’Ë Ê ÁﬂÁŸÿÊ ∑§ •ı⁄U Áﬂ∑§Ê‚ ¬˝ÊÁœ∑§⁄UáÊ regulatory moves have boosted the morale of the industry. The new players have taken their work seriously

Volume II, No. 1

DECEMBER 2003

’Ë◊Ê ÁflÁŸÿÊ◊∑§ •ı⁄U Áfl∑§Ê‚ ¬˝ÊÁœ∑§⁄UáÊ

Editorial Board:C.S.RaoP.A. BalasubramanianS.V. MonyK.N. BhandariA.P. KurianNick TaketAshvin ParekhNimish ParekhHasmukh ShahA.K. Venkat SubramaniamProf. R.Vaidyanathan

Editor:K. Nitya Kalyani

Hindi Correspondent:Sanjeev Kumar Jain

Design concept & Production:Imageads Services Private Limited

Art Director : Shailesh IjmulwarProduction : Anand and Usha

Printed by P. Narendra andpublished by C.S.Rao on behalf ofInsurance Regulatory and Development Authority.

Editor: K. Nitya Kalyani

Printed at Pragati Offset Pvt. Ltd.17, Red Hills, Hyderabad 500 004and published fromParisrama Bhavanam, III Floor5-9-58/B, Basheer BaghHyderabad 500 004Phone: 5582 0964, 5578 9768Fax: 91-040-5582 3334e-mail: [email protected]

© 2003 Insurance Regulatory and Development Authority.Please reproduce with due permission.

C.S.RAO

Evaluations can be exhilarating and sobering atthe same time. As promised in the last issue of IRDAJournal, this issue carries an evaluation of the threeyears of liberalisation by the stakeholders of theinsurance industry.

What has emerged is a frank inventory of the paththe industry, including its regulation and policy, hastread in these months, the obstacles and pitfallsencountered and strong advocation of, and suggestionsfor, their correction.

A hundred metre dash does not give enough spaceto look back to see how far we have come. But operatingin the insurance industry is not a short race. It’s amarathon and three years is only the beginning of thebeginning. It is, however, well worth the effort to lookback to see whether we are on the right track.

Some things emerge. The Regulations are clear andthe way they have been made transparent and fair.Professionalisation, new intermediaries and otherenabling regulatory moves have boosted the morale ofthe industry.

The new players have taken their work seriouslyand are steadily increasing their market share. Butthere are worries too, the market is not necessarilywidening, so the competition has not yet becomeintense, especially among the new players.

You will read in this issue the concerns expressedby many in the industry. Market conduct issues are

From the Publisher

worrying, some Regulations and Government policiesare constraining and these need to be looked into. Inthe case of non-life companies, the continuingunderwriting losses and unbridled managementexpenses are added worries. Health insurance is stilltrapped somewhere, unwilling to emerge and provideshelter to the people. The readiness, effectiveness andability of the older public sector players to compete againstthe energetic new entrants will be a deciding factor forstability in the markets in the years to come. These aresome of the concerns that have emerged and will continueto engage the attention of the Regulator.

Cautions have been sounded, against unbridledmarket share acquisition, against short sightedinvestment objectives, against forgetting the focal pointof it all – the customer…..

These are things the industry should tacklethrough self-regulation and by working to developprofessional practices with the objective of long termstability and profitability. The Regulator will watch theprocess and see them operationalised with the interestof the customers foremost in mind.

We should become a learning industry and whenwe look back on four years of liberalisation there shouldbe the satisfaction of having put into practice most ofthe wisdom that has emerged today from the industryitself. Our collective aim should be to develop a healthyinsurance industry and ensure complete customersatisfaction.

36

More ThanRocket Science!

10Miles to Go...

Vantage Point - K. Nitya Kalyani 4

In the Air 5

Statistics � Life Insurance 6

Statistics � Non-Life Insurance 8

Issue FocusOverview 10

Life 17

Overview 31

Reinsurance 33

Health 36

Non-life 42

Intermediation 58

Pricing 60

Awareness 61

�� 62

�� 63

�� 64

�� 65

�� !"�� 67

Accounting Non-Standards - P.S. Prabhakar 70

Round Up 71

News Briefs 72

Survey 76

Aloke Gupta

Inside

ISSUE FOCUSOVERVIEW

COVERSTORY

Fali A. Poncha61Catch ‘em Young

M.P. Modi

LETTER FROM THE EDITOR

It has been a great one year, developing a communications forum for the industry and getting a feel of whatit thinks and does.

It is with that satisfaction that we bring you this annual special issue that takes stock of three years ofliberalisation. We have tried to bring you opinions and thoughts from every sector of the industry and a fewfrom outside it. We hope you will find it enjoyable, useful and thought provoking.

The Indian insurance industry has come to be characterised by an openness in expressing its views andaccepting and demanding debate as part of the process of doing business and being regulated. Not thesmallest contributor to this has been IRDA itself, which has taken the lead in creating opportunities to listento the industry and all stakeholders and taking on communication as a critical role of a Regulator chargedwith a development function as well.

What this issue of the Journal does is to capitalise on that and take it forward. There was a moment ofdelight when, in the course of inviting articles - and nearly everyone in the industry was invited – we suggestedthey write frankly, and they wondered why they had to be told!

This to my mind is the strength of the industry and one that it will do well to preserve and grow.

Three years is hardly anything in the life of an industry that is based on large numbers and used to workingout decades of experience and projecting them for the future. But formative years are important and thelooking back has thrown up interesting points of satisfaction and equally remarkable points of unhappiness.Not that some of them were unpredictable, but the willingness to talk about what is going wrong is alwayssignificant.

So we have on the positive side the strong regulations, transparent entry and prudential norms and an openenvironment. On the negative side issues are emerging relating to market conduct and a disappointingmarket penetration and growth of the market size. Add to this issues that could be perceived very differentlylike the constraints (prudence!) in investment Regulations or the oppression (safety!) of tariffs and we see thecharacteristics of a market that is growing up (if not yet growing, exactly!). Read what industry members andobservers have to say. It’s quite some food for thought….. The issue is divided into sections that will give youOverviews and Workings, in addition to sections on industry sectors. Overviews are usually by sectorwideplayers or industry observers while the Workings section, life, non-life and reinsurance are company specific.We hope you will be able to savour the range of opinions and thoughts we have tried to present to you.

As I said, it’s been a great first year, and I look forward to increasing and deepening the communicationsmethod that we have created together. For nothing could have been possible without you readers – who arepart of an industry that thinks and works the way we do.

Thank you!

K. Nitya Kalyani

eflectionsR

�� Jour Jour Jour Jour Journal, December 2003nal, December 2003nal, December 2003nal, December 2003nal, December 20036

VANTAGE POINT

Our Daily Bread

Write to us!

Editor, IRDA Journal,Insurance Regulatoryand Development Authority,Parisrama Bhavanam, III Floor, 5-9-58/B,Basheer Bagh, Hyderabad 500 004or e-mail us at [email protected]

K. Nitya KalyaniIt may be apocryphal, or may even be ajoke, when your friend tells you that hisson thinks that vegetables come from thesupermarket! But this could be so true.There is the discomfort of the knowledgethat most of us in urban India have noclue about the pains and problems ofraising a crop – specially a staple crop –and making a living out of it.

Equally true is that most of us, evenin the insurance industry, hardly knowanything about farming and raisingcrops, the financial and emotionalhardships and risks involved in theprocess that somehow, miraculouslyensures we get our daily rice or rotis.We hardly know anything even abouttheir insurance!

By all accounts it’s a bad businessto be a farmer in India raising staplecrops. The smaller you are the worse itis. Your inputs are controlled either bythe Government or by your own financesor the weather gods. And your output isbought up on the basis of administeredprices or by the all encompassingmiddle man. You never quite get out ofthe control regime, never mind we are inthe second decade of economic reformsand there are 15 year olds who havenever heard the words ‘industriallicence.’ It’s no surprise that someone

said if any industry were to be run withthe constraints that agriculture isunder, all the industrialists would shutshop and go home.

That the Indian farmerunquestioningly considers it his dharmato continue to raise staple crops is theonly saving grace for the rest of us.

Food is a very emotional thing. Thatwe had to go abegging for it in the 70swas one of the low points in Indiancontemporary history. And that weworked to a passionate plan and set itright determinedly is one of theachievements of any economy, andespecially one that has the problemsthat we have.

The next green revolution is waitingto happen. It’s waited too long if youreally think about it. This time aroundit should aim at making the job ofraising crops a financially viable onesupported by technology and the risksmanaged with financial tools includinga proper and viable insurance scheme.That security will be the nation’s primesecurity.

Not that there is no insurancescheme in place now. The pilot cropinsurance scheme in the early eightiesbecame the National AgriculturalInsurance Scheme in 1999 and is being

reborn as the Farm Income InsuranceProgramme (FIIP) which promises to bemore extensive. In addition to yieldshortfalls it will also cover pricefluctuations. The Agriculture InsuranceCompany of India has been registeredwith the IRDA and is to soon commenceoperations offering this and otherschemes.

But in many ways the crop insuranceinitiatives suffered from problemssimilar to the predominant healthinsurance scheme. The product was notactuarially priced and there was everypossibility of adverse selection (evenwhen the block model was followed). Thepricing was controlled and subsidised,and in the case of the crop scheme, itwas a government scheme rather thanan insurance industry scheme. AndPolitical meddling never helps.

Any real protection – especially on asustained and reliable basis – will comeonly from a commercially viable scheme,and crop insurance is no different.

In the next issue of IRDA Journalwe take a look at the activity of raisingcrops, the financial protection in theform of crop insurance, and thechallenges in this activity.

If you want to write about it, youknow where to reach us!

��In our next issue...

7�� Jour Jour Jour Jour Journal, December 2003nal, December 2003nal, December 2003nal, December 2003nal, December 2003

IN THE AIR

Mr. Mathew Verghese joined IRDA asMember (Non-life) in early November.The 1967 recruit to New India AssuranceCompany as Regional Engineer in theChennai office, Mr. Verghese retired fromthe company on deputation in Kenya asManaging director and Principal Officer,Kenindia Assurance Company Ltd. inSeptember this year.

Kenindia, a subsidiary of New Indiawas, like the insurance industry in Kenya,going through one of its worst periods in2001 when Mr. Verghese arrived in theland of the lion safari.

The reason? Unhealthy competition.Undercutting was rampant andcompanies could not pay claims or collectpremiums. Having worked themselvesinto a spiral of dwindling revenues and,certainly, profits, the industry was in badshape to say the least.

His solution was self discipline.“Being the largest company in themarket, if we did something the otherswould have no choice but to follow, itis inevitable,” hereasoned. Andthough this metwith stiffresistance

��

from his own executives, he set outnorms for premium quotation andcollection and for claims payments.

And it had a ripple effect. For onething Kenindia turned around to makea profit in the very first year after hetook over . But what is more, the marketreturned to stability with othercompanies also following suit and “theregulator’s job was easier,” he says.

Now, on the other side of the table,Mr. Verghese is ready to apply theexperience again here.

Self discipline is the first thing thatcomes to his mind when asked abouthis agenda for the Indian non-lifeindustry. IRDA has made a goodbeginning by putting out one of the bestRegulations. There are teethingtroubles in the market and these willbe corrected as we go along.

Supervision and inspections go alimited way he says. But the crux of theRegulator’s job is to draw out themaximum possible information,evaluate it and advise the industry forcorrection.

As for really healthy development,“I think it’s better they believe in selfdiscipline,” is his stand. Problems of theindustry need to be sorted out by thecompanies. And IRDA has to see to itthat the insurance companies run their

business in such a way that the lattertake on this responsibility.

What are his concerns aboutthe industry as he sees it

today? Rampant growth inmanagement expenses

and an unpreparednessfor detariffing,

which is aroundthe corner.

Containment of managementexpenses is an area in which the IRDAhas a very important role to playaccording to him. But right now it’s apublic sector problem and the cost cuttingthat will result from voluntaryretirement scheme (VRS) is likely to beable to take care of it.

As for detariffing he says, newcompanies have been around for twoyears on an average and they havecollected and mined their data. Thepublic sector companies which have notdone so yet have another 18 months or soto do it. So all of them can have indicativestatistics to quote rates by when ODdetariffing arrives. But that may not bea sufficient level of preparation. “We haveto get them to share statistics on anindustry-wide basis,” he believes.

This is part of his vision that publicsector companies should become moretransparent. The IRDA has to step inimmediately and get industry-widestatistics developed at least in one stateand one metro to begin with on a pilot basis.

Meanwhile instances of breach oftariff have to be dealt with severely, hesays. “A simple fine is not enough. Thepenalty should be sufficient to stop themfrom doing it again.”

Apart from that Mr.Verghese believesin minimalistic supervision and more ofdevelopment work. “Our role is to spreadinsurance coverage to reach everywhere.”Health insurance is a case in point.

The 60 year old Mr. Verghese has ahomemaker wife who, he says, hasperfected the art of moving with him andgetting things going at home in a jiffy!His two sons work in the financial sector,one in Mumbai and one in the US. Hisdaughter, who is in human resourcesdevelopment, works in Bahrain.

And when not working you could findhim playing a round of golf, a game helearnt during his three years in Kenya.Apart from his daily morning badmintongame of course!

An analysis of the performance of thelife insurers for the month ended 31stOctober, 2003:

A synoptic view of the performanceof the thirteen life insurance players inthe industry is given below. The trendsindicated below are based on the firstyear premium figures (including singlepremium) of the insurers.

By October 2003, the life insurershad underwritten first year premium ofRs.6,66,833.97 lakhs towards1,05,96,575 policies. Of this, individualbusiness accounted for Rs.5,44,236.76lakhs for 1,05,89,573 policies. Thegroup business accounted forRs.1,22,597.21 lakhs for 7,002 policies.

The private insurance players havecaptured 11.24 per cent of the totalmarket, where as the LIC still enjoys88.76 per cent share of the market.

Analysis of individual businessstatistics further reveals that LICaccounted for 87.63 per cent of thebusiness in terms of premium and 94per cent in terms of policies. As againstthis, the private insurers captured 12.37per cent of the premium and six per centof the policies. In terms of groupbusiness, LIC captured 93.74 per centof the premium and 93.84 per cent ofthe policies. The twelve private insurerscaptured 6.36 per cent of the premiumbusiness and 6.26 per cent of the policiesunderwritten during the period for group

business. Further, in terms of thepercentage of number of policies, up toOctober, 2003 LIC tops the list with94.23 per cent, leaving the twelveprivate insurers accounting theremaining 5.77 per cent.

A review of the performance of theprivate players further reveals thatICICI Prudential continued to lead witha 3.70 per cent market share of thepremium underwritten and 1.29 per centof the number of policies, followed byBirla Sunlife in terms of premium andTata AIG in terms of number of policies.In terms of number of lives coveredunder the various group schemes, SBILife led with 22.54 per cent, followed byMax New York Life at 11.02 per cent.

First Year Premium – October 2003

1 Allianz BajajAllianz BajajAllianz BajajAllianz BajajAllianz Bajaj 1,105.01 5,822.72 0.87 13,403 80,859 0.76 6,277 24,548 1.46Individual Single Premium 5.39 258.86 2.57 13 674 2.26Individual Non-Single Premium 1,089.27 5,531.48 9.66 13,378 80,156 13.80Group Single Premium 0.76 0.03 1 0.91 781Group Non-Single Premium 10.35 31.62 0.64 12 28 8.72 6,277 23,767

2 ING VysyaING VysyaING VysyaING VysyaING Vysya 414.16 1,672.34 0.25 6,510 26,849 0.25Individual Single Premium 0.15 18.99 0.19 22 2,795 9.39Individual Non-Single Premium 414.01 1,653.34 2.89 6,488 24,054 4.14Group Single PremiumGroup Non-Single Premium

3 AMP SanmarAMP SanmarAMP SanmarAMP SanmarAMP Sanmar 151.23 807.19 0.12 2,785 16,342 0.15 7,310 37,383 2.22Individual Single PremiumIndividual Non-Single Premium 133.32 723.24 1.26 2,783 16,331 2.81Group Single PremiumGroup Non-Single Premium 17.91 83.95 1.69 2 11 3.43 7,310 37,383

4 SBI LifeSBI LifeSBI LifeSBI LifeSBI Life 1,146.12 4,428.88 0.66 11,393 26,705 0.25 48,293 3,79,782 22.54Individual Single Premium 287.52 753.18 7.49 4,303 5,023 16.88Individual Non-Single Premium 307.18 1,055.48 1.84 7,054 21,530 3.71Group Single Premium 515.71 1,754.10 65.04 1 15 13.64 4,481 17,917Group Non-Single Premium 35.71 866.12 17.43 35 137 42.68 43,812 3,61,865

5 TTTTTata AIGata AIGata AIGata AIGata AIG 1,619.54 7,923.68 1.19 17,993 81,298 0.77 17,196 87,702 5.20Individual Single PremiumIndividual Non-Single Premium 1,421.94 6,426.19 11.23 17,988 81,259 13.99Group Single Premium 50.18 245.70 9.11 1 0.91 11,573 55,247Group Non-Single Premium 147.43 1,251.80 25.19 5 38 11.84 5,623 32,455

Oct. Upto Oct. Upto Oct. Oct. Upto Oct. Upto Oct. Oct. Upto Oct. Upto Oct.

Premium u/w % of No. of Policies/Schemes % of No. of lives coveredPremium Policies under Group Schemes

% of livesunder

Group SchemesInsurer

��

Report Card:LIFE


STATISTICS - LIFE INSURANCE

��

6 HDFC StandardHDFC StandardHDFC StandardHDFC StandardHDFC Standard 980.14 7,598.72 1.14 8,742 79,909 0.75 2,497 24,414 1.45Individual Single Premium 367.56 2,712.70 26.98 736 6,246 20.99Individual Non-Single Premium 575.82 4,589.22 8.02 7,999 73,601 12.67Group Single Premium 36.76 296.80 11.01 7 62 56.36 2,497 24,414Group Non-Single Premium

7 ICICI PrudentialICICI PrudentialICICI PrudentialICICI PrudentialICICI Prudential 6,123.33 24,642.69 3.70 23,984 1,37,133 1.29 1,549 8,123 0.48Individual Single Premium 1,436.00 5,241.00 52.13 1,088 5,377 18.07Individual Non-Single Premium 4,592.00 19,205.00 33.55 22,888 1,31,725 22.68Group Single Premium 95.33 196.69 7.29 8 31 28.18 1,549 8,123Group Non-Single Premium

8 Birla SunlifeBirla SunlifeBirla SunlifeBirla SunlifeBirla Sunlife 1,643.93 9,885.19 1.48 11,906 48,997 0.46 11,226 22,269 1.32Individual Single Premium 98.74 571.85 5.69 3,940 8,983 30.18Individual Non-Single Premium 1,296.59 7,213.45 12.60 7,958 39,988 6.89Group Single Premium 36.78 202.84 7.52 268 1,522Group Non-Single Premium 211.82 1,897.05 38.17 8 26 8.10 10,958 20,747

9 AvivaAvivaAvivaAvivaAviva 575.12 2,789.42 0.42 4,773 31,936 0.30 6,038 26,348 1.56Individual Single Premium 47.19 173.39 1.72 54 314 1.06Individual Non-Single Premium 525.49 2,605.82 4.55 4,718 31,616 5.44Group Single PremiumGroup Non-Single Premium 2.44 10.21 0.21 1 6 1.87 6,038 26,348

10 OM KotakOM KotakOM KotakOM KotakOM Kotak 633.93 3,256.86 0.49 3,738 20,280 0.19 5,951 40,162 2.38Individual Single Premium 15.66 208.52 2.07 20 144 0.48Individual Non-Single Premium 613.51 2,599.60 4.54 3,715 20,120 3.46Group Single PremiumGroup Non-Single Premium 4.75 448.74 9.03 3 16 4.98 5,951 40,162

11 Max New YorkMax New YorkMax New YorkMax New YorkMax New York 896.20 5,264.12 0.79 8,184 51,444 0.49 2,755 1,85,706 11.02Individual Single Premium 51.01 96.37 0.96 20 91 0.31Individual Non-Single Premium 832.09 4,803.04 8.39 8,159 51,297 8.83Group Single PremiumGroup Non-Single Premium 13.11 364.71 7.34 5 56 17.45 2,755 1,85,706

12 MetLifeMetLifeMetLifeMetLifeMetLife 151.98 876.40 0.13 1,709 9,204 0.09 1,635 6,022 0.36Individual Single Premium 2.33 18.51 0.18 20 115 0.39Individual Non-Single Premium 143.95 842.70 1.47 1,688 9,086 1.56Group Single PremiumGroup Non-Single Premium 5.70 15.19 0.31 1 3 0.93 1,635 6,022PPPPPrivate Trivate Trivate Trivate Trivate Totalotalotalotalotal 15,440.6915,440.6915,440.6915,440.6915,440.69 74,968.2174,968.2174,968.2174,968.2174,968.21 11.2411.2411.2411.2411.24 1,15,1201,15,1201,15,1201,15,1201,15,120 6,10,9566,10,9566,10,9566,10,9566,10,956 5.775.775.775.775.77

13 LICLICLICLICLIC 1,07,803.21 5,91,865.76 88.76 17,43,843 99,85,619 94.23 3,74,887 16,84,976 100.00Individual Single Premium 5,036.93 28,562.85 73.97 7,145 45,184 60.29Individual Non-Single Premium 83,188.63 4,48,371.97 88.68 17,35,344 99,33,864 94.48Group Single Premium 19,577.65 1,14,930.94 97.71 1,354 6,571 98.35 3,74,887 16,84,976Group Non-Single PremiumGrand TGrand TGrand TGrand TGrand Totalotalotalotalotal 1,23,243.901,23,243.901,23,243.901,23,243.901,23,243.90 6,66,833.976,66,833.976,66,833.976,66,833.976,66,833.97 100.00100.00100.00100.00100.00 18,58,96318,58,96318,58,96318,58,96318,58,963 1,05,96,5751,05,96,5751,05,96,5751,05,96,5751,05,96,575 100.00100.00100.00100.00100.00 3,74,8873,74,8873,74,8873,74,8873,74,887 16,84,97616,84,97616,84,97616,84,97616,84,976 100.00100.00100.00100.00100.00

Premium u/w % of No. of Policies/Schemes % of No. of lives coveredPremium Policies under Group Schemes

Oct. Upto Oct. Upto Oct. Oct. Upto Oct. Upto Oct. Oct. Upto Oct. Upto Oct.

% of livesunder

Group SchemesInsurer


STATISTICS - LIFE INSURANCE

Royal Sundaram 1,680.05 14,902.42 1,408.70 10,317.45 1.60 44.44

Tata-AIG 2,350.78 21,751.89 1,953.57 13,556.75 2.33 60.45

Reliance General 1,153.91 9,246.41 1,689.95 10,300.69 0.99 -10.24

IFFCO-Tokio 2,038.68 18,808.19 2,412.87 12,610.48 2.02 49.15ICICI-lombard 4,073.67 27,559.29 1,650.22 8,926.56 2.96 208.73

Bajaj Allianz 3,973.81 25,780.37 2,579.21 15,366.34 2.77 67.77

HDFC Chubb 1,147.05 4,742.23 28.97 28.97 0.51 16,270.14

Cholamandalam 872.03 5,227.40 0.56New India 30,584.00 2,25,616.00 31,450.00 2,23,926.00 24.21 0.75

National 26,360.00 1,93,263.00 21,752.00 1,66,400.00 20.74 16.14

United India 22,528.00 1,88,158.00 21,981.00 1,81,826.00 20.19 3.48

Oriental 22,696.00 1,72,788.00 22,966.00 1,69,935.00 18.54 1.68ECGC 3,619.08 23,893.69 1,943.31 17,725.92 2.56 34.80

PRIVATE TOTAL 17,289.99 1,28,018.20 11,723.49 71,107.24 13.74 80.04

PUBLIC TOTAL 1,05,787.08 8,03,718.69 1,00,092.31 7,59,812.92 86.26 5.78

GRAND TOTAL 1,23,077.07 9,31,736.89 1,11,815.80 8,30,920.16 100.00 12.13

Insurer Premium 2003-04 Premium 2002-03 Market share Growth %upto Year on

October, 03 YearFor the month Upto the month For the month Upto the month

(Rs. in lakhs)

Gross Premium Underwritten – October 2003

Report Card:GENERAL

Performance in October 2003The performance of the general

insurance companies in the month ofOctober 2003 has hit a relatively newlow of 8.7 per cent growth (Rs. 96 croresaccretion) from the previous growth ratesof 13.2 per cent in September 2003(Rs. 142 crores accretion) and 11.4 percent growth in August 2003 (Rs. 117crores accretion). Both the public andprivate sector players seem to be gaspingto push up stronger growth rates.

The public sector players haveincreased their premium volumes byRs. 40 crores (3.9 per cent growth rate)and the private sector players by Rs. 56crores (48 per cent growth rate) inOctober. While the quantitativeincreases in each month can vary, the

growth rate in each month is anindicator of the cumulative results ofthe market to boost premium volumes.What is more significant in theperformance of October is the apparentslow down in the energetic performanceof the private sector companies one waswitnessing in the past. Hopefully it isnot likely to be a trend.

Sooner than later, the private sectorplayers will have to put in placestrategies aimed not at winning theexisting accounts of the public playersbut at diversifying their marketpenetration as a whole. Retention ofaccounts won at a heavy cost andadministering and servicing them woulddivert executive time from marketing.The private players in future would haveto turn their attention to working in theunorganised and underserved markets.

The growth rate of 8.7 per cent inOctober 2003 has also to be evaluated

in terms of the host of bank tie-upsannounced by insurers, increased autosales, introduction of brokers/ corporateagents to stimulate market demand forinsurance covers and sale ofGovernment sponsored UniversalHealth Insurance Scheme. What hashappened to all these initiatives? Arethe insurers doing enough to raise thelevels of risk awareness or are theymerely content to compete in themarkets organised and established?

Among the public sector players,National Insurance continues its marchwith a growth rate of 21 per cent withthe aim of reaching the top slot of theteam. New India and Oriental have lostfurther ground by dropping premiumvolumes by a small margin in October.They seem to be on a path ofconsolidation.

Among the private sector players,ICICI Lombard with an accretion of

G. V. RaoGrowth rates hit a low


STATISTICS - NON-LIFE INSURANCE

The author is retired CMD, The OrientalInsurance Company.

Rs 24 crores is at the top of the heapfollowed by Bajaj Allianz with Rs. 14crores. IFFCO-Tokio and Reliance havedropped on their monthly premiums ofOctober 2002. Royal Sundaram andTata AIG have moderate accretion levelsof Rs. three and four crores respectively.

ECGCECGC a public sector company has

done well by recording an accretion ofRs. 16 crores on a base of Rs. 19 crores,quite an impressive performance.

Performance up to October 2003The slowdown of growth rate in

October 2003 of 8.7 per cent has broughtthe overall growth rate at the end ofOctober 2003 to 11.6 per cent from theprevious level of 12.4 per cent at the endof September 2003. Out of the totalaccretion of Rs. 950 crores, bringing themarket level premiums to Rs. 9100crores at the end of October 2003, thepublic players have contributed Rs. 380crores (five per cent growth rate) and theprivate players Rs. 570 crores (80 percent growth rate). National Insurancealone among the public players hascontributed Rs. 270 crores.

Among the private players ICICILombard has so far recorded anaccretion of Rs. 187 crores, BajajAllianz Rs. 103 crores, Tata AIG Rs. 83

crores, IFFCO-Tokio Rs. 62 crores andRoyal Sundaram Rs. 46 crores. Theprivate sector’s market share seems tobe stabilising at around 14 per cent.

ECGC has performed remarkably byrecording an accretion of Rs. 51 croreswith a growth rate of 35 per cent. Itsperformance in October 2003 hasstrengthened it further.

A Final CommentIs the growth rate for the month of

October of 8.7 per cent likely to be a

future trend? Is the growth rate of 11.6per cent at the end of October 2003, anindication of very tough competition forexisting available business withinadequate efforts made at marketexpansion by the players? Was thegrowth rate of 21.5 per cent in 2002 - 03a flash in the pan due to external marketstimuli? What difference have thebrokers/ corporate agents made to themarket expansion?

The public sector players will surelyhave their management costs at a muchhigher level than in 2002 - 03 due to thepoor growth in premium volumes. Theprivate sector players will have toughertask on hand to maintain the zoominggrowth rates of the past. Their prioritieshave to change to one of organising newmarkets.

The present competitive zeal amonginsurers to fight for the renewals of eachother will have to yield place to the creationof new markets in personal lines, ruralinsurances and selling more to existingcustomers. Marketing insurance covers,and not merely competing for andmanaging the available business, is theneed of the market.


STATISTICS - NON-LIFE INSURANCER

s. in

lakh

s

Premiums 2002-03 Private Sector

Note:1. Total for 2002-03 is for 12 month period2. Total for 2003-04 is for 7 month period

1,60,000

1,40,000

1,20,000

1,00,000

80,000

60,000

40,000

20,000

0April May June July August Sept. Oct. Total

2002 2003

Rs.

in la

khs

Premiums 2002-03 Public Sector

Note:1. Total for 2002-03 is for 12 month period2. Total for 2003-04 is for 7 month period

14,00,000

12,00,000

10,00,000

8,00,000

6,00,000

4,00,000

2,00,000

0April May June July August Sept. Oct. Total

2002 2003

ISSUE FOCUS - OVERVIEW


The Committee on Reforms in theInsurance Sector (commonly known asthe Malhotra Committee) made amajor recommendation in its reportsubmitted on January 7, 1994: thatthere was an urgent need to activate theinsurance regulatory apparatus even inthe then prevailing set-up of anationalised insurance sector. A strong,effective, autonomous, compact andhighly professional statutory body withindependent source of funding should beestablished.

Government (wisely) decided to doso, even though the powerful tradeunions were opposed even to this move.

In a short span of four years as astatutory body, IRDA can legitimatelyclam to have achieved glorious success insmoothly ushering in competition withoutany controversies and creating a soundand fair modern regulatory environment.The transparent and impartial processof licensing new entrants after decades ofGovernment monopoly straightawayearned it great respect.

The Malhotra Committee (I was itsMember-Secretary, and also SpecialSecretary, Insurance) envisioned IRDAto be modelled on the Securities andExchange Board of India (SEBI), becausethat was a recent regulatory model.

It was recognised that there was nosingle “globally accepted model ofregulation. Each country has its ownlaws and regulatory arrangementsdepending upon its experience,administrative capabilities and socio-economic and political preferences.These vary from tight regulationscontrolling virtually every aspect ofinsurance business to liberal off-sitesupervision.”

In our context it was clear that theIndian regulatory requirements wouldbe stringent, at least to start with,having due regard to the objectives ofcreating a healthy, orderly andcompetitive industry. In this respect too,IRDA’s achievements are noteworthy.

Post liberalisation, the range ofinsurance products has expanded. The

More Than Rocket Science!M. P. Modi

unbundling of products allows consumersto follow a modular approach. Unit linkedproducts are gaining fast popularity;health related products are widelyavailable, customer service has improvedwith information technology (IT)induction. Insurers have been made to setup internal grievance machineries and theInsurance Ombudsman system has beenintroduced. These are major positivedevelopments, facilitated and encouragedby a proactive and accessible IRDA.

Consumer protection is central toinsurance regulation and supervision.While maintenance of the insurer’ssolvency is a principal objective, thereare other aspects, such as fair premiumrates, equitable allocation of profitsbetween policyholders andshareholders, and among differentgroups of policyholders, good value for

money, and speedy claims settlement.Sometimes the objectives might beconflicting, as in the matter ofprescribing solvency requirements.Herein lies the challenge andopportunity for the Regulator to developa vibrant and solid industry having asmall number of players.

In this context there are severalaspects which merit IRDA’sconsideration; these include quality oftraining of agents; solvency margins; databuilding; taxation and unified insurancelegislation.

The last one – unified law – is a cryingneed. There is a plethora of laws andregulations generated by demands of

expediency to an extent, so widelydispersed and out of date that manyprovisions are inconsistent with therequirements of a contemporarycompetitive industry. While this fallssquarely in the province of Government,there would be little progress withoutIRDA’s determined pursuit. Theprovisions for subordinate legislationshould be considerably enlarged.

