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The conceptual framework for indian insurance industry by abdul lathif


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The conceptual framework for indian insurance industry by abdul lathif

  1. 1. The Conceptual Framework for Indian Insurance Industry S. Abdul Lathif, Ph.D. Research Scholar. ABSTRACT In today’s age of consumerism, insurance requirements have expanded to keep pace with the increasing risks. Gone are the days when life insurances ruled the roost; today we have a wide assortment of risk coverage commencing from health insurance to travel insurance to theft insurance to even a wedding insurance. With affluence and spending capacity on the surge there is a growing trend to fulfill needs, deal with responsibilities and secure one’s possessions, be it good health or wordly wealth. This study shows that the conceptual model of development of insurance industry in India. Key Words: Insurance Industry, IRDA, Life Insures and Non Life Insures Companies. INTRODUCTION The Insurance sector in India governed by Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and General Insurance Business (Nationalizations) Act, 1972, Insurance Regulatory and Development Authority (IRDA) Act, 1999 and other related Acts. With such a large population and the untapped market area of this population Insurance happens to be a very big opportunity in India. Today it stands as a business growing at the rate of 15-20 per cent annually. Together with banking services, it adds about 7 per cent to the country’s GDP .In spite of all this growth the statistics of the penetration of the insurance in the country is very poor. Nearly 80% of Indian populations are without Life insurance cover and the Health insurance. This is an indicator that growth potential for the insurance sector is immense in India. It was due to this immense growth that the regulations were introduced in the insurance sector and in continuation “Malhotra Committee” was constituted by the government in 1993 to examine the various aspects of the industry. The key element of the reform process was Participation of overseas insurance companies with 26% capital. Creating a more efficient and competitive financial system suitable for the requirements of the economy was the main idea behind this reform. Since then the insurance industry has gone through many sea changes. The competition LIC started facing from these companies were threatening to the existence of LIC .since the liberalization of the industry the insurance industry has never looked back and today stand as the 1
  2. 2. one of the most competitive and exploring industry in India. The entry of the private players and the increased use of the new distribution are in the limelight today. The use of new distribution techniques and the IT tools has increased the scope of the industry in the longer run. WHY DO WE NEED INSURANCE? Insurance is a way of managing risks. When you buy insurance, you transfer the cost of a potential loss to the insurance company in exchange for a fee, known as the premium. Insurance companies invest the funds securely, so it can grow, and pay out when there’s a claim. Insurance helps you: • Own a home, because mortgage lenders need to know your home is protected • Drive vehicles, because few people could afford the repairs, health care costs and legal expenses associated with collisions and injuries without coverage • Maintain your current standard of living if you become disabled or have a critical illness • Cover health care costs like prescription drugs, dental care, vision care and other health- related items • Provide for your family in the event of a death • Run a small business or family farm by managing the risks of ownership • Take vacations without worrying about flight cancellations or other potential issues Take the time to review your policies and contact one of our helpful agents to answer your questions or get advice. A little knowledge can make a big difference when it comes to buying the right insurance protection for you and your family. IRDA (Insurance Regulatory and Development Authority of India) The acronym for the Insurance Regulatory and Development Authority of India, it is the apex body overseeing the insurance business in India. It protects the interests of the policyholders, regulates, promotes and ensures orderly growth of the insurance in India. INSURANCE GROWTH DRIVERS IN INDIA 2
  3. 3. The demand for insurance products is likely to increase due to the exponential growth of household savings, purchasing power, the middle class and the country’s working population. Listed below, are the various underlying growth drivers for India’s insurance industry: • Growing of the financial industry as a whole • Growth of life and non-life industry • Promoting innovation and removing inefficiency • Competition and orderly growth • Growth of specific insurance segments such as motor insurance EMERGING TRENDS • Multi-distribution i.e. increasing penetration through new modes of distribution such as the internet, direct and telemarketing and NGOs • Product innovation i.e. increased levels of customization through product innovation • Claims management i.e. timely and efficient management of claims to prevent delays which can increase the claims cost • Profitable growth i.e. expanding product range, developing innovative products and expanding distribution channels • Regulatory trends i.e. mandated regulatory changes by the IRDA to promote a competitive environment in both the life and non-life insurance sectors. LIFE INSURANCE: KEY CHALLENGES In 2012, the life insurance industry witnessed a decline in the first year premium collected which dropped from INR1, 258 billion in 2011 to INR1, 142 billion, a drop of approximately 10%. This was owing to the following challenges that the industry faced in • Products strategy and design • Cost • Taxation • Distribution • Prospects and challenges of various channels • Compensation • Customer service 3
