insuarance report final

8/7/2019 insuarance report final

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Indian insurance sector

SCHOOL OF BUSINESS

ANANALYTICAL REPORT by GROUP 3


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ontri#

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7% of th

"

ountr$

&

D'

in 2009. A w

ll-

v

lop

nd

volv

d insur

ncesector is

#

oon for

economicdevelopment

s it provides long-term funds for

infr

structuredevelopment

ndconcurrentl$

strengthens

the risk-t

king

#

ilit$

of thecountr$

. Further, insur

nce

h

s#

een

not

#

leemployment gener

tor, not only for the

insur

nce industry,#

ut h

s

lsocreatedsignificant demand

fora rangeofassociated professionalssuch as#

rokers,

insuranceadvisors, agents, underwriters, claims managers

andactuaries.

By thenatureof its#

usiness, insurance isclosely linked to

saving and investing. Life insurance, funded pensionsystems

andnon-life insurance haveaccumulatedasignificant

amount ofcapital over time, which can#

e invested

productively in theeconomy. The mutual dependenceof

insuranceandcapital markets playsan instrumental role in

channeling fundsand investment capabilities toaugment the

development potential of the Indianeconomy.

Indias growing consumer class, rising insurance awareness,

increasing domestic savings and investments are among the

most critical factors that have positivelydriven the market

penetrationof the insurance productsamong itsconsumer

segments. However, thereare largeuntappedareas, which

haveyet not benefited from theupsideof insurance.

Imparting financial literacy, incentivizing Indian households to

transfersavings from physical assets to financial assetsand

taking thedistributionnetwork to rural areasare

expected to help bring moreand more individuals within

the insuranceambit. While insurance penetration in India is

higher than that incountriessuch as

(

hinaand Brazil, it stillhasaconsiderably long way to go.

The insurance industry in India has visibly progressed

since the time whenbusinesses were tightly regulatedand

concentrated in the handsofa few publicsector insurers.

Following the passageof the Insurance ) egulatoryand

Development Authority Act in 1999, Indiaabandoned

publicsectorexclusivity in the insurance industry in favor

of market-drivencompetition. Thisshift hasbrought about

majorchanges to the industry. Thenew eraof insurance

development hasseen theentryof international insurers,

the proliferationof innovative productsanddistribution

channels, and the raising ofsupervisionstandards.

The period post-sector liberalization, which wecall'

hase

I, has witnessedanunprecedentedsurge in thesalesof

insurance products, with the industry recording a(

A&

) of

24.2% inannualized premium equivalent during FY00-05.

The insurance industry, in its first phaseofdevelopment, has

been relying on regularcapital infusions from the promoters

as its lifeline. High new businessstrainandexpanding

distributionnetworks have resulted inaccounting losses

across the industry. Inorder to meet theircommitment

towardclaim settlement and reservecreation, promoters

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havebeen investing additional capital, resulting in "cash-

burn." The tradeoff between "growth" and "profitability" was

heavily inclined toward the former.

Thenext four to fiveyearscanbe termedas1

hase II,

which saw players focusonanexpanding product range,

developing innovative productsandbuilding a robust

distributionchannel. During this period, i.e., FY05-09, the

industry grew at a2

A3

4 of 25.9%. Insurers wereshiftingweight from the

1

hase I philosophyof "growth versus

profitability" to the1

hase II mantraof "profitable growth."

Asa result, the focusshifted from "growth" to "profitability,"

with product pricing becoming more rational basedon more

conservativeassumptions.1

roduct innovationcontinued

and traditional policies gainedsome foothold inanotherwise

unit-linked incentive product ( 5 LI1

) driven market.

The Indian life insurance industry stands at the threshold

of launching its1

hase III growth. The phase is marked by

bringing the industry to a stable position, ensuring "stable

profitable growth." Most large players will now look to

decelerate the paceofdistribution growth and increase their

focuson the retentionofchannel partnersas well as improvechannel productivity. Further, insurancecompaniesare

working toward improving persistency.

At thiscrosssection, the roleof the regulatorbecomes

critical. The Insurance 4 egulatoryand Development

Authority (I 4 DA) is in the finalizationstage vis--vis most of

its regulations, which wouldbe instrumental innavigating

the futurecourseof the insurance industry. I 4 DA has

introducedcertain regulations to help improvedisclosures,

profitabilityandcapital as well asensureconsumer

protection. Further, the regulator isamid finalizing thenorms

for the initial publicoffering (I1

6

) of insurance

companies. Inasector wherenoneof the playersare listed,

the I1

6

of insurancecompaniescouldbea milestone in the

future growth of thesector.

4 isk management playsa verycritical role in the insurance

business. In thenext three to fouryears, India plans toshiftfrom thecurrent solvency I norms to risk-basedsolvency

norms, called thesolvency II model. Thischange will result in

thebetterapportionment of risk in thebackdrop of the actual

risk associated with theasset.

With the rising competition, the industry may also witness

consolidation among smaller players and the emergence

ofsome large players. The regulator is in the processof

finalizing guidelines for mergersandacquisitions in the

insurancespace in India. The government, regulatorand

the insurancecompaniesarenow focusedon maintaining

a favorableenvironment forsustainable growth, higher

contributionof the industry toeconomicdevelopment and

the increasing reach of insurance to theunderdevelopedareasof thecountry.

Tosummarize, the Indian insurance industry is poised for a

quantum leap in performance with unprecedented growth

opportunities, notwithstanding a temporary sliding growth

curve. Thestage isnow well poised for the real show

tocommence.

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Introduction

Theeconomic reforms initiated in theearly 90s paved the

way for the growth and opening up of the financial sector,

which led to a sustained period of economic growth. The

insurance industry wasopenedup for private players in

2000, and hasseen tremendous growth over the past decade

with theentryof global insurance majors. India is fast

emerging asoneof the worlds most dynamic insurance

markets with significant untapped potential.

The insurancesector playsacritical role inacountrys

economicdevelopment. It actsasa mobilizerofsavings, a

financial intermediary, a promoterof investment activities,

astabilizerof financial marketsanda risk manager. The

life insurancesector playsan important role in providing

risk cover, investment and tax planning for individuals; the

non-life insurance industry providesa risk cover forassets.

Health insuranceand pensionsystemsare fundamental to

protecting individualsagainst the hazardsof life, and India,

as thesecond-most populousnation in the world, offers

significant potential for that typeofcover. Furthermore,

fireand liability insuranceareessential forcorporationstosafeguard infrastructure projectsand investment risks.

7

rivate insurancesystemscomplement social security

systemsandadd valueby matching risk with price.

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7/45

Appropriate risk pricing isoneof the most powerful tools for

setting the right incentives for the allocation of resources, a

feature which is the key to a fast-developing country such

as India.

By the nature of itsbusiness, insurance isclosely related

to savings and investing. Life insurance, funded pension

systems, and toa lesserextent, non-life insurance, will

accumulate a significant amount of capital over time, whichcanbe invested productively in theeconomy.

There are good reasons to expect that the growth

momentum canbesustained. In particular, there is

significant untapped potential in varioussegmentsof the

market. While thenation is heavilyexposed tonatural

catastrophes, the insurancecover to mitigate thenegative

financial consequencesof theseadverseevents isstill

underdeveloped. Thesame is true forboth pensionand

health insurance, where insurerscan playacritical role

inbridging demandandsupply gaps. The majorchanges

inboth national economic policiesand insuranceregulations will highlight the prospectsof thesesegments

going forward.

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Section I:Industryoverview

The insurance industry in India hascomea long waysince

the time whenbusinesses were tightly regulatedand

concentrated in the handsofa few publicsector insurers.

Following the passageof the Insurance 8 egulatoryand

Development Authority Act in 1999, Indiaabandoned

publicsectorexclusivity in the insurance industry in favor

of market-drivencompetition. Thisshift hasbrought about

majorchanges to the industry. Thebeginning ofanew eraofinsurancedevelopment hasseen theentryof international

insurers, the proliferationof innovative products

anddistributionchannels, as well as the raising of

supervisorystandards.

volutionof the industry

The growing demand for insurancearound the world

continues to havea positiveeffect on the insurance industry

acrossall economies. India, being oneof the fastest-growing

economies (even in thecurrent global economicslowdown),

hasexhibitedasignificant increase in its9

D@

, andan

even larger increase in its

9

D

@

percapitaanddisposableincome. Increasing disposable income, coupled with the high

potential demand for insuranceofferings, hasopened many

doors forboth domesticand foreign insurers. The following

tablebrieflydepicts theevolutionof the insurancesector

in India.