Similarly, a great deal remains tobe done in the matter of taxation ininsurance industry. In life insurance, taxlaws are still based on the LIC model ofa single fund. In general insurance, thereare issues relating to reserving with taximplications. Life insurance inparticular is a long-term business;general insurance business can havelong-tail claims too. The need for a long-term stable tax regime is self-evident.Moreover, for unit linked productsappropriate tax provisions are necessary.IRDA is well positioned to recommendto Government suitable changes.

Prescribing solvency requirementsis a balancing act: low requirementswill not allow the Regulator enough timeto intervene; high margin requirementswill require high capital with highercosts to consumers without anyadditional significant protection. Thecontrol level solvency marginrequirements (perceived to be high atpresent) may be reviewed from time totime in this perspective. This is entirelywithin the domain of IRDA.

A great deal has been achieved in thefield of training of agents. They play avital role as intermediaries in facilitatinginformed decision-making by consumers.The number of new agents is slated togrow rapidly. Many educationalinstitutions are offering a variety of newlystructured courses in insurance. Thequality of training and education needsto be subjected to continuous scrutiny.Development of alternate channels isbeing encouraged, which would requireconsiderable nurturing.

Reasonableness of insurancepremium rates can be judged, inter alia,on the basis of purity of data maintained

Prescribing solvencyrequirements is abalancing act: low

requirements will notallow the Regulator

enough time to intervene;high margins will requirehigh capital with higher

costs to consumers.



The author is Director, ICICI PrudentialLife Insurance Company. The viewsexpressed here are his own.

by the insurance companies. Databuilding suffered immensely during thedecades of state monopoly.

In general insurance, the situation waspathetic. The data supplied by the generalinsurance companies to the TariffAdvisory Committee (TAC) was oftenincomplete and outdated and, over theyears, the system has almost broken down.In life insurance the time lag in bringingout mortality tables was rather large.IRDA deserved credit for revitalising theTAC, and supporting measures forcontinuous mortality investigation. Thisis an area which would require focusedattention without interruption.

Even after three years ofliberalisation, rural and social sector

Vacancies!A. K. Venkat Subramanian

The Government of India, in exercise ofpowers conferred on it by Insurance Act,1938, framed the Redressal of PublicGrievances Rules, 1998, to provide aforum for resolving disputes andcomplaints from the insured publicagainst insurance companies. Theserules came into effect on November 11,1998. To resolve the complaints of theinsured relating to settlement of claimson the part of insurance companies in acost effective, efficient and impartialmanner, offices of the InsuranceOmbudsman were set up in 1999. Atpresent, there are 12 ombudsmencovering all parts of the country.

On the basis of the experience gainedsince establishment of the InsuranceOmbudsman Scheme, the Government ofIndia has also constituted an AdvisoryCommittee in April 2003, to reviewthe working of the scheme and advise theIRDA in this regard. The committee hasmet twice so far.

The unique feature of the InsuranceOmbudsman Scheme is that the awards

and orders of the Ombudsman are bindingon the insurance companies while theinsured, if not satisfied with the award ororder can go to other redressal fora.

The only restriction in approachingthe Ombudsman is that only individualpolicyholders who have taken insuranceon personal lines will be covered. Furtherany complainant whose complaint on thesame subject matter is already before acourt/consumer forum/ or arbitrator orwas decided by any such forum cannotapproach the Ombudsman.

Despite many attractive featureslike cost effectiveness and speedydisposal with certain finality, theOmbudsman Scheme is not well knownto the insured public. The total numberof complaints with the Ombudsmanduring the year 2002-2003 was only6,379, life insurance cases being 2,481and general insurance 3,898. Of these,

The author is Trustee, Catalyst Trust andChairman, Insurance OmbudsmanAdvisory Committee.

the total number disposed was 4,414;life cases being 1,917 and general cases2,497. A majority of the cases undernon-life relate to Mediclaim.

It is seen that the Ombudsmanscheme needs further improvement.There has been delay in filling up thevacancies of Ombudsman as and whenthey occur. There is also certainavoidable rigidity in the procedureadopted for filling up the vacancies.

The Advisory Committee hassuggested some remedial measures tothe IRDA to ensure that the post ofOmbudsman is not kept vacant undulyfor a long time. The committee has alsorequested the General Body ofInsurance Councils to bring outbrochures in regional languagesexplaining the Ombudsman Scheme tothe insureds in ordinary, simple andeasily understandable terms.

It is hoped that in the coming yearsthere will be greater awareness on thepart of insured public about the schemeof Ombudsman and full use will be madeof this speedy and cost effective schemeof redressal of disputes.

Despite many attractivefeatures the OmbudsmanScheme is not well known

to the insured public.

insurance is not viewed beyond therequirements of regulatory compliance.The share of the private sector in termsof premium and policies is still small.Yet the public sector giants are feelingthe heat of competition; the critical issueof ownership of these entities has not yetbeen touched. Erosion in the value of theseenterprises is clearly visible. Regulatoryconcessions may have to be made forreasons of ownership.

If the transition to change isprolonged, some of these entities havethe potential of becoming monumentalproblems. IRDA could sound theGovernment in good time; after all it ishas a responsibility to protect insurancecompanies from drifting towardsunsustainable operations.

It has been said that guiding(regulating) financial institutions,including insurance companies, is a lotharder than doing things like launchingspaceships which obey the laws ofNewtonian mechanics that are wellunderstood. The overall structure of allbut the simplest financial institutionsis very complex. IRDA has done well indeveloping the insurance sector and hasamply fulfilled the expectations of thosewho prepared the road map toliberalisation.


One of the key objectives of insuranceliberalisation was to deepen the insurancemarkets by getting more and moreconsumers under its fold and improve onthe product deliverable and customerservicing aspects of the business to bring itat par with international standards.

This would mean creating greaterawareness amongst masses about thebenefits and need for insurance. The generalperception in the pre-liberalised scenario wasthat the seller rather than the buyer wascalling the shots, and that insuranceoperations were not adequately customer-centric. The hope was that the competitionin the market would move the consumer tocentre-stage.

Has that really happened....

Despite a decade of economicliberalisation in India ‘consumerawareness’, ‘consumer education’ and‘consumer protection’ are subjects on whicha lot is talked, little is done and lessachieved!

It is my considered view that in orderto realise the promises of liberalisation, thefocus has clearly to be on the consumer - toenable him take well informed decisionsand make the right choices. The concept ofrisk management through theinstrumentality of insurance needs to besold much before an actual insuranceproduct is sold. An extensive, vigorous andsustained consumer education campaigncould lead to a more rapid expansion anddeepening of the insurance market.

IRDA has already taken a lead byinvolving Prasar Bharati in its campaign.The industry leaders would do well to thinkof ways and means they need to adopt inorder to respond to the consumers’ growingappetite for more information and greatertransparency in their dealings with them.

It would be fairly normal to say thatinduction of competition in this sector wasexpected to lead to a much better marketpenetration through development of newermarkets, bring about qualitativeupgradation and enrichment of the salesprocess, higher levels of professionalisationamong the intermediaries, develop worldclass systems and processes, provide to theinsuring public through convenientchannels of distribution a fuller range of

A Reality CheckNaren N. Joshi

customised products which address all theirperceived insurance needs to theirsatisfaction, adopt best market practices,be transparent and fair in dealings and keepthe consumers regularly informed aboutthe product details and other policyconditions.

Has that really happened....

FORTE (Foundation of Research,Training & Education in Insurance,promoted by FICCI and ING Insurance), incollaboration with IRDA, commissioned aqualitative research study with a view todeveloping an empirical base and somemeaningful insights into the consumerexperience prior to liberalisation, changesin expectations after liberalisation andperceived performance of insurance playersvis-à-vis these expectations. The study wasconducted in the five metropolitan cities ofDelhi, Mumbai, Kolkata, Hyderabad and

Bangalore. The trend revealed by the studyindicates that the insurance companies needto do a lot more to come up to theexpectations of consumers in terms ofbuilding trust and confidence.

The regulatory provisions protectingthe policyholders’ interests and the rulesgoverning investment of funds also needto be highlighted to help build trust in thenew players.

The consumers want real timeresponse. They look for moreknowledgeable and highly professionalinsurance agents and advisors. They expectprompt dispatch of premium receipts andpolicy documents, regular reminders aboutpremiums due and complete,comprehensive and accurate information

about the terms and conditions of the policy.And they do not want any devils in details.

They are quite unhappy about the claimsettlement and grievance handlingprocedures. The level of dissatisfaction ispretty high in respect of claims under Motorand Mediclaim policies.

The good news, however, is that theyhave already seen some improvement insome of these areas of concern in so far asthe life insurance sector is concerned. Butthe liberalisation does not seem to havemade any impact on the non-life side, atleast not at the retail level.

The Indian insurance sector haswitnessed a slow and steady change. Postprivatisation, one expected tremendousimprovement in:

■ Market expansion■ Product development■ Customer service■ Distribution channels

There indeed has been positivemovement in almost all these areas. In factin these early years of privatisation whenthe new players have started playing theirrole in the insurance sector, they have donerelatively better than the new players in theother infrastructural sectors like banks andtelecom companies.

Some of the specific areas that needcloser look are as under:

Market expansionLet us take up the life insurance sector.

Thirteen companies are active in the lifeinsurance market including LIC. The datapertaining to new business in the lifeinsurance market is as follows:

The market seems to be expanding andgrowing but only in depth and not the widthof coverage. Also, whether these kinds ofgrowth rates are sustainable in the longrun without reaching out to newer

The regulatory provisionsprotecting the

policyholders’ interestsand the rules governinginvestment of funds needto be highlighted to help

build trust in the newplayers.


Year New NewPremium Income Policies

(In Rs. crores) (In lakhs)

1999-00 499.90 172.10

2000-01 585.40 200.10

2001-02 747.50 235.50

2002-03 1,232.50 253.80


markets, remains to be seen. There hasbeen no concerted effort on developmentof new markets, the overall insurance piehas not changed significantly.

The new players are not looking atdevelopment of rural markets as viablebusiness propositions rather only formeeting the statutory requirements.

In the non-life sector, the challengeseems to be more daunting. Not only theretail market has not been impacted in anyperceiveable proportion, the levels ofawareness and also the standards ofcustomer services, as perceived by thegeneral public, are pretty low. Theexpansion in the rural sector also has beendriven solely by regulatory compulsion.

Product DevelopmentThere certainly has been a plethora of

new and innovative products offered by thenew players although some otherspecialised products from theirinternational product stable are notforthcoming e.g. health products.However, the expanding range of productscan become meaningful only ifaccompanied by a massive consumereducation campaign.

Customer ServiceThis is an area where new companies

are clearly ramping up by bringing in theirinternational best practices, operationalefficiency through efficient use oftechnology etc. Customer servicing todayhas clearly become the focal point ofinsurance companies. There is a greatersensitivity in dealing with the customers.The public sector companies have also notremained far behind and are fast gearingup to these changes. However, a lot stillneeds to be done in this area as is evidencedthrough the FORTE survey. The realresponse and turnaround times in deliveryof the services have to be got down to thecustomer expectation levels in specific areaslike delivery of first policy receipt, policydocument, premium notice, final maturitypayment, death claim etc.

AdvisorsThe quality of advisors has certainly

undergone a change in terms of theirprofile, education and approach to business,being more professional. ‘Tax-based selling’of insurance is slowly being replaced by‘need-based selling’. However, as evidenced

from the FORTE study, there still existrampant unethical trade practices likerebating, misrepresentations etc. Theadvisor is expected to give completeinformation on all products and not justpush high commission products, maintainregular contact with client to giveinformation on new products/services, givepremium payment reminder and be activelyinvolved in assisting the claimants for deathclaims settlement and lapsed policy revivals.

BancassuranceThere have been a number of

bancassurance tie-ups in India but themodel is still in its nascent stage ofevolution. The way bancassurance isevolving in India, it seems to be heavilydependent on the replication in some formor the other of the traditional tied agencyarrangement. It has not, so far, led to saleof insurance products off the shelf by the

banks. Both insurers and banks have notdone enough to evolve hybrid products forthe Indian market. Some analysts believethat banccassurance could grow faster ifaccompanied by active commoditisation ofinsurance products.

Health insuranceThe health insurance sector has not

really taken off due to a number of reasonslike high capital requirements, lack ofdatabase for actuarial calculations,inefficient TPA network etc. Some policyinitiatives on the part of the Government,particularly in the area of minimum capitalrequirements for companies providinghealth insurance products on exclusivebasis seem necessary. It may also serve thecause of health insurance further if lifeinsurance companies are allowed to offertypical health insurance products includinghospitalisation and domiciliary treatments.

The author is Chief Representative, India,ING Insurance International B.V andExecutive Director of FORTE.


There has been noconcerted effort on

development of newmarkets, the overall

insurance pie has notchanged significantly.

ConclusionIt would be fair to say that insurance

industry has registered impressive growthin new premium but the growth in spreadof coverage evidenced by number of policiessold has lagged behind. The developmentof new markets needs to be put on theindustry agenda strongly. Moreimportantly, the rural market needs to beaddressed squarely for ensuringsustainable growth in the long run. Therehas been noticeable improvement in thequality of intermediaries, particularly theadvisors and agents. However there isstrongly felt need for improvement in theclaim settlement processes and also forquicker responses to the policyholders’grievances as also quicker turn around ofdocuments.

The need - and that too quite an urgentone - for more comprehensive, clear andcredible consumer education campaign canhardly be over emphasised.

The three years since the opening up ofthe insurance industry have witnesseda series of remarkable and impressivedevelopments in the sector.A few important ones amongst these are– the entry of a large number ofIndian and foreign private players inboth life and non-life business, greaterchoice in terms of products and servicesavailable to the consumer, theintroduction of new distributionchannels (brokers and bancassurance),the introduction of a large number oftransparent and efficient legislativeinstruments and the emergence of theIRDA as one of the leading financialregulators around the globe.

Having stated the above and havinggiven due credit to the Government, theRegulator and the insurance companiesfor the developments so far, the gravestconcern for the industry today is itsincommensurate size as compared to thegrowth rate of the economy and the largepopulation of our country. The currentpenetration level of about 1.87 percentof GDP is one of the lowest in the world.

CII strongly feels that to addressthis problem of the low spread ofinsurance products in the market, thereis a need for a concerted effort by all thestakeholders in the insurance industry.

Some of the immediate concerns thatneed to be addressed are:Pension reforms and life companies

The Government has recentlyannounced proposed reforms in thepensions sector. It is imperative thatinsurance companies are permitted totake part in the new pensions market onan equal footing as the new players. Giventhe nature of the insurance business, CIIstrongly feels that the insurancecompanies are inherently suited for thepensions sector and have a critical role inthe development of this important sector.Amendments to insurance laws

In most jurisdictions, the principallegislation provides for the guidelinesand the enabling provisions for theregulatory authority to frameregulations. The regulations contain allthe details. This enables the regulatoryauthority to respond to the changing

Under Insuring!situation quickly as the changes in theregulations do not require prior approvalof the Parliament.

The regulations being subordinatelegislation have to be laid on the Tableof the House as soon as possible but thenotification does not require approvalof the Parliament. While the LawCommission has adopted this approachin respect of some items, manyimportant areas have been left out suchas investment pattern and foreignequity participation. CII feels that is aneed to pursue adoption of this approachfor all issues.Detariffing

Following the liberalisation of theinsurance sector in India there has beena growing demand in the industry toabolish the tariff system that governsthe rates and the terms and conditions

of the non-life insurance business. Noother market of significance, worldwide,prescribes tariffs at all, and CII feels thatthe true benefits of liberalisation will notaccrue to the consumer unless there iscompetition in the pricing of the non-lifeinsurance products. The current tariffsystem in the general insurance businessis an anachronism and should be doneaway with.Spreading insurance awareness

One of the prime factors impedingthe growth of the insurance sector todayis the lack of knowledge about insuranceand insurance products amongst thecommon man. There is an urgent needto highlight the benefits of insuranceproducts to the majority of thepopulation. This measure is imperativeto ensure that there is an increase in

the penetration of insurance products.Growing Health insurance

Despite a large number of healthinsurance licensees in India, Healthinsurance has not really taken off simplybecause it is not profitable.Deliberations on the factors impedingits growth have revealed that there areboth regulatory as well as systemicbarriers. While the systemic barriershave to be taken care of by the industryitself (insurers, TPAs, medicallaboratories and other healthcareproviders) there are two primaryregulatory barriers that need to beresolved. These are:■ The 26 per cent cap on foreign

participation: In India Healthinsurance is a poorly understood andrisky business (given the systemicbarriers). With this backdrop, itbecomes difficult for foreign investorto participate in this sector withoutadequate control over operations. CIItherefore suggests that the cap beraised to 49 per cent.

■ High initial capital requirement ofRs. 100 crores: With such high entrycapital levels it becomes difficult forthe companies operating in India toeven break even. In the US a systemof risk based capital requirementhas been adopted, wherein thecapital that companies are requiredto maintain increases with the riskit takes on as the policy provider. CIIfeels that a similar model needs toadopted in India.

Tapping the rural marketThere lies a large potential in rural

India, not only for crop and agriculturalproducts but also for lines of insurancebusiness related to life, motor and retailproducts such as TVs, refrigerators etc.Rural markets as they are today are nodoubt difficult to penetrate – given thepoor infrastructure, distance and lowaverage premium. These impedimentscan be overcome only by the use ofinnovative products (designed keepingin mind the need of the ruralpopulation) and by using newdistribution channels such as villagepanchayats, rural banks and nongovernmental organisations (NGOs).

The gravest concern forthe industry today is itsincommensurate size ascompared to the growthrate of the economy and

the large population of ourcountry.

Confederation of Indian Industry



The Indian insurance sector has come of

age. With the private sector companieshaving made a foray into the market, thescenario has begun to change.

As expected, liberalisation of this sectorhas helped bring about several positivedevelopments.

■ The market size has expanded,

■ New products are entering the market,

■ Innovative channels of distribution arebeing used,

■ Customer servicing has improvedtremendously

The insurance market is likely to growat a rate of 22 to 27 per cent, giving enoughroom to all the players to grow. Of course,ultimate success will be determined byservicing and customer satisfaction.

However, consumer awareness levelis still off the mark. According to therecently conducted FICCI survey on the‘Present State of Indian Insurance Sector,’of 147 respondents, the awareness levelsregarding insurance are still in the realmof medium to low, as indicated by 58 percent of FICCI survey respondents. Thisclearly indicates the onerous task thatcompanies have in creating awarenessabout ‘need to insure’ and also thetremendous potential they have inexpanding the markets by getting morecustomers into their fold by increasingawareness levels.

Despite several positive developmentsand the entry of several large privateplayers in the market, there are certainareas, which need to be deliberated uponin order to reap the full potential ofprivatisation.

■ Although the market share of theprivate sector has increased to almost10 per cent market size, the mootquestion is have new markets beentapped? It’s time now to start looking atthe B and C population segments, asthe metro and large urban market willsaturate in three to five years time. Thefuture success of the companies will bedetermined by the insurers’ ability to

Remove Bottlenecksinnovate and distribute simple productsfor BandC population segments.

Rural markets hold tremendouspotential, as suggested by several studiesand surveys. In fact rural share in bothFMCG and durables exceeds 50 per centof the market share. Also, the RuralMarket study conducted under the aegisof the FICCI- ING Insurance Foundationon Research, Training and Education(FORTE) shows there is sufficientawareness amongst A and B segmentsof rural areas about insurance,especially on the life side.

Companies need to work out appropriateconsumer awareness campaigns tocreate ‘need to insure’ amongst ruralmasses and develop appropriatemarketing strategy in collaboration with

some of the existing and well trustedinstitutions such as bank branches,cooperatives, panchayats and non-governmental organisations (NGOs) totap this huge market.

■ The 26 per cent foreign equity ininsurance joint ventures continues tobe an issue of concern and needs to bereviewed. This was suggested by almost41 per cent of the survey respondents.It is unnecessary to burden a localpartner compared to the orinternational partner with an additional23 per cent of capital because in the kindof voting rights and control overcompany the difference between 26 percent and 49 per cent holding is minimal.

■ Lack of clarity on the role ofintermediaries, such as brokers, wasidentified to be one of the hinderingfactors by almost 54 per cent of FICCI

survey respondents. Factors such asrestriction on foreign equity for brokersventures, notification of IRDAwithdrawing five per cent discount onthe premium for brokers for certainsegment of policyholders, non-paymentof brokerage on business emanatingfrom public sector units (PSU) etc. wereconsidered as factors hinderingdevelopment of this important channelof distribution, by the FICCI surveyrespondents.

■ The issue of rebating has been botheringthe Regulator as well as the players. Thisneeds be looked at seriously to ensureregulated and sustained growth of theinsurance market.

■ Taxation issues on the life side continueto bother the private insurancecompanies.

■ Detariffing is another critical elementof insurance reforms. This, sooner orlater, will become a reality, as tariff andliberalisation do not go hand in hand.Worldwide, markets have graduallymoved to detariffing. It is thereforeimportant to chalk out a roadmap,prepare all the stakeholders of its likelyimpact, and make the process lesspainful.

■ Health insurance has a great potentialin the country, but remains highlyunderdeveloped in India. According tosome estimates, only three per cent ofIndia’s population is covered under someform of voluntary health insuranceschemes. This segment needs theRegulator’s focused attention for itsdevelopment.

■ Last but not the least, training andeducation will play a critical role in thesustained development of the sector.

IRDA has indeed done an excellent jobin building a strong foundation of Indianinsurance sector. Now, all the stakeholdersof the industry have to now work insynchrony to ensure sustained growth ofthe sector as also to achieve globalstandards. For this we look forward to thecontinuous guidance and support of theRegulator and the Government in creatinga conducive environment.

The companies have anonerous task in creatingawareness about ‘need to

insure’ and also atremendous potential inexpanding the markets.

Federation of Indian Chambers of Commerce and Industry



Actuarial processes within a life andgeneral insurance office are key to itsfinancial management and thus theviability and system of the AppointedActuary is an important tool in the handsof the insurance Regulator.

While a number of actuarial thecertifications were mandated throughInsurance Act 1938 and Insurance Rules1939 in respect of life insurance, actuarialprocesses within general insurance wereunknown in India. The insurance worldoutside India had moved miles and milesin the period spanning the days of statecontrol in India of insurance business. TheIndian insurance industry was obliviousto these developments. This was true forlife as well as general insurance the frommanagement perspective as well as theregulatory perspective.

The setting up of IRDA heralded anumber of initiatives for defining andsetting up an appropriate framework forthe insurance industry to operate in thenew context. The initiatives within IRDAand the Actuarial Society of India (ASI) soas to ensure availability of actuarial inputto the insurance industry and with theRegulator were one such, which has madea mark of its own.

The decision to introduce theAppointedA c t u a r ysystem wasa historicalmoment forIRDA andwas achallenge ofsorts for theASI whichhad toprepare forit. TheAppointedA c t u a r ysystem isbased on apremise thata financialregulatory

role can best be performed by having onesingle named individual actuary inrespect of an insurer and this role cannotbe thus performed if the individual wereworking within the Regulator’s office.

Growing with the IndustryLiyaquat Khan

The system was introduced for allinsurers though with some differingapproach for general insurance asagainst life insurance. Side by side, ASIensured that processes were put in placefor ensuring competence andprofessionalism of such AppointedActuaries on an ongoing basis.

ASI’s policy of wanting its membersto be competent and professionallyprepared in a global context ensured thatnew insurers had the benefit of havingqualified and competent actuariesworking in India from around the world.

This had a snowballing effect onsecondary actuarial services in theconsulting, information technology (IT)and business process outsourcing. Theresult is that ASI as of now has about3,000 students at various stages asagainst about 400 in the year 2000.

Two other aspects which were not

heard of around that time, and which arekey to ensuring a robust regulatoryregime, need to be mentioned.

Introduction of Peer Review systemmandated for the work of AppointedActuary in life insurance is one such.Guidance Note 4 of ASI mandates thisand aims to ensure that an independentopinion is available on the work of theAppointed Actuary before the actuarialreport is signed off, thus ensuring higherlevel of confidence with the Regulator aswell as the ASI that the interest ofpolicyholders is best served.

Second and equally important isissue of illustration given to a prospectivelife policyholder at the point of sale. TheGuidance Note 1 which is the regulatoryframework of ASI for regulating

The author is President, Actuarial Societyof India.

The actuaries need toensure business context

and should therefore havein their mindset

appropriate businessorientation.



professional work of the AppointedActuaries, amongst other things, requiresthat an Appointed Actuary take allreasonable steps to ensure that newpolicyholders are not misled with regardto their expectations, e.g. in connectionwith illustrations at the point of sales.In ASI, we have closely worked with IRDAand the Life Insurance Council to put inplace Guidance Note 5: AppointedActuary and Principles of life insurancepolicy illustrations, which defines aframework within which the AppointedActuary has to perform this function.

Certification of liability and premiumfor non-tariff products in generalinsurance by the Appointed Actuarywithin the framework of Guidance Note21 of ASI is an important milestone inactuarial management of generalinsurance business.

The last three years have thrownup requirements to design products toserve needs of customers, whichare varying. This is true for life as wellas general insurance. Besides therole of the Appointed Actuary to sign offsuch products from Regulator’sperspective, the design aspect of ensuringcontinuing profitability to shareholdersis the focal point.

The actuaries, whether working onproduct development, addressing assetliability management (ALM) issues,designing appropriate distributionstrategies or investment strategies, needto ensure business context and shouldtherefore have in their mindsetappropriate business orientation.

To ensure this, in the year 2000, ASIembarked upon new strategies ofactuarial education which is beingmonitored dynamically so as to ensurethat actuaries possess, besides regulatoryaspects, an explicit business orientationin other roles whatever that may be.

The three-year’s endeavours of boththe insurance industry and the actuarialprofession are a success saga withouthiccup so far.

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ISSUE FOCUS - WORKINGS


Three years is a brief period to concludewhether the objectives of opening theinsurance sector stand fulfilled. Theagenda set for the industry whenParliament voted the end of Statemonopoly was tough: go for rapid growthin the penetration ratio, commit to anincreasing share of business towardsrural households, develop new channelsof distribution, lower the cost ofcustomer acquisition, rapidly increasecustomer awareness and education, andimplement the entire plan withoverwhelming Indian ownership!

On a balanced judgment, the countryhas incontrovertibly stood to benefitfrom the liberalisation. The new playershave brought a whiff of fresh air intoeverything: product range, marketing,intermediary education, technology andcustomer service. The staid insuranceindustry has suddenly started grabbingcentre space in every discussion.

But ask every CEO about his/hercandid view of what has been achievedand what needs to be done. The to-dolist emerges longer than the completedtasks. The unfinished work, both fromthe insurers and the Regulator, looksfar more demanding than what has beenaccomplished. It looks like we’ve justreached base camp. The peak remainsan arduous journey to cover.

While there are several issues thatbother the new arrivals depending ontheir business profile, partners’ visionand other aspects, I would list three thatneed attention from the macroviewpoint.

First, the need to quickly revamp thearchaic insurance laws. Everyone in theindustry knows the inconsistencies andthe irrelevance of many provisions of the1938 legislation, which has served uswell till now. While the effort to re-writethe law has commenced, given our recordof amending legislations, there is apalpable impatience.

What we now need is a short andsimple piece of legislation that is morefacilitative than prescriptive. Alegislation that can serve the industrymoving into a new gear, taking into

After Three Years of Euphoria...R.Krishnamurthy

account the rapid deregulation takingplace in every facet of the economy.

Second, we need to quickly look atthe prescriptive aspects of theinvestment guidelines that governinsurance companies’ investment offunds. With rapid decline in interestrates, customers today expect thecompanies to work harder and increasethe total return on their funds.

The range of investment instruments,drawn at a time when the fiscal systemwas pre-empting the market resources forsupplementing the State’s borrowings, canno longer hold good.

Investment is a function left to theprudence and good judgment of theinsurance companies. We see rapiddevelopments in new investment

instruments and tools, such as interestrate derivatives, zero coupon bonds andinvestment in overseas securities. Therules should enable a wider investmenthorizon, subject to the overridingconcern about safety and asset quality.And insurers should be free to pursuethem whether through in-houseexpertise or outsourced management,subject to caution and professionalism.

Third, there should be an end to thenagging issues on taxation, which havebeen debated ad nauseam. We’ve hadexpert committees that have gone atconsiderable length into reasonablelevels of taxation of surplusattributable to shareholders andpolicyholders. The Government shouldannounce the final view to enable thecompanies to plan ahead.

On taxation, there is also a need notto tinker with the provisions concerninginsurance in the annual budgetaryexercise. Insurance is a long-term

contract. We should encourage the flowof resources into this sector, whether byway of single premium or regularpremium to increase the long-termhousehold savings through insuranceholding. The insurance industry willemerge as a catalyst for infrastructuregrowth. We should not treat insurancecontracts as bank deposits or short-term instruments from the taxationstandpoint.

On the part of insurance companies,there is a big unfinished agenda. Theforemost is to become more transparentand accountable. There is a lot thatremains to be done on accuratelydescribing policy benefits and givingbenefit illustrations in sales literature.The level of knowledge and competenceof the intermediaries needs to increaseconsiderably.

On rural insurance, insurancecompanies have yet to make seriousattempts, and the unrelenting stand ofthe Regulator needs careful heeding.The rural sector is becoming a bountifulsource of opportunity, and the first inthe to-do list of companies should beclear strategies for time-bound ruralpenetration.

The author is Managing Director andChief Executive Officer, SBI LifeInsurance Company.

It looks like we’ve justreached base camp. The

peak remains an arduousjourney to cover.

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Since the issue of the first license to aprivate insurance player in October 2000,the life insurance sector has seen significantchanges. While these changes are mostwelcome and will benefit the growth of theindustry and the customers, there areseveral key issues that need to be addressedimmediately. I have focused here on threeissues which, in my opinion, are key.

ProfessionalismThe insurance industry particularly on

the life and pensions sector is dependentheavily on distribution. The old adage“insurance is not bought but sold” holds trueeven in India.

Today the customers are asking threefundamental questions; (1) Do I need lifeinsurance? (2) If yes, how much coveragedo I need? (3) Can you offer me a solutionthat meets my needs and my pocket book ?Therefore, the role of the intermediary ischanging very fast from a mere order takerto an advisor.

The question now arises as to what theindustry is doing about this.

Not much unfortunately. The approachhas been one of mass recruitment of agentswithout much attention to selection.Furthermore, there is very little investmentin training and development. Therefore theindustry is today characterised mostly bypart-time agents. This has resulted in verylow agent productivity and poor persistencyof business. Who suffers? Thepolicyholders as well as all the stakeholders.

The customer finds that within a fewmonths of buying a policy the agent whosold the policy has left the company and inmany cases has joined another company!Now this agent may even be trying toreplace the original policy with a differentone from the new company! So thepolicyholder has now become an ‘orphan’and finds it hard to get any meaningfulservice. Companies incur substantialexpenses because of agent attrition andpolicy attrition – popularly called the‘revolving door.’ These expenses willeventually be passed on to the customersin the form of re-pricing of products.

The solution is for changes inregulations to allow for professionalism.Today the laws and regulations do not allow

Venkatesh S. Mysore

Restructure!companies to attract full-time agentsbecause of the limitations on compensationpayable to agents. Agents are on a 100 percent variable compensation which is alsovery low by international standards.Appropriate changes to sec 40 A – 44 of theInsurance Act is badly needed to facilitatechanges. Without this the industry isheaded for more of the same which cannotbe in the interest of customers.

ScalabilityIn a country as vast as India where

almost two thirds of the population lives inrural areas, achieving scale is critical.Building scale and reaching critical massrequires substantial capital investment.With the current limitation on foreignequity at 26 per cent, it would be verydifficult for insurance companies toincrease scale in the proportion needed for

this market. While all players welcome goodsound regulation, there is no purposeserved in limiting foreign ownership. Thisshould change as early as possible tofacilitate growth. While foreign players arecommitted to the Indian market and arewilling to bring the know-how, technology,processes and best practices, the equity capcurrently is a limiting factor.

