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Subjects:
Insurance industry
Legislation
Privatization
Regulation
Classification Codes
9179 Asia & the Pacific
8200 Insurance industry
4310 Regulation
Locations:
India
Author(s):
Aparna Viswanathan
Document types:
Feature
Publication title:
International Financial Law Review
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India privatizes insurance: Will it attract investor funds?

Aparna Viswanathan. International Financial Law Review. London: Mar 2000. Vol. 19, Iss. 3; pg. 28
Abstract (Summary)
In one historic sweep India has privatized its insurance market by allowing private companies to undertake general and life insurance. On
December 2, 1999, India's parliament passed the Insurance Regulatory and Development Authority (IRDA) Bill 1999, ending a decade long
dispute with the US over opening the Indian insurance market to competition. The new private players in the Indian insurance market are
Indian insurance companies which obtain a certificate of registration from the IRDA. An Indian insurance company is a company
incorporated under Indian law in which the aggregate holding of equity shares by a foreign company does not exceed 26% of the paid up
equity capital.
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Full Text
(3683 words)
Copyright Euromoney Publications PLC Mar 2000
[Headnote]
After 10 years of wrangling, the Indian government has privatized its insurance industry. Aparna Viswanathan of Viswanathan & Co asks whether the
legislative reforms have created an adequate regulatory framework
In one historic sweep India has privatized its insurance market by allowing private companies to undertake general and life insurance
business. On December 2 1999 India's parliament passed the Insurance Regulatory and Development Authority (IRDA) Bill 1999, ending a
decade long dispute with the US over opening the Indian insurance market to competition.
The IRDA Act amended the Life Insurance Corporation Act 1956 so as to divest the Life Insurance Corporation of India (LIC) of the exclusive
privilege of carrying on life insurance business in India, and amended the General Insurance Business (Nationalization) Act 1972 to divest
the General Insurance Corporation of India (GIC) of the exclusive privilege of carrying on the general insurance business in India. The LIC
and GIC along with the state-owned Oriental Insurance Company and New India Assurance Company will remain the market incumbents
who will compete against the new private entrants.
The new private usurers
The new private players in the Indian insurance market are Indian insurance companies which obtain a certificate of registration from the
Insurance Regulatory and Development Authority (IRDA). An "Indian insurance company" is a company incorporated under Indian law,
whose sole purpose is to carry on life insurance, general insurance or re-insurance business, and in which the aggregate holding of equity
shares by a foreign company either by itself or through its subsidiary companies or its nominees does not exceed 26% ofthe paid up equity
capital.
"Foreign company", in turn, means a company which is not incorporated in India or a corporation, association, institution or other body which
does not have its principal office in India. A promoter may not, at any time, hold more than 26% of the paid up equity capital in an Indian
insurance company. Ifthe promoter owns more than 26% of the paid up equity capital at the time of commencement of business, the excess
must be divested 10 years from the commencement date. This divestment requirement does not, however, apply to promoters which are a
foreign company.
The question left open is whether the 74/ remaining equity in an Indian insurance company may be held by a company incorporated in India
in which foreign companies have an equity stake. Indirect holdings of equity by foreign companies have been expressly allowed in the
telecom sector and the issue of whether tiered holding company structures can be created in the insurance context has not been addressed
by the IRDA Act. By creating tiered holding company structures in which a foreign company owns shares in the Indian company which, in
turn, owns 74% of the Indian insurance company, foreign investors could increase their effective control over the insurer.
Capital requirements and share transfers
The new insurers must have a minimum paid up equity of Rsl billion ($22.7 million) for life or general insurance and a minimum paid up equity
ofRs2 billion for reinsurance business. The prior approval ofthe new statutory regulator, the IRDA, must be obtained for the transfer of shares
where the nominal value of the shares intended to be transferred by any individual, firm, group, constituents of a group or body corporate
under the same management, jointly or severally exceeds 1% ofthe paid up equity capital of the insurer. The definition of "group" and "same
management" have been taken from the Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act).
"Group" means a group of two or more individuals, association of individuals, firms, trusts, trustees or bodies corporate (excluding financial
institutions) or any combination thereof which exercises or is in a position to exercise control, directly or indirectly, over any body corporate,
firm or trust. "Group" also means a group of associated persons, among other things, a director of a company and his relative, or a partner of
a firm and a relative of such partner or two trustees of a trust. Two bodies corporate are deemed to be "under the same management" if, for
example, they share the same managing director or manager or one owns one-fourth of the shares or controls composition of one-fourth of
the board of directors of the other. Various other examples of operating under the same management are provided by the MRTP Act.
In short, in order to obtain a licence as an insurer, a company must be incorporated under Indian law, have a minimum paid up capital ofRs1
billion (or Rs2 billion for reinsurance) and may have foreign equity participation up to 26%.
The IRDA Act imposes a series of operating restrictions on the insurers in terms of deposit requirements, solvency margins, separation of
policyholders and shareholders funds, profit entitlement, expense regulations and taxation. As discussed below, several of these restrictions
depart from international practice and raise questions regarding the viability of the regulatory framework.
Every insurer must deposit with the Reserve Bank of India (RBI) cash or approved securities as follows:
* life insurance - a sum equivalent to 1% of his total gross premium written in India in any financial year commencing after March 31 2000 not
exceeding Rs100 million.
* general insurance - a sum equivalent to 3% of his total gross premium written in India in any financial year commencing after March 31
2000 not exceeding Rs100 million.
* reinsurance business - Rs200 million.
The Act also requires insurers to maintain a prescribed solvency margin defined as the excess ofthe value of assets over the amount of
liabilities. The minimum solvency margin for life insurance is the higher ofthe aforesaid Rs500 million (RsIs billion for reinsurance) or a sum
not exceeding 5% of the mathematical reserves for direct business and reinsurance acceptances without any deduction for reinsurance
cessions or a sum not exceeding 1% of the sum at risk for the policies on which the sum at risk is not a negative figure. In the case of general
insurance, the solvency margin is the highest of Rs500 million (Rsl billion for reinsurance) or a sum equivalent to 20% of net premium income
or a sum equivalent to 30% of net incurred claims subject to credit for reinsurance in computing net premiums and net incurred claims. The
minimum solvency margin of 50% has been viewed as high by international insurers particularly in view of the profit distribution rules and
taxation rules as discussed below.
Investments
There are two main methods of regulating investments by insurers. In some countries, including India, the law prescribes allocation of assets.
In other jurisdictions, no asset allocations are prescribed, instead, the prescribed minimum solvency may be met only by "eligible assets".
The Report ofthe Expert Group on Technical Issues related to Life and Non-Life Insurance Companies issued by the Confederation of Indian
Industry (CII) in September 1999 (CII Report") has suggested that Indian law shift from prescribing asset allocation and investment limitations
to the concept of eligible assets which would back the prescribed minimum solvency margins discussed above. However, the IRDA Act fails
to make this regulatory transition and continues to prescribe allocation of assets.
The IRDA Act provides that no insurer may directly or indirectly invest the funds of policyholders outside India. The IRDA may specify the
time, manner and other conditions of investment of assets to be held by an insurer. However, the Insurance Act, 1938 already specifies an
elaborate list of "approved investments" and "approved securities" which has not been amended by the IRDA Act. Therefore, in the absence
of further legislative amendments, any regulations promulgated by the IRDA must be within the parameters of the existing regulations
governing asset allocation. The IRDA Act also provides that every insurer must undertake such percentages of life insurance, general
insurance in the rural or social sector as may be specified by the IRDA.
The Insurance Act, 1938 requires insurers to establish a fund for the business oflife insurance called the life insurance fund. The Valuation
Balance Sheet (Form 1 to the Insurance Act, 1938), states that ifthe proportion of surplus allocated to the shareholders is not uniform in
respect ofall classes ofinsurance, the surplus must be shown separately for the classes to which the different proportions relate. This note
indicates that separate funds should be maintained for different classes oflife insurance business although the 1938 Act does not expressly
so provide. Importantly, the IRDA Act does not provide that separate funds must be maintained for different types of life insurance business
such as participating and non-participating businesses. It envisions that the existing practice of maintaining a single fund and a single surplus
will continue.
However, as pointed out in the CII Report, this concept of a single fund and a single surplus is not in line with modem life insurance business.
Life insurance business may be either particigating; in which the policyholders pay a higher premium for the right to participate in the surplus
generated or non-participating in which the policyholders do not share in the surplus. The shareholders instead get most or all of the surplus
because they bear allthe financial risks involved in providing the life insurance products. Life insurance products may also impose the entire
risk on shareholders (term assurance) or on policyholders (unit linked). Therefore, the law must reflect these developments in insurance
practice and provide for different funds for different Masses of policyholders. In addition, the share of surplus which may be allocated to
shareholders should vary according to each type of fund so as to adequately balance the interests of policyholders and shareholders. Even
more importantly, the following legal rules governing profit entitlement must be re-examined.
The Insurance Act, 1938 places restrictions on payment of dividends to shareholders and bonuses to policyholders. The 1938 Act provides
that no life insurer shall for the purpose of paying any dividend to shareholders or any bonus to policy holders or of making any payment in
service of any debentures utilize any portion of the life insurance fund except a surplus shown in the valuation balance sheet submitted to the
Authority as a result ofan actuarial valuation of the assets and liabilities of the insurer. Further, the share of any such surplus allocated to or
reserved for the shareholders, including any amount for the payment of dividends guaranteed to them, may not exceed 7.5 % of such
surplus.
In other words, 93.5 % of the surplus must be reserved for the policyholders for distribution as bonus and cannot be used for payment of
dividends to the shareholders. The percentage oE92.5 % is particularly high. The CII Expert Report has recommended that a minimum
of90% ofthe surplus from a participating fund be allocated to the policyholders as bonus and the distribution of the balance 10% be left to the
discretion of the individual companies. Insurers have taken the view that a 7.5% share of the surplus for shareholders is an unviable return
which is unlikely to attract foreign investment in Indian insurance companies. The return becomes even less attractive for products such as
term assurance where the entire risk is borne by shareholders. As the CII Expert Report points out, if the products are non-participating, the
policyholders are fully compensated provided the guaranteed benefits are paid and they do not have a right to claim part of the surplus. If
only 7.5% of the surplus can be transferred to the shareholders fund, who receives the remaining 97.5% of the surplus ? Perhaps the
ownership oFthese assets could remain ambiguous in the era of the state-owned insurers. However, in the new privatized market,
shareholder funds will not be attracted if shareholders are not going to be compensated for their investment by an adequate rate of return.
Although this issue raises a question over the viability of the new regulatory regime, it has not been addressed in the IRDA Act.
The IRDA Act also fails to allow for the transfer of any or all of the surplus from a non-participating fund to shareholders to compensate them
for the risks borne by the shareholders. The new legislation moreover does not provide insurers the option to fund non-participating life
insurance business from either the profits fund or the shareholders fund. 1 he foregoing restrictions on the shareholders share of the surplus
render the regulatory regime unreasonable because insurers will not be able to offer potential shareholders an adequate rate of return on
their funds. As these restrictions are contained in the Insurance Act, 1938, they can be amended only by an Act of Parliament and not by
rules and regulations issued by the new statutory regulator, the IRDA.
Expense regulations
The Insurance Rules, 1939 prescribe limits on expenses of management of life insurance and general insurance business not-withstanding
the fact that expense regulations are not common in market economies. The Rules prescribe the following limits which are expressed as a
percentage of life insurance premiums (less reinsurance) received during the year:
As stated above, the prescribed limit on expenses for the first four years is 100% ofthe premium. However, insurers have taken the view that
it is not possible for a company to limit expenses to the 100% expense ratio during the first four years of operation. In India, start up costs are
very high and the expense ratios will reduce only over time. However, the IRDA Act does not amend or even address the issue of expense
regulations notwithstanding the fact that no new insurer will be able to show an expense ratio of 100% during the first four years of operation
in its Business Plan. It is important to note that expense regulations are not included in the matters over which the regulator, the IRDA, can
make regulations. Moreover, the IRDA can only make regulations consistent with the Insurance Rules, 1939, therefore, it does not have
jurisdiction to amend the foregoing expense regulations.
Tax issues
In India, life insurance business is taxed as follows. The taxable profits of life insurance business are the annual average of the surplus
arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938 in respect
ofthe last inter-valuation period ending before the commencement ofthe assessment year. This tax rate applicable to such income is the flat
rate of 12.5%. The taxable profits of nonlife business are the Insurer's Profit Before Tax (PBT) determined in the annual financial statements
required under the Insurance Act, 1938 minus the amounts carried to reserves for unexpired risks. There are a number of critical tax issues
which affect the viability of the new regulatory regime. However, none of these issues have been addressed by the IRDA Act. In the initial
years, the new private insurers will make losses particularly in view ofthe need to declare bonuses to policy holders in order to compete
against the LIC and GIC. The losses and the bonuses which must be declared will be financed by transfers of funds from the shareholders
funds to the policyholders fund. However, this transfer of funds from the shareholders fund may be deemed to be a taxable surplus.
Therefore, as recommended by the CII Expert Report, the First Schedule of the Income Tax Act, 1961 should be amended to provide that
any amounts transferred from the Shareholders Fund to the Policyholders Fund must be deducted in computing the taxable surplus.
Furthermore, if, after such deduction, the resulting amount is a deficit, such deficit should be carried forward as a business loss to be offset
against the taxable surplus in subsequent years. However, the IRDA Act does not address any tax issues and there is no proposal to amend
the relevant provisions ofthe Income Tax Act,1961.
The regulator
The Act creates a statutory regulator, the Insurance Regulatory Development Authority (IRDA), which is vested with the duty to regulate,
promote and ensure the orderly growth of the insurance and reinsurance business. The IRDA will replace the existing administrative body,
the Insurance Regulatory Authority (IRA). The chairman ofthe IRDA, N Rangachary and member (non-life), H Ansari, have already been
appointed as full time members. A total of five full time members and four part time members are expected to be appointed this Spring.
The powers of the IDRA are, first, licensing of the new private insurers by issuing certificates of registration. The IRDA is expected to issue
rules and regulations, including procedures for obtaining a licence, by April 2000.
The second area of jurisdiction ofthe IRDA is tariff setting. It is important to note that the IRDA may only control the rates, terms and
conditions that may be offered by general insurance business not so controlled and regulated by the Tariff Advisory Committee (TAC) under
section 64U of the Insurance Act 1938. However, section 64U consists of very broad language which mandates the TAC to "control and
regulate the rates, advantages, term and conditions that may be offered by insurers in respect of general insurance business". According to
this sweeping language, the TAC is statutorily vested with the power to regulate all aspects of the rates, terms and conditions ofthe general
insurance business. It is thus unclear what aspects of tariffsetting remain to be regulated by the IRDA and this ambiguity may raise issues of
overlapping jurisdiction between the TAC and the IRDA.
Third, the IRDA is to regulate the operating issues discussed above such as investment of funds, business to be undertaken in the rural
sector, and margin of solvency. However, as mentioned above, the IRDA may only make regulations consistent with the Insurance Act, 1938
and the Insurance Rules, 1939. Therefore, the IRDA will not have the power to, for example, lower the minimum Rs500 million solvency
margin.
Fourth, the IRDA will regulate intermediaries by specifying qualifications, a code of conduct and practical training for insurance intermediaries
and agents, a code of conduct for surveyors and loss assessors, regulating professional organizations, inspecting, investigating and
adjudicating disputes between insurers and intermediaries, and specifying the percentage of premium income of the insurer to finance
regulation of professional organizations.
Finally, the IRDA is to protect the interests of policyholders in matters concerning assignment of policy, nomination by policyholder, insurable
interest, settlement ofinsurance claim, surrender value of policy and other terms and conditions of the insurance contract. However, this
means that the IRDA will have overlapping jurisdiction with the state-level and National Consumer Commission which have been hearing
coverage cases filed by insureds against the state owned insurers. It is now unclear whether the proper forum for a coverage dispute will be
a consumer commission or the IRDA.
Of even greater concern is the language in the IRDA Act which provides that the IRDA shall be bound by such directions on questions of
policy, other than those relating to technical and administrative matters as the central government may give in writing to it from time to time.
Although the IRDA shall be given an opportunity to express its views before any direction is given, the decision ofthe Central Government
whether a question is one of policy or not shall be final. This language is identical to that contained in the Telecom Regulatory Authority of
India Act, 1997 which has permitted the Department of Telecommunications (DoT) to interfere with the functioning of the Telecom Regulatory
Authority of India (TRAI). Various telecom issues have been deemed policy issues so as to permit the Government, through the DoT, to
interfere with the independence of the statutory regulator.
The provision binding the IRDA to the Government's policy decisions is, in effect, a way to allow the executive branch of government to
interfere with the statutory regulator and exceed the proper bounds ofits authority. This language in the IRDA Act constitutes excessive
delegation of legislative power to the executive which is both contrary to the principle of separation of powers between the three branches of
government and in violation ofthe Constitution of India.
The outlook
The foregoing analysis reveals that several major issues undermine the attempts to create an adequate regulatory regime for the newly
privatized insurance sector. First, the Insurance Act, 1938 must be amended to increase the share of surplus which can be distributed from
the policyholders fund to the shareholders fund. The current 7.5% share of surplus available to shareholders is inadequate to attract investor
funds. Second, the limitations in the Insurance Rules,1939 on expenses which may be incurred during the initial years must be relaxed as the
present limits will not be part of any viable business plan. Third, the Income Tax Act, 1961 must be amede cn that funds contributed from the
shareholders funds try the policyholders funds in order to make up a deficit, particularly in the start-up years, are deducted from taxes and the
deficit is carried forward as a loss. Unless the foregoing changes are made, the legal framework will not provide a reasonable regulatory
environment.
However, the foregoing reforms require legislative changes which are beyond the jurisdiction of the IRDA and will require an Act of
Parliament. Although the IRDA is expected to issue rules and regulations by April 2000, it does not have the jurisdiction to reform any of the
three issues discussed above. Therefore, in view of the fact that there is no timetable for further legislative reforms, it is not possible to
estimate the time required for the emergence of a regulatory framework conducive to attracting invest-nent and doing business.
Furthermore, the new regulatory regime fails to create an independent statutory regulator because the government has reserved the right to
intervene and issue directives to the IRDA on matters of policy. This provision in the IRDA Act subjects a statutory authority to the discretion
of the executive branch thereby violating the separation of powers of the executive and the legislature which is a basic feature of India's
constitution. Unless the IRDA Act is amended to delete this provision allowing the government to issue policy directives, an independent
statutory regulator will not be in place, thereby undermining the entire regulatory regime. In sum, while the new IRDA Act is a dramatic step
forward to an open insurance market, further legislative reforms are necessary before an adequate regulatory environment will be in place.
Indexing (document details)
Subjects: Insurance industry, Legislation, Privatization, Regulation

