The Present Situation of Insurance in India and Developments in Private Insurance in the Next Five to Ten Years

The Present Situation of Insurance in India and
Developments in Private Insurance in the Next Five to Ten
Years
by Praveen GuptaÃ
1. Introduction
The last decade has been a slowly unfolding, occasionally frustrating but eventful period
for the Indian insurance industry. The dominant theme throughout the 1990s was the
liberalization agenda. Signi®cant milestones were ®rst, the setting up of a high powered
committee to recommend future course of action. This entailed attempts to take a fresh look at
the existing industry, to meet the aspirations of a dissatis®ed burgeoning clientele and to
resolve the pressures of globalization. And second, the setting up of a regulatory mechanism
to ful®l all the above.
Having come this far, the next decade ought to represent one of the most momentous
phases. If the business of insurance is allowed to be driven by market forces, it will strive to
catch up with advances made by the other ®nancial services and even integrate with them and
will endeavour to bring a world-class quality to this market and grow rapidly to respond to the
massive potential.
2. Entrepreneurial origins
Insurance in India, like any other aspect of commerce, is of entrepreneurial origin. Its
history is far more longstanding than perhaps anywhere else in Asia. The Insurance Act 1938
is also the oldest surviving legislation on the subject in this part of the world. Of course, it was
trade and commerce which gave birth to insurance in the pre-colonial era. The colonial years
also saw the establishment of several foreign insurers. And interestingly, early last century a
few insurers followed Indian traders, or the British ¯ag, overseas. In their heyday such players
operated out of more than 50 countries. Even today Indian companies operate out of 31
overseas locations.
The Insurance Act of 1938 still forms the legal basis governing India's nationalized
insurance business. The Act's scope includes setting provisions for the licensing of insurers,
prescribing capital norms, prohibiting unfair trade practices and specifying accounting
requirements. However, the legal relevance of the Act has been eroded by various subsequent
Acts governing the nationalization of life and non-life insurance business.
Nationalization (life in 1956 and non-life in 1972) deserves most credit for the spread of
networks across India and for the introduction of rural coverage. But it has had a feudalizing
effect. Although the aristocracy is big business, it has been a one-way street. While big
Ã M.A., F.I.I.I., A.C.I.I., General Manager (Business Development), Allianz AG, Bombay, India.
The Geneva Papers on Risk and Insurance Vol. 25 No. 3 (July 2000) 315±334
# 2000 The International Association for the Study of Insurance Economics.
Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 1JF, UK.

business has been the engine of growth, there is very little that insurers could claim in the form
of innovation. Moreover, small business (personal insurance) has received little attention.
Insurance largely remains a commodity that is bought.
3. The existing players: a snapshot
Life Insurance Corporation of India was established in September 1956. All private life
insurers (154 domestic insurers, 16 foreign insurers, 75 provident societies) were nationa-
lized. The wholly state-owned Life Insurance Corporation of India (``LIC'') was established
and granted a monopoly including all pensions and annuities business. LIC has a central of®ce
in Mumbai, seven zonal of®ces, 100 divisional of®ces and 2,046 branch of®ces. It has 5.59
lakh active agents spread over the country. The corporation also transacts business abroad and
has of®ces in Fiji, Mauritius and the U.K. LIC is associated with joint ventures abroad such as
Kenindia Assurance Co. Ltd, Nairobi and Life Insurance Corporation (International) FC,
Bahrain. It also entered into an agreement with SunLife (U.K.) for marketing unit-linked life
insurance and pension policies in the U.K.
The total new business of the corporation during 1998±1999 was Rs. 63,618 crores
under 148.57 lakh policies.1
LIC's group insurance portfolio has also grown steadily with in-
force business of Rs. 76,500 crores sum assured and annuities of Rs. 625 crores per annum
under 84,750 group insurance and group superannuation schemes, covering 236 lakh
individuals at the end of 1997±1998. In 1997±1998, LIC's total income was Rs. 30,732.60
crores consisting of premium income of Rs. 19,257.07 crores, investment income of Rs.
11,296.32 crores and other income of Rs. 184.21 crores. A Social Security Fund (``SSF'')
administered by the LIC was set up in 1998±1999 to meet the insurance requirements of the
weaker and vulnerable sections of the society.
The non-life insurance industry was nationalized and a government company, known as
General Insurance Corporation of India (``GIC'') was formed by the central government in
November 1972. Thereby, the erstwhile 107 Indian and foreign insurers, which were
operating in the country prior to nationalization, were grouped into four operating companies,
namely: National Insurance Co. Ltd, The New India Assurance Co. Ltd, Oriental Insurance
Company Ltd, and United India Insurance Company Ltd. All four subsidiaries of GIC
compete with one another and underwrite various classes of general insurance business
exceptfor aviation insurance of national airlines and crop insurance, which ishandled byGIC.
4. Market overview
Population : 1 billion
GDP growth of economy : 6±7% p.a.
Insurance industry growth (in¯ation adjusted) : 7±8% p.a.
Life: non-life : 70 : 30
Share of world insurance market : 0.34%
Life Non-life
Premium per capita (US$) : 4.90 2.10
Premium as per share of GDP : 1.3% 0.60%
1
1 lakh ˆ 100,000; 1 crore ˆ 10 million; US$; ˆ Rs. 43.65.
316 GUPTA

