A Comparative Analysis between LIC and Private Insurance Companies

DISSERTATION PROJECT REPORTON

A COMPARATIVE ANALYSIS OF LIFE INSURANCECORPORATION AND PRIVATE INSURANCE COMPANIES

Report submitted in partial fulfillment of the requirements for

Post Graduate in Management

PROJECT GUIDE: SUBMITTED BY:

Prof. Usha Kiran Rai Shashank Tripathi

FMS BHU MBA IV Sem (Finance)

FMS BHU

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CONTENTS

Ø Acknowledgement

Ø Introduction

§ Concept of Insurance

§ Global Insurance Industry

§ Performance of Indian Industry

§ Insurance sector reforms in India

§ New avenues for growth of the Insurance industry

Ø Research Methodology

§ Research Objectives

§ Research Design

§ Research Process

§ Limitations of the Study

§ Significance of the study

Ø Analysis and Interpretation

Ø Findings & Conclusions

Ø References

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ACKNOWLEDGEMENT

I must acknowledge my indebtedness to various personalities, but for whom, this project

could not have seen the light of the day.

I am profoundly grateful to Prof. Usha Kiran Rai, Faculty of Management Studies, BHU

who agreed to become my mentor and guide for the project and gave me the opportunity to

work on this project. I am also grateful, for her support and guidance throughout this

project with valuable information and giving me a better insight of the things, without

which the successful culmination of this project would not have been possible. Not only did

she inspired me throughout the progress of the project, but, also motivated me to get an

insight into the field of my work.

I would also like to extent my immense gratitude to Prof. A. K. Agrawal, and respected

Dean Prof. Deepak Barman, Faculty of Management Studies, BHU who allowed me to

choose the topic for my Dissertation.

Shashank Tripathi

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CHAPTER 1

INTRODUCTION

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1. CONCEPT OF INSURANCE :

Life has always been an uncertain thing. To be secure against unpleasant possibilities,always requires the utmost resourcefulness and foresight on the part of man. To prayor to pay for protection is the spirit of the humanity. Man has been accustomed topray God for protection and security from time immemorial. In modern daysInsurance Companies want him to pay for protection and security. The insurance mansays "God helps those who help themselves"; probably he is correct.

Too many people in this country are not in employment; and work for too many nolonger guarantees income security. Several millions are part-time, self employed andlow-earning workers living under pitiable circumstances where there is no securitycover against risk. Further the inherent changing employment risks, the prospect ofcontinual change in the work place with its attendant threats of unemployment andlow pay especially after the adoption of New Economic Policy and the imminent lifecycle risks - a new source of insecurity which includes the changing demands offamily life, separation, divorce and elderly dependents are tormenting the society.Risk has become central to one's life. It is within this background life insurance policyhas been introduced by the insurance companies covering risks at various levels. Lifeinsurance coverage is against disablement or in the event of death of the insured,economic support for the dependents. It is a measure of social security to livelihoodfor the insured or dependents. This is to make the right to life meaningful, worthliving and right to livelihood a means for sustenance. Therefore, it goes withoutsaying that an appropriate life insurance policy within the paying capacity and meansof the insured to pay premium is one of the social security measures envisaged underthe Indian Constitution. Hence, right to social security, protection of the family,economic empowerment to the poor and disadvantaged are integral part of the right tolife and dignity of the person guaranteed in the constitution.

Man finds his security in income (money) which enables him to buy food, clothing,shelter and other necessities of life. A person has to earn income not only for himselfbut also for his dependents, viz., wife and children. He has to provide legally for hisfamily needs, and so he has to keep aside something regularly for a rainy day and forhis old age. This fundamental need for security for self and dependents proved to bethe mother of invention of the institution of life insurance.

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What is Insurance :The business of insurance is related to the protection of the economic values of assets. Everyasset has a value. The asset would have been created through the efforts of the owner. Theasset is valuable to the owner, because he expects to get some benefit from it. The benefitmay be an income or some thing else. It is a benefit because it meets some of his needs. In thecase of a factory or a cow, the product generated by is sold and income generated. In the caseof a motor car, it provides comfort and convenience in transportation. There is no directincome.

Every asset is expected to last for a certain period of time during which it will perform. Afterthat, the benefit may not be available. There is a life-time for a machine in a factory or a cowor a motor car. None of them will last for ever. The owner is aware of this and he can somanage his affairs that by the end of that period or life-time, a substitute is made available.Thus, he makes sure that the value or income is not lost. However, the asset may get lostearlier. An accident or some other unfortunate event may destroy it or make it non-functional.In that case, the owner and those deriving benefits from there, would be deprived of thebenefit and the planned substitute would not have been ready. There is an adverse orunpleasant situation. Insurance is a mechanism that helps to reduce the effect of such adversesituations.Insurance, in law and economics, is a form of risk management primarily used to hedgeagainst the risk of a contingent loss. Insurance is defined as the equitable transfer of the riskof a potential loss, from one entity to another, in exchange for a premium. Insurer, ineconomics, is the company that sells the insurance. Insurance rate is a factor used todetermine the amount, called the premium, to be charged for a certain amount of insurancecoverage. Risk management, the practice of appraising and controlling risk, has evolved as adiscrete field of study and practice.

Origin of Insurance

PRACTICE OF INSURANCE IN INDIA: 1818-1956

It is claimed that insurance was practiced in India even in Vedic times in one form or theother. The Sanskrit term "Yogakshema" in the Rigveda meant some kind of insurance, whichwas practiced by the Aryans in India nearly 3000 years ago. During the Mughal periodinsurance took firm roots. There are even references to the cover against war risks. Lossesdue to the passage of royal troops through farms were compensated by the State as a gestureof goodwill.

The year 1818 is an epoch -making year in the history of our country. The first Life InsuranceCompany on India soil appears to have been started in this year. A group of Europeanspioneered the establishment of the Oriental Life Insurance Society to afford relief to thedistressed relatives of European. The venture was not quite successful but the company wasreformed in 1829.The renewed Company also got into trouble in 1833 when Agency Houseof Calcutta, partners of the same, fell.

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Prince Dwarkanath Tagore was the only solvent partner & the sole responsibility for carryingon the institution developed on him. Meanwhile, early in Janury1834, the Government madeup its mind to establish a Public Insurance Company & a Committee was set up for thispurpose .A number of foreign Insurance Companies then operating in the country viewed thismove with alarm. They set up Committees of their own enquire into their individual affairs.Dwarkanath Tagore, too, had a Committee appointed to look into the affairs of the Oriental.As a result, another company was born out of the previous one in the name of "New OrientalCompany"

In the reorganization of the "Oriental" in the year 1834, two other gentlemen were associated.One was Ramtanu Lahiri and the other Rustamjee Cowasjee. The latter was anotherprominent figure of the business world. Rustamjee entered insurance business in 1828, hewas already known to the community and the Government as a wealthy Parsi merchant.Rustamjee's connection with insurance also started with "Laudable Societies", but he waslater on associated with Companies like "Sun Life Office (1834) ", New Oriental(1835),Universal Life (1835) , New Laudable (1840) , and Indian Laudable (1841) . He wasalso on the Committee of the Union Insurance Company which was formed by a group offive persons. This Company was issuing policies covering river-risks only. He was intimatelyconnected with the Committee of Insurance Offices in Calcutta. Rustamjee Cowasjee &Dwarkanath Tagore was probably the first Indians to join in partnership business with theEuropeans & in the field of insurance they were pioneers on this side of the country.

Apart from Calcutta, several enterprising people in Bombay started in 1823 the "BombayLife" Assurance Company. The company went into liquidation soon and could not revive. In1829, the "Madras Equitable "was formed. It finally ceased to function in 1921 due tofinancial difficulties after the First World War.

The effort to set up a public insurance company at the government level also went in vain,mainly from objection of private operators. Majority of the early attempts to form insuranceoffices were in the province of Bengal. This was due to its political & economic importanceat that time.

The contribution of Raja Ram Mohan Roy, one of the greatest social reformers of India, tothe development of life insurance is very great. He was deeply concerned about the sad plightof desperate widows and helpless orphans.

OVERSEAS INSURERS

Initially, when Life Offices were established in large numbers in Britain, some of themventured to issue sterling policies to the British residents in India. Premiums collected herewere credited to England largely for British beneficiaries. Business seems to have been briskand profitable and was usually under short term policies. Insurance mortality tables andinsufficient mortality data of Englishmen in India made the premiums heavy-heavier than athome. Insurance was denied to the "natives" even if they wanted it- for their lives werealways considered risky and sometimes valueless. When Indian lives were accepted as a veryspecial case, the extras charged were still heavier.

Prominent amongst the companies which came to India around this period was the "MedicalInvalid and General" incorporated in London in 1841. As more areas were annexed and the

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ruling power, with vested interests in developing trade, took charge , the "Medical" extendedits area of operation, established large connections, absorbed the" Agra Life" and in 1835,took over the "New Oriental". P.M. Tate, the then manager of the "Medical", was a keenbusinessman, widely liked, influential and shrewd. With W.F. Ferguson, who was themanager of the "New Oriental" before amalgamation, he commenced very active operationswhich were temporarily affected by the 1857 "Mutiny".

The Universal Life Insurance Company established in England in 1836 opened its IndianBranch in 1840 and enjoyed a long period of successful operations until it was taken over bythe "North British" in May 1901. Insurance exceeding Rs. 10 crores were issued in Indiaduring this period. Another English Company operating in India at that time was the ColonialLife Assurance Company. It was established in 1846 under the auspices of the Standard LifeAssurance Company. The original prospectus of this company declared its purpose as"extending to the Colonies of Great Britain and to Indian the full benefit of Life Assurance".It appointed agents with local boards which were first established on Calcutta, Bombay,Madras and Colombo. Later on this company was taken over by the "Standard Life" andmade valuable contribution to investigations into the mortality experience of assured lives inIndia. Eventually it ceased its operations in India in 1938.

It is difficult to say which was the oldest Life Policy in India, but the oldest known appears tobe one sold by the Royal Insurance (which commenced business in India in 1845) on the lifewas to Cursetjee Furdonjee on 6th January 1848, no reference to any earlier policy beingavailable. In the year 1853, the Liver pool and London and Globe Insurance Companyestablished in England in 1836, commenced business in India. Sir Charles Forbes was its firstagent, succeeded by M/s. Forbes, Forbes and Campbell. It accepted only European lives andcommenced insuring Indian lives only after 1929.This too, was mainly to oblige good agentsof the Company for classes other than life business. The North British and Mercantile was thenext company to appear on the Indian scene.

It started fire insurance business in the year 1861 and life business 1864. The LondonAssurance started life business in 1864, limited principally to European lives and closeddown its life department when the Life Assurance Companies Act 1912 made submission ofreturns compulsory.

On 3rd December, 1870, seven earnest men of Bombay with just seven rupees for initialexpenses gave shape to a plan of offering insurance to the public without the risk of ruin andthe "Bombay Mutual Life Assurance Society" came into existence. This was followed by theOriental Life Assurance Company in1874, the Bharat in 1896 and the Empire of India in1897.

THE BIRTH OF INDIAN INSURERS

With the advent of the 20th century, the glorious renaissance of swadeshi days dawned. Atthe same time, well- to do Indians realized the potentiality of Indian Insurance business. TheSwadeshi movement of 1905-1907 gave rise to more insurance companies. The United Indiain Madras, National Indian and National Insurance in Calcutta and the Co-operativeAssurance at Lahore were established in 1906. In 1907, Hindustan Co-operative InsuranceCompany took its birth in one of the rooms of the Jorasanko House of the great poetRabindranath Tagore, in Calcutta. The Indian Mercantile (1907) was started in Bombay,

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General Assurance (1908) at Ajmer and the Swadeshi Life (Later Bombay Life) in Bombayin 1908.