Classification Codes 9179 Asia & the Pacific, 8200 Insurance industry, 4310 Regulation
Locations: India
Author(s): Aparna Viswanathan
Document types: Feature
Publication title: International Financial Law Review. London: Mar 2000. Vol. 19, Iss. 3; pg. 28
Source type: Periodical
ISSN: 02626969
ProQuest document ID: 51976963
Text Word Count 3683
Document URL: http://proquest.umi.com/pqdweb?did=51976963&sid=6&Fmt=3&clientId=97393&RQT=309&VName=PQD
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Abstract
Full Text
Full Text - PDF (277 K)
Subjects:
Growth rate
Reinsurance
Insurance companies
Business forecasts
Globalization
8220 Property & casualty insurance
3300 Risk management
Locations:
India
Author(s):
B Venkata Ramana
Document types:
Feature
Publication title:
Risk Management
More options ↓
INDIA: An Industry on a Growth Trajectory

B Venkata Ramana. Risk Management. New York: 2008. pg. 54, 2 pgs
Abstract (Summary)
Both the domestic Indian and global insurance and reinsurance industries have maintained an upward surge of all-round growth in the last
few years. Thanks to liberalization and globalization of financial services the world over, the untapped potential, both in life and non-life
insurance, has made growing economies like India the center of attention. The public sector giant Life Insurance Corp of India grew to
562.2 billion rupees in terms of the first-year premiums during the same period. Reinsurance is multi-billion dollar global industry that is vital
to the financial stability of insurance companies. As the mechanism of insurance and reinsurance is a dynamic process, insurance markets
all over the world have been undergoing contractual permutations and combinations with improvised technological innovations in the
operational systems. The industry experts have estimated business in the domestic insurance industry to be around $60 billion by the year
2010, $35 billion of which will come from rural and semi-urban sectors.