Market conduct and complianceConsistent with the points I have made

under professionalism, one of the bigthreats to the industry is in the areas ofmarket conduct and compliance. Thesignificant increases being seen in ‘feet onstreet’ raises the need for substantialtraining and sound complianceprogrammes. With the low levels ofproductivity being seen and the relativelylow level of average premiums, companiesare not investing in training and

compliance. This creates a situation wherecustomers are not getting the appropriatetype of advice and most importantly,disclosure.

The so called mature markets such asthe US and the UK have seen majorlawsuits from customers related to poorsales practices and lack of disclosure. Thishas resulted in companies having to paysubstantial fines and restitution topolicyholders. If appropriate steps are nottaken today, the Indian insurance industrywill also face similar consequences.

One case in point is rebating. Whilethere is a law against it, everyone knowsthat this is rampant in the market place.IRDA needs to enforce this law strictly. Theindustry has an obligation to enforce thisas well, rather than look the other way.

Replacement of business is anotherarea. Replacement of policies is generallynot in the interest of the customer. Thereis no attention being paid to this aspect.Proper disclosure to customers attains evenmore importance in the context of unitlinked policies being marketed by many ofthe companies. Do the customersunderstand all aspects of this product andways in which the benefits may be affectedby market performance?

In conclusion, everyone is quite excitedabout the opportunities for the growth anddevelopment of the insurance industry inIndia. This market has the potential to growinto one of the largest markets in the worldwithin the foreseeable future. However, ifappropriate steps are not taken now to getthe structural aspects right, this industrywill potentially face many challenges thatwill affect growth.

The author is Managing Director, MetLifeIndia Insurance Company.

If appropriate steps arenot taken now to get thestructural aspects right,

this industry willpotentially face many

challenges that will affectgrowth.

��

I was a stranger to the industry… justtwo years ago I did not know, any moreabout life insurance than the commonman did. Now I represent one of thefastest growing companies in the world’sfastest growing market. It’s amazinghow things could change rapidly for thebetter if only the right thrust were given.

I share my thoughts here as I seethings from a common man’sperspective.

Touching people’s livesWhat delights me the most about

liberalisation is that I meet thousandsof confident and smiling individuals whohave made insurance their career andare leading decent lives asentrepreneurs. The insurance agencyprofession has surely changed for good.There are professionals and high societyindividuals who now look at thisopportunity with interest. When we andmy industry friends together providecareer opportunities to thousands ofyoung men and women each month notjust as agents but as doctors, mediaprofessionals medical diagnostic staff,customer service executives etc., I feelhappy that liberalisation has trulyworked for creating employment.

Life insurance has a strongcommunity development angle. Whensmall families are protected and peopleimbibe the strong sense of savings, wetruly are touching their daily lives. Theopening up of the sector has madeinsurance more affordable, accessibleand stroked a larger canvass moredeeply than ever before.

I feel happy about the path-breakingproduct range with the best of breedcustomer care now available. Thecommon man can choose from a varietyof insurance plans tailor-made to matchhis needs and with price tags andpayment options that don’t pinch hispocket much.

A taxing thoughtBut the campaign has just started.

There are millions of homes stilluninsured, especially in rural India.

The Glass is Half Full...Nani B. Javeri

What bothers me most is not just ‘un-insurance,’ but under-insurance as well.When thousands of those who alreadybought insurance do not realise thattheir insurance cover does not matchtheir lifestyle value and their familiesare at great risk of compromising theirbasic livelihood – there’s still a largejob to be done. As a member of thesociety, I like to remind all not to buyinsurance as a mere tax saving tool butas a first step in serious financialplanning.

We live longI am concerned that in India, as is

elsewhere, working lives are gettingshorter and organic lives longer.Increasing cost of healthcare is drivingfamilies penniless. The industry must

address this colossal need with path-breaking campaign to influence thecommon man to shift from the shortterm saving mode to the long-termsaving mode and to plan for hishealthcare needs while he’s stillperfectly healthy.

At a different level I amdisappointed at the industry’s minimalusage of technology –I can’t see whypolicies can’t be issued electronically indigital format and why people can notbe empowered to find what’s best forthem in a non-obtrusive way through theInternet and other electronic means.

Life is in the fast laneThe industry is growing at a

phenomenal speed...To drive safelyahead.. we must look back and learnfrom what happened elsewhere whentop line growth was relentlesslypursued. Issues of rebating, unhealthycompetition and misselling are bound

to trouble us. We are in the business ofproviding security – we cannotcompromise safety for speed.

It rings a bellWe want to be seen as a fair player..

not just by the customer. But by theRegulator, agents, employees and all.BSLI was recently voted as the ‘BestPlace to Work’. Perhaps that’s a momentof soul searching - when I see happypeople sitting and working busily attheir desks around nine pm – I gentlyremind them about life outside theoffice.

We put a bell in all our sales offices..this bell is rung every time a policy issolicited. This is a symbolic remindernot just to celebrate success but also toremind ourselves about theresponsibility we have taken up.

Enduring customer valueWhen I joined BSLI, out of long habit

I used to inadvertently refer to thecompany as ‘the bank.’ But I see truth inthe statement. At an abstract levelthere’s no difference at all. Like banks,we do take care of public money, areconscious of our social obligations,channelise savings into investmentavenues and, while banks deal withaccounts, we are truly banking on lifeitself.

Having achieved this much in such ashort time we must take each furtherstep with confidence and contentmentAs I propose a toast to everyone in theindustry for their share of success, I seethe glass half full. Pension reforms,usage of cutting edge technology forcustomer care, value based selling andcementing of the diverse building blocksof the financial services pyramid toproduce enduring customer value wouldmake the glass full of spirit and success.

We are in the business ofproviding security – we

cannot compromise safetyfor speed.

The author is Chief Executive Officer,Birla Sun Life Insurance Company.



No shortcuts, no freespending...James WaltonThe insurance market worldwide has seensome turbulence over the last two years,with the general insurers taking some bigknocks with the WTC attack and the naturaldisasters worldwide, while the life insuranceindustry is trying to grapple with declininginterest rate regimes and negative interestspreads. The life insurance industry in Indiais still trying to come to grips with continuousdrop in interest rates and it will take sometime before the industry settles down toconducting business in a somewhat stableinterest rate regime.

Since the privatisation of the industryin 2000, we have seen 12 new private sectorinsurance players set up operations withmore than Rs. 2,600 crores of capitaldeployed so far. I am sure there will bemany more insurance companies whowould be interested in participating in thismarket with huge growth potential if theparticipation of foreign ownership isincreased from the current 26 per cent levelto 49 per cent.

Although it is too early to take a stockof the private sector insurance players(especially in terms of their profitability),there have been some significantmilestones that have been achieved, and Iwould like to mention a few of them.

The first one that comes to my mind isthe development of infrastructure by theprivate insurers. In this short period, AllianzBajaj, ICICI Prudential and HDFC StandardLife have been the pioneers in developinga branch network to reach out the Indianpopulation. Concomitantly, the agencychannel has also developed significantly(total agency recruitment by the privatelife insurers is close to 1,50,000 with AllianzBajaj and ICICI having more than one thirdof the agents).

Development of alternate channels ofdistribution has been another area wherethere has been progress. Although theseare early days to predict anything, the earlysuccess of the bancassurance relationshipsputs India as a serious contender for beingamong the few countries in the worldwhere bancassurance can work. The widenetwork of bank branches here also augursextremely well for the future of suchrelationships.

One major change that has comethrough post liberalisation, is a visible

change in the way insurance is beingattempted to be sold in India. From atax-incentive-driven sale, the focus hasshifted (at least in the private insurers)to a need based selling approach.This will take time and will help indevelopment of life insurance awarenessas well as growth in the medium term.Awareness of life insurance has gone upover the last few years, particularly in non-rural areas. The efforts that have gone into advertising the basic need for insurancehave yielded positive results and we arealready seeing the industry move to thenext category of product specificadvertisement. The day is not far whenthis market will see individual brands oflife insurance stand up on their own.

Better quality of service, especiallythrough appropriate use of technology, hasbeen another area where there have been

good improvements. For example, AllianzBajaj has invested heavily in its proprietaryIT software OPUS, through which we arecapable of issuing a policy (within certainlimits) at any Customer Care Centre inIndia over the counter in five minutes.

Innovation in products: The initialinnovations came in the form of riderbenefits. Product innovations followed,especially in the area of Children’sEducation on the traditional products side;and whole life and retirement planningproducts on the unit linked platform. Asthe market matures, we will also seeinnovative products especially for the ruraland group sectors, as well as in annuities.We have also seen more willingness by thecustomer to take on more risk and less

guarantees as evidenced by the upsurge inunit linked policies.

The insurance industry will unfoldmuch the same way it has in the West butfaster, and will follow the wishes of thecustomer. The existing products ofendowment and unit linked will evolve tomore sophisticated entities. Companies thatsurvive will either have a national brandreach or will become boutique specialistsin areas like health, annuities, pensions orhigh net worth customers. Companies thattry to be everything to everyone will runinto problems.

There are additional dangers that mustbe constantly evaluated just to survive.

a) Companies that overspend with profitprojections out 10 years will neverreach that goal, as evidenced by thelarge list of casualties throughout otherAsian countries.

b) Companies that try short cuts in qualitydistribution, will stumble. “Insurance inIndia is sold, not bought”.

c) Companies that get caught in pricewars in volatile negative interestspreads are sitting on a time bomb, asevidenced by the experience in Japan,Korea, Thailand, etc.

d) Companies that think they are in theinvestment and risk business ratherthan insurance will have roller coasterrides. European insurers with highexposure on equities should not be ourexamples.

In a market where more than 40 croreof the insurable population is still notinsured, and many of those insured are alsonot adequately insured, the potential forgrowth is huge, partly reflected in thephenomenal growth of the industry overthe past couple of years. The growth of theprivate insurance players has beenphenomenal, but they will stabilise afterreaching a critical mass. IRDA has alsoplayed an extremely positive role in theregulation and development of the sector.Overall, the result of three years ofprivatisation has been extremely positive,and the future looks very bright indeed.

The author is CEO, Allianz Bajaj LifeInsurance Company.

There is a visible changein the way insurance is

being attempted to be soldin India. From a

tax-incentive-driven sale,the focus has shifted (at

least in the privateinsurers) to a need based

selling approach.



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The life insurance industry has had abrilliant take off by any (global)standard.

Customers have tremendous choicefrom a large variety of products frompure term (risk) insurance to unit-linked investment products. Advice andneed based selling is emergingsignificantly through much bettertrained sales forces and advisors. Peopleare buying products and services basedon their true needs and not onlystraightforward money-back policieswhich is actually not a very good productto buy for long term protection andsavings. Also, other distributionchannels are developing such asbancassurance, corporate agents andbrokers. Products and services has seendramatic improvement with almostevery product now available in the lifeinsurance space.

In short, multi-product marketsegments through multi-distribution isnow easily available to the public.

But, the honeymoon is over….The tax, legal and regulatory

environments need to improvesignificantly. Many changes andclarifications are required on the tax frontsuch as the policyholder tax which needsto be reduced, loss carry-forward needs tobe further clarified and tax free return ofcapital invested in the Policyholders’ Fundneeds to be enabled. The Insurance Act isunder review and all operational mattershave to be removed from the Act, such ascommission limitations which need be leftto the IRDA. Also on the regulatory frontquite a few matters need improvementenabling the industry to grow better andfaster all benefiting the customer.

Even more importantly, the boys willbe separated from the men in the comingthree to five years. Most of the playershad a favorable experience setting up theirinitial businesses. We see that severalplayers are now getting under strainfinding out that their distribution modelsdo not really work and are changingstrategies too often in this regard whichbrings insecurity amongst employees and

You Ain’t Seen Nothin’ Yet...!Yvo R. Metzelaar

advisors. Life insurance is a long termgame and at this stage the main challengeremains to build a robust, large and highquality tied agency sales force. Otherdistribution channels will gainimportance but the foundations of any lifeinsurance company remains to developtrue sales professionals who understandthe needs of individual customers.

Other dimensions are also becomingmore important such as efficientcustomer services and operations,attractive products and servicesretaining sound profitability, expensemanagement and asset-liabilitymanagement, to name a few.

We expect around five leading lifeinsurance companies to emerge, of whichING Vysya Life will be one !

Pensions will be crucial for thecountry……

Especially since social security isalmost absent in the country, it is of theessence that a sound pension frameworkand system be developed in the comingsay five to 10 years. The Government istaking the first steps to develop a newsystem starting with its own employees.That is very commendable but there isstill a long way to go making pensionproducts and services available to thelarger sections of society. The biggestchallenge is to get the self-employedcommunity into the system.

…and ING Vysya is ready for itING Vysya Life has now established

itself in 20 cities where 40 large sales

teams are operating, daily establishingcontacts with thousands of peopleexplaining the value of life insuranceand the importance of it in life itself inthe spirit of our tagline “Adding Life toInsurance”.

We will continue to build scalemaintaining and improving our qualityof services offering compelling insurancesolutions to customers. We are and willremain a leading company in Indiabased on our strong foundations. ING,the largest life insurance company in theworld, will provide global expertise andknowhow and Vysya will bring in thewarmth and compassion in buildingmeaningful, lifetime relationships withour customers by offering life, pension,insurance and other financial servicesthrough the ING Vysya Group.

The Indian life insurance industrywill soon be one of the largest and one ofthe most vibrant in the world and hastruly gorgeous prospects for customersin this beautiful and exciting sub-continent called India.

The author is Managing Director andChief Executive Officer, ING Vysya LifeInsurance Company.

The Insurance Act isunder review and all

operational matters haveto be removed from theAct, such as commissionlimitations, and left to

the IRDA.



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India has transited from a monopolistenvironment to a liberalised, dynamicinsurance industry with relative ease. TheIRDA has played the umpire withpragmatism and more than a littlepanache and the growth of the privateinsurance companies is there for all to see.

What should be the regulatoryagenda as the insurance sector entersits second phase? It is common groundthat effective self-regulation is the bestway forward. But for self-regulation towork, it must be effective. It is easy topersuade ourselves into believing thateverything in the garden is lovely. But itisn’t. There are issues that need to besorted out and it is in the industry’s bestinterests to see if it can prove to theRegulator that it can do so itself.

The efforts of all life insurers shouldbe channelled towards delivering a formof self-regulation that is widely seen astransparent, credible and, whereappropriate, tough. Self-audits showmaturity in sectors. Moreover self-regulation is important because over-regulation can hamper the growth anddevelopment of the industry.

Self-regulation must have theoverriding objective of establishing,promoting and monitoring highstandards of integrity, fair dealing andcompetence. It must ensure thatproposed policies are suitable to theneeds and resources of customers andthat those buying the product are fully inthe know about the product and its price.

It is only logical that an insuranceagent will make a pitch to a customerthat persuades him or her to buy thepolicy. However, in so doing, if the agentindulges in unfair criticism of rivalcompanies it hurts the business andleaves the customer none the wiser. Aninsurance policy is not so much sold asit is bought. If the buying is influenced,as it often is, by extraneous factors suchas offering of rebates, the entireindustry suffers.

Rebating is rampant in the lifeinsurance business and law can only doso much and no more. The industry

Do-it-YourselfAnuroop ‘Tony’ Singh

should wake up to the reality ofmalpractices and evolve its own code ofconduct for agents and companies tofollow. Anti-rebating provisions shouldbe made part of the agent trainingcurriculum.

An illustration document is atangible piece of paper vital in sellinglife insurance. Max New York Life tookthe lead in making detailed salesillustrations available to customersand it gives me pleasure to see thattoday it has been made a mandatoryrequirement from the Regulator’s sidewith both optimistic and pessimisticviews having to be necessarilyillustrated. A sales illustration shouldbe seen as an article of faith betweenthe company and its customer.

While many other deliverymechanisms are likely to take theirplace under the sun in the future, theinterface between the agent and thecustomer is likely to be the mainstay ofinsurance selling in India. At Max NewYork Life, we take pride in the time andmoney we invest in training our AgentAdvisors. I believe that insurancecompanies must evolve a code of conductfor agents beyond the regulatory code ofconduct.

Restrictions on the commission dueto agents are also inimical to theindustry’s interests. Evolved insurancemarkets—among them the US and theUK, even Korea—have no caps on agent

The author is the CEO and ManagingDirector, Max New York Life InsuranceCompany

commission. The commission is whatdrives an agent to sell a policy and servethe customer. Given the rejections in thesale process, it is critical that thecommission structure is attractiveenough for quality professionals to takeup insurance as a career.

Also, poaching on each other’s agentsand employees is a practice that shouldbe shunned by insurers. Rather thanexpect the Regulator to play a role onthis, it would be ideal if the members ofthe industry decided not to poach oneach other’s resource talent.

The best thing would be for insurersto voluntarily decide on a set of dos anddon’ts and for IRDA to only superviseoversights. Then everything in thegarden could indeed be lovely!



Life insurers should bechannelled towards

delivering a form of self-regulation that is widely

seen as transparent,credible and, where

appropriate, tough. Self-audits show maturity in

sectors.

��

The liberalisation of the life insuranceindustry has been like a breath of freshair into what was once considered a dullindustry. The dozen new players, andeven LIC, have introduced numerousnew initiatives. Some insurers, such asICICI PruLife, have followed theirstrategy to be a scale player in the massmarket, by introducing a complete rangeof products to meet the needs of eachcustomer. Others have taken a morefocused approach, introducing selectproducts that they believe hold potentialand fill market gaps.

Undoubtedly, the biggest beneficiaryof the competition amongst life insurershas been the consumer. A wide range ofproducts and professional advice hasbecome the mainstay of the industry,and the Indian consumer forms thepivot of each company’s strategy. Servicestandards are being set andimplemented and a series of distributionchannels have thrown open newopportunities. Whatever the case maybe, each life insurer has approached thecategory with a fresh perspective. Thesuccess of the efforts is noteworthy –private players now have about 10 percent of new business premium income,far exceeding initial expectations.

Sure, well begun is half done. Butthe challenges ahead will test the mettleof the finest insurers, and must beaddressed comprehensively byGovernment, and more so, industry.

For instance, there has been littledone to address the concerns regardingclaims. After all, the primary reasonconsumers purchase life insurance is toreceive money in the event of thepolicyholder’s death.

However, just a fraction of customersare actually aware about what theymust do should the need to make a claimarise. This often leads to confusion andlonger time lags for the beneficiaries,inability of the company to meet claimsquickly, and a general uncertainty aboutthe specific benefits of life insurance.The onus is on life insurers to makecustomers aware of their rights and

Insurer as TeacherShikha Sharma

responsibilities in such an event, andwork towards creating a moretransparent environment.

Possibly the biggest, mostchallenging, opportunity is in the areasof retirement solutions and pensionreforms. The need for progressive,comprehensive participation in thesegment has been propoundedextensively; and it’s an area that hasbeen served by many public and privateorganisations.

As I see it, it really boils down tothree issues; first: the absence of socialsupport for the huge section ofpopulation not covered by pensions,second: the burgeoning deficit due tounfunded pensions in the Governmentsector and third: the need for adequate

incentives for the common man to savefor retirement in the face of anincreasingly aging population.

The first issue – the need – isundisputed. Government, companiesand even individuals are recognisingthat efforts must be made to provide fortheir future, and are taking steps in thisdirection. It is the apparent disparityof these measures that brings us to thenext two issues. The gravity of thesituation and the sheer number ofpeople affected, demand Governmentimpetus and many more long-rangingincentives that encourage individuals toplan for their own future. The challengeremains to devise a system thatencourages not just short-term, ad-hoc

provisions for retirement, butsystematic retirement planning over amuch longer period of 20-25 years.

This is really the core of pensionreforms, and unless this problem isaddressed holistically, funding theirgolden years will remain a problem forthose who will retire a decade or two downthe line. Examples of countries such asChile, that have kick-started individualplanning for retirement, show that suchefforts have begun with a concertedinvestor education campaign, and beenfollowed through by encouraging taxbreaks. Governments in such countries areable to justify such tax benefits because oftheir long-reaching favourable impact onthe development of capital markets andstimulation of investment ininfrastructure and other long-termprojects.

Undoubtedly, there is scope formuch improvement and reform in thesystem. However, the demographics arecompelling, so the sector will grow.Given the lack of social security system,the onus is on individuals to plan fortheir own retirement, and it is the rightregulatory framework and appropriatetax incentives that can help acceleratethe pace of growth.

The author is Managing Director andCEO, ICICI Prudential Life InsuranceCompany.

The challenge remains todevise a system that

encourages not just short-term, ad-hoc provisions forretirement, but systematicretirement planning overa much longer period of

20-25 years.



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Three years in the life of an industry isa very short period, but so much hashappened since the insurance industrywas opened up for private participationthat its impact cannot be ignored. It hasbeen a very exciting period marked bycompetition, innovation, training,distribution channel development andcreating increased awareness for theconsumer. In short, a period of intenselearning for us all.

It has also been a period marked bythe orderly development of a regulatoryframework. The significance of theprocess of regulatory evolution in theinsurance industry can be fullyappreciated only in the context of theturmoil created by regulatory issues inother recently liberalised sectors.

Three developments that stand outin the performance of the insuranceplayers during the last three years arethe innovation in product developmentand consumer choice, the evolution ofdistribution channels and the increasedemphasis on building consumerawareness.

Competitive forces have brought tothe fore the best in product developmentand feature differentiation. The choiceof features can now be decide by theconsumer as he is offered an unbundledproduct with a wide variety of riders tochoose from unlike in the past when hewas offered a bundled product withfeatures he may not have really wanted,but still had to pay for.

The awareness of the central role ofthe customer in the scheme of thingsand the desire to reach him when hewants and where he wants have led tothe development of alternate channelsof distribution, includingbancassurance, brokers, the Internetand direct marketing.

If, today, I have concerns about thefuture development of the insuranceindustry, it also has to do with the sameissues highlighted above.

Unfortunately, in the race to gainmarket share and establish a presencein the market place, certain practicesare creeping in which could adverselyaffect the image of the insuranceindustry in the long run. The salesprocess is seemingly rewarding shortterm gains at possible long term cost.Circumvention of Regulations to rewarddistributors in order to drive higher and

Deepak Satwalekar

Intense LearningISSUE FOCUS - WORKINGS


higher new business sales may have longterm implications for the viability of theplayers.

Another cause for concern is the delayin the formulation of a unified Actaddressing all issues related toinsurance. The Insurance Act, 1938,definitely needs amendment to keep upwith the changes that have happened inthe economy as well as in the markets.Many restrictions enshrined in the Actneed to be removed from there andreframed as regulations issued by theRegulator, thus enabling a quickerresponse to changing market conditions.

The last concern is the uncertaintyof how the newly constituted PensionRegulatory Authority will interact withthe IRDA, in as much as life insurancecompanies will be possibly regulated byboth. Initial indications in the mediahave led one to believe that theregulations regarding capitalrequirements, foreign holding,investment restrictions, etc areweighted in favour of the pensionproviders to be regulated by the newauthority. An early clarification wouldgo a long way in removing theuncertainty prevailing in the industry,and help the probable players to firmup their plans, so as to give theGovernment’s initiative a quick start.

The author is Managing Director, HDFCStandard Life Insurance Company.

There is the uncertainty ofhow the newly constituted

Pension RegulatoryAuthority will interactwith the IRDA as life

insurance companies willbe possibly regulated

by both.

http://www.irdaindia.org/irdajournal.htm

on the web!

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As I look back at the progress the Indianinsurance industry has made over the lastthree years, it brings to mind Robert Frost’swords “…the woods are lovely, dark anddeep, … and miles to go before I sleep.”Taking some liberties with those words Iwould say, “..the woods are no longer darkand deep, and we have miles to go beforewe sleep.”

Indeed, the opening of the gates threeyears ago gave the insurance sector as alsothe economy a positive push towardsgrowth, and it couldn’t have come at abetter time.

The Great Indian Insurance MarketAs a percentage of the gross domestic

product, the increase in contribution ofinsurance premium from around 1.5 to 1.7percent in 1998-99 to 2.5 to 2.57 percentnear the end of 2001- 02 confirms that thissector is on a growth trajectory.

But it’s not just the numbers that arelooking better post liberalisation. The entireapproach to both buying and sellinginsurance has been turned inside out. Froma completely seller dominated market, thebusiness is now pretty much driven by whatthe consumer wants, what products he islooking for and how he wants to buy them,to the sheer range of options he can choosefrom. In short, we are now officially abuyer’s market. What’s heartening to seeis that awareness levels have increased tosuch an extent that consumers are actuallylooking at the product for the purpose forwhich it was originally created.

In line with the increase in awarenessand the ability to bring products closer tothe consumer’s door, products themselvesare now tailored to meet exact marketrequirements. For instance, Tata AIG nowoffers Tata AIG HealthFirst – a unique,first-of-its-kind health insurance plancoupled with life insurance cover. The otherproduct innovation we are proud of isMahaLife Gold – a unique whole lifeinsurance cover that doubles up as anannuity plan and generates a guaranteedannual tax-free income.

Historically, life insurance in India wasnot sold by insurance companies – it wasbought by consumers as tax-savinginstruments. Seldom was it bought as a

Consumer BenefitsIan J. Watts

risk-mitigating instrument. Consequently,more often than not, the insured ended upbuying a policy that did not meet his specificneeds. It followed that after-sale servicewas not a very high priority and theconsumer was invariably left running incircles for issues like premium payments,claims dispute and final settlement.

The new rules of the gameFor the first time in Indian history, a

once unregulated market is being reinedin with regulation. The effects of disciplinehave benefitted not just market players butalso consumers, with the establishment ofbest practices across the process chain.

The IRDA plays a stellar role inregulating and disciplining the market. TheIRDA also closely monitors products beforeand after they are introduced to ensureinsurance companies meet basic solvencyrequirements, and thus safeguard theinvestor’s interests.

And the players are doing their bit,lending support for the establishment ofthese best practices and taking on the taskof educating the market. On its part TataAIG, through its Academy of Excellenceand its tie-up with the Association ofFinancial Planners (AFP) India, has createda dedicated programme to train its agentsas full-fledged financial advisors.

One significant characteristic of India’sinsurance market is its one billion strongpopulation, of which about 40 to 45 percentis insurable. This attractively large marketis scattered across a huge geographical areaand is not easy to cover using single modeof distribution.

Traditionally life insurers have reliedsolely on the agency channel. Privateplayers have brought with theminternational experience, new

technologies, new distribution channels andof course, new products. The ground rulesof the insurance business are beingredefined. Public sector insurers themselvesare gearing up with their own responses tothis new found competition.

The mantra is innovation anddiversification. Distribution is more crucialfor the life insurer who needs to have amass retail base to minimise the chancesof being adversely affected by any casualty.

The road aheadThe opening up of the pensions

sector and the establishment of a newpensions regulator are likely to furtherstimulate Indian insurance. It remains tobe seen though, if these regulations allowlife insurance companies to participate bothin the accumulations and the annuityphase.

I feel another area that needs to beaddressed is the capitalisation cap on theforeign partner. Increasingly, foreign directinvestment (FDI) and foreign institutionalinvestment (FII) limits have been upped inmany growth sectors like banking andtelecom. We truly believe the Indianinsurance industry after three years of freemarket rules, is now mature enough to beextended that same increase incapitalisation limits for the foreign partner.

Insurance is a long haul business andrelies centrally on the financial viability ofthe insurance provider. Companies willneed to demonstrate a long termcommitment to the Indian consumer beforethey start seeing any profits. It is only fairfrom the Indian partner’s perspective thatthe foreign partner be allowed to bring inadditional capital now rather than later,when the business starts generating profits.

With a little help from our regulatorysystem, I strongly believe the lovely woodswill be better lit, and insurers will gladlyventure into more virgin territories, takingthe fruits of insurance further and widerinto the Indian market.

Awareness levels haveincreased to such an extentthat consumers are actually

looking at the product forthe purpose for which it was

originally created.

The author is Managing Director, TataAIG Life Insurance Company.

India is one of the very few countriesthat has seen the insurance industrymove from total private enterprise tototal State ownership and again to anopen market with dominant playersfrom the state sector. The IRDA, whenit was set up, had a difficult and delicatetask on hand to oversee the transitionin an orderly and uncompromisingmanner into a developed market withits characteristics of freedom withregulation, play of market forces,development institutions, education,research, and above all expansion of themarket. Its first priority was to set inplace the regulatory and legalframework under which a new paradigmwill evolve. In this brief overview I shalltry and highlight some of the elements.

The most significant aspect of thesethree years has been the transparentconsultative process adopted in framingRegulations and amendments to law.Instead of setting up expert groupswrapped in secrecy, an open approachwith participation of all stakeholderswas universally adopted, arguably to anunprecedented level. This ensured thatRegulations and guidelines were widelyaccepted without an element of surprise.This approach has come to stay.

It is singularly noteworthy that allnew Regulations, legal amendments,setting up of institutions etc., wereintroduced within the timeframeannounced in the first place. I do notknow of any other agency that has shownsuch consistency.

There are many aspects of theopening up that deserve to behighlighted; I wish to take up a few ofthe key elements for mention.

Introduction of the broker as anintermediary is of far-reachingsignificance though there have beensome issues relating to rates ofbrokerage in general insurance. Theseare being addressed by a committee.The introduction of minimumqualifications, training andexamination of agents is a good first stepand the introduction of corporate agencytoo is significant. There is a long way togo; but it is clear that substantial

Seek Sustainable SolutionsS.V.Mony

penetration of insurance can be achievedthrough these intermediaries.

A higher level of awareness ofinsurance is a necessary condition fordevelopment of this sector. The initiativesof the IRDA to improve awarenessthrough interactive programmes on radioand television are laudable.

Even though the share of the newinsurers is yet to grow, all indicatorspoint to steady growth and in due coursea good balance will be achieved. Thestructural asymmetry in the market dueto the vast difference in size and styleof the erstwhile monopolies and the newentrants will continue to cause widelydiffering views and positions on keysubjects such as dismantling of ratetariffs in general insurance, taxationand expense limits. The IRDA will haveto tread carefully in achievingsustainable solutions. The changing

stance in dealing with brokerage ingeneral insurance is a pointer.

The introduction of a series ofdetailed regulations in a relativelyshort time in a wide-ranging array ofsubjects is likely to cause difficulties inmonitoring compliance. Agents’ trainingrequirements and rebating areexamples. It is important to exploreareas in which self-regulation can beprogressively introduced. Self-regulation will lighten the monitoringload on the IRDA even as the membersof the industry become more responsiblein their conduct. Monitoring ofintermediaries and loss assessors areexamples.

Pensions business is a scenario thatis still evolving. The role of IRDA and

the insurance industry will no doubtbecome clearer in due course.

The last three years have been veryeventful. The new companies haveestablished themselves strongly thoughthey are yet to make significant inroads.

Most life insurance players have hadto inject substantial capital muchhigher than the minimum prescribed,which incidentally was initially objectedto as too high for that business! In AMPSanmar we, like the others, haverealised that it is by no means an easybusiness. Establishing credibility andbrand image, recruiting and trainingagents and other personnel, productintroductions, etc. have all beenchallenges that were overcome.

The insurance industry is certainlypoised to grow in real terms. Servicetakes centre-stage. Consumerawareness, particularly of rights is onthe increase, competition is alreadyintense, and there is a host ofpublications and correspondentsexamining every move, every productunder the microscope and writing on thesubject, thus requiring the players to beon their toes. Competitive insurancemarket has truly arrived. The futurebelongs to the fittest and that is butappropriate. Monitoring the ‘healthy’practices in the market will be achallenge before the IRDA.

The author is Vice-Chairman, AMPSanmar Life Insurance Company.

Self-regulation will lightenthe monitoring load on the

IRDA even as themembers of the industrybecome more responsible

in their conduct.



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Since 1991, the Indian economy andindustry have undergone significanttransformation, moving away from aState controlled to a competitivemarket economy. The most remarkablefeature of this transformation has beenin the financial sector, particularly inthe Indian insurance industry, which hasbeen opened up to all competitors –domestic and foreign – integrating thefinancial services industry to the globaleconomy.