  4. 4. • Governance and regulatory issues LIFE INSURANCE BUSINESS It is the fastest growing sector in India since 2000 as Government allowed Private players and FDI up to 26% and recently Cabinet approved a proposal to increase it to 49%. Life Insurance in India was nationalised by incorporating Life Insurance Corporation (LIC) in 1956. All private life insurance companies at that time were taken over by LIC. In 1993, the Government of India appointed RN Malhotra Committee to lay down a road map for privatisation of the life insurance sector. While the committee submitted its report in 1994, it took another six years before the enabling legislation was passed in the year 2000, legislation amending the Insurance Act of 1938 and legislating the Insurance Regulatory and Development Authority Act of 2000. The same year the newly appointed insurance regulator - Insurance Regulatory and Development Authority IRDA —started issuing licenses to private life insurers. Life Insurance Companies: Private Sector • AEGON Religare Life Insurance • Aviva India • Shriram Life Insurance • Bajaj Allianz Life Insurance • Bharti AXA Life Insurance Co Ltd • Birla Sun Life Insurance • Canara HSBC Oriental Bank of Commerce Life Insurance • Star Union Dai-ichi Life Insurance • DLF Pramerica Life Insurance • Edelweiss Tokio Life Insurance Co. Ltd 4
  5. 5. • Future Generali Life Insurance Co Ltd • HDFC Standard Life Insurance Company Limited • ICICI Prudential • IDBI Federal Life Insurance • IndiaFirst Life Insurance Company • ING Vysya Life Insurance • Kotak Life Insurance • Max Life Insurance • PNB MetLife India Life Insurance • Reliance Life Insurance Company Limited • Sahara Life Insurance • SBI Life Insurance Company Limited • TATA AIA Life Insurance Public Sector • GIC Re (General Insurance Corporation of India - Re-Insuer) NON-LIFE INSURANCE BUSINESS General insurance companies have willingly catered to these increasing demands and have offered a plethora of insurance covers that almost cover anything under the sun. Any insurance other than ‘Life Insurance’ falls under the classification of General Insurance. It comprises of insurance of property against fire, theft, burglary, terrorism, natural disasters etc.  Personal insurance such as Accident Policy, Health Insurance and liability insurance which covers legal liabilities.  Errors and Omissions Insurance for professionals, credit insurance etc.  Policy covers such as coverage of machinery against breakdown or loss or damage during the transit. 5
  6. 6.  Policies that provide marine insurance covering goods in transit by sea, air, railways, waterways and road and cover the hull of ships.  Insurance of motor vehicles against damages or accidents and theft. All these above mentioned form a major chunk of non-life insurance business. General insurance products and services are being offered as package policies offering a combination of the covers mentioned above in various permutations and combinations. There are package policies specially designed for householders, shopkeepers, industrialists, agriculturists, entrepreneurs, employees and for professionals such as doctors, engineers, chartered accountants etc. Apart from standard covers, General insurance companies also offer customized or tailor made policies based on the personal requirements of the customer. A suitable general insurance cover is an absolute essential for every family. This is a necessity to overcome uncertainties and risks prevalent in life. It is also necessary to protect one’s property against risks as a loss or damage to one’s property can leave one in doldrums. Losses created by catastrophes such as the tsunami, earthquakes, cyclones, floods, and volcano eruptions or landslides have left many penniless and shelter-less. Such losses have the potential to shatter lives but availing a suitable insurance cover could help mitigate the unforeseen risks. Similarly, an individual can be provided with a suitable insurance cover against Personal Accidents. A Health Insurance policy can provide financial relief and lowering of mental agony to an individual undergoing medical treatment on account of a disease or an injury. It is important for prospective customers to read and understand the terms and conditions of a policy before they enter into an insurance contract. The proposal form needs to be filled in correctly and completely with all factual and relevant data by the customer. He must also ensure that the insurance cover is adequate and an appropriate one, as desired. CLASSIFICATION OF INDIAN INSURANCE INDUSTRY 6