Full Text
(1460 words)
Copyright Risk and Insurance Management Society, Inc. 2008
Both the domestic Indian and global insurance and reinsurance industries have maintained an upward surge of all-round growth in the last
few years. Thanks to liberalization and globalization of financial services the world over, particularly in the last decade, the untapped
potential, both in life and non-life insurance, has made growing economies like India the center of attention.
Moreover, the Indian insurance industry remains on an accelerated and surcharged growth trajectory. For the year 2006-07, the insurance
sector reached 4.8% of GDP and achieved a whopping 19.9% growth rate in premium compared to a global market growth rate of 2.9%. And,
although the penetration of life and non-life insurance together is hardly 2% (against the global average of 7.5%), it is amazing to find that, in
India, the life insurance business recorded an astronomical 110% growth rate (total business of $18.6 billion) and the nonlife sector reached
22.4% (total business at $6.2 billion).
Despite the heavy competition from private players, the public sector giant Life Insurance Corporation of India (LIC) grew to 562.2 billion
rupees in terms of the first-year premiums during the same period. At the same time, the performance of private players, particularly in the
non-life segment, has been most encouraging-not only in growth rate, but also overall market share. (Private sector growth was 60.4%
against 8.6% in public sector in 2006-07 and gross direct underwritten premium reached 162.6 billion rupees, up from 98 billion rupees in
2000-01.)
The number of private insurers has gone up to 17 in the life insurance sector and 12 in the non-life sector, during this period, which is the
single biggest factor for the overall growth and expansion of network of the insurance industry as a whole. With the determined efforts and
proactive stance of the Insurance Regulatory and Development Authority (IRDA), particularly in streamlining and rationalizing the attitude and
approach of all the participating players at the marketplace, customized products and new service parameters have also assumed full focus
as of late.
As a result, perceptible improvement and innovation in the variety and quality of products, technology-driven systemic changes in the
marketing and distribution channels, and objectively targeted sales advertising and product campaigns have assumed global standards.
Some of these innovations include delivery mechanisms emanating from different types of tie-ups with financial institutions, nongovernment
organizations, cooperative societies, communication technology projects and the sale of policies through bank networks (e.g.,
bancassurance), post offices and the internet. Having realized the vast potential and untapped business in rural and semi-urban sectors,
most of the insurers have started expanding their operational network and manpower to those areas and have since made considerable
headway in this regard.
While the entry and establishment of joint ventures between some of the global insurance majors and the Indian corporate giants is
progressively on the upswing, some of the large Indian companies are gradually venturing into overseas markets with the twin objectives of
diversifying their core business activities (which include insurance) and increasing their presence across the continents.
Public sector giants like LIC, the New India Assurance Co. Ltd., and General Insurance Corporation of India (GIC) (the sole national
reinsurer) have been operating in several overseas countries for some time. Recently, for example, Shriram Group, gained up 40% stake in
Monarch Insurance Company of Philippines, and ICICI Prudential Life expanded into multiple Gulf countries.
Reinsurance
Reinsurance is multi-billion dollar global industry that is vital to the financial stability of insurance companies. It enables them to provide
insurance against risks they otherwise would not be able to accept safely.
As the mechanism of insurance and reinsurance is a dynamic process, insurance markets all over the world have been undergoing
contractual permutations and combinations with improvised technological innovations in the operational systems.
With the entry of national and international insurance companies into countries like India arising out of sudden spurt of growth and proactive
proliferation of primary insurance in this part of the world, the global reinsurance markets have seen accelerated buoyancy all around.
The increased activation in the systems and transaction modules of insurance and reinsurance, particularly in the last five to seven years has
generated many innovative trends, opportunities and challenges to the reinsurance fraternity, specifically to Asian reinsurers, and especially
GIC.
By virtue of its experience and exposure in providing reinsurance support and guidance to its non-life insurance subsidiaries for more than
three decades, GIC has excellent organizational and technical skills in taking care of reinsurance arrangements for the current Indian
insurance market. Looking to the proactively effective regulatory mechanism put in place in the country, the accelerated growth momentum
generated in the Indian insurance market and the technical expertise of GIC as national reinsurance leader, all the market players, including
the IRDA, can take full advantage of electronic communication technology to further improve existing reinsurance arrangements throughout
the world.
Meanwhile, GIC Re, as part of its strategy to expand its operations and to make its presence felt globally has recently upgraded its
representative offices in London and Dubai into fullfledged branches and accelerated its action plan to finalize alliance with local reinsurance
companies in the eastern and southern part of the African continent. GIC Re also has a representative office in Moscow, which has been
playing a proactive role in coordinating the strategic reinsurance arrangements with that part of the world.
GIC Re recorded an overall underwriting loss of 759.5 million rupees for the financial year 2006-07, however, it has achieved a robust growth
of more than 156% in its net profits of 15.31 billion rupees, compared to 5.98 billion rupees during the corresponding period in the previous
year.
Overall, GIC ranks 21st among nonlife reinsurers with a net worth of $1.4 billion, and according to GIC Re, it is positioned as the lead
reinsurer in the Afro-Asian region and other emerging economies. Recently, for example, it acquired 15% shareholding in Kenya's East Africa
Re with an investment of $2 million.
In an interview, the chairman of GIC clarified that despite reduction of obligatory sessions from 20% to 15%, during 2006-07, the premium
income for GIC Re went up from 2 billion rupees to 2.7 billion rupees. Its international reinsurance business amounted to 22% of its total
turnover for the year.
Since more and more global insurance companies are queuing up to forge partnerships in the Indian market and considering the stringent
regulatory measures initiated by IRDA, the domestic insurance and reinsurance markets are sure to witness new issues and challenges,
particularly in the context of the recent detariffication of non-life insurance products, which came into effect in January 2007.
Due to the changed equilibrium in market forces resulting from industry consolidation, new regulations and solvency margins, the attention of
all the players in the market is slowly turning towards designing and developing new and innovative products, introducing fast-track
distribution channels and fine-tuning the systems, procedures and business strategies. This is bound to result in increased market
penetration both in life and non-life sectors.
Accordingly, the industry experts have estimated business in the domestic insurance industry to be around $60 billion by the year 2010, $35
billion of which will come from rural and semiurban sectors. In terms of life and nonlife, the market is expected to grow much faster and touch
$35 billion in business and $25 billion in non-life business.
Current trends and estimates also indicate that for every 1% increase in India's GDP, insurance premiums increase by at least 4%. As a
result of detariffication and freedom in pricing, general insurers are sure to experience more freedom in revising their reinsurance
arrangements.
Enlarge 200%
Enlarge 400%
While public sector non-life companies, which are well-capitalized, are logically inclined to reinsure less, the private companies with limited
capital base might continue to reduce their exposures by reinsurance. Though reinsurance rates considerably softened globally, domestic
non-life insurers may have to pay higher rates as the primary insurance rates have substantially fallen, following lifting of price controls and
losses due to catastrophic floods in Mumbai, Chennai and Surat in 2006.
Meanwhile, having upgraded its offices in London and Dubai and partnership deals in south and east Africa, the GIC Re is strengthening its
role as a leading reinsurance player in Afro-Asian markets.
Based on tentative business plans for the next three years, GIC Re's global net worth is expected to cross $1.5 billion mark by 2009,
increasing its international business to about 35% with an underwriting profit of at least 1.5 billion rupees, presuming that no major
catastrophes occur during the period.
[Sidebar]
The original version of this article appeared in the lune 2008 issue of the magazine Insurance Chronicle © 2008 The Icfai University Press. It has
been reprinted with permission. For more information, visit: www.iupindia.org.
[Author Affiliation]
B. Venkata Ramana is a faculty member of The Icfai Business School in Hyderabad (Andhra Pradesh),
India.
Subjects: Growth rate, Reinsurance, Insurance companies, Business forecasts, Globalization

Classification Codes 9179 Asia & the Pacific, 8220 Property & casualty insurance, 3300 Risk management
Locations: India
Author(s): B Venkata Ramana
Author Affiliation: B. Venkata Ramana is a faculty member of The Icfai Business School in Hyderabad
(Andhra Pradesh), India.
Document features: Maps
Publication title: Risk Management. New York: 2008. pg. 54, 2 pgs
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Abstract
Subjects:
Health insurance
Health services
Health care expenditures
Financing
Public health
Statistical analysis
8210 Life & health insurance
8320 Health care industry
1200 Social policy
9130 Experimental/theoretical
Locations:
India
Author(s):
Hima Gupta
Document types:
Feature
Publication title:
International Journal of Health Care Quality Assurance
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The role of insurance in health care management in India

Hima Gupta. International Journal of Health Care Quality Assurance. Bradford: 2007. Vol. 20, Iss. 5; pg. 379
Abstract (Summary)
Health insurance in India has shown little development. It has not been able to evoke enthusiasm among Indian insurers. Consequently,
several reports on Indian health care insurance have been produced. The purpose of this paper is to offer a review of this matter. Critical
review of related published and grey literature. Almost 79 per cent of health expenditure is borne by private bodies and the rest by the public.
Authors argue that to stimulate private health insurance growth, the Indian government should recognize health insurance as a separate
line of business and distinguish it from other non-life insurance. Particular emphasis is placed on the present health care scenario in India
and international field generally. A global comparison of selected Asian countries, regarding their national incomes and health expenditure in
public and private sectors, generates insights. Third party administrators (TPAs) facilitate a cashless health services for their customers and
offer back-up services to the insurance companies. Desired strategies and ways of furthering the role of the Insurance Regulatory and
Development Authority in acting as a regulator for the purpose of ensuring the industry's smooth functioning is an issue for India's health
services. Information about the present complexities in the health insurance market has been gathered from various sources and
summarized. [PUBLICATION ABSTRACT]

Full Text
(4678 words)
Copyright Emerald Group Publishing Limited 2007
Introduction
The World Health Organization defines health as complete physical, mental and social well-being, not merely the absence of disease and
injury ([13] Parekh, 2003). Accordingly, a country's health system comprises all the organizations, institutions and resources devoted to
produce health services.
Health care has always been a problem area for India, a nation with a large population and a substantial portion living below the poverty line.
Consequently, health care access and equity become important issues, and health insurance has not been developed to its immense
potential in the world's fifth largest economy. An estimated 1.3 billion people worldwide lack access to effective, affordable health care, while
more than 150 million people in 44 million households worldwide every year face financial ruin as a direct result of large medical bills. Yet
most policymakers have assumed until recently that poor families in developing countries - whose survival is precarious - would not pay
health insurance premiums even to forestall the costs of future hospitalization ([8] International Conference on Social Health Insurance in
Developing Countries, 2005).
Table I [Figure omitted. See Article Image.] suggests that public health care is concentrated in rural areas that lean towards prevention while
private units are curative only mainly to discourage malpractice issues. Further, public domain expenditure is met by center, state, local and
social insurance. If we analyze the situation in the private domain, the maximum contribution is out-of-pocket, followed by pharmaceutical
industry and so on. In India until now, the primary health care system has been managed mainly by limited government health care facilities
and other public health care systems in a traditional model of health funding and provision. However, this structure is unable to meet the
demand from 200 million plus health insurable Indian people. Moreover, it has become expensive owing to high health service costs,
inadequate physician numbers, weak education programmes, low hospital numbers, poor medical equipment and insufficient government
health service budget allocation. Even the Indian social insurance programmes, such as the Employee State Insurance Scheme (ESIS) and
Central Government Health Scheme (CGHS) are restricted to a small segment (3 per cent) of the population ([12] Nagendranath and Chari,
2002).
Table II [Figure omitted. See Article Image.] shows that India spends up to 7 per cent of GDP on healthcare, out of which 1.3 per cent is in
the government sector (accounting for 22 per cent of overall spending) and 4.7 per cent in the private sector (78 per cent of overall spending)
([13] Parekh, 2003). Spending impact data are interesting - India's life expectancy, 64 years, is higher compared to China's spending on
healthcare (5 per cent of its GDP) with a 52.5 years life expectancy. The USA spends around 13.2 per cent of its GDP on health care, and its
life expectancy is 72.5 years ([14] Parera, 2004).
Estimating future health insurance expenditure
One Indian government commission estimated future health insurance needs. It was assumed that 10 per cent of India's population would
still be in poverty by 2016 ([16] Sinha, 2005). Desirable health insurance coverage should be 50 per cent of the population, in line with China
and Korea. The cost of government insurance is assumed to be Rupees 400 per year per person for the population below the poverty line.
The cost of private insurance, on the other hand, is estimated at Rupees 1,200 per year per person for all persons other than those below the
poverty line. Based on these assumptions, health insurance expenditure is estimated to be Rupees 645,320 million per year, of which
Rupees 49,640 million comes from the public sector and Rupees 595,680 million from the private sector, assuming 40 per cent coverage
instead of 50 per cent (Table III [Figure omitted. See Article Image.]). This amounts to slightly over 1 per cent of GNP by 2015.
Health insurance operational costs

