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Globalisation, liberalisation and privatisation of insurance

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It describes the impact of Globalization, Liberalization and Privatization upon Insurance

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Globalisation, liberalisation and privatisation of insurance

  1. 1. GLOBALISATION, LIBERALISATION AND PRIVATISATION OF INSURANCE Presented By: Habib Zafar Khan LL.B (Rank 1); LL.M (International Trade and Business Law- Rank 3) Research Associate, Centre for Air and Space Law NALSAR University of Law, Hyderabad habib.nalsar@gmail.com 1
  2. 2. MEANING OF INSURANCE  Insurance is a policy from a financial institution that offers a person, company, or other entity reimbursement or financial protection against possible future losses or damages.  Precautionary measure against future contingent losses. 2
  3. 3. MAIN BRANCHES OF INSURANCE  Accident Insurance,  Fire Insurance,  Holiday and Travel Insurance,  Household Insurance,  Liability Insurance,  Livestock and Bloodstock Insurance,  Marine insurance,  Motor insurance,  Pluvial insurance,  Private health insurance,  Property insurance  Reinsurance  Retrocession etc. 3
  4. 4. CLASSIFICATION OF INSURANCE SERVICES  GATS and Insurance: Financial services include all insurance and insurance- related services, and all banking and other financial services (excluding insurance) . Financial services include the following activities: Insurance and insurance-related services (i) Direct insurance (including co-insurance) : (a) life (b) non-life (ii) Reinsurance and retrocession; (iii) Insurance intermediation, such as brokerage and agency; (iv) Services auxiliary to insurance, such as consultancy, actuarial, risk assessment and claim settlement services. 4
  5. 5. GLOBALISATION: MEANING  Penguin Dictionary of Economics: “Globalization Stresses the geographical dispersion of industrial and service activities (for example research and development, sourcing of inputs, production, distribution) and the cross border networking of companies (for example through joint ventures and the sharing of assets.”  Globally economic integration and Interdependence i.e. Single Market Economy. It includes Investment, Unrestricted trade,Cross border economic activities, Movement of capital, manpower, management, technology, labour, consumption, services etc. 5
  6. 6. HISTORY OF GLOBALISATION  1960 till now – Rapid Development  1991 Adopted by India, Finance Minister-Dr. Manmohan Singh.  Besides free Trade, Capital flows, Investments, Industrialization and commercialization, has taken place in era of Globalisation. Impact of Globalization  Economic Development  Productivity Enhancement,  Greater Innovation- Adaptability and utilisation of Technology.  Resource mobility-reduced the cost of production and distribution  boosted competition across the border 6
  7. 7. DEREGULATION  Deregulation is the easing of regulation i.e. reduction of existing limits on regulation such as for import, foreign investment, trade, commerce etc.  Deregulation facilitates an increase in the levels of competition.  Entry of reputed international insurers.  Expansion of the Insurance market.  Adoption of more innovative approaches to distribution and product development. 7
  8. 8. LIBERALISATION  Liberalization results from the deregulation process.  The more profound deregulation on the market the wider spread might be liberalization within certain economic sectors. Instruments of Liberalization:  Foreign investment including capital  Dismantling Entry barriers: tariff and non-tariff barriers  Licensing system  Simplifications of customs measures,  Reduction in physical restrictions on imports  Reforming financial system and opening up financial market to private (domestic and foreign) players  Removing controls on foreign capital flow to the country 8
  9. 9. Local economy oMobilization of domestic savings oImprovement in financial stability oFacilitation of production and trade oImprovement in the efficiency of capital allocation FOREIGN INSURERS Capital inflows Knowledge transfer Increased efficiency Local insurance market Improvement in service to customers Improvement in the efficiency of the insurance market Transfer of knowledge in the areas of technology and management Increase in the quality of Regulation and Supervision How does Liberalisation help? 9
  10. 10. PRIVATISATION ‘Privatization’ is the transfer of care, custody, and control of government assets to the private sector to perform the same or very similar functions the government performs. 10
