Contents

Concept of insurance...................................................................................................................................3
What is insurance........................................................................................................................................3
Type of insurance:.......................................................................................................................................3
Introduction.................................................................................................................................................4
Evolution of Insurance Before liberalization................................................................................................4
Milestones of Insurance Regulations in the 20 th Century..........................................................................6
What are the emerging trends in the insurance industry in terms of product innovations?.......................7
Indian Insurance Market – History..............................................................................................................8
Insurance Market- Present..........................................................................................................................9
State Insurers Continue To Dominate......................................................................................................9
Reaching Out To Customers..................................................................................................................10
Intense Competition..............................................................................................................................10
Global Standards...................................................................................................................................10
Some Areas of Future Growth...................................................................................................................11
Life Insurance........................................................................................................................................11
Health Insurance....................................................................................................................................11
Pension..................................................................................................................................................11
PRESENT SCENARIO OF INSURANCE INDUSTRY.........................................................................................11
Evolution of Insurance During liberalization..............................................................................................12
Growth of insurance industry post liberalization......................................................................................12
Act:............................................................................................................................................................14
Financial and Insurance Sector in India.....................................................................................................14
Insurance sector in India in 2010...............................................................................................................15
General Insurance.....................................................................................................................................15
Health Insurance.......................................................................................................................................16
Investments...............................................................................................................................................17
Investment Policy......................................................................................................................................17
Indian insurance industry to have stable profitable growth......................................................................18
India’s insurance sector poised for 200% growth by 2010........................................................................19

1|Managerial economics
COMPETITION............................................................................................................................................20
MARKET SIZE AND GROWTH.....................................................................................................................22
Insurance Industry Trends.........................................................................................................................22
APPLICATION OF INFORMATION TECHNOLOGY IN INSURANCE SECTOR...................................................23
CONCLUSION.............................................................................................................................................24
References.................................................................................................................................................24

2|Managerial economics
Concept of insurance

In our daily life, whenever there is uncertainly there is an involvement of risk. The instinct of
security against such risk is one of the basic motivating forces for determining human attitudes.
As a sequel to this quest for security, the concept of insurance must have been born. The urge to
provide insurance or protection against the loss of life and property

What is insurance

In law and economics, insurance is a form of risk management primarily used to hedge against

the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of
a loss, from one entity to another, in exchange for payment. An insurer is a company selling the
insurance; an insured, or policyholder, is the person or entity buying the insurance policy. The
insurance rate is a factor used to determine the amount to be charged for a certain amount of
insurance coverage, called the premium. Risk management, the practice of appraising and
controlling risk, has evolved as a discrete field of study and practice.

Type of insurance:

1. Auto Insurance.
2. Home Insurance.
3. Health insurance
4. Accident, sickness and unemployment insurance
5. Casualty Insurance.
6. Life Insurance.
7. Property Insurance.
8. Supplemental natural disaster insurance
9. Liability insurance
10. Public liability insurance
11. Mortgage insurance
12. Pet insurance
13. Pollution insurance
14. Purchase insurance 
15. Travel insurance

3|Managerial economics
Introduction

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. But, unlike life insurance, a different structure was created for the industry.
One holding company was formed with four subsidiaries. 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. In what follows, we
examine the insurance industry in India through different regulatory regimes. A totally regulation
free regime ended in 1912 with the introduction of regulation of life insurance. A comprehensive
regulatory scheme came into place in 1938. This was disabled throughliberlzation. But, the
Insurance Act of 1938 became relevant again in 2000 with deregulation. With a strong hint of
sustained growth of the economy in the recent past, the Indian market is likely to grow
substantially over the next few decades. The rest of the chapter is organized as follows. First, we
study the evolution of insurance business before liberlzation. This is important because the
denationalized structure brought back to play important legal rules from 1938. Next we analyze
the nationalized era separately for life and property casualty business as they were not
nationalized simultaneously. Much of post-independence history of insurance in India was the
history of nationalized insurance. In the following section, we examine the new legal structure
introduced after the industry was denationalized in 2000. In the penultimate section, we examine
the current state of play and projected future of the industry. The final section sets out
conclusions.

Evolution of Insurance Before liberalization

Insurance in the Colonial Era. 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
4|Managerial economics
these companies operated in India but did not insure the lives of Indians. They were insuring the
lives of Europeans living in India.

