Introduction of LIC<br />With over a billion people, India is fast becoming a global economic power. With a relatively youthful population, India will become an attractive insurance market over the next decades. This paper examines the Indian insurance industry. It highlights the importance of the rural sector – where the majority of the Indians still live. It shows how the recent privatization is playing out in the market. Based on recent economic estimates, the paper provides projections of segments of the market for 2025.<br />India is among the important emerging insurance markets in the world. Life insurance will grow very rapidly over the next decades in India. The major drivers include sound economic fundamentals, a rising middle-income class, an improving regulatory framework and rising risk awareness. The fundamental regulatory changes in the insurance sector in 1999 will be critical for future growth. Despite the restriction of 26% on foreign ownership, large foreign insurers have entered the Indian market. State-owned insurance companies still have dominant market positions. But, this would probably change over the next decade. In the life sector, new private insurers are bringing in new products to the market. They also have used innovative distribution channels to reach a broader range of the population. There is huge in the largely undeveloped private pension market. The same is true for the health insurance business. The Indian general insurance segment is still heavily regulated. Three quarters of premiums are generated under the tariff system. Reinsurance in India is mainly provided by the General Insurance Corporation of India, which receives 20% compulsory cessions from other general insurers. Finally, the rural sector has potential for both life and general insurance. To realize this potential, designing suitable products is important. Insurers will need to pay special attention to the characteristics of the rural labor force, like the prevalence of irregular income streams and preference for simple products.<br />Evolution of the insurance sector<br />India had the nineteenth largest insurance market in the world in 2003. Strong economic growth in the last decade combined with a population of over a billion makes it one of the potentially largest markets in the future. Insurance in India has gone through two radical transformations. Before 1956, insurance was private with minimal government intervention. In 1956, life insurance was nationalized and a monopoly was created. In 1972, general insurance was nationalized as well. As a part of the general opening up of the economy after 1992, a Government appointed committee recommended that private companies should be allowed to operate. It took six years to implement the recommendation. Private sector was allowed into insurance business in 2000. However, foreign ownership was restricted. No more than 26% of any company can be foreign-owned.<br />Insurance in the Colonial Era. <br />Life insurance in the modern form was first set up in India through a British company called the Oriental Life Insurance Company in 1818 followed by the Bombay Assurance Company in 1823 and the Madras Equitable Life Insurance Society in 1829. All of these companies operated in India but did not insure the lives of Indians. They were insuring the lives of Europeans living in India. The first general insurance company, Triton Insurance Company Ltd., was established in 1850. It was owned and operated by the British. The first indigenous general insurance company was the Indian Mercantile Insurance Company Limited set up in Bombay in 1907.<br />In 1912, two sets of legislation were passed: the Indian Life Assurance Companies Act and the Provident Insurance Societies Act. First, they were the first legislations in India that particularly targeted the insurance sector. Second, they left general insurance business out of it. In 1938, the Insurance Act was passed which covered both life and general insurance companies.<br />Evolution of Insurance during Nationalized Era: 1956-2000 <br />Before 1956, insurance was private with minimal government intervention. In 1956, life insurance was nationalized and a monopoly was created. In 1972, general insurance was nationalized as well. There were 107 general insurance companies operating at the time. The reason for this was that insurance is a “cooperative enterprise,” under a socialist form of government; therefore, it is more suited for government to be in insurance business on behalf of the “people”. Second, those Indian companies are excessively expensive. Third, argued that private competition has not improved services to the “public” or to the policyholders.<br />Life Insurance Business during the Nationalized Era. <br />Indian life insurance was nationalized in 1956. An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector. All life companies were merged together to form one single company: the Life Insurance Corporation. By 2000, Life Insurance Corporation had 100 divisional offices in seven zones with 2048 branches. There were over 680,000 active agents across India with a total of 117,000 employees in the Life Insurance Corporation employed directly.<br />After the report of the Malhotra Committee came out, changes in the insurance industry appeared imminent. On December 7, 1999, the new government passed the Insurance Regulatory and Development Authority Act. Starting in early 2000, the Insurance Regulatory and Development Authority started granting charters to private life and general insurance companies. By the end of 2003, there were thirteen life insurance companies had charters to operate, one public (the old monopoly) and twelve private companies. All of the private companies had foreign partners in life business. Almost all general insurance companies also have foreign partners.<br />LIC PRODUCTS AND PRICING POLICIES<br />The largest segment of the life insurance market in India has been individual life insurance. The types of the policies sold were mainly whole life, endowment and “money back” policies. Money back policies return a fraction of the nominal value of the premium paid by the policyholder at the termination of the contract. Thus, whether we examine the new policies sold or the total number of policies in force, there has been a tenfold increase during that period. Therefore, if we examine the headcount of policies as an indication of penetration, there has been a substantial rise. A part of this rise is directly attributable to a deliberate policy of rural expansion of the Life Insurance Corporation.<br />
WHAT IS ENDOWMENT POLICY
Endowment insurance are policies that cover the risk for a specified period and at the end the sum assured is paid back to the policyholder along with all the bonus accumulated during the term of the policy.<br />
The Endowment insurance policies work in two ways, one they provide life insurance cover and on the other hand as a vehicle for saving.