There is usually a substantial difference in the cost of running a private health insurance compared to a public scheme. The difference can be
five to ten times lower in the case of public systems (Table IV [Figure omitted. See Article Image.]). The main reason for such differences is
that public systems are compulsory. People cannot opt out of them. The cost of acquisition is thus lower.
There is also a range of non-government organizations (NGOs) and self-help groups that operate their own health insurance schemes.
Probably the most well known is the Indian Self-Employed Women's Association (SEWA). For members, the scheme charges an annual
premium of Rupees 30 to a maximum of Rupees 1,200 per year. There is also a fixed deposit option, i.e. a set amount is deposited with a
hospital irrespective of any scheme. The actual health care scheme is run (on a group basis) by the government-owned insurer - New India
Assurance, and there are a number of health insurance type plans along SEWA lines ([16] Sinha, 2005).
Issues and concerns
There is a variety of problems with India's health coverage plans. The common negative factors include ([13] Parekh, 2003):
- Grossly inferior service when the plan giver, ESIS, CGHS etc, owns facilities.
- Rejection and unwarranted reimbursement delays.
- Service limitations - either low policy limits on reimbursement amounts or restricts applied to pre-existing and chronic ailments.
- Inadequate information regarding health, ailments, procedures and treatments, corresponding costs and outcomes.
- Provider malpractice.
- Pricing for comprehensive total care.
- Inadequate medical care coverage.
International health insurance reform
An evaluation of the reform measures adopted in some developed markets like France and Germany, found these results ([13] Parekh,
2003):
- A shift to economic and medical efficiency.
- The introduction of health care activity budgeting and evaluation.
- Changes in the health risk coverage, introduction of gatekeeper mechanisms and diffusion of healthcare networks.
- Weakened providers and strengthened state.
- Promoting competition.
Health reform is not and never will be a dispassionate matter of selecting policy instruments from some menu of idealized options. An
enlightened, progressive strategy in health care must take into account the political context of reform. It must consider the different
environments that are obvious possibilities for the next decade and beyond. We may conclude from this review that if the will exists then
states can substantially expand coverage. However, as one moves up the income scale, political support and resources are harder to come
by. Further, concerns grow about the interface between public and private coverage, with "crowd out" issues and other distributional
questions dominating the discussion about coverage expansion, as policy makers focus less on how to cover people than on how to make
sure one kind of coverage does not preempt another. Concern about "crowd out" leads to policies that keep out some of the people policy
makers may want to cover. In this context, the question whether states or the federal government is more likely to expand coverage is
eclipsed by the more fundamental challenges raised by pluralism. Neither federal nor state government is likely to be fully successful without
first identifying better ways of coordinating public and private activities and resources to provide continuous and affordable coverage ([6] Gold
and Mittler, 2001).
Current policies available in the market and the major players
The first policy that comes to mind is General Insurance Corporation's (GIC) Mediclaim health insurance scheme. Currently there are only
two players in this field, Life Insurance Corporation and General Insurance Corporation (with its four subsidiaries). Mediclaim is the health
insurance scheme offered by GIC, while Jeevan Asha is offered by Life Insurance Corporation (LIC). Competition has, however, brought in
many new players. Emerging markets, comprising 86 per cent of world population, including some of the populated nations like China (1.3
billion), India (1.1 billion) and Indonesia (0.2 billion) account for 23 per cent of global economic output. Emerging markets collectively
accounted for 11 per cent of global life insurance premiums in 2003 ([17] Swiss Re, 2004).
Over the next 50 years, Brazil, Russia, India and China (BRIC) could become a much larger force in the world economy (Table V [Figure
omitted. See Article Image.]).
Several companies entered the health insurance market and a dozen companies linked with foreign partners. Growth in the twenty-first
century will come from countries like South Korea, China, Taiwan, South Africa and India (Table VI [Figure omitted. See Article Image.]).
Delay may doom the future efforts of insurance companies to stake a claim in these high potential markets ([17] Swiss Re, 2004).
Indian and global statistics
This section gives the users important and detailed statistics about the Indian as well as global insurance industries. These statistics give
important insights where the respective markets are headed. The global life insurance market stands at $1,521.2 billion while the non-life
insurance market is placed at $922.4 billion. The USA accounts for about one-third of the $2443.6 billion global insurance market and Japan
stands next with a 20.6 per cent share. India takes the 23rd position with US$9.933 billion annual premium collections and a meagre 0.4 per
cent share. India's life insurance premium as a percentage of GDP is just 1.8 per cent. The income derived by GIC and its subsidiary
companies through investment was Rs.2491.76 crore and the investible fund generated was Rs.2843 crore in 1999-2000. Indian insurance
market is set to touch $25 billion by 2010, on the assumption of a 7 per cent annual growth in GDP ([1] Anand, 2003). India's healthcare
industry is currently worth Rs 73,000 crore which is roughly 4 percent of its GDP. The industry is expected to grow at the rate of 13 percent
for the next six years, which amounts to an additional Rs 9,000 crore each year. Over the last five years, there has been an attitudinal
change amongst a section of Indians who are spending more on healthcare. A big opportunity exists for the industry, emerging from
privatising the insurance segment, which extrapolates into a new delivery system in India. With global revenues of approximately US$2.8
trillion, the healthcare industry is the world's largest and India is emerging as a major player not least because of its population size.
According to the Insurance Regulatory and Development Authority (IRDA), the Indian healthcare industry has the potential to show the same
exponential growth that the software and pharmaceutical industries have in the past decade. Further, IRDA explain that only 10 per cent of
the market potential has been tapped and market studies indicate a 35 per cent growth in the coming years. In short, India has a vast
insurable population but currently only 2 million people (0.2 per cent of the total population) are covered under Mediclaim and according to a
recent study, there are 315 million potentially insurable lives in the country ([2] Bahadur, 2001).
The attractiveness of the industry gives rise to more corporate players in the field. The emergence of private health insurance is yet to exert
any significant pressure on the way Indian hospitals compete or operate. Institutional customers (government agency employees or
companies reimbursing the cost of medical care to staff) have emerged as an important source of regular and lucrative business for the
private health insurers. The Indian Credit Rating Agency (ICRA) has observed that most hospitals are benefiting from emerging private health
insurance companies and have set up administrative systems to service enrolled customers. Another reason for the growth in health
insurance is the cashless claim facility, which has been introduced by a number of private insurers. The National Health Policy (NHP) set the
goal of increasing public health expenditure from 0.9 to 2 per cent of GDP by 2010 ([18] Verma, 2003).
Companies are also talking about new products they will introduce in the market, from smart cards to patient guidance services. All this is
expected to reduce the cost of healthcare and make the industry more professional. Nevertheless, it is estimated that the US$761 million
health insurance business in India will swell five-fold to US$4 billion by 2005. Most of the foreign companies entering India have decided to
focus on life insurance rather than health insurance alone, just because a broader insurance product range is available. Also, there are
companies like Bajaj Alliance which has launched a Mediclaim policy with a cashless claim facility. The insured under this policy receive
cashless treatment from 41 hospitals across the country to the extent of the sum insured for ailments covered by the policy. The major
advantage is that under such plans, the policyholder is not required to settle his or her hospital bill upfront and then make a claim with the
insurer. Instead, the insurer settles the hospital bills on behalf of the policyholder. It is a precursor to the formal transition to a third-party
administrator regime, which provides hassle-free health insurance and also standardizes medical diagnostic and hospitalization expense
procedures. This is something that is missing in the current GIC Mediclaim policy, which requires payment for hospital expenses from
patients who submit bills to their insurance company. A problem is that reimbursement often takes time owing to the bureaucratic procedures
involved.
New insurance schemes
One scheme, the Universal Health Insurance policy, is available to groups of 100 or more family members. The policy reimburses up to
Rs.30000 medical expenses towards hospitalisation for the family. In cases of the family head's accidental death, Rs.25000 compensation is
paid for the loss of earnings at Rs.50 per day, up to a maximum of 15 days, after a three-day waiting period. The premium is Rs.365 per
annum for an individual, Rs.1.50 per day for a family of five limited to spouse and children and Rs.2 per day for covering dependent parents
in a family size up to seven. A subsidy of Rs.100 per year towards annual premium for families below the poverty line is also provided under
the scheme. For the purposes of this policy "hospital" means:
- Any hospital/nursing home registered with the local authority and under the supervision of a registered and qualified medical practitioner.
- Hospital/nursing home run by the government.
- Enlisted hospitals run by NGOs/trusts and selected private hospitals with fixed schedule of charges.
Hospitalisation should be for a minimum period of 24 hours. However, this time limit is not applied to some specific treatments and also
where, owing to technological advancement, hospitalisation for 24 hours may not be required.
The main policy exclusions are:
- All pre-existing diseases.
- Corrective, cosmetic or aesthetic dental surgery or treatment.
- Spectacles, contact lens and hearing aid.
- Primarily diagnostic expenses not related to sickness/injury.
- Treatment for pregnancy, childbirth, miscarriage, abortions etc.
- Covers people between the ages of three months to 65 years.
Under the policy, family members can receive reimbursement of Rs.30,000 (US$656) individually or collectively.
Why health insurance?
The reasons for health insurance-based services include:
- In the mid 1980s the healthcare sector was recognized as an industry. Hence, financial institutions started funding while the government
reduced import duty on medical equipments and technology.
- Socio-economic changes: with the rise of the literacy rate, increasing awareness through media channels' deep penetration, contributed to
greater attention paid to health.
- Brand development: many family-run businesses have set up charity hospitals, and by lending their name to hospitals, companies
developed good market images.
- Extension to related business: some pharmaceutical companies like Wockhardt and Max India have ventured into this sector as it is a direct
extension to their work ([12] Nagendranath and Chari, 2002).
Third party administrators (TPAs)