The network consists of 4,208 of®ces covering even remote rural areas. The number of
full-time employees amounts to more than 85,000. In addition, more than 180,000 agents are
involved in distributingGIC'sproducts. Besides the domestic market, the industry is presently
operating in 17 countries directly through branches or agencies and in 14 countries through
subsidiary and associate companies. The wholly-owned subsidiary of GIC, India Interna-
tional Insurance Pte Ltd, was set up in Singapore in 1988. It has grown into a leading company
in that country. The gross premium income of GIC in 1997±1998 was Rs. 7,736 crores as
against Rs. 7,021 crores in 1996±1997, representing a growth of 10.2 per cent. The gross
pro®ts were Rs.1,623 crores as against Rs.1,084 crores in the previous year.
General Insurance
Corporation of India
National
Insurance Co.
(Calcutta)
New India
Assurance Co.
(Mumbai)
Oriental
Insurance Co.
(New Delhi)
United India
Insurance Co.
(Chennai)
International overview, 1996
Premium volume direct business Economic indicators
Total
US$m
Non-life
US$m
Life
US$m
GDP
US$bn
Population
m
GDP/capital
US$bn
China 9,622 5,653 3,969 813 1,224 664
Hong Kong 5,432 1,856 3,576 155 63 24,564
India 6,584 1,978 4,606 357 936 381
Indonesia 2,707 1,557 1,150 227 198 1,146
Japan 5,19,590 1,12,644 4,06,946 4,556 126 36,245
Korea, Republic 62,471 15,239 47,232 485 46 10,640
Malaysia 4,632 2,561 2,071 99 21 4,694
Philippines 1,248 686 562 84 72 1,165
Singapore 4,259 1,287 2,972 93 3 30,465
Taiwan 15,827 4,833 10,994 274 21 12,829
Thailand 4,586 2,400 2,186 184 60 3,063
All 11 countries 6,35,958 1,50,694 4,86,264 7,327 2,714 2,310
United States 6,52,992 3,66,529 2,86,463 7,636 265 28,783
World 2,105,836 9,09,100 1,196,736 28,475 5,322 5,350
THE PRESENT SITUATION OF INSURANCE IN INDIA AND DEVELOPMENTS IN PRIVATE INSURANCE 317

Direct premium per GDP, % Direct premiums per capita, USD
Total Non-life Life Total Non-life Life
China 1.20% 0.70% 0.50% 7.9 4.6 3.2
Hong Kong 3.50% 1.20% 2.30% 860.7 294.1 566.6
India 1.80% 0.60% 1.30% 7 2.1 4.9
Indonesia 1.20% 0.70% 0.50% 13.6 7.9 5.8
Japan 11.40% 2.50% 8.90% 4,133 896 3,237
Korea, Republic 12.90% 3.10% 9.70% 1,371.8 334.6 1,037.2
Malaysia 4.70% 2.60% 2.10% 219.1 121.1 97.9
Philippines 1.50% 0.80% 0.70% 17.4 9.5 7.8
Singapore 4.60% 1.40% 3.20% 1,399 422.8 976.3
Taiwan 5.80% 1.80% 4.00% 740.2 226 514.1
Thailand 2.50% 1.30% 1.20% 76.3 39.9 36.4
All 11 countries 8.90% 2.10% 6.80% 228.3 54 174.3
United States 8.60% 4.80% 3.80% 2,461 1,382 1,080
World 7.40% 3.20% 4.20% 395.7 170.2 224.9
5. Fallout of state-control
Despite signi®cant autonomy in the early years of nationalization, bureaucracy
eventually began to displace the entrepreneur. Two phenomena stand out. The ®rst was the
creation of a risk averse hierarchy ``running'' the risk business: ``Do not write business which
might invite a claim''seemed to be the governing principle. This was supplemented by many
manifestations of audit. Another principle was: ``Do not pay a claim unless you have to.''
Underwriting was severely stunted.
Second, nationalization coincided with the upswing of population growth. While
populism paid lip service to the rural poor, the middle class was never the focus and was
generally ignored. Much has recently been said and written on the latter. There is an element
of subjectivity about its size and buying power. The myth of a 250 million-strong middle class
perpetrated in the Western mind needs to be revisited. But the fact remains that this is one
segment which cannot be ignored any longer. It was a major blind spot until reformists within
the government started waking up to address the retarded health insurance sector.
However, what nationalization could not achievewas to drawan iron curtain between the
Indian market and the rest of the insurance world. The public sector's own surviving foreign
operations provided a window to the world, even into some developed markets. For example,
an agency in London dates back to 1921. Entering Japan soon after the war was the seizing of
an opportunity which no one else saw. The backbone of insurance services in Africa and the
Middle East, in particular, is the Indian professional ± stock largely derived from the Indian
marketplace on an ongoing basis. Thus the bonding. The Indian insurance sector employs a
largeworkforce quali®ed with Associateship and Fellowship of thewell established Insurance
Institute of India. It has recently received recognition from the Chartered Insurance Institute
and the CPCU.
318 GUPTA

There is hope not only in the form of even a fraction of overseas professionals returning
and helping a quick take-off of the Indian market, but also in wake of some strong
undercurrents. The corporates are being wooed by potential entrants ± reinsurers, brokers and
others (the latter do not exist on direct side). They have a fair understanding of alternative risk
®nancing, primarily supported by the development in ®nancial markets. Concepts such as
captives may not be too far out of their reach. Some of them have begun to assert direct access
to the reinsurance markets, as a matter of right.
6. Expectations of a rising middle class
The rising aspirations of an emerging middle class is another factor. The middle class has
fuelled the auto boom in response to an inadequate public transport system. The creaking
healthcare infrastructure will soon have to give way to more reliable alternatives, as in the
education system. Private banks have whetted their appetite for quality personal service.
Consumer activism, the popularity of public interest litigation and a free press will make the
demands of the insuring middle class inescapable.
And what about quality? While the rest of theworld works on a 24-hour seamless service
approach with the help of call centres and help-lines, the Indian scenario is different. This
insurance industry works only on alternate days and the staff get a month's salary! There is a
®ve-day week system which ensures 104 general leave days in a year. Apart from that the
employees can avail themselves of 23 days casual leave, 30 days paid leave, 15 days medical
leave and 17 days leave under the Negotiable Instruments Act, taking the total probable non-
working days to 189. The employees can thus avail themselves of a day off for each working
day, which most do. Apart from deteriorating service levels, the insurance business has been
witnessing increased corruption, both within and outside.
7. The Malhotra Committee
Insurance presently accounts for less than 1 per cent of the Indian GDP. However, it
represents a growing proportion in an expanding economy. Notwithstanding the pressures
from the WTO, the pro-liberalization lobby within the government accepts that more players
are needed to manage and service this growth satisfactorily. Also obvious is the desperation to
strengthen the infrastructure; a major source of investments ought to be long-term funds
mobilized by insurance. It is generally perceivedthat there is enough room for up to two dozen
players, as against the current ®ve.
One of the main catalysts for initiating change in the way insurance business is
conducted in this market is the Malhotra Committee. In fact it is the fountain-head. The
recommendations made by the Report of the Committee on Reforms in Insurance Sector
(``the Committee'') suggest entry of private sector as follows:
(a) May be allowed on selective basis on compliance with paid-up capital being not more
than 40 per cent, eventually to be reduced to 26 per cent. Other shareholders individually
to have not more than 1 per cent to ensure a wide base of ownership.
(b) The Committee is not in favourof composite of®ces. However, there is no objection to the
same promoters forming life and general units.
(c) Foreign insurers may be permitted entry by forming local units, preferably as joint
ventures with domestic partners. The Committee is not in favour of branch operations by
foreign insurers.