Some of the companies that started later did provide insurance for Indians. But, they were
treated as “substandard”. Substandard in insurance parlance refers to lives with physical
disability. In this case, the common adjustment made was a “rating-up” of five to seven years to
normal British life in India. This was a common practice of the European companies at the time
whether they were operating in Asia or Latin America. The first company to sell policies to
Indians with “fair value” was the Bombay Mutual Life Assurance Society starting in 1871.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.

Insurance business was conducted in India without any specific regulation for the insurance
business. They were subject to Indian Companies Act (1866). After the start of the “Be Indian
Buy Indian Movement” in 1905, indigenous enterprises sprang up in many industries. Not
surprisingly, the Movement also touched the insurance industry leading to the formation of
dozens of life insurance companies along with provident fund companies. In 1912, two sets of
legislation were passed: the Indian Life Assurance Companies Act and the Provident Insurance
Societies Act. There are several striking features of these legislations. First, they were the first
legislations in India that particularly targeted the insurance sector. Second, they left general
insurance business out of it. The government did not feel the necessity to regulate general
insurance. Third, they restricted activities of the Indian insurers but not the foreign insurers even
though the model used was the British Act of 1909. Comprehensive insurance legislation
covering both life and non-life business did not materialize for the next twenty-six years. During
the first phase of these years, Great Britain entered World War I. This event disrupted all
legislative initiatives. Later, Indians demanded freedom from the British. As a concession, India
was granted “home rule” through the Government of India Act of 1935. It provided for
Legislative Assemblies for provincial governments as well as for the central government. But
supreme authority of promulgated laws still stayed with the British Crown.

The only significant legislative change before the Insurance Act of 1938, was Act of 1928. It
enabled the Government of India to collect information of

5|Managerial economics
(1) Indian insurance companies operating in India,

(2) Foreign insurance companies operating in India and

(3) Indian insurance companies operating in foreign countries.

The last two elements were missing from the 1912 Insurance Act. Information thus collected
allows us to compare the average size face value of Indian insurance companies against their
foreign counterparts. In 1928, the average policy value of an Indian company was 619 US dollars
against 1,150 US dollars for foreign companies Foreign insurance companies were doing well
during that period. In 1938, the average size of the policy sold by Indian companies has fallen to
532 US dollars and that of foreign companies had risen somewhat to 1, 188 US dollars (in 1928,
the average size was 1,150 US dollars). The Birth of the Insurance Act, 1938. In 1937, the
Government of India set up a consultative committee. Mr. Sushil C. Sen, a well known solicitor
of Calcutta, was appointed the chair of the committee. He consulted a wide range of interested
parties including the industry. It was debated in the Legislative Assembly. Finally, in 1938, the
Insurance Act was passed. This piece of legislation was the first comprehensive one in India. It
covered both life and general insurance companies. It clearly defined what would come under the
life insurance business, the fire insurance business and so on. It covered deposits, supervision of
insurance companies, investments, commissions of agents, directors appointed by the
policyholders among others. This piece of legislation lost significance afterliberlzation. Life
insurance was nationalized in 1956 and general insurance in 1972 respectively. With the
privatization in the late Twentieth Century, it has returned as the backbone of the current
legislation of insurance

Milestones of Insurance Regulations in the 20 th Century

1912 The Indian Life Insurance Company Act

1928 Indian Insurance Companies Act

1938 The Insurance Act: Comprehensive Act to regulate insurance business in India

1956 liberalization of life insurance business in India with a monopoly awarded to the Life
Insurance Corporation of India

6|Managerial economics
1972 liberalization of general insurance business in India with the formation of a holding
company General Insurance Corporation

1993 Setting up of Malhotra Committee

1994 Recommendations of Malhotra Committee published

1995 Setting up of Mukherjee Committee

1996 Setting up of Insurance Regulatory Authority (IRA) Recommendations of the IRA

1997 Mukherjee Committee Report submitted but not made public

1997 The Government gives greater autonomy to Life Insurance Corporation, General
Insurance Corporation 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 Non-resident Indians and Foreign Institutional Investors

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 Bill

1999 Cabinet clears Insurance Regulatory and Development Authority Bill

2000 President gives Assent to the Insurance Regulatory and Development Authority Bill

What are the emerging trends in the insurance industry in terms of product
innovations?