  11. 11. GLOBALISATION OF INSURANCE MARKET  The globalization of the insurance markets due to liberalization and deregulation.  Strong increase in the demand for insurance in the emerging market.  In early 90s, Radical reforms in Latin America and Central and Eastern Europe  In Asian countries the liberalization process gained momentum following the Asian crisis (1997).  Process favoured and speeded up by multilateral agreements, such as the WTO, EU and NAFTA.  1997 - an agreement of Liberalisation of financial services following which 102 countries committed to remove entry barriers and liberalise their markets.  The GATS agreement offers legal security and protection to global insurance players. 11
  12. 12. DRIVING FORCES OF INSURANCE MARKET GLOBALIZATION Why foreign Insurance Company in Domestic Market?  “Push factors” Insurance Companies move out to emerging markets due to Increasing Global Trade , Growing Direct Investment , Potential Future Growth in Emerging Markets , Saturation in industrialized countries and Strong growth in emerging countries and expected Efficiency Gains through Diversification , Economics of scale etc.  “Pull factors” are the motives behind allowing the foreign companies to operate in local market. Emerging Markets have Strong Economic growth and Trade, and there are substantial requirements of capital in Emerging Markets to cover major risks. 12
  13. 13. BENEFIT FOR HOST COUNTRY Economy related benefits to the local country  Improves the financial Stability, Trade and Production.  Paces the mobilization of savings, capital and resources. Insurance market related benefits  Capital structure, Management efficiency of entire insurance industry improves because foreign companies bring fresh capital with them.  Market efficiency improves due to information dissemination, global operating knowledge and increased competition.  Range of available products increases because foreign companies bring with them a wide range of products and product development expertise.  Customers’ service improves.  Increased competition, technology led service, and cost competition finally benefits the consumers.  Globalisation also improves Regulatory and Governance system.  It also improves market conduct and Ethical Business Standard. 13
  14. 14. PROBLEMS FOR INSURANCE PLAYERS  Small number of global players(20 to 30) -UNEP (2002).  National operation rather than a global.  Another 70 companies operate significantly in more than one continent through branches.  Only 1.2% of global insurance premium comes from across border business.  Complying with increasing regulations  Anti–money laundering  Stricter corporate governance standards  Intensifying competition Leading Global Companies are:  AXA,Allianz,Generali,AIG,ING,Aviva,Prudential,CNP. 14
  15. 15. INSURANCE IN EU AND US EU - Three Directives  First Generation of Insurance Directives: the freedom of establishment limited by the Host Country Control  Non-life directive (1973)  Life directive (1979)  Second generation : the freedom of movement of services.  Non-life directive (1988)  Third Generations: the Single European License and the Home Country Control  Non-life directive (1992)  Life directive (1992) Note: The introduction of Euro in 1999 also profoundly changed the economic landscape for financial services firms in the European market 15
  16. 16. ALLIANCES IN INDUSTRY  Maximum mergers and acquisitions in the insurance sector have taken place in the USA followed by UK.  From 1990 to 2003 – 606 M&A’s took place in US alone followed by UK at 217.  In EU – After the 3rd Directive i.e. during 1990 to 2002 - 2,595 M&As involving European insurance companies all over the world. 16
  17. 17. HISTORY OF INSURANCE INDUSTRY IN INDIA 17 YEAR EVENT 1912 The Indian Life Insurance Company Act 1938 The Insurance Act: Comprehensive Act to regulate insurance business in India 1956 Nationalization of life insurance business in India 1972 Nationalization of general insurance business in India 1993 Setting up of Malhotra Committee 1994 Recommendations of Malhotra Committee 1995 Setting up of Mukherjee Committee 1996 Setting up of (interim) Insurance Regulatory Authority (IRA)Recommendations of the IRA 1997 Mukherjee Committee Report submitted but not made public CONTD…