Third party administrators are insurance intermediaries who undertake the entire administration of health plans for insurance companies.
Apart from settling claims, TPAs offer customer service and technical support. The IRDA organization recently published draft regulations ([3]
Bhat and Babu, 2003); that is, TPAs will:
- be allowed to enter into agreements with more than one insurer for reducing health insurance service costs, but as TPAs they are barred
from becoming directors of an insurance company, insurance agents, or an intermediary;
- be required to start with a minimum working capital of Rs1 crore (minimum amount required to run the business as TPA according to IRDA
guidelines);
- renew their licenses three yearly through IRDA;
- have to maintain and report to IRDA on transactions carried out on behalf of the insurer. But this would not include trade secrets,
policyholders' personal details;
- understand IRDA's code of conduct for TPAs, refraining them from trading in information, submitting wrong information to insurers and
advertising without prior approval of the insurer among other things; and
- have to ensure staff undergo a minimum three-months training in the field of health insurance and have access to competent medical
professionals.
The TPA has to spell out the scope of services that it will deliver within its agreement with an insurance company. The TPAs facilitate
cashless health processes for their customers and offer back-up services to the insurance companies. There are 23 licensed TPAs but only
11 operate because they failed to fulfill their obligations towards consumers. The IRDA has expressed clearly the rationale behind licensing
TPAs:
It is expected that, with the benefits of cashless services being fully appreciated by the insured ... health insurance would get popularised. In
addition, with the onus of service shifting from the insurer to the service provider, access to health services should become that much easier -
thereby giving a quantum jump to the spread of health insurance ([15] Rao, 2003).
The TPAs organize healthcare providers by establishing networks with hospitals, general practitioners, diagnostic centres, pharmacies,
dental and physiotherapy clinics, among others. The agreement between TPAs and healthcare organisations includes monitoring and
collecting documents and bills. Documents are audited, processed and sent to the insurance companies for reimbursement. The TPAs
manage claims, get reimbursements from the insurance company and pay the healthcare provider. The TPAs have in-house expertise
including clinicians, hospital managers, insurance consultants, legal experts, information technology professionals and management
consultants. By bringing all these elements "in-house" they are able to contain costs. The introduction of TPAs has not been smooth,
however, and they receive complaints. Until reliable data across different diseases in India are available, TPAs will be limited to mainly large
urban populations ([15] Rao, 2003).
Changing attitudes - from self-centric to consumer oriented
Medical costs are running into hair-raising amounts and so quality health care makes this a seller's market. Currently, two-thirds of India
relies on private sector health insurance, which accounts for 83 per cent of total health expenditure. Until recently, Mediclaim held the health
insurance monopoly in India, which was more self- than consumer-centric. It treated every claim with characteristic bureaucratic suspicion,
paying only upon submission of the bill ([12] Nagendranath and Chari, 2002).
The global comparison
The data shown in Table VII [Figure omitted. See Article Image.] indicate the status of selected Asian countries, with reference to their
national incomes and health expenditures in public and private sectors. Data show the need for insight into health care expenditures of those
countries and also the steps taken to improve the health status of their people.
Overall, India still has a low insurance penetration (1.95 per cent) that makes it 51st in the World. India, on the other hand, boasts a saving
rate of around 25 per cent per capita income, while less than 5 per cent is spent on insurance. Public health investment has been
comparatively low and specialists recommend an increase in public health expenditure from the present 0.9 per cent of GDP to 2.0 per cent
in 2010. However, the quantum suggested is too little and late. It falls far short of the 5 per cent of GDP that has been a long-standing
requirement for health improvement recommended by the WHO decades ago. Moreover, it is projected that public expenditure in 2010 will be
33 per cent of total health expenditure - up from the present 17 per cent. But even 33 per cent is lower than the average of any region in the
world today. India would continue to be one of the most privatised health systems in the world even in 2010 ([7] Gupta, 2005).
The desired strategies
Strategies should propel India's health insurance sector to the forefront. Arguably, the potential market for India's insurance buyers is
tremendous and offers great growth potential, as much of the demand may not be accessible because of poor distribution, large distances or
high relative costs. Also, most health insurance company new entrants have a tendency to target existing customers rather than expanding
the market, which is a myopic strategy. Therefore, the thrust should be to stimulate demand in areas that are currently not served. In India,
policies are inflexible, and it is imperative that they should offer comparable returns and flexibility ([12] Nagendranath and Chari, 2002).
Regulation - the catalyst
The industry is growing at about 13 per cent annually and is expected to grow at 15 per cent over the next four to five years. Along with a
forecast growth from US$18.7 billion to around US$45 billion - equivalent to 8.5 per cent of GDP by 2012, private healthcare is expected to
account for 75 per cent of this spending. At the current pace of growth, healthcare tourism alone will generate over $2 billion additional
revenue by 2012. Voluntary health insurance market is estimated at Rs4 billion ($86.3 million) currently but is growing fast. Industry estimates
put the figure at Rs 130 billion ($2.8 billion) by 2005.
Private insurance as a catalyst for progress
In constituting the origins of health insurance, private health schemes traditionally initiate and facilitate health care progress. Continuously
seeking possibilities to improve the service offered to their clients, private health insurers are, almost by nature, social entrepreneurs. This
social entrepreneurship forms the basis of the innovative added value that private health insurance may offer. In the context of increased
globalisation, international challenges emerge for health insurance and health provision. Because of improved communication and travel,
more people are able to purchase products and services throughout the world. Health care and health insurance cannot escape this
irreversible development. This causes public health systems - national phenomena closely bound to the state, many difficulties, but insurers
offering private health insurance have a great deal of experience and skill dealing with international cases. Flexibility enables private health
insurance to offer quick solutions for emerging issues. This flexibility is one of the preconditions for private health insurance to function as a
catalyst for innovation in health insurance and health care provision. In response to the waiting list problem, for example, private insurance
showed a sense of innovation by offering patients rapid treatment in high quality hospitals abroad. While public health systems are mainly
concerned with reimbursing or offering health care, private health insurance sector risk prevention efforts are significant. Private insurance
may contribute to the development in medical science by making new technologies and medicine that are not (yet) covered by public health
systems financially accessible. Finally, private health insurance is a forerunner regarding patient service informatics. In countries where
medical costs are being reimbursed, the introduction of electronic medical insurance cards can lower the administrative burden for patients
and providers. These and similar initiatives may be adopted by public health systems or may be left to private health insurance. Private
insurers however have taken the first step more readily ([5] Colombo and Tapay, 2004).
Bottleneck: lack of health statistics
An important requirement for health insurance is the availability of good health statistics - explained clearly in the Government of India's 2002
National Health Policy ([18] Verma, 2003):
[The NHP] Statistical database ... is a major deficiency in the current scenario. The health statistics collected are not the product of a rigorous
method or method. Statistics available from different parts of the country, in respect of major diseases, are often not obtained in a manner,
which make aggregation possible or meaningful.
To address this problem, the government declared that NHP 2002 had committed itself to a programme for putting in place a modern and
scientific health statistics database as well as a system of national health accounts. The IRDA Annual Report 2002-2003 (2005) echoed the
concern described by NHP:
Amongst the issues facing the health insurance industry, absence of credible data in the health insurance market in the country is critical.
Steps need to be initiated to generate meaningful statistics, which could be the starting point for scientific pricing of health insurance
premium.
Conclusion
Competition will surely cause the market to grow, create a bigger "pie" and offer additional consumer choices through the introduction of new
products, services and price options. Yet, at the same time, public and private sector companies will be working together to ensure the
sector's healthy growth and development. The health sector in rural India is characterized by poor infrastructure such as poor staffing,
compared to both comparable international figures and India's urban centers. Consequently, the rural poor suffer from lack of access to
health facilities and inadequate delivery mechanisms. Both are rooted in the governance of the rural health sector. However, given the state
of affairs in India's healthcare sector regulation, it is doubtful whether fully-fledged insurance companies will take big strides into health
insurance. The health sector needs to be regulated and reformed to make healthcare risks manageable so that insurers find it worthwhile to
move into and develop the sector.
Sigma
[Reference]
1. Anand, B. (2003), Health Insurance, MFL Net Services Pvt. Ltd, Hyderabad, India.
2. Bahadur, A. (2001), Healthcare Industry, Confederation of Indian Industry, India.
3. Bhat, R. and Babu, S.K. (2003), Health Insurance and Third Party Administrators: Issues and Challenges, Indian Institute of Management,
Ahmedabad, India.
4. Birla, K. and Ambani, M. (2000), A Policy Framework for Reform in Healthcare, Ch. 7, Table 7.8, Prime Minister's Council on Trade and Industry,
New Delhi, available at: http://indiaimage.nic.in/pmcouncils/reports/health/health-chap7.htm.
5. Colombo, F. and Tapay, N. (2004), Private Health Insurance in OECD Countries: The Benefits and Costs for Individuals and Health Systems,
OECD Health Data.
6. Gold, M.R. and Mittler, J. (2001), "Health insurance expansion through states in a pluralistic system", Journal of Health Politics, Policy and Law,
Vol. 26 No. 3, pp. 581-616.
7. Gupta, A.S. (2005), The Big Squeeze: InfoChange News and Features, Centre for Communication and Development Studies, Pune.
8. International Conference on Social Health Insurance in Developing Countries (2005), Berlin, 5-7 December, further details available at:
www.who.int/contracting/berlin/en/index.html.
9. Neil, O.J., Leme, P., Lawson, S. and Pearson, W. (2003), "Dreaming with BRICs: the path to 2050", Global Economics Paper no: 99, Economic
Research from the GS Financial Workbench® available at: www2.goldmansachs.com/insight/research/reports/99.pdf.
10. Mahal, A. (2002), "Assessing private health insurance in India", Economic and Political Weekly, Vol. 37, February, pp. 559-71.
11. Matlani, A. (2004), Current Trends, Medvarsity, New Delhi.
12. Nagendranath, A. and Chari, P. (2002), "Health insurance in India - the emerging paradigm", a seminar on the emerging issues in the Indian
insurance sector, September, IIFT-School of International Business Management, New Delhi.
13. Parekh, A. (2003), Appropriate Model for Health Insurance in India, Federation of Indian Chambers of Commerce and Industry, New Delhi.
14. Parera, R. (2004), Health Insurance in India: Devising an Appropriate Model, KPMG, Delhi.
15. Rao, C.S. (2003), Annual Report 2002-03, IRDA, Hyderabad.
16. Sinha, T. (2005), The Indian Insurance Industry: Challenges and Prospects, Institute of Insurance and Risk Management, Hyderabad.
17. Swiss Re (2004), "Exploiting the growth potential of emerging insurance markets - China and India in the spotlight", , No. 5, Swiss Re Insurance
Co., Economic Research and Consulting, Zurich, available at: www.swissre.com/Internet/pwsfilpr.nsf/vwFilebyIDKEYLu/SHOR-65GHWP/
$FILE/sigma5_2004_e.pdf.
18. Verma, D.V.V.S. (2003), "Ensuring a healthy future: NCMP commitments - agenda for action", Lok Satta Times, Vol. 4 No. 1, available at:
www.loksatta.org/ncmp commitments.pdf.
[Appendix]
Corresponding author
Hima Gupta can be contacted at:
ims@del2.vsnl.net.in
Hima Gupta, Institute of Management Studies, Lal Quan, Ghaziabad,
India
[Illustration]
Table I: Comparison of planned and non-planned expenditure
Table II: Estimate of total health expenditure in India - 1990-1991
Table III: Estimated health insurance expenditure
Table IV: Administrative costs of operating health insurance programmes: a comparison of private and public
insurers
Table V: Real GDP growth: five year averages in four countries
Table VI: Top ten markets in 2004
Table VII: National income and health expenditure in selected Asian countries (US$)
Subjects: Health insurance, Health services, Health care expenditures, Financing, Public health,
Statistical analysis
Classification Codes 8210 Life & health insurance, 8320 Health care industry, 1200 Social policy,
9130 Experimental/theoretical, 9179 Asia & the Pacific
Locations: India
Author(s): Hima Gupta
Author Affiliation: Hima Gupta, Institute of Management Studies, Lal Quan, Ghaziabad, India
Document features: Tables, References
Publication title: International Journal of Health Care Quality Assurance. Bradford: 2007. Vol. 20, Iss. 5; pg.
379
ISSN: 09526862
DOI: 10.1108/09526860710763307

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Subjects:
Insurance industry
Life insurance
Industrywide conditions
Problems
Supreme Court decisions
4330 Litigation
Locations:
India
Author(s):
Vaswati Kumari
Document types:
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Publication title:
National Underwriter
More options ↓
New life insurance players in India hit some speed bumps

Vaswati Kumari. National Underwriter. (Life, health/financial services ed.). Erlanger: May 7, 2001. Vol. 105, Iss. 19; pg. 47, 2 pgs
Abstract (Summary)
New life insurance players in the Indian market are far ahead of their property and casualty insurance counterparts in launching new products
and getting down to real business. But new hurdles have come up at a time when everything seemed to be going smoothly for the new
players. For one thing, sharp differences have emerged between the new players and regulators on the issue of appointing ombudsmen who
would be quasi-judicial officers entrusted with the task of hearing complaints from customers in different parts of the country. Another worry is
the possible effect of the recent judgment of the Supreme Court on all life insurance companies.