They are more expensive than Term policies and Whole life policies. Normally the bonus in calculated on the sum insured but the only drawback is that the bonuses are not compounded.
Endowment insurance plans are best for people who do not have a saving and an investing habit on a regular basis. Endowment Insurance Plans can be bought for a shorter duration period.<br />
Product Benefits include: Death Benefit, Maturity Benefit, Extra/Supplementary Benefit. These benefits are offered by LIC in the wake of increased competition, though not many benefits were offered before.<br />The Plan Parameters <br />
Term Insurance is a no frills life insurance plans and covers you for a term of one or more years. It pays a death benefit only if you die in that term. Term Insurance generally offers the cheapest form of insurance. You can renew most Term Insurance policies for one or more terms even if your health condition has changed. Each time you renew the policy for a new term, premiums may climb higher.<br />
Term policy, cover only the risk during the selected term period. If the policyholder survives the term, the risk cover comes to an end.
A Term plan is a pure risk cover plan and it meet the needs of people who are initially unable to pay the larger premium required for a whole life or an endowment assurance policy, but they hope to be able to pay for such a policy in the near future.
The preference of money back and endowment policies by Indian customers<br />But out of all these policies money back and endowment policies of LIC have been widely preferred by customers for very long. The reason for this is provided in the benefits of these policies given as follows: <br />Money Back Policy Benefits:<br />The benefits under money back policies premiums can be paid as per the insurance company’s policy. These could be quarterly, half yearly or annually. The premiums for these policies are payable for the selected term of years, or till death if it occurs earlier.<br />By buying such policies one can receive income at regular intervals other than the risk cover it provides. Also a good amount of bonus on the full sum assured is quite a good bargain. <br />Money back life insurance policies offer the dual benefits of insurance and redemption of money at regular intervals.<br />These policies fit perfectly in the scheme of things of traditional savings, for people who seek financial instruments that provide insurance and savings elements, coupled with low risk element and guaranteed returns.<br />It creates a long-term savings opportunity with a reasonable rate of return, especially since the payout is considered exempt from tax except under specified situations.<br />Endowment Policy Benefits:<br />Under a special provision in the Income tax Act, the returns on an insurance policy are tax free. There will be two possibilities, if the policy is other than a term policy. <br />a) On untimely death of the insured: In this situation, a benefit can be received on the death of the person insured under the policy. This receipt is tax free in the hands of the dependants who actually receive the insurance benefit. This means that under Section 10 (10D) of the Income Tax Act the amount received on death from an insurance policy will not be included in the taxable income calculations. <br />b) On maturity: In this case, the amount would be received at maturity of the policy. It would include bonus and other benefits. This happens when the policyholder actually lives through the entire policy period, for example, in money back policies or endowment policies. In this case too the receipt is completely tax-free in the hands of the investor. <br />ExampleConsider a case where a customer takes a policy with a sum assured of Rs 10 lakh cover. At maturity after 20 years, the total amount including bonus comes to Rs 21 lakh. The bonus is accumulated at different rates for the years over the life and this works out to Rs 11 lakh totalling to an overall figure of Rs 21 lakh; this entire amount is tax free. <br />While that is true, one of the reasons for endowment and money back policies to be more popular than others is also the fact that Life Insurance Corporation of India (LIC) agents pushed them vigorously. The reason - commission on these products is higher than other products. As a result the market is not aware about other usual products that are in LIC's portfolio. Thus due to the above advantages Indian customers preferred LIC’s money back and endowment policies<br />The new private insurer focused on providing customized product - product that contain innovative feature- to the customers for this the company conducted extensive market research to figure out what types of products would appeal to consumers .