Transcript
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Indian insurance sector
SCHOOL OF BUSINESS
ANANALYTICAL REPORT by GROUP 3
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ontri#
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ountr$
&
D'
in 2009. A w
ll-
v
lop
nd
volv
d insur
ncesector is
#
oon for
economicdevelopment
s it provides long-term funds for
infr
structuredevelopment
ndconcurrentl$
strengthens
the risk-t
king
#
ilit$
of thecountr$
. Further, insur
nce
h
s#
een
not
#
leemployment gener
tor, not only for the
insur
nce industry,#
ut h
s
lsocreatedsignificant demand
fora rangeofassociated professionalssuch as#
rokers,
insuranceadvisors, agents, underwriters, claims managers
andactuaries.
By thenatureof its#
usiness, insurance isclosely linked to
saving and investing. Life insurance, funded pensionsystems
andnon-life insurance haveaccumulatedasignificant
amount ofcapital over time, which can#
e invested
productively in theeconomy. The mutual dependenceof
insuranceandcapital markets playsan instrumental role in
channeling fundsand investment capabilities toaugment the
development potential of the Indianeconomy.
Indias growing consumer class, rising insurance awareness,
increasing domestic savings and investments are among the
most critical factors that have positivelydriven the market
penetrationof the insurance productsamong itsconsumer
segments. However, thereare largeuntappedareas, which
haveyet not benefited from theupsideof insurance.
Imparting financial literacy, incentivizing Indian households to
transfersavings from physical assets to financial assetsand
taking thedistributionnetwork to rural areasare
expected to help bring moreand more individuals within
the insuranceambit. While insurance penetration in India is
higher than that incountriessuch as
(
hinaand Brazil, it stillhasaconsiderably long way to go.
The insurance industry in India has visibly progressed
since the time whenbusinesses were tightly regulatedand
concentrated in the handsofa few publicsector insurers.
Following the passageof the Insurance ) egulatoryand
Development Authority Act in 1999, Indiaabandoned
publicsectorexclusivity in the insurance industry in favor
of market-drivencompetition. Thisshift hasbrought about
majorchanges to the industry. Thenew eraof insurance
development hasseen theentryof international insurers,
the proliferationof innovative productsanddistribution
channels, and the raising ofsupervisionstandards.
The period post-sector liberalization, which wecall'
hase
I, has witnessedanunprecedentedsurge in thesalesof
insurance products, with the industry recording a(
A&
) of
24.2% inannualized premium equivalent during FY00-05.
The insurance industry, in its first phaseofdevelopment, has
been relying on regularcapital infusions from the promoters
as its lifeline. High new businessstrainandexpanding
distributionnetworks have resulted inaccounting losses
across the industry. Inorder to meet theircommitment
towardclaim settlement and reservecreation, promoters
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havebeen investing additional capital, resulting in "cash-
burn." The tradeoff between "growth" and "profitability" was
heavily inclined toward the former.
Thenext four to fiveyearscanbe termedas1
hase II,
which saw players focusonanexpanding product range,
developing innovative productsandbuilding a robust
distributionchannel. During this period, i.e., FY05-09, the
industry grew at a2
A3
4 of 25.9%. Insurers wereshiftingweight from the
1
hase I philosophyof "growth versus
profitability" to the1
hase II mantraof "profitable growth."
Asa result, the focusshifted from "growth" to "profitability,"
with product pricing becoming more rational basedon more
conservativeassumptions.1
roduct innovationcontinued
and traditional policies gainedsome foothold inanotherwise
unit-linked incentive product ( 5 LI1
) driven market.
The Indian life insurance industry stands at the threshold
of launching its1
hase III growth. The phase is marked by
bringing the industry to a stable position, ensuring "stable
profitable growth." Most large players will now look to
decelerate the paceofdistribution growth and increase their
focuson the retentionofchannel partnersas well as improvechannel productivity. Further, insurancecompaniesare
working toward improving persistency.
At thiscrosssection, the roleof the regulatorbecomes
critical. The Insurance 4 egulatoryand Development
Authority (I 4 DA) is in the finalizationstage vis--vis most of
its regulations, which wouldbe instrumental innavigating
the futurecourseof the insurance industry. I 4 DA has
introducedcertain regulations to help improvedisclosures,
profitabilityandcapital as well asensureconsumer
protection. Further, the regulator isamid finalizing thenorms
for the initial publicoffering (I1
6
) of insurance
companies. Inasector wherenoneof the playersare listed,
the I1
6
of insurancecompaniescouldbea milestone in the
future growth of thesector.
4 isk management playsa verycritical role in the insurance
business. In thenext three to fouryears, India plans toshiftfrom thecurrent solvency I norms to risk-basedsolvency
norms, called thesolvency II model. Thischange will result in
thebetterapportionment of risk in thebackdrop of the actual
risk associated with theasset.
With the rising competition, the industry may also witness
consolidation among smaller players and the emergence
ofsome large players. The regulator is in the processof
finalizing guidelines for mergersandacquisitions in the
insurancespace in India. The government, regulatorand
the insurancecompaniesarenow focusedon maintaining
a favorableenvironment forsustainable growth, higher
contributionof the industry toeconomicdevelopment and
the increasing reach of insurance to theunderdevelopedareasof thecountry.
Tosummarize, the Indian insurance industry is poised for a
quantum leap in performance with unprecedented growth
opportunities, notwithstanding a temporary sliding growth
curve. Thestage isnow well poised for the real show
tocommence.
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Introduction
Theeconomic reforms initiated in theearly 90s paved the
way for the growth and opening up of the financial sector,
which led to a sustained period of economic growth. The
insurance industry wasopenedup for private players in
2000, and hasseen tremendous growth over the past decade
with theentryof global insurance majors. India is fast
emerging asoneof the worlds most dynamic insurance
markets with significant untapped potential.
The insurancesector playsacritical role inacountrys
economicdevelopment. It actsasa mobilizerofsavings, a
financial intermediary, a promoterof investment activities,
astabilizerof financial marketsanda risk manager. The
life insurancesector playsan important role in providing
risk cover, investment and tax planning for individuals; the
non-life insurance industry providesa risk cover forassets.
Health insuranceand pensionsystemsare fundamental to
protecting individualsagainst the hazardsof life, and India,
as thesecond-most populousnation in the world, offers
significant potential for that typeofcover. Furthermore,
fireand liability insuranceareessential forcorporationstosafeguard infrastructure projectsand investment risks.
7
rivate insurancesystemscomplement social security
systemsandadd valueby matching risk with price.
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Appropriate risk pricing isoneof the most powerful tools for
setting the right incentives for the allocation of resources, a
feature which is the key to a fast-developing country such
as India.
By the nature of itsbusiness, insurance isclosely related
to savings and investing. Life insurance, funded pension
systems, and toa lesserextent, non-life insurance, will
accumulate a significant amount of capital over time, whichcanbe invested productively in theeconomy.
There are good reasons to expect that the growth
momentum canbesustained. In particular, there is
significant untapped potential in varioussegmentsof the
market. While thenation is heavilyexposed tonatural
catastrophes, the insurancecover to mitigate thenegative
financial consequencesof theseadverseevents isstill
underdeveloped. Thesame is true forboth pensionand
health insurance, where insurerscan playacritical role
inbridging demandandsupply gaps. The majorchanges
inboth national economic policiesand insuranceregulations will highlight the prospectsof thesesegments
going forward.
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Section I:Industryoverview
The insurance industry in India hascomea long waysince
the time whenbusinesses were tightly regulatedand
concentrated in the handsofa few publicsector insurers.
Following the passageof the Insurance 8 egulatoryand
Development Authority Act in 1999, Indiaabandoned
publicsectorexclusivity in the insurance industry in favor
of market-drivencompetition. Thisshift hasbrought about
majorchanges to the industry. Thebeginning ofanew eraofinsurancedevelopment hasseen theentryof international
insurers, the proliferationof innovative products
anddistributionchannels, as well as the raising of
supervisorystandards.
volutionof the industry
The growing demand for insurancearound the world
continues to havea positiveeffect on the insurance industry
acrossall economies. India, being oneof the fastest-growing
economies (even in thecurrent global economicslowdown),
hasexhibitedasignificant increase in its9
D@
, andan
even larger increase in its
9
D
@
percapitaanddisposableincome. Increasing disposable income, coupled with the high
potential demand for insuranceofferings, hasopened many
doors forboth domesticand foreign insurers. The following
tablebrieflydepicts theevolutionof the insurancesector
in India.