Liberalisation of the Indian economy,and particularly the insurance industry,has opened up tremendous businessopportunities to Indian and foreignoperators. The new market has alsothrown up several kinds of newchallenges to the Life InsuranceCorporation of India (LIC) as well as tothe other insurance companies.

LIC, since nationalisation, hasperformed exceedingly well andcontributed immensely to the processof economic development through itsmulti-dimensional activities. As just

one example, the share of life insurancefunds in household financial savings hasgone up from 8.7 per cent in 1993-94 to12.1 per cent in 1999-2000 (out of whichthe share of LIC was 11.3 per cent in1999-2000). In terms of GDP, insurancefunds was 1.5 per cent in 1999-2000.

LIC today services over 12 crorepolicies which is a record for any lifeinsurance company in the world. Itsettled over 86.55 lakh claims includingSurvival Benefit payments andMaturity Claims during the year. Thereis no other life insurance company in theworld that settles such a large numberof claims.

During the last few years, the Indianinsurance industry has been witnessinga relatively better growth rate whencompared with many other countries ofthe world. During 2000 the Indian

insurance industry as a wholewitnessed an inflation adjusted growthof 16.6 per cent as against 6.6 per centof the global growth rate.

The growth of the life insurancemarket is also identified in terms ofinsurance penetration i.e. premiums aspercentage of GDP. In the year 2000, lifeinsurance penetration in India was 1.77as against world penetration of 4.88.

In spite of significant growth of lifeinsurance business through theoutstanding efforts of LIC, only 25-26per cent of insurable the population hasbeen insured. Therefore, joint effortsneed to be made by all insuranceoperators for the market to extend the

coverage to millions of insurable peoplewho need and can afford life insurance.While the market needs a wide range ofinsurance products, we need to focusmore closely on single premium and unitlinked insurance, pension market,health insurance etc.

The financial market has beenundergoing tremendous changes duringrecent times due the entry of newproducts and service delivery systems,particularly in the insurance sector. Tosurvive, insurance companies need tocreate an environment of understandingfor the investing public by disseminatinginformation and educating them aboutthe relative benefits of life insurance.

Life insurance competes with othersavings products from mutual funds,banks and the Government. Since theIndian market is led by personalisedselling and the brand name of LIC, thereis limited awareness about insuranceamong the investing public. However,the scene has changed somewhat in thelast two years with the opening up ofthe insurance industry. With theprivate insurers and the LIC going infor aggressive publicity there is muchgreater awareness about life insurancetoday than before. This has alsocontributed to LIC performing muchbetter despite the entry of privateinsurers in the market.

Changing productsNeed is a changing phenomenon and,

in a market economy, products are theoffshoot of customers’ need. Timerelevant, customer need based, productsare to be developed in the background ofcost and intrinsic return. Productchallenges are therefore to developpension plans, health insurance, termassurance, investment product (unitlinked insurance) and market segmentrelated products (like corporate/institutional agency products).

At present there are 58 productsbeing sold by LIC. However, some ofthe products have been re-structured onthe basis of competitive needs andemerging market demand. LIC has also

Strategies...S. B. Mathur

Joint efforts need to bemade by all insurance

operators for the market toextend the coverage tomillions of insurable

people who need and canafford life insurance.



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initiated steps to introduce some newproducts like Bima Nivesh, anticipatedwhole life and critical illness plans.

There is no doubt that with theIndian insurance market getting moredeveloped and sophisticated, terminsurance and pension plans, as hashappened in the West, will becomeincreasingly popular. The demand forpension products will be on the rise withfewer employers – the decrease in theimportance of public sector – offeringassured pension to their employees.Similarly, with younger people earningmuch more than ever before, thepopularity of pure term insurance planswill also inevitably increase.

We have observed the recent growthin the global life insurance industry wasled by single premium and unit linkedinsurance. In fact, these are the two mostimportant growth drivers of theinsurance industry in recent times andoffer tremendous potential for growth inIndia also.

Pensions The pension market all over the

world has been growing at a significantlyhigh rate and offering tremendousopportunities to insurance companiesalso. The share of pension and providentfunds in household savings in Indiaduring the year 2000-01 was 20.7 percent, which was much higher than theshare of Life Insurance Funds.

Even LIC has achieved significantgrowth rate in individual pensionbusiness.

The growth rate of first premiumincome in respect of individual pensionplans during the year 2001-02 was355.15 per cent and the growth rate inrespect of policies was 120.09 per cent.Yet, the pension market in India mostlyremains untapped and this is probablythe most potential segment of the lifeinsurance market in India.

DistributionOne of the important challenges

before the insurance industry is topromote innovative distribution

channels to meet the new generationdemand and distribution of products.

At present the product marketrelationship is dominated bypersonalised selling. But the emergingmarket will be characteristicallydifferent in future, particularly due toinformation explosion and technologyled delivery system.

With the emergence of financialconglomerates, universal banking andthe integration of the financial servicesindustry and the changed the geometryof financial products, existing marketintermediaries like agents need to gearthemselves to the changes in the productmarket and consumer choice.

Channel management is going to bea hard task in future and calls forspecialised channel managers who canprovide a new dimension to new

generation distribution of insuranceproducts.

Rural sectorSince the rural market for life

insurance distinctly differs in respectof needs, preferences, disposableincome, seasonality of income, level offinancial literacy and penetration offinancial media, the approach, theproduct and the distribution need tohave a different look than that followedfor the urban market.

While individual life products havetheir own appeal among large sectionsof the rural population having regularincome and capacity to pay premium,there is a need for products which cantake into account people having seasonalincome.

Further, for low income people, lowpremium risk cover will be desirable.For this segment, group insurancepolicies like Jana Shree Bima Yojanahave been launched by LIC which willbe attractive and useful.

Rural distributionThere is also a need for promoting a

different distribution channel, forexpanding the rural insurance market.

Distributors of life insuranceproducts in rural areas must have stronglocal linkages. These rural distributorsmust be capable of educating andmotivating rural people about thenecessity of life insurance keeping inview local constraints. Towards thisneed, LIC has been promoting RuralCareer Agents (RCAs) throughspecialised training and financialincentives. This has also helped topromote life insurance consciousnessand business for LIC.

In a country like India, having widedisparities in the per capita income,disposable income, different level ofeducation and media penetration,expanding insurance market,geographically and in the country as awhole, is no doubt a difficult task. But aconsorted joint effort by LIC and otherinsurance companies and various mediaorganisations can definitely providemomentum to the growth of the lifeinsurance market.

As of now, penetration is quite lowin India compared to other similarincome countries and we need to have avery structured approach to capturevarious market segments in rural andurban areas.

The strategies suggested above canmake a difference and assist furthermarket penetration of life insurance inIndia.

The pension market inIndia mostly remainsuntapped and this is

probably the most potentialsegment of the life

insurance market in India.

The author is Chairman, Life InsuranceCorporation of India.

The three year old, liberalised Indianinsurance industry has shown acommendable growth and ability toembrace change. The last three yearshave been eventful and successful for oneof India’s fastest growing industries.

The private players have had beenbusy devising specific strategies to reachout to specific segments of the market,with innovative products. Insurancecompanies are now concentrating onoffering products on the lines of buildingblocks, where in the consumers cantailor-make a product by adding onlythose features that he wants, from amenu of features. Also, companies havemade attempts to educate theconsumers on the various products.With the entry of private players intothe sector, the IT investments in backoffice, front line customer service, etc hasincreased significantly. Companies arealso emphasising on building a strongdistribution network at retail level aswell as at corporate level through tie-ups with banks, NBFCs, distributioncompanies, brokers etc.

The private insurers together havecreated a pool of over one lakh welltrained Life Advisors in the last twoyears. This is quite a significantdevelopment in the last couple of years.

Insurance companies are todayinvesting heavily on the tied agencyforce. The insurance salespersons are notmore just agents whose job is to sell youany policy. They have transformed into“Advisors”.

Most insurance companies realisethat the importance of advising theconsumer before selling him a product.However, this trend is yet at a nascentstage and many more improvementscan be brought about. The role of anagent in the near future should movefrom agencyship to advisorship. Theadvisor should be capable of giving theright advice to consumers, be it withrespect to the policy, or the sum assuredor be it planning for the various stagesof life.

The advisor is the bridge betweenthe company and the consumer.Therefore, the insurance company will

Bridging GapsShivaji Dam

need to ensure that the bridge is firmlyin place. Most companies have madesignificant investments in training andretention of advisors. The way forwardis to have specialised training programsfor advisors that are aimed at bettertechnical understanding of theinsurance products and also for betterrelationship skills.

Finally, the insurance companies arelikely to come together and followcertain standards:

■ Companies could ensure thatadvisors across the company undergosome basic training in personalfinancial services instruments. Theyshould be able to evaluate theconsumers’ needs in conjunction withother investments/ liabilities.

■ Companies could follow somewhatstandardised templates for

analysing consumer needs andrecommending products to meetthose needs. This kind ofstandardisation would also helpconsumers in taking a buyingdecision, as they can easily compareproducts from different companies.

As a last thought, insurancecompanies should consider having acommon platform, focusing on thedevelopment of the advisor force,which in effect would benefit theinsurance consumer.

■ Another important development inthe Indian insurance industry will bethat of intermediated marketing.Using banks is likely to be the bigemerging trend. Already most largeand private banks are busyexperimenting with the marketing of

insurance. It is conceivable in Indiathat the bancassurance model couldemerge as the eventual marketleader in sales volumes. Many factorsweigh heavily in the favour ofbancassurance including the branchnetwork and reach to individualcustomers.

Finally, the ability to give thecustomer comfort on the performance ofhis insurance investment will make thecustomers trust the new insurancecompanies. This is likely to cause twosignificant trends to emerge viz. focuson investment management and focuson information sharing.

The investment management focuswill result in the insurance companiesretaining the best fund managers andcreate demand for really long termassets – ranging from 25 to 50 years’maturity. This thrust will give the entireinvestment management scenario inIndia a stable reputation that it sorelylacks due to the temporary and volatilenature of the markets.

The second focus, on informationsharing, will give customer the choice todecide their investment portfolios andagain generate a sense of control andtrust. This will also improve theaccountability and responsibility offund managers.

In conclusionThree very important trends that

will emerge to make insurance a robustindustry in the private sector aremovement of the role of the individualagent to becoming a family advisor, therole of the banks in reaching the entirepopulace of India with the new insuranceproducts, and the role of investmentmanagers in earning the industry areputation for solid and reliableperformance.

The author is Managing Director, OMKotak Mahindra Life InsuranceCompany.



Two significant trends arelikely to emerge: focus oninvestment managementand focus on information

sharing.

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Stuart Purdy

Huge OpportunitySince the liberalisation of the Indianeconomy the opening of the insuranceindustry has been a key landmark. TheIndian insurance industry is sitting on avolcano of growth and potential waiting toexplode. Since the last three years that theindustry has been opened to private playersit has shown a renewed vibrancy resultingin new opportunities in terms ofemployment, savings, new channels ofinsurance distribution, wider coverage torural areas and even to the economicallydeprived sections of the society.

The vibrancy of the industry has alsobeen reflected in the growth of theindividual players. The private players havemanaged to gather 11 per cent of the totalnew business. At an individual level Avivahas been successfully able to not onlyestablish its presence in the market buthas also to pioneer some new concepts inthe industry like the bancassurance model.Aviva has also helped develop for theindustry a code of good conduct and salesillustration rules to ensure that thepolicyholders’ interests are protected.

One of the key contributors to the successof the insurance industry has been thepresence of a strong and unbiased Regulator.Key initiatives like opening new distributionchannels, encouraging players to betransparent and entry of intermediaries likebrokers have helped the Indian customers.

However despite the launch of innovativeproducts the Indian market is still at a nascentstage. There is a huge untapped potentialthat has not yet been explored in the sellingof insurance in the country. Penetration oflife insurance in India is as low as 2.15 percentof the GDP. Currently out of an insurablepopulation of around 30 crore people onlyeight crores are insured. (Source: Swiss re,Sigma, 2002) Given the sheer geographicalspread of the country there is a vast marketthat remains untapped and there is plenty ofroom for growth.

Most of the Asian countries with theexception of Japan, South Korea and Taiwanhave low insurance penetration as comparedto the developed countries. Countries withlow penetration levels such as India andChina present a huge opportunity.

EquityThe recent report of comments made

by Mr. C.S. Rao, Chairman, IRDA,recommending to the Government a hike

in the foreign investment limit to 49 percent from the current 26 per cent is awelcome move. Insurance as a businessrequires regular capital infusion. Theraising of the equity cap will not only bringmore money but also help in expanding theindustry. It will also allow the foreignshareholders to demonstrate an evenhigher level of committment to India.Insurance has a long gestation period tobreak even. It requires a long-termcommittment on the part of the players aswell as a significant investment.

PensionWith the breakdown of the social

security system, India needs to evolve amore mature and developed pensionsystem. The pension fund market

comprises over 240 million investors andfunds worth $40 billion (comparable to theentire life industry). Pension is an areawhere companies like us have significantexperience. We would like to use thatexpertise in India also.

If we really want pensions in India tobe a success, we need to take them intometros, cities, towns, district headquartersand villages. Life insurers, with their onemillion agents, and their bancassurancepartners can do this. Aviva, like manyinsurers, also has the benefit of havingdistribution partnerships with leadingbanks.

To allow the development of the pensionmarket the Government has to not onlyallow life insurance companies to participatein the accumulation phase but it also cannotafford to restrict the number of players inthe market. In many countries around the

world, life insurance companies are themain mode for saving for a pension. Welook forward to the Government allowingcompanies like us to operate freely andcompetitively in the pension market. Thisis also in the consumer’s interest.

RebatingThough IRDA does not allow rebating

by the insurance agents, this is not the realityin the market. The Indian consumer hasbeen used to his agent passing on apercentage of the commission to him. Privateplayers have been lobbying for freedom tovary commissions on insurance policies soldby their agents. In fact agents’ commissionin India is amongst the lowest in the world.Experience in other countries shows thatcommission rates typically rise in the earlystages of deregulation and later find theirown natural levels. In the UK it is notuncommon for an independent financialadvisor to invest his entire commission intothe product on behalf of his client and onlycharge fees by the hour for the financialadvice rendered. This benefits the customersignificantly as the insurance companyinvests the additional sum into thePolicyholders’ Fund.

SummaryThe Indian insurance industry is set to

accelerate taking pensions, savings andinsurance products into the homes ofmany more consumers. Insurancecompanies build distribution andharnessing that distribution power topopularise pensions and insuranceproducts is a huge opportunity forlegislators to grasp. It is clear that therevitalised LIC and its 12 privatecompetitors are rising to the challenge.

The author is Managing Director, AvivaLife Insurance Company.

To allow the developmentof the pension market the

Government has to notonly allow life insurancecompanies to participate

in the accumulation phasebut it also cannot afford to

restrict the number ofplayers in the market.



In India’s recent economic history theopening up of a sector to private playershas resulted in a sharp growth in thesize of the market.

The automobile and mobiletelephony industries are two cases inpoint.

The year 1998-99 saw Hyundai, theSouth Korean auto major, commencingits operations in India, a year which alsosaw Tata Motors (then known as Telco)coming up with its own small caroffering. Maruti too responded with adramatic price reduction on its flagshipproduct the Maruti 800. The result wasa dramatic increase in sales in thefollowing year with sales going up from4.93 lakh units in 1998-99 to 7.34 lakhunits in 99-00.

In the case of mobile telephony eventhe mere prospect of the arrival of thirdand fourth players saw the competitiveinstincts of incumbents being triggeredto a point where a combination of pricecuts and promotion saw the marketdoubling in fiscal 2001 and again in 2002over the previous year. The tempo ofgrowth had been kept up in the followingyear with the mobile connections goingup by another 75 per cent.

There is no doubt that the entry ofprivate players in the life insuranceindustry over the last three years hascaused a sea change in the level of

Time for Some Soul-SearchingD.Sampathkumar

awareness in the public mind, about theneed for some kind of income securityagainst the risk of mortality. The energydemonstrated by private players thatare so characteristic of any new entrantinto a market has certainly been animportant factor. Equally, thecompetitive instincts unleashed in theLife Insurance Corporation of India (LIC),the public sector market leader, by theadvent of private players has been noless significant in this context.

The increased awareness has, to acertain extent, also translated intoexpanded market size with a largerpercentage of the income-earningpopulation opting for some form of socialsecurity for its dependents. But sadly,

the story of rapid market expansionhasn’t quite repeated itself in the caseof the life insurance industry. Thegrowth in new business can only bedescribed as modest.

It could be argued that a lifeinsurance product is qualitatively

different from a traditional consumergood, whether of the durable or non-durable variety. But it could be arguedwith equal force that an insuranceproduct is not all that much differentfrom a traditional consumer good.

Hedging a risk (of mortality) afterall, ought to instill a sense of well beingin a consumer’s mind given itsconnotation to family welfare. There isthus a value proposition of a currentconsumption nature putting it on parwith a fast moving consumer good. It isanother matter that the industry hassought to emphasise the savingsdimension in its marketingcommunications.

But even if the comparison withconsumer goods is open to debate whatcannot be denied is that there is a hugegap between the potential market andthe market penetration achieved by thepublic and private players have beenwoefully inadequate. This becomes clearif one looks at the current levels ofhousehold incomes in the economy,which need to be secured against acontingency of premature death for thedependents in the household and the sizeof the ‘life fund’ in the industry. A rough,back-of-the-envelope calculation showsthat the level of market penetration isonly around 10 per cent when measuredby this yardstick.

Clearly the growth opportunity isbeing missed by the industry for somereason or the other. Is this a problem ofmarketing communication? Or hasownership structure got something to dowith this?

There has to be some serious soul-searching within the industry on some ofthese questions. Perhaps this is an issuewhere the Regulator can take theinitiative in setting forth a strategicagenda so that the community can enjoythe fruits of financial security at anaffordable cost that an expanded marketmust necessarily offer.

The author is Corporate Editor, The HinduBusiness Line.

Sadly, the story of rapidmarket expansion hasn’t

quite repeated itself in thecase of the life insuranceindustry. The growth in

new business can only bedescribed as modest.





Even as the initial euphoria is dyingdown, it is now time for the secondgeneration of reforms in the liberaliseddomestic insurance sector. The sectorhas witnessed high drama in thelast three years and it would continueto be exciting in future. In the last threeyears 20 private sector companiesincluding some of the top names of theIndian corporates and multinationalinsurers are changing the face thesector. With higher performance andexpanding network thus far, each ofthese companies has an enrichingexperience to share.

The foreign companies are ready toincrease their stake and Indian partnersare pumping more funds and arerealising the value of their investmentin a short period of time. Some non-lifecompanies have already started makingprofits. The convergence trend in thefinancial sector - banks, insurance,capital markets - is quite distinct.

The private sector companies maynot have written a huge business duringthe last three years but have definitelyushered in a competitive atmosphere inthe sector. And I wish they go publicmuch faster than what they hadprojected in the beginning.

However it is time to go beyond thebattle for market share and a public andprivate sector dichotomy. Social security- in terms of life insurance, property andcasualty, including health insurance, andpensions - are the dire necessities of Indiaand should be the focus of the market.

In 2000, after five years of countlessdeliberations (Malhotra Committeesubmitted its recommendations in1994), the great insurance dramaunfurled with the unanimous view thatdomestic insurance should be opened upto the private sector for achievingmultiple oblectives.

Indian and foreign companieswere ready with their figures on the sizeof the Great Indian Market waiting tobe tapped. Some pegged it at 250million, others put it at 350 millioninsurable people.

Time for Reforms Part IIL. P. Mehta

Armed with statutory powers IRDA,headed then by Mr. N. Rangachary,moved with great speed to make theliberalised industry operational. As theindustry moves fast forward, thegreatest threat to the free market isunethical practices. The market beforenationalisation in 1956 and 1971 hasenough evidence to prove this.

Be it life or non-life, there ispractically enough, rather plenty, foreverybody. Let IRDA be given more teethto ensure an orderly functioning of themarket. A wholesome insurance marketis a virtuous proposition benefitingcitizens, both rich and poor, and thecountry’s economic development, muchfaster and wholesome way.

From among the range of issues likeregulations, market conduct,

detariffing, the investment scenario,profitability, consumer satisfaction,professional development andintermediation what warrantsGovernment and IRDA’s constantactions immediately are: increasing theforeign direct investment to 49 per centfrom 26 per cent , detariffing,penetration of insurance and pensionmarket, professional development and,above all, customer service. Only 10 percent of the 100 crore Indian populationhas some kind of insurance, and thetotal premia for both life and generalinsurance is around two per cent of thegross domestic product (GDP) comparedto four per cent of GDP in East Asia.

The neglected area of annuities andpension schemes (with considerable

potential among the self-employed asonly 100 million people are covered byprovident fund or pensions) is nowgetting its due attention. Healthinsurance, house protection andaccident insurance have been neglectedin the past because it is easier to markethigh-value general insurance policieslike fire or marine insurance to largecorporaes. As a result, non-lifeinsurance has remained confined toproducts like Fire, Marine and Motorinsurance.

In India, premium from retail andpersonal insurance businesses hasremained stuck at eight to10 per cent oftotal premium. In developed countries,the figure is 70 per cent!

Health insurance with a base of overRs. 1,000 crores is virtually non-existent today. Only 2.5 per cent of thepopulation is covered by healthinsurance policies and the premiumrates have remained high and customerservice and healthcare infrastructurecontinues to be extremely poor. In thatway the show has just begun and, withappropriate debate, policy decisionsand products it is up to the Government,the IRDA and market players to puttheir acts together to take the course ofinsurance liberalisation forward.

The author is Editor, Asia Insurance Post.

In India, premium fromretail and personal

insurance businesses hasremained stuck at eight

to10 per cent of totalpremium. In developed

countries, the figure is 70per cent!

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35�� Jour Jour Jour Jour Journal, December 2002nal, December 2002nal, December 2002nal, December 2002nal, December 2002 35�� Jour Jour Jour Jour Journal, December 2003nal, December 2003nal, December 2003nal, December 2003nal, December 2003

P. B. RamanujamPaleontology & Palingenesis

Reinsurance to GIC is what fish isto water. It was all along the sole, ifperemptory and prokeleusmatic, mentorfor the Indian reinsurance market as awhole. It scripted the entire reinsurancephilosophy for all the four public sectorunit (PSU) insurers. The reinsuranceprogramme was drawn up for the Indianmarket, in its entirety, taking intoaccount the combined financial andoperational skills and strengths of thefour PSU companies on the principle ofConjunctis viribus.

This had enabled it to becomemonogenic in nature speaking with one voiceand operating with one objective, namely,to maximise retention in the country. It hadcontrolled the obligatory cessions, marketpool arrangements, market surplus treatyfacilities and facultative placements ofdirect insurers. The property (large andlisted) risks were underwritten on a marketbasis by the GIC and were communicatedto the companies for accounting and recordkeeping. It had arranged reinsurance

Role of GIC before opening upUncrowned Rex et Imperator of the Indian reinsurance world

protection both for self and subsidiaries. Inother words, it was the only interface thebetween the Indian insurance market andthe global reinsurers.

Hence, it had considerable brandequity and reputation in the reinsuranceworld on account of its enormousfinancial strength, reinsuranceunderwriting skills, academic excellenceand professional experience. This couldensure long standing, enduringrelationships with a number of leadingglobal reinsurers. It used to operate bothdirectly as well as through a set ofestablished brokers having standing incertain specialised global reinsurancemarkets. Moreover, the entire ForeignInward insurance was centralised atGIC through what was called ‘SWIFT’an acronym for Single Window InwardFacultative and Treaty. Logic then wasthat the gullible, greenhorn directinsurers on a standalone basis hadneither the Sophia Kai Phronesis(knowledge and experience) nor networth

and market standing to provideadequate market capacity and thus arevulnerable to exploitation by globalgiants.

In a nutshell, the performance ofGIC as a sole statutory reinsurer, as faras Indian outward reinsurancebusiness was, measured in financialterms, a net inflow of Rs.1,190 croresfrom 1976 to 2000.

Even if this period is broken downinto five year cycles, except during the1991-96 period, when there was a netoutflow of Rs.635 crores, the other timecycles produced positive results.However, the results of SWIFT i.e. theforeign inward acceptance portfolio,regrettably, have not been too flatteringfor various reasons. Concededly the truepurpose of centralising the entire inwardbusiness was not accomplished at all.Remedia sunt graviora pericula! theremedy was worse than disease.

With the re-designation of GIC asthe National Reinsurer by IRDA, thecharacter and the business profile of GIChas undergone a change from the role ofgubernator to benefactor and enabler tothe Indian reinsurance market. Someof other significant changes are :

1. The Indian Market (Property) Poolhas been discontinued

2. The inter-group cessions in respectof large and listed risks is nowconfined to the four PSUs.

3. Indian reinsurers are acceptinginward business from India as wellas from abroad on their own strengthand standing either directly orthrough brokers.

4. The categorisation of risks into

Role of GIC post liberalisationAvanculus Maximus Benevolus - A new GIC reborn - a deuteromorphosis - What aparadigm shift!

listed, medium sized and small havebeen left to the companies.

Reinsurance knowledge is no longera zealously guarded monopoly of GIC. Ifyou wish to multiply knowledge, divideit! An oxymoronic truth. Companies noware at liberty to make placementsabroad if local terms are not suitable.Brokers are being licensed and they playan ever aggressive role in helping thedirect insurers in securing facultativeplacements abroad especially inaviation, energy risks, petrochemicalsrisks and so on.

GIC currently extends the followingfacilities to the companies in additionto managing Obligatory Cessions: Offerto participate in companies’ surplustreaties, market surplus treaties and

facultative acceptances, protecting theirnet account through excess of loss (XL)arrangements.

GIC is an active member in theFAIR Property, Energy and AviationPool. It is also a member in the AsianReinsurers’ Summit. All these are tocreate further facility to the Indianmarket. GIC has also set up a TerrorismPool on behalf of the Indian marketwhich is functioning satisfactorily witha reasonable sized corpus of aroundRs.300 crores as on March 31, 2003. Ifthis trend continues, Indian market maynot be looking to international markettoo keenly. Further, GIC has started lifereinsurance business besides promotinga separate institution for the agricultureinsurance business.

GIC has extended its foreignbusiness frontiers in a big way. Thereis a quantum leap in foreign inwardbusiness from $ 63 million in 2001-01to $ 214 million in 2002-03.



The author is Managing Director, GeneralInsurance Corporation of India.

GIC offers the following seven criticalservices to the Indian Market.

■ Enhanced peak risk protectionthrough optional facility fromRs. 1,500 crores to Rs. 3,000 croresPML and CAT (EQ) XL fromRs.850 crores to Rs.1300 crores

■ Protecting companies Net Accountwith XL arrangement (whichcontains Retro Cession business)

■ Motor Obligatory Cessions –absorbing proportionate (20 percent) losses from the market (itmight be a revelation to note thatoverall obligatory cession portfolio ofGIC is a loss because of thisdimension)

■ Affording automatic facility throughMarket Surplus Treaties (Marinepremium rates are deplorably low)

■ Offering terrorism protection overthe pool capacity –

i) Rs 300 crores Xs Rs 200 crores(stand alone risks)ii) From ground up Rs 500 crores(package policies)

■ XL covers for Motor/WC (That tooMotor deparment of all things !)

■ Enhanced Aviation capacity

GIC has however, to redouble itsefforts to develop the following newbusiness lines and create capacitywhich is no doubt a daunting challenge :

1. Oil and Energy

2. Telecom / cellular networks covers3. Liability, D&O and Professional

Indemnity

4. Jewellers Block Indemnity

5. Credit insurance

6. Agricultural insurance7. Life reinsurance – annuities, financial

reinsurance, catastrophe reinsurance,total permanent disability (due tosickness) on group schemes

Matters of serious concern

While the Indian reinsurancemarket is chugging along comfortably,

all is not hunky-dory yet. Some of theanxieties are enumerated below – theseare only illustrative and not exhaustive.

1. The pious and sublime dictum (or isit a mere exhortation ?) of IRDA toexhaust local capacity beforeplacement abroad is not strictlyfollowed. Sequentia perdita are twofold :

(a) Loss of precious premium andforeign exchange

(b) Unutilised capacities created atextra cost goes down the drain – adouble jeopardy.

2. Companies are accepting risks atpremium rates which will make themarket surplus treaty unviable.Errors of a few would lead to holisticbereavement to all.

3. Companies are retaining only agossamer thin margin forthemselves while quoting rates forbusinesses. This goes against veryspirit of copious reinsurancecommissions intended as a cushionagainst adversities.

4. The proclivities/propensities ofcomposite brokers would be tocorner the entire market because theyhave the reinsurance edge over directbrokers.

5. Brokers have to be categorised andrated and regulatory inspection betightened further to prevent unfairtrade practices and also to ensureprompter settlements of hugebalances at their disposal includingfacilitating settlement ofcommutation proposals.

6. The cascading impact of the cost ofdirect broking on the reinsurancecommission structure, especially inthe context of overall loss experienceof the obligatory cessions portfolio.In the case of Motor obligatorycessions the loss is so huge as to wipeout surplus in other non-motorobligatory arrangements.

7. Insurance is risky; reinsurance isriskier; retrocession is riskiest.

Hence, there should be separateregulatory prescriptions regardingreinsurance (including retrocession)business especially with regard to :

a) Solvency norms (Tis custodiet ipsoscustodes – who will guard theguardians themselves?)

b) Foreign assets allocation andprudential diversification norms

c) Currency matching principle inAsset- Liability management

d) Financial accounting and reportingstandards

e) Catastrophe and equalisingreserves and the tax concessionsthereon.

8. Intercontinental regulatoryharmonisation needed to facilitategreater and smoother cross borderbusiness flows.

9. Insurance and reinsurancecompanies should be permitted todo information technology enabledback-office work.

10. All market conduct regulation be,gradatim, dismantled while, in thesame breath, strengtheningfinancial condition regulations.

Piece de resistance

Finally, paradoxical as it may sound,suggestion coming from me (a kind ofipse dixit) the Indian direct insurancemarket deserves the competitivepresence of a few more reinsuranceplayers. This would enable GIC torediscover itself. What I call autoanagnorisis – a self revelation. Themarket pie is too huge. Come one, Comeall! There is enough and to spare. vivoet vivat – Live and let live !

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The purpose of reinsurance is to remove

volatility in an insurer’s results and thereduce the negative impact on thebalance sheet and profit and lossaccount. It also provides substitutecapital for an insurer, brings globalknowledge and technical expertise to alocal market and provides employmentin a local market.

Swiss Re appreciates that in thefirst phase the authorities havenecessarily been preoccupied with theprimary insurance market because it isthis market which addresses theinsurance needs of the man in the street.Much has been achieved by theauthorities over the past three years andtoday the primary market has grownsignificantly, stabilised and given theIndian consumer a wider choice of

Derisking Reinsurers’ EntryDhananjay Date

insurance products and providers. Thecompulsory tariff and mandatoryreinsurance cessions are the remainingimpediments to an open and competitivemarket.

However, since insurance andreinsurance are two sides of the samecoin, the time is now ripe to address thereinsurance aspects. Swiss Re believesthat it will be in the best interest of theIndian insurance market if theauthorities consider the following :

Business modelBusiness modelBusiness modelBusiness modelBusiness modelAmend existing Regulations so that

international reinsurers have thefreedom to choose, like in anycommercial activity, a suitable business

model for India. The presentRegulations only permit a joint venture(JV) in India where the minimumcapital requirement is Rs. 200 crore andthe foreign partner’s equity is capped at26 per cent.

Entry capitalEntry capitalEntry capitalEntry capitalEntry capitalInternational experience reveals

that even a capital base of Rs. 500crores (i.e. 2.5 times the presentprescribed amount) would be inadequatefor a reinsurer in India. There areseveral Indian risks which have valuesin excess of Rs. 10,000 crores. Moreover,India is vulnerable to natural

catastrophes like earthquake, cyclonesand flooding and these events have thepotential to destroy well over Rs. 500crores.