The end of the First World War (1914-18) witnessed an influx of insurance companies inIndia. Famous Indian business houses started new insurance companies. Industrial andPrudential Bombay, Western India, Satara, were floated before the war, but by 1919,companies like Jupiter General, New India, Vulcan Insurance Company etc. came into being.Pandit K.Santhanam with blessing of Lala Lajpat Rai and Pandit Motilal Nehru started LaxmiInsurance Co. Similarly, Andhra Insurance was started in Masulipatnam, with the initiative ofstalwarts like Dr. Pattabhi Sitaramaiah. From political platforms also, national leaderssupported this cause. It is duty to every Indian to support only Indian Insurance. The keynoteof our Swaraj is in placing all our insurance with our Indian companies", said MahatmaGandhi in his message. "I hope Indians will realize the importance of patriotism only throughIndian insurance institution", stated Pandit Jawaharlal Nehru. Thus, the cause of Indianinsurance became a national issue. The pursuit to boost Indian insurance represented acrusade to extricate the Indian economy from foreign domination.

PROGRESS IN INSURANCE BUSINESS

The growth of Life Insurance in concrete terms could be said to being during the first twodecades of twentieth century when most of the major companies were founded. They grew interms of rise in the number of companies, in terms of number of policies and sum assured aswell as total life fund. Indian Insurance Year Book, published for the first time in 1914, givesthe figure of the total business-in -force as 22.44 crore which grew to Rs. 298 crore in 1938.In 1914, there were only 44companies transacting insurance business in India, and during thenext 25 years their number rose to 176. The total progress on all the primary heads, viz. lifefund (Rs. 50.50 crore), premium income (Rs. 10.50 crore) and new business (Rs. 43.30 crore)indicate that Indian Insurance Business had been making a definite headway during thisyears. The inter-war -years thus saw rapid growth life insurance in India.

The promotion of new life insurance companies continued to be almost a craze and insurancecompanies mushroomed. In this period, 176 insurance companies were formed and many ofthem failed. Thus unhealthy growth was harmful to the interest of the policy holders andinsurance business in India. Feeling concerned about it, the All India Life Assurance Offices'Association urged upon the Government in 1932 to undertake the insurance legislation to

• (a) Compulsorily register all Life Insurance companies.• (b) Secure a deposit of Rs.2 lakh from all Life Insurance companies.• (c) Compel foreign companies doing business in India to keep sufficient funds in

India securities to meet their liabilities under all policies issued in India.

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INSURANCE ACT, 1938

The Insurance Act, 1938, was the first comprehensive legislation governing not only life butalso non- life branches of insurance to provide strict state control over insurance business. Insub- sections to dealt with provident companies, mutual offices and co-operative societies aswell.

The silent features of the Act were as follows:

• (A) Constitution of a Department of Insurance under a superintendent vested withwide powers of supervision and control over all kinds of insurance companies.

• (B) Regulation for the compulsory registration of insurance companies and for filingof returns of investment and financial conditions.

• (C) Provisions for deposit, to prevent insurers of inadequate financial resources ofspeculative concerns for commencing business.

• (D) Provisions that 55% of the net life fund of an Indian or non- Indian insurer shouldinvested in Indian Government and approved securities with at least 25% in IndianGovernment Rupee securities.. All other companies, i.e., foreign companies mustinvest 100% of their Indian liabilities in Indian Government and approved securities,with at least 33.3% Indian Government securities.

• (E) Prohibition of rebating, restriction of commission, licensing of agents etc.Maximum rates of commission were fixed at 40% of the first premiums and 5% of therenewal premium in respect of life assurance business. The agent must be licensed, toimprove the status of the profession.

• (F) Periodical valuation of Indian Insurance business of foreign companies and thebusiness of Indian companies.

• (G) Provision for policyholders' directors, making it possible for the representatives ofpolicyholders to be on the Board of directors.

• (H) Standardization of policy conditions required all companies to file standard formsand tables of premium approved by an Actuary. Under this requirement, the initialdeposit for life insurance business was raised from Rs. 25000 in Governmentsecurities to Rs. 50000 in cash approved securities, which was subsequently to beraised by installments to Rs. 2 lakh within a specified time limit.

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GROWTH OF LIFE BUSINESS IN INDIA: 1914-1948Srno 1914 1930 1940 1945 1948

1 No of insurers 44 68 195 215 209

(a) Indian 44 68 179(91.79)

200(93.02)

189(90.43)

(b) Non-Indian - - 16 15 20

2 Total No. ofpolicies In force - 748997 1628381 2714000 3016000

(a) Indian - 513925(68.61)

1371963(84.25)

2376000(87.55)

2791000(90.15)

(b) Non-Indian - 220703 181247 261000 234000

(c) Indian outsideIndia - 14369 75171 77000 202000

3 Total business inforce 22.44 258.42 304.03 573.07 712.76

(a) Indian (Rs. Crore) 22.44 84.89(32.85)

225.51(74.17)

459.43(80.17)

566.38(79.46)

(b) Non-Indian - 69.76 60.12 91.85 101.08

(c) Indian outsideIndia - 3.77 18.4 21.79 45.3

4 Total life funds(Rs. Crore) 6.36 20.53 62.41 107.4 150.39

Note: Figures in brackets show percentage of the total.

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Nationalization

THE LIFE INSURANCE CORPORATION OF INDIA: 1956

This was the first step taken towards the nationalization of life insurance business in India.On 20th January, 1956 all life insurance companies were taken over by 43 nominatedcustodians. The custodians were experienced senior executives of private insurancecompanies, reporting directly to the Finance Ministry. From the word go, the complex task ofrunning the industry on a permanent basis and continuing the services to policy holderswithout interruption were their major concerns. The actual work of integration had to awaitlegislation. The custodians managed the insurance companies till 1-09-1956, when LifeInsurance Corporation was established under the general direction and control of the Ministryof Finance.

The Ordinance provided for the transfer of the control of 154 Indian insurers, 16 non Indianinsurers and 75 provident societies. These arrangements were designed to ensure that noinconvenience whatsoever was caused to the policy holders. With the Government take overthe management aimed towards the evolution of a common uniform premium rate, policyconditions and service and working procedures and above all to help promote team spirit.

The corporation, a body corporate shall consist of not more than 15 members appointed bythe Central Government, one of them being appointed by the government as chairman.

The capital of the corporation was at Rs 5 crore provided by the central government.

INSURANCE SECTOR REFORMS

In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor R.N.Malhotra was formed to evaluate the Indian Insurance industry and recommended its futuredirection.

The Malhotra committee was set up with the objective of complementing the reformsinitiated in the financial sector.

The reforms were aimed at "creating a more efficient and competitive financial systemsuitable for the requirements of the economy keeping in mind the structural changes currentlyunderway and recognizing that insurance is an important part of the over all financial systemwhere it was necessary to address the need for similar reforms...".

In 1994, the committee submitted the report and some of the key recommendations included:

(1) STRUCTURE

• Government stake in the Insurance Companies to be brought down to 50%.• Government should take over the holdings of GIC and its subsidiaries so that these

subsidiaries can act as independent corporations.• All the insurance companies should be given greater freedom to operate

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(2) COMPETETION

• Private Companies with minimum paid up capital of Rs.1 bn should be allowed toenter the industry.

• No Company should deal in both Life and General Insurance through a single entry.• Foreign Companies may be allowed to enter the industry in collaboration with the

domestic companies.• Postal Life Insurance should be allowed to operate in the rural market.• Only one State Level Life Insurance Company should be allowed to operate in each

state.

(3) REGULATORY BODY

• The Insurance Act should be changed• An Insurance Regulatory Body should be set up.• Controller of Insurance (Currently a part from the Finance Ministry)should be made

independent

(4) INVESMENTS

• Mandatory Investments of LIC Life Fund in government securities to be reduced from75% to 50%.

• GIC and its subsidiaries are not to hold more than 5% in any company (There currentholdings to be brought down to this level over a period of time).

(5) CUSTOMER SERVICE

• LIC should pay interest on delays on payments beyond 30 days.• Insurance Companies must be encouraged to set up unit linked pension plans• Computerization of operations and updating of technology to be carried out in the

insurance industry.

The committee emphasized that in order to improve the customer service and increase thecoverage of insurance industry should opened up to competition. But at the same time, thecommittee felt the need to exercise caution as any failure on the part of new players couldruin the public confidence in the industry.

Hence, it was decided to allow competition in a limited way by stipulating the minimumcapital requirement of Rs. 100 crores. The committee felt the need to provide greaterautonomy to insurance companies in order to improve their performance and enable them toact as independent companies with economic motives. For this purpose, it had proposedsetting up an independent regulatory body.

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Liberalization :

OPENING UP OF INSURANCE SECTOR – 1999 THE INSURANCEREGULATORY AND DEVELOPMENT AUTHORITY

Reforms in the Insurance sector were initiated with the passage of the IRDA Bill inParliament in December 1999. The IRDA since its incorporation as a statutorybody in April 2000 has fastidiously stuck to its schedule of framing regulations andregistering the private sector insurance companies.

The other decision taken simultaneously to provide the supporting systems to theinsurance sector and in particular the life insurance companies was the launch ofthe IRDA's online service for issue and renewal of licenses to agents.

The approval of institutions for imparting training to agents has also ensured thatthe insurance companies would have a trained workforce of insurance agents inplace to sell their products, which are expected to be introduced by early next year.

Since being set up as an independent statutory body the IRDA has put in aframework of globally compatible regulations. In the private sector 14 lifeinsurance companies have been registered.

ENTRY OF PRIVATE COMPANIES

Under the IRDA Act, private companies can now operate in India's insuranceindustry. However, they must obtain a license from the IRDA before beingpermitted to write business.

To have its license application considered, a domestic private company must beregistered in accordance with the Companies Act of 1956 and have approximatelyUS$ 20 million of investment capital. The specific licensing requirements thatPrivate Indian Companies must fulfill are set forth in the Registration on IndianInsurance Companies Regulations, published by the IRDA 2000.

LIFTING OF BARRIERS TO FOREIGN INVESTMENT

The IRDA Act also lifts certain barriers to foreign direct investment in Indianinsurance industry.

Global insurers are now permitted to set up and register a domestic company inorder to write business in India. However, regulations stipulate that they have acapital base of at least US $ 20 million, and their investment in such company iscapped at 26 percent. Thus, to participate in the market, they must form a jointventure with an Indian partner that is able to invest the remaining funds.

The equity investments limit is the same for global reinsures seeking to writebusiness in India, but they are required to put up a capital of approximately US$ 45million in order to establish a domestic company.

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Since the IRDA first enacted these rules, 13 new life insurance companies haveentered the market.

On the other hand, no global reinsurer has established a domestic company.Instead, most of the top international reinsurance companies operate from theiroverseas offices by sharing the reinsurance risks picked up by the GIC. A recentproposal has been put forward to increase foreign direct investment to 49 percent.In addition, global companies are pushing for the right to establish branch officesin India. These changes are likely to substantially increase the presence ofinternational insurers, reinsurers, and brokers in India.

The IRDA Insurance Brokers Act in India 2002 permitted overseas insurance andreinsurance brokers to enter the market, but with the same equity cap as thatgoverning the operations of foreign insurers and reinsurers. Thus, foreign brokersmust also form a joint venture with an Indian partner in order to establish an Indianbroking house.

The 2002 IRDA legislation established four broker categories, one of whichbrokers must select when applying for a license:

1. Category 1A : Direct General Insurance Broker2. Category 1B : Direct Life Insurance Broker3. Category 2 : Reinsurance Broker4. Category 3: Composite Broker5. Category4: Others, for example Insurance Consultants and Risk

Management Consultants.

Each category has different solvency margins and capital adequacy ratios, and allcategories need to carry professional indemnity insurance at different minimumlevels.

In the years since market liberalization was initiated, the insurance sector haswitnessed some impressive changes. The needs of insurance and reinsurancebuyers have grown; the market is introducing new products to address these needs;and the services of brokers are now seen as critical to making informed insuranceand reinsurance decisions.

OVERVIEW OF THE CURRENT INSURANCE MARKET

In the years since the IRDA Act initiated market reforms, the insurance sector hasexperienced some remarkable changes.

The entry of a large number of Indian and Foreign private companies in lifeinsurance business has to lead greater choice in terms of products and services.Increased consumer awareness of the benefits and importance of insurance andreinsurance has generated many more buyers; and new distribution channels_among them brokers, bank assurance, the Internet, and corporate agents_ haveprovided additional ways of getting products and services to customers.

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Private insurance companies have to date written a small percentage of business inthis sector during the last three years, but they have ushered in a competitiveenvironment that has accelerated market growth.