Several private players have ventured into the insurance industry since last four years and the
growth of the industry has been averaging around 15%. In the first year it was 100% but now it
has gradually tapered down to 15%. On an average it is around 10% to 15% per annum. The life
insurance industry has led the growth in the insurance sector. There the growth is mainly due to
unit linked products which are very akin to mutual funds product. They are looked upon as

7|Managerial economics
investment returns. So, they involve a very small element of risk coverage. Perhaps that is the
reason they have picked up fast.

In General insurance growth has come in the form of personalized business like health insurance
and the motor insurance. More innovations have come in segments like overseas travel insurance
policies. The procedures have been simplified. Similarly in health several products have come up
and many modifications have been introduced. Some companies have packaged some of the
policies and they are giving extended coverage.

The main bottleneck to innovation is that even today 70% of the market is tariffed. So you
cannot issue a policy other than what is specified in the tariff. More innovations will come once
the entire market is detariffed. Only then different products can be introduced. For example,
more innovative health insurance products can be introduced to suit the common people and
different age groups.

Indian Insurance Market – History

Insurance has a long history in India. Life Insurance in its current form was introduced in 1818
when Oriental Life Insurance Company began its operations in India. General Insurance was
however a comparatively late entrant in 1850 when Triton Insurance company set up its base in
Kolkata. History of Insurance in India can be broadly bifurcated into three eras: a) Pre
liberalization b) liberalization and c) Post liberalization. Life Insurance was the first to be
nationalized in 1956. Life Insurance Corporation of India was formed by consolidating the
operations of various insurance companies. General Insurance followed suit and was nationalized
in 1973. General Insurance Corporation of India was set up as the controlling body with New
India, United India, National and Oriental as its subsidiaries. The process of opening up the
insurance sector was initiated against the background of Economic Reform process which
commenced from 1991. For this purpose Malhotra Committee was formed during this year who
submitted their report in 1994 and Insurance Regulatory Development Act (IRDA) was passed in
1999. Resultantly Indian Insurance was opened for private companies and Private Insurance
Company effectively started operations from 2001.

8|Managerial economics
Insurance Market- Present

The insurance sector was opened up for private participation four years ago. For years now, the
private players are active in the liberalized environment. The insurance market have witnessed
dynamic changes which includes presence of a fairly large number of insurers both life and non-
life segment. Most of the private insurance companies have formed joint venture partnering well
recognized foreign players across the globe.

There are now 29 insurance companies operating in the Indian market – 14 private life insurers,
nine private non-life insurers and six public sector companies. With many more joint ventures in
the offing, the insurance industry in India today stands at a crossroads as competition intensifies
and companies prepare survival strategies in a detariffed scenario.

There is pressure from both within the country and outside on the Government to increase the
foreign direct investment (FDI) limit from the current 26% to 49%, which would help JV
partners to bring in funds for expansion.

There are opportunities in the pensions sector where regulations are being framed. Less than 10
% of Indians above the age of 60 receive pensions. The IRDA has issued the first licence for a
standalone health company in the country as many more players wait to enter. The health
insurance sector has tremendous growth potential, and as it matures and new players enter,
product innovation and enhancement will increase. The deepening of the health database over
time will also allow players to develop and price products for larger segments of society.

State Insurers Continue To Dominate There may be room for many more players in a
large underinsured market like India with a population of over one billion. But the reality is that
the intense competition in the last five years has made it difficult for new entrants to keep pace
with the leaders and thereby failing to make any impact in the market.

Also as the private sector controls over 26.18% of the life insurance market and over 26.53% of
the non-life market, the public sector companies still call the shots.

The country’s largest life insurer, Life Insurance Corporation of India (LIC), had a share of
74.82% in new business premium income in November 2005.
9|Managerial economics
Similarly, the four public-sector non-life insurers – New India Assurance, National Insurance,
Oriental Insurance and United India Insurance – had a combined market share of 73.47% as of
October 2005. ICICI Prudential Life Insurance Company continues to lead the private sector
with a 7.26% market share in terms of fresh premium, whereas ICICI Lombard General
Insurance Company is the leader among the private non-life players with a 8.11% market share.
ICICI Lombard has focused on growing the market for general insurance products and increasing
penetration within existing customers through product innovation and distribution.

Reaching Out To Customers No doubt, the customer profile in the insurance industry is
changing with the introduction of large number of divergent intermediaries such as brokers,
corporate agents, and banc assurance. The industry now deals with customers who know what
they want and when, and are more demanding in terms of better service and speedier responses.
With the industry all set to move to a detariffed regime by 2007, there will be considerable
improvement in customer service levels, product innovation and newer standards of
underwriting.