Full Text
(1215 words)
Copyright National Underwriter Company May 7, 2001
New Delhi
New life insurance players in the Indian market are far ahead of their property and casualty insurance counterparts in launching new products
and getting down to real business.
Three new companies involving Standard Life and Prudential plc of the United Kingdom and Sun Life of Canada have already booked a large
number of customers.
Three others involving New York Life and American International Group of the United States and Old Mutual of the United Kingdom expect to
do so in the next couple of months.
But new hurdles have come up at a time when everything seemed to be going smoothly for the new players.
For one thing, sharp differences have emerged between the new players and regulators on the issue of appointing ombudsmen who would
be quasi-judicial officers entrusted with the task of hearing complaints against insurance companies from customers in different parts of the
country.
(Ombudsmen will have the power to pass judgments and order insurance companies to comply. The companies will have the right to seek
review of the judgment in the courts.)
This would be similar to the role of ombudsmen in the banking industry in India, who have played a major role in ensuring justice and fair play
for customers. It is expected that there will be at least one insurance industry ombudsman in each of the 23 states in the country.
Under the regulation, an insurance company has the choice of either having ombudsmen or self-regulatory organizations. However, the new
players prefer to set up selfregulatory organizations as has been done in other Asian markets such as Malaysia and Thailand.
SROs, the insurers feel, would ensure proper balance between the needs of the insurance companies and the customers, while ombudsmen
functioning under the control of the regulator would result in too much regulation and might even stifle the growth of insurance. (Instead of the
regulator, the SRO would be appointed by the association of insurance companies.)
However, the regulator is pushing for a change in the law to make it compulsory for them to have ombudsmen.
"We are hoping that all new companies will go along with the ombudsmen program. Some of them have agreed to it," says N. Rangachary,
chairman of the Insurance Regulatory and Development Authority, the country's regulator.
The difference on the issue of ombudsmen is just one of the worries of the new insurance players. Another is the possible effect of a recent
judgment of the Supreme Court on all life insurance companies. The Supreme Court of India has warned the state-run Life Insurance
Corporation against denying death claims "in a mechanical and routine manner."
The Court struck down LIC's decision to deny claims to the family of a deceased person on the grounds that it was given false information
about the person's health condition at the time of buying the policy. This judgment will be applicable to all life insurers, including the new ones
with foreign partners.
"The LIC should bear in mind that its credibility and reputation depend on its prompt and efficient service. Therefore, extreme care and
caution should be taken by the corporation in the repudiation of a policy issued by it, and should not to be handled in a mechanical and
routine manner," the Supreme Court in New Delhi ruled.
This judgment and the appointment of ombudsmen, if it is made compulsory, will put a lot of pressure on the new players when it comes to
selecting lives or new customers, sources say.
It will also affect their flexibility in underwriting new customers, who have either not been covered by any form of insurance or have been
using the services of the LIC. Most new players are trying to lure away some of the existing customers of LIC.
The main sales pitch of the new players is that they offer a lot of flexibility and a variety of options with their products. There is also an
attempt to compete with LIC by offering higher returns on investmentoriented plans.
A major bottleneck on this score is the current depressed state of the economy and extremely volatile Indian stock market, which the insurers
had planned to tap in order to improve the return on their investments.
Birla Sun Life, the joint venture of the Aditya Birla Group of Mumbai and Sun Life of Canada, has come out with three products that focus on
flexibility and offer customers different options. They are "Flexi save plus endowment," "Flexi cash flow money back" and "Flexi life line whole
life."
HDFC Standard Life, the joint venture between Mumbaibased Housing Development Finance Corp. and Standard Life Assurance Co. in the
United Kingdom, plans to bundle indemnity products with mortgage and bank loans extended by the Housing and Development Finance
Company and HDFC Bank.
The insurance coverage will take care of loan repayments in case of death of the insured, giving the family added protection.
The company has also signed an agreement with Peerless Finance Corporation of Kolkata (formerly known as Calcutta) for selling its
products.
This is a major move because Peerless is the largest non-banking finance company in India and is also involved in other areas such as
health care, hospitality, housing and travel and tourism and, therefore, can provide many hot leads.
Two other joint ventures, Max New York Life and Dabur CGU Life Insurance, will offer investment products with life coverage to penetrate the
market of tax-saving bonds, in direct competition with LIC, according to sources.
Tata AIG Life Insurance, which is the joint venture between the Tata group of Mumbai and AIG, will shortly launch savings-linked products in
the first phase of its operation and then follow it up with unit-linked products, according to the company's managing director, George
Oommen. (Unitlinked products are the equivalent of variable life and annuity products.)
"Though India is a new market for us, we will not be competing directly with Life Insurance Corporation. We will develop a market of our own,"
says AIG Vice Chairman Edmund S.W Tse.
ICICI Prudential Life, the joint venture involving Mumbai-based Industrial Credit & Investment Corporation of India and Prudential plc in
London, is talking to non-government organizations to tap into the rural market.
It has also come out with Life Guard, which is a low-cost protection product, and Pru Cashback, which is a savings, liquidity and protection
cover.
"We have already sold 1,500 policies in the first four months of our launch. We have recently launched `Salaam zindagi,' a social sector
policy designed to cover larger groups amongst the economically weaker sections of society," says Shika Sharma, managing director of ICICI
Prudential.
Four of the foreign insurers involved in joint ventures have their own mutual fund companies in India. They are Allianz AG of Germany, Zurich
Financial Services of Switzerland, ING Group of the Netherlands and Sun Life of Canada.
One more foreign insurer, American International Group of the United States, recently announced that it was picking up a 26% equity share
in an asset-management company being set up by agencies of the state government of Gujarat in western India for funding of infrastructure
projects.
These five foreign insurance companies, including AIG, are expected to leverage their involvement in mutual fund business to sell insurance
products floated by different insurance joint ventures in which they happen to be partners.
Subjects: Insurance industry, Life insurance, Industrywide conditions, Problems, Supreme Court
decisions
Classification Codes 8210 Life & health insurance, 4330 Litigation, 9179 Asia & the Pacific
Locations: India
Author(s): Vaswati Kumari
Document types: General Information
Publication title: National Underwriter. (Life, health/financial services ed.). Erlanger: May 7,
2001. Vol. 105, Iss. 19; pg. 47, 2 pgs
ISSN: 08938202

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1 m a r ke d i te m

Document
Abstract
Full Text
Subjects:
Life insurance
Market potential
Manycompanies
Private sector
Locations:
India
Author(s):
Joanna Slater
Document types:
Feature
Publication title:
Far Eastern Economic Review
More options ↓
India seeds a new market

Joanna Slater. Far Eastern Economic Review. Hong Kong: Oct 31, 2002. Vol. 165, Iss. 43; pg. 50, 2 pgs
Abstract (Summary)
Until recently life insurance was the domain of a state-run monopoly, but India has decided to swing open the doors as part of its continuing
economic reforms. Since early last year, private firms have entered the market with aggressive advertising, innovative products and a
mission to make Indians think differently about risk. So far, they are off to a running start: The private upstarts have already captured about
10% of new business in the rapidly expanding market. Most are joint ventures between Indian companies and international insurers like AIG,
MetLife, and Prudential, all eager to get in at the ground floor of what they believe will be a huge opportunity. The key to unlocking that
potential, say private insurers, is to educate consumers to think about insurance in different ways.

Full Text
(1123 words)
Copyright Dow Jones & Company Inc Oct 31, 2002
[Headnote
]
Money
[Headnote]
INSURANCE
[Headnote]
The Indian middle class is fast discovering the
need for personal risk management-and in
the
process sparking a boom in private insurance
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Enlarge 400%
[Photograph]
RITES OF PASSAGE: A new message on TV
RAJJIV KUMAR SAIGAL clearly remembers his first visit from a new breed of life-insurance agent. The 48-year-old pharmaceutical executive
considered himself a good financial planner, but the agent pointed out a potential shortfall of $70,ooo in his family's future needs should
anything happen to him. "That night, I didn't sleep," Saigal recalls.
Not only did he buy a policy, but Saigal later became an agent himself-all part of the ferment now sweeping the Indian insurance industry.
Until recently life insurance was the domain of a state-run monopoly, but India has decided to swing open the doors as part of its continuing
economic reforms. Since early last year, private firms have entered the market with aggressive advertising, innovative products and a
mission to make Indians think differently about risk.
So far, they're off to a running start: The private upstarts have already captured about 10% of new business in the rapidly expanding market.
Most are joint ventures between Indian companies and international insurers like AIG, MetLife, and Prudential, all eager to get in at the
ground floor of what they believe will be a huge opportunity. Gross premium income in the year ending March 2002 totalled almost $9 billion.
Insurance giant Swiss Re estimates that India will be one of the fastest growing markets for life insurance in the world until 2010, with annual
growth of 13.5%. General insurance-for cars, homes, and so on-is set to grow 8.3% annually in the same period. "The potential in India is far
greater than really in any part of Asia," says Dean O'Hare, CEO of American financial giant Chubb Corp., who visited Mumbai in October to
launch a generalinsurance joint venture.
The key to unlocking that potential, say private insurers, is to educate consumers to think about insurance in different ways. For 45 years
there was only one place to get a life-insurance policy: the gargantuan, state-run Life Insurance Corporation of India, created back in 1956
when the socialist-leaning government merged all 200odd existing insurers. The LIC, as it's known here, has a tremendous network-some
600,000 agents and 2,000 branches-but in the absence of competition, it was under no pressure to innovate with new products or better
service.
What's more, "people bought insurance for the wrong reasons," says Saugata Gupta, the marketing head of ICICI Prudential Life Insurance,
currently the leading private player. Rather than a hedge against risk, most customers used life insurance as a tax break or as a vehicle for
savings.
Private companies smelled opportunity. Many Indians either didn't own insurance at all or owned far too little by global standards. Several
CEOs of the new private-insurance companies bashfully admit that their first real policy came with the job. One executive recalls a discussion
with an employee who was startled to realize that his car was insured for more than his life.
In general, Indians are "grossly underinsured," says Deepak Satwalekar, CEO of HDFC Standard Life Insurance, a link-up between one of
India's leading financial institutions and Edinburgh-based Standard Life. Satwalekar says he bought an insurance policy 30 years ago only
because his then boss, a part-time LIC agent, urged him to do so. Now he says he spends 90% of his time on education, whether talking to
fellow CEOs or addressing conferences.
BRAVE NEW WORLD
These days, the audience is listening. The underlying message of the new private insurers and their squads of agents"Prepare for the worst"-
is in tune with social and economic changes taking place in the country. In the past, protection meant an extended family or a secure job.
Now both look less than rock-solid, especially in India's cities, where nuclear families and job-hopping are increasingly common.
Current events also play a part. Several insurance companies mentioned the western state of Gujarat as a promising market. Over the past
year and a half, the fragility of life and property has been all too clear there: The state's residents have experienced a major earthquake,
communal riots and an attack by militants.
Still, for most the worries are closer to home. ICICI Prudential decided to focus its sales pitch by tugging on some basic heartstrings:
marriage, children, retirement. To anchor the campaign, says Gupta, "we wanted to find a powerful symbol of protection." In a slick television
ad, the company featured a striking image of a bride at the conclusion of a Hindu wedding ceremony, just as her husband places a streak of
vermillion in her hair. This powder, or sindhoor, resonates with Indian audiences as the mark of a major milestone in life: becoming a spouse,
with responsibilities to your partner and eventually a family.
Since it began business early last year, ICICI Prudential has sold nearly 200,000 policies. "Our motto is 'we cover you at every step in life',"
says Gupta. "We're going to get [the customer] young, then upsell, upsell, upsell." The shortterm challenge for private insurers is not new
products, which they've introduced in abundance-everything from pension plans to "pure risk" policies, where small premiums insure a
person against various adverse eventualities with no money back.
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[Photograph]
NEW BREED: Selling insurance has primarily
become
a process of educating the consumer
Instead, says Saigal, the pharmaceutical executive-turnedagent, the difficulty is the long shadow of the LIC. Customers here still instinctively
put their trust in the hoary governmentrun institution. "They tell me, `private companies will run away, and American companies will go back
to America and take our money with them ," he says.
That faith helps to explain why the main beneficiary of competition so far has been the LIC. In its first financial year after the market opened,
ending this spring, its income from first-time premiums zoomed 137%. Aggressive marketing by the newcomers helped increase awareness
of insurance, but when it came to buying, many customers gravitated toward more familiar territory. The LIC has also proved itself a
formidable competitor, improving its service and engaging in more in-your-face marketing.
Meanwhile, private companies continue to mount their challenge. In another shot in the arm, the government has said it would allow banks
and non-governmental organizations to market insurance, opening a host of new distribution channels for insurers. In the past three months,
Saigal says he's sold 75 policies for his employer, Max New York Life Insurance. Returning home after giving a presentation to employees of
the Bombay Stock Exchange, he shares a bit of the salesman's craft. "You just have to ask certain questions that incite curiosity," he says.
The question he asks is: As the challenges of life multiply, "where will the money come from?"
By Joanna
Slater/MUMBAI
Subjects: Life insurance, Market potential, Manycompanies, Private sector