A JV with the referred equity split,or even a fully owned subsidiary for thatmatter, would still be inadequatebecause a subsidiary’s capital isnormally less than its parent’s.Creditors of a “limited” company, as iswell known, can only recover what canbe salvaged from its limited capital. Theparent is not obliged, and seldom does,reimburse a subsidiary’s creditors.

The branch wayThe branch wayThe branch wayThe branch wayThe branch wayInternational reinsurers should be

permitted to set up a branch in India.Swiss Re firmly believes that this is bestfor the Indian market. The branch modelhas already run well in India in the caseof international banks. In reinsurance,where huge risks and potentialcatastrophic losses are involved, abranch model makes sound sense ; theparent’s balance sheet backs thebranch’s liabilities.

Allow an internationalreinsurer to choose its own businessmodel; this will encourage the reinsurerto bring its technical know-how andinternational expertise to the localmarket. It will also generateemployment and offer careeropportunities in the local market.

In many developed insurancemarkets in the world, a noticeable trendis that the authorities are encouragingthe branch model over the subsidiary orJV because of the peculiar nature ofinsurance/reinsurance and because ofthe simple but compelling advantagesthat a branch operation has.

Allow an internationalreinsurer to choose its ownbusiness model; this will

encourage the reinsurer tobring its technical know-how and internationalexpertise to the local

market.

The author is Managing Director,Swiss Re Services India Pvt. Ltd.

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ISSUE FOCUS - BOTTLENECKS


Increase in penetration of Healthinsurance was one of the expressobjectives of opening up the insurancesector to private players. Even as wecomplete three years of this change, thisarticle takes stock of how Healthinsurance has fared during this period.It would be worthwhile to reflect on the

■ Growth of Health premiums –crossing Rs.1,000 crores

■ The TPA experiment and■ The path ahead

Public sector and private sector non-life insurers offer a range of healthinsurance products includingMediclaim (Individual and Group) andOverseas Mediclaim Policy (OMP)

The numbersAs per available figures, gross

Health insurance premium written in2002-03 was Rs. 1,144 crores as againstRs. 519 crores in 2000-01. Thisrepresents a growth of over 120 per centin the three years of a liberalisedinsurance regime. These figures can bemisleading in absence of a break-up ofthe premium figures by types of policies.

Without doubt, the plain vanillaoffering of Mediclaim would account forthe lion’s share of the total. But a closerlook would reveal that premiumgenerated from Overseas MedicalPolicies (OMP) is also included in themore generic term of gross healthinsurance premium. Clubbing of OMPpremium figures (with total healthinsurance figures) projects an erroneouspicture since by no stretch ofimagination can this policy be seen tobe increasing health insurancepenetration in the country.

If and when the bifurcated figures aremade available, we might be surprisedto note that the dramatic growth inHealth insurance over the last few yearshas largely been propelled by growth inOMP premiums. It is interesting to notethat among the private sector non-lifeplayers, during 2002-03, Tata AIGclocked the maximum health premiumamounting to Rs. 32.82 crores. And TataAIG does not even have a Mediclaim

Miles to Go...Aloke Gupta

equivalent policy ! No prizes for guessingthat all this came entirely from OMP.

To this if we add the premiums forthis policy from all insurers – public andprivate – a not very happy conclusionabout the growth and penetration ofHealth insurance in the country mightwell nigh emerge. Other policies underHealth Insurance are not very popularand will not account for a significantshare of the total.

Life insurance companies have beenselling critical illness riders, which arean important component of Healthinsurance. These riders, which arebenefit riders in nature as againstmedical reimbursement policies,provide a real fill-up in the productrange in Health insurance. CriticalIllness riders in fact, provide leverage

to a policyholder of optimising coveragevis a vis premiums by ‘layering’ ofdifferent types of health policies.

Critical illness premium figures,lives covered and claims figures need tobe combined with the Health insurancefigures of the non-life companies to getthe correct picture of penetration ofHealth insurance.

Third Party AdministratorsEven one year ago, available Health

insurance policies (read Mediclaim)were essentially indemnity plans,without any facility of ‘cashlesshospitalisation’. There were no tie-upsof health providers with insurancecompanies. Mediclaim was marked by

adverse selection and resultant highclaims ratios, inadequate coverage(confined to hospitalisation), stringentexclusions especially pre-existingdiseases and rigidity of the premiumrates. An unregulated healthcare sector,provider malpractices and lack ofstandards, accreditation and qualitybenchmarks further compounded theproblem.

Though most of these problems stillremain unresolved, the IRDA did take asignificant step forward when itintroduced Third Party Administrators(TPAs) in 2002. The public sector unit(PSU) non-life insurers empanelled 11TPAs on a regional basis to provide‘cashless hospitalisation’ to Mediclaimpolicyholders all over the country.

A Third Party Administrator (TPA),is a service organisation under contractfrom an insurance company toadminister its health insurance policies,by providing a bouquet of services to thepolicyholders. A TPA performs the roleof a services integrator – a triage betweenthe insurer, the insured and thehealthcare provider. The range of TPAservices includes Enrollment andBenefits Management, ClaimsManagement, Provider NetworkManagement, Medical Managementand Customer Service Management forthe Health insurance policyholders of aninsurance company.

TPAs have now been in operation fortwo years. During this short period manypertinent issues relating to theiroperations as well as spread of healthinsurance have been thrown up:

Insurer specificJunior level functionaries of the PSU

operating offices see TPAs as a threatto their jobs and are hence areantagonistic towards them. Themanagerial cadre on the other hand eyeTPAs with suspicion fearing a nexusbetween TPAs and healthcareproviders. Hence, on an operationallevel, the institution of TPA has startedoperations with a handicap. Due to thesenegative perceptions, TPAs haveexperienced delay in periodicreplenishment of claim float leading to

The Indian healthcaresector lacks any

widespread form ofaccreditation, clinical

protocols and guidelines,quality benchmarks and,any uniformity of hospital

charges.

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a cascading effect of delay in claimssettlement to providers, providersrefusing ‘cashless hospitalisation’ topolicyholders ultimately resulting inpolicyholder dissatisfaction.

Healthcare provider specificThe Indian healthcare sector is

unregulated. It lacks any widespreadform of accreditation, clinical protocolsand guidelines, quality benchmarksand, as a result, any uniformity ofhospital charges. There is a plethora ofhomegrown hospital information andbilling software in use and healthcareproviders do not follow theinternationally acceptable diseasecoding system.

All these make it difficult for TPAsto capture health diagnosis and expenserelated information in a uniform mannermaking archiving and mining of thisinformation near impossible. Thisinformation which can be a critical inputfor insurers and their actuaries todevelop adequate pricing and newerproducts remains obscure and ‘un-minable’.

Cartelisation by healthcareproviders in certain areas to resist pricenegotiation has also been observed. Thisform of collective bargaining, in theabsence of healthcare sector regulations,spells disaster for the efforts of TPAsand insurers to control claim costs andprovider fraud.

TPA specificTPAs have generally not performed

up to the expectations of thepolicyholders and insurers. There havebeen complaints of delayed issuance ofID cards and mailing of collaterals.Dedicated call centres have really notbeen ‘dedicated’ and policyholdersdemanding ‘cashless hospitalisation’have been turned away by healthcareproviders. Claims have not been settledin 15 days, as promised, either to thehealthcare providers or policyholderswho decided to go out of the providernetwork and hence did not avail of the‘cashless facility’.

All these are probably transientstart-up troubles but what is disturbing

is the information about growing unholynexus between some TPAs andhealthcare providers resulting inincreased utilisations and ‘kick-backs’.Insurers need to be vigilant of thisphenomenon since this could well shroudthe entire Health insurance industry indoubt, distrust and despair.

A silver lining is however the declineof incurred claims ratio after the adventof TPAs. As per figures available fromGIPSA, the incurred claims ratio ofpublic sector non-life companies Healthinsurance portfolio came down to 91.07per cent in 2002-03 as against 99.21percent in 2001-02.

Accreditation of healthcare providersAccreditation of healthcare

providers is a critical requirement forenabling quality benchmarking of

services and healthcare facilities,eventually standardising providercharges. The services and facilitiesprovided at the diagnostic centres,nursing homes, and hospitals need tobe standardised. The introduction of arating mechanism that is compulsoryfor participation in insurance schemescan fulfill this need.

The system of healthcare facilitygrading is necessary to differentiatehealthcare organisations on a gradedscale based on their ability to deliverquality patient care. The organisationsgraded higher are expected to havebetter facilities, superior quality levelsand consistency in service delivery, andas a result, to provide quality healthcareto the patients.

All efforts in the last few years topromote a voluntary healthcare provideraccreditation agency have not borne fruit.The health sector is divided over the issue.A system of rating of healthcare providershas been introduced by credit ratingagencies, ICRA and CRISIL. Theseagencies have not met with much successsince only a few tertiary level hospitalshave got themselves rated, mainly tosource domestic and foreign funding. Thedrawback with the rating process is thatit is voluntary, expensive and apparentlydoes not add value to healthcareproviders in the general apathy towardsquality. The accreditation process needsto percolate down to at least secondarylevel of care for it to make any significantimpact on the quality of healthcaredelivery in the country.

Realising the necessity of anaccredited healthcare provider network,insurers recently decided to appoint leadTPAs in metro regions to commenceempanellment of an accredited commonprovider network. These TPAs were todevelop and apply some credentialingparameters. In spite of initial setbacksthat it has suffered, this initiative needsto be carried to its logical end.

Common standardsThere is also a need to create

common standards and norms for codingof diseases and for treatmentprocedures. The exercise started bypublic sector non-life companies’ in2002, to develop standardised billingformats from the healthcare providers

The drawback with therating process is that it isvoluntary, expensive andapparently does not add

value to healthcareproviders in the generalapathy towards quality.

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seems to have derailed. The IRDAshould still press for standard formatsof crucial treatment related documentsfor insurers, TPAs and providers

Some of the changes may call forinvolvement of Indian Medical Counciland even changes in laws. The IRDAshould play the role of a coordinator anddrive the changes required in this field.

Entry of new playersDespite opening up of the insurance

sector, no global health insurance companyhas shown interest in entering the market.Government’s intent through legislation togive preference to registration of thoseinsurers who intend to carry on Healthinsurance business has not yielded thedesired result as the minimum capitalnorm for exclusive health insurers is feltto be on the higher side.

The experience of the public sectornon-life companies has also not beenencouraging with regard to coverage andfinancial performance. As a result, noinitiative has been taken to introducenew Health insurance products. Theprivate sector non-life companies haveintroduced slight variations of theexisting Mediclaim and the privatesector life insurers have introducedcritical illness riders to their life policies.

Global insurance licensing practicesallow life insurers the freedom to offerproducts that cover contingencies thatmay affect a covered life e.g., life, healthand accident, and are termed asemployee benefits. For a life insuranceagent, Health insurance is an extensionof a life policy. The process of life policyselling is more intense and often resultsin a long-term relationship.

Life insurance agents report thatmost life insurance prospects orpolicyholders ask for a health insuranceproduct, and would be confident buyingit from them. But present regulationsrestrict life insurers from sellingreimbursement type wider healthinsurance covers and only allow themto offer critical illness riders to lifepolicies.

Critical illness riders are usefulmore as top up layers or assupplemental covers to a wider healthinsurance policy like Mediclaim andsub-optimal solution as sole healthinsurance cover.

Since comprehensive revision ofinsurance laws is underway, it is anopportune moment for IRDA to bringabout far reaching changes forpromotion of health insurance in thecountry. Such changes relate to – (i)Allowing life insurers to write all formsof Health insurance (ii) Reviewingcapital requirement and related normsfor standalone health insurers.

The path aheadHealth issues are acquiring urgency

due to factors like medical inflation,

increasing life expectancy, increasing loadof lifestyle diseases and uncertainties inindividual employability and earnings.Paradoxically, living long and dying youngare both creating new tensions in society.With the virtual absence of a health socialsecurity system and a high proportion ofnational health spending being met byhouseholds, the need for a widespreadHealth insurance system is urgent andpressing. Each set of players in the gameneeds to play his part honestly.

■ Relaxation of entry norms for healthinsurers needs to go hand in handwith reforms to allow healthinsurance to be freely written by allplayers.

■ Hospitals desirous of coming upwith integrated health plans which

The author is a Health insuranceconsultant.

combine healthcare financing anddelivery need to be encouraged andsupported.

■ Data capturing, archiving andmining is critical for Healthinsurance. Standard formats needto be used to report to IRDA onpremiums, claims, and lives coveredfor each type of policy.

■ New products are required to caterto the changing needs of a dynamicsociety. Products like dreadeddisease, organ transplant, mentaldisease, etc. can be introduced on apilot basis.

■ Existing Mediclaim premiums canbe rationalised by introducingpricing based upon the type of roomoccupancy. This will widen anddeepen the reach of Mediclaim.

■ Insurers should re-look at the pre-existing diseases clause whichcauses maximum heartburn. Thiscalls for adequate pricing ofMediclaim which remains thebenchmark product.

■ High claims being a weighty issue,a technique like DRG basedcontracting with providers is crucialto contain spiralling medical costs.

■ TPAs also need to learn andintroduce claims costsmanagement techniques like pre-admission testing, pre-authorisation prior to admission,utilisation and continued stayreviews, etc.

■ Policyholders’ education programmeinforming them about the changesbeing introduced and the reason andrationale for it will pre-emptcomplaints about arbitrary andunilateral action.

It is a long and difficult road aheadbut not a day too late to begin thejourney in right earnest.

For a life insurance agent,Health insurance is an

extension of a life policy.The process of life policy

selling is more intense andoften results in a long-

term relationship.

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Two Steps Forward, One Step Back‘Health for all by 2000!’ was theGovernment of India’s position on healthuntil the year 2000. ‘Health for all by2020!’ is the Government’s latestmantra. How will any of thesestatements be possible without thewidespread use of a financialmechanism like health insurance?

Since the 1980s, the nationalisedinsurance companies have been sellingthe Mediclaim health insurance policy.With subsequent modifications thenumber of policy holders increased andso did the claims paid-out.

In 1996, the first Third PartyAdministration (TPA) organisation waslaunched, offering services suchas cashless hospitalisation, 24-hourcall centre support, enrolment andclaims administration. The TPA,Sedgwick Parekh Health Management,offered its services as a ‘wrapper’ toany health financing plan – be it insuredor self-funded. The model was successfuland within a short span of threeyears, over 75 major employers hadavailed of these services.

The model was simple – aspecialised service provider that couldintroduce significant efficiencies inadministration, services that catered tothe customer and controlled costthrough negotiated/contracted rateswith hospitals. The model required theTPA to contract directly with theemployer. The insurance contract wasindependent, and was drawn directlybetween insurer and employer.

In 1999, the nationalised insurancecompanies began to recognise that TPAs(of which there were now three) wereable to add significant value to theproduct but were unsure as to how towork with TPAs. Threatened by theTPAs’ relationship with their clients, inMay 2000, they quit formalarrangements with with TPAs.

Simultaneously, TPAs had begundiscussions with the IRDA for the

Nimish R. Parekhpropagation of a Health insurancemodel that would include TPAs andwould allow the average consumer toaccess healthcare in a simple, cashlessmanner. The IRDA warmed to the ideaand decided that it would be importantto ‘legitimise’ the TPA model byintroducing regulations to bring theTPA under its ambit. A working groupwas formed in 2001 and the Regulations– Third Party Administrators (HealthServices) Regulations - were introducedin early 2002. Twenty organisationswere granted licenses in early 2002.

Mediclaim pricing and costsThe average claim value per in-

patient claim in metros and semi-metros has risen from Rs. 8,500 in 1995

to over Rs. 30,000 in 2002! ButMediclaim premium has been revisedonly in 1996 and then in 2002. The resultof this inherent underpricing is thathealth insurance portfolios willdemonstrate inferior performance in ayear just prior to an increase inpremium.

The impact is further amplifiedwhen taking the pure risk premium(which today is just 58 per cent of totalpremium, the rest being marketing andadministrative overheads) into account.Even when a gross premium increase of30 per cent is factored in between year2000 and 2001, the loss ratio continuesto increase alarmingly.

Moreover, Mediclaim is often sold togroups (employers) as one componentin a basket of non-life products and theinsurer typically reduces the premiumon Group Mediclaim to accommodatethe client and give him a better deal.This is a further discount on an alreadyunderpriced product and the gross lossratio gets further amplified.

The state of Health insuranceIn 2002, Mediclaim was operating

at a gross loss ratio of over 100 per centand covered approximately 50 lakhpeople. Of this, most were employees oforganisations who had purchased GroupMediclaim. In fact, a large segment ofthe covered population was theemployees and families of the sixnationalised insurance and reinsurancecompanies!

Five years after the first majormodification to the Mediclaim policystructure and premium, the insurerswere buckling under the lossespropagated by this policy. A decision wasmade to increase the premium by fiveto 30 per cent (depending on the ageband). In addition, the annualmaximum limit (sum assured) wasincreased to Rs. 5,00,000. There wassome resistance from policyholders butthe premium increase was generallyabsorbed by the market.

‘Health for all by 2020!’ isthe Government’s latestmantra. How will it bepossible without thewidespread use of a

financial mechanism likeHealth insurance?

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Progress of the TPA modelIn May 2002, TPAs were invited to

submit bids for the provision of TPAservices for the four nationalisedinsurers, by General Insurance (PublicSector) Association (GIPSA). The tenderdid not even specify the detail of servicesto be provided and still demanded thata commercial proposal be submitted aspart of the bid. Most of the 23 licensedTPAs submitted bids (after guessing thecommercials!) and a selection wasmade. The TPAs that had not beenselected raised several objections to theselection process. At which point, theGIPSA chose to have the entire selectiondissolved.

Meanwhile, private sector insurershad conducted surveys and due diligencereviews on TPAs and proceeded to selectone or two for their health insuranceproducts. Many had a Mediclaimequivalent as they could not go againstwhat the market dominators offered interms of price.

In August 2002 the public sectorcompanies again went through a roundof selection and - with no due diligenceand with the basis of selection beingunclear – selected 10 out of the 23 TPAs.

TPA fees for the nationalisedcompanies ranged from 5.2 to 5.4 percent of gross premium, depending on theregion selected. There was no clearindication of the revenue realisation inRupee terms for any of the TPAs as theinsurers themselves did not have clearinformation on the premium realisationon a zonal basis.

After this round of selections, therewas a concerted effort on the part of theTPAs to identify exactly what serviceswere to be performed. Several discussionswere held by the insurers and TPAs tonail down the legal contract. The termswere finalised in October/November2002. The first Mediclaim policyinclusive of TPA services sold in October

2002 to employers that renewed. Nineout of the ten selected TPAs proceededto execute the contract in October andNovember 2002 without evenunderstanding what income they were toreceive as they did not have informationon the premium realisation for the zonethat they were to cover.

Parekh Health Management, whichwas selected for the West Zone byOriental Insurance Company, insistedon accurate premium information priorto contract execution, and got thisinformation in late December 2002. Thefee worked out to approximately Rs. 60per member per annum. Parekh Healthrecognised that working at these pricinglevels, the business was commercially

unviable and informed Oriental thatthey were unable to work with them onthis product at the given pricing levels.It was the only TPA to have refused toaccept this business.

State of the market todaySince the launch of the Mediclaim

policy with TPA services there has beena lot of criticism of the product in themedia. Interestingly, network hospitalshave been the loudest in their criticismprimarily because they have not beenpaid as per their agreements, with manypayments delayed beyond reasonabletime limits. Consumers too have shared

their experiences in delayed enrolment,lack of response at call centres, non-recognition of their ID cards at hospitalsamong others.

All-in-all, the health insurancemarket from the nationalisedcompanies’ Mediclaim point of viewseems to be in turmoil. An interestingcontrast is the experience with privateinsurers and their version of Mediclaim.They too have had their share ofproblems, but not to the degree ofnegative publicity as has been faced bythe public sector insurers and TPAs. Infact, most employers who havepurchased private insurance with TPAservices seem to be satisfied withservices. The negative publicity mayprimarily be due to the sheer volumethat the nationalised companiescontinue to serve versus the privatecompanies; however, there are somefundamental issues that exist that needto be addressed.

TPA selectionHealth insurance administration is

a specialised field and requires highlyskilled personnel and technology. TheTPA provides a critical service to theindustry in both customer facing andback-office areas to an insurer. Theservices form an integral part of thesuccessful delivery of a health insuranceproduct, which means that the TPAmust be selected with care and diligence.TPA selection must include thoroughdue diligence of infrastructure,knowledge, experience, capacity andtechnical capability. A politicalselection process is not only insufficientit is irresponsible!

ResponsibilityThe primary responsibility of the

state of health insurance lies with theinsurance company and NOT the TPA.The consumer relies on the insurers’capabilities to select the right serviceprovider particularly when he/she has

TPA selection mustinclude thorough due

diligence of infrastructure,knowledge, experience,capacity and technicalcapability. A political

selection process is notonly insufficient, it is

irresponsible!


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no choice in selection therefore theinsurer’s primary responsibility to theconsumer cannot be vacated. The TPAis responsible to the consumer indirectly.Let me state categorically that it isirresponsible of a TPA to solicitbusiness that it is not capable of serving– either due to lack of capital or lack ofexperience and know how. TPAs thataccept business despite their inabilityor lack of capacity to handle the businessshould have their licenses revoked bythe IRDA as they are doing a disserviceto the consumer and to the developmentof a healthy market as a whole.

Now what?The IRDA, insurance companies,

TPAs and medical providers willall have to participate in the ongoingdevelopment of the health insurancemarket.

IRDAThe IRDA has taken a huge leap in

the health insurance marketdevelopment by introducing regulationsfor TPAs. It now needs to look ahead byfacilitating the development of otherimportant facets such as uniformity ofdata and information, adoption ofstandardised coding systems andconfidentiality of medical information.It will also need to evaluate the need fora distinct set of regulations governingHealth insurance. Finally, it will beimportant for the IRDA to consider theinclusion of life insurance companies inthe Health insurance arena. They shouldbe allowed to provide not just riders butfull-fledged Health insurance as, inmany markets, health insurance isconsidered to be allied with lifeinsurance.

Insurance companiesInsurance companies need to take a

hard look at two major aspects of theirHealth insurance aspirations:

a) Product design and pricing

b) Service provision capabilities of theiradministration partners

In my opinion, Mediclaim isthe single biggest deterrent tothe innovation and development ofhealth insurance products due to itspricing. It is critical that thenationalised insurance companiesrecognise that the long termsustainability of portfolio based pricingis low and that healthcare cost inflationwill mar any efforts to shore up a losingportfolio as has been demonstrated inmarkets all over the world.

Health insurance products will haveto be evaluated on their own merits

and the critical medical loss ratioparameter will have to be brought intothe evaluation protocol. This is thesingle most important aspect of healthinsurance in India that will have to betaken into consideration by the industryif we wish for consuming Indiansto choose from a rich offering of variedhealth insurance products thatare priced fairly and designed to suitevery need.

Insurance companies will also haveto view their TPAs as partners and notvendors. TPAs will be the deciding factorin the success or failure of each insurers’health insurance aspirations. TPAsthat fail to perform or fail the duediligence review or demonstrate a lackof responsibility to the consumer in anyway must have their licenses revoked!

Finally, it will beimportant for the IRDAto consider the inclusion

of life insurancecompanies in the Health

insurance arena.

TPAsTPAs will have to mature very

quickly to ensure that they take onbusiness of a size that is commensuratewith their capacity. TPAs will have toalso ensure that they have easy accessto capital as their needs in a growingmarket will demand constant increasesin capacity in a step function approach.TPAs will have to recognise that theyare similar to the BPO/ITESorganisations in that scalability andquality of service are the only yardsticksthat they will be measured on.Adherence to Service Level Agreementsand unrelenting pursuit of customersatisfaction (both insurer andpolicyholder) will be the only path tosuccess.

Medical providersHospitals, diagnostic centres,

physicians, pharmacies and otherparamedical providers will all need toreconcile themselves to the fact that thepayor (insurance company through itsTPA/s) will play an ever increasing rolein the financing of healthcare. With thisparticipation, there will be increasedaccountability and demand forinformation from them. They will alsoneed to recognise and react to theleverage exerted by the payor in pricing.Gone are the days of irrational pricingby physicians. It will serve the consumerbest for this group of stakeholders toengage the payors in productivediscussion and partnership to ensurethat the consumer is served best.

In conclusion, if we are able to takethese next steps prudently, I’m surethat “Healthcare for all by 2020” willbecome reality rather than an emptypromise.

The author is Chief Executive Officer,United Healthcare India. The viewsexpressed here are his own.


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It is over three years since the generalinsurance market in India wasliberalised by allowing the entry ofprivate sector players to providecompetition to the four public sectorplayers, operating under a monopolyregime, since nationalisation of generalinsurance in 1973.

Objectives of liberalisationInsurers, in a liberalised market, are

expected to create new demands for theinsurance products that they market byenhancing the levels of risk awarenessamong the uninsured public. Instead ofbeing mere service providers, it wasexpected that they would lead amarketing revolution to widen themarket base by netting more and moreuninsured public to avail the benefits ofinsurance. How have the insuranceplayers performed?

By creating a competitiveenvironment the standards and levelsof customer service were expected to goup to benefit the insured public. Inkeeping with the trends of the growingeconomy and rising incomes, newproducts to take care of the hithertounattended risk exposures wereexpected to flood the market. The Statewas to benefit by more investmentsflowing into the financial system to helpthe economy grow. How have theseobjectives been met so far?

Gains of liberalisationA quantitative and qualitative

assessment can be made of theobjectives to gain an insight into whathas been achieved and where the futureshould lead us to optimise the benefitsof liberalisation. This article seeks toexamine market growth, customersatisfaction levels, competitive trends,and problems hindering the futuredevelopment of the market as a part ofthe analysis from their annual financialstatements for 2002-03.

Market growthThere has been an impressive

growth in the volumes of premium

Advantage, Large CustomersG. V. Rao

income of the insurance market in2002-03. The premium income hasgrown by 21.5 per cent to record a levelof Rs. 14, 000 crores. The public sectorplayers have contributed Rs. 12,600crores and the private sector playersRs. 1,400 crores.

Fire business grew by 10.6 per cent,Marine by 15.8 per cent andMiscellaneous by 26 per cent. Thereasons for the impressive growth couldbe to increased premium levels of mega-sized risks wherein the rates aredictated to by reinsurers, increase in theMotor tariff premium rates andincreased auto sales and a customer-led demand for medical insuranceschemes. The buoyant economy has alsoassisted in the growth of business.

Public sector performanceThe public sector players posted an

excellent growth rate of 14.4 per cent intheir gross premiums and recordedRs. 12,600 crores as income. But theportfolio growth showed that it was thegrowth in Marine segment at 12.7 percent (Rs. 1,145 crores gross premium)and the Miscellaneous, usually a loss-making portfolio at 19.5 per cent(Rs. 8,954 crores gross premium) thatwas responsible for this performance.The Fire portfolio remained stagnant atRs. 2,500 crores.

Whereas the gross Fire premium ofthe market grew by Rs. 284 crores theshare of the public players was onlyRs. four crores! In Marine they improvedtheir income by Rs. 130 crores out of atotal increase of Rs. 167 crores.In Miscellaneous the growth wasRs. 1,458 crores out of the marketgrowth of Rs. 2,016 crores.

The market share of the publicplayers dropped to 90 per cent from theprevious 96 per cent. The have missedout on the growing size of the Firepremium and this should be a matter ofutmost concern to them.

The earned premiums, a truemeasure of growth, showed that thegrowth rate was nine per cent, the sameas the year before. Their retention levelof business earned premiums has fallento 73 per cent from the 77 per cent in theprevious year, showing a heavierdependence on reinsurance support.Another feature noted was that thoughthe Marine premiums grew by Rs. 130crores at gross levels, at the earnedpremium levels it showed a fall ofRs. seven crores! Evidently a goodportion of the Marine business increasehas come from risks that were reinsuredvery heavily.

Their claims ratio on earnedpremiums has dropped to 84 per centfrom the high of 93 per cent in theprevious year. The managementexpense ratio on earned premiums hasrisen to 32.2 per cent up from 30.4 percent in the previous year. The expenseratio continues to be a matter of concernas the public sector depends almostentirely on the vagaries of claims ratiosrather than on cost cutting as a tool tostay profitable. The present level of 32per cent is unacceptably high from theinsuring public point of view.

The four public sector players have,however, ample reasons to congratulatethemselves for turning out aperformance beyond the marketexpectations. The combined profitsbefore tax have soared from a meagreRs. 36 crores in 2001-02 to Rs. 840crores in 2002-03.

The significant contribution hascome from the reductions achieved in theunderwriting losses by Rs. 621 crores.Though the industry continues to reelunder operational losses, theunderwriting loss in 2002-03 hasdropped to Rs. 1,441 crores against Rs.

In 2002-03,the premium income grewby 21.5 per cent to record alevel of Rs. 14, 000 crores.

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2,062 crores of the previous year. Theinvestment and other income grew fromRs. 2,098 crores to Rs. 2,282 crores toproduce a profit before tax (PBT) of Rs.841 crores.

The Fire and Engineering businessesdid not witness any major losses. TheMotor business, a perennial source ofconcern, had a relatively lower loss ratiothan before due to increases in the tariffrates that took effect from July 2002.With the exception of United India,whose underwriting loss went up fromRs. 368 crores to Rs. 400 crores, the otherthree insurers have managed to reducetheir underwriting losses. Oriental hasperformed exceptionally well, and hasreduced its underwriting loss from themassive Rs. 534 crores of the previousyear to Rs. 250 crores, the lowest among

the four insurers.

While the financial performance ofthe public sector players has beensatisfactory on the overall, how havethey performed on other parameters ofgrowth, expenses and settlement ofclaims? The following tables show theperformance figures.

Table A shows the earned premiumsof each insurer with their loss ratios inbrackets, Table B the underwritingresults, Table C the results ofinvestment and other incomes, Table Dprofits before tax, and Table E themanagement expenses and the ratioson the earned premiums.

The outstanding losses in amountsand their number as at March 31, 2003are shown in Table F to demonstrate

that the insuring public should be givena better deal. The outstanding lossesare mounting up at the rate of Rs. 1,000crores per annum. The figures inbrackets show the number ofoutstanding claims and it is significant.

Table A: Earned Premiums and Loss Ratios(Rs. in Crores)

Company 2002 - 03 2001 - 02 2000 - 01

National 1,965 (83 %) 1,817 (95 %) 1,704 (86 %)

Oriental 1,855 (79 %) 1,821 (100 %) 1,684 (89 %)

New India 3,297 (82 %) 2,859 (89 %) 2,577 (89 %)

UIIC 2,110 (90 %) 1,973 (90 %) 1,822 (98 %)

Total 9,227 8,470 7,787

Table B: Underwriting Results(Rs. in Crores)

Company 2002 - 03 2001 - 02 2000 - 01

National (301) (463) (245)

Oriental (250) (582) (275)

New India (490) (534) (446)

UIIC (400) (368) (420)

Total (1,441) (2,062) (1,386)

Table C: Investment and Other Income(Rs. in Crores)

Company 2002 - 03 2001 - 02 2000 - 01National 440 360 335

Oriental 425 358 350

New India 803 761 685

UIIC 614 610 429

Total 2,282 2,098 1799

Table D: Profits before Tax(Rs. in Crores)

Company 2002 - 03 2001 - 02 2000 - 01National 139 (97) 90

Oriental 175 (235) 75

New India 313 208 239

UIIC 214 157 8

Total 841 36 413

Table E: Management Expenses(Rs. in Crores)

Company 2002 - 03 2001 - 02

National 646 (33%) 554 (31%)

Oriental 640 (34.5%) 585 (32.1%)

New India 895 (33%) 758 (29.3%)

UIIC 614 (29%) 525 (29%)

Total 2,795 2,422

Table F: Outstanding Claims(Rs. in Crores)

Company 2002 - 03 2001 - 02 2000 - 01

National 2,253 (3,40,000) 2,124 1,867

Oriental 2,490 (3,12,000) 2,524 2,159

New India 3,929 (3,60,000) 3,384 3,022

UIIC 3,244 (4,35,000) 2,963 2,793

Total 11,916 10,995 9,841Cumulative Total (14,47,000)

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The public sector insurers should notonly be concerned with the competitivepressures generated by brokers and theprivate players but deal with the issuesof how to cut their high costs and givetheir customers a better deal. Thestatistics shown above are to be seen inthe light of focusing their attention onthe areas needing their urgent attention.