Intense Competition In a de-tariffed environment, competition will manifest itself in prices,

products, underwriting criteria, innovative sales methods and creditworthiness. Insurance
companies will vie with each other to capture market share through better pricing and client
segmentation.The battle has so far been fought in the big urban cities, but in the next few years,
increased competition will drive insurers to rural and semi-urban markets.

Global Standards While the world is eyeing India for growth and expansion, Indian

companies are becoming increasingly world class. Take the case of LIC, which has set its sight
on becoming a major global player following a Rs280-crore investment from the Indian
government. The company now operates in Mauritius, Fiji, the UK, Sri Lanka, Nepal and will
soon start operations in Saudi Arabia. It also plans to venture into the African and Asia-Pacific
regions in 2006.

The year 2005 was a testing phase for the general insurance industry with a series of catastrophes
hitting the Indian sub-continent.

10 | M a n a g e r i a l e c o n o m i c s
Some Areas of Future Growth

Life Insurance
The traditional life insurance business for the LIC has been a little more than a savings policy.
Term life (where the insurance company pays a predetermined amount if the policyholder dies
within a given time but it pays nothing if the policyholder does not die) has accounted for less
than 2% of the insurance premium of the LIC (Mitra and Nayak, 2001). For the new life
insurance companies, term life policies would be the main line of business.

Health Insurance
Health insurance expenditure in India is roughly 6% of GDP, much higher than most other
countries with the same level of economic development. Of that, 4.7% is private and the rest is
public. What is even more striking is that 4.5% are out of pocket expenditure (Berman, 1996).
There has been an almost total failure of the public health care system in India. This creates an
opportunity for the new insurance companies. Thus, private insurance companies will be able to
sell health insurance to a vast number of families who would like to have health care cover but
do not have it.

Pension
The pension system in India is in its infancy. There are generally three forms of plans: provident
funds, gratuities and pension funds. Most of the pension schemes are confined to government
employees (and some large companies). The vast majority of workers are in the informal sector.
As a result, most workers do not have any retirement benefits to fall back on after retirement.
Total assets of all the pension plans in India amount to less than USD 40 billion. Therefore, there
is a huge scope for the development of pension funds in India. The finance minister of India has
repeatedly asserted that a Latin American style reform of the privatized pension system
in India would be welcome (Roy, 1997). Given all the pros and cons, it is not clear whether such
a wholesale privatization would really benefit India or not (Sinha, 2000)

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

11 | M a n a g e r i a l e c o n o m i c s
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 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

Evolution of Insurance During liberalization

Rationale for liberalization. After India became independent in 1947, National Planning modeled
after the Soviet Union was implemented. Nowhere it was more evident in the Second Five Year
Plan implemented by the Prime Minister Jawaharlal Nehru. His vision was to have key industries
under direct government control to facilitate the implementation of National Planning. Insurance
business was not seen to be of strategic importance. Therefore, there are two questions we need
to address. First, why did the Government of India nationalize life insurance in 1956? Second,
why did it not nationalize general insurance at the same time? We deal with the first question
first.

Growth of insurance industry post liberalization

The journey of insurance liberalization process in India is now several years old. The first major
milestone in this journey has been the passing of Insurance Regulatory and Development
Authority Act, 1999. This along with amendments to the Insurance Act 1983, LIC and GIC Acts

12 | M a n a g e r i a l e c o n o m i c s
paves the way for the entry of private players and possibly the privatization of the hitherto public
monopolies LIC and GIC. Opening up of insurance to private sector including foreign
participation has resulted into various opportunities and challenges.
The life insurance sector has grown tremendously over the years, and have more people covered
under its policy than ever before. The Insurance Regulatory Development Authority now has laid
certain guidelines with concern to the documents required for the policy to be insured.

The insurance companies have to follow all the requirements of the IRDA regarding the address
proofs and identity proofs of the insurer. The company has the entire right to verify the address
proof and identity proofs. The policy market has changed a lot with the advent of ULIPs.
Insurance is a federal subject in India. The insurance sector has gone through a number of phases
and changes. Since 1999, when the government opened up the insurance sector by allowing
private companies to solicit insurance and also allowing foreign direct investment of up to 26%,
the insurance sector has been a booming market.