State owned insurers still write the bulk of insurance business, and they have thenet worth required to underwrite large corporate risks without depending almostentirely on reinsurance support. However, their focus on restructuring is beginningto put them at a disadvantage against private competitors.

Over the next few years, the share of the market held by the public insurers isexpected to drop substantially, with private companies assuming a growingpercentage of the business written.

At present there are 15 private insurers with two standalone private players andremaining private-foreign joint venture.

Purpose and Need of Insurance :

Assets are insured, because they are likely to be destroyed through accidental occurrences.Such possible occurrences are called perils. Fire, floods, breakdowns, lightening,earthquakes, etc, are perils. If such perils can cause damage to the asset, we say that the assetis exposed to that risk. Perils are the events. Risks are the consequential losses or damages.The risk to a owner of a building, because of the peril of an earthquake, may be a few lakhsor a few crores of rupees, depending on the cost of the building and the contents in it.

The risk only means that there is a possibility of loss or damage. The damage may or may nothappen. Insurance is done against the contingency that it may happen. There has to be anuncertainty about the risk. Insurance is relevant only if there are uncertainties. If there is nouncertainty about the occurrence of an event, it cannot be insured against. In the case ofhuman being, death is certain, but the time of death is uncertain. In the case of person who isterminally ill, the time of death is not uncertain, though not exactly known. He cannot beinsured.

Insured does not protect the asset. It does not prevent its loss due to peril. The peril cannot beavoided through insurance. The peril can sometimes be avoided through better safety anddamage control management. Insurance only tries to reduce the impact of the risk on theowner of the asset and those who depend on that asset. It only compensates the losses andthat too, not fully.

Only economic consequences can be insured. If the loss is not financial, insurance may not bepossible. Example of non-economic losses are love and affection of parents, leadership ofmanagers, sentimental attachments to family heirlooms, innovative and creative abilities, etc.

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How Insurance Works?

The mechanism of insurance is very simple. People who are exposed to the same risks cometogether and agree that, if any one of them suffers a loss, the others will share the loss andmake good to the person who lost. All people who send goods by ship are exposed to thesame risks, which are related to water damage, ship sinking, piracy, etc. Those owningfactories are not exposed to these risks, but they are exposed to different kinds of risks like,fire, hailstorms, earthquake, lightning, burglary, etc. Like this, different kinds of risks can beidentified and separate groups made, including those exposed to such risks. By this method,the heavy loss that any one of them may suffer (all of them may not suffer such losses at thesame time) is divided into bearable small losses by all. In other words, the risk is spreadamong the community and the likely big impact on one is reduced to smaller manageableimpacts on all.

If a Jumbo Jet with more than 350 passengers crashes, the loss would run into several croresof rupees. No airline would be able to bear such a loss. It is unlikely that many Jumbo Jetswill crash at same time. If 100 airline companies flying Jumbo Jets, come together into aninsurance pool, whenever one of the Jumbo Jets in the pool crashes, the loss to be borne byeach airline would come down to a few lakhs of rupees. Thus, insurance is a business ofsharing .

There are certain principles, which make it possible for insurance to remain a fairarrangement. The first is that it is difficult for any one individual to bear the consequences ofthe risks that he is exposed to. It will become bearable when the community shares theburden. The second is that the perils should occur in an accidental manner. Nobody should bein a position to make the risk happen. In other words, none in the group should set fire to hisassets and ask others to share the costs of damage. This would be taking unfair advantage ofan arrangement put into place to protect people from risks they are exposed to. Theoccurrence has to be random, accidental, and not the deliberate creation of the insured person.

The manner in which the loss is to be shared can be determined before-hand. It may beproportional to the risk that each person is exposed to. This would be indicative of the benefithe would receive if the peril befell him. The share could be collected from the members afterthe loss has occurred or the likely shares may be collected in advance, at the time ofadmission to the group. Insurance companies collect in advance and create a fund from whichthe losses are paid.

The collection to be made from each person in advance is determined on assumptions. Whileit may not be possible to tell beforehand, which person will suffer, it may be possible to tell,on the basis of past experiences, how many persons, on an average, may suffer losses. Thefollowing two examples explain the above concept of insurance:

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Example 1

In a village, there are 400 houses, each valued at Rs. 20000. Each year, on the average, 4houses get burnt, resulting into a total loss of Rs. 80000. If all the 400 owners come togetherand contribute Rs. 200 each, the common fund would be Rs. 80000. this is enough to pay Rs.20000 to each of the 4 owners whose houses got burnt. Thus, the risk of 4 owners is spreadover 400 house-owners of the village.

Example 2

There are 1000 persons who are all aged 50 and are healthy. It is expected that of these, 10persons may die during the year. If the economic value of the loss suffered by the family ofeach dying person is taken to be Rs. 20000, the total loss would work out to Rs. 200000. Ifeach person in a group contributed Rs. 200 a year, the common fund would be Rs. 200000.This would be enough to par Rs. 20000 to the family of each of the ten persons who die.Thus, the risks in the case of 10 persons, are shared by 1000 persons.

Insurance of ‘Human Asset’

A human being is an income generating asset. One s manual labour, professional skills andbusiness acumen are the assets. This asset also can be lost through unexpectedly early deathor through sickness and disabilities caused by accidents. Accidents may or may not happen.Death will happen, but the timing is uncertain. If it happens around the time of one sretirement, when it could be expected that the income will normally cease, the personconcerned could have made some other arrangements to meet the continuing needs. But if ithappens much earlier when the alternate arrangements are not in place, there can be losses tothe person and dependents. Insurance is necessary to help those dependent on the income.

A person, who may have made arrangements for his needs after his retirement, also wouldneed insurance. This is because the arrangements would have been made on the basis of someexpectations like, likely to live for another 15 years, or that children will look after him. Ifany of these expectations do not become true, the original arrangement would becomeinadequate and there could be difficulties. Living too long can be as much a problem as dyingtoo young. Both are risks, which need to be safeguarded against. Insurance takes care.

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Insurance of Intangibles :

The concept of insurance has been extended beyond the coverage of tangible assets.Exporters run risk of losses if the importers in the other country default in payments or incollecting the goods. They will also suffer heavily due to sudden changes in currencyexchange rates, economic policies or political disturbances in the other country. These risksare insured. Doctors run the risk of being charged with negligence and subsequent liabilityfor damages. The amounts in question can be fairly large, beyond the capacity of individualsto bear. These are insured. Thus, insurance is extended to intangibles. In some countries, thevoice of a singer or the legs of a dancer may be insured.

Types of Insurance :

Any risk that can be quantified can potentially be insured. Specific kinds of risk that maygive rise to claims are known as "perils". An insurance policy will set out in detail whichperils are covered by the policy and which are not.

Below is a (non-exhaustive) list of the many different types of insurance that exist. A singlepolicy may cover risks in one or more of the categories set forth below. For example, autoinsurance would typically cover both property risk (covering the risk of theft or damage tothe car) and liability risk (covering legal claims from causing an accident). A homeowner'sinsurance policy in the U.S. typically includes property insurance covering damage to thehome and the owner's belongings, liability insurance covering certain legal claims against theowner, and even a small amount of health insurance for medical expenses of guests who areinjured on the owner's property.

Automobile insurance known in the UK as motor insurance, is probably the most commonform of insurance and may cover both legal liability claims against the driver and loss of ordamage to the insured's vehicle itself. Throughout most of the United States an auto insurancepolicy is required to legally operate a motor vehicle on public roads. In some jurisdictions,bodily injury compensation for automobile accident victims has been changed to a no-faultsystem, which reduces or eliminates the ability to sue for compensation but providesautomatic eligibility for benefits.

Aviation insurance insures against hull, spares, deductible, hull war and liability risks. Boiler insurance (also known as boiler and machinery insurance or equipment breakdown

insurance) insures against accidental physical damage to equipment or machinery. Builder's risk insurance insures against the risk of physical loss or damage to property

during construction. Builder's risk insurance is typically written on an "all risk" basiscovering damage due to any cause (including the negligence of the insured) not otherwiseexpressly excluded.

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Business insurance can be any kind of insurance that protects businesses against risks. Someprincipal subtypes of business insurance are (a) the various kinds of professional liabilityinsurance, also called professional indemnity insurance, which are discussed below under thatname; and (b) the business owners policy (BOP), which bundles into one policy many of thekinds of coverage that a business owner needs, in a way analogous to how homeownersinsurance bundles the coverage that a homeowner needs.

Casualty insurance insures against accidents, not necessarily tied to any specific property. Credit insurance repays some or all of a loan back when certain things happen to the

borrower such as unemployment, disability, or death. Mortgage insurance (which see below)is a form of credit insurance, although the name credit insurance more often is used to refer topolicies that cover other kinds of debt.

Crime insurance insures the policyholder against losses arising from the criminal acts ofthird parties. For example, a company can obtain crime insurance to cover losses arising fromtheft or embezzlement.

Crop insurance "Farmers use crop insurance to reduce or manage various risks associatedwith growing crops. Such risks include crop loss or damage caused by weather, hail, drought,frost damage, insects, or disease, for instance."

Defense Base Act Workers' compensation or DBA Insurance provides coverage for civilianworkers hired by the government to perform contracts outside the US and Canada. DBA isrequired for all US citizens, US residents, US Green Card holders, and all employees orsubcontractors hired on overseas government contracts. Depending on the country, ForeignNationals must also be covered under DBA. This coverage typically includes expensesrelated to medical treatment and loss of wages, as well as disability and death benefits. Directors and officers liability insurance protects an organization (usually a corporation)

from costs associated with litigation resulting from mistakes incurred by directors andofficers for which they are liable. In the industry, it is usually called "D&O" for short. Disability insurance policies provide financial support in the event the policyholder is

unable to work because of disabling illness or injury. It provides monthly support to help paysuch obligations as mortgages and credit cards.

o Total permanent disability insurance provides benefits when a person is permanentlydisabled and can no longer work in their profession, often taken as an adjunct to lifeinsurance. Errors and omissions insurance: See "Professional liability insurance" under "Liability

insurance". Expatriate insurance provides individuals and organizations operating outside of their home

country with protection for automobiles, property, health, liability and business pursuits. Financial loss insurance protects individuals and companies against various financial risks.

For example, a business might purchase cover to protect it from loss of sales if a fire in afactory prevented it from carrying out its business for a time. Insurance might also cover thefailure of a creditor to pay money it owes to the insured. This type of insurance is frequently

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referred to as "business interruption insurance." Fidelity bonds and surety bonds are includedin this category, although these products provide a benefit to a third party (the "obligee") inthe event the insured party (usually referred to as the "obligor") fails to perform itsobligations under a contract with the oblige.

Health insurance policies will often cover the cost of private medical treatments if theNational Health Service in the UK (NHS) or other publicly-funded health programs do notpay for them. It will often result in quicker health care where better facilities are available. Home insurance or homeowners insurance: See "Property insurance". Liability insurance is a very broad superset that covers legal claims against the insured.

Many types of insurance include an aspect of liability coverage. For example, a homeowner'sinsurance policy will normally include liability coverage which protects the insured in theevent of a claim brought by someone who slips and falls on the property; automobileinsurance also includes an aspect of liability insurance that indemnifies against the harm thata crashing car can cause to others' lives, health, or property. The protection offered by aliability insurance policy is twofold: a legal defense in the event of a lawsuit commencedagainst the policyholder and indemnification (payment on behalf of the insured) with respectto a settlement or court verdict. Liability policies typically cover only the negligence of theinsured, and will not apply to results of willful or intentional acts by the insured.o Environmental liability insurance protects the insured from bodily injury, property damageand cleanup costs as a result of the dispersal, release or escape of pollutants.o Professional liability insurance also called professional indemnity insurance, protectsprofessional practitioners such as architects, lawyers, doctors, and accountants againstpotential negligence claims made by their patients/clients. Professional liability insurancemay take on different names depending on the profession. For example, professional liabilityinsurance in reference to the medical profession may be called malpractice insurance.Notaries public may take out errors and omissions insurance (E&O). Other potential E&Opolicyholders include, for example, real estate brokers, home inspectors, appraisers, andwebsite developers.

