, a leading international financial services organization into the Indian insurance market is analyzed here and also the attractiveness of Insurance markets in India and China is discussed, followed by recommendations to the respective governments on how to attract more FDI.
Q.(1) How is the insurance market in India changing? Why is India an attractive market for investment? Indian insurance is a flourishing industry, with several national and international players competing to excel. Insurance is a federal subject in India. There are two legislations that govern the sector- The Insurance Act- 1938 and the IRDA Act- 1999. The insurance sector in India has come a full circle from being an open competitive market to nationalization and back to a liberalized market again.
1.Present Scenario:- The Government of India liberalized the insurance sector 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. Under the current guidelines, 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. In the private sector 12 life insurance and 8 general insurance companies have been registered..
2.Non-Life Insurance Market In December 2000, the GIC subsidiaries were restructured as independent insurance companies. At the same time, GIC was converted into a national re-insurer. In July 2002, Parliament passed a bill, delinking the four subsidiaries from GIC. Presently there are 12 general insurance companies with 4 public sector companies and 8 private insurers.
3.Re-insurance business Insurance companies retain only a part of the risk (less than 10 per cent) assumed by them, which can be safely borne from their own funds. The balance risk is re-insured with other insurers. In effect, therefore, re-insurance is insurers insurance. It forms the backbone of the insurance business. It helps to provide a better spread of risk in the international market, allows primary insurers to accept risks beyond their capacity, settle accumulated losses arising from catastrophic events and still maintain their financial stability. Currently, all insurance companies have to give 20 per cent of their reinsurance business to GIC.
4.Life Insurance Market The Life Insurance market in India is an underdeveloped market that was only tapped by the state owned LIC till the entry of private insurers. The penetration of life insurance products was 19 percent of the total 400 million of the insurable population. The 12 private insurers in the life insurance market have already grabbed nearly 9 percent of the market in terms of premium income. The new business premiums of the 12 private players has tripled to Rs 1000 crore in 2002- 03 over last year. Meanwhile, state owned LICs new premium business has fallen.
There are very few opportunities in the world that are as large as the India opportunity: with a population of almost 1.2 billion, the market is enormous; the number of skilled, English-speaking people in the workforce is impressive; and the government has proven to be very stable. Most economists agree that India will have solid, stable growth for the next 20 to 30 years. Investing at the ground floor of the growth phase of the Indian economy is a once-in-a-lifetime opportunity. There are very few investment opportunities that can compare to the Indian market in the long term.
Q2) Why did Sun Life Financials enter the Indian Market? With a huge population base and large untapped market, insurance industry is a big opportunity area in India for national as well as foreign investors. India is the fifth largest life insurance market in the emerging insurance economies globally and is growing rapidly. This impressive growth in the market has been driven by liberalization, with new players significantly enhancing product awareness and promoting consumer education and information.,
Research Findings :- Total life insurance premium in India is projected to grow Rs 1,230,000 Crore by 2010-11. Total non-life insurance premium is expected to increase at a CAGR of 25% for the period spanning from 2008-09 to 2010-11. With the entry of several low-cost airlines, along with fleet expansion by existing ones and increasing corporate aircraft ownership, the Indian aviation insurance market is all set to boom in a big way in coming years. Home insurance segment is set to achieve a 100% growth as financial institutions have made home insurance obligatory for housing loan approvals.
Health insurance is poised to become the second largest business for non-life insurers after motor insurance in next three years. A booming life insurance market has propelled the Indian life insurance agents into the ‘top 10 country list’ in terms of membership to the Million Dollar Round Table (MDRT) — an exclusive club for the highest performing life insurance agents.