  7. 7. There Are Basically Two Types of Policy Health Covers Namely:- a) Individual Policy b) Family Floater Policy a) Individual Policy Individual policy provides health cover for a single individual only. It is an agreement between an individual (policyholder/customer) and the insurer (insurance company). It is a legal document that is valid for a year. Such an individual policy needs to be renewed before the expiry of the contract in order to enjoy continued benefits provided by the insurance company. An individual policy can be renewed by paying the premium as stated by insurance company based on various factors and parameters. Such an individual policy is not transferable. In case, if the policyholder wants to change his policy cover from one insurance company to any other insurance company, then such a customer (insured) has to forego the benefits such as cumulative bonus or benefits during diseases or ailments being covered under the policy. b) Family Floater Policy A Family Floater Health Insurance Policy is a health cover wherein the entire family will be covered under a single Sum Insured. Such a policy covers reimbursement of hospitalization expenses for illness/diseases contracted or injury sustained by the Insured person, but should not exceed Sum Insured (all claims in aggregate) for that family as stated in the Schedule in any one period of insurance. Just like individual policy, this floater policy needs to be renewed before the expiry of the contract for enjoying continued benefits. Fire Insurance Fire insurance provides protection against damage to property caused by accidents due to fire, lightening or explosion, whereby the explosion is caused by boilers not being used for industrial 7
  8. 8. purposes. Fire insurance also includes damage caused due to other perils like strom tempest or flood; burst pipes; earthquake; aircraft; riot, civil commotion; malicious damage; explosion; impact. Marine Insurance Marine insurance basically covers three risk areas, namely, hull, cargo and freight. The risks which these areas are exposed to are collectively known as "Perils of the Sea". These perils include theft, fire, collision etc. General Insurance is also known as Non-Life Insurance in India. There are totally 27 General Insurance (Non-Life) Companies in India. These 27 General Insurance companies have been classified into two broad categories namely: a) PSUs (Public Sector Undertakings) b) Private Insurance Companies a) PSUs (Public Sector Undertakings):- These insurance companies are wholly owned by the Government of India. There are totally 4 PSUs in India namely:- • National Insurance Company Ltd. • Oriental Insurance Company Ltd • The New India Assurance Pvt Ltd • United India Insurance Company Ltd b) Private Insurance Companies:- There are totally 24 private General Insurance companies in India namely:- • Apollo DKV Health Insurance Ltd • Bajaj Allianz General Insurance Co. Ltd • Cholamandalam MS General Insurance Co. Ltd • Future Generali Insurance Company Ltd • HDFC Ergo General Insurance Co Ltd • ICICI Lombard General Insurance Ltd • Iffco Tokio General Insurance Pvt Ltd • Reliance General Insurance Ltd • Royal Sundaram General Insurance Co Ltd • Star Health and Allied Insurance • Tata AIG General Insurance Co Ltd • Universal Sompo General Insurance Pvt Ltd 8
  9. 9. • Religare Health Insurance Company Limited • Magma HDI General Insurance Company Limited • Liberty Videocon General Insurance Company Limited • L&T General Insurance Company Limited • Max Bupa Health Insurance Company Ltd. • SBI General Insurance Company Limited • Raheja QBE General Insurance Company Limited, • Export Credit Guarantee Corporation of India Ltd • Bharti AXA General Insurance CompanyLimited • Shriram General Insurance Company Limited, • Agriculture Insurance Co. of India Ltd MARKET SHARE OF ALL LIFE INSURANCE COMPANIES IN INDIA Source: free press india PRESENT SCENARIO OF INSURANCE INDUSTRY • India with about 200 million middle class household shows a huge untapped potential for players in the insurance industry. Saturation of markets in many developed economies has made the Indian market even more attractive for global insurance majors. The insurance sector in India has come to a position of very high potential and competitiveness in the market. Indians, have always seen life insurance as a tax saving device, are now suddenly turning to the private sector that are providing them new products and variety for their choice. • Consumers remain the most important centre of the insurance sector. After the entry of the foreign players the industry is seeing a lot of competition and thus improvement of 9