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EA
B
ibitC
.C
. TracinD
tB
e cB
ronoloD
ical eE
olution of tB
e insurance industry
Year EF
ent
G
H
G
H
Oriental Life Insurance Co.I
as establisP
ed in Calcutta.
G
H Q R
The first insurance coS T
any,U
oS
bayV
utual Life InsuranceW
ociety,I
as forS
ed.
G
X R Q
The IndianV
ercantile Insurance LiS
itedI
as forS
ed.
G
X
G
Y
Life Insurance CoS T
anies Act and the Pension
und A ct ofG
X
G
Y
U ea
innina
of forS
al insurance rea
ulations
G
X Y H
The Indian Insurance CoS T
anies ActI
asT
assed to collect statistical data on both life and non -life.
G
X
3H
The Insurance Act ofG
X
3H
I asT
assed; there I as strict state suT
erF ision to control fraud s.
G
X b c
The Central GoF ern
S
ent tood
oF erY e b
Indian and foreia n life insurers as I ell asT
roF ident societies and nationalif ed
these entities.
The LIC Act of GX b c
I
asT
assed.
G
X b Q
The code of conduct by the General Insurance Council to ensure fair conduct and ethical businessT
racticesI
as fraS
ed.
G
X Q Y
The General InsuranceU
usiness (Nationalif
ation) ActI
asT
assed.
G
X X
G
U
ea
innina
of econoS
ic liberalif
ation
G
X X
3 The V alhotra Co S S itteeI
as set u T to co S T le S ent the reforS s initiated in the financial s ector.
G
X X e
g etariffication of aF
iation, liability, T ersonal accidents and health and S arine cara
o T roducts
G
X X X
The Insurance Rea
ulatory andg
eF
eloT S
ent Authority (IRg
A)U
illI
asT
assed in the ParliaS
ent.Y R R R
IR g AI
as incorT
orated as the statutory body to rea
ulate and rea
isterT
riF
ate sector insurance coS T
anies.
General Insurance CorT oration (GIC), alona
I
ith its four subsidiaries, i.e., National Insurance CoS T
any Ltd., OrientalInsurance Co S T any Ltd., Ne
I
India Assurance Co S T any Ltd. and United India Assurance Co S T any Ltd.,I
as S ade India s
national reinsurer.Y R R b
g
etariffication ofS
arine hullY R R c
Relah
ation of foreia
n ei
uity norS
s, thus facilitatina
the entry of neI
T
layersY R R Q
g
etariffication of all non -life insuranceT
roducts eh
ceT
t the auto third-T
arty liability sea
S
ent
p
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In India, theq
inistry ofr
inance is ress
onsible for enactint
and iu s
leu
entint
let
islations for the insurance sectorv
ith
the Insurance Ret
ulatory andw
ex
elos u
ent Authority (IRw
A)
entitledv
ith the ret
ulatory and dex
elos u
ental role. Thet
ox
ernu
ent also ov
ns theu
ajority share in sou
eu
ajor
cou s
anies in both life and non -life insurance set u
ents.
Ey
hibit
.
des
icts the struc ture of the insurance industry
in India.
Ey
hibit .
. Indian insurance industry structure
inistry of
inance(Go ern
ent of India)
Current scenario
At
rov
int
u
iddle -class set u
ent, risint
incou
e, increasint
insurance av
areness, risint
inx
estu
ents and infrastructure
ss
endint
, hax
e laid a stront
foundation to ey
tend insurance
serx
ices in India. The totals
reu
iuu
of the insurance
industry has increased at a CAGR of
.
betv
eenr Y03
and r Y09 to reach INR
,
3.9 billion in r Y09.
Ey
hibit .3. Totals
reu
iuu
s of the insurance industry (lifeand non-life)
3,000
0
3
IR
A
Life insurance Non-life insurance
Public Public
Pri
ate Pri
ate
,
00
,000
,
00
,000
00
0
0
30
3
0
0
0
0 Y03 Y04 Y05 Y06 Y07 Y08 Y09
ource: IR A
oth the life and non -life insurance sectors in India,v
hichv
ere nationali
ed in the 950s and 960s, ress
ectix
ely,v
ere liberali
ed in the 990s.
ince the foru
ation of IRw
A
and the os
enint
us
of the insurance sector tos
rix
ates
layers in
000, the Indian insurance sectorhasv
itnessed
ras
idt
rov
th.
Non-life insurance
re
iu
Life insurance
re
iu
Gro
th rate (in
)
ource: IR A
The os
enint
us
of the insurance sector fors
rix
ates
articis
ation/t
lobals
layers durint
the 990s has
resulted in stiff cou s
etition au
ont
thes
layers,v
ith each
offerint
better
ualitys
roducts. This has certainly offered
consuu
ers the choice to buy as
roduct that best fits his or
her re
uireu
ents.
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The number of players during the decade has increased from
four and eight in life and non-life insurance, respectively, in
2000 to 2j
in life and 24 in non-life insurance (including 1 in
reinsurance) industryas in August 2010.
k
xhibit 1.4.l
rowth in thenumberof insurance players
2000 2001 2002 200j
2004 2005 2006 2007 2008 2009 2010
Life insurersm
ublic 1 1 1 1 1 1 1 1 1 1 1m
riv atej
10 12 12 1j
1j
15 15 21 21 22
Non-life insurersm
ublic 4 4 5 6 6 6 6 6 6 6 6m
riv atej
6 8 8 8 8 9 10 15 15 17
n einsurer 1 1 1 1 1 1 1 1 1 1 1
Most of the private players in the Indian insurance industry
areajoint venturebetweenadominant Indiancompanyanda
foreign insurer.
Life insurance industryoverview
The life insurancesector grew at an impressiveo
Al
n
of
25.8% between FY0j
and FY09, and thenumberof
policies issued increasedat ao
Al
n of 12.j
% during the
same period.
Asof August 2010, there were 2j
players in thesector (1
publicand 22 private). The Life Insuranceo
orporationof
India (LIo
) is theonly publicsector player, and heldalmost65% of the market share in FY10 (basedon
first-year premiums).
To address the need for highly customized products and
ensure prompt service, a large number of privatesector
players haveentered the market. Innovative products,
aggressive marketing andeffectivedistribution have
Ina fragmented industry, new playersare gnawing away the
market shareof larger players. Theexisting smaller players
haveaggressive plans fornetwork expansionas their foreign
partnersare keen tocapitalizeon theenormous potential that
is latent in the Indian life insurance market.
k xhibit 1.5. Market shareamongst private players - FY10(basedon first year premiums) (in %)
I
I
I
ru,16.5
thers, 8.6SBI Life, 18.
New entrants, 4.0
Met Life, 2.8
Tata AI
,
.4 Bajaj Allianz, 11.6
Kotak Mahindra,
.5
MNYL, 4.8 eliance Life, 10.2
enabled fledgling private insurancecompanies tosignup HDF
Standard, 8.5
Indiancustomers more rapidly thanexpected.m
rivatesectorBirla Sunlife, 7.7
playersareexpected to playan increasingly important role in
the growth of the insurancesector in thenear future.
Source: I DA annual report FY09, I DA Journal, Insurance egulatoryand Development Authority website, www.irdaindia.org, accessed 26 May 2010
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I
I
I
rudential, Bajaj Allianz and SBI Lifecollectively
account forapproximately 50% of the market share in the
private life insurancesegment. To tap thisopportunity, banks
havealsostartedentering alliances with insurance
companies todevelop/underwrite insurance products rather
than merelydistribute them.
Non-life insurance industryoverview
Between FY0
and FY10, thenon-life insurancesector grew
at a
Az
{ of 17.05%. Intense competition that followed the
de-tariffication and pricing deregulation (which was started
during FY07) decelerated the growth momentum.
Asof August 2010, thesector hada total of 24 players
(6 public insurers, 17 private insurersand 1 re-insurer).
Thenon-life insurancesectoroffers productssuch asauto
insurance, health insurance, fire insuranceand marineinsurance. In FY10, the non-life insurance industry had the
following product mix.
rivatesector players havenow pivoted their focusonauto
|
xhibit 1.6.
roduct mix (FY 10) (in %)
and health insurance.}
ut of the total non-life insurance
premiumsduring FY10, auto insuranceaccounted for 4
.5%
of the market share. The health insurancesegment has
posted the highest growth, with itsshare in the total non-life
insurance portfolio increasing from 12.8% in FY07 to 20.8%
in FY10. These twosectorsare highly promising, and
areexpected to increase theirshare manifold in the
coming years.