<br />MAX NEWYORK LIFE - INRODUCTION<br />Max New York Life Insurance Company is a joint venture between New York Life International Inc. And Max India Limited. New York Life, a Fortune 100 Company, is one of the world’s experts in life insurance with over 156 years of experience in the business and over US$ 165 billion (Rs. 775,000 Crores) in assets under management. <br />HDFC STANDARD LIFE INSURANCE<br /> HDFC Standard Life Insurance Co. Ltd. is a joint venture between HDFC, India’s largest housing finance institution and Standard Life Assurance Company, Europe’s largest mutual life company. HDFC manages Rs. 21,450 Crores in assets and Standard Life manages over US $100 billion in assets. Both the promoters are well known for their ethical dealings, their financial strength and their commitment to be a long-term player in the life Insurance industry. <br />
ICICI Prudential Life offered compound interest. It also offered accident benefit and disability benefit riders with a marginally higher premium of Rs. 270 p.a. it also launched a pension plan “ ICICI Pru Forever” which would provide the policy holder a fixed income after a certain period of time with additional riders such as critical illness benefit, major surgical benefit, accident and disability benefit.
Tata AIG came up with whole life policy known as MahaLife, which would provide life cover for 100 years, with guaranteed annual payment of 5% of the sun assured each year from the 13th year for the rest of the life. Policy holder needs to pay premium only for the first 12 years of the policy or until death whichever came earlier.
Aviva launched 3 products in early 2002- life long, a whole life flexible protection plan, life saver, premium endowment savings plan, and life bond, a single premium investment bond. Aviva also offered “unitize with profit” products (like unit linked product, under “unitize with profit”, the premium was split into many units. A part of the investment return was held that by the insurance co. to offset market fluctuation during the term of the policy, and the surplus was distributed as terminal benefit).
Having realised the untapped potential of the rural market for insurance products, AMP Sanmar decided to target semi urban and small town by having product features simple and straight forward. AMP Sanmar decided to keep its product strategy as offering simple life insurance solution to individual primarily aiming at wealth creation and risk protection.
Birla Sun Life also launched products meant for the rural population in order to capture a larger market share. It launched the Birla Sun Life Kavach Yojna, a three year single premium insurance cover available in denomination of Rs. 50, 100, and 200, which offered 100 times the amount of premium paid in the event of death of customer.
Comparison of the products<br />Market-linked returns have become the norm today. This is the reason why insurance companies launch unit-linked plans in different avatars. Important segments of the consumer market no longer consider life insurers as competing only with other life insurers. In an effort to gain market power and thereby to protect or enhance profitability the issue of product development and innovation, including pricing and marketing innovation, is all the more important with the continued convergence among financial service competitors.<br />The most significant innovation of the Birla Sun Life and AMP Sanmar is that it has provided social security -insurance cover to the rural and society's poorer sections. In the rural and non-traditional business, these two have rightfully claimed distinction for product innovation. The products include insurance cover, with a very low rate of premium, for livestock, poultry, ducks, fishery, horticulture, sericulture, agriculture, pump sets, gramin personal accident, hut insurance, tribal welfare, etc., whereas such facilities were not made available by GIC nor LIC till 2002.<br />
LIC has done a reasonably good job of introducing a couple of new products over the last two-three years, but there has been very little innovation in the sector in general. The majority of the products available today are also skewed more towards investment return rather than death benefit. With the advent of competition, many new products will be introduced in the market and customers will benefit from more value and options as a result.