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EA

B

ibitC

.C

. TracinD

tB

e cB

ronoloD

ical eE

olution of tB

e insurance industry

Year EF

ent

G

H

G

H

Oriental Life Insurance Co.I

as establisP

ed in Calcutta.

G

H Q R

The first insurance coS T

any,U

oS

bayV

utual Life InsuranceW

ociety,I

as forS

ed.

G

X R Q

The IndianV

ercantile Insurance LiS

itedI

as forS

ed.

G

X

G

Y

Life Insurance CoS T

anies Act and the Pension

und A ct ofG

X

G

Y

U ea

innina

of forS

al insurance rea

ulations

G

X Y H

The Indian Insurance CoS T

anies ActI

asT

assed to collect statistical data on both life and non -life.

G

X

3H

The Insurance Act ofG

X

3H

I asT

assed; there I as strict state suT

erF ision to control fraud s.

G

X b c

The Central GoF ern

S

ent tood

oF erY e b

Indian and foreia n life insurers as I ell asT

roF ident societies and nationalif ed

these entities.

The LIC Act of GX b c

I

asT

assed.

G

X b Q

The code of conduct by the General Insurance Council to ensure fair conduct and ethical businessT

racticesI

as fraS

ed.

G

X Q Y

The General InsuranceU

usiness (Nationalif

ation) ActI

asT

assed.

G

X X

G

U

ea

innina

of econoS

ic liberalif

ation

G

X X

3 The V alhotra Co S S itteeI

as set u T to co S T le S ent the reforS s initiated in the financial s ector.

G

X X e

g etariffication of aF

iation, liability, T ersonal accidents and health and S arine cara

o T roducts

G

X X X

The Insurance Rea

ulatory andg

eF

eloT S

ent Authority (IRg

A)U

illI

asT

assed in the ParliaS

ent.Y R R R

IR g AI

as incorT

orated as the statutory body to rea

ulate and rea

isterT

riF

ate sector insurance coS T

anies.

General Insurance CorT oration (GIC), alona

I

ith its four subsidiaries, i.e., National Insurance CoS T

any Ltd., OrientalInsurance Co S T any Ltd., Ne

I

India Assurance Co S T any Ltd. and United India Assurance Co S T any Ltd.,I

as S ade India s

national reinsurer.Y R R b

g

etariffication ofS

arine hullY R R c

Relah

ation of foreia

n ei

uity norS

s, thus facilitatina

the entry of neI

T

layersY R R Q

g

etariffication of all non -life insuranceT

roducts eh

ceT

t the auto third-T

arty liability sea

S

ent

p


10/45

In India, theq

inistry ofr

inance is ress

onsible for enactint

and iu s

leu

entint

let

islations for the insurance sectorv

ith

the Insurance Ret

ulatory andw

ex

elos u

ent Authority (IRw

A)

entitledv

ith the ret

ulatory and dex

elos u

ental role. Thet

ox

ernu

ent also ov

ns theu

ajority share in sou

eu

ajor

cou s

anies in both life and non -life insurance set u

ents.

Ey

hibit

.

des

icts the struc ture of the insurance industry

in India.

Ey

hibit .

. Indian insurance industry structure

inistry of

inance(Go ern

ent of India)

Current scenario

At

rov

int

u

iddle -class set u

ent, risint

incou

e, increasint

insurance av

areness, risint

inx

estu

ents and infrastructure

ss

endint

, hax

e laid a stront

foundation to ey

tend insurance

serx

ices in India. The totals

reu

iuu

of the insurance

industry has increased at a CAGR of

.

betv

eenr Y03

and r Y09 to reach INR

,

3.9 billion in r Y09.

Ey

hibit .3. Totals

reu

iuu

s of the insurance industry (lifeand non-life)

3,000

0

3

IR

A

Life insurance Non-life insurance

Public Public

Pri

ate Pri

ate

,

00

,000

,

00

,000

00

0

0

30

3

0

0

0

0 Y03 Y04 Y05 Y06 Y07 Y08 Y09

ource: IR A

oth the life and non -life insurance sectors in India,v

hichv

ere nationali

ed in the 950s and 960s, ress

ectix

ely,v

ere liberali

ed in the 990s.

ince the foru

ation of IRw

A

and the os

enint

us

of the insurance sector tos

rix

ates

layers in

000, the Indian insurance sectorhasv

itnessed

ras

idt

rov

th.

Non-life insurance

re

iu

Life insurance

re

iu

Gro

th rate (in

)

ource: IR A

The os

enint

us

of the insurance sector fors

rix

ates

articis

ation/t

lobals

layers durint

the 990s has

resulted in stiff cou s

etition au

ont

thes

layers,v

ith each

offerint

better

ualitys

roducts. This has certainly offered

consuu

ers the choice to buy as

roduct that best fits his or

her re

uireu

ents.

9


11/45

The number of players during the decade has increased from

four and eight in life and non-life insurance, respectively, in

2000 to 2j

in life and 24 in non-life insurance (including 1 in

reinsurance) industryas in August 2010.

k

xhibit 1.4.l

rowth in thenumberof insurance players

2000 2001 2002 200j

2004 2005 2006 2007 2008 2009 2010

Life insurersm

ublic 1 1 1 1 1 1 1 1 1 1 1m

riv atej

10 12 12 1j

1j

15 15 21 21 22

Non-life insurersm

ublic 4 4 5 6 6 6 6 6 6 6 6m

riv atej

6 8 8 8 8 9 10 15 15 17

n einsurer 1 1 1 1 1 1 1 1 1 1 1

Most of the private players in the Indian insurance industry

areajoint venturebetweenadominant Indiancompanyanda

foreign insurer.

Life insurance industryoverview

The life insurancesector grew at an impressiveo

Al

n

of

25.8% between FY0j

and FY09, and thenumberof

policies issued increasedat ao

Al

n of 12.j

% during the

same period.

Asof August 2010, there were 2j

players in thesector (1

publicand 22 private). The Life Insuranceo

orporationof

India (LIo

) is theonly publicsector player, and heldalmost65% of the market share in FY10 (basedon

first-year premiums).

To address the need for highly customized products and

ensure prompt service, a large number of privatesector

players haveentered the market. Innovative products,

aggressive marketing andeffectivedistribution have

Ina fragmented industry, new playersare gnawing away the

market shareof larger players. Theexisting smaller players

haveaggressive plans fornetwork expansionas their foreign

partnersare keen tocapitalizeon theenormous potential that

is latent in the Indian life insurance market.

k xhibit 1.5. Market shareamongst private players - FY10(basedon first year premiums) (in %)

I

I

I

ru,16.5

thers, 8.6SBI Life, 18.

New entrants, 4.0

Met Life, 2.8

Tata AI

,

.4 Bajaj Allianz, 11.6

Kotak Mahindra,

.5

MNYL, 4.8 eliance Life, 10.2

enabled fledgling private insurancecompanies tosignup HDF

Standard, 8.5

Indiancustomers more rapidly thanexpected.m

rivatesectorBirla Sunlife, 7.7

playersareexpected to playan increasingly important role in

the growth of the insurancesector in thenear future.

Source: I DA annual report FY09, I DA Journal, Insurance egulatoryand Development Authority website, www.irdaindia.org, accessed 26 May 2010

10


12/45

I

I

I

rudential, Bajaj Allianz and SBI Lifecollectively

account forapproximately 50% of the market share in the

private life insurancesegment. To tap thisopportunity, banks

havealsostartedentering alliances with insurance

companies todevelop/underwrite insurance products rather

than merelydistribute them.

Non-life insurance industryoverview

Between FY0

and FY10, thenon-life insurancesector grew

at a

Az

{ of 17.05%. Intense competition that followed the

de-tariffication and pricing deregulation (which was started

during FY07) decelerated the growth momentum.

Asof August 2010, thesector hada total of 24 players

(6 public insurers, 17 private insurersand 1 re-insurer).

Thenon-life insurancesectoroffers productssuch asauto

insurance, health insurance, fire insuranceand marineinsurance. In FY10, the non-life insurance industry had the

following product mix.

rivatesector players havenow pivoted their focusonauto

|

xhibit 1.6.

roduct mix (FY 10) (in %)

and health insurance.}

ut of the total non-life insurance

premiumsduring FY10, auto insuranceaccounted for 4

.5%

of the market share. The health insurancesegment has

posted the highest growth, with itsshare in the total non-life

insurance portfolio increasing from 12.8% in FY07 to 20.8%

in FY10. These twosectorsare highly promising, and

areexpected to increase theirshare manifold in the

coming years.