With the sector poised for immense growth, more players,
including monoline players, are expected to emerge in the
near future. The last twoyears hasseen theemergence
ofcompaniesspecializing in health insurancesuch as Star
Health & Allied Insuranceand Apollo DKV.
In the last decade, it wasobserved that most players have
| xhibit 1.7. Market shareamong players in FY10 (in %)
~
oyal Sundaram, 2.4 Tata-AI
, 2.
HDF
~
New India, 15.7
eneral, 2.4
Star Health andAllied Insurance, 2.6
AI
, 4.0 nited India,1
.6
IFF
- Tokio, 4.
~ eliance
eneral, 5.2
riental, 12.4
ngineering, 4.8
Marine , 6.
Auto, 4
.5 Bajaj Allianz, 6.6%
thers, 7.9National, 12.1
I
I
I-lombard, 8.6
Fire, 11.
All others, 7.2 Health, 20.8
ersonal Aviation, 1.2accidents, 2.5 Liability, 2.5%
Source: I DA Monthly Journal, Insurance egulatory and DevelopmentAuthority website, www.irdaindia.org, accessed 10 June 2010
Source: "I DA annual report FY09 - I DA Journal," Insurance egulatoryandDevelopment Authority website, www.irdaindia.org, accessed 26 May 2010
experienced growth by formulating aggressive growth
strategiesandcapitalizing on theirdistributionnetwork
to target the retail segment. Although the players in the
private and publicsector largely offer similar products in the
non-life insurance segment, private sector players outscore
their publicsectorcounterparts in their qualityofservice.
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Gro th dri ers
Indias fa
orable de
o
ra
hics hel
stren
then
ar
et
enetration
The life insurance co
era
e in India is
ery lo
, and
any of those insured are underinsured. There is
i
ense
otential as the
or
in
o
ulation (
5 -60
years) is e
ected to increase fro
675.8
illion to
795.5
illion in the ne
t
0 years (
006 -
026). The
rojected
er ca
ita G
P is e
ected to increase fro
INR 8,280 in Y01 to INR100,680 in Y26,
hich is
indicati
e of risin
dis
osable inco
es. The de
and for
insurance
roducts is e
ected to increase in li
ht of
the increase in
urchasin
o
er.
E
hibit 1.8.
or
in
o
ulation assess
ent and G
P
erca
ita till 2026
800 120
700 100
600
500 80
400 60
300 40
200
100 20
0 02001 2006 2011 2016 2021 2026
Age grou
25-60 (in
illion) Projected G
P
er ca
ita in '000s
ource: C IE, Census of India 2001
ealth insurance attracts insurance co
anies
The Indian health insurance industry
as
alued at
INR51.2 billion as of Y10.
uring the
eriod Y03 -10,
the gro
th of the industry
as recorded at a CAGR
of 32.59%. The share ofhealth insurance
as 20.8%
of the total non -life insurance
re
iu
s in Y10.
ealth insurance
re
iu
s are e
ected to increase to
INR300 billion by 2015.
Pri
ate sector insurers are
ore aggressi
e in this
segment. a
orable demogra
hics, fast
rogression of
medical technology as
ell as the increasing demand
for betterhealthcare has facilitated gro
th in the
health insurance sector. Life insurance companies aree
pected to target primarily the youngpopulation so
that they can amorti
e the ris
o
er the policy term.
Rising focus on the rural mar
et
ince more than t
o -thirds of Indias population li
es in
rural areas, micro insurance is seen as the most suitable
aid to reach the poor and socially disad
antaged
sections of society.
Poor insurance literacy and a
areness, high
transaction costs and inade
uate understanding
of client needs and e
pectations has restricted the
demand formicro-insurance products. o
e
er,
the mar
et remains significantly underser
ed,creating a
ast opportunity to reach a large number
of customers
ithgood
alue insurance,
hether
from the base of e
isting insurers or through retail
distribution net
or
s.
In Y09, indi
iduals generated ne
business premium
orth INR365.7million under2.15million policies,
and the group insurance business amounted to
INR2,059.5million under126million li
es. LIC
contributed most of the business procured in this
portfolio by garnering INR311.9million of indi
idual
premium from1.54million li
es and INR1,726.9
million ofgrouppre mium under11.1million li
es.
LIC
as the first player to offer speciali
ed products
ith lo
erpremium costs for the rural population.
Otherpri
ate players ha
e also started focussing on
the rural mar
et to strengthen their reach.
Go
ernment ta
incenti
es
Currently, insurance products enjoy EEE benefits, gi
ing
insurance products an ad
antage o
ermutual funds.
In
estors are moti
ated to purchase insurance products
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toavail thenearly
0% effective tax benefit onselect
investments (including life insurance premiums) made
every financial year. Life insurance isalready the most
popular financial product among Indiansbecauseof
the tax benefitsand income protection it offers in
acountry where there is very littlesocial security.
Thisdrives moreand more people tocome within the
insuranceambit.
merging trends
xploring multipledistributionchannels for
insurance products
To increase market penetration, insurancecompanies
need toexpand theirdistributionnetwork. In the
recent past, the industry has witnessed theemergence
ofalternatedistributionchannels, which include
bancassurance, direct selling agents, brokers, online
distribution, corporateagentssuch asnon-banking
financial companies (NBF
s) and tie-upsof para-
banking companies with local corporateagencies (e.g.
N
s) in remoteareas.
Agencies havebeen the most important andeffective
channel ofdistribution hitherto. The industry is viewing
the movement of intermediaries from mereagents
toadvisors.
roduct innovation
With customersasking for higher levelsof
customization, product innovation isoneof thebest
strategies forcompanies to increase their market share.
Thisalsocreates greaterefficiencyascompaniescan
maintain lowerunit costs, offer improvedservices
anddistributorscan increase flexibility to pay higher
commissionsand generate highersales.
The pensionsector, due to its inadequate penetration
(only 10% of the working population iscovered) offers
tremendous potential for insurancecompanies tobe
more innovative.
onsolidation in future
The past few years have witnessed theentryof many
companies in thedomestic insurance industry, attracted
by thesignificant potential of insurancesector.However, increasing competition ineasilyaccessible
urbanareas, the FDI limit of 26% and the recent
downturn inequity markets have impacted the growth
prospectsofsomesmall private insurancecompanies.
Such players may have to rethink about their future
growth plans. Hence, consolidation with largeand
established players may prove tobeabettersolution
forsuch small insurers. Largercompanies wouldalso
prefer to takeoveror merge with othercompanies with
establishednetworksandavoidspending money in
marketing and promotion. Therefore, consolidation will
result in fewerbut stronger players in thecountryas
well as generate healthycompetition.
Mounting focuson V over profitability
Manycompaniesareachieving profitabilityby
controlling expenses; releasing funds for future
appropriationsas well as through astrong renewal
premium buildup. Asa few larger insurerscontinue
toexpand, most are focusedoncost rationalization
and thealignment ofbusiness models to ground level
realities. This will betterequip insurers to realize
reportedembedded value ( V) and generate value from
futurenew business.
In theshort term, companiesare likely to face
challenges toachieve thedesired levelsof profitability.Ascompaniesarealso planning to get listedand raise
funds, the higher profitability will help companies to
get abetter valuationofshares. However, in the long
term, companies wouldneed to focuson increasing
V, asalmost 70% ofacompanys V is influencedby
renewal businessand profitability isnot as much ofan
indicator for valuation. Hence, playersarenow focusing
on increasing their V than profitability figures.
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ising capital requirements
Since insurance isacapital-intensive industry, capital
requirementsare likely to increase in thecoming
period. Thecapital requirement in the life insurancebusiness isa functionof the three factors: (1) sum at
risk; (2) policyholders assets; (
) new businessstrain
andexpenseoverruns. With new guidelines in place,
capital requirementsacross thesectorare likely to go
up due to:
Highersum assureddriving highersum at risk
reaterallocation to policyholders assetsdue to
lowercharges
Back loading ofcharges is resulting in high new
businessstrain, andexpenseoverrunsdue to low
productivityof thenewlyset distributionnetwork (and
inability to recovercorresponding costsupfront)
Fornon-life insurancecompanies, the growing demand
for health insurance productsas well as motor
insurance products is likely toboost the
capital requirement.