Life insurance provides a monetary benefit to a decedent's family or other designatedbeneficiary, and may specifically provide for burial, funeral and other final expenses. Lifeinsurance policies often allow the option of having the proceeds paid to the beneficiary eitherin a lump sum cash payment or an annuity.

o Annuities provide a stream of payments and are generally classified as insurance becausethey are issued by insurance companies and regulated as insurance and require the same kindsof actuarial and investment management expertise that life insurance requires. Annuities andpensions that pay a benefit for life are sometimes regarded as insurance against the possibilitythat a retiree will outlive his or her financial resources. In that sense, they are the complementof life insurance and, from an underwriting perspective, are the mirror image of lifeinsurance. Locked funds insurance is a little-known hybrid insurance policy jointly issued by

governments and banks. It is used to protect public funds from tamper by unauthorizedparties. In special cases, a government may authorize its use in protecting semi-private funds

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which are liable to tamper. The terms of this type of insurance are usually very strict.Therefore it is used only in extreme cases where maximum security of funds is required. Marine insurance and marine cargo insurance cover the loss or damage of ships at sea or on

inland waterways, and of the cargo that may be on them. When the owner of the cargo andthe carrier are separate corporations, marine cargo insurance typically compensates the ownerof cargo for losses sustained from fire, shipwreck, etc., but excludes losses that can berecovered from the carrier or the carrier's insurance. Many marine insurance underwriters willinclude "time element" coverage in such policies, which extends the indemnity to cover lossof profit and other business expenses attributable to the delay caused by a covered loss. Mortgage insurance insures the lender against default by the borrower. National Insurance is the UK's version of social insurance (which see below). No-fault insurance is a type of insurance policy (typically automobile insurance) where

insurers are indemnified by their own insurer regardless of fault in the incident. Nuclear incident insurance covers damages resulting from an incident involving radio active

materials and is generally arranged at the national level. (For the United States, see the Price-Anderson Nuclear Industries Indemnity Act.)

Pet insurance insures pets against accidents and illnesses - some companies coverroutine/wellness care and burial, as well.

Political risk insurance can be taken out by businesses with operations in countries in whichthere is a risk that revolution or other political conditions will result in a loss. Pollution Insurance A first-party coverage for contamination of insured property either by

external or on-site sources. Coverage for liability to third parties arising from contaminationof air, water or land due to the sudden and accidental release of hazardous materials from theinsured site. The policy usually covers the costs of cleanup and may include coverage forreleases from underground storage tanks. Intentional acts are specifically excluded Property insurance provides protection against risks to property, such as fire, theft or

weather damage. This includes specialized forms of insurance such as fire insurance, floodinsurance, earthquake insurance, home insurance, inland marine insurance or boilerinsurance. Purchase insurance is aimed at providing protection on the products people purchase.

Purchase insurance can cover individual purchase protection, warranties, guarantees, careplans and even mobile phone insurance. Such insurance is normally very limited in the scopeof problems that are covered by the policy.

Retrospectively Rated Insurance is a method of establishing a premium on large commercialaccounts. The final premium is based on the insured's actual loss experience during the policyterm, sometimes subject to a minimum and maximum premium, with the final premiumdetermined by a formula. Under this plan, the current year's premium is based partially (orwholly) on the current year's losses, although the premium adjustments may take months oryears beyond the current year's expiration date. The rating formula is guaranteed in theinsurance contract. Formula: retrospective premium = converted loss + basic premium × taxmultiplier. Numerous variations of this formula have been developed and are in use. Social insurance can be many things to many people in many countries. But a summary of

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its essence is that it is a collection of insurance coverage (including components of lifeinsurance, disability income insurance, unemployment insurance, health insurance, andothers), plus retirement savings, that mandates participation by all citizens. By forcingeveryone in society to be a policyholder and pay premiums, it ensures that everyone canbecome a claimant when or if he/she needs to. Along the way this inevitably becomes relatedto other concepts such as the justice system and the welfare state. This is a large, complicatedtopic that engenders tremendous debate, which can be further studied in the following articles(and others):

o Social welfare provision

o Social security

o Social safety net

o National Insurance

o Social Security (United States)

o Social Security debate (United States)

Terrorism insurance provides protection against any loss or damage caused by terroristactivities. Title insurance provides a guarantee that title to real property is vested in the purchaser

and/or mortgagee, free and clear of liens or encumbrances. It is usually issued in conjunctionwith a search of the public records performed at the time of a real estate transaction. Travel insurance is an insurance cover taken by those who travel abroad, which covers

certain losses such as medical expenses, lost of personal belongings, travel delay, personalliabilities, etc.

Workers' compensation insurance replaces all or part of a worker's wages lost andaccompanying medical expense incurred because of a job-related injury.

Advantages of Life Insurance :

Life insurance has no competition from any other business. Many people think that lifeinsurance is an investment or a means of saving. This is not a correct view. When a personsaves, the amount of funds available at any time is equal to the amount of money set aside inthe past, plus interest. This is so in a fixed deposit in the bank, in national savings certificates,in mutual funds and all other savings instruments. If the money is invested in buying sharesand stocks, there is the risk of the money being lost in the fluctuations of the stock market.Even if there is no loss, the available money at any time is the amount invested plusappreciation. In life insurance, however, the fund available is not the total of the savingsalready made (premiums paid), but the amount one wished to have at the end of the savingsperiod (which is the next 20 or 30 years). The final fund is secured from the very beginning.

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One is paying for it later, out of the savings. One has to pay for it only as long as one lives orfor a lesser period if so chosen. There is no other scheme which provides this kind of benefit.Therefore life insurance has no substitute.

Even so, a comparison with other forms of savings will show that life insurance has thefollowing advantages.

In the event of death, the settlement is easy. The heirs can collect the moneys quicker,because of the facility of nomination and assignment. The facility of nomination is nowavailable for some bank accounts.

There is a certain amount of compulsion to go though the plan of savings. In other forms, ifone changes the original plan of savings, there is no loss. In insurance, there is a loss.

Certain cannot claim the life insurance moneys. They can be protected against attachmentsby courts.

There are tax benefits, both in income tax and in capital gains.

Marketability and liquidity are better. A life insurance policy is property and can betransferred or mortgaged. Loans can be raised against the policy.

The following tenets help agents to believe in the benefits of life insurance. Such faith willenhance their determination to sell and their perseverance.

Life insurance is not only the best possible way for family protection. There is no otherway. Insurance is the only way to safeguard against the unpredictable risks of the future. It is

unavoidable. The terms of life are hard. The terms of insurance are easy. The value of human life is far greater than the value of property. Only insurance can

preserve it. Life insurance is not surpassed by many other savings or investment instrument, in terms of

security, marketability, stability of value or liquidity.

Insurance, including life insurance, is essential for the conservation of many businesses, justas it is in the preservation of homes.

Life insurance enhances the existing standards of living.

Life insurance helps people live financially solvent lives.

Life insurance perpetuates life, liberty and the persuit of happiness.

Life insurance is a way of life.

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The Business of Insurance :

Insurance companies are called insurers. The business of insurance is to (a) bring togetherpersons with common insurance interests (sharing the same risks), (b) collect the share orcontribution (called premium) from all of them, and (c) pay out compensation (called claims)to those who suffer. The premium is determined on the same lines as indicated in theexamples above, but with some further refinements.

In India, insurance business is classified primarily as life and non-life or general. Lifeinsurance includes all risks related to the lives of human beings and General insurance coversthe rest. General insurance has three classifications viz., Fire (dealing with all fire relatedrisks), Marine (dealing with all transport related risks and ships) and Miscellaneous (dealingwith all others like liability, fidelity, motor crop, personal accident, etc.). Personal accidentand sickness insurance, which are related to human beings, is classified as non-life in India,but is classified as life , in many other countries. What is Non-life in India is termed asProperty and Casualty in some other countries.

The premium is based on expectations of the losses. These expectations are based on studiesof occurrences in the past and the use of statistical principles. There is, in statistics, a law oflarge numbers . When you toss a coin, the chance of a head or tail coming up is half. If thecoin is tossed 10 times, one cannot be sure that the head will come up 5 times. If the coin istossed 1 million times, the number of heads will be closer to half a million proportionatelythan in the case of 10. The variation will be less as a percentage. So also, the larger thenumbers (of risks) included in the pool, the better the chances that the assumptions regardingthe probability of the risk occurring, which is the basis of premium calculation, will berealized in practice. In order to be amenable to statistical predictions, insurers have to insurelarge numbers of risks. Larger the spread of business better is the experience in relation toexpectations.

The business of insurance is nothing but one of sharing. It spreads losses of an individualover the group of individuals who are exposed to similar risks. People who suffer loss getrelief because their loss is made good. People who do not suffer loss are relieved becausethey were spared the loss.

The insurer is in the position of a trustee as it is managing the common fund, for and onbehalf of the community of policyholders. It has to ensure that nobody is allowed to takeundue advantage of the arrangement. That means that the management of the insurancebusiness requires care to prevent entry (into the group) of people whose risks are not of thesame kind as well as paying claims on losses that are not accidental. The decision to allowentry is the process of underwriting of risk. Underwriting includes assessing the risk, whichmeans, making an evaluation of how much is the exposure to risk. The premium to becharged depends on this assessment of the risk. Both underwriting and claim settlements haveto be done with great care.

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Criticism of Insurance Companies :

Some people believe that modern insurance companies are money-making businesses whichhave little interest in insurance. They argue that the purpose of insurance is to spread risk sothe reluctance of insurance companies to take on high-risk cases (e.g. houses in areas subjectto flooding, or young drivers) runs counter to the principle of insurance.Other criticisms include:

Insurance policies contain too many exclusion clauses. For example, some house insurancepolicies do not cover damage to garden walls.

Most insurance companies now use call centre and staff attempt to answer questions byreading from a script. It is difficult to speak to anybody with expert knowledge.

Role of Insurance in Economic Development :

For economic development, investments are necessary. Investments are made out of savings.A life insurance company is a major instrument for the mobilization of savings of people,particularly from the middle and lower income groups. These savings are channeled intoinvestments for economic growth.

As on 31.3.2002, the total investments of the LIC exceeded Rs. 245000 crores, of which morethan Rs. 130000 crores were directly in Government (both State and Centre) relatedsecurities, more than Rs. 12000 crores in the State Electricity Boards, nearly Rs. 20000 croresin housing loans and Rs. 4000 crores in water supply and sewerage systems. Otherinvestments included road transport, setting up industrial estates and directly financingindustry. Investments in the corporate sector (shares, debentures and term loans) exceededRs. 30000 crores. These directly affect the lives of the people and their economic well-being.

A life insurance company will have large funds. These amounts are collected by way ofpremiums. Every premium represents a risk that is covered by that premium. In effect,therefore, these vast amounts represent pooling of risks. The funds are collected and held intrust for the benefit of the policyholders. The management of life insurance companies arerequired to keep this aspects in mind and make all its decisions in ways that benefit thecommunity. This applies also to its investments. That is why successful insurance companieswould not be found investing in speculative ventures. Their investments, as in the case of theLIC, benefit the society at large.

Apart from investments, business and trade benefit through insurance. Without insurance,trade and commerce will find it difficult to face the impact to major perils like fire,earthquake, floods, etc. Financiers, like banks, collapse if the factory, financed by it, isreduces to ashes by terrible fire. Insurers cover also the loss to financiers, if their debtorsdefault.

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2. GLOBAL INSURANCE INDUSTRY :

The global insurance industry is one of the largest sectors of finance. It ranges fromconsumer to corporate and industrial insurance, and even reinsurance, or insurance ofinsurance.

The major insurance markets of the world are obviously the US, Europe, Japan, and SouthKorea. Emerging markets are found throughout Asia, specifically in India and China, and arealso in Latin America.

With the internet and other forms of high-speed communication, companies and individualsare now able to purchase insurance and related financial products from almost anywhere inthe world. Increasing affluence, especially in developing countries, and a risingunderstanding of the need to protect wealth and human capital has led to significant growth inthe insurance industry.

Given the evolving and growing socio-economic conditions worldwide, insurance companiesare increasingly reaching out across borders and are offering more competitive andcustomized products than ever before.