If we observe the trend of ULIPS in insurance market, after the insurance sector is opened, private players, came up with aggressive marketing strategies to establish their presence. ‘Modern’ products, which are unit-linked life insurance policies where the investment risks is borne by the policyholder. The LIC hardly took any step for this purpose until recently.
Falling interest rates [The last five years saw interest rates fall dramatically by 400 basis points]. This was also initiated by the private players owing to cut throat competition. The liberalization was also accompanied by wider product offerings by the insurers [ex. Endowment plan, pension plans etc] as compared to the products of LIC.
In a Whole life policy, the sum assured with bonus is paid out either on death or survival till a pre-determined age. Whole life policies expire at age 100. A few expire earlier. Whole life insurance policies are valuable because they provide permanent protection and accumulate cash values for emergencies or bequeaths. Since it is unrealistic to expect the policyholders to keep paying level annual premiums beyond certain age, most insurance companies provide an option to the policyholders to pay their premiums over a shorter term called premium-paying term. LIC stands nowhere near this mark of cover of 100years by Tata AIG. Again, we find that there is only one non-participating whole life policy available in the Indian market.
Change in LIC Portfolio<br />In the year 2002, LIC introduced a new facility- the term assurance rider- that would accompany select life insurance policies. This facility provided an extra risk cover, which was double the existing risk cover under the plan, subject to an overall limit of Rs. 25 lacs. In addition to Anmol Jeevan, it introduced a few other new policies in early 2002- “Jeevan Anand” (a combination of an endowment and a whole life plan) “Jeevan Rekha” (a combination of money back and whole life plan), “Jeevan Surbhi” (a money back policy) and “Jeevan Mitra” (an endowment policy). The “Jeevan Surabhi” policy offered early payment of survival benefit and money back facility. LIC also launched a new “Bima Kiran” policy, which had an accident benefit and extended term cover beyond maturity period in addition to risk cover during the term of the policy.<br />In addition to the new launches LIC also made changed to its product portfolio by withdrawing certain scheme and bringing down return on some others. In March 2002, the company withdrew “Jeevan Sanchay” a children’s growth scheme and the children’s money back policy due to the falling yield on investment. It also brought down the assured return on its newly launched scheme following a 0.5% rate cut by the RBI and the depressed sentiments in the market. In late 2001, LIC launched a special campaign to revive people’s interest in its policies, which now carried customer friendly incentives. A 30% waiver on late fees was offered along with relaxation in the procedure of mandatory self declaration of good health and offered for revival facility.<br />
As a consequence of these changes, which brought about a bundling of insurance and investments products, portfolio management of life insurance companies today is similar to that of a bank or non bank financial company. Specifically LIC has to:
Look out for arbitrage opportunities in the market place both across markets and over time,
Use value at risk modelling to ensure that their reserves are adequate to absorb market related shocks,
Ensure that there is no mismatch of duration between their assets and liabilities, and
Ensure that risk return trade off of their portfolios remain at an acceptable level.
Analysis of the products of new companies<br />To analyse the strategies of new companies it is important to know about the Market dynamics of insurance sector. The Market Overview includes a timeline on the evolution of the Indian insurance industry. An overview of the size and growth of the main segments is also included. Product offerings by the leading players like HDFC, LIC, Tata AIG, Bajaj Allianz etc are also mentioned in both the life and non-life insurance segments.<br />There have been various factors that have driven the change in the insurance market. These include Increasing Gross Financial Household Savings, Deregulation in the Indian Insurance Market and Increase in Dependency Ratio. All these have motivated the companies to come up with new and innovative insurance products so as to deal with the growing needs of both urban and rural people. As a result it can be justified that the new products by private players are based on sound market research and reasonable grounds. Thus there are less chances of failure of these private players in this sector. Private companies must also have looked into Major Issues & Implications involved in the market. These include Unprofitable Health Insurance Sector, Dearth of New Products. Owing to all these developments it can be vindicated that most of private players are playing it safe by bringing the innovative products in a market which is hungry for such rejuvenation. These are based on extensive market research, are wisely priced and effectively distributed so as to minimize the risk of their failure and ripe the maximum benefits of the untapped Indian insurance market. Thus these companies are likely to survive in the long run.<br />Future Prospects: Market Share.<br /> How would the life insurance market be divided up between the incumbent Life Insurance Corporation and the newcomers? Models of market share have shown that in a fast growing market, the first few years are critical. <br />In life insurance, the Life Insurance Corporation has two important elements in its favour. <br />
The Life Insurance Corporation has a vast distribution network in the rural and semi-urban areas. This would be hard to duplicate. One potential way to duplicate it would be through bancassurance – selling insurance through banks. Some insurance companies have already embarked on this road.