With thecapital market picking up and valuationson
the rise, insurancecompaniesareexploring various
waysof increasing theircapital base to invest in product
innovation, introducing new distributionchannels,
educating customers, developing thebrand, etc.
This isdue to the following reasons:
A major portionof thecosts in insurancecompanies is
fixed (though it shouldbe variableorsemi-variable in
nature). Hence, the reduction insales will not result in
the lowering ofoperational expenses, thusadversely
impacting margins. Assuch, reduced margins would
impact profitability, and insurers wouldneed to invest
additional funds.
Thesustainedbearishness incapital marketscould
further pressurize the investment marginsand
increase thecapital strain, especially in thecaseof
capital/return guarantee product.
Besides, companiesare likely to witnessaslowdown
innew business growth.
ompanies mayalsooptfor product restructuring to lower theircostsand
optimallyutilizecapital.
According to I DA egulations 2000, all insurance
companiesare required to maintainasolvency ratio
of 1.5 at all times. But thissolvency margin isnot
sustainable. With the growing market risks, the level
of requiredcapital will be linked to the risks inherent
in theunderlying business. India is likely tostart
implementing Solvency II norms in thenext three to
fouryears.
The transition from Solvency I norms to Solvency II
normsby 2012 isexpected to increase thedemand
foractuariesand risk management professionals.
The regulator hasalsoasked insurancecompanies
to get their risk management systemsand processes
auditedevery threeyearsbyanexternal auditor. Many
insurancecompanies havestartedaligning themselves
with thenew normsand hiring professionals to meet
thedeadline.
ontribution of the insurance sector totheeconomy
Insurance has hada very positive impact on Indias
economicdevelopment. Thesector is gradually increasing its
contribution to thecountrys
D
. Inaddition, insurance is
driving the infrastructuresectorby increasing investments
each year. Further, insurance hasboosted theemployment
scenario in Indiaby providing direct as well as indirect
employment opportunities.
Due to the healthy performanceof the Indianeconomy, the
shareof life insurance premiums in the grossdomestic
savings (
DS) of the householdssector has increased.
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xhibit 1.9. Shareof life insurance premiums in
DS(householdsector) (in %)
20 17.9 17.6
ontributionof insurance to infrastructure
enerally, countries with strong insurance industries
havea robust infrastructureandstrong capital formation.
1511.0
10
5
0
15.9 Insurance generates long-term capital, which is required12.
tobuild infrastructure projects that havea long gestation
period.
oncurrently, insurance protects individuals
andbusinesses from suddenunfavorableevents. A well-
developedandevolved insurancesector isneeded for
economicdevelopment as it provides long-term funds for
FY05 FY06 FY07 FY08 FY09
Source: I DA, National Income Statistics, July 2010, MI
The increasedcontributionof the insurance industry
from the household
DS hasbeen ploughedback into the
economy, generating higher growth. The following factors
showcase how thecontributionof the insurance industry has
strengthenedeconomic growth:
infrastructuredevelopment andsimultaneouslystrengthens
the risk taking ability.
Although the insurancesector is relatively young in India, its
contribution to infrastructural development has been on a
visible riseasdepicted in the following exhibit.
xhibit 2.0.
ontributionof various insurance products to infrastructure (in IN billion)
FY06 FY07 FY08 FY09
Investments from traditional products
Approvedsecurities including
entral
,1
1
,541 4,01
4,4
9
overnment Securities
Infrastructureandsocial sector 546 759 76
756
Investment subject to exposurenorms, 1,
27 1,5
8 2,0
5 2,787
including other thanapproved investments
Housing and fire-fighting equipment
1
7
9 42
nit-linked insurance product funds ( LI s)
Approved investments 2
4 576 1,115 1,515
ther thanapproved investments 25 95 219 21
Source: "I
DA annual report FY09," Insurance
egulatoryand Development Authority website, www.irdaindia.org, accessed 20 August 2010
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In FY09, the total investmentsby the insurance industry
increased to IN 9,742 billion, asagainst IN 8,18
billion in
the previousyear. Further, investmentsbyboth lifeandnon-
life insurers increasedby 20.2% and 4.6% to IN 9,16
billion
and IN 589 billion, respectively, in FY09.
However, as outlined in the leventh Five Year
lan (2008-
2012), there is a significant fund requirement of IN 20,562
billion in the infrastructure sector.
iven an expected robust
increase in the insurancebusinessand the increasing
participationof foreign insurers in India, insurance
companiesare well positioned tocontribute to infrastructure
development in thecountry.
These investmentscould further increase with the
development ofsounddebt markets, especially the market
for long-term government paperand income tax incentives
toattract savings for infrastructural schemes. The
direct investment of policyholder fundsof life insurers ingovernment bonds isanother way in which the industry has
helped thedevelopment of infrastructure. Inaddition, I DAs
mandate for insurancecompanies to invest 15% of their
annual sales in infrastructure isexpected toboost
capital formation.
ontributionof insurance to FDI
The importance of FDI in the development of acapital-
deficient country such as India cannot be undermined.
This is where the high-growth sectorsofaneconomy
playan important rolebyattracting substantial foreign
investments.
urrently, the total FDI in the insurancesector,
which was IN 50.
billionat theendof FY09, isestimated
to increase toapproximately IN 51 billion in FY10. It is
difficult toestimate, but anequal amount ofadditional
foreign investment, can roughly flow into thesector if the
government increases the FDI limit from 26% to 49%.
The insurancesector, by virtueofattracting long-term
funds, isbest placed tochannelize long-term funds toward
the productivesectorsof theeconomy. Therefore, the
growth in their premium collections isexpected to translate
into higher investments inother keysectorsof theeconomy.
Therefore, the liberalizationof FDI norms for insurance
wouldnot onlybenefit thesector, but several othercritical
sectorsof theeconomy.
ontributionof insurance to theoffshoring business
India hasbecomeoneof the most populardestinations
foroffshoring insurance processes, and leading insurance
companies in the S and urope has moved their processes
either to theircaptiveunitsor third-partyoutsourcing firms.
urrently, around 6
% of Indias insuranceoutsourcing
revenuescome from the
S andaround 22% from
M
A.
India offers varied insurance solutions dealing with health,
property, life, annuities, reinsurance and casualty, among
others. The following is a list of insuranceservices that are
outsourced to India.
The total revenues from the Indian offshore insurance
business process outsourcing services increased from
S$
67 million in FY0
to S$790 million in FY07,
andareexpected to reach S$2 billionby FY10. This
increasedbusiness will also result in increasedemployment
opportunities in the insuranceoffshoring business.
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xhibit 2.1. Insuranceservicessuite
B
Technologyenabled
nd-to-endplatform
Analytics
Technologyandconsulting
Source: Infosys
ropertyandcasualty insurance
Application
nderwritingprocess support
olicy
laimsadministration processing andand maintenance adjudication
ustomer relationship andinformation management
Insurance Activeworkflow desk solution
Hire-to-retire
rocure-to-pay
roduct
ustomeranalytics analytics
Applicationdevelopmentand maintenance
Life insurance, pensionandannuities
New business
olicyadministration
laimsand Annuitiesissuance servicing
ustomer relationship andinformation management
Activedesk solution
penblock life
losedblock lifeadministration administration
roducer
etirementadministration servicesservice
rocure-to-pay Hire-to-retire
rofitabilityanalytics
Life, retirement services,produceradministration
platform
einsurance
Treaty
nderwritingadministration support
Technical
laimsaccounting management
einsurance treatyadministration
Insurance workflow
Hire-to-retire
rocure-to-pay
laimsanalytics
isk analytics
Business processandoperationsconsulting
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Section II:
Industryat cross-roadsofdevelopment
Insurance industry: significantlyuntapped latent potential
Indias insurance industry has witnessed rapid growth during
the last decade.
onsequently, many foreigncompanies
haveexpressed their interest in investing indomestic
insurancecompanies, despite the
overnment of Indias
regulation, which mandates that the foreignshareholdinglimit is fixedat 26% for the lifeas well asnon-life
insurancesectors.
The countrys strong economic growth in recent years has
helped increase penetration levels substantially.
remium
income, asa percentageof
D
, increased from
.