Insurance in its current form has its history dating back until 1818, when Oriental Life Insurance
Company was started by Anita Bhavsar in Kolkata to cater to the needs of European community.
The pre-independence era in India saw discrimination between the lives of foreigners (English)
and Indians with higher premiums being charged for the latter. In 1870, Bombay Mutual Life
Assurance Society became the first Indian insurer At the dawn of the twentieth century, many
insurance companies were founded. In the year 1912, the Life Insurance Companies Act and the
Provident Fund Act were passed to regulate the insurance business. The Life Insurance
Companies Act, 1912 made it necessary that the premium-rate tables and periodical valuations of
companies should be certified by an actuary. The oldest existing insurance company in India is
the National Insurance Company Ltd., which was founded in 1906. It is in business. The
Government of India issued an Ordinance on 19th January, 1956 nationalizing the Life Insurance
sector and Life Insurance Corporation came into existence in the same year. The Life Insurance
Corporation (LIC) absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies—
245 Indian and foreign insurers in all. In 1972 with the General Insurance Business Act was
passed by the Indian Parliament, and consequently, General Insurance business was nationalized
with effect from 1st January, 1973. 107 insurers were amalgamated and grouped into four
companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd.,

13 | M a n a g e r i a l e c o n o m i c s
the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General
Insurance Corporation of India was incorporated as a company in 1971 and it commence
business on January 1sst 1973.

With effect from December 2000, these subsidiaries have been de-linked from the parent
company and were set up as independent insurance companies: Oriental Insurance Company
Limited, New India Assurance Company Limited, National Insurance Company Limited and
United India Insurance Company Limited.

Act:

The insurance sector went through a full circle of phases from being unregulated to completely
regulate and then currently being partly deregulated. It is governed by a number of acts.

The Insurance Act of 1938 was the first legislation governing all forms of insurance to provide
strict state control over insurance business. Life insurance in India was completely nationalized
on January 19, 1956, through the Life Insurance Corporation Act. All 245 insurance companies
operating then in the country were merged into one entity, the Life Insurance Corporation of
India

Financial and Insurance Sector in India

The financial sector in India has become stronger in terms of capital and the number of
customers. It has become globally competitive and diverse aiming, at higher productivity and
efficiency. 
Exposure to worldwide competition and deregulation in Indian financial sector has led to the
emergence of better quality products and services. Reforms have changed the face of Indian
banking and finance. The banking sector has improved manifolds in terms of capital adequacy,
asset classification, profitability, income recognition, provisioning, exposure limits, investment
fluctuation reserve, risk management, etc.
 Diversifying into investment banking, insurance, credit cards, depository services, mortgage
financing, securitization has increased revenues. As large number of players in various fields
enters the market, competition would be intensified by mutual funds, Non Banking Finance
Corporations (NBFCs), post offices, etc. from both domestic and foreign players. All this would
14 | M a n a g e r i a l e c o n o m i c s
lead to increased sophistication and technology in the sector. Corporate governance would come
into the picture and other financial institutions would have to reach global standards. Also the
limit for FDI in private banks is increased to 74% and the limit for FII is 49%. There are many
challenges ahead for the banking sector such as technology, consumer satisfaction, corporate
governance, risk management, etc. and they are redefining their priorities, which are now
focused on cost reduction, product differentiation and customer centric services. Some of the
major players in this sector are HDFC, ICICI, HSBC, State Bank of India, Punjab National Bank,
Ing Vysya, ABN Amro Bank, Centurion Bank, City Bank, etc. 

Insurance sector in India in 2010

The US$ 41-billion Indian life insurance industry is considered the fifth largest life insurance
market, and growing at a rapid pace of 32-34 per cent annually, according to the Life Insurance
Council.

Life insurance companies have witnessed a 70 per cent jump in new premium collection during
the first five months of the financial year. According to data released by the Insurance
Regulatory and Development Authority (IRDA), insurance companies garnered US$ 11.73
billion in new business premium during April-August 2010, against US$ 6.90 billion in the
corresponding period last year.

State-owned LIC gained the most, with an increase of 88 per cent in new business premium
income. At the same time, private sector insurance recorded a 34 per cent increase in income
from sales of new policies. New business income collected by ICICI Prudential stood at US$
576.60 million during April-August. SBI Life remained in the third position after registering a 40
per cent increase in new sales to US$ 531.87 million from US$ 379.20 million in April-August
2009. HDFC Standard Life saw a robust 54 per cent increase in new business.