  10. 10. the customer service in the industry. Computerization of operations and updating of technology has become imperative in the current scenario. Foreign players are bringing in international best practices in service through use of latest technologies. • The insurance agents still remain the main source through which insurance products are sold. The concept is very well established in the country like India but still the increasing use of other sources is imperative. At present the distribution channels that are available in the market are listed below. • Direct selling • Corporate agents • Group selling • Brokers and cooperative societies • Bancassurance • Customers have tremendous choice from a large variety of products from pure term (risk) insurance to unit-linked investment products. Customers are offered unbundled products with a variety of benefits as riders from which they can choose. More customers are buying products and services based on their true needs and not just traditional money back policies, which is not considered very appropriate for long-term protection and savings. There is lots of saving and investment plans in the market. However, there are still some key new products yet to be introduced - e.g. health products. • The rural consumer is now exhibiting an increasing propensity for insurance products. A research conducted exhibited that the rural consumers are willing to dole out anything between Rs 3,500 and Rs 2,900 as premium each year. In the insurance the awareness level for life insurance is the highest in rural India, but the consumers are also aware about motor, accidents and cattle insurance. In a study conducted by the results showed that nearly one third said that they had purchased some kind of insurance with the maximum penetration skewed in favor of life insurance. The study also pointed out the private companies have huge task to play in creating awareness and credibility among the rural populace. The perceived benefits of buying a life policy range from security of income bulk return in future, daughter's marriage, children's education and good return on savings. 10
  11. 11. CONCLUSION There is a probability of a spurt in employment opportunities. A number of web-sites are coming up on insurance, a few financial magazine exclusively devoted to insurance and also a few training institutes being set up hurriedly. Many of the universities and management institutes have already started or are contemplating new courses in insurance. Life insurance has today become a mainstay of any market economy since it offers plenty of scope for garnering large sums of money for long periods of time. A well-regulated life insurance industry which moves with the times by offering its customers tailor-made products to satisfy their financial needs is, therefore, essential if we desire to progress towards a worry-free future. LIFE INSURANCE INDUSTRY ESTIMATED TO GROW BY 15% CAGR OVER NEXT 5 YEARS: The life insurance sector is estimated to grow by up to 15 per cent CAGR over the next five years, mainly due to multiple regulatory and industry changes brought in over the past few years and due to favorable demographics of the country, an industry body said today. "The worst is over for the life insurance industry that has not seen very positive growth figures in the past few years. "With favorable demographics, new products launches on the anvil, industry expanding their operations and infusing efficiencies, the (insurance industry will see significant growth in India," Life Insurance Council Secretary General V Manickam told reporters here. He further said that favourable demography, which is the insurable population, is expected to grow to 75 crore and life expectancy to 74 years by FY2020, which would help achieve spurt in the preference for Life Insurance. Thus, life insurance, which is the second most preferred financial instrument, would drive the growth in net household financial savings to an estimated 35 per cent of total savings in next seven years, compared to meagre 26 per cent in FY10. "The life insurance industry is expected to record a CAGR of 12-15 per cent over the next five years and the penetration measured as the percentage of insurance premium to gross domestic product (GDP) is likely to grow to five per cent by year 2020 from current 3.2 per cent," he said, adding that the current size is Rs 2.8-3 lakh crore. 11
  12. 12. When asked on extension of time for the filing of products under new product guideline, Manickam said: "We have given a representation to the regulator and are hopeful of a positive response." Life Insurance Council also estimated a potential foreign exchange inflow of USD 10 billion in near term, when the FDI in the sector rises to 49 per cent, as proposed by the Centre. The rise in the permissible limit would bring in stable capital inflows and help the industry mature faster. Recently, IRDA has granted license to five Repositories that are authorized to open e- Insurance Accounts. "These accounts will help safeguard policyholders to hold insurance policy documents in electronic format and also provide access to the insurance portfolio online," Manickam added. Life insurers are also planning to expand their distribution channel and increase the number of life insurance advisers to more than 30 lakhs over next five years and is expected to contribute Rs 3,50,000 crore towards the infrastructure projects by FY2020. The Life insurance industry has witnessed growth in assets under management (AUMs), with investments that have been targeted towards deployment of funds enabling infrastructure growth in the country. Source: Times of India (19.09.2013) References: 1. www. 2. www. 3. 4. www. 5. 6. referred various journals and books. 12