The technical reserves, called thepolicyholders funds, are Rs. 16, 944 croresas on March 31, 2003. The net worth ofthe four companies amounts to Rs. 6,744crores. The industry’s investment incomeof Rs. 2,300 crores is geared by 70 percent of policyholders’ funds.

Private sector performanceThe private players have raised their

gross premiums to Rs. 1,340 crores fromthe previous Rs. 466 crores. Theaccretion has come from Fire by Rs. 280crores, Marine Rs. 38 crores andmiscellaneous by Rs. 558 crores. Theyhave targeted Fire and Engineeringbusiness as the strategic portfolios tobuild their assault from. Their earnedpremiums have gone up to Rs. 390 croresfrom Rs. 40 crores. Their retention is 29per cent up from nine per cent. Theirclaims ratio on earned premium is 75per cent down from the previous 102 percent. Their underwriting losses havereduced from Rs. 127 crores to Rs. 98crores. Their PBT showed Rs. 19 croresas profit from a loss position of Rs. 68crores in the previous.

Market and liberalisationThe private sector players’

performance has been impressive on allcounts. With no track record and withlimited financial resources andconstrained infrastructure they haveacquitted themselves well.

The market growth of 21.5 per centhas been an outstanding achievementtestifying to the dynamism that prevailsat the market. That is a big plus pointin favour of liberalisation. The inabilityof the public sector players to adjust tothe newly emerged competitiveenvironment is stark. What should be

worrisome to them is that there is noattempt made even now of how theirfuture has to be shaped. In a tariffenvironment the credit for reducingclaims ratios cannot be claimed assolely due to the efforts of management.

Only when the insurers cut costs ofoperations by raising their revenues peremployee, render acceptable claimsservices and bring in new customers into their fold, can the managementsclaim acclamation from the public or bytheir investors.

How truly free is the market?By encouraging competition with the

entry of private players and yetretaining price and product featurecontrols through a tariff regime, themarket has unwittingly served to

encourage unhealthy and undesirablepractices to flourish. By bringing inbrokers and corporate agents as a partof distribution channels, there has beena heightened awareness of competitioncreated. The competitive advantage onehas to demonstrate is not professionalexpertise but extraneousconsiderations. This has hurt the publicsector players more than anyone else.The market has not been liberalisedenough for it to grow faster and for thecustomers to experience the benefits ofprice and product feature competition.Continuation of this state of affairs willdamage the market and retrieval maybe very difficult.

It is now time to take the next step todetariff the entire market and allow

enterprise and marketing skills to bedisplayed and for players to be moreinnovative and market savvy. Unless thisis done immediately, the market will besubjected to rebating and kickbacks, thebane of the previous regimes.

Who has benefited by liberalisation?The immediate beneficiaries of

liberalisation have been the big-sizedcorporate customers who are nowflooded with offers of service and adviceby a number of players. This has led totheir making demands outside thecontrol regime.

The individual customers that donot have substantial premiums to backthem up have been served poorly. Therising number of grievances, theheightened apathy for customers and thegrowing number of outstanding claimstestify to the fact that nothing haschanged for them. It is business as usualfor all the insurers. Whether it is thepublic or private sector players, it is onlythe big corporate customers that are theattraction. Was this the objective ofliberalisation? The individual customerremains uneducated on either riskawareness or on the benefits of theinsurance bought. Not service but salesseem to be the goal of insurers.

ConclusionThe urgent need now is to bring in

more competition to make the insurersto work harder for procuring theirpremiums. Detariifing will make thecustomers more aware of the productfeatures and prices at which they aremade available. This kind of customerinvolvement will generate a market thatbargains for mutual interests. Riskmanagement and underwriting skillswill come to the fore. Fight for survivalwill induce creativity and more energeticmarketing efforts by insurers, keepingthe customer in focus. It is time for thecustomer to come in to bat for himself.

The author is retired Chairman andManaging Director, The OrientalInsurance Company.

By encouragingcompetition and yet

retaining a tariff regime,the market has

unwittingly served toencourage unhealthy andundesirable practices to

flourish.

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Road TollsH. Ansari

Just as nationalisation had helped inmobilisation and deployment ofmassive financial resources togetherwith the spread of life and generalinsurance business in the country,liberalisation was expected to usher inan era of plenty where the benefits ofinsurance can be taken to the doorstepof the consumers. Further, liberalisationis also expected to bring about marketexpansion and focussed penetration.

The CII Sub-committee onDistribution and Intermediaries in1999 had estimated that life insurancepremium in the country would increaseto Rs. 60,000 crores by 2005 and crossRs. 1,40,000 crores by 2010. Non-lifepremium would aggregate closer to Rs.20,000 crores by 2005 and touch Rs40,000 crores by 2010.

As regards pension, the estimatesprojected the premium to go up toRs.4 ,000 crores by 2005 and increase toRs. 14,000 crores by 2010. The consumermega-trends indicated that the earlyyears of the new millennium will witnessmajor social and economic shifts that willchange the way the consumers behave.More than two thirds of the populationwill become literate. Close to half thepeople will be under the age of 20-25years. Modern telecommunication willspread far and wide. Informationtechnology will pervade our homes.Personal computer penetration wouldincrease from one in every 500 personsto one in every 50 by 2008.

These changes would give rise to twodevelopments; a new demand at thelower end of the market spectrum and adramatic shift in the nature of demandat the upper end of the market. The keyto capturing these opportunities wouldbe technology. Delivering value forproducts will also require a cost effectivebut multi-distribution network. Thegrowth will come from all those playerswho would provide the best value fortheir products at optimum prices.

The fear about the liberalisedscenario was, first and foremost, theinsolvency of the insurer. This featureis not uncommon even in developed

markets with the US leading the packwith nearly 300 insolvencies in the last20 years. The other fear was that agentswould misinform customers. Further,persons belonging to the same poolwould be treated differently. Therewould be discrimination in settlementof claims and also non-payment ofclaims.

To overcome these fears, the capitalrequirements for those wishing to enterthe market was pegged high i.e. at Rs.100 crores. This is the highest capitalrequirement for an insurance companyin this part of the globe. In addition,the solvency margin to begin with waskept much higher than the normalinternational standards. The Regulatorhad advised all insurers that theirassets at all times should be 150

percent of their liabilities. Further, outof the total capital of a new directinsurer of Rs. 100 crores, the solvencymargin was required to be not less thanRs. 50 crores at any time. This wasconsciously done to ensure that theplayers remain both solvent andfunctional in the market.

Let us now look at the realisationfrom liberalisation. The new companiesare gradually settling down. Many ofthem have become aggressive. Theexisting companies are putting theirstrategies and reform agenda in place.The competition is gradually hotting up.

The market in life insurance up tothe end of March 2003 indicated thatthe private sector had garnered 7.97 percent of the market with LIC’s sharebeing reduced to 92.03 per cent.

The non-life business in 2002-2003grew 20 per cent as compared to 2001-

2002 financial year. Whilst the publicsector grew by around 13.5 per cent, theprivate sector growth was an impressive180 per cent. The public sectorcompanies’ share came down to 90.5 percent. The total non-life premium grewto nearly Rs. 14,100 crores at the end of2002-2003.

The trend in the current financialyear 2003-2004 is on expected lines. Inlife insurance, LIC continues to lead butwith a reduced share of 89.05 per cent ofthe market premium ending September,2003. The share of private sector hasclimbed upto 10.95 per cent. In respectof non-life, the public sector companiesshare has been eroded from 9.5 per centat the beginning of the financial year tothe extent of 13.70 per cent as onSeptember 30, 2003. They nowcommand 86.50 per cent of the market.If this trend continues, the privateplayers may end up by capturing almost20 per cent of the market on the non-lifeside by the end of March 2004. Theoverall non-life premium by the end ofMarch 2004 is likely cross Rs. 16,700crores but with a lower rate of growth.

The current score card would indicatethat the estimates forecast earlierappear achievable. The life insurancepremium as at March 31, 2003 hasalready crossed Rs. 50,000 crores andis well on course to crossing Rs. 60,000crores by 2005. The Non-life premiumfor the financial year 2002-2003 standsat slightly over Rs. 14,000 crores andwould almost touch the estimatespredicted by 2005.

Though the market is on the move,market conduct has been a casualty.Whilst regulations for variousintermediaries have been notified, themarket behaviour of some of them isunethical. The guiding criterion appearsto be snatching of business at whatevercost. The level to which some of thecompanies have lowered theirstandards to garner premium has neverhappened in the past. Hence the needfor all to cooperate and lay down properguidelines for implementation.Competition is no doubt good. It is alsobeneficial for the consumer. However,

There have to be ground-rules in competition and

the Lakshman rekhaneeds to be observed by all

players.

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there have to be ground-rules incompetition and the Lakshman rekhaneeds to be observed by all players. TheLife Insurance and General InsuranceCouncils are required to play a more pro-active role in developing market conductfor strict implementation.

Motor insurance continues to be thefastest growing portfolio in the generalinsurance business in the country. Thoughit appears to be the simplest, theexperience of the Indian market on thisportfolio during the last 15 years, hasbeen anything but satisfactory. It controlsmore than 38 per cent of the total generalinsurance business in the country. As atMarch 31, 2003 the motor premium of theindustry was around Rs. 5,000 crores.

Apart from being the fastest growingportfolio, Motor also accounts for themaximum number of documents. Nearly60 per cent of all documents, issued and60 per cent of claims reported emanatefrom this portfolio. One of the primaryreasons for the continued underwritinglosses of public sector non-lifecompanies in India has been the higheroutgo – both for Own Damage (OD) andThird Party (TP) liability claims underthis portfolio. Added to the claims costis the business acquisition cost and highmanagement expenses which makesthis portfolio highly loss prone.

With a road network of over 8.7million kilometres, and a vehiclepopulation of around 50 million in thecountry, Indian roads take a toll of morethan 85,000 victims every year with over3.5 lakh accidents reported annually.Our accident per thousand vehicles isthe highest in the world i.e. 31.80 percent and is more than twice that of theUK and 2.5 times that of the US. Ourmotor crash / accident ratio works outto around 0.17 per cent per year.

As against this, in the US, with alarger road network and with over fourtimes the vehicle population of around220 million, the motor related accidentcases are only around 42,000. Theirvehicle population to motor crash /accident ratio is 0.019 per cent per year.

This large loss to human life andaccident claims in the country translates

into a high cost to the insurers and thesociety. All constituents need toconcentrate on motor road safety. Tillrecently, the country had to contend witha few models of vehicles on the Indianroads – the likes of Ambassadors and Fiatand few models of commercial vehicles.The situation in the last seven years hasundergone a sea-change with high-techand high value vehicles with greateracceleration and greater probability ofdamages being now on the roads.

With greater numbers of newer andcostlier models vying for space oncongested Indian roads, the result is anincrease in number of accidents and roadrelated casualties. Road safety issuesare of critical importance and insurersmust pay attention to it. At present,

against every Rupee collected aspremium for insurance in the country,the outgo in respect of damage to thevehicle is around 70 to 80 paise withover Rs. three incurred for death andpersonal injury. This has made Motorinsurance unviable for Indian insurers.

The India Motor Tariff was revisedwith effect from July 2002. The revisionhowever, can only improve the positionof OD claims. TP claims, in view ofinadequate premium coupled with courtawards will continue to bleed the non-life insurers in the market. Our Motorpremium rate at around 3.5 per cent isthe lowest in the world. The world’saverage is six per cent and above. Inrespect of TP there is an urgent need toincrease the premium and cap the upperlimit on compensation. The liabilitycannot be unlimited. If railways andairlines can have a limit of liability, thenwhy not motor? Alternately, anyliability beyond an upper limit of say

Rs. five lakhs can be taken over by thestate. It is wrong to expect an Insurer toperpetually bleed and yet underwrite TPbusiness in the country.

Motor insurance in view of its largevolume, cannot be ignored by insurers.It is the only portfolio which gives year-round liquidity. The business however,requires to be underwritten withunderwriting safeguards and control.The leakages, which are rampant, needto be plugged and complete statisticaldata is to be maintained by all insurerswhich will assist them in pricing theirproducts when the market is detariffedin the near future.

Insurance in India continues to be a“superior” good with demand growingrelatively with income. Traditionalinsurance however, is outdated.Customers have begun to switch over topackaging and alternative products.Technology will change the veryfoundation of our working. It will erodelong term advantages.

Risk assessment, risk evaluationand interpreting customer needs willhold the key for future survival. Indiahas a large potential for insurance withour middle class growing rapidly. Allplayers in the market have aresponsibility to shoulder. The marketwas opened so that the customers willhave a better future. The players havenow to show results through productinnovation, improved servicingstandards, better marketing and salestechniques and grater productawareness. All this would result in valueaddition and add to the bottomline.This would not only help the consumerbut would also improve the image of theinsurer in this part of the world. TheRegulator as friend, philosopher andguide and also as facilitator will havehis hands full to ensure that theinsurers live up to this high promise.

The author is Chair Professor, NationalInsurance Academy, Pune, and formerMember (Non-life), IRDA.

It is wrong to expect aninsurer to perpetually

bleed and yet underwriteTP business in the

country.

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Credit Insurance in India has beenprevalent in the export sector only asfar as trade credit goes. Bank credit orinstitutional credit was insured eitherwith the Deposit Insurance CreditGuarantee Corporation (DICGC) orExport Credit Guarantee Corporation ofIndia Ltd (ECGC), the latter for coveringexport credits.

ECGC has been in existence since1957 primarily as an export promotioninstitution providing export creditinsurance and credit guarantees.Originally it was exempted from thepurview of the Insurance Act 1938 andalso from provisions of GeneralInsurance Nationalisation Act 1972.

After prolonged correspondencesincluding with the parent Ministry,(Ministry of Commerce) and legalcounsels it applied for registration withthe IRDA in 2001 and was grantedregistration in September 2002. Goingby the spirit of opening up of the insurancesector, ECGC is also pitted against otherprivate and public sector insurers.

Export credit insurance is a voluntaryone unlike Marine insurance, an alliedcover which is mandatory as far as thebeneficiary is concerned. Hence to makethe former self sufficient, comparativelyhigh rates of premium are attracted andproducts are designed to ensurereasonable spread of risks.

Government of India has launchedprogrammes like Focus Africa, FocusLAC (Latin American Countries), FocusCIS (Commonwealth of IndependentStates) in order to push exports to theseregions which are laden with highpolitical risks. Just as the Regulationsprovide for obligatory contribution to therural sector for all insurers, thecorresponding area of concern, and hencethe need to introduce a mandatorycontribution, will be towards thedifficult markets in export creditinsurance.

Needless to mention that the bestoutcome in the wake of three years ofliberalisation are the many positivedevelopments in ECGC. Earlier onlyECGC was doing credit insurance, butnow other non-life insurers both

One of a Kind!Geetha Muralidhar

privately owned and those owned byGovernment of India are also reportedlystarting to offer this cover.

ECGC now offers a range of productsin the place of a single scheme whichexisted for 44 years. The covers havebeen tailored as per the exporters’ needs.Rationalisation of the premium rateshave led to an overall reduction to theextent of almost 40 per cent particularlyfor transactions pertaining to Focuscountries. Underwriting decisions havebeen hastened. Claim procedures havebeen simplified and streamlinedresulting in quick disposals.

Adequate delegation anddiscretions have been included in theterms of cover to the exporter to enableminimisation of losses. No Claim

Bonus has been enhanced. Upgradationof information technology (IT) systemshas resulted in WAN (Wide ActivityNetwork) and e-connectivity tocustomers. The branch network is beingexpanded continuously to reach out toexporters.

Corporate agency arrangementshave been tied up with various banks.Bancassurance in this sector ofinsurance is only formalising an alreadyexisting arrangement since insurance ofreceivables is prima facie the concern ofbanks. ECGC has left no stone unturnedto provide the best possible products andservices to enhance the competitivenessof Indian exporters.

Leading credit insurers arediversifying into related services forwhich they could charge fixed fees andbolster income without increasing riskexposure. ECGC also provides manyother specialised services to exportersby guiding them in export related

activities, providing information ondifferent countries with its own creditratings, assisting exporters inrecovering bad debts and offeringinformation on the credit-worthiness ofoverseas buyers. It is also offeringMaturity Export Factoring withoutrecourse to exporters.

In the recent past, credit insurersworldwide have suffered due to highinsolvency related claims and scarce yetexpensive reinsurance. Credit riskissues have not been the cause of thereinsurance losses. But the trade creditand political underwriters have had topick up a share of the tab. However, theyhave tried to contain the impact oncustomers.

It is observed that however well theymanage their own operations andexposure to credit and political risksaround the world, underwriters coveringinternational trade risk cannot escapethe impact of wider problems in theglobal insurance market. At the sametime, credit underwriters have seen asurge in claims on business in keywestern economies, reflecting the generaldownturn in economic conditions.

Trade credit and politicalunderwriting operates on different riskpatterns from most of the rest of theinsurance market; its risk is widelyspread – in both geographical andindustry terms. One area where creditinsurers’ offerings continue to score wellis in their inclusion of political riskcoverage. Political and economic risksare intensifying. Companies are seeingthat the political risk map of the worldcontinues to change and the threat ofwar and heightened anti-establishmentactivity are difficult to evaluate.

In a protracted favourable climatethere is a general tendency to think thatcustomer risk management is an easydiscipline for a company, without anyeconomic consequences. But theprevailing world situation has remindedexporters of the value of insurance, andits unavoidable cost. Thus it can beconcluded that there is an increasedworldwide acceptance of credit insurance.

The author is General Manager, ExportCredit Guarantee Corporation of India Ltd.

The best outcome in thewake of three years ofliberalisation are the

many positivedevelopments in ECGC.

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Very few sectors of the new economyhave received such public scrutiny as theinsurance sector. Given this fact, thegeneral insurance sector seems to beheaded towards a credibility crisis. Thisis a strong statement by any standards;however, when one views the currentsituation as a concerned observer andparticipant, one sees a sense of cynicismcreeping into the general insurancemarket in India.

The liberalisation of the insuranceindustry has happened in a mostadmirable manner. The Regulatorhas won worldwide accolades for thisorderly transition and for thetransparent regulatory mechanism.It is now the responsibility of the rest ofthe non-life industry to ensure that theregulatory expectations are fulfilled inletter and spirit, which includesconducting themselves in a highlyprofessional manner.

The industry consists of threeelements - the insurers, theintermediaries and the customers.There is a legitimate expectation thatthe liberisation of the industry wouldbe beneficial to the consumer bybroadening and deepening the non-lifemarket and introducing better servicestandards. It was also expected thatthe intermediaries would play acomplimentary role in promoting theindustry. Above all, it was expected thatthe new insurers would bring in globalbest practices in the country.

Underlying these expectations wasthe assumption that competition is goodfor everyone.

However, the competitive spiritseems to have expressed itself in theform of a free for all. All three partiesi.e. insurers, intermediaries and clientsseem to be contributing to this. Insurersare buying business by quotingunrealistic prices and short circuitingtariffs. Intermediaries keeppressurising the insurers to raise thelevel of remuneration beyond what ispermitted by the Regulations andinsurers are abetting this by finding

Shore up CredibilityShrirang V. Samant

ways and means to do it. Large buyersexpect some of the intermediarycommission to be passed back in termsof discounts or kickbacks.

There are several reasons for this,but the primary reason is theimpractical combination of partiallytariffed regime and regimentation ofintermediaries’ remuneration.

Let us examine how tariff regimecontributes to the unhealthy practices.Most of the Fire and Engineeringproducts are governed by tariff. Theseare the products normally bought bylarge corporates. Tariff based pricingcreates a presumption in buyers’ mindsthat they are being overcharged andconsequently they have an expectation

that the insurer will compensate for thehigh tariff rates by charging lower ratesin non-tariff products e.g. Marine andother Miscellaneous policies.

In fact the existence of tariff, i.e. priceand form control, discourages brokersfrom demonstrating any value addition.The intermediaries therefore justbecome one more element in thetransactional chain who, in fact, takeaway value rather than add it. Theyeffectively become rent seekers,leveraging their relationship with thebuyer.

When the market was opened foragents and brokers a number of peoplesaw the agency commission/brokerageas a low hanging fruit ready to beplucked, simply for positioningthemselves between the insurance buyerand the company. The rates fixed foragency commission and brokeragebecame the floor rates rather thanceilings. A common question oneencounters from the brokers today is

how much the insurer is willing to partwith over and above the statutory limit.

Since buyers also recognise thatbrokers are not in a position to addvalue and know that they receivecommission from insurance companiesthey feel justified in asking for part ofthe commission back either directly orindirectly. The big buyers have nowrealised that insurance companies areout to buy business at any cost.

It is quite evident that none of theinsurers, in both the private and publicsectors, has really contributed tospreading the message of insuranceamongst the general public in the areaof non-life insurance. There are severalreasons for it. In the mind of anindividual buyer non-life insurance isequated with Motor insurance, homeinsurance and Health insurance.

Motor insurance is statutory henceit gets bought rather than sold.Promoting home insurance in factrequires investment in distribution whichis not cost effective for private sectorplayers because of the small ticket size ofan average home policy. The need of thehour is to bring out a simplified homeproduct which is easy to explain andeasier to administer. There are structuralproblems with the Health insuranceproduct viz. Mediclaim. The corporateclients use the group Mediclaim facility

The competitive spiritseems to have expresseditself in the form of a free

for all.

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as an employee benefit and have nohesitation in asking the insurers to cross-subsidise the adverse claim ratio inMediclaim product by premiums in otherclasses of business from the samecorporates. This precludes any form ofunderwriting or claims control.

At an individual level too it isdifficult to introduce a medical productwhich can be underwritten withappropriate controls in the shape of roomcharges and fees for procedures until thepublic sector insurers change thestructure of Mediclaim policy whichprovides a blanket cover across allsections. It is also worth noting that inother parts of the world Health insurancegenerally undertaken by specialisedhealth insurers. IRDA’s recentannouncement that separate entrynorms might be considered for settingup health insurance companies is a verywelcome direction in building the Healthinsurance industry in the country.

The solution to the foregoingproblems, particularly the unhealthycompetitive practices, does not lie inharsher regulation but in liberalisation.Total detariffing can bring aboutsignificant improvement in the situation.A really free market is incompatible withproduct and price control, which is whattariff means. The tariff stops the insurer

from product differentiation,underwriting these on the merits of eachrisk and pricing them appropriately. In atarriffed market the buyer is the ultimateloser.

Detariffing will also allow theintermediaries to add value. In a reallyfree market the intermediaries,particularly brokers, play an importantrole by advising the buyers about the

products, coverages and price etc. Oncethe market is detariffed, it is importantto allow the market process to determinethe intermediaries’ remuneration rates.These will automatically find their rightlevel once the insurers learn to price theproduct on a net basis and theintermediary is able to demonstratevalue to the customer so that the customer

determines what level of intermediarycommission he is willing to pay.

To argue against detariffing on thegrounds of consumer protection isanachronistic. Regulation is all aboutprudential regulation i.e. monitoring thesolvency position of the insurers.Fortunately most of the private playersin India are backed by top rankinginternational and domestic promotersand hence their ability to maintain thecapital base is more or less assured.The Regulator’s focus should be onmonitoring solvency, which willautomatically ensure that the insurerscharge adequate price and keep theiracquisition cost under control.

In summary, the only logical solutionto the current deteriorating marketconduct of some of the players in thenon-life industry is to do a complete andswift de-tariffing, to remove restrictionon agency commission and brokerageand continue to monitor servicestandards and solvency position. Thiswill enable the local non-life industry todevelop world class underwriting skillsand the ultimate beneficiary of thewhole exercise will be the consumer.

The author is Managing Director, HDFCChubb General Insurance Company.

To argue againstdetariffing on the groundsof consumer protection is

anachronistic. Regulationis all about prudential

regulation i.e. monitoringthe solvency position of

the insurers.

Send your articles to: Editor, IRDA Journal, Insurance Regulatory and Development Authority,Parisrama Bhavanam, III Floor, 5-9-58/B, Basheer Bagh, Hyderabad 500 004 or e-mail us at [email protected]

�� We welcome consumer experiences.Tell us about the good and the bad you have gone through and your suggestions. Your insights are valuable to the industry. Helpus see where we are going.

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It all seemed only yesterday that we werebasking under the joy of being one of thenewly licenced insurance players. We keepsaying ‘new player’ and we are already almostthree years young. How fast time flies!

Looking back, I am happy that westayed our set path and didn’t stray andhence have little regrets on anything. Mymission as we set out was:

■ To provide cutting edge customer delight– 24 / 365

■ To “build” good strong distributionchannels – howsoever slow and tiresomeit may be, rather than “rent” or “buy”distribution

■ To build a wholesome well balancedportfolio of good quality business withemphasis on retail growth

The above ideals were not achieved bysudden flight. In fact like the old saying goes“but by toiling through the night” and burningthe candles at both ends. We were the firstto set up a nation wide 24 hour call centrewith a toll free number manned by our veryown people and, right from the word go – itwas a runaway success. Not only werequeries of customers and agents catered toat any time, but even claims could be lodgedfrom anywhere, at any time. We have setindustry standards in terms of contactability.

When it came to building distribution –it required ‘sweat equity’ and I can say withfull confidence – hard work pays – in thelong run.

We were aware that in non-life insurance- ‘selling’ products was indeed morechallenging than customers ‘buying’ productsfor mandatory reasons. We went with thetide, but ensured that we rowed too and keptto the planned path. Today we have a well-balanced portfolio and are working to growand maintain it that way.

Like the parents of a growing child, it’sthe environment - Regulatory, Economic,Social and Technological (REST) – and themarket forces that are clear areas of concern.We see that there is less concern onunderwriting losses and high acquisition cost,sacrificing long term interests on the altar ofquick wins and short term goals and wonderabout its long term effect on the market.

Achievements - IndustryIRDA efforts and industry initiatives

have allowed tremendous progress to

The Agony and the EcstasyDalip Verma

accompany the opening of the sector. TheyInclude improvements in consumerawareness, customer focus, distributionchannels and IT enabled services,unbundling of savings and protectionproducts to serve customer needs better,development of more professional salesforce through structured comprehensivetraining processes and the expansion ofretail focus with the development ofadditional distribution channels -bancassurance, direct marketing, affinitymarketing etc.

Rural and social sector insurance needsare being addressed and consumerprotection regulations have beenintroduced. IRDA sponsored publicityprogrammes were launched aimed atincreasing awareness.

Achievements - Tata AIG■ 24 /7 customer response centres and

improved service levels■ Product innovation and enhanced

flexibility which gives customer moreoptions

■ Value addition through high qualityproduct literature and detailed salesillustrations

■ Claims servicing - introduction of globalbest practices to accelerate claimshandling

■ Positioning of insurance as a viablecareer option - entrepreneurialopportunities.

■ Continuation of ongoing initiatives inproduct, retail and technologicalimprovements.

What more needs to be doneRegulatory reform■ Review of capital requirements - toward

encouraging local, regional and nicheplayers

■ Health insurance - to be viewed inisolation

■ Development of Health insurancethrough segment specific requirements

■ Ministry of Health support essential -drive toward uniformity -standardisation of procedures anddiagnostic codes - enabling data collectionacross health care providers, TPAs andhealth insurers

Distribution channel reform■ Positioning of insurance as a viable

career option - entrepreneurialopportunities

■ Establishment of agents / brokers asprofessional financial advisors andensuring that there is a good valueproposition to attract and retain goodprofessionals.

■ For agents - creation of a career path topromote professionalism and allowingallow companies to experiment withdifferent models of agency structure

Other challenges■ Insurance programmes, courses and

seminars across schools, colleges,universities and workplaces.

■ Sharing of information and resources -creation of central information registry.

■ Preparing the market towardsdetariffing.

■ Increasing penetration levels cannotoccur in isolation. All concerned - stateand private insurers, Government bodiesand the regulators - must work in unisontoward achieving common industry goals

In summaryNo generation has had the opportunity

as we have to build a great future for theInsurance Industry. It is a wonderfulopportunity, but also a profoundresponsibility. Keeping pace is simply notenough. Competitive advantage lies ingetting ahead and staying ahead. In thewords of Victor Hugo:

- The future has many names

- For the weak it is unattainable

- For the fearful it is unknown

- For the bold it is opportunity

The author is Managing Director, TataAIG General Insurance Company.

Like the parents of agrowing child, it’s theenvironment and themarket forces that areclear areas of concern.

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Three years is a short time in the life of

a country or even an industry. But thelast three years have been verysignificant for the insurance industry inIndia. For more than two and halfdecades, the position was stable withthe industry being a Governmentmonopoly.

The last three years have witnessedthe emergence of an open environmentwith private players entering themarket. The first step was taken byseparating the owner, Regulator andservice provider. Earlier, theGovernment had undertaken all thethree roles. The setting up of anindependent regulatory authority andallowing of private ownership marked

the end of the old era and the dawn ofthe new one.

The Regulator has been active, comingout as it has with a host of Regulations,covering a wide area of operations likeaccounting, publicity, intermediaries andre-insurance. Practically, all operationalfields have been brought within the ambitof the Regulations. New concepts havebeen introduced.

The attempts at professionalisingthe intermediaries has started givingresults. Compulsory training of agentshas forced the companies to organisetheir training programmes and alsoensure that the new entrants have a

basic grounding in insurance. Therefresher training envisaged in theRegulations will ensure continuousupdating of standards.

Insurance, for long, has been anindustry neglected by the media. Thedebates during the liberalisationprocess and the high visibility has hada salutary effect in attractingprofessionals to this industry asintermediaries. All this should go a longway in improving customer servicing.

Eroding profits have been a cause forconcern. As an industry, the profits havebeen declining in the last few years andthis trend appears to be accelerating.Fire and Marine, which have been theprofit making portfolios, have not beengrowing to the desired extent, whileMiscellaneous (of which Motor

Expand the Pie!V. Jagannathan

The author is Chairman and ManagingDirector, United India InsuranceCompany.

Eroding profits have beena cause for concern. As anindustry, the profits havebeen declining in the lastfew years and this trend

appears to be accelerating.

constitutes a major segment) has beenincreasing its share.

It is common knowledge that theinsurance industry has been bleedingheavily on account of Motor insurance.The Government insurers account formost of the Motor premium and unlessimmediate and drastic steps are takento restructure the premium orcompensation or both, there is everylikelihood of the entire industrybecoming sick. And this appears to be adistinct possibility when viewed alongwith the falling interest rate scenario.

A major cause for concern are reportsof unhealthy practices creeping into themarket place for business procurement.With intensifying competition and withhigh stakes, the temptation to cutcorners is high. Unless this is nipped inthe bud, the chances of this malaisegetting institutionalised is real. Thereis no doubt that the Regulator wouldtake required steps to set things rightin this matter.

Ultimately, all the changes shouldresult in expansion of the market. Thisis one of the major objectives of theliberalisation process. This will beachieved only if more people are drawninto the insurance net. Currently, thefocus of all the players is on getting ashare of the existing pie. An attitudinalchange has to occur and all the playershave a responsibility in ensuring thatthis goal is reached.

While concluding, I am sure thatthere is a bright future for insuranceindustry in India. The road ahead isnice, there is a good car available andall that matters is how the car is driven!

Development of the insurance industryover the last three years has broughtabout a paradigm shift in the waybusiness is being conducted. A Regulatorand the corresponding mechanism,opening up of the industry to the newplayers, new intermediaries,liberalisation and globalisation of theindustry perspectives have caught theimagination of everyone.

This has substantially raised theprofile of the industry and increased themindshare of insurance among thegeneral public. There is considerableinterest in the media and industryassociations and groups are excited bythe prospects of the industry as well as agamut of new services that could addvalue to their premium Rupee.

The consumer has been the biggestbeneficiary not only in terms of choices ofproviders and products but also in therange of quality and service. The Indianinsurance industry has beencharacterised by very low penetration.The mindset on insurance and itsbenefits have considerably improved andthe industry appears to be at a take-offstage.