%
in FY0
to 7.6% in FY09. However, the penetrationof
insurance in Indiastill continues tobe low, ascompared to
otherdevelopedanddeveloping economies.
The Indian life insurancesector has witnessedexponential
growth, drivenby innovation in product offeringsand
distributionowing to market entrantssince theopening up
of thesector in 2000.
urrently, it is the fifth-largest life
insurance market in Asia. The rapidexpansion in the life
sectorcoincided with a periodof rising householdsavings
anda growing middleclass, backed with strong economic
growth. Innovative product design (e.g. launch of
LI
s)andaggressivedistributionstrategies (e.g. development of
bancassurance) by privatesector players havesignificantly
contributed tostrong premium growth. The following
diagram shows the increasing premium percapitaduring the
same period.
xhibit 2.4.
ercapita insurance premium
2,500 2,187.1
xhibit 2.
. Insurance premiumsasa % of
D
8 6.
6 4.8 .
.7 4.2 5.5
2,000
7.
7.6
6.7 1,500
6.4 1,000 6
7.9 776.1
2,01
.8
1,716.11,921.9
1,769.
1,197.2 1,479.1
952.0
4
2
0
.5 4.12.7
.00.6 0.7 0.7 0.8
FY0
FY04 FY05 FY06
5000.9 0.9 0.9
0
FY07 FY08 FY09
1,00
.6785.4
628.
244.5 265.2528.4 19
.7 2
7.0109.5 147.8 166.6
FY0
FY04 FY05 FY06 FY07 FY08 FY09
Non-life insurance premium contributionasa % of
D
Life insurance premium contributionasa % of
D
Total insurance premium contributionasa % of
D
Source: I DA annual report FY0 -09, Insurance egulatoryand DevelopmentAuthority website, www.irdaindia.org, accessed August 2010; MI
Non-life insurance premium percapita
Life insurance premium percapita
Total insurance premium percapita
Source: I DA annual report FY0 -09, Insurance egulatoryand DevelopmentAuthority website, www.irdaindia.org, accessed August 2010; MI
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The global economy has slo
ly started reco
ering from the
economic recession. Lagging employment, coupled
ith
declining aggregate
ages, a
ea
ened residential and
commercial real estate mar
et, tight credit and a beha
ioral
shift on the part of consumers from consumption to sa
ings
are factors contributing to a delayed reco
ery. Although
the global insurance industry has not been impacted by the
financial crisis as much as the ban
s, it still has its set ofissues. The leading fi
e issues on the global insurance
atch
list are:
anaging ris
: The most significant concern for insurance
companies is ris
in all its forms. Increasingly, insuran ce
companies are adopting an enterprise -
ide
ie
of
managing ris
semploying a frame
or
to address them
across the organi
ation.
Promoting compliance: The cost of regulatory compliance
and the attendant reputational ris
of non -compliance are
on the rise.
Gro
ingglobally: The e
pansion into ne
mar
ets is
e
pected to help dri
e profits, as de
eloped economies
itness slo
ergro
th in the demand for insurance.
Lac
of inno
ation around products and deli
ery: The
use of technology and emphasis on inno
ation
ill helppro
ide better ser
ice and deli
ery. Institutions can also
strengthen their ties
ith customers and differentiate
themsel
es from competition.
Adapting to demogra phic shifts: The demographic
changes in NorthAmerica, Europe,
apan and other areas
is starting to shift assets from e
uities to annuities as
ell
as other fi
ed-income products.
E
hibit 2.5. Global comparison of insurance premiums, penetration and density for both life and non -life segments
Non-life prem iums in 2009 Life premiums in 2009
Country Premiums, Penetration, ensity, Premiums, Penetration, ensity,
U
million % of G
P U
per capita U
million % of G
P U
per capita
e
eloped
Australia 27,849 3 1,308.0 32,468 3.4 1,524.8
rance 88993 3.1 1,289.4 194077 7.2 2,979.8
Germany 126,591 3.7 1,518.7 111,776 3.3 1,359.7
ingapore 5,188 1.7 645.6 9,057 5.1 1,912.0
outh
orea 34,527 3.9 709.7 57,436 6.5 1,180.6
United
ingdom 91,560 3 1,051.2 217,681 10 3,527.6
United Arab Emirates 4,381 2.1 952.7 732 0.4 159.2
United
tates 647,401 4.5 2,107.3 492,345 3.5 1,602.6
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Non-life premiums in 2009 Life premiums in 2009
ountry remiums, enetration, Density, remiums, enetration, Density,
S$ million % of
D
S$ p ercapita
S$ million % of
D
S$ percapita
Developing
Bangladesh 205 0.2 1.
6
6 0.7
.9
Brazil 2
,979 1.5 12
.8 24,781 1.6 127.9
hina 5
,872 1.1 40 109,175 2.
81.1
India 6,
75 0.9 6.7 46,206 6.6 48.1
Indonesia 2,219 0.4 9.6 5,066 0.9 22
Malaysia
,158 1.6 115 5,682 2.9 206.9
Mexico 9,664 1.1 88.2 7,688 0.9 70.1
akistan 650 0.4
.6 54
0.
hilippines 8
5 0.5 9.1 1,56
1 17
omania 2,
65 1.4 111.2 5
0.
25.1
ussia
8,940 2.4 276.4 6
6 0 4.5South Africa 8,215 2.9 16
.9 28,77
10 574.2
Sri Lanka
58 0.9 17.7 2
8 0.6 11.8
Taiw an 11,44
494.8 52,204 1
.8 2,257.
Thailand 4,248 1.6 62.7 6,212 2.4 91.7
Vietnam 769 0.8 8.7 671 0.7 7.6
Source: "World Insurance in 2009," Swiss
e, June 2010, Insurance
egulatoryand Development Authority website, www.irdaindia.org, accessed
06 January 2010
According to Swiss e, among the key Asian markets, India
is likely to have the fastest-growing life insurance market,
with life premium poised to grow at a
A
of 15% for the
next decade, slightly faster than the 14% expected for
hina.
The growing consumerclass, rising insuranceawarenessand
greater infrastructurespending have made Indiaand
hina
the two most promising markets in Asia. uropeand the
Americas represent relatively mature insurance markets.
Though Indias penetrationappears higher, it isnot
excessive, given the high level of investments in insurance
policiesunderwritten. Nonetheless, besides India, Taiwan is
theother Asian market that sharessimilarcharacteristics.
Taiwan has the highest insurance penetration in Asia, largely
drivenby the immense popularityof LI
s.
The progressof the Indian insurance industryover thelast decade hasbeen the most crucial period in the
establishment of this industry; post the formationof I DA
in 2000. The initial four to fiveyears witnessed theentryof
many private players, each trying toacquire market share.
The latter part of this phase witnesseda heightened focus
on theexpanding product range, developing innovative
productsandbuilding a robust distributionchannel. The last
one to twoyears havebeen verycritical as the industry is
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trying tosustain its growth in light of thenew regulations
being formulated.
The Indian insurance industry isat a threshold from where
it can witness thenext growth wave, if presented with afavorable policy framework andanenabling distribution
environment. The industry is poised to witness the
emergenceofnew leaders who wouldcarveaniche for
themselvesbyusing instrumentssuch asalternative
channelsofdistribution, cost management and product
innovation, among others.
At thiscrosssection, the roleof the regulator is very
significant. I DA is in the finalizationstageof most of the
regulations pertaining to the industry. The regulator has
introducedcertain regulations to help improvedisclosures,
profitability, capital, consumer protection, etc.
ecent regulatorydevelopments thatgovern thecurrentmarket state
Thedevelopment of the insurance industry in India, as
inother international markets, is likely tobecritically
dependent on thenatureand qualityof regulation. The role
of the regulator in most markets is toensureefficiency,
transparencyand fair play, whileat thesame time, protect
the interestsof theconsumer. The I DA Act 2000 has
delineated thebroad regulatory framework within which
insurancecompaniesareexpected tooperate in India. The
provisionsof thisact address issues related toownership,solvency, investment portfolioconstruction, commission
structures, reporting formatsandaccounting standards.