Q3) What was the entry mode in India for Sun Financialsand Why? Sun Financials made a Foreign Direct Investment in India by forming a Joint Venture with Aditya Birla Group. Sun Life acquired 50% of the equity in Birla Capital International AMC Limited and Birla Capital International Trustee Company Limited. Sun Life and Aditya Birla Group also established a new sales and distribution company to market a broad range of financial products and services across India
Reasons for forming Joint Venture: To enter into a foreign country Sharing risks as well as costs involved in setting up the business. Good brand name and relations of the Local company can be capitalized. Suppliers, distributors and established channel partners of local company can be utilized. Cultural bridge can be minimized Joint ventures are a necessity by government Profit sharing/market sharing
Q4) Compare India & China’s attractivenessfrom the perspective of an Insurance & FinancialService Company Life markets in China and India are developing quickly in parallel. POPULATION & GDP GROWTH - Combined, China and India account for almost 40% of the worlds population, and they have expanded their economies at a rapid pace over the last five years, with GDP growth averaging 10.6% in China and 8.7% in India. Hundreds of millions of people have been lifted out of poverty, and a large middle class is emerging. Continued high growth is expected.
PREMIUM INCOME Both China and India have seen strong growth in life insurance premium income In China, the total for the industry was Y494 billion (US$68 billion) in 2007, a five-year compound annual growth rate (CAGR) of 17% per year. The Indian industrys premium income was Rs1.56 trillion (US$34 billion) for the 2006/07 financial year, a five-year CAGR of 26% per year. The Indian private sector has thrived, with market share reaching 18% in 2006-2007, or 26% of new life insurance premiums.
LOCATION Despite strong premium growth in general, the pace across different regions within each country is far from even. In China, growth has initially been concentrated in coastal, wealthier areas, with the western interior less developed, although this is changing fast. For India, while there are no requirements as to where companies locate operations, the majority of new players have chosen to be headquartered in Mumbai, with the rest scattered among the other key cities across the country.
REGULATIONS The first Chinese insurance law was introduced in 1995, and the China Insurance Regulatory Commission (CIRC) was formally established as the industry regulator in 1998. The Insurance and Regulatory Development Authority (IRDA), formed by legislation in 1999, supervises the Indian insurance industry.
DISTRIBUTION The geographic vastness of both China and India requires large distribution networks if companies want to have significant coverage across the country. Currently, the major channels for the distribution of life insurance products in China are individual tied agency forces, group sales representatives (selling group products to state-owned and private enterprises), and bank and post office branches In India, the distribution of life insurance is similar, dominated by tied agents who brought in 89% of the new business in the 2006-2007 financial year
PRODUCTS Savings-oriented products tend to dominate the life insurance industry in both China and India. Both markets offer a wide range of traditional nonlinked (both participating and nonparticipating) and linked savings products. There has been strong demand for investment-linked (or unit-linked) products in both countries, supported by strongly performing equity markets (at least until late 2007).
In India, fairly simple maturity investment guarantees are offered with these products, and restrictions on the use of derivative instruments for managing market risks have hampered innovation, although more sophisticated guarantees are likely to emerge. Investment guarantees are not yet generally offered with these products in China.
The following graphs illustrate the facts mentionedabove.
Q5) What would be your recommendations to thegovernments of China & India to attract more FDI inFinancials & Insurance Service Companies Both India and China have their own set of problems which need to be addressed to improve their attractiveness Recommendations for India Increasing the cap on the amount of foreign investment in this sector from existing 26% to 49%. This will result in a more competitive market as the best practices of the foreign companies will be implemented here when they enter the market on their own. There will be more control over operations and processes will be standardized.
The price structures will have to be in sync with the risk profiles attached. Obsolete regulations on insurance pricing will have to be done away with Distribution channels need to be more developed to help penetrate a larger share of the market Insurance and Reinsurance will have to be delinked as the same rules cannot be applied to both. Facilitate the penetration of insurance into rural markets by developing infrastructure and ensuring that the insurers design products catering to the need of this largely underserved market.
Recommendations for China Transparency regarding policies and the functioning of various departments of the government needs to be increased. Entry and exit procedures should also be made more straightforward and efficient The insurance sector is restructuring but the market is still consolidated by a few large players. The government should work towards increasing the competition to help develop a competitive market
Reduce the cost of entering the insurance market by reducing the amount of capital investment required Should work towards building more grass root economy by facilitating SMEs (not related to the government) as a supplement to national champions Enhance quality information disclosure; Impose prompt and severe punishment for any infringement of any requirement, even during market downturns
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