Classification Codes 9179 Asia & the Pacific, 8210 Life & health insurance
Locations: India
Author(s): Joanna Slater
Author Affiliation: By Joanna Slater/MUMBAI
Publication title: Far Eastern Economic Review. Hong Kong: Oct 31, 2002. Vol. 165, Iss. 43; pg. 50, 2 pgs
ISSN: 00147591

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Subjects:
Studies
Insurance industry
Nationalization
Rural areas
9130 Experiment/theoretical treatment
8200 Insurance Industry
Locations:
India
Author(s):
K B Subhash
Deepti Bhat
Companies:
General Insurance Corp of India Ltd
NAICS:
524130
Document types:
Feature
Publication title:
The Journal of Wealth Management
More options ↓
What Lies Beneath: The Untappped Insurance Market in India

K B Subhash, Deepti Bhat. The Journal of Wealth Management. London: Winter 2007. Vol. 10, Iss. 3; pg. 65, 23 pgs
Abstract (Summary)
The modern concept of insurance practices in India started during the British rule in 1818 when Oriental Life Insurance Co was
established in Calcutta. India became independent from British rule in 1946, and by 1956 the insurance sector was nationalized, with the
Life Insurance Corp (LIC) of India created by combining almost 245 private life insurance companies; 107 private non-life companies
combined in 1973 to form the General Insurance Corp (GIC). But since the very purpose of nationalizing the insurance sector got side-lined
due to the monopolistic power it enjoyed, coupled with the bureaucratic mindset of LIC and GIC, insurance again was opened to private
players in 1999. During 2000-2006, almost 15 life and 13 non-life private insurance players started operations in India, indicating the
willingness of foreign institutional investors to enter the Indian insurance sector. But through all these major changes the actual impact was
felt only in major urban areas, while the vast majority of the rural population was excluded from the insurance sector.

Full Text
(9161 words)
Copyright Euromoney Institutional Investor PLC Winter 2007
The story of insurance is probably as old as the story of mankind. The same instinct that prompts modern businessmen to secure themselves
against loss and disaster existed in primitive men also. They too sought to avert the evil consequences of fire and flood and loss of life and
were willing to make some sort of sacrifice in order to achieve security. Though the modern concept of insurance is largely a development of
the recent past, particularly after the industrial era, its beginnings date back almost 6,000 years.
Since India has huge potential in the coming years in the insurance sector, this article revolves around three important aspects: 1) analyzing
the evolution of the insurance industry in India to understand the basic problems with this sector; 2) looking to the regulatory framework to
strengthen the scenario for better future prospects; and 3) identifying some strategies for tapping the huge potential of rural markets.
There have been many studies with respect to the evolution of the insurance industry in different parts of the world. A study by Robin
Pearson [1997] involved conducting a survey to identify the factors determining the pace and the timing of innovation in one British financial
service, the insurance industry, from 1700 to 1914. The study also analyzed the relevance of existing models of economic innovation and
constructed a new model, which was more applicable to the long-run development of services in an industrializing economy.
An important study by Keneley [2005] on the Australian insurance industry dealt with the regulatory aspects. The regulatory environment in
which the Australian life insurance industry operates has its antecedents in two major periods of legislative intervention. In 1870, the
"Freedom with Disclosure" principle was established, which was the basis for the regulatory approach in the Australian insurance industry. In
the 1940s, the concept was again refined in the context of a general recognition of an interventionist approach to financial markets. It is
suggested that regulation of the life insurance market in Australia came about not in response to problems associated with market failure but
in reaction to external influences not directly related to conditions in the Australian life insurance industry. This is almost in direct contrast with
the Indian insurance industry. Following the emergence of the British insurance industry in 1818, both the nationalization of the insurance
sector in 1956 and then opening it up for private players from 1999 onward were the results of drawbacks that existed in India at those times.
The history of the Indian insurance sector can be broadly divided into three categories: pre-nationalization period (1818-1956), post-
nationalization period (1956-1999), and post-liberalization period (1999 onwards). From 1818 to 1956 (138 years), there were almost 245 life
and 90 non-life insurance companies doing business in India. They all were nationalized in 1956, resulting in the birth of the Life Insurance
Corporation of India. But the very purpose of nationalizing the insurance sector was sidelined, mainly because of the monopoly power vested
with LIC. Thus the insurance sector was opened up to private players, which was in line with the government's LPG (Liberalisation,
Privatisation, and Globalisation) economic policy.The real impact of LPG was felt by the Indian insurance sector only from 2000 onwards,
when as many as 15 life insurance and 9 non-life insurance companies (most of them of foreign origin) started operations in India, partnering
with various Indian players to cater to the neglected needs of Indian insurance customers. This clearly indicates the willingness of foreign
institutional investors to enter the Indian insurance sector.
Exhibit 1 gives more concise information about the three phases of the Indian insurance industry.The early part of the first phase was
typically known as British Raj and the later part Swaraj. The second phase comes under Monopoly Raj and the last phase can be called the
LPG Era. The change from one phase to the other was the result of the drawbacks that existed in the earlier phases-mainly differential
treatment of people in the sale of insurance products.
The insurance sector in India has now come full circle-i.e., the emergence of the modern concept of the insurance industry in 1818 by the
British, followed by the establishment of the first-ever Indian life insurance company in 1871 and non-life insurance company in 1907, then
the nationalization of the insurance sector (life in 1956 and non-life in 1973), and finally reopening the insurance sector to private players in
1999. However, the actual impact of all this evolution has been felt only in major urban areas. The vast majority of the rural population has
been excluded from the insurance sector, which clearly shows that the very purpose of starting up the first Indian insurance companies in
1871 (life) and 1907 (non-life)-the need for Indians to have broader coverage-was defeated. Only the urban population was covered by
insurance.
Tracing the developments in the Indian insurance sector reveals the 360-degree turn witnessed over a period of almost two centuries.The
insurance sector was nationalized 10 years after India's 1946 independence from Britain. From then until the re-opening of the sector in the
1990s, the state-owned companies functioned under the deluge of bureaucracy and inefficiency but still had millions of policyholders, as
there were no alternatives available to the Indian customers. Until nationalization in 1956, due to insufficient infrastructure and improper
regulatory framework, it was justified that the insurance industry was not able to cater to the needs of rural population. But after
nationalization (1956-1991), scrupulous monopolistic practices followed by the nationalized insurance companies exercised their whims and
fancies in developing marketing strategies for selling the insurance products.Though the insurance industry was one of the biggest
contributors to national development in the form of investing in various infrastructural developmental activities, it failed to emerge from the
bureaucracy and inefficient tangle of a public sector enterprise.
During this period, any suggestion regarding the opening up of the sector was met with harsh criticism and agitation from insurance
employees unions.The Congress government (1991-1996) introduced reforms in various sectors of the economy but could not bring about a
change in the insurance sector, and it was left to the BJPled coalition to instate the present liberal structure, despite criticism from some left-
support groups. The argument behind opening up the insurance sector was consumercentric, claiming that 1) it would give better products
and service to consumers, and 2) the rural population could be brought under the umbrella of insurance coverage. In contrast, the opponents
of privatization argued that in a poor country like India, the insurance sector needs to consider social objectives first, whereas private sector
newcomers do not have that commitment. But the Indian government went ahead with its LPG policy in the insurance sector from 1999
onwards. Although the insurance sector was opened to competition again in 1999-2000, it is still in its infancy stage, which makes it slightly
difficult to gauge its real performance in terms of meeting the very objectives of opening up to private players.
The present insurance market in India has some typical features that make it even more lucrative for the players to take active initiative in
tapping the huge potential market. If one considers these features as opportunities, then the very purpose of opening up the insurance sector
can be justified. Features like low market penetration, ever-growing middle class population, growth of intensive consumer movement
coupled with an increasing demand for better insurance products, inadequate application of information technology for insurance business,
and the tax incentives given to the insurer, all lead to the conclusion that insurance sector in India is growing at an increasing rate, and if the
players are efficient enough, then predictions about the future potential of the Indian insurance sector may be attainable with in a short
timespan-say three to five years.
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EXHIBIT 1
Bird's Eye View of Indian Insurance Industry (1818-
2007)
BACKGROUND
The modern concept of insurance in India started without any regulation in 1818, with the establishment of Oriental Life Insurance Company
in Calcutta by the British. It was a typical story of a colonial era: a few British insurance companies dominating the market serving mostly
large urban centers, focused mostly on insuring lives in the European community. After India's independence in 1946, things took a dramatic
turn. First, the life insurance companies were nationalized in 1956, and then the general insurance business was nationalized in 1973. Only
in 1999 were private insurance companies allowed to again enter the Indian insurance sector.
Sinha [2002] conducted a research study on privatization of the insurance market in India, from British Raj to Swaraj to Monopoly Raj. He
concluded that India is not unique among developing countries where the insurance business has been opened up to foreign competitors. It
was observed that the openness of the market did not mean a takeover by foreign companies even within a decade. Thus it is unlikely that
the same will happen in India, especially when foreign insurers cannot have a majority shareholding in any company.This clearly indicates
the attitude of Indian government not to allow the foreign players to have full control over the insurance industry, a careful move to have
control of the social obligations to be fulfilled by private insurance players.
A somewhat detailed study by Bhattacharya and Rane covered the main rationale for nationalizing the insurance sector in India-i.e., to have
a uniform and standardized setup. The establishment of IRDA to regulate the insurance business backed the initiative taken by the
government to open up the insurance sector in 1999. The government could have set up a regulatory body to monitor insurance business at
the time of nationalization instead of barring private insurers completely. That also would have served the government's objective of reaching
out to the masses of all strata and income groups.
This article is the first detailed study on the evolution of the Indian insurance sector. But similar studies have been done on other countries.
Pearson [1997] analyzed the factors determining the pace and timing of innovation in the British insurance industry from 1700 to 1914. Since
a good system of keeping all the official records existed in the U.K., it was possible to study the relevance of existing models of economic
innovation. Also, a new model was constructed that was suitable for the long-run development of services in an industrializing economy. But
the situation in India was slightly different; moving from an agrarian economy, without completely going through an industrial economy, India
jumped to a service economy. This is in contrast with most of the other countries, making the new model developed by Pearson [1997] not
completely suitable for India.
Similar research studied the regulatory environment in which the Australian life insurance industry operates, which has its antecedents in two
major periods of legislative intervention (Kenely [2005]). In contrast to Australia, regulatory changes happened in India mainly because of the
problems that existed in the insurance industry at different points of time.
Zou [2003] conducted a study that analyzed the development, regulation, and future of the corporate insurance market in the People's
Republic of China. And Hwang [2003] examined key determinants of the demand for life insurance in China with a view to explaining its rapid
growth since the country's economic reform in 1978. According to Fok and Panthaky [2005], the Chinese and Indian life insurance markets
are expected to see double-digit rates of growth in the medium run.
Little research has been done on micro insurance in India to identify ways of bringing the rural population under the umbrella of insurance.
Dror andjacquier [1999] identified some strategies for bringing the rural population under the medical and health insurance schemes.
During the period 1999-2006, the share of private players (mostly joint ventures of Indian and foreign partners) in India rose only to 15%; LIC
still dominates the market with 85%.Thus there exists great potential in the life insurance sector, and to capitalize on this, potential entrants
need to consider their entry strategy very carefully.
These studies show that the scope of the insurance industry's evolution around the world has not been fully explored, nor have regulatory
mechanisms for the smooth and efficient workings of the industry in India or ways of catering to the insurance needs of the Indian rural
population. Hence this article tries to throw some light on these basic issues and identify strategies for achieving growth in the Indian
insurance industry.
THE INDIAN INSURANCE INDUSTRY BEFORE NATIONALIZATION IN 1956