With the sector poised for immense growth, more players,

including monoline players, are expected to emerge in the

near future. The last twoyears hasseen theemergence

ofcompaniesspecializing in health insurancesuch as Star

Health & Allied Insuranceand Apollo DKV.

In the last decade, it wasobserved that most players have

| xhibit 1.7. Market shareamong players in FY10 (in %)

~

oyal Sundaram, 2.4 Tata-AI

, 2.

HDF

~

New India, 15.7

eneral, 2.4

Star Health andAllied Insurance, 2.6

AI

, 4.0 nited India,1

.6

IFF

- Tokio, 4.

~ eliance

eneral, 5.2

riental, 12.4

ngineering, 4.8

Marine , 6.

Auto, 4

.5 Bajaj Allianz, 6.6%

thers, 7.9National, 12.1

I

I

I-lombard, 8.6

Fire, 11.

All others, 7.2 Health, 20.8

ersonal Aviation, 1.2accidents, 2.5 Liability, 2.5%

Source: I DA Monthly Journal, Insurance egulatory and DevelopmentAuthority website, www.irdaindia.org, accessed 10 June 2010

Source: "I DA annual report FY09 - I DA Journal," Insurance egulatoryandDevelopment Authority website, www.irdaindia.org, accessed 26 May 2010

experienced growth by formulating aggressive growth

strategiesandcapitalizing on theirdistributionnetwork

to target the retail segment. Although the players in the

private and publicsector largely offer similar products in the

non-life insurance segment, private sector players outscore

their publicsectorcounterparts in their qualityofservice.

11


13/45

Gro th dri ers

Indias fa

orable de

o

ra

hics hel

stren

then

ar

et

enetration

The life insurance co

era

e in India is

ery lo

, and

any of those insured are underinsured. There is

i

ense

otential as the

or

in

o

ulation (

5 -60

years) is e

ected to increase fro

675.8

illion to

795.5

illion in the ne

t

0 years (

006 -

026). The

rojected

er ca

ita G

P is e

ected to increase fro

INR 8,280 in Y01 to INR100,680 in Y26,

hich is

indicati

e of risin

dis

osable inco

es. The de

and for

insurance

roducts is e

ected to increase in li

ht of

the increase in

urchasin

o

er.

E

hibit 1.8.

or

in

o

ulation assess

ent and G

P

erca

ita till 2026

800 120

700 100

600

500 80

400 60

300 40

200

100 20

0 02001 2006 2011 2016 2021 2026

Age grou

25-60 (in

illion) Projected G

P

er ca

ita in '000s

ource: C IE, Census of India 2001

ealth insurance attracts insurance co

anies

The Indian health insurance industry

as

alued at

INR51.2 billion as of Y10.

uring the

eriod Y03 -10,

the gro

th of the industry

as recorded at a CAGR

of 32.59%. The share ofhealth insurance

as 20.8%

of the total non -life insurance

re

iu

s in Y10.

ealth insurance

re

iu

s are e

ected to increase to

INR300 billion by 2015.

Pri

ate sector insurers are

ore aggressi

e in this

segment. a

orable demogra

hics, fast

rogression of

medical technology as

ell as the increasing demand

for betterhealthcare has facilitated gro

th in the

health insurance sector. Life insurance companies aree

pected to target primarily the youngpopulation so

that they can amorti

e the ris

o

er the policy term.

Rising focus on the rural mar

et

ince more than t

o -thirds of Indias population li

es in

rural areas, micro insurance is seen as the most suitable

aid to reach the poor and socially disad

antaged

sections of society.

Poor insurance literacy and a

areness, high

transaction costs and inade

uate understanding

of client needs and e

pectations has restricted the

demand formicro-insurance products. o

e

er,

the mar

et remains significantly underser

ed,creating a

ast opportunity to reach a large number

of customers

ithgood

alue insurance,

hether

from the base of e

isting insurers or through retail

distribution net

or

s.

In Y09, indi

iduals generated ne

business premium

orth INR365.7million under2.15million policies,

and the group insurance business amounted to

INR2,059.5million under126million li

es. LIC

contributed most of the business procured in this

portfolio by garnering INR311.9million of indi

idual

premium from1.54million li

es and INR1,726.9

million ofgrouppre mium under11.1million li

es.

LIC

as the first player to offer speciali

ed products

ith lo

erpremium costs for the rural population.

Otherpri

ate players ha

e also started focussing on

the rural mar

et to strengthen their reach.

Go

ernment ta

incenti

es

Currently, insurance products enjoy EEE benefits, gi

ing

insurance products an ad

antage o

ermutual funds.

In

estors are moti

ated to purchase insurance products

12


14/45

toavail thenearly

0% effective tax benefit onselect

investments (including life insurance premiums) made

every financial year. Life insurance isalready the most

popular financial product among Indiansbecauseof

the tax benefitsand income protection it offers in

acountry where there is very littlesocial security.

Thisdrives moreand more people tocome within the

insuranceambit.

merging trends

xploring multipledistributionchannels for

insurance products

To increase market penetration, insurancecompanies

need toexpand theirdistributionnetwork. In the

recent past, the industry has witnessed theemergence

ofalternatedistributionchannels, which include

bancassurance, direct selling agents, brokers, online

distribution, corporateagentssuch asnon-banking

financial companies (NBF

s) and tie-upsof para-

banking companies with local corporateagencies (e.g.

N

s) in remoteareas.

Agencies havebeen the most important andeffective

channel ofdistribution hitherto. The industry is viewing

the movement of intermediaries from mereagents

toadvisors.

roduct innovation

With customersasking for higher levelsof

customization, product innovation isoneof thebest

strategies forcompanies to increase their market share.

Thisalsocreates greaterefficiencyascompaniescan

maintain lowerunit costs, offer improvedservices

anddistributorscan increase flexibility to pay higher

commissionsand generate highersales.

The pensionsector, due to its inadequate penetration

(only 10% of the working population iscovered) offers

tremendous potential for insurancecompanies tobe

more innovative.

onsolidation in future

The past few years have witnessed theentryof many

companies in thedomestic insurance industry, attracted

by thesignificant potential of insurancesector.However, increasing competition ineasilyaccessible

urbanareas, the FDI limit of 26% and the recent

downturn inequity markets have impacted the growth

prospectsofsomesmall private insurancecompanies.

Such players may have to rethink about their future

growth plans. Hence, consolidation with largeand

established players may prove tobeabettersolution

forsuch small insurers. Largercompanies wouldalso

prefer to takeoveror merge with othercompanies with

establishednetworksandavoidspending money in

marketing and promotion. Therefore, consolidation will

result in fewerbut stronger players in thecountryas

well as generate healthycompetition.

Mounting focuson V over profitability

Manycompaniesareachieving profitabilityby

controlling expenses; releasing funds for future

appropriationsas well as through astrong renewal

premium buildup. Asa few larger insurerscontinue

toexpand, most are focusedoncost rationalization

and thealignment ofbusiness models to ground level

realities. This will betterequip insurers to realize

reportedembedded value ( V) and generate value from

futurenew business.

In theshort term, companiesare likely to face

challenges toachieve thedesired levelsof profitability.Ascompaniesarealso planning to get listedand raise

funds, the higher profitability will help companies to

get abetter valuationofshares. However, in the long

term, companies wouldneed to focuson increasing

V, asalmost 70% ofacompanys V is influencedby

renewal businessand profitability isnot as much ofan

indicator for valuation. Hence, playersarenow focusing

on increasing their V than profitability figures.

1


15/45

ising capital requirements

Since insurance isacapital-intensive industry, capital

requirementsare likely to increase in thecoming

period. Thecapital requirement in the life insurancebusiness isa functionof the three factors: (1) sum at

risk; (2) policyholders assets; (

) new businessstrain

andexpenseoverruns. With new guidelines in place,

capital requirementsacross thesectorare likely to go

up due to:

Highersum assureddriving highersum at risk

reaterallocation to policyholders assetsdue to

lowercharges

Back loading ofcharges is resulting in high new

businessstrain, andexpenseoverrunsdue to low

productivityof thenewlyset distributionnetwork (and

inability to recovercorresponding costsupfront)

Fornon-life insurancecompanies, the growing demand

for health insurance productsas well as motor

insurance products is likely toboost the

capital requirement.