This will make all potential entrants a local entity. A high entry barrier has drawn only
very big players. With increasing global consolidation, the list is already shrinking. Unlike
China, this would enable a full countrywide licence, with a few riders (namely compulsory
social insurance). Submitted way back in 1994, the recommendations made by the Committee
seem to have survived despite the ever-changing political hue:
· Allowing gradual entry from the private sector into the industry;
· Sticking to a clear separation of non-life and life business;
· Allowing foreign insurers, but only through joint ventures with Indian companies;
· Requiring a minimum paid-up capital of new insurance companies of Rupees 100 crores
(1 billion);
· De®ning capital adequacy and solvency ratios, and other prudential norms for the
industry;
· Reducing the government's equity stake in LIC and GIC to 50 per cent (kept in abeyance
for the moment);
· Allowing direct insurance brokers;
· Relaxing investment guidelines (so far focused on government securities and sectors) in
order to allow insurers to bene®t from higher returns on investment;
· Continued monitoring and modi®cation of rates, terms and conditions for the industry;
· Establishing a strong and effective Insurance Regulatory and Development Authority
(`ÌRDA'') to create a ``level playing ®eld'' for insurance companies.
8. The IRDA
The setting up of an independent insurance supervisory authority was one of the core
recommendations of the Malhotra Committee. An interim Insurance Regulatory Authority
(`ÌRA'', later modi®ed to `ÌRDA'') was established in January 1996. The agency's power in
particular to oversee and control the entry of private insurance players gave rise to much
debate and opposition. With the passage of the IRDA Bill 1999, the process of liberalization
of the insurance industry received a ®llip. This development would now deny India the
dubious distinction of being clubbed with Cuba, North Korea and Myanmar.
To ensure the smooth passage of the IRDA Bill the government had to make four
amendments to satisfy the opposition (within and outside). These were:
· Priority to be given to health insurance when issuing certi®cates of registration;
· A percentage (to be speci®ed by the IRDA) of funds will need to be invested in the social
sector and infrastructure;
· Insurers will be expected to undertake a certain percentage of business in the rural or
social sector and provide policies to persons residing in rural areas, workers in the
unorganized and informal sectors and to economically backward classes; and
· Insurers will initially be ®ned Rs. 2.5 million if they fail to ful®l social sector obligations
and subsequent failures will result in cancellation of their licence.
Today there is a plethora of legislation: the Insurance Act of 1938, LIC Nationalization
Act of 1956, GIC Nationalization Act of 1972 and the IRDA Act of 1999. The Ministry of
Finance has indicated that all these will be brought under a single umbrella legislation.
Following the passage of the Bill, the IRDA has stated that it expects to ®nalize
regulations within a period of 90 days. The process for applying for new licences will be
speci®ed in the regulations, but it is likely to be very similar to the process adopted in other
320 GUPTA

countries. Once the regulations have been ®nalized there is likely to be a window of
opportunity during which time the IRDAwill receive applications for licences. The IRDAwill
then vet the applications and grant licences accordingly. The approvals may come during the
autumn and winter of 2000.
9. Foreign insurers wishing to enter India
Non-life Life/pensions
AIG, Allianz, AXA, CGU, Chubb, Cigna,
Mitsui, Reliance Industries, RSA, Tokio
Marine, Zurich
Aegon, Aetna, AIG, Allianz, All State, AMP,
AXA, Canada Life, CGU, ING, Metlife, New
York Life, Principal, Prudential, Standard Life,
Sun Life
Nationalization had rendered the Of®ce of the Controller of Insurancevestigial. With the
setting up of an empowered independent authority, the regulator is back in the driving seat. It
is, therefore, important to understand its powers and functions:
(a) Issue to the applicant a certi®cate of registration, renew, modify, withdraw, suspend or
cancel such registration;
(b) Protection of interests of the policy-holders in matters concerning assigning of policy,
nomination by policy-holders, insurable interest, settlement of insurance claim,
surrender value of policy and other terms and conditions of contracts of insurance;
(c) Specifying requisite quali®cations, code of conduct and practical training for inter-
mediary or insurance intermediaries and agents;
(d) Specifying the code of conduct for surveyors and loss assessors;
(e) Promoting ef®ciency in the conduct of insurance business;
(f) Promoting and regulating professional organizations connected with the insurance and
reinsurance business;
(g) Levying fees and other charges for carrying out the purposes of the Act;
(h) Calling for information from, undertaking inspection of, conducting enquiries and
investigations including audit of the insurers, intermediaries, insurance intermediaries
and other organizations connected with the insurance business;
(i) Control and regulation of the rates, advantages, terms and conditions that may be offered
by insurers in respect of general insurance business not so controlled and regulated by the
Tariff Advisory Committee under section 64U of the Insurance Act 1938;
(j) Specifying the form in which account books shall be maintained and the way in which
statement of accounts shall be rendered by insurers and other insurance intermediaries;
(k) Regulating investment of funds by insurance companies;
(l) Regulating the maintenance of a margin of solvency;
(m) Adjudication of disputes between insurers and intermediaries or insurance intermedi-
aries;
(n) Supervising the functioning of the Tariff Advisory Committee;
(o) Specifying the percentage of premium income of the insurer to ®nance schemes for
promoting and regulating professional organizations referred to in clause (f);