Since the Life Insurance Corporation started with 100% of the market share, it will lose market share simply because of expansion of the market itself and less because of loss of existing customers. The Life Insurance Corporation is the only financial institution in the top 50 trusted brand names in India
As life insurance benefits accrue over time, it becomes more expensive to switch - because switching would mean a loss of accrued benefits. With the rapid expansion of life insurance, the market share of the Life Insurance Corporation could fall below the 50% mark in five years time
Conclusions<br />The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together with banking services, insurance services add about 7% to the country’s GDP. A well-developed and evolved insurance sector is a boon for economic development as it provides long- term funds for infrastructure development at the same time strengthening the risk taking ability of the country. <br />The wake up bugle for India's largest, and till date a monopoly, insurance company, the Life Insurance Corporation of India (LIC), has been sounded. The Insurance Regulatory and Development Authority (IRDA) has licensed HDFC Standard Life, Max New York Life and ICICI-Prudential combine to transact life insurance business along with Reliance and Tata-AIG.<br />So are we going to see LIC struggling? Not necessarily, given LIC's known and hidden strengths. And if the corporation can get its act together to meet the competition, it can be a very tough adversary. In fact, LIC is not perturbed by the likely competition, while waking up to the emerging reality. Conversely, it believes that it is the new players who will have to seek cover if the Indian public sector giant flexes its huge financial muscle!<br />In spite of its strengths and advantages, LIC has a couple of holes in its shield that new players would try to exploit. For instance, with intelligent pricing, HDFC Standard Life along with HDFC could eat into LIC's individual assurance market It may be noted that LIC derives sizeable business through its housing finance subsidiary, LIC Housing Finance Ltd., as its insurance policy doubles as a collateral for the housing loan.<br />"
Competition will be severe in the group assurance schemes, more so in the case of gratuity-assurance as compared to term-assurance schemes."
Unit-linked insurance products is yet another area which LIC has not tapped extensively due to restrictions placed by the Insurance Act on investments of the Life Fund and also due to LIC's own diffidence.<br />Savvy marketing is another area where the new companies would score over LIC if the latter continues its current style of functioning. For example, when NBFCs and even nationalised banks deliver their fixed deposit certificates inside a plastic folder, LIC sends its policies â€“ to be preserved for decades -- in a brown envelope.<br />The flashy office and the glossy product literature of private insurers are sure to attract customers and will immensely aid their marketing teams. On the other hand, LIC agents depend entirely on their personal skills without any product literature to support.<br />On its costs side, LIC has to keep an eagle eye. "
While its first year premium cost is the lowest in the world at 65 per cent, it is not so in the case of renewal premium. Good global companies have their renewal premium cost at eight per cent whereas for LIC it is around 13 per cent,"
he remarks. In fact, premium procurement costs will go up further if LIC decides to pay agency commission as per the Insurance Act to retain its top-notch agents.<br />But for these small hitches, the LIC juggernaut is standing on a solid wicket.<br />HISTORY OF GIC<br />The entire general insurance business in India was nationalized by General Insurance Business (Nationalization) Act, 1972 (GIBNA). The Government of India (GOI), through Nationalization took over the shares of 55 Indian insurance companies and the undertakings of 52 insurers carrying on general insurance business. <br />General Insurance Corporation of India (GIC) was formed in pursuance of Section 9(1) of GIBNA. It was incorporated on 22 November 1972 under the Companies Act, 1956 as a private company limited by shares. GIC was formed for the purpose of superintending, controlling and carrying on the business of general insurance. <br />As soon as GIC was formed, GOI transferred all the shares it held of the general insurance companies to GIC. Simultaneously, the nationalized undertakings were transferred to Indian insurance companies. After a process