With thecapital market picking up and valuationson

the rise, insurancecompaniesareexploring various

waysof increasing theircapital base to invest in product

innovation, introducing new distributionchannels,

educating customers, developing thebrand, etc.

This isdue to the following reasons:

A major portionof thecosts in insurancecompanies is

fixed (though it shouldbe variableorsemi-variable in

nature). Hence, the reduction insales will not result in

the lowering ofoperational expenses, thusadversely

impacting margins. Assuch, reduced margins would

impact profitability, and insurers wouldneed to invest

additional funds.

Thesustainedbearishness incapital marketscould

further pressurize the investment marginsand

increase thecapital strain, especially in thecaseof

capital/return guarantee product.

Besides, companiesare likely to witnessaslowdown

innew business growth.

ompanies mayalsooptfor product restructuring to lower theircostsand

optimallyutilizecapital.

According to I DA egulations 2000, all insurance

companiesare required to maintainasolvency ratio

of 1.5 at all times. But thissolvency margin isnot

sustainable. With the growing market risks, the level

of requiredcapital will be linked to the risks inherent

in theunderlying business. India is likely tostart

implementing Solvency II norms in thenext three to

fouryears.

The transition from Solvency I norms to Solvency II

normsby 2012 isexpected to increase thedemand

foractuariesand risk management professionals.

The regulator hasalsoasked insurancecompanies

to get their risk management systemsand processes

auditedevery threeyearsbyanexternal auditor. Many

insurancecompanies havestartedaligning themselves

with thenew normsand hiring professionals to meet

thedeadline.

ontribution of the insurance sector totheeconomy

Insurance has hada very positive impact on Indias

economicdevelopment. Thesector is gradually increasing its

contribution to thecountrys

D

. Inaddition, insurance is

driving the infrastructuresectorby increasing investments

each year. Further, insurance hasboosted theemployment

scenario in Indiaby providing direct as well as indirect

employment opportunities.

Due to the healthy performanceof the Indianeconomy, the

shareof life insurance premiums in the grossdomestic

savings (

DS) of the householdssector has increased.

14


16/45

xhibit 1.9. Shareof life insurance premiums in

DS(householdsector) (in %)

20 17.9 17.6

ontributionof insurance to infrastructure

enerally, countries with strong insurance industries

havea robust infrastructureandstrong capital formation.

1511.0

10

5

0

15.9 Insurance generates long-term capital, which is required12.

tobuild infrastructure projects that havea long gestation

period.

oncurrently, insurance protects individuals

andbusinesses from suddenunfavorableevents. A well-

developedandevolved insurancesector isneeded for

economicdevelopment as it provides long-term funds for

FY05 FY06 FY07 FY08 FY09

Source: I DA, National Income Statistics, July 2010, MI

The increasedcontributionof the insurance industry

from the household

DS hasbeen ploughedback into the

economy, generating higher growth. The following factors

showcase how thecontributionof the insurance industry has

strengthenedeconomic growth:

infrastructuredevelopment andsimultaneouslystrengthens

the risk taking ability.

Although the insurancesector is relatively young in India, its

contribution to infrastructural development has been on a

visible riseasdepicted in the following exhibit.

xhibit 2.0.

ontributionof various insurance products to infrastructure (in IN billion)

FY06 FY07 FY08 FY09

Investments from traditional products

Approvedsecurities including

entral

,1

1

,541 4,01

4,4

9

overnment Securities

Infrastructureandsocial sector 546 759 76

756

Investment subject to exposurenorms, 1,

27 1,5

8 2,0

5 2,787

including other thanapproved investments

Housing and fire-fighting equipment

1

7

9 42

nit-linked insurance product funds ( LI s)

Approved investments 2

4 576 1,115 1,515

ther thanapproved investments 25 95 219 21

Source: "I

DA annual report FY09," Insurance

egulatoryand Development Authority website, www.irdaindia.org, accessed 20 August 2010

15


17/45

In FY09, the total investmentsby the insurance industry

increased to IN 9,742 billion, asagainst IN 8,18

billion in

the previousyear. Further, investmentsbyboth lifeandnon-

life insurers increasedby 20.2% and 4.6% to IN 9,16

billion

and IN 589 billion, respectively, in FY09.

However, as outlined in the leventh Five Year

lan (2008-

2012), there is a significant fund requirement of IN 20,562

billion in the infrastructure sector.

iven an expected robust

increase in the insurancebusinessand the increasing

participationof foreign insurers in India, insurance

companiesare well positioned tocontribute to infrastructure

development in thecountry.

These investmentscould further increase with the

development ofsounddebt markets, especially the market

for long-term government paperand income tax incentives

toattract savings for infrastructural schemes. The

direct investment of policyholder fundsof life insurers ingovernment bonds isanother way in which the industry has

helped thedevelopment of infrastructure. Inaddition, I DAs

mandate for insurancecompanies to invest 15% of their

annual sales in infrastructure isexpected toboost

capital formation.

ontributionof insurance to FDI

The importance of FDI in the development of acapital-

deficient country such as India cannot be undermined.

This is where the high-growth sectorsofaneconomy

playan important rolebyattracting substantial foreign

investments.

urrently, the total FDI in the insurancesector,

which was IN 50.

billionat theendof FY09, isestimated

to increase toapproximately IN 51 billion in FY10. It is

difficult toestimate, but anequal amount ofadditional

foreign investment, can roughly flow into thesector if the

government increases the FDI limit from 26% to 49%.

The insurancesector, by virtueofattracting long-term

funds, isbest placed tochannelize long-term funds toward

the productivesectorsof theeconomy. Therefore, the

growth in their premium collections isexpected to translate

into higher investments inother keysectorsof theeconomy.

Therefore, the liberalizationof FDI norms for insurance

wouldnot onlybenefit thesector, but several othercritical

sectorsof theeconomy.

ontributionof insurance to theoffshoring business

India hasbecomeoneof the most populardestinations

foroffshoring insurance processes, and leading insurance

companies in the S and urope has moved their processes

either to theircaptiveunitsor third-partyoutsourcing firms.

urrently, around 6

% of Indias insuranceoutsourcing

revenuescome from the

S andaround 22% from

M

A.

India offers varied insurance solutions dealing with health,

property, life, annuities, reinsurance and casualty, among

others. The following is a list of insuranceservices that are

outsourced to India.

The total revenues from the Indian offshore insurance

business process outsourcing services increased from

S$

67 million in FY0

to S$790 million in FY07,

andareexpected to reach S$2 billionby FY10. This

increasedbusiness will also result in increasedemployment

opportunities in the insuranceoffshoring business.

16


18/45

xhibit 2.1. Insuranceservicessuite

B

Technologyenabled

nd-to-endplatform

Analytics

Technologyandconsulting

Source: Infosys

ropertyandcasualty insurance

Application

nderwritingprocess support

olicy

laimsadministration processing andand maintenance adjudication

ustomer relationship andinformation management

Insurance Activeworkflow desk solution

Hire-to-retire

rocure-to-pay

roduct

ustomeranalytics analytics

Applicationdevelopmentand maintenance

Life insurance, pensionandannuities

New business

olicyadministration

laimsand Annuitiesissuance servicing

ustomer relationship andinformation management

Activedesk solution

penblock life

losedblock lifeadministration administration

roducer

etirementadministration servicesservice

rocure-to-pay Hire-to-retire

rofitabilityanalytics

Life, retirement services,produceradministration

platform

einsurance

Treaty

nderwritingadministration support

Technical

laimsaccounting management

einsurance treatyadministration

Insurance workflow

Hire-to-retire

rocure-to-pay

laimsanalytics

isk analytics

Business processandoperationsconsulting

17


19/45


20/45

Section II:

Industryat cross-roadsofdevelopment

Insurance industry: significantlyuntapped latent potential

Indias insurance industry has witnessed rapid growth during

the last decade.

onsequently, many foreigncompanies

haveexpressed their interest in investing indomestic

insurancecompanies, despite the

overnment of Indias

regulation, which mandates that the foreignshareholdinglimit is fixedat 26% for the lifeas well asnon-life

insurancesectors.

The countrys strong economic growth in recent years has

helped increase penetration levels substantially.

remium

income, asa percentageof

D

, increased from

.