(p) Specifying the percentage of life insurance business and general insurance business to be
undertaken by the insurer in the rural or social sector; and
(q) Exercising such other powers as may be prescribed.
10. What is an Indian private insurance company?
The IRDA Bill says:
``Indian insurance company means any insurer being a company:
(a) Which is formed and registered under the Companies Act, 1956;
(b) In which the aggregate holdings of equity shares by a foreign company, either by itself or
through its subsidiaries or its nominees, do not exceed 26 per cent paid-up equity capital
of such Indian insurance company;
(c) Whose sole purpose is to carryon life insurance business or general insurance business or
reinsurance business. For the purpose of this clause, the expression `foreign company'
shall have the meaning assigned to it under clause (23A) of section 2 of the Income Tax
Act, 1961.''
11. Tariff Advisory Committee
Four years before the non-life industry's nationalization, the TAC was set up by the
government with the core assignment of exercising tariff controls over most non-life
classes of business. This move followed what the government at the time perceived as an
unhealthy rate of competition among more than 100 non-life insurers and an acute threat
to some players' ®nancial soundness. The classes of insurance business regulated by the
TAC include ®re, motor, workers' compensation, engineering and marine hull. In a move
towards deregulation, the government deregulated marine cargo and personal accident
business in 1994. About two years ago the control of the TAC was moved from the GIC to
the IRDA.
The TAC does not always have the muscle to enforce rates. At least as far as the motor
premiums are concerned, the actual go ahead comes from the government, and the decision is
a political one. The reason? The clout of the truckers. They do not want to pay higher
premiums, so too bad if the industry is making losses on this portfolio. A hike was phased out
over three years, the ®rst tranche taking effect early in 1998. The truckers were in no mood to
let it go, and the matter was referred to the IRDA for adjudication. It was conveniently set
aside. The reason: the insurance industry had no historical data to back up its position that it
was bleeding to death due to high third-party claims. Apart from a lack of data and excess of
politics, this also re¯ects total disregard for underwriting. In India there are broad lines along
which you are charged motor premiums, like whether the vehicle is being used for
commercial purposes or personal transportation, or in terms of territory, whether you live
in Mumbai or anywhere else in the country! Anyone with sober driving habits driving to the
of®ce and back in a city pays the same premium as any rash or incompetent driver.
Motor insurance today accounts for 38 per cent of the total non-life portfolio (the largest
component of ``Miscellaneous''). Given the pace at which the car population is growing, it is
only a matter of time before the portfolio accounts for 50 per cent of all the premiums. This
should be a matter of grave concern for both existing companies as well as new entrants.
322 GUPTA

Fire Marine Miscellaneous
40%
60%
80%
100%
20%
Direct premiums non - life insurance, shares of business lines (%)
1988 1989 1990 1991 1992 1993 1994 1995 1996
Unfortunately, what insulates it from correction is not only the political clout of the truckers
because of the government monopoly, but the fact that the motor portfolio is fully retained
within the market.
12. Challenges of pricing
With the entry of ambitious private motor underwriters, it would be important to
establish at the outset with the IRDA and TAC that the tariff rates were and have been
``minimum rates'' and not ``the absolute'' rates. If the base rates were closer to adequate,
anyone desirous of availing themselves of reinsurance protection would not have a problem.
With the return of underwriting, what is expected to happen is that the subsidiaries of GIC will
be stuck with the worst of the bad business because of vested interests of the ®eld force and
total absence of control on the part of the insurers.
A more recent initiative of the IRDA and the TAC has been towards rationalizing the All
India Fire Tariff. The proposed rating structure follows the rule of thumb of ``one risk one
rate''. Originally expected to be implemented from April 2000, it is meeting stiff resistance
from the managements of the four companies. It could deprive them of anything from 30 to 40
per cent of the ®re premium, the most pro®table of all portfolios. It has, therefore, been cross-
subsidizing all the losses incurred courtesy of motor. Now, what they say is if there is no
historical data to prove that motor has been loss-making, where are the data to prove that ®re
has been pro®table!
Theworld of rating does not end with tariffs. Where there are none, youhavethe ``market
agreements''. Interestingly, the packaging of products, in future, would necessitate cross-
class products. The IRDA has already said it would introduce a system of ``®le & use'',
whereby approvals would be conveyed within 30 days. The product may correspondingly
need a different reinsurance treatment. Unless the reinsurance arrangements are sensitized to
such needs, eventually you may have a situation where ongoing programmes may lose their
utility and reinsurance monies may not just trickle but ¯ow out of the country.