  18. 18. YEAR EVENT 1997 The Government gives greater autonomy to LIC, GIC and its subsidiaries with regard to the restructuring of boards and flexibility in investment norms aimed at channeling funds to the infrastructure sector 1998 The cabinet decides to allow 40% foreign equity in private insurance companies-26% to foreign companies and 14% to NRI’s, OCB’s and FII’s 1999 The Standing Committee headed by Murali Deora decides that foreign equity in private insurance should be limited to 26%. The IRA bill is renamed the Insurance Regulatory and Development Authority (IRDA) Bill 1999 Cabinet clears IRDA Bill 2000 President gives Assent to the IRDA Bill 18
  19. 19. INDIA AND INSURANCE SECTOR  IRDA Act of 1999 ended the monopoly power previously held by the state-owned insurers.  IRDA has so far issued 29 licenses (both life and non-life) to new private Indian insurance companies, most of which have global insurance companies as partners.  FDI cap is 49% under the automatic route subject to obtaining license from IRDA.  In the case of auxiliary services like consultancy, actuarial and risk assessment, foreign equity up to 51 per cent has been allowed.  Number of insurers - 44 (End-March 2009)  22 insurers (1 in public sector and 21 in private sector) in life insurance business  21 insurers (6 in public and 15 in private sector) in non- life insurance business  1 re-insurance company viz., General Insurance Corporation of India in the public sector. 19
  20. 20.  19 out of 21 life insurance companies set up in the private sector since 2000, are in joint venture with foreign partners.  14 out of 15 new private insurers in the non-life segment, have been opened in collaboration with the foreign partners.  Total– 33 having FCs Practical Aspect: Indian Insurance company opening branch in foreign http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearLi st.aspx?DF=RL&mid=4.2 20
  21. 21. FOREIGN PLAYERS IN INDIAN LIFE INSURANCE MARKET 21
  22. 22. INSURERS FOREIGN PARTNERS HDFC Standard Life Insurance Co. Ltd. Standard Life Assurance, UK Max New York Life Insurance Co. Ltd. New York Life, USA ICICI-Prudential Life Insurance Co. Ltd. Prudential , UK Om Kotak Life Insurance Co. Ltd. Old Mutual, South Africa Birla Sun Life Insurance Co. Ltd. Sun Life, Canada Tata-AIG Life Insurance Co. Ltd. American International Assurance Co., USA SBI Life Insurance Co. Ltd. BNP Paribas Assurance SA, France ING Vysya Life Insurance Co. Ltd. ING Insurance International B.V., Netherlands Allianz Bajaj Life Insurance Co. Ltd. Allianz, Germany Metlife India Insurance Co. Ltd. Metlife International Holdings Ltd., USA 22
  23. 23. INSURERS FOREIGN PARTNERS Reliance Life Insurance Co. Ltd. (Earlier AMP Sanmar Life Insurance Company from 3.1.02 to 29.9.05) --- AVIVA Aviva International Holdings Ltd., UK Sahara Life Insurance Co. Ltd. --- Shriram Life Insurance Co. Ltd. Sanlam, South Africa Bharti AXA Life Insurance Co. Ltd. AXA Holdings, France Future Generali India Life Insurance Company Ltd. Pantaloon Retail Ltd.; Sain Marketing Network Pvt. Ltd. (SMNPL), IDBI Fortis Life Insurance Company Ltd. Fortis, Netherlands Canara HSBC OBC Life Insurance Company Ltd. HSBC, UK Aegon Religare Life Insurance Company Ltd. Religare, Netherlands DLF Pramerica Life Insurance Co. Ltd. Prudential of America, USA 23
  24. 24. FOREIGN PLAYERS IN NON-LIFE SECTOR  Royal Sun Alliance, UK  Millea Asia Pte. Ltd., Japan  American International Assurance Co., USA  Allianz, Germany  Mitsui Sumitomo, Japan  Fairfax through its affiliates, Canada  ERGO, Germany  Individual Promoters, UAE  Apollo Hospital Enterprises Ltd.; Apollo Energy Company Ltd.; PCR Investments Ltd. & DKV, Germany (August 3, 2007)  Pantaloon Retail Ltd.; Shendra Infrastructure Development Ltd. (SIDL); Participatie Maatschapij Graafsschap Holland NV, Netherlands (“Generali”)  Sompo, Japan  Santam, South Africa  AXA Holdings, France  QBE, Australia 24
  25. 25. INDIAN NON-LIFE INSURANCE COS.  New India Assurance Co. Ltd.  National Insurance Co. Ltd.  The Oriental Insurance Co. Ltd.  United India Insurance Co. Ltd.  Export Credit Guarantee Corporation Ltd.  Agriculture Insurance Co. of India Ltd. 25
  26. 26. LATEST NEWS  Insurance Laws (Amendment) Bill, 2008 and Life Insurance Corporation (Amendment) Bill, 2008 introduced in Parliament  ET news report- 18 Sep 2009  IRDA, is in the process of finalising guidelines for mergers and acquisitions in the insurance sector.  Also that the FDI cap may be increased from 49% to 76% or even upto 100%  Can Foreign Insurance Companies / Banks set up Liaison Office in India? Ans. Foreign Insurance companies can establish Liaison Offices in India only after obtaining approval from the Insurance Regulatory and Development Authority (IRDA). 26
  27. 27. “If a child, a spouse, a life partner, or a parent depends on you and your income, you need life insurance.” Thank you!! 27

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