Over the past ten years, global insurance premiums have risen by more than 50%, withannual growth rates ranging between 2 and 10%.In 2004, global insurance premiumsamounted to $3.3 trillion.

The majority of insurance comes from developed nations such as most of Europe, the US,and Japan. In 2004, premiums in North American amounted to $1,217 billion, while theEuropean Union generated $1,198 billion, and Japan produced $492 billion. The UKamounted to $295 billion.

The four biggest generators of insurance premiums comprised almost two-thirds of premiumsfor 2004, the US and Japan amount to half, while they only make up 7% of the world spopulation.

In contrast, the emerging markets that make up 85% of the world s population produced only10% of the premiums.

The leading global insurance companies are:

• Zurich Financial Services,• AXA• Berkshire Hathaway/ Berkshire Hathaway Re• Allianz• Aviva• ING Group• Munich RE Group• American International Group (AIG)• Nippon Life Insurance• Assicurazioni Generali

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GLOBAL LIFE INSURANCE DENSITY :

Continent/Country 2001** 2002** 2003** 2004** 2005** 2006**North America 1508.6 1563.8 1565.7 1617.2 1686.3 1731.8United States 1602 1662.6 1657.5 1692.5 1753.2 1789.5Canada 675.9 657.3 722.9 926.1 1071.9 1204.1

Latin America 26.3 29.1 30 37.2 42.0 51.3Brazil 10.8 27.2 35.8 45.9 56.8 72.5Mexico 53.2 59.2 41.3 50.2 49.9 62.9Uruguay 21.5 17.8 15.4 N/A 15.5 16.6Argentina 68.8 19.7 24.2 34.5 35.4 43.8Panama 39.3 44.6 42.4 50.6 47.2 51.2Chile 122.1 103.5 138.3 164.5 174.9 176Colombia 11.5 12.5 12.4 14.3 16.8 20.5

Europe 573.2 620.4 726.9 848.1 911.8 1119.6United kingdom 2567.9 2679.4 2617.1 3190.4 3287.1 5139.6Switzerland 2715.7 3099.7 3431.8 3275.1 3078.1 3111.8Netherlands 1345 1296.1 1561.7 1936.5 1954.2 2071.6France 1268.2 1349.5 1767.9 2150.2 2474.6 2922.5Belgium 1155 1323.6 2004.8 2291.2 2988.7 2427.7Sweden 1356 1232.2 1602.3 1764.3 2105.2 2214.6Denmark 1364.4 1574.9 2037.5 2310.5 2489.9 2840.8Germany 674.3 736.7 930.4 1021.3 1042.1 1136.1Italy 720.8 904.9 1238.3 1417.2 1449.8 1492.8Austria 632 648.7 811 955.3 1095.1 1104.6Portugal 302.9 418.6 611.4 768.1 1113.7 1131.5Spain 491 588 488.6 571.9 615.8 651.0Poland 48.7 50.7 59.9 73.3 101.9 150.5Russia 33.2 23.1 33.9 24.8 6.3 4.0Croatia 25.3 33.2 46.3 58.7 70.9 81.8Hungary 59.3 76.7 99.1 117.3 148.2 192.3Greece 108.9 116 152.1 177.9 213.1 256.7Bulgaria 5 9.9 5.5 8.2 11.1 13.2Ukraine 0.1 0.1 0.3 0.6 1.3 1.9Turkey 5.5 6.5 8.4 12 12.7 13.1

Asia 125 128.1 140.1 147.2 149.6 154.6South Korea 763.4 821.9 873.6 1006.8 1210.6 1480.0Japan 2806.4 2783.9 3002.9 3044 2956.3 2829.3Tiwan 760.9 925.1 1050.1 1494.6 1699.1 1800.0Hongkong 1249.7 1237.9 1483.9 1884.3 2213.2 2456Israel 525.2 459.3 460.8 467.4 510.2 532.6Malaysia 129.5 118.7 139.8 167.3 188 189.2Singapore 713.2 730.1 1300.2 1483.9 1591.4 1616.5Thailand 34.1 42.1 52 50.8 54.6 60India 9.1 11.7 12.9 15.7 18.3 33.2China 12.2 19.5 25.1 27.3 30.5 34.1Phillipines 6.6 8.7 8.6 9.4 10.6 13.1UAE 56.3 74 72.5 59.7 74.7 89.8Srilanka 4.3 4.5 5.3 6.2 6.9 8.5Indonesia 3.6 5.2 6.4 7.5 10.5 12.5Oman 13.6 14.8 13.8 14.2 17.3 14.3Vietnam 2.1 3.8 4.1 7.3 6.1 6.1Iran 1.1 1.5 1.7 2.3 2.2 2.6Kuwait 30.3 36.8 36.9 39.1 35.7 40.9Pakistan 1.2 1 1.1 1.5 1.9 2.3Saudia Arabia 0.6 1.7 1.7 2.1 0.7 0.8

Africa 22.4 21.5 26.1 30.3 30.7 38.3South Africa 377.2 360.5 476.5 545.5 558.3 695.6Mauritius 95.3 103.7 119.1 133.1 136.1 N/AZimbabwe 12.4 7.8 21.4 N/A N/A N/AMorocco 9.4 12.2 12 10.6 11.7 14.7Kenya 2.9 3 3.4 3.7 4.5 5.3Nigeria 0.5 0.5 0.6 0.7 0.5 0.8Egypt 2.7 2.4 2.7 3.1 4 4.7Algeria 0.4 0.5 0.5 0.8 0.9 1.2

Oceania 697.5 668.7 750.7 851 885 896.3Australia 1040.3 1010.4 1129.3 1285.1 1366.7 1389New Zealand 198.4 211.1 272 318 219.7 215

World 235 247.3 267.1 291.5 299.5 330.6

Source: Swiss Re, Sigma volumes* Insurance density is measured as ratio of premium to total population** Data relates to calenderyears Figure in US$www.indiainsuranceresearch.com

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3. PERFORMANCE OF INDIAN INSURANCE INDUSTRY :

Performance up to October 2006

The performance growth rate that was 22.8 percent as at September 2006 has movedup to 23.3 percent at the end of October 2006, an improvement of significance. Thetotal premium at the end of October is Rs.14,628 crore as against Rs.11,855 crore.The established players have added Rs.807 crore at a growth rate of 8.3 percent withthe new players adding Rs.1966 crore at a growth rate of 62 percent. Here again,ICICI Lombard has achieved an accretion of Rs.887 crore; whereas the total accretionof all the established players is Rs 807 crores, a truly impressive record. New Indiawith Rs.286 crore, closely followed by Oriental with Rs.277 crore are the majorcontributors for the established players. Reliance, a late starter in the race forpremium acquisition has recorded an accretion of Rs.357 crore as against a meagerlast year renewal of Rs.89 crore. The growth path is now led by several players: witheight out of the twelve players having achieved accretions in excess of Rs.100 croreand more at the end of October 2006. With the imminent detariffing around the cornerin January 2007, the next two months should witness even more fierce battles forsupremacy of the market turf. A few of the new players are inching towards breakinginto the big league premium players of yesteryears and this may happen sooner thanone thought. Interesting and challenging times are certainly ahead for all the players.

Premiums Rise 163.68% over October, 2006

Individual premium:

The life insurance industry underwrote Individual Single Premium of Rs.1336610.10lakh for the period ended October, 2006 of which the private insurers garneredRs.118242.78 lakh and LIC garnered Rs.1218367.32 lakh. The correspondingnumbers for the previous year were Rs.443296.40 lakh for the industry, with privateinsurers underwriting Rs.64530.68 lakh and LIC Rs.378765.72 lakh. The IndividualNon-Single Premium underwritten during April-October, 2006 was Rs.1771903.71lakh of which the private insurers underwrote Rs.536863.16 lakh and LICRs.1235040.55 lakh. The corresponding numbers for the previous year wereRs.743586.24 lakh, Rs.260432.63 lakh and Rs.483153.61 lakh respectively.

Group premium:

The industry underwrote Group Single Premium of Rs.467348.58 lakh of which theprivate insurers underwrote Rs.30147.74 lakh and LIC Rs.437200.84 lakh. The livescovered being 7678192, 456696 and 7221496 respectively. The correspondingnumbers for the previous year were Rs.171382.70 lakh with private insurersunderwriting Rs.17261.98 lakh and LIC Rs.154120.72 lakh and the lives coveredbeing 8547743, 397721 and 8150022 respectively. The Group Non-Single Premiumunderwritten during April-October, 2006 was Rs.53221.05 lakh which wasunderwritten entirely by the private insurers, covering 2366084 lives. Thecorresponding numbers for the previous year were Rs. 18031.15 lakh and covering1277400 lives.

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Segment-wise segregation:

A further segregation of the premium underwritten during the period indicates thatLife, Annuity, Pension and Health contributed Rs.2329869.52 lakh (64.24%),Rs.74006.48 lakh (2.04%), Rs.1221904.91 lakh (33.69%) and Rs.897.90 lakh (0.02%)respectively. In respect of LIC, the break up of life, annuity and pension categorieswas Rs.1677831.45 lakh (58.04%), Rs.69437.82 lakh (2.40%) and Rs.1143339.44lakh (39.55%) respectively. In case of the private insurers, Rs.652038.07 lakh(88.58%), Rs.4568.66 lakh (0.62%), Rs.78565.47 lakh (10.67%) and Rs.897.90 lakh(0.12%) respectively was underwritten in the four segments.

Unit linked and conventional premium:Analysis of the statistics in terms of linked and non-linked premium indicates that49.46% of the business was underwritten in the non-linked category, and 50.54% inthe linked category, i.e., Rs.1793702.35 lakh and Rs.1832976.45 lakh respectively. Incase of LIC, the linked and non-linked premium was 41.38% and 58.62%respectively, as against which for the private insurers taken together this stood at86.53% and 13.47% respectively. During the corresponding period of the previousyear, linked and non-linked premium indicates that 54.74% of the business wasunderwritten in the non-linked category, and 45.26% in the linked category, i.e.,Rs.752509.54 lakh and Rs.622185.30 lakh respectively. In case of LIC, the linked andnon-linked premium was 33.96% and 66.04% respectively, as against which for theprivate insurers taken together this stood at 77.02% and 22.98% respectively.Growth momentum continues in October 2006 with 25.3 percent

All-round growth :

The month of October 2006 has been the month of extraordinary growth for the non-life insurers with the growth rate high at 25.3 percent. This achieved rate is onlyslightly below that of September of 25.8 percent. As against the monthly renewals ofRs.1772 crore in October last year, the premium income scaled in 2006 is Rs.2220crore. The established players have recorded an accretion of Rs.151 crore at a growthrate of 11.3 percent. The new players have had an accretion of Rs.297 crore at agrowth rate of 63 percent. Among the former, New India leads with an accretion ofRs.60 crore followed by Oriental with Rs.56 crore. But the stellar performances inthe month have come from ICICI Lombard that has produced a massive accretion ofRs.167 crore with Reliance adding Rs.56 crore to its meager renewal premium ofRs.12 crore.

The new players have continued to maintain a strong grip on their market share thatstands at 35 percent. Two points of interest to the market have emerged. One is thatthe monthly accretion of ICICI Lombard at Rs.167 crore is higher than the combinedaccretion achieved by all the established players of Rs.151 crore. This performanceshould stand out as of interest to the market. The second point of market interest isthat for the first time, the October monthly premium of ICICI Lombard at Rs.310crore has exceeded the monthly premium performances of National Insurance andUIIC that have accomplished premiums of Rs.305 crores and Rs.257 crorerespectively. The established players do seem to be coming under increasing pressureby the new players with their relentless high growth rates and premium productions.

31

41 per cent growth in life insurance industry in 2006 :

New Delhi: Life insurance sector grew by 41 per cent in 2005-06 due to betterperformance of country's largest life insurer, LIC, and private players like Bajaj Allianzand ICICI Prudential.

The 15 life insurance companies together collected Rs 35,898 crore in the fiscal endedMarch this year, compared to Rs 25,343 crore in the previous fiscal, according to datacompiled by regulator IRDA.