13. Tariffs likely to continue
Due to lack of reliable statistics, most entrants appear quite satis®ed with the concept of
tariff in the early years. Eventually two scenarios could emerge: one, more and more products
bypassing the tariff, for reasons discussed earlier; and two, some companies opting out of the
pricing regime of the TAC. To most personnel of the nationalized industry, a world bereft of
tariffs is unthinkable! Take the introduction of Industrial All Risk cover, couple of years ago.
About a hundred policies have been sold to date, partly because the threshold is very high. The
®rst petrochemical industry has just gone in for it. There are half a dozen in waiting, given the
substantial savings in the premium vis-aÁ-vis traditional covers. It is a matter of time, and with
the arrival of brokers one will begin to see newer wordings and applications. Eventually non-
industrial risks too will start falling under its purview, as happened in the Southeast Asia a
decade ago.
It is a tight rope-walk for the TAC. The threat of de-tarif®ng or rationalization of
premium rates is obvious: the premiums would come down. It would bring in new customers
by making insurance more affordable and increasing or maintaining premiums by attractively
packaging the products. With the imminent entryof private players, the customer believes and
expects that the price of insurance in general will come down. The TAC, therefore, has a
choice. Either it decides to become proactive and thereby survive, or it takes a backseat and
renders itself redundant.
Whether they like it or not, both the IRDA and the TAC will eventually be less and less
involved in product and price control. Instead solvency control and importance of rating (thus
rating companies) will grow. A second tranche of licensing may see the entryof yetanother lot
of insurers, hence more competition and volatility in results. Perhaps therewill be a larger role
for foreign insurers. Their share in joint venture equity is expected to go up as the need for
higher capitalization becomes a reality.
14. Reinsurance mechanisms
As early as 1956, statutory reinsurance cessions were established so as to increase the
risk retention capacity of the domestic insurance market. Following the nationalization of the
non-life insurance industry, GIC became India's sole statutory reinsurer, bene®ting from a
compulsory 20 per cent cession on all domestic business. The mechanism works as follows:
(1) Obligatory priority reinsurance cession to GIC of 20 per cent of each insurance policy,
subject to limits. These are retained by GIC subject to some non-proportional
reinsurance protection.
(2) Obligatory cessions of 30 per cent and 20 per cent to market pools in ®re and marine hull
insurance, subject to limits. These are retroceded to the insurers, subject to common
excess of loss reinsurance protection. The pools are managed by the GIC.
(3) At the next level, the four subsidiaries have to cede business to each other to utilize any
unused capacity available with them in any risk underwritten.
(4) In addition to these, GIC provides some large reinsurance treaties to its subsidiaries and
before using them they cannot seek facultative reinsurance overseas.
(5) The GIC's subsidiaries have their surplus treaties placed overseas which too are
substantially designed by GIC. Trading in these is left to the subsidiaries.
(6) Excess of loss protections for all retained business of GIC and subsidiaries are arranged
overseas by the GIC.
(7) Large risks in ®re insurance business, called ``listed risks'' are underwritten centrally
324 GUPTA

and distributed among the four subsidiaries by GIC. In the process full automatic
reinsurance capacity of the market is utilized.
(8) All these measures have helped in achieving high levels of retained premium income
within the country. Overall retentions as percentage of gross direct premium in India
were approximately 85 per cent. Motor business is retained 100 per cent within the
country. Only overseas motor portfolio is placed on an excess of loss basis.
15. The national reinsurer
The Malhotra Committee has recommended that the GIC be made the national reinsurer.
There is also a suggestion that GIC could be a life reinsurer aswell.Whether it is the GIC or yet
another entity, the IRDA's regulations on reinsurance are expected to keep the following
objectives in view and ensure that:
· Each insurer maintains adequate retention level;
· Each insurer's reinsurance programme is optimal and objective;
· In the aggregate, national retention does not fall below those in the recent years in the
nationalized set-up;
· Flexibility of individual insurers in respect of special risks to of¯oad risk through
reinsurance and utilize competitive rating and terms available in thewider global markets;
· Full retention capacity of the market as a whole is utilized by instituting suitable
mechanisms for exchange of business within the country;
· In managing the pools and such national exchange of business an overseeing role is given
to participating insurers;
· Infrastructure is in place to prepare and update data on accumulation of risks in speci®ed
areas prone to exposures such as ¯ood, cyclone, earthquake, etc;
· Insurers are not expected to accept global inward reinsurance business. When permitted,
suf®cient care to be taken to allocate separate and additional capital, accounting
standards. It is necessary to ensure that adverse results of global reinsurance do not
affect the security and solvency relating to Indian policyholders. Separate ``fund account''
approach may be considered;
· Set in place regulations in respect of reinsurance brokers.
16. Related issues: the future of reinsurance
· Till now, the obligatory cessions and premiums to the pools are ceded by virtue of
decisions at the level of the holding company, viz. GIC. Once the market opens up, agreed
cessions to reinsurer and to any pool will have to be formalized through agreements;
· The concept of ``admitted reinsurance'' may need to be examined from the view of
solvency and UPR;
· Discussions need to take place on the basis of obligatory reinsurance cessions and their
duration in the context of the objectives articulated. These would include:
(a) Present basis of 20 per cent on all policies on a quota share basis, subject to limits; or
(b) Agreed quota share on a surplus treaty of a ceding company, as may be agreed;
(c) The basis of cessions in case of insurers with pure non-proportional reinsurance
protection;
(d) Whether proportional obligatory reinsurance in motor to be continued, as insurers would