%

in FY0

to 7.6% in FY09. However, the penetrationof

insurance in Indiastill continues tobe low, ascompared to

otherdevelopedanddeveloping economies.

The Indian life insurancesector has witnessedexponential

growth, drivenby innovation in product offeringsand

distributionowing to market entrantssince theopening up

of thesector in 2000.

urrently, it is the fifth-largest life

insurance market in Asia. The rapidexpansion in the life

sectorcoincided with a periodof rising householdsavings

anda growing middleclass, backed with strong economic

growth. Innovative product design (e.g. launch of

LI

s)andaggressivedistributionstrategies (e.g. development of

bancassurance) by privatesector players havesignificantly

contributed tostrong premium growth. The following

diagram shows the increasing premium percapitaduring the

same period.

xhibit 2.4.

ercapita insurance premium

2,500 2,187.1

xhibit 2.

. Insurance premiumsasa % of

D

8 6.

6 4.8 .

.7 4.2 5.5

2,000

7.

7.6

6.7 1,500

6.4 1,000 6

7.9 776.1

2,01

.8

1,716.11,921.9

1,769.

1,197.2 1,479.1

952.0

4

2

0

.5 4.12.7

.00.6 0.7 0.7 0.8

FY0

FY04 FY05 FY06

5000.9 0.9 0.9

0

FY07 FY08 FY09

1,00

.6785.4

628.

244.5 265.2528.4 19

.7 2

7.0109.5 147.8 166.6

FY0

FY04 FY05 FY06 FY07 FY08 FY09

Non-life insurance premium contributionasa % of

D

Life insurance premium contributionasa % of

D

Total insurance premium contributionasa % of

D

Source: I DA annual report FY0 -09, Insurance egulatoryand DevelopmentAuthority website, www.irdaindia.org, accessed August 2010; MI

Non-life insurance premium percapita

Life insurance premium percapita

Total insurance premium percapita

Source: I DA annual report FY0 -09, Insurance egulatoryand DevelopmentAuthority website, www.irdaindia.org, accessed August 2010; MI

19


21/45

The global economy has slo

ly started reco

ering from the

economic recession. Lagging employment, coupled

ith

declining aggregate

ages, a

ea

ened residential and

commercial real estate mar

et, tight credit and a beha

ioral

shift on the part of consumers from consumption to sa

ings

are factors contributing to a delayed reco

ery. Although

the global insurance industry has not been impacted by the

financial crisis as much as the ban

s, it still has its set ofissues. The leading fi

e issues on the global insurance

atch

list are:

anaging ris

: The most significant concern for insurance

companies is ris

in all its forms. Increasingly, insuran ce

companies are adopting an enterprise -

ide

ie

of

managing ris

semploying a frame

or

to address them

across the organi

ation.

Promoting compliance: The cost of regulatory compliance

and the attendant reputational ris

of non -compliance are

on the rise.

Gro

ingglobally: The e

pansion into ne

mar

ets is

e

pected to help dri

e profits, as de

eloped economies

itness slo

ergro

th in the demand for insurance.

Lac

of inno

ation around products and deli

ery: The

use of technology and emphasis on inno

ation

ill helppro

ide better ser

ice and deli

ery. Institutions can also

strengthen their ties

ith customers and differentiate

themsel

es from competition.

Adapting to demogra phic shifts: The demographic

changes in NorthAmerica, Europe,

apan and other areas

is starting to shift assets from e

uities to annuities as

ell

as other fi

ed-income products.

E

hibit 2.5. Global comparison of insurance premiums, penetration and density for both life and non -life segments

Non-life prem iums in 2009 Life premiums in 2009

Country Premiums, Penetration, ensity, Premiums, Penetration, ensity,

U

million % of G

P U

per capita U

million % of G

P U

per capita

e

eloped

Australia 27,849 3 1,308.0 32,468 3.4 1,524.8

rance 88993 3.1 1,289.4 194077 7.2 2,979.8

Germany 126,591 3.7 1,518.7 111,776 3.3 1,359.7

ingapore 5,188 1.7 645.6 9,057 5.1 1,912.0

outh

orea 34,527 3.9 709.7 57,436 6.5 1,180.6

United

ingdom 91,560 3 1,051.2 217,681 10 3,527.6

United Arab Emirates 4,381 2.1 952.7 732 0.4 159.2

United

tates 647,401 4.5 2,107.3 492,345 3.5 1,602.6

20


22/45

Non-life premiums in 2009 Life premiums in 2009

ountry remiums, enetration, Density, remiums, enetration, Density,

S$ million % of

D

S$ p ercapita

S$ million % of

D

S$ percapita

Developing

Bangladesh 205 0.2 1.

6

6 0.7

.9

Brazil 2

,979 1.5 12

.8 24,781 1.6 127.9

hina 5

,872 1.1 40 109,175 2.

81.1

India 6,

75 0.9 6.7 46,206 6.6 48.1

Indonesia 2,219 0.4 9.6 5,066 0.9 22

Malaysia

,158 1.6 115 5,682 2.9 206.9

Mexico 9,664 1.1 88.2 7,688 0.9 70.1

akistan 650 0.4

.6 54

0.

hilippines 8

5 0.5 9.1 1,56

1 17

omania 2,

65 1.4 111.2 5

0.

25.1

ussia

8,940 2.4 276.4 6

6 0 4.5South Africa 8,215 2.9 16

.9 28,77

10 574.2

Sri Lanka

58 0.9 17.7 2

8 0.6 11.8

Taiw an 11,44

494.8 52,204 1

.8 2,257.

Thailand 4,248 1.6 62.7 6,212 2.4 91.7

Vietnam 769 0.8 8.7 671 0.7 7.6

Source: "World Insurance in 2009," Swiss

e, June 2010, Insurance

egulatoryand Development Authority website, www.irdaindia.org, accessed

06 January 2010

According to Swiss e, among the key Asian markets, India

is likely to have the fastest-growing life insurance market,

with life premium poised to grow at a

A

of 15% for the

next decade, slightly faster than the 14% expected for

hina.

The growing consumerclass, rising insuranceawarenessand

greater infrastructurespending have made Indiaand

hina

the two most promising markets in Asia. uropeand the

Americas represent relatively mature insurance markets.

Though Indias penetrationappears higher, it isnot

excessive, given the high level of investments in insurance

policiesunderwritten. Nonetheless, besides India, Taiwan is

theother Asian market that sharessimilarcharacteristics.

Taiwan has the highest insurance penetration in Asia, largely

drivenby the immense popularityof LI

s.

The progressof the Indian insurance industryover thelast decade hasbeen the most crucial period in the

establishment of this industry; post the formationof I DA

in 2000. The initial four to fiveyears witnessed theentryof

many private players, each trying toacquire market share.

The latter part of this phase witnesseda heightened focus

on theexpanding product range, developing innovative

productsandbuilding a robust distributionchannel. The last

one to twoyears havebeen verycritical as the industry is

21


23/45

trying tosustain its growth in light of thenew regulations

being formulated.

The Indian insurance industry isat a threshold from where

it can witness thenext growth wave, if presented with afavorable policy framework andanenabling distribution

environment. The industry is poised to witness the

emergenceofnew leaders who wouldcarveaniche for

themselvesbyusing instrumentssuch asalternative

channelsofdistribution, cost management and product

innovation, among others.

At thiscrosssection, the roleof the regulator is very

significant. I DA is in the finalizationstageof most of the

regulations pertaining to the industry. The regulator has

introducedcertain regulations to help improvedisclosures,

profitability, capital, consumer protection, etc.

ecent regulatorydevelopments thatgovern thecurrentmarket state

Thedevelopment of the insurance industry in India, as

inother international markets, is likely tobecritically

dependent on thenatureand qualityof regulation. The role

of the regulator in most markets is toensureefficiency,

transparencyand fair play, whileat thesame time, protect

the interestsof theconsumer. The I DA Act 2000 has

delineated thebroad regulatory framework within which

insurancecompaniesareexpected tooperate in India. The

provisionsof thisact address issues related toownership,solvency, investment portfolioconstruction, commission

structures, reporting formatsandaccounting standards.