The opening up of intermediationthrough professionalised agents,corporate agents, brokers andbancassurance has dramaticallyimproved the visibility of the insurer andtheir products and services. This coupledwith information technology (IT)facilitation is going to make insuranceavailable at the doorstep of the customeranywhere, anytime. Insurance premiumhas been considered to be high and policyterms and conditions rigid. This has ledto a movement in favour of detariffingand pluralisation of rates and terms,offering customers a diversified menu ofproducts and services.

There has been considerable stress onprofessionalisation, which has generateda host of insurance educationalprogammes including professionalcourses. Interest has also been generated

Mind-Boggling ProspectsH.S.Wadhwa

in areas such as actuarial studies and riskmanagement courses.

However there are grave concernsthat the freedom and opportunities whichare available to the new entrants, canmake them susceptible to take shortcutsand fall for short-term gains. Immediatestress has to be therefore placed on totalprofessionalisation of all the new playersand in their abiding in toto to the letterand spirit of the Regulationsincluding those of the TariffAdvisory Committee (TAC.)

Sharp practices in the areaof pricing and offering ofcommissions etc. are going toerode the credibility and destroythe long-term prospects of theindustry. We acknowledge the

concerns the IRDA is showing in theseareas and would be happy if all playersof the industry join in upholding higheststandards of insurance professionalismand conduct. The primary task of everyplayer is to widen and deepen themarket by attracting new customers andenhancing the loyalty of old customers.This can be achieved by high level ofdynamism and ethical conduct.

As far as National is concerned wehave been on the fast lane in every arearesponding to the initiatives taken by theRegulator and the Government. We havepioneered a series of tie ups starting withleading auto giant Maruti whichtransformed intermediation and hasgiven a new meaning to after sales

service to car owners in auto insurance.In the area of bancassurance the largestnumber of tie-ups have been entered intoby us. Similarly maximum initiative hasbeen shown by us in the recruitment andtraining of agents with as many as 116training centres countrywide. Innovativeproducts like Sampoorana SurakshaBima, a seven in one package, hasreceived enquiries even from abroad.More new products from the National’sSuraksha series are in the pipeline.

Opening up of the insurance industryhas brought about a revolution in the waypeople insure. Simultaneously it hasopened new challenges before both theold and the new players. If the marketis developed properly, the premiumgeneration will be mind boggling.

We are sure that all the players willrise to the occasion and make the Indianinsurance industry grow rapidly andbecome a model for other countries inensuring customer protection as well associal and economic betterment.

The author is Chairman and ManagingDirector, National Insurance CompanyLimited.

Sharp practices in thearea of pricing and

offering of commissionsare going to erode the

credibility and destroy thelong-term prospects of the

industry.



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I still remember the days of early 1990’sclearly, when serious talks were on aboutprivatisation of the insurance industry inIndia. At a time when there were only afew of us left who had had the opportunityof working in a total private environmentprior to 1973, these talks of impendingprivatisation appeared to be more out ofsheer inquisitiveness rather than out of anyreal concern about the welfare of theindustry. Then came the MalhotraCommittee and the rest is history beforeyou.

The insurance industry is not the samenow as it was when the Malhotra Committeewas formed, which was the first positive stepin the direction to invite private initiative ininsurance. Nor will it be the same again atany time in future. The questions that weask ourselves at this stage are, whetherprivatisation has taken the direction that wasintended for it, whether it has done good tothe industry in particular and community atlarge, whether public sector insurers arebenefited or handicapped by suchprivatisation and whether any furtherregulatory steps are to be initiated by theRegulator at this stage.

Privatisation is still in its infancy for usto get an answer to the first question. TheGovernment has considered all aspects ofthe situation before embarking uponprivatisation. Globally, greater competitionhas brought out the best in everycompetitor and we believe that thisgeneralisation would be true ofprivatisation of insurance industry also.Again, it is too early to say anythingsignificant about the impact of privatisationon our industry and our community. Themarket has been used to dealing with publicsector insurers continually for over threedecades and the recent global events onterrorism and spurt in natural calamitieshave impelled a large segment of thecommunity to avail insurance covers.

Gone are the days when insurance wastalked of only to comply with a legalrequirement, or when there was anexternal compulsion from a bank orfinancial institution. Insureds arenowadays better informed and desire to beso. From this point of view alone, I maysay that there could not have been a bettertiming for a larger number of players inthe field.

For most of us in the public sector, it isthe third question that is of greaterrelevance to us. What have we gained fromprivatisation and what have we lost?Competition was existent among the fourmajor players even before privatisation.The public sector insurers are, therefore,not new to competition. Even today, wefind that a public sector underwritercompetes as much with other public sectorunits (PSUs) as with the private players.The addition of a few more insurers in thearena has enlarged the scope for such acompetition. One major gain from theprivatisation for the PSUs would be thechange in their functioning from beingsheer output-oriented to technologyoriented. There has been a tremendoussurge in the inflow of technology. This isalmost certain to benefit the customer bygreater speed of issuing documents andsettling claims.

A second gain could be the change inthe outlook on market segmentation. Allinsurers have started looking keenly at therequirement of the various customergroups so as to coin new schemes to caterto their needs. From making available aselected list of schemes for the public tochoose from, insurers have started probinginto market requirements. The gain,therefore, is the R & D that goes into theefforts.

On the other side, the private playershave shown significant growth of theirportfolios. Growth rate may not be a trueindicator on this, as their opening base isquite small. Nevertheless, every player inthe field has made a significant contribution.I would, however, view this as an opportunity

rather than as a loss to the PSUs for tworeasons. First, it has proved that marketpenetration into unexplored areas is morepossible by PSUs. Second, our country has ageneral insurance potential of over Rupeesone trillion, even according to a veryconservative estimate and the collectiveefforts of all insurers put together hardlysum upto even a small fraction of this. Thecake is very large for the too few insurers toshare.

On the last question, full credit shouldbe given to IRDA for trying to ensure thatthere is no growth of unwanted grasswhere trees are expected to grow.Traditionally, there has been no dearth oflaws, rules and regulations in our country.Effective policing is the requirement of theday. One area where the Regulator shouldbe, and I am sure the Regulator wouldalready have been greatly concerned, is theorderly growth of the industry. It must beensured that in a tariff regime as it standstoday, intermediaries contribute effectivelyto the customer service and not become adevice or tool to illegal rebating of premiumleading to unintended price competition.

The second area of concern for theRegulator would be improving the lot ofpolicyholders and also the building ofsafeguards in the Balance Sheet whichreflect IRDA’s anxiety on this. Thesuccessive Chairmen of IRDA have showngreat resilience in ensuring that there isorderly growth of the industry.

Regulations Good, Policing BetterS. L. Mohan

The author is Chairman and ManagingDirector,The Oriental InsuranceCompany.



From making available aselected list of schemes forthe public to choose from,

insurers have startedprobing into market

requirements. The gain,therefore, is the R & D

that goes into the efforts.

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The years leading up to the opening ofthe insurance market were justifiablyfull of expectations relating to theintroduction of newer practices onproducts, processes, placement andpromotion of insurance precepts andpractices. The opening up of insuranceand the licensing of the new privatecompanies – with or without jointventures – has resulted in a virtualexplosion of ideas. They say “allrevolutions begin in the mind.”

The product range has dramaticallyincreased, not only through theintroduction of more generic versions butalso through more variations and add-ons to the generic versions. Themomentum is only going to pick upfurther pace with the gradualwithdrawal of tariff - allowing theunderwriters to evolve customer specificcovers resulting in buyers getting whatthey want. It is only a natural corollarythat the concomitant processes work tothe facilitation and introduction of newgeneration of products and ideas - IndianIT has specially blossomed at the righttime to let this happen!

The Indian market had never seenthis kind of placement and promotionof insurance products with virtuallyevery technique in the book ofdistribution being employed – be ittraditional mode of one to one selling orburgeoning of channels or through directmarketing, bank assurances, broad

marketing, worksite marketing and soon. The promotion techniques aregetting even more sophisticated andrefined with niche marketing being themantra of the day.

The Indian general insuranceindustry is thus well poised on itsevolutionary journey. The increasingcompetition, declining interest rates,pricing deregulation and an evolvingregulatory frame work are the true aidsand hallmarks of an industry where thesharpest and the keenest will survivemore in the eyes of the customer before

they get caught with the regulators. Thelikely detariffing, which would definitelycatalyse changes in the pricingenvironment, increase in the operatingleverage and re-pricing of investmentportfolios, likely increase in thebusiness sourcing costs and theconsequent and likely decrease in ‘float’availability because of faster claimssettlement due to increasingcompetitive pressures will result in the

The Market SpeaksArun Agarwal

The author is Chief Executive,Cholamandalam MS General InsuranceCompany.

The Market has begun totalk – it is a benefactor to

those who listen and wouldbe a destroyer to those who

ignore it.

industry’s behavioural profile gettingchanged much faster – and the beautyof it all is that it would happen at thebehest of the Market – with bothindustry and the market saluting thesupremacy of the ultimate customer.

It is an important lesson andrecognition in the whole journey of theIndian insurance industry, and perhapsa more pronounced realisation is thefact that the Market has begun to talk– it is a benefactor to those who listenand would be a destroyer to those whoignore it.

There is a more importantrecognition that the market can andshould never, ever, be policed. Theplayers can merely be enabled and madeto conform - to good governance, ethicalstandards, legitimate consumer interestand best of service standards.

It is then that the insurance industrywould subserve its true role - and aidand a helper in the growth anddevelopmental processes of the society.

The upshot will be that the Marketand stakeholders (as opposed to justshareholder’s values as in the West oremployees’ welfare as in the Far East),together, will be richer.



Do our Issue Focus stories make you want to say something too?You too can write in with your views.

Send them to:The Editor, IRDA Journal, Insurance Regulatory and Development Authority, 5-9-58/B, Basheer Bagh, Hyderabad - 500 034.

WHAT DO YOU THINK?

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Staying Power PrimeSandeep BakshiThe Insurance Industry was nationalisedin 1973 and over hundred companies whichexisted prior to nationalisation werecollapsed into four. These companies haveindeed done yeoman service to the Indianinsurance space.

The human capital of the Indianinsurance industry has come to be respectedall over the globe and that is seen in variousinternational assignments where they haveaccredited themselves with aplomb.

The opening up of the sector threeyears ago has seen eight new players comein, each with a strong parentage andhaving financial strength and/or powerfulinternational presence.

The task for the new companies was noteasy as the existing companies had forgedstrong relationships, understood the risks well,had powerful databases, a physical distributionsetup and an agency force which had beenbuilt up over the years.

The new companies had a limiteddistribution and therefore needed the supportof the intermediaries to get technicalevaluations and the databases. The limiteddistribution has also forced them to look atalliances like bancassurance besides focusingon the intermediaries.

Further a specific effort has been madeto make the customers aware of customisedproducts as there is little perceiveddifferentiation in a tariffed product regime.The new companies have used their localand internal linkages, support fromintermediaries, customised products andalliances/bancassurance partners to get ashare in the market which has grown fromfour per cent in 2001-2002 to ten per centin 2002-2003 and about 14 per cent in thefirst half year of 2003-2004.

In spite of the growth in penetration theclient companies continued to haveapprehensions about the ability of the newplayers to pay large claims. While thesecompanies had been making a case with theirability based on strong reinsurancearrangements, this was not getting acceptedwithout being tested. The last six months havebeen very eventful in this regard as some ofthe largest explosion, Fire and Engineeringclaims have happened in risks being lead bythe new players. The prompt and efficientsettlement has in fact built a huge credibility

for the new players regarding their claimsettlement ability.

One of the expectations which remainsunfulfilled in spite of the eight new playersis that of developing the personal lines.Years of experience have demonstratedthat the low cost policies like householderspolicies etc. cannot be sold through thephysical distribution channel as the frictioncost viz. acquisition cost and operations costin the policy issuance eat into a large chunkof the premium. The answer to this lies intechnology solutions.

India’s demographic profile is movingtowards a younger population which isextremely comfortable with the virtualtechnology platform. One believes that arobust virtual platform with the ability foronline policy issuance and secure paymentgateway is the way forward for the large

scale development of the personal linesproducts. The success of bank ATMs whichhas increased the branch capacity tenfoldand increased the web trading of sharesgives us optimism that efficient use oftechnology could lead to a quantum growthin the personal lines.

Tariff was introduced in the Indianmarket to achieve certain core objectivesof stability and managing policyholder’sinterest by ensuring that the companiesremain robust. The purpose has beenserved as we have an industry in a soundstate of health. The time is probablyappropriate to look at detariffing as theexisting public sector companies have astrong war chest on account of the gains intheir investment books and data profileswhile most of the new companies on theother hand have international exposure inoperating in a detariffed regime. Whilethe view may sound radical, detariffingalong with the freeing up of brokers’/agencyremuneration is the panacea for this sector.

These steps could result in an initial ratecutting and some losses but in the longrun it would lead to optimum pricing ofrisks and the companies emergingstronger.

Liberalisation has produced differentresults in different sectors and it remainsto be seen what the outcome in this sectorwould be. For example, after ten years ofliberalisation the penetration of new/multinational banks/private banks is about25 per cent while the penetration of thenew players in mutual funds is over 70 percent. However strong growth has beenrecorded in both the sectors and thebiggest beneficiary has been the customer.

Whatever be the scenario, thedistribution channel both physical andvirtual is to play a key role in thedevelopment of the sector. The insurancedistribution channel is offering hugeopportunities in the Rs.15,000 croresbusiness which is continuously recordinga double digit growth. We expect globalmajors in broking to set up strongdistribution platforms. Over the nextcouple of years the companies areexpected to become carriers of capital andrisk with physical and virtual channelscontributing to the business inflows.

The industry is blessed to have aRegulator which is managing thechallenges in the sector arising out ofopening up to private sector, changes intariffed regime, intermediaries,policyholders’ interest, competition and thesocial responsibility with great maturity.In addition, platforms and industry forumshave been set up for the sectors. Onebelieves that the right business conductand collaboration in the area of databases,negative list, frauds and the like will be ofimmense benefit to all the participants.



One of the expectationswhich remains unfulfilledin spite of the eight new

players is that of developingthe personal lines.

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The insurance sector in India has atotal investment corpus of about Rs.40,000crores. Insurance is largely seen as aprotection product and most of the offeringsare believed to be commoditised in a tariffedregime. New products in the area ofliabilities, credit insurance, performanceguarantee etc. are expected to takeinsurance to the platform of businessfacilitation. This, coupled with the growthin the personal lines where the retentionsare high, is expected to result in a sharp

The author is Managing Director andCEO, ICICI Lombard General InsuranceCompany.

increase in the investment corpus. Thearea of investment will only grow in thefuture.

We have seen the sector attracting alot of media attention. The gross writtenpremium (GWP) numbers which arereported so regularly for the private sectorhave little relevance as the building up of aninsurance business is like a marathon andwe are all in the first few laps of that race.The challenge for all the participants is tomaintain quality growth without fatiguing.

The insurance industry has undergonean extensive change in the last threeyears with the entry of some 20 newcompanies in the life and generalinsurance sectors. The change has beensmooth, courtesy of the regulator – IRDA.

The policies have been fair to all theparties and whatever apprehensionswere there was resolved throughconstant dialogue and deliberations. Inthe past three years, almost all

companies after receiving the licenseshave been active in the market andtrying to capture a sizable share of theinsurance pie.

If we trace the events back, some ofthe significant regulations introducedby IRDA are – quick implementation ofinsurance regulations, speedy, simpleand non-controversial licensingformalities, compulsory training forbecoming an agent, and opening of newchannels of distribution for insuranceproducts like agents, banks, and, themost important of all, heralding theentry of brokers in the market. Thesemeasures had a catalytic effect to thepenetration of the insurance marketbesides increasing the generalawareness about insurance.

With the major issues concerning theinsurance industry having beenaddressed by a series of regulations overthe past three years, IRDA will have amajor role to play in the coming years.Major issues, which need to beaddressed, are the smooth transition ofthe market to a detariffed scenario.

With most of the companies in theirthird year of operations, it will takeanother two years to actually harvestthe fruits of liberalisation. Most of thenew players may not have the might andlearnings of the public sector insurancecompanies. However, the new players

A Smooth Journey...Sam Ghosh

The author is CEO, Bajaj AllianzGeneral Insurance Company.

in the industry have learnt to graduallybe on their feet. On the life and non-lifesides the new players have garneredover 10 per cent market share, which issignificant considering that in some ofthe mature markets the time taken toachieve this was well over five years.

The Rs.14,000 crore generalinsurance market has witnessed somechanges in procedures and systemshitherto unheard of in the insuranceindustry. The entry of new players hadits spillover effects in other sectors likethis industry and has given a fillip tothe employment market. Suddenly thejob market looked up after years ofdownturn. The industry has created newemployment opportunities in both theskilled and the unskilled sector.Professionals like lawyers and charteredaccountants have taken to specialisedskills in insurance field. Actuarialpractice, an important insuranceprofession, has a lot of new avenues inthe liberalised environment.

Overall we are thankful that themarket has opened up quickly and in anorderly manner thanks to the Regulatorand his team. We wish them all the bestfor the future.

Let me conclude by saying that thesector is extremely exciting for all theplayers and we are fortunate to be a part ofthis phase. The opportunities are there forall the participants and we can justifiablylook to the future with a degree ofoptimism.



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DetariffAntony JacobThe Indian Insurance Industry hasgrown tremendously since liberalisationin 2000. The multi-channel distributionpattern to improve insurancepenetration, increased focus oncustomer service and innovative productranges to cater to the unique needs ofdifferent segments of the society haveall contributed to the industry’s currentlevels of growth.

This growth has been aided by theunstinting support of the Governmentand the IRDA. Last year’s increase inrates under the Motor insurance tarifffollowed by the introduction of thebroker and corporate agent regulationswere significant steps towardsstreamlining the industry.

With a steady growth record over thepast few years, the outlook of the Indianinsurance industry is extremelypositive. There is scope for substantialgrowth in the industry over the next fiveyears, as illustrated below. Within this,health will be a major growth area,besides the small business segment. Inessence, Retail will become ‘Red Hot’ forinsurers like Royal Sundaram.

One major area of focus for the futureis the proposed removal of tariff. We seethe transition being from a tariff and‘rate card’ environment to that of soundtechnical and differential pricingmodels for the vast range of generalinsurance products designed for specificcustomer segments, in line with globaldeveloped insurance markets.

Over the past few years, it isheartening to note that the industry hastaken several strides towards tappingthe vast potential offered by the one

The author is Deputy Managing Director,Royal Sundaram Alliance InsuranceCompany.

billion population in the country.Insurance companies - especially thosein the general insurance sector – havemade significant progress at improvingthe penetration of insurance with theirmulti-channel distribution of productsand services. Royal Sundaram’sdistribution strategy - through strongbancassurance partnerships, brokersand agents has witnessed theimpressive growth of its customer baseto over 4,20,000. As in other developedinsurance markets, intermediaries suchas banks, agents and brokers will soonbecome drivers of innovative productsand contracts.

The development of the brokerintermediary channel will contributesignificantly to improvingprofessionalism within the industry,besides catering to the need for properrisk management. While brokers workingon behalf of the insurer helpcustomisation of insurance products andpromote better risk managementpractices, agents working on behalf of theinsured enable the client to receive thebest advice on the most suitableinsurance products. Bancassurance hasalso emerged as a key distributionchannel for both life and non-lifeinsurance.

Relationship management hasemerged a clear area of focus for theindustry, which is now looking atcustomer retention as a sure steptowards building a loyal customer base.At Royal Sundaram, excellence inrelationship management extends notonly to the customer but also to the routeto the customer, comprising thedistribution and marketing network.

As the overallrange of generalinsurance productsand solutions tendto closely convergedue to stiffcompetition in theindustry, the soled i s t i n g u i s h i n gfactor for themarket leaderwould be excellencein customer service.Royal Sundaram

believes that excellence in customerservice delivery is an integralcomponent in the achievement ofsustainable competitive advantage.

Accessibility to the customerthrough toll free lines, simple policywordings for better understanding of theproduct, easier buying procedures andeffective claims management are someprerequisites to reach general insuranceto India’s potential customers. Thecurrent emphasis should be on thethriving retail and small businesssegment, which remains largelyuntapped.

Given the large rural spread in India,insurance for the rural and socialsegments is another focus area. Specialfeatures such as simple buyingprocedures, easy modes of remittance ofthe affordable premiums, high level ofservice standards, regular visits bycompany officials for further guidance,speedy and fair settlement of claims andperiodical review of operating systems,as with Royal Sundaram go a long way intaking insurance to this sector.

We are pleased with the directionthe industry is taking. There are anumber of challenges that lie ahead -including the removal of tariff - but weare confident that growth can besustained. With support and guidancefrom an able regulator, the future of theinsurance industry in India is, I feel,extremely positive with several moremilestones to cross!



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Industry Growth Forecast

I would like to explain the broker’sperspective on the progress made toliberalise the industry and, inparticular, to comment on some of theissues that have a direct bearing on thebrokers’ contribution to this initiative.

In the first instance, I would liketo preface these comments by remindingthe reader that, brokers have only beenin existence for approximately12 months, a very short time frame tobe able to draw any meaningfulconclusions, but we can take a snapshotof what has transpired to dateand perhaps comment on somedirectional changes that may beconsidered to optimise the brokerchannel to enhance choice andprofessional service to clients.

It would be useful to consider theintention of introducing a multi-channeled delivery system whichincludes a prominent role forprofessional insurance brokers.

In many developed markets, thepercentage of insurance business,particularly in the non-life segment,handled by brokers represents a highproportion of the total, and there arestatistics to indicate that the growthfactor in such markets are superior tothose where brokers do not have aprominent presence.

This indicates that brokers have avaluable role to play in the developmentof the insurance industry and thedistribution of products and services tovarious industry segments and socio-economic groups. The healthycompetition that is generated isgenerally beneficial to the insurancebuyer and the industry as a whole. It isalso an accepted fact that the role andfunction of the broker generally takesover some of the functions currentlyperformed by insurers, thereby reducingthe risk carrier’s acquisition costs.

Having said all this, there isfrequently a question that is posed, asto the real ‘added value’ that a brokercan bring in to a tariff dominatedmarket. In the first instance, I wouldmention that there is a vast difference

Risk Carrier as CompetitorNeil R.Mathews

in the professional services provided bythe broker as compared to an agent inthe critical areas of market selection,risk management, portfoliomanagement, and claims services.

Professional brokers take a broadview of their role, reaching well beyondtransactional intermediation of riskinto the area of strategic risk consulting,which involves a review of the full rangeof risks to which business is exposedi.e. property/fire protection, health andsafety, environmental, businesscontinuity and technology risk, legal,financial, etc.

Through the process of riskidentification and assessment, thebroker assists the client to develop risk

control strategies which are designed tolower their overall costs of financingthese risks. The process is intensive andhelps to raise the standards of goodgovernance and risk awareness withinthe client organisation.

The ability of a broker to deliver allof these value-added services isdependant largely on his ability toderive revenue at a level consistent withbroker remuneration in other parts ofthe world and be able to compete fairlyand equitably with other channel serviceproviders as well as the direct salesnetworks of insurers. There is thereforea prerequisite for a level playing fieldwhere all intermediary service providerscan compete in the market place todeliver their services.

The current practice of directdiscounts to clients being offeredofficially in the form of a five per centdiscount on major tariff classes and toa greater extent the unofficialdiscounting that is indulged in bycertain insurers with scant regard to theRegulations, not to mention businessethics and good governance, is a directand serious impediment in the path ofdeveloping a comprehensive and efficientbroker delivery channel.

There are of course, matters in thearea of ethical business practices andprofessionalism that need to be addressedby the broker community itself and theseare currently being tackled by the brokers’representative body, the InsuranceBrokers Association of India (IBAI).Equally it is felt that the IRDA asregulatory body needs to pay urgentattention to the activities of some of therisk carriers on the issue of rebating.

In the acutely price sensitiveenvironment that we find ourselvespromoting and successfully selling thevalue proposition of a professionalbrokerage service is, to say the least,challenging. When this is compoundedby some insurers offering illegalincentives, in certain cases as much as22.5 per cent to clients direct, theposition for brokers becomes almostuntenable. It is ironic that in the processof liberalising the market and creatingfair competition, we find ourselves in theinvidious position of our erstwhile andfuture business partners – the insurers– taking the role of our biggestcompetitors in their unprincipledscramble to acquire market share.

In conclusion, I would like to sharewith the readers my vision that despitethe current challenges and difficulttrading conditions, India will become amajor broker driven market which willnot only develop the insurance sector ata significant rate but also helpdistribute products and services widelyamongst all sectors of the communitywithin a finite period of time.

The author is Chief Executive Officer, AonGlobal Insurance Services Pvt.Ltd.

Through riskidentification and

assessment, the brokerassists the client todevelop risk controlstrategies which are

designed to lower theiroverall costs of financing

these risks.



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Evolution with ModerationBharat J. BodaThe presence of intermediaries other thanagents is of recent origin in the Indianmarket. Without exception each type ofintermediary has been allowed to come intoexistence, licensed and encouraged to findspace for their type of business in theexisting insurer driven market.

The types of intermediaries areenumerated below:

■ Agents - i. Individual for life, general orboth; ii. corporate for life, general orboth.

■ Brokers - i. direct for life, general orboth; ii. reinsurance for life, generalor both.There were no brokers previously.

■ Bancassurance - a referral facilityprovided by banks to insurers to theirown customers for which the banksearn a fee.

■ Consultants are recognised by theregulations but not regulated. They areappointed by the client or by the insurerand are no different than they alwayswere. They tend to be more visible nowdue to emergence of the otherintermediaries as enumerated above.

The rationale in throwing open theseopportunities in intermediation was:

■ penetration and growth■ improved efficiency in purchase of

insurance■ increased awareness of risk issues and

insuranceNationalisation in 1972 emphasised the

need to take the message of insurance tothe common man. Liberalisation in 1999,27 years later, is repeating the samemessage. Distribution is considered a keyarea of attention now as againstconsolidation 27 years ago.

The new regulatory environment isgeared to move towards solvency basedregulation of insurers rather thanmanaging their solvency through markettariff and directed reinsurance. The IndiaMotor Tariff is under review by a committeeto detariff Own Damage (OD) premiumsby year 2005. There can be potentially amovement towards partial, if not full,detariffing, to enhance competitionbetween insurers. This can be expected tobring improved values of risk bearing frominsurers to their customers. Intermediaries

with professional expertise will mature inthat situation and enhance the quality ofinsurance purchase and claim service.

The IRDA has been issuing frequentnotifications regarding the levels ofcommission payable to the brokers and agents.There is also disparity between the levels ofcommission and it has also been wronglylinked with the level of paid-up capital of thecorporate client. Thus, it would be observedthat the Indian market is still feeling its wayon the correctness of its rules of the game.

Intermediaries have come into existence.Uncertainty prevails on the exact role theyhave to play and the level of justifiableremuneration. This has probably been themain cause of slow progress in developmentof broking activities. Added to this, the stillburning issue of the five per cent Special

Discount also needs to be quickly resolved.

Broadly there are three sets ofintermediaries - those that represent theinsurers, those that work for clients andthose that provide consulting.

Those that represent insurers have theirrole cut out, responsibilities taken care ofbut restricted to the single insurer option ina competitive situation.

Those that work for clients have togain client acceptance, hold themselvesresponsible for their actions and workwith a multiple insurer option in acompetitive situation.

The consultant can influence the workand responsibilities of insurers and brokers.

The Indian client will need tounderstand the above perspectives beforehe can actively and efficiently start usingintermediaries. This process requiresattention by all concerned to make theIndian intermediary accepted in theinsurance buying process. This is part of

market evolution and if properly catalysedcan enable earlier maturity of the Indianintermediary.

As things are it is not necessary for anIndian broker to go in for foreigncollaboration particularly for directbusiness. He can use his own expertise andexperience in developing the direct localbusiness. Joint venture in insurancecompanies was introduced after a great dealof thought and consideration. The equityparticipation of the Indian and foreignpromoters are allowed to equalise at 26 percent after ten years of proven businessresults.

Similar thought and considerationappear to have prevailed in respect ofbrokers as well. There is an exception inthat reinsurance broking can be transactedby brokers based overseas without havingto be licensed in India. There are fourforeign brokers at present in joint venturesin India. Many others operate asreinsurance brokers from outside Indiathough not licensed by IRDA. The interfaceof the foreign broker with the Indianinsurance market also requires a clearerenunciation.

There is a perception that the Indianinsurance market has not added to itspremium. There has been diversion ofbusiness from public sector insurers to theprivate insurers. The ground reality is thatpublic sector insurers have to support andcome to terms with intermediaries – bothagents and brokers. The private sectorrequire to build a critical mass in premiumand they are aggressive directly andthrough their agents irrespective of theservices of a broker.

The broker is portrayed as harmful tohealthy practice in the market. On thecontrary, with the in different approach of

The interface of theforeign broker with the

Indian insurancemarket also requires a

clearer enunciation.



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public sector insurers on one side andaggression of private insurers on the other,the broker is harmed against in his practiceas an intermediary and not allowed ahealthy opportunity. These evidence thatthere can be hiccups as we go forward butit should be possible to attend them fullyand emerge as successful intermediaries.

Insurers, particularly private insurers,need to reach across the country. Byallowing brokers to relate with individualsand firms in different towns and cities, a

wider and immediate distribution networkis made possible. Such network can bemade possible in two ways – (1) federatethe brokers as a mutual support systemand (2) create a network of sub-brokers.While the first may not be much of an issuefor the Regulations, it is limited in scope.The latter of course will require a furtherliberalisation of broker Regulations. Thisopens up greater immediate access tobuyers across the country and is thereforepresented as a strong recommendation tothe IRDA for its consideration.

‘Regulator duality needs to be addressed’Three years ofliberalisation haveseen significantchanges in the Indianinsurance industry.Eight private sectorinsurers haveentered the marketin the non-life side

and the competition is heating-up.

In keeping with the tenets ofliberalisation, the market is expected tobecome a completely non-tariff marketwithin a time frame to be set by theinsurance Regulator. As of now tariffproducts constitute an estimated 70 percent of the volume of the non-life insurancebusiness in India.

Prior to liberalisation, the last majorstep in de-tariffing was taken in 1994 whenMarine Cargo insurance was de-tariffed.This was when the market was under theerstwhile oligopolistic setup where therewere only four public sector insurers. Theonly major class to be de-tariffed sinceliberalisation is the insurance of mega risks(Fire and Engineering) with thresholdlimits of Rs.10,000 crores sum insured orRs.1,054 crores probable maximum loss(PML). This was done in December 1999.

Resistance to detariffing – the cradle babysyndrome?

To a large extent, resistance to de-tariffing appears to be from the insurersthemselves. A case in point is the transitand allied insurances of tea, coffee,

K. K. Srinivasancardamom and rubber. This class of businesswas not included when the Marine Cargobusiness was de-tariffed in 1994 and hencecontinues to be under tariff. The totalestimated volume of business of this class isless than Rs.20 crores. The Workmen’sCompensation (Insurance) tariff is anotherexample. The reason for this kind ofresistance is perhaps that tariffs give assuredpremiums to insurers and takes away theirdrudgery of pricing risks more scientifically.

With this kind of resistance, the marketcan sooner or later expect to see more activeintervention of the insurance Regulator inthe de-tariffing process.

In 2002, IRDA appointed a committeeunder the chairmanship of Justice T. N. C.Rangarajan to examine the matter of de-tariffing the Own Damage (OD) portion ofMotor insurance. Based on therecommendations of the JusticeRangarajan Committee, IRDA hasappointed a committee under thechairmanship of Mr.S.V.Mony, formerChairman of General InsuranceCorporation of India (GIC) and currentlyVice-Chairman of AMP Sanmar LifeInsurance Company Limited, to preparethe roadmap for de-tariffing the OD portioneffective from April 1, 2005.

Stunted product developmentSince customisation is difficult in a tariff

regime, the loser in a tariff market is thecustomer who has to be content, largely,with plain-vanilla tariff products. In otherwords, product innovation and productdevelopment are stunted in a tariff market.