generally have non-proportional protection only. Obligatory cessions in motor may need
to be dispensed with;
(e) Level of cessions to national reinsurer ought to be reduced over a period of time, on the
basis of the experience;
(f) Need for a dispute settlement mechanism between insurers and reinsurers.
17. Possible roles for GIC: as a reinsurer
· Development of niche markets and expertise;
· Develop technical skills as a reinsurer in the face of international exposure;
· Manage national pools and develop catastrophe exposure data;
· Accept portfolio obligatory cessions on the original terms, conditions and prices;
· Pools to have professional overseeing / management committees which would facilitate:
(a) Risk rating based on quality and provide a suitable pro®t-sharing programme;
(b) Commission earnings in line with international markets;
(c) Time-bound compliance by the ceding companies and the reinsurer is ensured;
(d) Reinsurance programme to be approved by the IRDA on a ``File and Use'' basis.
18. Scenarios
With capital requirement of Rs. 2 billion for a reinsurance company, it is very unlikely
that a private reinsurer will enter the market, simply because the Indian counterpart would
need to shell out Rs. 1.48 billion ± a rather heavy demand. Munich Re and Swiss Re have been
traditional supporters of the Indian insurance industry. They could continue to write
reinsurance business out of India as in the past. With the protectionist lobby clamouring to
retain all the premiums ``within'' the country, one needs to see how this would translate into
regulatory manifestation. If the Malaysian model is any indicator, possibly all new players
would need to exhaust the local capacity before looking outward.
After all how much could the new insurers write, on net basis, with a capital of Rs. 1
billion? The options could be:
· Write only what you could retain on a net basis. This may suit players like CGU, which
traditionally does not believe in working for reinsurers! What happens to the likes of
Allianz and AIG, heavily involved in large infrastructure projects, if they are not allowed
to utilize their global capacities?
· Co-insure with other new players. But you need to have con®dence in the mutual
underwriting abilities.
· Reinsurance exchanges between the new players. Numbers may not be too large, thus a
limited capacity.
· Reinsure with the state insurance companies. Are you willing to compromise quality?
What if your cash calls are not honoured on time? The logistics sound nightmarish.
· Increase your capital base. Would the shareholders be happy?
Apart from creative solutions, this calls for yet another mechanism not necessarily under the
patronage of the GIC (were it to be the national reinsurer). This could eventually become one
of the drivers for self-regulation.
326 GUPTA

19. Bancassurance
The keystone for bancassurance, currently, is the Banking Regulation Act, which lays
down the type of activities banks can engage in. That does not include insurance. In fact, as far
as commercial non-life portfolio goes, banks have been key drivers in pushing its insurance.
Banks and latterly ®nancial institutions are major ®nanciers of most commercial enterprises.
But for their insistence on having a collateral in the form of insurance, very little insurance
would be bought. Their keenness to enter insurance business is, therefore, quite justi®able.
Whether banks can write insurance or distribute insurance products will depend on what
view the Reserve Bank of India (the Central Bank), IRDA and government take on this law.
While distributing insurance products allows companies to leverage the branch network of
banks to access the Indian market, it is felt that writing insurance has serious implications for
the risk pro®le of a bank's balance sheet.
The repeal of Glass Stegall Act in the U.S. has set the trend for convergence in ®nancial
services. Indian banks have started talking about universal banking and becoming ®nancial
supermarkets.Butissuesofcorporategovernanceremain(asubjecthotlydebatedandpursued
bytheIndiancorporateworld):shouldtheybekeptatarm'slength,towhatextentshouldowner-
ship and management overlap,and whoshouldregulatewhatquestions need to be resolved?
The Nationalization of Banks Act may also be amended soon, allowing government to
relinquish majority ownership in public sector banks. While the private sector ± Indian and
foreign banks ± exists, this development puts new challenges before them. Should ownership
in these banks be widespread with government being single largest shareholder? While early
reforms largely changed the external regulatory environment, the second-generation reforms
are expected to reach deep into the inner beings of Indian ®nancial institutions. Banks will be
no exception.
The Reserve Bank's stiff norms for banks and ®nancial institutions wishing forays into
insurance are understandable:2
· A minimum net worth of Rs. 500 crores as on 31 March 2000;
· Minimum capital adequacy ratio of 10 per cent;
· Three-year continuous pro®t record;
· Net non-performing assets at least 1 per cent below industry average;
· Satisfactory track record of subsidiaries;
· Participation in insurance business could be undertaken in the form of a joint venture.
Participation in the insurance joint venture not to exceed 30 per cent of the paid-up capital
of the company.
What will fuel the growth?
Let us take life insurance ®rst. Out of the estimated insurable population of 312 million
as at the end of March 1998, only 63 million were covered under individual life insurance.
That makes it only 20 per cent. Adding persons under group and superannuation schemes, the
total coverage comes to just 25 per cent of the insurable population. The pension market was
2
RBI has since relented to Banking industry's representation for more easy entry for banks into insurance.
Similar norms for Non-Banking Financial Corporates (NBFCs) are, however, awaited.

estimated in 1997 at around 120 million in the age group 18 to 60 years of which no more than
0.25 per cent has been tapped. Only 5.4 per cent of the policies sold were for amounts of over
Rs. 1 lakh. At US$ 4.90 per capita in India, the life premiums are the lowest in the world.
Imagine the vast untapped potential. According to market murmurs, sale of life products has
come down with customers wishing to buy products from new players.
48%
44%
1%
1%
6%
Money back/anticipated endowment
Endowment
Whole life/term assurance
Critical illness
Other
Life premium volumes Non-life premium volumes
2000 2001 2002 2003 2004 2005
2
3
4
5
6
7
8
9
10
11
12
13
14
% growth
1
Baseline forecast of real non-life and life insurance growth rates
20. Opportunities in healthcare
Healthcare is an expanding sector. The Indian population has already touched the one
billion mark. Average life expectancy has gone beyond 60 years. Indians spend about 6 per
cent of their GDP on healthcare and about 80 per cent of these expenses are borne privately.
328 GUPTA