General Insurance

According to data released by IRDA, the general insurance industry recorded 22.76 per cent
year-on-year (y-o-y) growth in gross premium underwritten during April–October 2010. The
industry collected gross premium of US$ 5.29 billion during April–October 2010 compared with
US$ 4.31 billion in the same period last year.
15 | M a n a g e r i a l e c o n o m i c s
The public sector players posted 21.09 per cent y-o-y growth in gross premium during April–
October 2010 over the corresponding period last year. At the same time, private players recorded
a 25.19 per cent y-o-y increase in gross premium. The state-run insurers fared better than their
private counterparts, with New India Insurance collecting the maximum premium of US$ 916.77
million during April-October 2010, compared to US$ 770.25 million in the same period last
year, growing by 19.04 per cent. According to the IRDA's Summary Reports of Motor Data of
Public and Private Sector Insurers - 2009-10, nearly 28.4 million policies were issued and a total
premium of US$ 2.31 billion was collected.

Health Insurance

The Indian health insurance market has emerged as a new and lucrative growth avenue for both
the existing players as well as the new entrants. According to a latest research report "Booming
Health Insurance in India" by research firm RNCOS released in April 2010, all emerging trends
including the key factors driving the market growth. Furthermore, the report also identifies what
could be the possible growth areas for expansion and gives a detailed overview of the
competitive landscape. The Indian health insurance market has continued to post record growth
in the last two fiscals (2008-09 and 2009-10). Moreover, as per the RNCOS estimates, the health
insurance premium is expected to grow at a compound annual growth rate (CAGR) of over 25
per cent for the period spanning from 2009-10 to 2013-14.

According to a report published by Yes Bank and an industry body in November 2009, the
medical insurance sector would account for US$ 3 billion in the next three years. Health
insurance premium collections were US$ 1.75 billion in 2009-10 compared with US$ 893.76
million in the previous year, IRDA said in its annual report for 2009-10. It should, however, be
noted that figures for 2009-10 include policies served by third party administrators (TPAs) as
well as those directly served by insurers whereas figures for 2008-09 include policies served by
TPAs only.

16 | M a n a g e r i a l e c o n o m i c s
Figure: Health Insurance Premium (2002-2013E)

Investments

The Indian insurance unit of Dutch financial services firm ING plans to invest US$ 51 million in
2010/11 to fund expansion in India.

Private life insurer Future General India will expand its distribution network by opening around
100 branches in addition to its existing network of 91 branches during 2010. It will also increase
the agency force by 21,000 to 65,000 people.

Investment Policy

According to a guidance note released by IRDA, the regulator has increased the lock-in period
for all unit-linked insurance plans (ULIPS) to five years from the current three years, thereby
making them long-term financial instruments, which basically provide risk protection. The
commission and expenses have also been reduced by evenly distributing them throughout the
lock-in period. Moreover, IRDA said that insurers will provide a mortality cover or a health
cover to all ULIPS, other than pension and annuity products, thereby increasing the risk cover
component on them.

IRDA has ordered life insurers to offer customers a guaranteed return of 4.5 per cent per annum
on pension and annuity plans. In a move that would result in lower capital requirement for life
insurers, the IRDA has asked them to initiate the process of calculating ‘economic capital’ from
March 2010.

17 | M a n a g e r i a l e c o n o m i c s
Exchange rate used:
1 USD = 44.49 INR (as of November 2010)
1 USD = 44.84 INR (as of December 2010)

Indian insurance industry to have stable profitable growth

The Indian life insurance industry is at the threshold of having a stable profitable growth, says a
study.

"The insurance companies are poised for a quantum leap in performance with unprecedented
growth opportunities, notwithstanding a temporary sliding growth curve," says a study by the
Confederation of Indian Industry (CII) and Ernst and Young (E and Y).

According to the study, most large insurance players are expected to decelerate the pace of
distribution growth and increase their focus on the retention of channel partners and improve
channel productivity.

India is fast emerging as one of the world's most dynamic insurance markets with significant
untapped potential, it says. The Insurance Regulatory and Development Authority (IRDA) - will
become more critical and it is in the finalization stage of its regulations, which would be
instrumental in navigating the future course of the insurance industry.

IRDA has introduced certain regulations to help improve disclosures, profitability and capital as
well as to ensure consumer protection. Further, the regulator is amid finalizing the norms for the
initial public offer (IPO) of insurance companies.