The minimum paid-up equitycapital requirement has

beenset at IN 1 billion. The insurancebusiness iscapital

intensive, and international experiencesuggests that, on

anaverage, non-life insurancecompanies require four to

fiveyears tobreak even. In the interim, thesecompanies

would require regularcapital infusion for funding expected

lossesand meeting solvency requirements. In thiscontext,

given theexisting regulatoryconstraintsof foreigndirect

investment by theoverseas partner, asubstantial part of the

funding would have tobedoneby the Indian partner, whose

financial strength is likely to influence thecredit strength of

thejoint venture.

iven theevolutionarystageof the Indian insurance

industry, oneof the focal points for the regulator hasbeen

todrivestabilityandsolvency in the industry. Theact also

mentionsbroad guidelines for theconstructionof the

investment portfoliosof life insurancecompanies. These

norms havebeendesigned to makesure that an insurer

doesnot takeonunsustainable risks indeploying funds

collectedby wayof premiums.

verall, the regulatory

environment is favorableand takescare that players

maintain prudent underwriting standards, and reserve

valuationand investment practices. The primaryobjective

for thecurrent regulations is to promotestabilityand fair

play in the market place. Someof the recent regulatory

changesand their impact include:

New disclosurenorms

I

DA hascomeup with the following disclosurenorms:

I

DA has issueddisclosurenorms for insurance

companies, mandating them to publish accountsona half-

yearlybasis. Thedisclosurenormsareseenasa precursor

toallowing insurancecompanies to hit the primary

market. According to thenew norms, insurers will have to

publish theirbalancesheet ona half-yearlybasis, starting

from the periodending

1 March 2010.

Disclosures tobe made foracompany launching an I

All financial disclosures for the past fiveyears prior to

the I

have tobeavailableon thecompany website. In

addition, insurancecompanies have todisclose thedata

on various parameterssuch as thecalculationofeconomic

capital, surrenderand lapseexperienceofbusinessand

expense patterns for the five-year period.

22


24/45

Insurancecompanies that intend to go public would

also need to disclose required and available solvency

margins for five years, capital structure and details of

investment performance. A wide rangeof risk factors

related to credit, market, insurance, liquidity, operational

and asset and liability management need to be disclosed

clearlyby the insurers, accompaniedbya report from

an independent external actuaryon the reasonableness

of the methodology adopted and assumptions made to

determine valuations.

I DA hasalso instructedall life insurers toexplicitlydisclose, in theirbenefit Illustrationdocument, theexactamount ofcommission/brokerage paidby insurers toinsuranceagents. Thiscircularcame intoeffect from 1July 2010.

year ina taperedscale, ending with 2.25% after the

fifteenth year. Thenew guidelinesapply from 1 September

2010. arlier, the regulator hadallowedcommissions

chargedbyagents tonot exceed 40%.

Forsingle-premium products, the maximum commission

rate is 2% of the premium paid, and for regular premium

products, the rate is in the rangeof 15%-

0% of premium

in the first year, followedby 5%-7% in thesubsequent

years.

According to thedraft guidelines, all life insuranceagents

will have to gathera minimum of IN 150,000 as the

first-year premium orsell a minimum of 20 life insurance

contracts. Whenanagent fallsshort ofachieving either

of theabove, they would have to proportionatelyachieve

Implications

The regulator has directed all firms tocomeup with a publicdisclosure framework to ensure a fair and stable insurance

market. Thesenorms would help investors tobe fullyaware

of the financial performance, company profile, financial

position, risk exposure, elementsofcorporate governance in

placeand the management of the insurancecompanies.

Thestandardon publicdisclosures for the insurance

companies, which hasbeen preparedout of the leading

international practices followedby the International

Associationof International Supervisors (IAIS), will

strengthencorporate governanceand market discipline.

According to I DA, thecircularon thedisclosureofagent

commission will enhance transparencyby providing

prospective policyholders with detailsof theexact amount ofcommission/brokerage paidby insurers to insuranceagents,

thus making it pro-investor. However, on thenegativeside,

this move mayencourage many insuranceagents to rebate

commissions to theirclients, which isan illegal practice.

Alteredcommissionstructureofagents

Insurers wouldbeallowed tochargeup to 4% onannual

premium paidon LI

s for the first fiveyears, and

thereafter, charges will be reducedduring the tenureof

the policy. This figurenarrowsdown to

% by the tenth

more ineitherone to makeup for theshortfall. Where

theaverageannual persistency ratio is less than 50%, the

licenseof theagent will not be renewed.

Implications

This moveby the I DA reflects itsefforts toensure

transparencyand implement morestringent disclosure

norms toavoid mis-selling. This is likely toallow insurers to

recover theircost ina "more transparent and informed way,"

thereby reducing "unfair practices" and the "information

gap" indomestic insurance toenhance market discipline.

Any variation in the payment structureofagents will also

help companies to reduce theircosts. Further, tenure-

basedcommissions will definitelybenefit the industry. High

commission isalsoexpected tocomedownand there will

bebetter reward for longer-term policies than theshorter-

term ones.

ustomersare the largest gainers from thischange, as

products will now be more transparent, customer-friendly

andaimedat protecting their long-term interests.

With the implementationof the I DAsnew norm, insurance

companies may initially faceasetback in policysale

numbersand total premiums. Although the I DA stance is in

favorofbringing transparency in thecommissionstructure

ofagents, thisnorm couldnegatively impact agentsas well,

at least in theshort term. Toaddress the impact of reduced

2


25/45

commission, insurancecompanies may resort to innovative

waysofcompensating their top-performing agents. Non-

commission-based remuneration may increase.

ompanies

mayexpand theirdifferent rewardand recognition programs

to make thesaleof LI

sattractive foragents in light of

these recent changes.

In the long term, the roleofagents isexpected toevolve with

this policychange. In future, increased transparency is likely

to makeagents moreaccountablenot only inselling the right

products, but also in providing bettercustomerservice. This

isalso likely to guarantee that agentsjustify thecommissions

theyearn. From being mereagents, they will beexpected to

serveas financial plannersselling a

bouquet of financial products.

I

norms for insurancecompany

The insurance regulator has reduced the waiting period for

an insurancecompany to makean I

from 10 years to 5

yearsaftercommencing operations.

I DA has finalized its I

guidelinesand hassent them

to the Securitiesand xchange Boardof India (S BI).

S BI will club I DAs recommendations with its general

guidelineson I

s foranycompany that wants to raise

money from the public through equityshares.

Thenorms forcorrect valuation, disclosureofoperating

resultsand profit and lossaccount and filing of the

draft red herring prospectusare the threeessentials

that acompany has to fulfill whenopting fora public

float. Besides, companies would have to make financial

disclosures, risk disclosures, investment performance, etc.(detailsstated in theabovesection "New

disclosurenorms").

Implications

Insurancecompaniesneedcapital toexpand, innovate

andsustain in the market. Insurancecompanies typically

prefer to raisecapital by floating an I

. Therecanbea

mix ofa fresh issue ofsharesas well as thesaleofshares

by the parent company. Most companies prefer this route

when they do not have enough capital to plough back into

theirbusiness. With the I

routeof raising capital, Indian

promoters will get theopportunity to put theirequity into

the market as well as FIIs will alsobe able to participateand

acquirestakes.

romoting health insurance

I DA hasallowed insurancecompanies tooffer "Health

plus Life

ombi

roduct," a policy that would provide

lifecoveralong with health insurance tosubscribers.

nder the guidelines issuedby the I DA, lifeandnon-life

insurance firmscanalso partner inoffering the health-

plus-lifecover. Thecombi products maybe promotedbyall

life insuranceandnon-life insurancecompanies, however,

a tieup is permittedbetweenone life insurerandonenon-

life insureronly. Thus, a life insurer is permitted toenter

analliance with onlyonenon-life insurerand vice-versa.

Thesaleofcombi productscanbe made through direct

marketing channels, brokersandcomposite individual and

corporateagents, common toboth insurers. However,

these productsarenot allowed tobe marketed through

"bank referral" arrangements. The regulator further

specified that the guidelinesdonot apply to micro-

insurance products, which are governedby I DA (Micro

Insurance) egulations, 2005.

nder the "

ombi

roduct," theunderwriting of the

respective portionof the risks will beunderwrittenby

respective insurancecompanies, i.e., life insurance risk

will beunderwrittenby the life insurancecompanyand the

health insurance portionof risk will beunderwrittenby the

non-life insurancecompany.

ImplicationsLife insurance has a much deeper penetration in India, as

compared to the non-life insurancesegment. Thisstep is in

sync with the governments, regulators and the insurance

companysstrategy tocover more peopleunder the

insuranceumbrella.