Life Insurance Corporation's premium income rose more than 28 per cent to Rs 25,645crore after it sold 3.16 crore policies as against Rs 19,972 crore collected a year ago.However, LIC's market share dipped by 6.63 per cent to 71.44 per cent from 78.07 percent in the year ago period due to stiff competition and aggressive marketing of privatelife insurers.

The 14 private players were able to steadily increase their market share from 21.93 percent to 28.56 per cent in a year's time by collecting Rs 10,252 crore during the periodunder review.

Private sector life insurance business jumps 90% :

In a tough battle to expand market shares the private sector life insurance industryconsisting 14 life insurance companies at 26% have lost 3% of market share to the stateowned Life Insurance Corporation (LIC) in the domestic life insurance industry in 2006-07.According to the figures released by Insurance Regulatory & Development Authority thetotal premium these 14 companies have shot up by 90% to Rs 19,471.83 crore in 2006-07from Rs 10, 252 crore.

LIC with a total premium mobilization of Rs 55,934 crore has been able retain a marketshare of 74.26 % during the reporting period. In total the life insurance industry in firstyear premium has grown by 110% to Rs 75, 406 crore during 2006-07. The 2006-07performance has thrown a few surprises in the ranking among the private sector lifeinsurance companies. New entrants like Reliance Life and SBI Life had shown a hugegrowth of over 381% and 210% respectively during the year. Reliance Life which hasbecome one of the top five companies ended the year with a premium of Rs 930 croreduring the year.

Though ICICI Prudential Life Insurance remained as the No 1 private sector lifeinsurance company during the year Bajaj Allianz overtook ICICI Prudential in terms ofmonthly market share in March, for the first time ever. Bajaj's market share amongprivate players in non-single premium for March stood at 29.1% vs. ICICI Prudential's23.8%. Bajaj gained 4.6 percentage point market share among private sector players forFY07.Among other private players, SBI Life and Reliance Life continued to do well, eachgaining 4% market share in FY07. SBI Life's growth was driven by increasingcontribution from ULIP premiums. Another notable development of the 2006-07performance has been the expansion of retail markets by the life insurance comapnies.Bajaj Allianz Life insurance has added 20 lakh policies while ICICI Prudential hasexpanded over 19 lakh policies during the year.

32

Building a Vibrant Insurance Market in India :

India's insurance industry is an example of the positive effects of competition and newinvestors in the marketplace. As we know, India opened its insurance market to theprivate sector in 1999 when parliament passed a new law establishing an independentregulatory body to oversee the insurance market. The law opened the door forparticipation of private insurance companies and a limited participation of foreigninsurance companies through joint ventures with Indian companies. The law also chargedinsurance companies to make available insurance products and services to the hugesegment of the population that are vulnerable and not necessarily part of the formaleconomy.The results of the liberalization are there for everyone to see. The insurance markets --both life and non-life -- have grown impressively. IRDA is working on a regulatoryframework that helps level the playing field for all types of insurance companies,irrespective of their ownership. Since 1999, IRDA has licensed 22 new private Indianinsurance companies, an overwhelming number of which have global insurancecompanies as their partners. To date, the industry has attracted foreign direct investmentof $235 million.

In 2006, Indian insurance companies mobilized over $29 billion, nearly four times asmuch as in 1999 ($8 billion). In other countries, this kind of capital mobilization providescrucial resources for investment in infrastructure, corporate businesses, long-term bonds,and municipal projects. Once India does more to free insurance companies to invest insuch important sectors, it too can gain benefit from this long-term financial resource.Other improvements are occurring as well. New insurance products such as productliability insurance, professional liability insurance, small/medium size enterpriseinsurance, weather insurance, and group health insurance for the poor have beenlaunched. Private insurance companies are also using banks, microfinance institutions andcooperatives to increase their market share and compete with well-entrenched state-owned insurance companies.

The marketplace is getting competitive, but the market share of private insurancecompanies remains very low in the 10-15 percent range. The heavy hand of governmentstill dominates the market, with price controls, limits on ownership, and other restraints.We have seen what happens in India when a market is truly opened up. We saw it in theIT sector, we saw it in the telecom sector, and we are seeing it in the aviation sector. Whycan't insurance be next? India's insurance market remains very small compared with someof the major emerging markets. South Africa and South Korea, with a fraction (one-twentieth) of India's population, do at least twice as much insurance business as Indiancompanies did in 2004. This is a major missed opportunity for India's economy. A vibrantinsurance market can support the economy by providing long-term capital -- equity anddebt -- to the private sector. For example, in the U.S. over two-thirds of financial assets ofinsurance companies are in corporate bonds and equities, municipal securities andcommercial mortgages.

Insurance also shields households and businesses from irrecoverable loss, such as frommajor natural disasters, illness and death. In India, 80 percent of health care is privatelyprovided, yet only 10 percent of the population has access to health insurance. Therefore,many individual households have to pay the full out-of-pocket costs for health treatment.What will expand the insurance industry and help it contribute to the economy? Majorpolicy and institutional issues have to be addressed and changed.

33

Insurance is a capital-intensive industry. It is also a long-gestation business. India'sinsurance industry needs capital, and a major source of capital would be from foreigninvestors, who are now limited to 26 percent ownership. India needs to raise the cap onForeign Direct Investment (FDI) to attract capital for the industry. For some time therehas been an understanding that the FDI cap will be raised to 49 percent, and manycompanies entered the Indian market with this expectation. Failure to follow through inraising the cap is increasingly seen by investors as a breach of faith.This promise needs to be delivered, not 5 years from now, but soon, if India wishes toregain its credibility in the eyes of foreign investors. Increasing the cap on FDI will bothenhance the growth of the insurance industry and improve global confidence in India as abusiness and investment destination.

The cap should be raised above 50 percent within a short period so that foreign investorswould have management control commensurate with their investment and the flow of FDIto the sector will increase. Leading foreign companies bring more than capital to theinsurance industry. They also bring generations of successful experience in managing andgrowing the industry.

The benefit of the long-term capital that the insurance industry mobilizes is also beinglost as a source of long-term capital. In India, over 60 percent of the insurance industry'sfinancial assets are locked in government securities. Investment guidelines for insurancecompanies prescribed by the regulator must be changed to allow and promote access toinsurance funds by the corporate sector and infrastructure projects.

There is also a strong case for raising the FDI cap for reinsurance and auxiliary insuranceservices, such as brokerage and actuarial services.

Major lines of non-life insurance business such as fire and car continue to be governed bya pricing regime that is administered and not risk-based. This distorts the market andmakes it inefficient. It has prevented the emergence of a culture of underwriting ininsurance companies. The IRDA needs to dismantle this regime to make these segmentsof the market truly competitive.

The IRDA should also seek to create a regulatory regime that promotes the most efficientuse of capital, eliminates avoidable micro-management of business practices, allowscompanies to price their products prudentially, and levels the playing field betweenprivate and state-owned insurance companies. When markets are competitive andresponsive to consumer demand and preference, it is the consumer that benefits in termsof lower cost and increased ability to manage risks.

Health is an area that is underserved by the insurance industry. India as an economy hashigh health spending but poor health outcomes. With no pooled risk sharing frominsurance policies and a health care system that is primarily private, the cost toindividuals becomes a major economic burden. For this reason, many microfinanceinstitutions are finding that a primary use of micro loans to the poor is to pay medicalbills.

The current minimum capital requirement of $22 million capital for setting up a healthinsurance company is a significant barrier to entry, particularly when FDI is restricted to26 percent. The lack of data from both health providers and from existing claims makesrisk-based pricing of health insurance products difficult. The absence of an appropriateregulatory framework that enforces a minimum level of service and hygiene standards is

34

an important reason the health insurance market in India is so underdeveloped. It is notsurprising that not a single health insurance company is among the 22 new privateinsurance companies licensed since 1999. Clearly, the IRDA and the Ministry of Healthneed to work in tandem to solve these problems.

Another area where the insurance industry is not doing its job is helping mitigate the risksfor personal and business loss from natural catastrophes. In the past decade, India andChina accounted for one-fourth of the global economic losses from natural disasters.Insurance availability in India for natural catastrophes is almost negligible. As we haveseen with the Indian Ocean tsunami, the absence of a "safety net" for property lost in adisaster has led to substantial personal loss and slowed economic recovery.

Insurance Sector Reforms in India: Challenges and Opportunities :

Insurance in India started without any regulations in the nineteenth century. It was atypical story of a colonial era: a few British insurance companies dominating the marketserving mostly large urban centers. After the independence, the Life Insurance Companywas nationalized in 1956, and then the general insurance business was nationalized in1972. Only in 1999 private insurance companies were allowed back into the business ofinsurance with a maximum of 26 per cent of foreign holding (World Bank EconomicReview 2000). The entry of the State Bank of India with its proposal of bank assurancebrings a new dynamics in the game. On July 14, 2000 Insurance Regulatory andDevelopment Authority bill was passed to protect the interest of the policyholders fromprivate and foreign players. The following companies are entitled to do insurancebusiness in India.

The private insurance joint ventures have collected the premium of Rs.1019.09 crore withthe investment of just Rs.3,000 crore in three years of liberalization. The privateinsurance players have significantly improving their market share when compared to 50years Old Corporation (i.e. LIC). As per the figures compiled by IRDA, the LifeInsurance Industry recorded a total premium underwritten of Rs. 10,707.96 crore for theperiod under review. Of this, private players contributed to Rs.1, 019.09 crore, accountingfor 10 percent. Life Insurance Corporation of India (LIC), the public sector giant,continued to lead with a premium collection of Rs.9,688.87 crore, translating into amarket share of 90 per cent. In terms of number of policies and schemes sold, privatesector accounted for only 3.77per cent as compared to 96.23 per cent share of LIC (TheEconomic Times, 21March 04).

he ICICI Prudential topped among the private players in terms of premium collection. Itrecorded a premium of Rs. 364.9 crore and a market share of 25 per cent, followed byBirla Sun Life with a premium under- written Rs.170 crore and a market share of 15percent, HDFC Standard with 132.7 crore and Max New York Life with Rs.76.8 crorewith a market share of approximately 15 per cent each. Unlike their counterpart in the lifeinsurance business, private non-life insurance companies have not yet started addressingthe retail market. All is set to change in the coming years. Like in the banking sector, non-life insurance companies will soon have no choice but to focus on individual buyers.

The latest series of bomb attacks, attack on parliament, attack on Ayodhya, attacks of theMaoists, nature calamities like tsunami, floods and drought, ragging are prevailed in thecountry and need not to say about the farmer who has been insecure about rains, seeds,crops and suitable price for his crop. In developed countries, the owners have insured

35

even pet dogs. Whereas in India about 80 percent of human beings and major naturalresources have not been insured in globalization era.

It is, therefore, an urgent need to explore the challenges and opportunities faced by theinsurance sector in India.

India’s Insurance Industry Likely To Jump By 500% In 2010:ASSOCHAM :

The Associated Chambers of Commerce and Industry of India (ASSOCHAM) hasprojected about 500% hike in the size of domestic insurance business which will grow toUS$ 60 billion by 2010 from the current size of around US$ 10 billion as the growingcompetitive age is developing a larger appetite among people for wider insurancecoverage.

The projections of the Chamber are based on feedback that it received from its variousconstituents, engaged in the insurance business, highlighting that India s life insurancepremium as a percentage of GDP is currently estimated at 1.8% against 5.2% in US, 6.5%in UK and about 8% in South Korea.

Releasing the analysis, ASSOCHAM President, Mr. Venugopal N. Dhoot said that ruraland semi-urban India will contribute US $35 billion to the Indian insurance industry by2010, including US $20 billion by way of life insurance and the rest US $15 billionthrough non-life insurance schemes.

A large part of rural India is still untapped due to poor distribution, large distances andhigh costs relative to returns. Urban sector insurance is estimated to reach US $25 billionby 2010, life insurance US $15 billion and non-life insurance US $10 billion , added Mr.Dhoot.

ASSOCHAM findings reveals that in the coming years the corporate segment, as a wholewill not be a big growth area for insurance companies. This is because penetration isalready good and companies receive good services. In both volumes and profitabilitytherefore, the scope for expansion is modest.