The minimum paid-up equitycapital requirement has
beenset at IN 1 billion. The insurancebusiness iscapital
intensive, and international experiencesuggests that, on
anaverage, non-life insurancecompanies require four to
fiveyears tobreak even. In the interim, thesecompanies
would require regularcapital infusion for funding expected
lossesand meeting solvency requirements. In thiscontext,
given theexisting regulatoryconstraintsof foreigndirect
investment by theoverseas partner, asubstantial part of the
funding would have tobedoneby the Indian partner, whose
financial strength is likely to influence thecredit strength of
thejoint venture.
iven theevolutionarystageof the Indian insurance
industry, oneof the focal points for the regulator hasbeen
todrivestabilityandsolvency in the industry. Theact also
mentionsbroad guidelines for theconstructionof the
investment portfoliosof life insurancecompanies. These
norms havebeendesigned to makesure that an insurer
doesnot takeonunsustainable risks indeploying funds
collectedby wayof premiums.
verall, the regulatory
environment is favorableand takescare that players
maintain prudent underwriting standards, and reserve
valuationand investment practices. The primaryobjective
for thecurrent regulations is to promotestabilityand fair
play in the market place. Someof the recent regulatory
changesand their impact include:
New disclosurenorms
I
DA hascomeup with the following disclosurenorms:
I
DA has issueddisclosurenorms for insurance
companies, mandating them to publish accountsona half-
yearlybasis. Thedisclosurenormsareseenasa precursor
toallowing insurancecompanies to hit the primary
market. According to thenew norms, insurers will have to
publish theirbalancesheet ona half-yearlybasis, starting
from the periodending
1 March 2010.
Disclosures tobe made foracompany launching an I
All financial disclosures for the past fiveyears prior to
the I
have tobeavailableon thecompany website. In
addition, insurancecompanies have todisclose thedata
on various parameterssuch as thecalculationofeconomic
capital, surrenderand lapseexperienceofbusinessand
expense patterns for the five-year period.
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Insurancecompanies that intend to go public would
also need to disclose required and available solvency
margins for five years, capital structure and details of
investment performance. A wide rangeof risk factors
related to credit, market, insurance, liquidity, operational
and asset and liability management need to be disclosed
clearlyby the insurers, accompaniedbya report from
an independent external actuaryon the reasonableness
of the methodology adopted and assumptions made to
determine valuations.
I DA hasalso instructedall life insurers toexplicitlydisclose, in theirbenefit Illustrationdocument, theexactamount ofcommission/brokerage paidby insurers toinsuranceagents. Thiscircularcame intoeffect from 1July 2010.
year ina taperedscale, ending with 2.25% after the
fifteenth year. Thenew guidelinesapply from 1 September
2010. arlier, the regulator hadallowedcommissions
chargedbyagents tonot exceed 40%.
Forsingle-premium products, the maximum commission
rate is 2% of the premium paid, and for regular premium
products, the rate is in the rangeof 15%-
0% of premium
in the first year, followedby 5%-7% in thesubsequent
years.
According to thedraft guidelines, all life insuranceagents
will have to gathera minimum of IN 150,000 as the
first-year premium orsell a minimum of 20 life insurance
contracts. Whenanagent fallsshort ofachieving either
of theabove, they would have to proportionatelyachieve
Implications
The regulator has directed all firms tocomeup with a publicdisclosure framework to ensure a fair and stable insurance
market. Thesenorms would help investors tobe fullyaware
of the financial performance, company profile, financial
position, risk exposure, elementsofcorporate governance in
placeand the management of the insurancecompanies.
Thestandardon publicdisclosures for the insurance
companies, which hasbeen preparedout of the leading
international practices followedby the International
Associationof International Supervisors (IAIS), will
strengthencorporate governanceand market discipline.
According to I DA, thecircularon thedisclosureofagent
commission will enhance transparencyby providing
prospective policyholders with detailsof theexact amount ofcommission/brokerage paidby insurers to insuranceagents,
thus making it pro-investor. However, on thenegativeside,
this move mayencourage many insuranceagents to rebate
commissions to theirclients, which isan illegal practice.
Alteredcommissionstructureofagents
Insurers wouldbeallowed tochargeup to 4% onannual
premium paidon LI
s for the first fiveyears, and
thereafter, charges will be reducedduring the tenureof
the policy. This figurenarrowsdown to
% by the tenth
more ineitherone to makeup for theshortfall. Where
theaverageannual persistency ratio is less than 50%, the
licenseof theagent will not be renewed.
Implications
This moveby the I DA reflects itsefforts toensure
transparencyand implement morestringent disclosure
norms toavoid mis-selling. This is likely toallow insurers to
recover theircost ina "more transparent and informed way,"
thereby reducing "unfair practices" and the "information
gap" indomestic insurance toenhance market discipline.
Any variation in the payment structureofagents will also
help companies to reduce theircosts. Further, tenure-
basedcommissions will definitelybenefit the industry. High
commission isalsoexpected tocomedownand there will
bebetter reward for longer-term policies than theshorter-
term ones.
ustomersare the largest gainers from thischange, as
products will now be more transparent, customer-friendly
andaimedat protecting their long-term interests.
With the implementationof the I DAsnew norm, insurance
companies may initially faceasetback in policysale
numbersand total premiums. Although the I DA stance is in
favorofbringing transparency in thecommissionstructure
ofagents, thisnorm couldnegatively impact agentsas well,
at least in theshort term. Toaddress the impact of reduced
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commission, insurancecompanies may resort to innovative
waysofcompensating their top-performing agents. Non-
commission-based remuneration may increase.
ompanies
mayexpand theirdifferent rewardand recognition programs
to make thesaleof LI
sattractive foragents in light of
these recent changes.
In the long term, the roleofagents isexpected toevolve with
this policychange. In future, increased transparency is likely
to makeagents moreaccountablenot only inselling the right
products, but also in providing bettercustomerservice. This
isalso likely to guarantee that agentsjustify thecommissions
theyearn. From being mereagents, they will beexpected to
serveas financial plannersselling a
bouquet of financial products.
I
norms for insurancecompany
The insurance regulator has reduced the waiting period for
an insurancecompany to makean I
from 10 years to 5
yearsaftercommencing operations.
I DA has finalized its I
guidelinesand hassent them
to the Securitiesand xchange Boardof India (S BI).
S BI will club I DAs recommendations with its general
guidelineson I
s foranycompany that wants to raise
money from the public through equityshares.
Thenorms forcorrect valuation, disclosureofoperating
resultsand profit and lossaccount and filing of the
draft red herring prospectusare the threeessentials
that acompany has to fulfill whenopting fora public
float. Besides, companies would have to make financial
disclosures, risk disclosures, investment performance, etc.(detailsstated in theabovesection "New
disclosurenorms").
Implications
Insurancecompaniesneedcapital toexpand, innovate
andsustain in the market. Insurancecompanies typically
prefer to raisecapital by floating an I
. Therecanbea
mix ofa fresh issue ofsharesas well as thesaleofshares
by the parent company. Most companies prefer this route
when they do not have enough capital to plough back into
theirbusiness. With the I
routeof raising capital, Indian
promoters will get theopportunity to put theirequity into
the market as well as FIIs will alsobe able to participateand
acquirestakes.
romoting health insurance
I DA hasallowed insurancecompanies tooffer "Health
plus Life
ombi
roduct," a policy that would provide
lifecoveralong with health insurance tosubscribers.
nder the guidelines issuedby the I DA, lifeandnon-life
insurance firmscanalso partner inoffering the health-
plus-lifecover. Thecombi products maybe promotedbyall
life insuranceandnon-life insurancecompanies, however,
a tieup is permittedbetweenone life insurerandonenon-
life insureronly. Thus, a life insurer is permitted toenter
analliance with onlyonenon-life insurerand vice-versa.
Thesaleofcombi productscanbe made through direct
marketing channels, brokersandcomposite individual and
corporateagents, common toboth insurers. However,
these productsarenot allowed tobe marketed through
"bank referral" arrangements. The regulator further
specified that the guidelinesdonot apply to micro-
insurance products, which are governedby I DA (Micro
Insurance) egulations, 2005.
nder the "
ombi
roduct," theunderwriting of the
respective portionof the risks will beunderwrittenby
respective insurancecompanies, i.e., life insurance risk
will beunderwrittenby the life insurancecompanyand the
health insurance portionof risk will beunderwrittenby the
non-life insurancecompany.
ImplicationsLife insurance has a much deeper penetration in India, as
compared to the non-life insurancesegment. Thisstep is in
sync with the governments, regulators and the insurance
companysstrategy tocover more peopleunder the
insuranceumbrella.