As insurers leverageon the marketing andoperational

network of their partner insurers, the proposed product

innovation isexpected to facilitate policy holders toselect

an integrated product of theirchoiceunderasingle roof

without shopping around the market for twodifferent

24


26/45

insurancecoverageoptions from twodifferent insurers.

Therefore, insurers are expected to offer appropriate covers

asanattractive proposition for the policyholders.

Alteration in LI

s

I DA hasattempted to make LI

a long-term protection

contract covering risks related to mortality, longevity

and health bysimultaneouslyoffering a fairdeal to the

policyholderanddoing away with theexcesses in the

system. The keychanges introduced through thenewguidelinesareas follows:

Lock-in period: I DA has increased the lock-in period for

all LI

s from threeyears to fiveyears, including top-

up premiums, thereby making them long-term financial

instruments that provide risk protection. All limited

premium LI

s, other thansingle premium products, will

havea premium paying term ofat least fiveyears.

Level paying premiums: All regular premium/limited

premium LI

s will haveuniform/level paying premiums.

Anyadditional payments will be treatedasasingle

premium for the purposeofan insurancecover.

vendistributionofcharges: Thechargeson LI

sare

mandated tobeevenlydistributedduring the lock-in

period inorder toeliminate high front ending ofexpenses.

Increase in risk component: Further, all LI

s, other than

pensionandannuity products, will providea mortality

coverora health cover, thereby increasing the risk cover

component insuch products.

ap onsurrendercharges: I DA has recommendedacap

on thesurrenderchargesat up to 15% of the fund value in

the first year for policies with a tenor more than 10 years

and 12.5% for policies with a tenorof less than 10 years.

Thischargecomesdown to 5% and 2.5%, respectively, in

the fifth yearof the policy, andbecomesnil for policiesof

less than 10 yearsafter the fifth year. For tenorsabove 10

years, thecharge in thesixth year is 2.5%, which becomes

nil in theseventh year.

25

Minimum guaranteed return for pension products:

egarding pension products, all LI

pension/annuity

products will offera minimum guaranteed returnof 4.5%

perannum, orasspecifiedby the I DA from time to time.

This will provide protection to the life timesavingsof

pensioners from anyadverse fluctuationsat the time

of maturity.

Implications

The impact of these new guidelines oncustomers will befavorable due to lower charges and guaranteed returns,

among other reasons. However, thesechanges will

also impact the marginsof life insurers, as thecharges,

particularlysurrendercharges, arecapped. Thiscould have

anadverse impact on their profitability.

The possibility of adecline in the profitability and increase

in the capital requirements of life insurers has resulted in

discounting the previously high multiples assigned to the

new business achieved profits (NBA

), and as such, there

couldbeadecline in the valuationassigned to the life

insurance business. The changes in LI

s guidelines could

also result inadelay in the I

plansofanumberof players

as they will have to rework their product offerings.

Though it may makeselling difficult as it would make

products inflexible, it wouldcertainly reduce persistency

risk, make A

Msstable, andboost theoverall

certaintyonassumptionsand the profitabilityof the

businessunderwritten.

ther regulations

Besides the above regulations, I DA and the government

are in the processofdrafting more regulatory reforms for

the industrysuch as:

With the private playerscompleting nearly 10 yearsof

existence, the industry isseeking alternative ways to

meet itscapital needs. The government isconsidering


27/45


28/45

Section III:ritical factors for

market development

Distributionchannels

Theeffectivenessandcost ofdiversedistributionstrategiesof

different players iscrucial inensuring thesuccessof players

in the insurancebusiness, particularly in the retail linesof

business. The low differentiationamong retail insurance

productssuggests thecriticalityofdistribution reach and

efficiency forsuccess in thisbusiness.The factors that determine the choice of the distribution

channel ofan insurancecompanyare:

Whereare thecustomers?

What is target customer profile?

Which product (linked, traditional, term, etc.) canbesold

through distributionchannel?

Which channel providesbest buying experienceand value

to target customersegment?

What is theoperational cost involved ineach type

ofchannel?

Thecustomer preferences varyby market segment vis--vis

geography, age, income, lifestyle, etc., and market

characteristicschangeover time.

# oleof intermed iaries/distributors/financial advisors

Insurance has tobesold the worldover, and the Indian

market isnoexception. The touch point with theultimate

customer is thedistributoror the producer, and the role

playedby them in insurance markets iscritical.

Insurancedistribution isnot simplyabout pushing products.

Anoutsizedshareof the valueacross theentire insuranceindustry valuechain isadded indistribution. Forcustomers,

it is indistribution that needsareunderstoodandassessed,

options (from full risk transfer toself insuranceand more

exotic methodsof managing risk) are identified, andcounsel

on thechoiceofcarriersandother providers is given. It

isbecauseofdistribution that relationshipsand trust are

built with agents, brokersandcustomers, opportunitiesare

identifiedandcreated, and productsandservicesaresold.

It is the distributor who makes the difference in terms of

the quality of advice for thechoice of product, servicing of

policy post sale and the settlement of claims. In the Indian

market, with their distinct cultural and social ethos, these

conditions playa major role inshaping thedistributionchannelsand theireffectiveness.

The figurebelow providesanestimateof thecurrent

market shareof the variousdistributionchannelsusedby

life insurers, and givesa view of how thesechannelscould

develop in the future.

27


29/45

E$

hibit 2.6.: Current mar%

et share and potentialmar

%

et gro&

th

'

igh

Tied agents

( ancassurance

Corporate agents

(

ro)

ers

0

irect

1

or)

site

InternetLo

2

Lo2

Current mar) et share ' igh

3 ancassurance: Insurance products 4 irect: 5 ales through call

offered through ban6 s centres and/or direct mailing

3 ro 6 ers: Representati7

es for buyers Internet: E-commerce sales8

ho deal8

ith either agents or through internet portalscompanies in arranging for co

7

erage

In today s scenario, insurance companies must mo9

e from

selling insurance to mar%

eting an essential financial product.

The distributors ha9

e to become trusted financial ad9

isors for

the clients and trusted business associates for the

insurance companies.

The most prominent models of insurance distribution are:

Agents

Insurance agents ha9

e to%

no&

&

hichproduct&

ill appeal to

customers, and also%

no&

their competitors products in the

same space to be effecti9

e sales indi9

iduals&

ho can sell their

company and its products to the customers. To the a9

erage

customer, e9

ery ne&

company is the same. Life insurance in

India has been mostly distributed through an elaborate

net&

or%

of agents.

The agency force has a highgestation period and is

more suitable to sell comple$

ris%

-based products. The

product mar%

et focus on relati9

ely simpler ULIPs ma%

es

Corporate agents: Non -ban 6

institutions in7

ol7

ed in thesale of insurance products

5 ource:@

atson@

yatt

Tied agents: Insurancecompanies aligned agency force

@

or6 site: A ar6 eting arrangements8

ith entities to sell insurance totheir employees

predominantly agency -based models relati9

ely e$

pensi9

e.

Agents are di

9

ided into

9

arious categories, depending on thes

%

ills, e$

perience and producti9

ity. Companies are focusing on

identifying training needs and increas ing the producti9

ity of

agents. E$

hibit 2.7pro9

ides features of agents at

different le9

els:

28


30/45

B xhibit 2.7. Tiedagency model

Low productivity

Nascent Heavy investment required in product and process trainingagency force

"Trained" and

"independent"

agency force

Insurers focusoncontrolling attrition

Insurers' brandstrength, product innovationandcommission ratesarecritical in preventing attrition

High productivity

"Mature" and Loyalty (propelledby trailing commissionbuildup)"highly" productive

C

quips theorganization with theability tosell complex risk andasset protection productsagency force

Source: Life Insurance,D

delweiss, 6 August 2010, viaThomsonE

esearch

Agentsare responsible for the reputationof thecompanythey are working for and have their obligations toward

theirclients. Herearesome of thebasic functions that

agents perform:

F

rovideall thenecessaryapplication forms

Submit application forms to thecompany

Arrange forall the medical testsand related formalities

F

rovide reminders premiums paymentsand

return receipts

Should help customers makenecessarychanges in

address, nomination, etc.

Help in the processofassignment

Assist customers forany loanapplicationsand

related formalities

Should help customers revive lapsed policies

Assist inclaiming death benefits, if required

Besides theabove, agentsarenow moving from the

solecontact point betweenacustomerandan insurance

company tobecome financial advisors. Agents wouldnow

be responsible forexplaining thenatureofa policy to

customersas that will help customers to take informed

decisions. Their role is likely toenhance, as they will not

onlysell insurance products, but offerother financialproductsas well toenhancecustomerbenefits.