Healthcare spending:
Country % of GDP Country % of GDP
India 6.0 Taiwan 2.5
Japan 5.5 Malaysia 2.4
Philippines 4.0 Thailand 1.8
Singapore 3.4 Indonesia 1.7
Hong Kong 2.7
Healthcare expenses and risks thereof, are not transferred to insurance companies. The
total premium income of GIC from mediclaim portfolio (this is a hospitalization cover) is
about Rs. 100 crores. Ten per cent of a population of 2.5 million covered, comprises its own
employees. Most estimates suggest that today the Indian health market has a potential of more
than $4 billion per annum.
Munich Re has been quick to recognize the opportunities in health-care management. It
recently picked up a one-third stake in a health-related third-party administrator. Outsourcing
will pick up in a liberalized environment. Health care offers one such major avenue.
21. The paradigm has already shifted
Apart from the bought and not sold paradigm, the underselling of personal lines could
also be historically attributed to:
· Low per capita income;
· Joint family system strongly rooted ± a precursor to insurance;
· Low level of insurance awareness.
Over a period of time, however, there has been a shift:
A Higher disposable income;
A Changing attitudes driven by consumerism and nuclear families replacing joint families.
While the size of the Indian middle class remains a subjective estimate, it is bigger than the
population of most countries. Whatever the numbers and class of business, a new approach is
called for in trying to ®gure out the industry potential in the next ®ve to ten years. This has
been traditionally measured by considering macro indicators:
r Need to change focus from gross premium as percentage of GDPand per capitapremium,
whereby potential could be overestimated;
r Need to identify new sectors, new products and potential as a factor of premium rate;
r General insurance sector in India shows higher correlation with industrial growth than
with the GDP. Overdependence on industrial growth could lead to missing out on
opportunities in the growing services sector. It already accounts for 50 per cent of the
GDP;
r New opportunities in the ®nancial sector: creditor and mortgage insurance. In under ten
years there will be more than 300 million credit card users;
r New opportunities in retail sector in the form of extended warranty cover;
r Information technology industry is poised for unprecedented growth. In under ten years
India's remote processing revenue could be in excess of $50 billion;

r Creative ways of stimulating corporate business potential which already accounts for
more than half of the total general premium. The Indian market is expected to remain
tariff-bound for some time.
22. Enter, the world of mass marketing
``The dominant factor for business in the next two decades ± absent war, pestilence, or
collision with a comet ± is not going to be economics or technology. It will be demographics.''
Peter Drucker was referring to the ``underpopulation''that should be happening in most of the
developed markets in coming 50 years. India and China may be the only two big countries
where population may be actually increasing.
As the paradigm in insurance shifts from buying to selling, like other sectors of the
Indian economy it will be increasingly driven by the marketer. And the biggest frontier for
marketers would be the mass market. While the haves grow big, what is needed is not a
singular but a multi-pronged strategy, ranging from as good as anywhere in the world quality
at world prices all theway to adequate quality at affordable prices. As the marketing guru C.K.
Prahalad says, ``The challenge for India is to bring in the lower tier consumers in the market
economy.'' Insurers of tomorrow cannot afford to ignore the fortunes to be made in the
process.
23. Where will the critical mass come from?
True, the early critical mass, for the new entrants, will come from commercial and
industrial business. But what next? Having stabilized their balance sheets, established their
brands and won the con®dence of the shareholders, they would need to move intovolumes and
large numbers. What other than thevast populace can offer this? After the middle class, where
other than in rural India can you ®nd the new customer?
r One in every eight human beings in the world lives in rural India, which makes it roughly
12.2 per cent of the globe's population;
r The rural consuming class is growing at about 3 to 4 per cent per annum. It roughly
translates into 1.2 million new consumers each year: a market that will remain a reality
for the next 20 years;
r 6.31 lakh villages make a non-homogeneousmarket,characterized by distance, disparity,
diversity and dispersal;
r What constitutes the rural heartland is a subject of much animated ambiguity;
r There are new entrants to the consumer club which are stoking the ®res:
(Million households)
Categories: 1994±1995 2006
Consuming class 29 91
Climbers 48 74
Aspirants 48 15
Destitutes 35 13
330 GUPTA

r Subsistence economy has changed into a consumption economy ± the single biggest
transformation;
r After the rural consumer, the marketer has now focused on the consumer in the lower
tiers. Insurers can go for both, simultaneously;
The urban Milieu, 2012:
Category SEC Characteristics Households (m)
1997 2012
Super haves A1 ‡ Small group, easy to reach,
can pay dollar prices.
1 4
Haves A1, A2 Large number, will balance
bene®t and price and buy what
is typically labelled as
premium or high-end popular.
5 19
Strivers B1, B2 part of C De®nite ceiling on how much
they can spend; are looking for
the best available bene®ts at
that price.
19 39
Beginning
consumers
Part C, D‡ Just entering the arena of
consumption; benchmark of
quality and price is what they
were doing earlier.
10 17
Strugglers D, E Unskilled worker, petty trader,
subsistence-level wages.
14 18
Total 49 97
r India's marketing elite recently picked out ®ve big marketing ideas that changed
lifestyles. Simple and smart, these ideas altered the market dynamics and changed the
lives of millions of people;
r One of the success stories involved building an organization out of the community, way
beyond the conventional de®nition of organization. This and yet another FMCG, by
combining brand power and distribution, pioneered mass marketing in the country;
r There is notextbookprescription for insurers to be. But their vision cannot be blindto this
reality. They need not reinvent the wheel.
24. Challenges of delivery
How to deliver? Backed with service, it goes beyond distribution. Successwould involve
converting big numbers of potential customers into large volumes of premiums and pro®ts.
A Af®nity groups: there can be several common denominators to what could go to make
large insurable masses.
A One such is the co-operativemovement. The Malhotra Committee has provided room for
insurance companies in the co-operative sector. The capital requirement is a mere Rs. 20
crores (200 million). A very effective medium for intensive and extensive spread of