ASSOCHAM has suggested that insurer s strategy should be to stimulate demand in areasthat are currently not served at all. Insurance companies mostly focus on manufacturingsector; 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 tounderstand the requirements of India's villagers, their daily lives, their peculiar needs andtheir occupational structures. There are farmers, craftsmen, milkmen, weavers, casuallabours, construction workers and shopkeepers and so on. More often than not, they areinto more than one profession.

The rural market offers tremendous growth opportunities for insurance companies andinsurers should develop viable and cost-effective distribution channels; build consumerawareness and confidence. The Paper found that there are a total 124 million ruralhouseholds. Nearly 20% of all farmers in rural India own a Kissan Credit cards. The 25million credit cards used till date offer a huge data base and opportunity for insurancecompanies. An extensive rural agent network for sale of insurance products could be

36

established. The agent can play a major role in creating awareness, motivating purchaseand rendering insurance services.

There should be nothing to stop insurance companies from trying to pursue their ownunique policies and target whatever needs that they want to target in rural India.ASSOCHAM suggests that insurance needs to be packaged in such a form that it appearsas an acceptable investment to the rural people. In the near future, when we ll see moreinnovations in agriculture in the form of corporatization or a more professional approachfrom the farmers side, insurance will definitely be one option that the rural Indian isgoing to accept.

ASSOCHAM believes that insurers should enter into tie-ups or understandings withgovernment agencies to ensure the success of the insurance schemes. The need of thehour is to have innovative policies that have explicit benefits for the people to observe,understand and measure.

Indian Insurance Industry: New Avenues for Growth 2012 :

Description: With an annual growth rate of 15-20% and the largest number of lifeinsurance policies in force, the potential of the Indian insurance industry is huge. Totalvalue of the Indian insurance market (2004-05) was estimated at Rs. 450 billion (US$10billion). According to government sources, the insurance and banking servicescontribution to the country's gross domestic product (GDP) is 7% out of which the grosspremium collection forms a significant part. The funds available with the state-ownedLife Insurance Corporation (LIC) for investments are 8% of GDP. Till date, only 20% ofthe total insurable population of India is covered under various life insurance schemes,the penetration rates of health and other non-life insurances in India is also well below theinternational level. These facts indicate the of immense growth potential of the insurancesector.

The year 1999 saw a revolution in the Indian insurance sector, as major structural changestook place with the ending of government monopoly and the passage of the InsuranceRegulatory and Development Authority (IRDA) Bill, lifting all entry restrictions forprivate players and allowing foreign players to enter the market with some limits on directforeign ownership. Though, the existing rule says that a foreign partner can hold 26%equity in an insurance company, a proposal to increase this limit to 49% is pending withthe government. Since opening up of the insurance sector in 1999, foreign investments ofRs. 8.7 billion have poured into the Indian market and 21 private companies have beengranted licenses.

Innovative products, smart marketing, and aggressive distribution have enabled fledglingprivate insurance companies to sign up Indian customers faster than anyone expected.Indians, who had always seen life insurance as a tax saving device, are now suddenlyturning to the private sector and snapping up the new innovative products on offer.

The life insurance industry in India grew by an impressive 36%, with premium incomefrom new business at Rs. 253.43 billion during the fiscal year 2004-2005, braving stiffcompetition from private insurers. This report, Indian Insurance Industry: New Avenuesfor Growth 2012 , finds that the market share of the state behemoth, LIC, has clocked21.87% growth in business at Rs.197.86 billion by selling 2.4 billion new policies in

37

2004-05. But this was still not enough to arrest the fall in its market share, as privateplayers grew by 129% to mop up Rs. 55.57 billion in 2004-05 from Rs. 24.29 billion in2003-04. Though the total volume of LIC's business increased in the last fiscal year(2004-2005) compared to the previous one, its market share came down from 87.04 to78.07%. The 14 private insurers increased their market share from about 13% to about22% in a year's time. The figures for the first two months of the fiscal year 2005-06 alsospeak of the growing share of the private insurers. The share of LIC for this period hasfurther come down to 75 percent, while the private players have grabbed over 24 percent.There are presently 12 general insurance companies with four public sector companiesand eight private insurers. According to estimates, private insurance companiescollectively have a 10% share of the non-life insurance market. Though the focus of thismarket research report is on the potential growth on the Indian Insurance Sector, it alsotalks about the market size, market segmentation, and key developments in the marketafter 1999.

38

CHAPTER 2

RESEARCH METHODOLOGY

39

RESEARCH OBJECTIVES:

1. To compare the performance of LIC and private insurance companies in India.

2. To find out the performances of LIC and private insurance companies in eachcategory (size. growth, productivity and efficiency)

3. To compare grievance management of LIC and private insurance companies.

RESEARCH DESIGN :

a. Type of research design : Analytical Research

b. Data collection : Secondary Sources

c. Statistical Tools : Ratio AnalysisBar Graph

RESEARCH PROCESS

In this research my research objective was to compare the performance of LIC and Privateinsurance companies. For this purpose I decided the four broad categories under which I havecompared the LIC and Private insurance companies. These are:

1. Size2. Growth3. Productivity4. Grievance Handling

Under these Broad Categories I have analyzed 13 factors which are:

1. Size• Total Premium• Total Income• Size of Balance Sheet• Total number of Policies• Total number of Branches

2. Growth• Growth in Premium• Growth in Income

40

• Growth in number of Policies• Growth in Market share

3. Productivity• Business per Branch• Income per Branch• New Premium per Branch

4. Grievance Handling

I have used the Secondary data of last five financial years. I have collected data from thevarious balance sheet of LIC and other private insurance companies, web sites and in somecases I personally met some employees of some insurance companies. I tried to find out mostof the information required to compare the LIC and private insurance companies.

In Analysis I have found all the required data and on the basis of performance gave the rankto LIC and Private Insurance Companies on each factor and then points. Now these Pointshave been multiplied with the weightage of that factor. And then after the analysis of eachfactor a consolidated point table has been prepared to know that which sector is performingbetter than other.The Weightage for different categories are:

Factors WeightageSize 25%A. Total Premium 5%B. Total Income 5%C. Balance Sheet Size 5%D. Total No. of Policies 5%E. Total No. of Branches 5%

Growth 40%A. First Premium 10%B. Growth in Income 10%C. Increase in No. of Policies 10%D. Growth in Market Share 10%

Productivity 15%A. Business per Branch 5%B. Income Per Branch 5%C. First Premium per Branch 5%

Grievance Handling 20%

41

LIMITATIONS:

1. Could reach to a limited number of documents of different insurance companies inregard to the management and other policies and resultant figures so as to identifythe exact cause of their lag in performance.

2. Due to the limited time could not study all the insurance companies originaldocuments individually.

3. Non-Proficiency in technical aspects of insurance companies might have hindered thebest analysis of the findings.

SIGNIFICANCE OF THE STUDY:

The Detailed Study has been done with the purpose of finding out the relative share of LIC andPrivate Insurance in India. It is useful for the people associated with the Insurance Industry andthe research associates related to the Insurance Sector in India. This study will acquaint themwith the data of all the banks complied at one place along with the findings, conclusion andrecommendations.

42

CHAPTER 3

ANALYSIS ANDINTERPRETATION

43

1. SIZE :

(A) TOTAL PREMIUM :(Rs. In crores)

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

LIC63533 75127 90792 127822 149789

PrivateInsurers

3120 7727 15083 28253 51561

TOTAL66653 82854 105875 156075 201350

6353375127

90792

127822

149789

0

20000

40000

60000

80000

100000

120000

140000

160000

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

PREMIUM OF LIC

31207727

15083

28253

51561

0

10000

20000

30000

40000

50000

60000

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

PREMIUM OF PVT INSURERS

44

Avg. Premium( In Crores) Rank points

points aftermultiplying byweightage(7.5%)

LIC 101412.20 1 1 7.5

Private Insurance Co. 21148.80 2 0.5 3.75

Average premium of LIC is much more than that of all insurance companiesaltogether. LIC s average premium of the last five years is nearly five timesthe average premium of the all other private insurance companies.

It can be said that up to that time their were less number of private players inthe field of insurance but then also undoubtedly LIC is the king.

(B) TOTAL INCOME :

(Rs. In crores)FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

LIC93089 112393 132147 174425 206363

PrivateInsurers

4323 9049 18863 24242 52648

TOTAL 97412 121442 151010 198667 259011

93089112393

132147

174425

206363

0

50000

100000

150000

200000

250000

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

INCOME OF LIC

45

Avg. Income( In Crores) Rank points

points aftermultiplying byweightage(7.5%)

LIC 143683.40 1 1 7.5

Private Insurance Co. 21825.00 2 0.5 3.75

All over income of LIC is much more than than of private players.It is due to the fact that LIC being a government agency is beingtrusted by lot of companies and has large number of shares in bigcorporates.

43239049

1886324242

51561

0

10000

20000

30000

40000

50000

60000

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

INCOME OF PVT INSURERS

46

(C) SIZE OF BALANCE SHEET :

(Rs. In crores)

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

LIC346022 416910 531390 625956 776904

PrivateInsurers

6585 13653 28910 53048 100774

TOTAL 352607 430563 560300 679004 877678

346022416910

531390625956

776904

0

200000

400000

600000

800000

1000000

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

BALANCE SHEET SIZE OF LIC

658513653

28910

53048

100774

0

20000

40000

60000

80000

100000

120000

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

BALANCE SHEET SIZE OF PVTINSURERS

47

Avg. Balance SheetSize( In Crores) Rank points

points aftermultiplying byweightage (7.5%)

LIC 539436.40 1 1 7.5

Private Insurance co. 40594.00 2 0.5 3.75

Total average size of balance sheet of LIC in the last five years is certainlyhigher than that of private insurance companies. There is a huge gap in thisvalue. It is obvious that LIC has bigger balance sheet as being working in theinsurance field for quite large time. As compared to average balance sheet sizeof 40,594 crores of private insurance companies, LIC s average balance sheetsize goes to much high as that of 5,39,436.4 crores.

(D) TOTAL NUMBER OF POLICIES :

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

LIC26968069 23978123 31590515 38229292 37612599

PrivateInsurers

1658847 2233075 3871410 7922294 13261558

TOTAL 28626916 26211198 35462117 46151586 50874157

48

Avg. number ofpolicies Rank points

points aftermultiplying byweightage(7.5%)

LIC 31675670 1 1 7.5

Private Insurance Co. 5789437 2 0.5 3.75

LIC is an undoubted leader in the field of average number of policiesper year in the last five years. It is seen that private insurance companies aregaining momentum and are trying to defeat LIC in case of new insurances.Main reason behind LIC having such a large number of policies is the trust of acommon man. LIC being a government agency has got a faith of indian mass.People are not yet prepared to give their savings in the hands of private players.

2862691626211198

35462117

46151586

50874157

0

10000000

20000000

30000000

40000000

50000000

60000000

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

TOTAL NUMBER OF POLICIES

LIC

PVT.INSURERS

INDUSTRY

49

(E) NUMBER OF BRANCHES :

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

LIC2196 2197 2220 2301 2522

PrivateInsurers

416 804 1645 3072 6391

TOTAL 2612 3001 3865 5373 8913

%growth innumber ofbranches Rank points

points aftermultiplying byweightage(7.5%)

LIC 14.8 2 0.5 3.75

Private Insurance Co. 1436 1 1 7.5

When the matter of total number of branches comes its very muchobvious that LIC, being the oldest existing insurance company in India, has thelarge number of offices in the countryby any single insurance company. Sincethe number of private insurance companies is increasing, with continuousexpansion in their business, now the number of branches of all private playershas crossed the number of branches of LIC.

2196 2197 2220 2301 2522

416804

1645

3072

6391

26123001

3865

5373

8913

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

LIC

PVT INSURERS

INDUSTRY

50

o 2. GROWTH :§ (A) FIRST PREMIUM :

(Rs. In crores) FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

LIC17347 20653 28515 55934 59996

PrivateInsurers

2440 5564 10270 19425 33715

TOTAL 19787 26217 38785 75359 93711

1734720653

28515

5593459996

0

10000

20000

30000

40000

50000

60000

70000

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

FIRST PREMIUM OF LIC

24405564

10270

19425

33715

05000

10000150002000025000300003500040000

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

FIRST PREMIUM OF PVTINSURERS

51

Growth inFirst Premium(in PercentageTerms)

Growth in FirstPremium(in AbsouteTerms) (incrores) Rank points

points aftermultiplyingbyweightage(10%)

LIC 245.85 42649 2 0.5 5Private Insurance Co. 1281.76 31275 1 1 10

Though LIC has attained more growth in absolute terms i.e. Rs.42649crores but private players being so less in number five years back has achieved adream come true growth of 1281.76 % which is certainly a matter of pride forthem.