As insurers leverageon the marketing andoperational
network of their partner insurers, the proposed product
innovation isexpected to facilitate policy holders toselect
an integrated product of theirchoiceunderasingle roof
without shopping around the market for twodifferent
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insurancecoverageoptions from twodifferent insurers.
Therefore, insurers are expected to offer appropriate covers
asanattractive proposition for the policyholders.
Alteration in LI
s
I DA hasattempted to make LI
a long-term protection
contract covering risks related to mortality, longevity
and health bysimultaneouslyoffering a fairdeal to the
policyholderanddoing away with theexcesses in the
system. The keychanges introduced through thenewguidelinesareas follows:
Lock-in period: I DA has increased the lock-in period for
all LI
s from threeyears to fiveyears, including top-
up premiums, thereby making them long-term financial
instruments that provide risk protection. All limited
premium LI
s, other thansingle premium products, will
havea premium paying term ofat least fiveyears.
Level paying premiums: All regular premium/limited
premium LI
s will haveuniform/level paying premiums.
Anyadditional payments will be treatedasasingle
premium for the purposeofan insurancecover.
vendistributionofcharges: Thechargeson LI
sare
mandated tobeevenlydistributedduring the lock-in
period inorder toeliminate high front ending ofexpenses.
Increase in risk component: Further, all LI
s, other than
pensionandannuity products, will providea mortality
coverora health cover, thereby increasing the risk cover
component insuch products.
ap onsurrendercharges: I DA has recommendedacap
on thesurrenderchargesat up to 15% of the fund value in
the first year for policies with a tenor more than 10 years
and 12.5% for policies with a tenorof less than 10 years.
Thischargecomesdown to 5% and 2.5%, respectively, in
the fifth yearof the policy, andbecomesnil for policiesof
less than 10 yearsafter the fifth year. For tenorsabove 10
years, thecharge in thesixth year is 2.5%, which becomes
nil in theseventh year.
25
Minimum guaranteed return for pension products:
egarding pension products, all LI
pension/annuity
products will offera minimum guaranteed returnof 4.5%
perannum, orasspecifiedby the I DA from time to time.
This will provide protection to the life timesavingsof
pensioners from anyadverse fluctuationsat the time
of maturity.
Implications
The impact of these new guidelines oncustomers will befavorable due to lower charges and guaranteed returns,
among other reasons. However, thesechanges will
also impact the marginsof life insurers, as thecharges,
particularlysurrendercharges, arecapped. Thiscould have
anadverse impact on their profitability.
The possibility of adecline in the profitability and increase
in the capital requirements of life insurers has resulted in
discounting the previously high multiples assigned to the
new business achieved profits (NBA
), and as such, there
couldbeadecline in the valuationassigned to the life
insurance business. The changes in LI
s guidelines could
also result inadelay in the I
plansofanumberof players
as they will have to rework their product offerings.
Though it may makeselling difficult as it would make
products inflexible, it wouldcertainly reduce persistency
risk, make A
Msstable, andboost theoverall
certaintyonassumptionsand the profitabilityof the
businessunderwritten.
ther regulations
Besides the above regulations, I DA and the government
are in the processofdrafting more regulatory reforms for
the industrysuch as:
With the private playerscompleting nearly 10 yearsof
existence, the industry isseeking alternative ways to
meet itscapital needs. The government isconsidering
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Section III:ritical factors for
market development
Distributionchannels
Theeffectivenessandcost ofdiversedistributionstrategiesof
different players iscrucial inensuring thesuccessof players
in the insurancebusiness, particularly in the retail linesof
business. The low differentiationamong retail insurance
productssuggests thecriticalityofdistribution reach and
efficiency forsuccess in thisbusiness.The factors that determine the choice of the distribution
channel ofan insurancecompanyare:
Whereare thecustomers?
What is target customer profile?
Which product (linked, traditional, term, etc.) canbesold
through distributionchannel?
Which channel providesbest buying experienceand value
to target customersegment?
What is theoperational cost involved ineach type
ofchannel?
Thecustomer preferences varyby market segment vis--vis
geography, age, income, lifestyle, etc., and market
characteristicschangeover time.
# oleof intermed iaries/distributors/financial advisors
Insurance has tobesold the worldover, and the Indian
market isnoexception. The touch point with theultimate
customer is thedistributoror the producer, and the role
playedby them in insurance markets iscritical.
Insurancedistribution isnot simplyabout pushing products.
Anoutsizedshareof the valueacross theentire insuranceindustry valuechain isadded indistribution. Forcustomers,
it is indistribution that needsareunderstoodandassessed,
options (from full risk transfer toself insuranceand more
exotic methodsof managing risk) are identified, andcounsel
on thechoiceofcarriersandother providers is given. It
isbecauseofdistribution that relationshipsand trust are
built with agents, brokersandcustomers, opportunitiesare
identifiedandcreated, and productsandservicesaresold.
It is the distributor who makes the difference in terms of
the quality of advice for thechoice of product, servicing of
policy post sale and the settlement of claims. In the Indian
market, with their distinct cultural and social ethos, these
conditions playa major role inshaping thedistributionchannelsand theireffectiveness.
The figurebelow providesanestimateof thecurrent
market shareof the variousdistributionchannelsusedby
life insurers, and givesa view of how thesechannelscould
develop in the future.
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E$
hibit 2.6.: Current mar%
et share and potentialmar
%
et gro&
th
'
igh
Tied agents
( ancassurance
Corporate agents
(
ro)
ers
0
irect
1
or)
site
InternetLo
2
Lo2
Current mar) et share ' igh
3 ancassurance: Insurance products 4 irect: 5 ales through call
offered through ban6 s centres and/or direct mailing
3 ro 6 ers: Representati7
es for buyers Internet: E-commerce sales8
ho deal8
ith either agents or through internet portalscompanies in arranging for co
7
erage
In today s scenario, insurance companies must mo9
e from
selling insurance to mar%
eting an essential financial product.
The distributors ha9
e to become trusted financial ad9
isors for
the clients and trusted business associates for the
insurance companies.
The most prominent models of insurance distribution are:
Agents
Insurance agents ha9
e to%
no&
&
hichproduct&
ill appeal to
customers, and also%
no&
their competitors products in the
same space to be effecti9
e sales indi9
iduals&
ho can sell their
company and its products to the customers. To the a9
erage
customer, e9
ery ne&
company is the same. Life insurance in
India has been mostly distributed through an elaborate
net&
or%
of agents.
The agency force has a highgestation period and is
more suitable to sell comple$
ris%
-based products. The
product mar%
et focus on relati9
ely simpler ULIPs ma%
es
Corporate agents: Non -ban 6
institutions in7
ol7
ed in thesale of insurance products
5 ource:@
atson@
yatt
Tied agents: Insurancecompanies aligned agency force
@
or6 site: A ar6 eting arrangements8
ith entities to sell insurance totheir employees
predominantly agency -based models relati9
ely e$
pensi9
e.
Agents are di
9
ided into
9
arious categories, depending on thes
%
ills, e$
perience and producti9
ity. Companies are focusing on
identifying training needs and increas ing the producti9
ity of
agents. E$
hibit 2.7pro9
ides features of agents at
different le9
els:
28
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B xhibit 2.7. Tiedagency model
Low productivity
Nascent Heavy investment required in product and process trainingagency force
"Trained" and
"independent"
agency force
Insurers focusoncontrolling attrition
Insurers' brandstrength, product innovationandcommission ratesarecritical in preventing attrition
High productivity
"Mature" and Loyalty (propelledby trailing commissionbuildup)"highly" productive
C
quips theorganization with theability tosell complex risk andasset protection productsagency force
Source: Life Insurance,D
delweiss, 6 August 2010, viaThomsonE
esearch
Agentsare responsible for the reputationof thecompanythey are working for and have their obligations toward
theirclients. Herearesome of thebasic functions that
agents perform:
F
rovideall thenecessaryapplication forms
Submit application forms to thecompany
Arrange forall the medical testsand related formalities
F
rovide reminders premiums paymentsand
return receipts
Should help customers makenecessarychanges in
address, nomination, etc.
Help in the processofassignment
Assist customers forany loanapplicationsand
related formalities
Should help customers revive lapsed policies
Assist inclaiming death benefits, if required
Besides theabove, agentsarenow moving from the
solecontact point betweenacustomerandan insurance
company tobecome financial advisors. Agents wouldnow
be responsible forexplaining thenatureofa policy to
customersas that will help customers to take informed
decisions. Their role is likely toenhance, as they will not
onlysell insurance products, but offerother financialproductsas well toenhancecustomerbenefits.