The author is Secretary, Tariff AdvisoryCommittee (TAC). The views expressedhere are his own.

The author is President, InsuranceBrokers Association of India andChairman and Managing Director,J. B. Boda and Company Ltd.

World markets witness considerableshare of insurance placements done bybrokers as amongst all forms ofintermediaries. This is clearly an evidenceof the direction for the Indian market too!

Future role of TACIndia is perhaps the only market in the

world where two statutory regulators(namely, IRDA and Tariff AdvisoryCommittee (TAC)) in insurance have beenallowed to co-exist. Though IRDA is thesupreme Regulator and is mandated tosupervise the functioning of TAC, thisduality needs to be addressed. There are afew other tariff markets in the world butin these markets tariff administration is atbest a departmental activity of theinsurance Regulator.

In tune with the changes in theeconomic environment, TAC is in theprocess of re-aligning itself as the datarepository of the insurance industry. In thenon-life area, a beginning has been madein computerising the data collected frominsurers. In the life area, a computeriseddatabase on ‘declined lives’ for the exclusiveuse of life insurers has been set up.

TAC is also expected to assist IRDA inoff-site and on-site supervision of insurers.On-site inspection of exempted insurers forthe year 2002, has already been completed.TAC is also actively involved with theBureau of Indian Standards in evolvingand updating safety standards. Forcompetency enhancement in datamanagement, actuarial and rate-settingareas, TAC has recently entered in to anagreement with the World Bank. In short,TAC is gearing to face the futurechallenges.



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The opening up of the insurance sectorhas undoubtedly been a good move on thepart of the Government and once thenecessary legislation was approved byParliament, the change from a monopolysystem into a free enterprise system wasmade as smooth as possible by the pragmaticand transparent approach of the IRDA.

Three years have passed since the firstlicense was granted and specifically withregard to non-life insurance with which Ihave greater involvement, the questions Iask myself are -

Is there greater consumer awareness?Have any benefits of the opening upreached the common man?Has penetration improved?and my conclusions are as follows:

Whilst the IRDA has initiated acampaign for awareness through massmedia and the insurers have expendedlavish budgets on trying to create their ownbrand names, the awareness in real termshas not markedly risen. No doubt there is agreater general awareness that there aremore players in the market offering agreater variety of products but that has so

Catch’em YoungFali A. Poncha

far not led to a micro level awareness aboutinsurance, its benefits and the need forvarious covers that could reasonablyadequately counter misfortunes striking anaverage family.Why is this so?

It is so because the insurers and theirfield staff have largely targeted corporatesas the most cost effective way of improvingtheir bottom line. These being commercialorganisations, one cannot not blame themfor doing so but at the same time one cansay that they are missing the woods for thetrees. Ultimately, the real potential forgrowth and penetration can only come aboutif the purchasing base is substantiallywidened and this can only happen whenserious efforts on the part of insurers aredirected accordingly.

In my view, the awareness can best be

brought about through practical informationon insurance being imparted at thesecondary school level. This should be animportant part of broad based education thateventually would go a long way in preparingevery individual to manage in future his/her own personal risks. As they say, "thechild is the father of the man".

Of course, the next hurdle would be howto go about it because insurance still largelycontinues to be bought and not sold. This iseven more so relating to personal linesinsurance. By and large the intermediary,like the insurer, is only ready to invest histime and effort on large corporate accountsto maximise his ratio of earnings to timeand effort.

Perhaps, one way to address this is forthe Regulator to permit higher levels ofremuneration to agents and brokers, sayanything up to the maximum of 30 per centallowed under the Insurance Act for non-life and selected personal lines non tariffproducts. For life insurance, the first yearcommission is, although not as attractive asin many other countries, still reasonably

attractive to sales persons as it additionallygenerates recurring income for many years.

Another suggestion worth consideringis whether personal lines insurance coverscould allow for a return of a percentage ofthe premium (something in the nature of aprofit commission) if say for five years ofcontinuous coverage with the same insurer,there has been no claim.

I make this suggestion because one ofthe typical drawbacks, one may even call ita mental block, is that unlike in the case oflife insurance, the prospective buyer of non-life insurance if he has made no claims, feelsdisadvantaged as he has only paid outpremiums without getting any benefit back.As an insurance person, I do not for amoment suggest that this expectation isjustified but the ground reality is that itexists. Industrial risks are eligible fordiscounted premiums for good claimsexperience so savings linked products is anaccepted concept.

One other area that needs to beseriously addressed is for insurers tostreamline their claims service. Claims oflarge corporates always get priority inprocessing over individual claims Thosewho have had an unsatisfactory experience,justified or not, talk of their woes to as manyof their friends and colleagues in office asthey can, creating a cascade effect.

The fact that the insured has recourseto consumer courts and ombudsmen is oflittle solace to an average individual insuredwho is ill equipped to get a quick resolutionof his problems. What is required is anoverall attitudinal change. Perhaps,insurers could consider setting upAssistance Cells for their insureds. Thiswould benefit the PSU insurers who havelarge surplus of manpower resources and ifsuch cells are dedicated to make the difficultpath of the insured easier, this alone couldbring about a greater spread of awarenesstranslating into satisfied customers andincreased purchase of insurance.Additionally, an in-depth review by theIRDA of the Policyholders’ ProtectionRegulations needs to be considered.

Some or all of these, suggestions takenas a package could bring about a win-winsituation for all concerned interests.

The author is Chairman, InternationalReinsurance and Insurance ConsultancyServices Pvt. Ltd.

Awareness can best bebrought about throughpractical information on

insurance being imparted atthe secondary school level.

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KEEPING COUNT


Accounting Non-StandardsP. S. Prabhakar

IRDA’s Regulations appear to haveapproached the applicability of AccountingStandards to the insurance companiesrather casually. Except for an ornamentalmention that the Accounting Standardsissued by the Institute of CharteredAccountants of India (ICAI) would beapplicable to insurance companies, save aspecific few, there has been hardly anattempt to import this all-important conceptseriously into the Regulations.

To study only a few points on this, let ustake the applicability of AS-3 (Cash FlowStatements). Realising fully that the ‘soft’ aspectsof accounting, which include estimations andprovisions in a mega scale in an insurancecompany’s accounting, the IRDA’s Regulationsvery specifically provided that the Cash Flowstatements will have to be prepared only underthe Direct method. None of the insurancecompanies listened in the first year. We stillhave to wait and see what they are up to intheir second year. An industry that is largelydealing with public funds will have to come toterms with the regulatory aspects of accountingand cannot do only what is convenient to itself.

In AS-17 (Segment Reporting), forreasons best known to the Authority, thedefinition of ‘Segment’ itself has beentruncated to mean only portfoliosegmentation. As the business is done inthe whole nation, it may perhaps benecessary to include the geographicalsegments also.

As there are Regulations to mandatepresence of the companies in social / ruralsectors also, it will only be fair that theconcept of Segmental Reporting is extendedsectorally also. After all, the basic premiseson which the concept of accountingstandards sits are transparency anddisclosure. With so much public funds at‘risk’, is all this asking for too much?

In fact, IRDA should insist on a separatecomprehensive Accounting Standards forthe insurance industry. With so muchuniqueness, this industry certainlydeserves one. Perhaps a complete reviewby an expert study group, jointly sponsoredby the IRDA and the ICAI, could beconstituted to evolve Accounting Standardsfor general insurance industry to be mademandatory for all companies.

At the cost of sounding uncharitable, ithas to be mentioned that the ICAI’sguidance note on ‘Audit of GeneralInsurance Companies’ borders onmediocrity.

Audit Requirements

Originally in the Insurance Act, mentionabout Audit was a restricted one. Sec. 12 ofthe Insurance Act which was titled ‘Audit’,talked about audit of non-corporateinsurers only. (Sec. 11 was on Accounts).Obviously, the Insurance Act intended,wisely though, that the provisions ofCompanies Act were adequate enough forthe industry’s statutory audit requirements.

Upon the nationalisation of lifeinsurance business and on the formationof Life Insurance Corporation of India(LIC), the audit of the corporation came tobe governed under Sec. 25 of the LIC Act.In 1971, when the general insurancebusiness was nationalised, the GeneralInsurance (Business Nationalisation) Acthad no reference on this issue.

However, since all the generalinsurance companies came under publicsector, Sec. 619 of the Companies Act cameto govern the statutory auditrequirements. Besides this, theComptroller and Auditor General (CAG)has been having its own inspections, whichare more of ‘propriety audits’ in nature.

IRDA Act inserted Sec.114A in theInsurance Act, which facilitates issuanceof various regulations by IRDA. This sectiongrants powers to IRDA to make regulationson various issues and methodically goessection by section of the Insurance Act, inseriatim, where all regulations thought ofhad their spaces respectively.

Sec.114A (2) (f) mentioned “thepreparation of balance sheet, profit and lossaccount and a separate account of receiptsand payments and revenue account undersub-section (1A) of section 11”. This sub-section does not talk about audit at all.However, the regulation on “Preparationof Financial Statements and Auditor’sReport of Insurance Companies” not onlyhas the audit in its very name but also inthe contents. But, the legal sanction forregulating audit function was perceptiblymissing.

While this is the statutory position, inthe current scenario where privateinsurers have begun operating, theappointment of auditors appears to havecome within the ambit of functions of theIRDA, in terms of the Regulations referredabove. (Here, the IRDA Act does not makeany distinction between public sector andprivate sector insurance companies.)

Accordingly, IRDA has started compiling apanel of chartered accountants and for the

The author, who used to work with thenationalised general insurance industry,is a practicing Chartered Accountant. Inthis series he deals with various aspects offinancial reporting, disclosure and auditrequirements of insurance companies.

purpose has also prescribed certain exactingparameters for such empanelment. In theparameters only the longevity, size etc. of afirm seem to be given importance rather thanthe specialised qualifications in the field or thedomain expertise of the partners. This is rathersad.

An industry that is so unique andimportant cannot be ‘audited’ casually andgenerally, when specialisation is the orderof the day.

Another question that is generallyasked is, in as much as the StatutoryAuditors of a company are accountable toand only to the shareholders of thecompany, who alone should be theappointing authority, why is the Regulator,who is primarily the custodian of thepolicyholders, should have anything to dowith the same. One cannot rule thequestion out as devoid of merits.

In the humble opinion of the author,the IRDA should perhaps leave theappointment of statutory auditors to therespective companies’ general bodies butarm itself with the responsibility and theauthority to conduct all encompassing,comprehensive inspections (like the RBIdoes for all banks) for all insurancecompanies on a routine basis, with termsof reference focusing on policyholders’interests. For this purpose, the panelcreated already, which also should beaugmented constantly, could be made useof. ICAI’s newly introduced postqualification course on insurance can beperhaps thought of as a preferredqualification to get empanelled. This way,IRDA can and will ensure quality inspectionson matters of importance like InvestmentRegulations, cost control, Treaty Quarterlyaccounts checking, RI programmesverification etc. on a thorough basis. Whilethe auditors would be reporting to IRDA,the structured fees can be made payableby the respective insurance companies.This, of course, will require amendment toIRDA Act.

When such rigorous IRDA inspectionsare introduced as a routine, the CAG auditspresently in vogue for PSU insurers can bedispensed with.

ROUND UP


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National Re's Summit !The General Insurance Corporation of India (GIC) held a two day IndianInsurers' Summit on October 19 and 20 in Goa.

Mr. C. S. Rao, Chairman, IRDA, speaks at the Indian Insurers' Summit. Also in the picture areMr. P. B. Ramanujam, Managing Director, GIC and Mr. P.C. Ghosh, Chairman, GIC.

NEWS BRIEFS


The insurance market Lloyd’s has announced that it will move to annual accountingfor its statutory reporting by adopting UK Generally Accepted Accounting Principles(GAAP) from January 1, 2005.

After this initial move Lloyd’s will adopt International Accounting Standards (IAS)when there is more clarity on the proposed standard on accounting for insuranceconracts says a press release from Lloyd’s which adds that this should minimisethe impact to the Lloyd’s market in terms of costs and new systems.

The move is in line with the commitment by the Lloyd’s Franchise Board for syndicateaccounts to be more transparent and comparable with the accounts of their globalindustry peer group.

Lloyd’s has been hitherto following a three year accounting period and this move isexpected to create more transparency and comparability with its peers.

Lloyd’s moves to annual accounting

General Re, a subsidiary of Berkshire Hathaway Inc., announced that the ChinaInsurance Regulatory Commission (CIRC) has invited the company to apply for anational reinsurance license to conduct both life and property/casualty businessthroughout China.

It also announced that Chairman and CEO Mr. Joseph P. Brandon, has been“presented with the prestigious Marco Polo Award, which is given to thoseindividuals and organisations who have made contributions to the Sino-U.S.exchange of talent and expertise.”

The announcement noted that Gen Re has been active throughout Asia for manyyears, with offices in Beijing, Hong Kong, Shanghai, Taipei, Seoul, Singapore andTokyo. It has also been doing business in China as an offshore reinsurer workingwith all of the leading Chinese insurers. “However, once Gen Re has a nationalreinsurance license in China, the Company will be able to accept premiums inRenminbi, which will enable more efficient and convenient transactions for clientsthroughout the region,” said the bulletin.

Gen Re to apply for China license

An Australian federal government plan toease the indemnity insurance crisis wouldrequire doctors, lawyers and otherprofessionals to disclose more informationabout their potential negligence.The Australian Financial Review said thegovernment had acceptedrecommendations from its own reviewpanel which was set up in response to theHIH Insurance collapse, rise in litigationand September 11 terrorist attacks.Insurers would not have to pay claimsby professionals who failed to keep theminformed of circumstances that mightgive rise to a claim, the Review said.But insurance companies would have togive professionals more time to revealpotential problems - even after theirinsurance policies expired.“While the change has long been soughtby the insurance industry, thegovernment also plans to force insurancecompanies to give professionals a 45-day `grace period’ in which they candisclose potential problems after theirinsurance expires,” the newspaper said.Assistant Treasurer Ms. Helen Coonansaid the government was trying tobalance the interests of insurers,professionals and anyone who might relyon indemnity policies for compensation.

Australia wantsmore disclosure

Motordata Research ConsortiumSdn Bhd (MRC) said 38 insurancecompanies have complied with BankNegara Malaysia’s (BNM) directive thatall vehicle claims use a standardiseddatabase for motor parts prices andlabour charges when estimating repaircost. There are 40 insurance companiesat present.At a signing ceremony between MRCand 38 chief executive officers of GeneralInsurance Association of Malaysia’s(PIAM) members, its chief operatingofficer, Mr. Khaeruddin Sudharmin,

Common motor cost database for Malaysiasaid BNM had instructed insurancecompanies to use the database back inOctober 2001.He said the success and adoption of thisnational initiative would benefit allindustries and individuals associatedwith motor insurance claims, and instilgreater professionalism, transparencyand consistency in motor insuranceclaims servicing.The slow implementation prompted thecentral bank to set June 30, 2003 for 60per cent usage and end-2003 for fullusage.

Mr. Khaeruddin said that at present,about 12,800 claims were referred toMRC each month, representing about85 per cent of the total number of claimsfiled by insurance companies.“Currently, our database has prices of272 derivatives of 14 different vehiclemakes, which covers more than 89.7 percent (total industry volume) of privatevehicles on Malaysian roads,” he said.On the processing fee payable to MRCby insurance companies, Mr.Khaeruddin said it had been lowered toRM10 per claim, effective August 1,2003, from the RM20 per claim agreedin 1997.

NEWS BRIEFS


The Monetary Authority of Singapore(MAS) has decided for now not to allowsecond-hand insurance policies to be soldto small investors because of the complexityand risks of these products.In a consultation paper, the central banksaid it favours restricting the distributionof these instruments - known as tradedendowment and traded life policies (TEP/TLPs) - to non-retail investors. These aredefined by MAS as investors with personalassets of more than S$2 million or incomesof not less than S$3,00,000 in the past 12months, or corporations with net assets ofat least S$10 million.‘In line with our disclosure-basedphilosophy, MAS prefers not to be

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Seven of Japan’s nine largest nonlifeinsurers reported an increase in netprofits, as elevated stock prices helpedcover for limping sales.

Net premium — the equivalent of sales— inched up just 3.8 percent on a year-on-year basis to 3.5 trillion Yen, ascompetition whittled away prices.

High exposure to stock prices worked innon-life insurers’ favour this year,elevating corporate worth. Unrealisedgains on domestic stocks shot up 65 percent from the end of March to 3.5 trillionYen.

Meanwhile, unloading of stockholdingsand bonds by major players helped rakein a total 201.9 billion yen, up fivepercent from a year earlier.

Insurers’ massive stockholdings keepcompanies at the mercy of stock prices.Companies learned this to their cost lastyear, when they wrote off 75.8 billion Yenin one-off costs for stocks whose priceshad plunged 30 percent or more from theirbook prices.

This year, that cost was just 17.4billion Yen.

Net profit growth was especiallyprominent at the nation’s second-largest non-life insurer, Sompo JapanInsurance Co., which booked a net profitof 36.3 billion Yen, compared with a 3.9billion Yen loss the previous year.

Other large insurers saw huge growthspurts.

Mitsui Sumitomo Insurance Co.’s netprofit rose 164.7 percent to 79.2 billionYen, while Aioi Insurance Co.’s net profitsaw 141 percent growth to 9.1 billionYen.

Nipponkoa Insurance Co.’s net profitgrew 79.7 percent to 18 billion Yen.

But the industry leader, MilleaHoldings Inc., booked a net profit of 56.3billion Yen, down 36.6 percent from ayear earlier partly due to a one-off factorlinked to exchange-traded funds.

Fuji Fire & Marine Insurance Co. posteda net profit of 4.9 billion Yen, down 8percent from the previous year.

The remaining three firms are NissayDowa General Insurance Co., Kyoei Fire& Marine Insurance Co. and NisshinFire & Marine Insurance Co.

Executives of the companies admittedtimes are tough. They collectively sighedover struggling revenues from theirmainstay, automobile insurance. Thatsector has been hit by slow auto salesand fierce competition.“We expect conditions to continue to berough at home,” said Susumu Uchida,managing director of Mitsui SumitomoInsurance Co. “That is why we arestrengthening our base overseas andincreasing revenues there.”Net premium effectively grew 2.5percent to 6.1 trillion Yen at MitsuiSumitomo, whose major revenues camefrom unloading stocks at home andcashing in on underwriting servicesoverseas.Effective policy volume grew the mostat Mitsui Sumitomo and at NissayDowa General Insurance Co., where itrose 3.6 percent on a year-on-year basisto 148.9 billion Yen.Industry giant Millea saw effective salesstall at 864.2 billion Yen, down 0.6percent on a year-on-year basis. Thenumber of policies in force grew, thoughrevenue fell as the company was forcedto lower rates.

prescriptive in determining which productsare suitable for investors, so long as clearand adequate disclosure of all pertinentrisks are provided,’ it said.‘However, MAS notes that for TEPs andTLPs, adequate disclosure alone may notoffer investors enough protection.’MAS said those distributing such productshere should be licensed and supervised bythe central bank, and proposes to includeTEP/TLPs as a class of investment productsunder the Financial Advisers Act (FAA).Relatively new instruments here, TEP/TLPs are whole life and endowment policiessourced from overseas which are given upby the original policyholders for a numberof reasons. There are two types of TLPs:

life settlements, which are policies givenup by the elderly, and viatical settlements,which are those given up by the criticallyill. The investor buys a policy at a discountto its future value or death benefit and thereturn is realised when the insured dies.On TEPs, investors buy an endowment planthat was given up by the policy-holder beforematurity. The returns accrue when theendowment matures.

While TEPs and TLPs may offer attractivereturns, ‘such products are complex andbear significant risks,’ MAS said. Theseproducts are currently unregulated as theyfall outside the scope of both the InsuranceAct and FAA.

Japan non-life insurers’ net profits rise

NEWS BRIEFS


It is reported that Life Insurance Corporation of India (LIC) has totally bannedhigh potential secondary market transactions in any of its lapsed policies (policieswhich are inoperative due to non-payment of premium).

The secondary market for tradable insurance policies (TIP) in the life insurancesegment is a new concept in the country where the original policy holder manages tosell his lapsed policy to another buyer (who may be an individual or an institution)at discount and the latter revives the policy and receives all the returns and benefitsof the policy the original buyer is entitled to.

Such revival would not help LIC today since older policies typically have higherreturn rates, and in a falling interest rate scenario this would be an added burden.

Referring to the benefits LIC would have received by having the premium of thelapsed policies, the official clarified that the institution is prepared to give allsupport to original policyholders in case they want to revive the policies.At present, the purchasers of the tradable insurance policies are not only high networth individuals but also institutional investors such as mutual funds andprovident funds which are looking for high-yielding instruments in the fallinginterest rate regime.

The secondary market for life insurance policies is a big business in markets likethe US and UK. This market is growing at a rate of more than 30-40 per cent inthese markets.

LIC has obtained permission from its investment committee to invest five per centof the Varishtha Bima Pension Yojana in equities it is reported. The move comesafter the Government reportedly did not respond to LIC’s request for high-couponbonds with yields matching the high returns of the pension scheme.

The Varishtha Bima scheme, introduced earlier this year, assures a return of nineper cent to senior citizens. Although it is administered by LIC it is a Governmentscheme and the Government has committed to meeting the difference between thereturns LIC earns from the market and the assured return.

The scheme has so far collected close to Rs. 3,200 crores and the corpus that wouldbe invested in equities would be to the tune of Rs. 160 crores. But, with indicationsthat the scheme would be an ongoing one, the corpus would grow substantially overthe months. Until now LIC had invested bulk of the funds in government securities.

The diversification is due to the sustained fall in gilt yields was widening the gapbetween returns earned by the fund and the promised return. The investments ofthe Varishtha Bima Pension scheme are governed by the IRDA investmentguidelines for pension funds. The guidelines allow market investments up to 60per cent.

LIC’s investments in equities had touched 10 per cent of its life fund a few weeksago it is reported. This has come down to nine per cent on account of profit bookingin the recent rally in the stock markets.

Varishtha Bima’s market investment

Being constantly burdened with meetingrepatriation costs of out-of-job migrantIndian unskilled workers through itsembassies, the Government has got non-life insurers to come out with acompulsory cover that will meet theseexpenses. This cover — Pravasi BharatiyaBima Yojana — has been madecompulsory for all undergraduate workersgoing abroad from December 25.

The Government — more particularly theMinistry of External Affairs and theMinistry of Labour — has been discussingthis cover with insurance companies forseveral months. One reason for the delaywas that while the Government hadwanted the scheme to cover allrepatriations, insurers wanted to restrictit to health grounds only. After muchdiscussion the Government and theinsurance companies have come out witha standard policy that will be offered byall the non-life insurance companies.

The scheme would offer insurance cover ofa minimum Rs. 2,00,000 payable tonominee and legal heir in the event of deathor permanent disability of any Indianemigrant going abroad for employmentpurpose, an official release said.

It would also offer a medical cover ofminimum Rs. 50,000 as cashlesshospitalisation or reimbursement ofactual medical expenses in case ofaccident or ailment of the emigrant.

Moreover, the policy would provide aminimum Rs. 20,000 maternity benefitfor women emigrants.

The family of the emigrant consisting ofwife and two dependents would also beentitled to a maximum Rs. 10,000hospitalisation cover.

In the event of death of the emigrant, thescheme offers cost of transporting thedead body and one-way airfare of oneattendant.

Mandatory insurancefor workers goingabroad

LIC Bans Lapsed Policy trade

NEWS BRIEFS


Cost-cutting by outsourcing may be the latest mantra for most corporates, andIndia may be the hottest destination today for business process outsourcing (BPO)along with Russia, the Philippines and Brazil. Caution, however, is becoming thecatchword, and advice is being dispensed on taking adequate cover against the riskin these regions — also the most politically and militarily explosive ones, withIndia rated the highest in political and violence risk levels.

For, “the political perils aren’t new. The ability to cover countries like India isn’tnew. The ability to cover extra expenses isn’t new. What’s new is the ability to coverextra expenses resulting from the termination of a service contract. Standard tradedisruption insurance covers extra expenses if goods are lost in transit — basically,having to hunt for an alternative supplier of the goods, and that costs more,” warnsa leading US-based risk solutions provider, Aon Corporation, as it touts a newinsurance product it has devised.

A white paper explains how Aon Trade Credit placed a novel political risk insuranceprogramme for a Fortune 150 company, protecting against relocation expensesresulting from the unexpected termination or abandonment of the company’soverseas outsourcing contracts in India.

The paper also sports a chart in terms of current risk levels in the top emergingmarkets for offshore BPO as identified by AT Kearney.

The risk ratings have been based on Aon’s Trade Credit and Political Risk Map,ranging from low to moderate, medium, high and very high. India tops the rating,owing to its regulatory environment which it dubbed “notoriously tricky”.

That said, BPO operations have the connections required (and generate enoughexports) to avoid many regulatory pitfalls. India’s democracy is essentially stable,but troubled by frequent ethnic, religious and separatist violence, and the possibilityof war with Pakistan, Aon noted.

A new insurance for farmers will beintroduced soon to cover yield and pricefluctuations under a single policy.

The Farm Income Insurance Programme(FIIP) will be introduced in 23 districtsof 18 states for the wheat and rice cropin the Rabi season. The policy is animprovement over the existing NationalAgricultural Insurance Scheme whichcovers yield discrepancies only. It willbe launched across the country from thenext kharif season.

Based on the results of the pilot project,the FIIP will be fine-tuned for formallaunch in Kharif 2004, UnionAgriculture Minister Rajnath Singhsaid. The newly registered Agriculture

Insurance Company of India (AICI) willhandle the policy.

Under the FIIP, a farmer’s yield andprice risk would be protected byensuring minimum guaranteed income.A premium subsidy of 75 per cent isproposed for small farmers, while otherswould get 50 per cent.

The programme will be available in allstates and be compulsory for farmersavailing seasonal agricultural operationloans. The NAIS will be withdrawn forcrops covered by FIIP, but wouldcontinue to be applicable for others.

Over the past few years, averageagricultural production has outstripped

official consumption requirement andincreased procurement of wheat andpaddy is proving unsustainable. Stockswere 65 million tonnes in 2001-02,against a 25 million tonne requirement.This takes its own toll on procurementagencies. The Food Corporation ofIndia’s subsidy bill is nearing Rs 28,000crore a year.

Under the new scheme, Governmentestimates are that even in extremesituations, gross claims would not exceedRs. 12,000 crores.

While this isn’t the first attempt at cropinsurance, it is the first to coverproduction and price risks together. Thetotal area it may cover eventually is 45million hectares under paddy and 25million hectares under wheat. Premiumsubsidy here would add up to Rs. 5,200crores a year. There will be no subsidieson claim settlement.

New crop insurance scheme

Covering OutsourcingGeneral Insurance Corporation (GIC), thecountry’s national reinsurer, has doubled itsrisk underwriting capacity to Rs. 3,000 croresfor any single project for reinsurance supportto large domestic companies.

This means that GIC is now capable of payingup to Rs. 3,000 crores claims on any singleproject from its own funds.

GIC’s move would help large domestic groupslike to place reinsurance deals of their megaprojects with GIC rather than looking tointernational markets. This can also saveoutflow of foreign exchange as GIC can bepaid in Rupees.

General Insurance Corporation , whichenjoys a monopoly status in the country withregard to reinsurance, is currently exploitingits financial muscle to tap the growingdemands for higher capacities and retentionsso as to widen its clientele both in India andabroad.

General Insurance Corporation alsomanages an ‘Indian terrorism pool’ wherethe maximum loss payable is Rs 200 croreper risk. The pool is protected by an excess ofloss cover with an underlying of Rs 100 crore.

GIC doubles projectrisk cap


The IRDIRDIRDIRDIRDA JournalA JournalA JournalA JournalA Journal was launched in December, 2002, to serve as the forum for stakeholders of the insurance industry to make their views and experiencesknown to the Regulator and to teach others. You have supported us with your views and suggestions on various aspects of what is happening in the industryand your experiences and ideas. Where your support has been most visible and encouraging is in the steadily increasing requests for copies that arrive atthe office expressing interest in the contents of the Journal, encouraging us to take strength in the belief in which the publication was launched, which is thatthe industry needs such a medium of communication to listen to its stakeholders.

Once again, as always, we want your opinion. This time on the Journal itself. The Journal is shortly to complete its first year of existence. To help us takestock of where we have come and what needs to be done ahead, please answer the following questions and send it back to us by post to:EditorIRDA JournalInsurance Regulatory and Development AuthorityParisrama Bhavanam, III Floor, 5-9-58/B , Basheer Bagh, Hyderabad – 500 004Or e-mail us at [email protected] suberscribe your envelope with the words ‘IRDA Journal Survey’ or mention this in the subject line of your e-mail. Please feel free to use extra sheetsof paper if you need them.

Do you find the IRDA Journal useful in your day to day work?

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Dear ReadersDear Readers

Have your say!

�

�

We would like to see CEOs in Malaysiatake greater initiatives to ...implement the

best corporate governance practices intheir organisations, improve customerrelationships in a manner that inspires

greater confidence in the insuranceindustry and co-operate more effectively

through the industry associations tostrengthen the self-regulatory infrastructure

in Malaysia.

Bank Negara Malaysia on its expectations of an ideal insurance CEO

Insurers need to take a long hard look atthe structure of their cost base.

Inflexibility in cost structures (be theyattributed to staff, premises, systemsetc.) provides a perverse incentive to

write business at a loss. Other parts ofthe financial services sector have alreadyhad to face up to this challenge, but for

insurers it is perhaps only starting tobecome a serious reality.

Mr. David Strachan, Director, Insurance FirmsDivision, Financial Services Authority (FSA), UK

We expect conditions to continue to berough at home.That is why we are

strengthening our base overseas andincreasing revenues there.

Mr.Susumu Uchida, Managing Director,Mitsui Sumitomo Insurance Company

Premium increases are necessary, becausewe need to be able to look policyholdersin the eye and tell them that there will be

sufficient funds to cover claimsshould disaster strike. And we can

only cover claims if there aresufficient funds to do so.

Lord Peter Levene, Chairman, Lloyd’s of London

Deposit insurance schemes have adverseconsequences. They actually increase the

probability that a bank will collapsebecause of moral hazard. The other

problem with deposit insurance is that thecost of it is passed through to bank

customers in higher fees and charges.

Mr. David Bell, Chief Executive,Australian Bankers’ Association

“ ”The perception is that insurers are not

differentiated enough and the productsare viewed just as commodities, ... (so)

customers tend to buy on price and don'tinvestigate the full range of services and

products available.

Mr. John Sims, Head,Chubb's European Personal Lines unit

Events

RNI No: APBIL/2002/9589

December 23-24, 2003Venue: PuneBoda Marsh Seminar on Natural Hazards and Catastrophic Losses

February 18-19, 2004Venue: DelhiSixth Global Conference of Actuaries organised by the Federation of IndianChambers of Commerce and Industry (FICCI)in association with Actuarial Societyof India (ASI)

February 10-11, 2004Venue: Korea4th CEO Insurance Summit

March 2-3, 2004Venue: Singapore1st Asian Conference on Commutations & Run-Offs

December 1-9, 2003Venue: PuneLateral Thinking & Decision Making organised byNational Insurance Academy (NIA), Pune

December 8-9, 2003Venue: HyderabadEighth Insurance Summit, 2003, organised by the Confederationof Indian Industry (CII)Theme: Realising the Growth Potential

December 8-13, 2003Venue: PuneManagement of Change by NIA

December 16-17, 2003Venue: PuneSeminar on Geographic Information Systems by NIA

December 13, 2003Venue: KolkataInsurance India 2003National Seminar on:"Emerging trend in insurance sector"organised by Merchant Chamber of Commerce, Kolkata andMicrosec Risk Management Limited.

’Ë Ê ÁﬂÁŸÿÊ ∑§ •ı⁄U Áﬂ∑§Ê‚ ¬˝ÊÁœ∑§⁄UáÊ regulatory moves have boosted the morale of the industry. The new players have taken their work seriously

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