(B) GROWTH IN INCOME :

(Rs. In crores)FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

LIC12101 19303 19754 42277 31988

PrivateInsurers

2692 4725 9814 5379 28406

TOTAL 14793 24028 29568 47656 60394

% GROWTH IN INCOME :

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

LIC14.9 20.7 17.5 32 18.3

PrivateInsurers

165 109.3 108.4 28.5 117

TOTAL 17.8 24.6 24.3 31.5 30.3

52

Growth inIncome(in PercentageTerms)

Growth inIncome(in AbsouteTerms) (incrores) Rank points

points aftermultiplyingbyweightage(10%)

LIC 164.34 19887 2 0.5 5Private Insurance Co. 955.20 25714 1 1 10

Here LIC has neither attained more growth in absolute terms i.e.Rs.19887 crores as compared to 25714 crores of private players nor has gotmore growth in terms of percentage.this shows that private players are doinggreat job in enhancing their business.

(C) INCREASE IN NUMBER OF POLICIES :

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

LIC1475992 -2989946 7632584 6638585 -616693

PrivateInsurers

804696 574228 1638335 4050884 5339264

TOTAL 2280688 -2415718

9270919 10689469 4722571

14.9 20.7 17.532

18.3

165

109.3 108.4

28.5

117

17.824.6 24.3

31.5 30.3

0

20

40

60

80

100

120

140

160

180

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

LIC

PVT INSURERS

INDUSTRY

53

% INCREASE IN NUMBER OF POLICIES :

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

LIC5.79 -11.09 31.75 21.01 -1.6

PrivateInsurers

94.21 34.62 73.37 104.64 67.4

TOTAL 8.6 -8.4 35.3 30.1 10.2

Growth innumber ofpolicies(in PercentageTerms)

Growth innumber ofpolicies(in AbsouteTerms) Rank points

points aftermultiplyingbyweightage(10%)

LIC 39.47 10644530 2 0.5 5Private Insurance Co. 699.44 11602711 1 1 10

Private players are doing extremely well as they are increasing theircustomer base rapidly.

5.79

-11.09

31.75

21.01

-1.6

94.21

34.62

73.37

104.64

67.4

8.6

-8.4

35.330.1

10.2

-20

0

20

40

60

80

100

120

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

% GROWTH IN NO. OF POLICIES

LIC

PVT INSURERS

INDUSTRY

54

(D) MARKET SHARE :

LIC is still the market leader in insurance industry with 73.9 % share. But wecannot forget that in last five years market share of LIC has decreased. It was87.7 % in year 2003-04 which came down to 73.9 % in 2007-08.

0 20 40 60 80 100

FY 03-04

FY 04-05

FY 05-06

FY 06-07

FY 07-08

87.7

78.8

73.5

74.2

73.9

12.3

21.2

26.5

25.8

26.1

PVT. INSURERS

LIC

55

3. PRODUCTIVITY :

(A) BUSINESS PER BRANCH :

(Rs. In crores)FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

LIC28.93 34.20 40.9 55.55 59.20

PrivateInsurers

7.5 9.61 9.17 9.2 8.07

Avg. BusinessPer Branch (Incrores) Rank points

points aftermultiplying byweightage(5%)

LIC 43.756 1 1 5Private InsuranceCo. 8.71 2 0.5 2.5

Avg business per branch of LIC is much higher than that of whole privateinsurance companies.

28.93

34.2

40.9

55.5559.2

7.59.61 9.17 9.2 8.07

0

10

20

30

40

50

60

70

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

BUSINESS PER BRANCH

LIC

PVT INSURERS

56

(B) INCOME PER BRANCH :

(Rs. In crores)

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

LIC42.39 51.16 59.52 75.80 81.80

PrivateInsurers

10.41 11.25 11.47 7.89 8.23

Avg. Income PerBranch (Incrores) Rank points

points aftermultiplying byweightage (5%)

LIC 62.134 1 1 5

Private Insurance Co. 9.864 2 0.5 2.5

Average income per branch of LIC is much more than that of privateinsurance companies. Its almost six times the total value of all the privatecompanies.

42.39

51.16

59.52

75.881.8

10.41 11.25 11.477.89 8.23

0

10

20

30

40

50

60

70

80

90

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

INCOME PER BRANCH

LIC

PVT INSURERS

57

(C) NEW PREMIUM PER BRANCH :

(Rs.in crores)FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

LIC7.90 9.40 12.84 24.30 23.78

PrivateInsurers

5.86 6.92 6.24 6.32 5.28

Avg. NewPremium PerBranch (Incrores) Rank points

points aftermultiplying byweightage (5%)

LIC 15.644 1 1 5

Private Insurance Co. 6.124 2 0.5 2.5

This value tells us about increase in the business of an insurance companyin a period. Here we see that LIC is ahead of private insurance companiesin case of increasing their business.

7.99.4

12.84

24.3 23.78

5.866.92 6.24 6.32

5.28

0

5

10

15

20

25

30

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

NEW PREMIUM PER BRANCH

LIC

PVT INSURERS

58

4. GRIEVANCE HANDLING :

TOTAL NUMBER OF GRIEVANCES :

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

LIC474 704 851 354 651

PrivateInsurers

45 195 540 507 1406

NUMBER OF GRIEVANCES RESOLVED :

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

LIC39 123 215 313 80

PrivateInsurers

26 83 216 450 1103

% OF GRIEVANCES RESOLVED :

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

LIC8.2 17.5 25.3 88.4 12.2

PrivateInsurers

57.7 42.6 40.0 88.7 78.4

59

474

704

540 507

651

39123

216

450

80

0100200300400500600700800

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

GRIEVANCES IN LIC

TOTAL

RESOLVED

45195

540 507

1406

26 83216

450

1103

0

200

400

600

800

1000

1200

1400

1600

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

GRIEVANCES IN PVT. COMPANIES

TOTAL

RESOLVED

8.2

17.525.3

88.4

12.2

57.7

42.6 40

88.7

78.4

0

10

20

30

40

50

60

70

80

90

100

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

% OF GRIEVANCES RESOLVED

LIC

PVT INSURERS

60

% Grievancesresolved Rank points

points aftermultiplying byweightage(7.5%)

LIC 25.37 2 0.5 3.75

Private Insurance Co. 69.70 1 1 7.5

Grievance Handling is one of the major issues in any organization. It plays animportant role in Insurance sector. People do attract towards companies whohandles their grievances.

Here we see that private players are much ahead of LIC when the matter comesto grievance management. In the last five years LIC has resolved only 25.37 %of cases brought in front of them while the percentage of cases resolved in caseof private players is 69.7 %.

This shows that private players are very serious about their image and areworking hard to provide the solution of the problems of the people as early aspossible.

61

TOTAL POINTS TABLE:

Factors LIC

PrivateInsurance

Companies

Size

A. Total Premium 7.5 3.75

B. Total Income 7.5 3.75

C. Balance Sheet Size 7.5 3.75

D. Total No. of Policies 7.5 3.75

E. Total No. of Branches 3.75 7.5

Growth

A. First Premium 5 10

B. Growth in Income 5 10

C. Increase in No. of Policies 5 10

D. Market Share 10 5

Productivity

A. Business per Branch 5 2.5

B. Income Per Branch 5 2.5

C. First Premium per Branch 5 2.5

Grievance Handling 3.75 7.5

Total Score 77.75 72.75

62

CHAPTER 4

FINDINGS &CONCLUSIONS

63

FINDINGS & CONCLUSIONS:

• LIC is the giant of the insurance sector. The overall size of LIC is much more thanthat of all private insurance companies. Private insurers are in expansion mode andare increasing their size but are still much behind LIC. Total premium deposits inLIC is much higher than the private insurance companies. Total premium of LIC inFY 07-08 was 149789 crores which three times more than that of private insurancecompanies.

• Income of LIC is much greater than private insurance companies. Last year totalincome from investments of LIC was 48244.14 crores which was nearly equal to thetotal income of the all private insurance companies. By this we can imagine how bigthe LIC is.

• Size of balance sheet of private insurance companies are lagging much behind LIC.Balance sheet of LIC is seven times bigger than that of private insurance companies.

• If we see the total number of policies issued by LIC and private insurance companies,we find that there is a huge gap between them. No doubt that LIC is a well establishedplayer in the field of insurance and many private companies have just started theirbusiness. Hence it is obvious that LIC is having large number of policyholders.

• Number of branches of private insurance companies is increasing as the new playersare entering in this market. Also the established players are in expansion phase andhence are expanding there business. There are many private insurance companies andhence there total number of branches has gone past LIC in the last financial year. Butoffices of private insurance companies are mostly in urban areas and still it is LICwhich covers most of the area.

Hence we see that LIC is leading when it comes to size. It is giant in insurancesector having huge network and customer base.

• We see that due to excellent service quality and attractive offers private insurancecompanies have started getting a number of customers. They are growing rapidly.Though LIC is also increasing its customer base but private insurance companies aremoving at a fast pace.

• Though the income of private insurance companies is negligible when compared withLIC but then also the pace with which they are increasing their income is tremendous.Private insurance companies are expanding their business and will certainly going togive a tough competition to LIC in the coming days.

• LIC is certainly having a large customer base. Private insurance companies are nothaving that much number of customer base but they are increasing it rapidly. Theyhave registered a decent growth of 104.64 % in number of new policies in the year2006-07. Last year also their growth rate was 67.4 %.

64

• LIC, being the oldest player in the existing insurance market, has the biggest marketshare of 73.9 % which was 87.3% five years earlier. We see that private insurancecompanies are penetrating in the customer base of LIC.

Overall we can see that private insurance companies are giving a toughcompetition to the LIC and will certainly create a good business for themselvesin the coming days.

• There are many new entrants in this sector. There are many private insurancecompanies who have reported loss in this and previous years. This is the main reasonwhy private insurance companies lag behind LIC in case of business per branch.There is a big difference between them.

• Same is the case when it comes to income per branch. LIC is much ahead of privateinsurance companies in this field. They are undoubted champions in insurance when itcomes to profit earning.

• New business is increasingly going towards private insurance companies but still thecustomer base of LIC is very strong. In issuing new policies per branch also, they areahead of private insurance companies though not by very large margin.

Customer base of LIC is very strong and still business per branch, profit perbranch or premium per branch, they are leading much ahead of privateinsurance companies.

• LIC has not shown their good concern when the matter of grievance handling comes.Private insurance companies are far ahead in this matter. LIC has just resolved 25%cases in the last five years while private insurance companies have resolved nearly70% cases. This is a matter from where customer shift starts. We have seen the rapidincrease in customer base of private insurance companies which can be very muchaffected by this factor.

Overall we have seen that still LIC is very famous but private insurance companies aregrowing at exceptionally fast pace. Private companies show due concern in grievancemanagement and brings innovative schemes to attract the customers. Right now theyare giving good competition to LIC and very soon they will give very tough competitionto Life Corporation of India.

65

REFRENCES :

Ø Data on Indian Insurance from http://www.irdaindia.org

Ø Different statistics from http://www.rbi.org.in

Ø Journals published by Insurance Regulatory & Development Authority.

Ø Management of financial institutions by R.M. Srivastava

Ø http://www.businesstoday.com

Ø http://www.businessworld.com

Ø http://www.economictimes.com

Ø Different Survey on Insurance sector conducted by IIRC.

Ø Profile of Indian Insurance Companies by IRDA.

Ø www.licindia.co.in

Ø www.sbilife.co.in/

Ø www.tata-aig-life.com

Ø www.bharti-axalife.com/

Ø www.hdfcinsurance.com/

Ø www.reliancelife.co.in/

Ø www.bajajallianz.com/

Ø www.metlife.co.in/

Ø www.birlasunlife.com/

Ø http://www.finance.indiamart.com