The limiting factor for prospective insurers will be the
extensiveandcostlydistributionstructureequipped for
reaching thissegment. While publicsectorcompaniesareable
toattract agents, theycontinue tosuffer from high
attrition ratesdue to the indiscriminateagent appointment.
The most successful of thesecompanies tiedagentsare
hardlyof theelite varietyofsalespeople. Theyarestill the
neighborhooddo-gooders the postman, theschoolteacher
and theshopkeeper who know the peopleandare
themselves known in thecommunity.
Thechallenge here is the lack of knowledgeof thecompetitive market and the inability todo intelligent
comparisons with thecompetitors products. New companies
are looking foreducatedandaware individuals with a
marketing flair, anelite group that canbeattractedonly
with high remunerationand the lureofa fashionablejob, all of
which maynot be possible in thisbusiness with its price
pressuresand thecomplexityofselling insurance. With
this kindofsegmentationof intermediaries, the test for
the insurancecompany lies in training andeducating these
people tobecomeeffectivesales individuals.
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Further, I G DA holdsa mandatory test andother training
programs foragents in India. I G DA normsarebecoming
increasinglystiff foragents (commission reducedandspread
overa longer periodof time) is likely tobeeven morestrict,
which would impact agents in theshort term.
Bancassurance
Market entrantscannot expect to replicate theextensive
distributionnetwork of thenationalized insurance
companies. Building adistributionnetwork isexpensive
and timeconsuming. Asa result, private insurers have
largely followedastrategysimilar to that of the foreign
banks, i.e., starting from theaffluent segment and gradually
strengthening thedistributionnetwork to reach out to the
middle-incomesegment.
H xhibit 2.8. Bancassurance model
Bank-backed insurersand those promotedby largebanks that
are better positioned due to their relatively lower development
costs, predominantly variable cost structure (typically opening
own sales branches imply higher fixed and semi-variable costs)
and the integrationofsystems that may reduce thecost
ofoperations.
Though bank-backed insurersarebetter placedbecauseof their
strong brand, variablecost business models, access to the
banksdatabaseand walk-incustomers, which help reduce
overall acquisitioncosts, LII
clearlystandsasanexception to
this tenet becauseof itsscaleofoperationsand productivity
achievedoveryearsofoperations.
Thebancassurance model functionsat various levels, each
party having adifferent level ofagreement. H xhibit 2.8
explains the variousbancassurance models with their features.
Distri butionagreement
Insurerable to leverage thebank's infrastructure;sourceof fee -based income for thebank
Bank and insurer may havea fragmented view of theircustomers
Low level of integration
P
eluctanceofbank staff tosell insurance; insurer has littlecontrol overdistribution
Insurerable to leverage thebank's infrastructure;sourceof fee -based income for thebank
Integration in product development andchannel management
Strategic Sharing ofcustomerdatabase allowance
P
eluctanceofbank staff tosell insurance tosell insurance; insurer has littlecontrol overdistribution
Joint venture
Joint decision making;bank participation in product anddistributiondesign
High system integration, infrastrucural utilization; low -cost model
Insurer losescontrol ondistribution
Bank maybeable to realize higher profitabilityas an insurancedistributor rather thanasa producer
Financialservices
group
Full integrationofsystem; low-cost model
Q
otential for fully integrated productsanddeveloping aone-stop shop for financial services
Insurer is ill equipped toexercisecontrol overdistribution
Bank maybeable to realize higher profitabilityasan insurancedistributor rather thanasa producer
Source: Life Insurance,R
delweiss, 6 August 2010, viaThomsonS
esearch
T 0
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Technological advancesareexpected toenablenew
distributionchannels, while recent regulatorychanges
(banksentry into insurance) areexpected toallow cross-
selling between financial servicescompanies. However,
banc-assurance isexpected to gainconsiderable popularity.
The increasedalliancesbetweenbanksand insurance
companies position theselling of insurance productsby
banksasanopportunity to leverage theirextensivebranch
network andbroaden their incomebase to include more
fee-basedbusiness. Insurersequallyseebancassuranceas
a low-cost option toexpand theirdistributionnetwork and
foray into previously inaccessiblesegmentsof the market.
U
therdistribution methods
Alternate distribution channels are needed for the
following reasons:
To increase insurance penetration in thecountry Todifferentiateon thebasisofcustomerservice; to
retainandattract new customers toexpandbusiness
To increase insuranceawarenessand knowledge
among people
Tosatisfy theneedsof moredemanding customers
To improvecost efficiency in insurancedistributionV
rivate playersareexploring several alternatives to reduce the
cost of replicating thedistributionnetwork of publicsector
insurancecompanies. While third-partydistribution in fast-
moving consumer goods isa possibility, thecomplexityof
insurance products, especially given the low awareness levels,
wouldnecess itatedirect selling.U
ne potential channel is marketing through corporate
employers, i.e., employers purchase productsonbehalfof the
employeesorat least support the marketing effort. The
concept of "worksite marketing," i.e., thesaleof voluntary
insurance products toemployeesat the worksite through
payroll deduction hasbecomecommon. Worksite marketing,
which wasonce the realm ofa few small companies, selling
just a few products, hasnow stretched to largecompanies,
offering a varietyof worksite products.
Brokersandcorporateagentsconstituteasmall part of
thedistributionsystem in India. AsonW
1 March 2010,
there were 259 direct brokers,W W
compositebrokersand
6 re-insurancebrokers. Whilenot many largebrokersare
present in the Indian market at the moment, theoverall
contribution from corporatebrokers is likely to increaseas
manycorporateagentsarenow becoming brokers.X
lobal
insurancebrokerssuch as Aon, Marsh, Willisand Howden
havealsoentered the Indian market.
Some products, once they receivea high level of penetration
andawareness, canbecomecommoditiesandbesold
through more impersonal channels. Theuseof the internet to
distribute life insurance products hasonly recently
emerged, and hasnot madeasignificant impact so far,
partlybecauseof thesubstantial advisorycomponent of
most life insurance products.
The penetration in rural andsemi-urban areas has becomethe core of distribution strategy of insurers. As in metros
and urban areas, insurers have targeted the mass-affluent
segment in rural areasas well. Thecost ofsetting up
operations in rural/semi-urban areas is far lower compared
with those in metrosandurbanareas. There isa promising
potential of rural andsemi-urbanoffices with unrelenting
expansion in these areasand the presence of multiple
insurers may result insub-optimal operations.
Thesedistributionnetworks have reachedanunprecedented
scale from mobile phonecompanies to microfinance
institutions tosupermarket chainsandchurches.Y
ustomers,
in vast numbers, who were previouslyoff the gridarenow
within reach.
Y
hallenges with theexisting distribution model
India is arguably oneof the most challenging and promising
emerging insurance markets. Its rapidly growing economy,
coupled with a young and diverse population, open ample
opportunities for the development of insurance. However,
there is much tobedone to realize this potential. In todays
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Indian insurance mar
a
et, the main challenge to insurers andintermediaries are:
b
uilding faith about the company in the minds of clients
Intermediaries being able to build personal credibilityc
ith clients
Controlling operating ed
penses by reducing
distribution costs
Copingc
ith IRe
A norms on their commission
It is the traditionally tied agents that haf
e been the primary
channels of insurance distribution in the Indian mara
et.
Public sector insurance companies haf
e their branches
in almost all parts of the country and haf
e attracted local
people to become their agents. These agents are fromf arious segments in society and collectif
ely cof
er the entire
spectrum of the society. Apersonc
ho has lif
ed in the
locality formany years sells the products of the insurance
companyc
ith a local branch nearby. This ensures the last
mile touchpoint being closer to the customer. Of course,
the profile of the peoplec
ho acted as agents suggests that
they may not haf
e been sufficientlya
noc
ledgeable about
the diff erent products offered, and may not haf
e sold the
appropriate product to the client. Nonetheless, the customer
trusted the agent and the company. This arrangementc
ora
ed satisfactorily in the absence of competition.
In today s scenario, agents continue as the prime channel
for insurance distribution in India, as is the case in most
mara
ets, supported by call centers to a small ed
tent. Nearly
all the nec
players folloc
this model primarily
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