The limiting factor for prospective insurers will be the

extensiveandcostlydistributionstructureequipped for

reaching thissegment. While publicsectorcompaniesareable

toattract agents, theycontinue tosuffer from high

attrition ratesdue to the indiscriminateagent appointment.

The most successful of thesecompanies tiedagentsare

hardlyof theelite varietyofsalespeople. Theyarestill the

neighborhooddo-gooders the postman, theschoolteacher

and theshopkeeper who know the peopleandare

themselves known in thecommunity.

Thechallenge here is the lack of knowledgeof thecompetitive market and the inability todo intelligent

comparisons with thecompetitors products. New companies

are looking foreducatedandaware individuals with a

marketing flair, anelite group that canbeattractedonly

with high remunerationand the lureofa fashionablejob, all of

which maynot be possible in thisbusiness with its price

pressuresand thecomplexityofselling insurance. With

this kindofsegmentationof intermediaries, the test for

the insurancecompany lies in training andeducating these

people tobecomeeffectivesales individuals.

29


31/45

Further, I G DA holdsa mandatory test andother training

programs foragents in India. I G DA normsarebecoming

increasinglystiff foragents (commission reducedandspread

overa longer periodof time) is likely tobeeven morestrict,

which would impact agents in theshort term.

Bancassurance

Market entrantscannot expect to replicate theextensive

distributionnetwork of thenationalized insurance

companies. Building adistributionnetwork isexpensive

and timeconsuming. Asa result, private insurers have

largely followedastrategysimilar to that of the foreign

banks, i.e., starting from theaffluent segment and gradually

strengthening thedistributionnetwork to reach out to the

middle-incomesegment.

H xhibit 2.8. Bancassurance model

Bank-backed insurersand those promotedby largebanks that

are better positioned due to their relatively lower development

costs, predominantly variable cost structure (typically opening

own sales branches imply higher fixed and semi-variable costs)

and the integrationofsystems that may reduce thecost

ofoperations.

Though bank-backed insurersarebetter placedbecauseof their

strong brand, variablecost business models, access to the

banksdatabaseand walk-incustomers, which help reduce

overall acquisitioncosts, LII

clearlystandsasanexception to

this tenet becauseof itsscaleofoperationsand productivity

achievedoveryearsofoperations.

Thebancassurance model functionsat various levels, each

party having adifferent level ofagreement. H xhibit 2.8

explains the variousbancassurance models with their features.

Distri butionagreement

Insurerable to leverage thebank's infrastructure;sourceof fee -based income for thebank

Bank and insurer may havea fragmented view of theircustomers

Low level of integration

P

eluctanceofbank staff tosell insurance; insurer has littlecontrol overdistribution

Insurerable to leverage thebank's infrastructure;sourceof fee -based income for thebank

Integration in product development andchannel management

Strategic Sharing ofcustomerdatabase allowance

P

eluctanceofbank staff tosell insurance tosell insurance; insurer has littlecontrol overdistribution

Joint venture

Joint decision making;bank participation in product anddistributiondesign

High system integration, infrastrucural utilization; low -cost model

Insurer losescontrol ondistribution

Bank maybeable to realize higher profitabilityas an insurancedistributor rather thanasa producer

Financialservices

group

Full integrationofsystem; low-cost model

Q

otential for fully integrated productsanddeveloping aone-stop shop for financial services

Insurer is ill equipped toexercisecontrol overdistribution

Bank maybeable to realize higher profitabilityasan insurancedistributor rather thanasa producer

Source: Life Insurance,R

delweiss, 6 August 2010, viaThomsonS

esearch

T 0


32/45

Technological advancesareexpected toenablenew

distributionchannels, while recent regulatorychanges

(banksentry into insurance) areexpected toallow cross-

selling between financial servicescompanies. However,

banc-assurance isexpected to gainconsiderable popularity.

The increasedalliancesbetweenbanksand insurance

companies position theselling of insurance productsby

banksasanopportunity to leverage theirextensivebranch

network andbroaden their incomebase to include more

fee-basedbusiness. Insurersequallyseebancassuranceas

a low-cost option toexpand theirdistributionnetwork and

foray into previously inaccessiblesegmentsof the market.

U

therdistribution methods

Alternate distribution channels are needed for the

following reasons:

To increase insurance penetration in thecountry Todifferentiateon thebasisofcustomerservice; to

retainandattract new customers toexpandbusiness

To increase insuranceawarenessand knowledge

among people

Tosatisfy theneedsof moredemanding customers

To improvecost efficiency in insurancedistributionV

rivate playersareexploring several alternatives to reduce the

cost of replicating thedistributionnetwork of publicsector

insurancecompanies. While third-partydistribution in fast-

moving consumer goods isa possibility, thecomplexityof

insurance products, especially given the low awareness levels,

wouldnecess itatedirect selling.U

ne potential channel is marketing through corporate

employers, i.e., employers purchase productsonbehalfof the

employeesorat least support the marketing effort. The

concept of "worksite marketing," i.e., thesaleof voluntary

insurance products toemployeesat the worksite through

payroll deduction hasbecomecommon. Worksite marketing,

which wasonce the realm ofa few small companies, selling

just a few products, hasnow stretched to largecompanies,

offering a varietyof worksite products.

Brokersandcorporateagentsconstituteasmall part of

thedistributionsystem in India. AsonW

1 March 2010,

there were 259 direct brokers,W W

compositebrokersand

6 re-insurancebrokers. Whilenot many largebrokersare

present in the Indian market at the moment, theoverall

contribution from corporatebrokers is likely to increaseas

manycorporateagentsarenow becoming brokers.X

lobal

insurancebrokerssuch as Aon, Marsh, Willisand Howden

havealsoentered the Indian market.

Some products, once they receivea high level of penetration

andawareness, canbecomecommoditiesandbesold

through more impersonal channels. Theuseof the internet to

distribute life insurance products hasonly recently

emerged, and hasnot madeasignificant impact so far,

partlybecauseof thesubstantial advisorycomponent of

most life insurance products.

The penetration in rural andsemi-urban areas has becomethe core of distribution strategy of insurers. As in metros

and urban areas, insurers have targeted the mass-affluent

segment in rural areasas well. Thecost ofsetting up

operations in rural/semi-urban areas is far lower compared

with those in metrosandurbanareas. There isa promising

potential of rural andsemi-urbanoffices with unrelenting

expansion in these areasand the presence of multiple

insurers may result insub-optimal operations.

Thesedistributionnetworks have reachedanunprecedented

scale from mobile phonecompanies to microfinance

institutions tosupermarket chainsandchurches.Y

ustomers,

in vast numbers, who were previouslyoff the gridarenow

within reach.

Y

hallenges with theexisting distribution model

India is arguably oneof the most challenging and promising

emerging insurance markets. Its rapidly growing economy,

coupled with a young and diverse population, open ample

opportunities for the development of insurance. However,

there is much tobedone to realize this potential. In todays

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Indian insurance mar

a

et, the main challenge to insurers andintermediaries are:

b

uilding faith about the company in the minds of clients

Intermediaries being able to build personal credibilityc

ith clients

Controlling operating ed

penses by reducing

distribution costs

Copingc

ith IRe

A norms on their commission

It is the traditionally tied agents that haf

e been the primary

channels of insurance distribution in the Indian mara

et.

Public sector insurance companies haf

e their branches

in almost all parts of the country and haf

e attracted local

people to become their agents. These agents are fromf arious segments in society and collectif

ely cof

er the entire

spectrum of the society. Apersonc

ho has lif

ed in the

locality formany years sells the products of the insurance

companyc

ith a local branch nearby. This ensures the last

mile touchpoint being closer to the customer. Of course,

the profile of the peoplec

ho acted as agents suggests that

they may not haf

e been sufficientlya

noc

ledgeable about

the diff erent products offered, and may not haf

e sold the

appropriate product to the client. Nonetheless, the customer

trusted the agent and the company. This arrangementc

ora

ed satisfactorily in the absence of competition.

In today s scenario, agents continue as the prime channel

for insurance distribution in India, as is the case in most

mara

ets, supported by call centers to a small ed

tent. Nearly

all the nec

players folloc

this model primarily

insuarance report final

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