According to the study, there are large untapped areas which have not yet benefitted from the
upside of insurance. Imparting financial literacy, incentivizing Indian households to transfer
savings from physical assets to financial assets and taking the distribution network to rural areas
are expected to help bring more and more individuals within the insurance ambit. While
insurance penetration in India is higher than that in countries such as China and Brazil, it still has
a long way to go.

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India's growing consumer class, rising insurance awareness and increasing domestic savings and
investments are among the most critical factors that have positively driven the market
penetration of the insurance products among its consumer segments.Risk management also plays
a very critical role in the insurance business.

India’s insurance sector poised for 200% growth by 2010

Indian insurance sector is likely to register unprecedented growth of 200% and attain a size of
Rs. 2000 billion ($51.2 billion) by 2009-10, in which a private sector insurance business will
achieve a growth rate of 140% as a result of aggressive marketing technique being adopted by
them against 35-40% growth rate of state owned insurance companies.

The aforesaid findings are made by The Associated Chambers of Commerce and Industry of
India (ASSOCHAM) on `Insurance in Next 2 Years’, saying that in the last couple of years, the
insurance sector has grown by CAGR of around 175% and the trend will emerge still better
because of potential factor. Currently, the insurance sector size is estimated at Rs.500 billion
($12.8 billion).

Releasing the ASSOCHAM findings, its President, Mr. Venugopal N. Dhoot said that on account
of intense marketing strategies adopted by private insurance players, the market share of state
owned insurance companies like GIC, LIC and others have come down to 70% in last 4-5 years
from over 97%.
The private insurance players despite the sector is still regulated has been offering rate of return
(RoR) to its policy holders which is estimated at about 35% as against 20% of domestic
insurance companies. This factor is mainly responsible for hike in private insurance market share
which will grow further which is why the ASSOCHAM estimates that its growth rate could even
exceed 140%.
Secondly, the state owned insurance companies such as LIC and GIC have limited number of
policies to offer to their subscribers while in case of private insurance companies, their policy
numbers are many more and the premium amount as well as the maturity period is much
competitive as against those of government insurance companies. Interestingly, said Mr. Dhoot
that the private sector insurance players have started exploring the rural markets in which until
recently, the state owned companies had the monopoly.

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 The Chamber has projected that in rural markets, the share of private insurance players would
increase substantially as these have been able to generate a faith among their rural consumers.
Estimating the potential of the Indian insurance market from the perspective of macro-economic
variables such as the ratio of premium to GDP, ASSOCHAM reveals that India’s life insurance
premium, as a percentage of GDP is 1.8% against 5.2% in the US, 6.5% in the UK or 8% in
South Korea.
ASSOCHAM findings further reveal that in the coming years, the corporate segment, as a whole
will not be a big growth area for insurance companies. This is because penetration is already
good and companies receive good services. In both volumes and profitability therefore, the scope
for expansion is modest. The Chamber has suggested that insurer’s strategy should be to
stimulate demand in areas that are currently not served at all. Insurance companies mostly focus
on manufacturing sector, however, the services sector is taking a large and growing share of
India’s GDP. This offers immense opportunities for expansion opportunities.
To understand the prospects for insurance companies in rural India, it is very important to
understand the requirements of India’s villagers, their daily lives, their peculiar needs and their
occupational structures. The rural market offers tremendous growth opportunities for insurance
companies and insurers should develop viable and cost-effective distribution channels; build
consumer awareness and confidence. The ASSOCHAM found that there are a total 124 million
rural households. Nearly 20% of all farmers in rural India own a Kissan Credit cards. The 25
million credit cards used till date offer a huge data base and opportunity for insurance
companies. An extensive rural agent network for sale of insurance products could be established.
The agent can play a major role in creating awareness, motivating purchase and rendering
insurance services.

COMPETITION

Private and Foreign entrants in the Insurance Industry made others difficult to retain their
market. Higher customer aspirations lead to new expectations and compel him to move towards
the insurer who provides him the best service in time.