of mergers among Indian insurance companies, four companies were left as fully owned subsidiary companies of GIC (1) National Insurance Company Limited, (2) The New India Assurance Company Limited, (3) The Oriental Insurance Company Limited, and (4) United India Insurance Company Limited <br />The next landmark happened on 19th April 2000, when the Insurance Regulatory and Development Authority Act, 1999 (IRDAA) came into force. This act also introduced amendment to GIBNA and the Insurance Act, 1938. An amendment to GIBNA removed the exclusive privilege of GIC and its subsidiaries carrying on general insurance in India. <br />In November 2000, GIC is renotified as the Indian Reinsurer and through administrative instruction, its supervisory role over subsidiaries was ended. <br />With the General Insurance Business (Nationalization) Amendment Act 2002 (40 of 2002) coming into force from March 21, 2003 GIC ceased to be a holding company of its subsidiaries. Their ownership were vested with Government of India<br />Management/BOD<br />Mr. Yogesh Lohiya <br />Chairman-cum-Managing Director<br />Mr. Tarun Bajaj<br />Mr. M. V. Nair<br />Mr. S.B. Mathur<br />Mr. S.L.Mohan<br />Mr. G. Srinivasan<br />Ms. Bhagyam Ramani<br />Vision<br />“To be a leading Global Reinsurance and Risk Solution provider”<br />Mission<br />
To achieve our vision by
Building long-term mutually beneficial relationship with business partners.
Regularetory framework<br />The functioning of GIC has to be within the regulations of the following major Acts: <br />The Companies Act, 1956 <br />Insurance Act, 1938 <br />General Insurance Business (Nationalization) Act, 1972 <br />General Insurance Business (Nationalization) Amendment Act. 2002. <br />Insurance Regulatory and Development Authority Act, 1999<br />OUR BUSINESS<br />Domestic reinsurance business<br />As a sole reinsurer in the domestic reinsurance market, GIC provides reinsurance to the direct general insurance companies in the Indian market. GIC receives statutory cession of 10% on each and every policy subject to certain limits. It leads many of domestic companies’ treaty programmes and facultative placements. GIC’s capacity for each class of business on Treaty and Facultative basis for domestic business is given in the following table.<br />International reinsurance business<br />A GIC is spreading its wings to emerge as an effective reinsurance solutions partner for the Afro-Asian region and has started leading the reinsurance programmes of several insurance companies in SAARC countries, South East Asia, Middle East and Africa. To offer its international clientele an easy accessibility, efficient service and tailor made reinsurance solutions; GIC has opened liaison/representative/branch offices in London and Moscow. GIC provides following capacities for Treaty and Facultative business on risk emanating from the international market based on merits of the business.<br />Investment and fund management<br />Investments were made within the regulatory framework of Insurance Act, and IRDA Regulations and within corporate policy. The funds of the Corporation are managed in-house.<br />IRDA regulations on investment<br />IRDA regulations stipulates that without prejudice to Section 27 or 27(b) of the Act, every insurer carrying on General Insurance Business shall invest and at all times keep invested his total assets in the following manner.<br />What is new?<br />A.M. Best Co. reaffirms a - (Excellent) Rating to GIC Re<br /> A. M. Best Company has affirmed (11th March 2010) the financial strength rating of A- (Excellent) and issuer credit rating of “a-” of General Insurance Corporation of India (GIC Re). The outlook for both ratings is stable.<br />The ratings reflect GIC Re’s strong capitalization, stable expense ratio and established market presence. GIC Re’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), remains strong and is supportive of its current ratings.<br />As per A. M. Best Co., as the sole domestic reinsurer in India, GIC Res business profile remains strong, with the company maintaining its leading business position in the domestic reinsurance market. In recent years, GIC Re also has been directing more resources in expanding its overseas markets.<br />Mumbai, 17.03.2010<br />a_______<br />_ a___________________________ ____________________<br />________________________________________<br />_____________________a____<br />_ ___________________<br />__ ________a___________________<br />__ ____a____ ____________________<br />!_ "
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