insurance. The movement is very strong in western and southern India. If synergized
imaginatively, it could provide sure ®re growth to insurance.
A While the rest of theworld iswitnessing dis-intermediation, the Indian market is about to
see arrival of professional intermediary. So huge is the demand that they may need to be
``mass manufactured''. The expected spurt in direct and indirect employment should
emanate from here.
A Currently, agents cannot earn commisions for placing insurance of any business with
paid-up capital in excess of Rs. 1million. On most classes they are entitled a commission
of 5 per cent. Non-traditional classes (rural and personal lines) fetch 15 per cent.
Corporate agents were done away with after nationalization.
25. Drivers of growth
A Draft agents' regulation reveals that an agent can act on behalf of one life and one non-
life company. There would also be a lock-in period of tenyears. For a country and market
of this size, there would be a huge demand for good quality agents in the early years. It
appears from the current indications that if an intermediary wishes to deal with more
than one insurer it has to be a broker.
Traditionally, it is the life agent who sells non-life personal covers and investment
products such as the National Savings Scheme and Public Provident Fund ± a ``barefoot''
version of the professional IFA. What ought to be encouraged is precisely an intermediary on
these lines who would become the foundation of the ®nancial services supermarket and the
``agent of convergence''.
A Insurance portals have already started springing up. The Internet usage is still low. But in
this market, Internet usage is not directly proportional to the number of personal
computers sold. After public phones, the nextmost signi®cant revolution will be Internet
kiosks, which will bring theweb to the community. Low-priced personal products should
be easily dispersed over a wide territory and population. An IT legislation is already in
place. Stocks can now be bought on net and Internet banking has just made a beginning.
A Broking will see emergence and entry of regional, national and international varieties.
The regulator has already indicated that commissions up to 15 per cent will be payable.
Capital requirement of Rs. 1 million for individuals in direct business and Rs. 2.5 million
for corporates in direct and reinsurance placement, will see a large number entering the
market. Some of the existing elements will also re-engineer themselves. Foreign brokers
have been lobbying for anything from a 74 to 100 per cent share in equity of a broking
enterprise, while the Indian side wants to give away only 26 per cent. After initial
mushrooming there will be a consolidation phase. Broker's security will not be an issue,
as the practice of cash before cover is expected to continue in the foreseeable future
(section 64 VB of the Insurance Act). All new players wish to continue with this.
A Banks may stay out of the distribution loop, but not for too long. There will be a major
consolidation and thrust towards universal banking. Convergence will see banks playing
a greater role in both manufacturing and distribution of insurance products and cross-
selling to existing client base, thereby achieving a higher penetration rate for insurance.
A Maximum growth will come from infrastructure projects, health, medical, motor and
creditor insurances, on the non-life side. Life portfolio would grow with a selling mode.
However, the challenge for new players would be in transforming the perception of
332 GUPTA

consumers from viewing life insurance primarily as a savings vehicle to a risk protection
instrument.
Even with the most conservative estimates, in less than ten years' time the market will
almost treble from the current US$ 8.6 billion to US$ 25 billion. Direct and indirect
employment generation will go up from present 1 million to 2 million during the same period.
With the passage of the IRDA Bill, the only remaining component of the ®nancial sector yetto
be deregulated and liberalize has ®nally given in.
The commitment of the Ministry of Finance to the insurance agenda, is unquestionable.
It is only a matter of time before the spate of divestment measures laps up the insuranceworld.
That could bring the re-organization of current players. The possibilities are:
3 One state-owned company;
3 One state-owned company doing only corporate business and others into market business;
3 All four independent and competing;
3 Eventually government owning only 51 per cent in either of these.
Domestic companies have the advantage that they know the markets best. But they also have
to eradicate the de®ciencies in distribution to cope with high growth and exploit the
opportunities of the marketplace. The challenges could come from most unexpected areas.
Given the suspicion of a middleman, the transition from a broker-free to broker-driven market
would need to be watched. Once the value is palpable and real, this breed will get accepted.
Perhaps corporates will ®nd this transition easier than personal lines buyers.
1993–94 1995–96 1997–98
Fire Marine Motor Engg. Misc.
(other
than
motor and
eng.)
5
10
15
20
25
30
35
0
Portfolio mix (in %)
26. A worldwide laboratory
The Indian marketplace could also be a veritable laboratory for product development.
Due to its complexities and vast hetrogeneity, the market segmentation will be like nowhere

else in the world. The customers' desire to derive value for money and their proclivity for
savings-linked solutions (even non-life) could see evolution of products and services which
could be exported to other developed economies, too.
If there can be any lessons from the privatization of insurance industry in Bangladesh
and Sri Lanka, the state companies were at best reactive. In face of competition they improved
their quality of service, imitated the products and fought out for their market share. The Indian
situation could not be too different. Most believe that at best new players will grab 20 per cent
of market share in a rapidly expanding economy.
To compete on price, underwriting in state companies will need to be reinforced. Loss
and cost ratios would have to be lowered. Today, as mentioned earlier, there is nothing like
underwriting. Management expenses of the current players are in excess of 25 per cent. If, say,
the new ®re tariff, which prescribes minimum rates, is implemented, it should logically
encourage prudence in rating individual risks by merit.
27. Conclusion: the market will take over
With the introduction of professionals such as appointed actuaries, quali®ed and trained
intermediaries, quality loss adjusters, third-party service-providers and a high barrier
ensuring entry of strong insurers, the IRDA with some pro-activity could drive the market
development in the right direction. In less than ®ve years'time it should be withdrawing from
pricing and product approval mode to solvency and rating monitoring. The growing
consolidation and overlap in the ®nancial services, in India, could see creation of a super-
regulator.
Rather than allowing market forces to take control, a new breed of empowered marketer
should be encouraged to take over the front end. It is only a matter of time before the insurance
industry will enter the mainstream of this marketplace. To the end-user, who underwrites a
risk will be less important than who sells it. This ``correction'' entails as much investment and
commitment from any regulator as the other participants. The debate then would not be Indian
versus foreign or public sector versus private. It would be who can deliver up to and even
beyond the expectations of the customer.
Even inertia de®ed what was referred to as the ``Hindu Rate of Growth'' for the rest of the
economy. Despite bought not sold mode the Indian insurance industry has grown by 6 to 8 per
cent per annum. With a judicious mix of regulation, healthy interplay of the market forces and
a high degree of customer focus, let the entrepreneur be welcomed back into business. This
insurance market is set to grow upwards of 10 per cent each year for the next decade. Call it a
gold rush!
334 GUPTA

The Present Situation of Insurance in India and Developments in Private Insurance in the Next Five to Ten Years

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