The following table shows the market share of life and non-life insurers
 MARKET SHARE (%)  

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 LIFE INSURERS  NON – LIFE INSURERS
 1. LIC 76.07 1. New India 21.41
2.  ICICI Prudential  6.91 2. National 17.11
3.  Bajaj Allianz  4.75  3. United India  17.11
 4.  HDFC Standard  2.98 4. Oriental 17.02
5.  Brila Sunlife  1.72 5. ICICI- 8.04
Lombard
 6. Tata AIG  1.66 6. Bajaj Allianz  6.15
 7.  SBI Life 1.46 7. IFFCO-Tokio 4.00
8. Max New York  1.28  8.  Tata-AIG  2.89
 9. Aviva 1.08  9. ECGC 2.50
 10. Kotak Mahindra Old Mutual 0.71  10. Royal 2.17
Sundaram
11. ING Vysya 0.54 11. Cholamandala 1.22
m
 12. AMP Sanmar 0.46 12. HDFC-Chubb 0.89
 13. Met Life 0.37 13. Reliance 0.75
General
14. Sahara Life 0.03 14. Agriculture --
Insurance Co.
 Private total  23.93 Private total  27.35
 Public total 76.07 Public total 72.65
 Grand total 100.00 Grand total   100.00
 Source : www.irdaindia.org  

In the above table shows, the private players in the life insurance business have increased their
market share to 23.93 per cent. Among them ICICI prudential is ranked first in capturing the
market followed by Bajaj Allianz and HDFC Standard. In the General Insurance sector the
private players have captured 27.35 per cent. Among them ICICI-Lombard is ranked first,
followed by Bajaj Allianz and IFFCO-Tokio.
The healthy competition in the sector enabled the State owned insurers of our mother
country to reduce its market share to 76.07 per cent and 72.65 percent in life and non-life
business respectively. Moreover, private insurers have planned to increase their market share in
the next five years. The public insurers have to enrich its approach to withhold its share.

MARKET SIZE AND GROWTH

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Figure: Annual Premium – Indian Insurance Industry: 2001-2008

Insurance Industry Trends

 Private Insurers Continue to Gain Market Share

 Motor Insurance Driving Growth
 Demand for Terror Insurance
 Changes in Regulatory Environment
 Strong Influence of Agricultural Insurance over the Industry Health Insurance- A
Growing Sector in India

Indian healthcare insurance industry was worth US$~ million in 2009 with a compounded
annual growth rate of approximately 37 percent between 2002 and 2008. The market penetration
is only around 2 percent of the total population in India. In India, health insurance is the fastest
growing segments among other non-life insurance segment.

Figure 7.1: Forecast: India Insurance Industry: 2008A - 2012F

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APPLICATION OF INFORMATION TECHNOLOGY IN INSURANCE
SECTOR

 
There is a evolutionary change in the technology that has revolutionized the entire insurance
sector. Insurance industry is a data-rich industry, and thus, there is a need to use the data for
trend analysis and personalization. With increased competition among insurers, service has
become a key issue. Moreover, customers are getting increasingly sophisticated and tech-savvy.
People today don’t want to accept the current value propositions, they want personalized
interactions and they look for more and more features and add ones and better service
The insurance companies today must meet the need of the hour for more and more personalized
approach for handling the customer. Today managing the customer intelligently is very critical
for the insurer especially in the very competitive environment. Companies need to apply
different set of rules and treatment strategies to different customer segments. However, to
personalize interactions, insurers are required to capture customer information in an integrated
system.
With the explosion of Website and greater access to direct product or policy information, there is
a need to developing better techniques to give customers a truly personalized experience.
Personalization helps organizations to reach their customers with more impact and to generate
new revenue through cross selling and up selling activities. To ensure that the customers are
receiving personalized information, many organizations are incorporating knowledge database-
repositories of content that typically include a search engine and lets the customers locate the all
document and information related to their queries of request for services. Customers can hereby

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use the knowledge database to manage their products or the company information and invoices,
claim records, and histories of the service inquiry. These products also may be able to learn from
the customer’s previous knowledge database and to use their information when determining the
relevance to the customers search request.

CONCLUSION

There is a probability of a spurt in employment opportunities. A number of web-sites are coming

up on insurance, a few financial magazines 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. From the above, we
conclude that the entry of private operators in the insurance industry is necessary and justified in
order to increase operational efficiency, Achieve greater density and insurance of the country and
greater mobilization of long-term savings for long-gestation infrastructure prefect. New players
should not company treat government as a rivalry, but they can integrate, in India achieve the
objective of growth of insurance business.

References

1. Berman, Peter. "Rethinking Health Care Systems: Private Health Care Provision
in India." Harvard School of Public Health Working Paper, November 1996.
2. http://www.lic.wwindia.com/
3. http://www.asiainsurancereview.com/edsynopsis.asp
4. www.google.com
5. www.wikipedia.com
6. www.irdaindia.org

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