Ancient Indian history has preserved the earliest traces of insurance in the form of marine trade loans or carriers' contracts. These can be
found in Kautilya's Arthashastra, Yajnyavalkya's Dharmashastra and Manu's Smriti. Arthashastra was one of the first books to look at the
economic impacts of natural calamities. It categorized various calamities plaguing India around 300 B.C. as "fire, floods, epidemics and
famine." It also recognized that some calamities cause greater damage than others: "Fire destroys a village, or part of a village, whereas
floods carry off hundreds of villages." Similarly, "Epidemics devastate only a part [of the country] and can be remedied, whereas famine
causes troubles to the whole [of the country]."
Kautilya further observed:"It is the duty of the king to protect the people from all these calamities." He recommended that the king should also
store food and grains and distribute them to people affected by calamities.This was probably a pre-curser to modern-day insurance.These
works show that the system of credit and the law of interest were well developed in India much earlier than in other parts of the world. They
were based on a clear appreciation of hazard and the means of safeguarding against it.
But the modern concept of life insurance in India started in 1818 with the establishment of the Oriental Life Insurance Company in Calcutta, a
British company that failed in 1834. All the insurance companies established during that period were intended to look after the needs of the
European community and did not insure Indian natives. After 1829, when the foreign fife insurance companies did start insuring Indian lives,
Indian lives were treated as sub-standard lives, with heavy extra premiums charged.
In that year, 1829, the Madras Equitable Life Insurance Society was formed. After that there was a long phase of little growth in the life
insurance sector. This was because of the mismanagement and inexperience of the British fife insurance companies, several of which failed
before 1870, leading to the enactment of the British Insurance Act, 1870. Until then, insurance had found no strong footing in India; only
certain European companies operating in some parts of the country sold fife insurance to some extent. After 1870, the first Indian fife
insurance companies started operations and covered Indian fives at normal rates. The very first was Bombay Mutual Life Assurance Society
in 1871, followed by Oriental in 1874, Bharat Insurance Company in 1896, and Empire of India in 1897. With highly patriotic motives, these
companies came into existence to carry the message of insurance, and social security through insurance, to various sectors of society.
The Swadeshi movement of 1905-1907 gave rise to more insurance companies. United India in Madras, National Indian and National
Insurance in Calcutta, and the Co-operative Assurance at Lahore were established in 1906. In 1907, the Hindustan Co-operative Insurance
Company was started in Calcutta. Indian Mercantile, General Assurance, and Swadeshi Life (later Bombay Life) were some of the other
companies established during this period.
However, this period was dominated by foreign insurance offices, which did good business in India, including Albert Life Assurance, Royal
Insurance, and Liverpool & London Globe Insurance. The Indian offices that were set up during this period had to struggle against a
prevailing prejudice against life insurance for Indians and the natural ignorance of Indian natives.
The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life insurance business. The Act required that an
actuary should certify the premium rate tables and periodical valuations of companies. But it discriminated against Indian companies on many
accounts, putting them at a disadvantage.
In 1914 the government started publishing the returns of insurance companies in India. In 1928, the Indian Insurance Companies Act was
enacted to enable the government to collect statistical information about both life insurance and non-life insurance business transacted in
India by Indian and foreign insurers, including provident insurance societies.
In 1938, with a view to protecting the public, the earlier legislation was consolidated and amended by the Insurance Act 1938, establishing
effective control over the activities of insurers. This Act was the first legislation governing not only life insurance but also non-life insurance
that provided strict state control over the insurance business.
Calls for nationalization of the life insurance industry (in order to have uniformity as well as protect consumers' interest) had been made
repeatedly but gathered momentum in 1944, when a bill to amend the Life Insurance Act 1938 was introduced in the Legislative Assembly.
But it was not until January 1956 that life insurance in India got nationalized. About 154 Indian insurance companies, 16 non-Indian
companies, and 75 provident societies were operating in India at that time. Nationalization was accomplished in two stages. First the
management of the companies was taken over by means of an ordinance. Later ownership of the companies was taken by means of a
comprehensive bill.
The Parliament of India passed the Life Insurance Corporation Act in June 1956, and the Life Insurance Corporation of India was created that
September with the objective of spreading life insurance much more widely and in particular to the rural areas, with a view to reach all
insurable persons in the country, providing them adequate financial cover at a reasonable cost.
Exhibits 2 and 3 give some information about the life insurance business in India during 1) the period preceding national independence in
1946 and 2) from independence until nationalization (1946-1956).The first period information shows the number of life insurance companies
operating in India. The second period information shows the average amount of new policies issued.
In Exhibit 2, the shift in the concentration of Indian insurance companies in comparison to foreign companies can be seen clearly.This
happened because the European insurance companies knew British rule was going to end in India sooner or later, so they either shifted their
operations to outside India, sold their operations to wealthy Indian players, or closed down. From 1946 onward, the insurance sector was
completely dominated by Indian players.
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EXHIBIT 2
Indian and Foreign Insurance Companies Operating in India (1928-
1946)
From 1946 till 1956, Indian players enjoyed newfound freedom with fewer regulatory measures. With respect to the average number of new
policies issued by Indian insurance companies during 1946-1955, which is given in Exhibit 3, there was only a slight change.There was a
decrease in the average amount during 1947,1952, and 1955. Except for 1954 (which had a double-digit increase), all years showed only
single-digit increases.
The very purpose of starting up the Indian insurance company Bombay Mutual Life Assurance Society in 1870, and subsequently others at
various points in time, was to take care of Indian lives (both urban and rural). But even after the freedom movement culminated in 1946, most
of the players focused only on urban population. Lack of an adequate controlling mechanism, an inefficient administrative mechanism, and
differential pricing of insurance products made the government favor nationalizing the insurance sector.
The situation was the same with the non-life insurance sector. The history of general insurance dates back to the Industrial Revolution in the
West and the consequent growth of sea-faring trade and commerce in the 17th century. It came to India as a legacy of British occupation.
British and other foreign insurance companies transacted this business through their agencies in India.The Triton Insurance Company Ltd.,
was first general insurance company in India, established by the British in Calcutta in 1850.
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EXHIBIT 3
Average Number of New Policies Issued by Indian Insurance Companies (1946-
1956)
THE POST-NATIONALIZATION PERIOD [1956-1991]
The nationalization of the insurance sector (life insurance in 1956 and non-life in 1973) was justified mainly on three counts: 1) it was
perceived that private companies would not promote insurance in rural areas; 2) the government would be in a better position to channel
resources for saving and investment by taking over the business of life insurance; and 3) bankruptcies of life insurance companies had
become a big problem during 1946-1956.
At the same time most of the private insurance players were focusing only on urban areas, they also resorted to differential pricing policies for
selling insurance products (putting customers at their mercy) and mismanaged funds (often for personal gain), leading to the closure of many
insurance companies and mistrust in the minds of customers. Finally, the government took the drastic measure of bringing all the private
players under one umbrella with a view to rectifying these problems.
The life insurance industry was nationalized under the Life Insurance Corporation (LIC) Act of India in 1956. LIC controlled the business of
243 different units, Indian and foreign, that were engaged in the transaction of life insurance business in India. LIC at the outset had 5 zonal
offices, 33 divisional offices, and 212 branch offices, apart from its corporate office. The total assets at August 31, 1956, were about Rs.4,110
million, and the total number of policies in force was over 5 million, assuring a total sum of more than Rs. 12,500 million. The total number of
salaried employees was nearly 27,000.
These figures give a broad idea of the magnitude of the problem involved in setting up an integrated structure. Since life insurance contracts
are long-term contracts and require a variety of services, the need was felt in the later years to place a branch office at each district
headquarters. Reorganization of LIC took place in the early 1980s and large numbers of new branch offices were opened. Servicing functions
were transferred to the branches, and branches were made accounting units. It worked wonders for the performance of the corporation.
It may be seen that from about Rs. 200 crores [note: a crore is a unit in the Indian number system that equates to 10 million] of new business
in 1957, the corporation crossed Rs. 1,000 crores in 1969-1970, and after 10 more years crossed the Rs. 2,000 mark. But with re-
organization, by 1985-1986 LIC crossed Rs. 7,000 crores assured on new policies.
One important factor has helped the LIC to grow rapidly in recent years: a high saving rate in India coupled with the need for tax planning.
But even though the saving rate is high (compared with other countries with a similar level of development), Indians exhibit a high degree of
risk aversion, resulting in a lesser flow of funds toward insurance as well as capital market investments.Thus, nearly half of investment is in
physical assets (like property and gold). Around 23% is in (low yielding, but safe) bank deposits. Only some 1.3% is in life insurance-related
savings vehicles.
When parliament set up LIC as a monopolistic public undertaking in 1956, it was argued and believed that elimination of competition-and the
malpractice that competition gave rise to during 1946-1956-would lead to 1) better and more economical management of the business of life
insurance, 2) reduction in administrative expenses, 3) improvement in the quality of service, 4) increase in volume of business, and 5)
maximization of social advantages that insurance can provide through higher returns on investments of life funds, consistent with safety and
liquidity of the invested funds.
For achieving the above-mentioned objectives, a committee was set up with a chairman, two managing directors, and two other members. It
also has an investment committee consisting of a chairman, a functional director, and five other persons to advise the corporation in matters
relating to the investment of its funds.
For purposes of efficient administration, the whole of India was divided into five zones, with the zonal head offices in Bombay, Calcutta,
Madras, Delhi, and Kanpur. The Central Office of the LIC was located in Bombay. Every full-time employee of the insurers (erstwhile private
players who got nationalized) whose business was transferred to and vested in the LIC became an employee of the corporation. They held
the same positions at the same remuneration, upon the same terms and conditions, and with the same rights and privileges as before. The
corporation was required, at least once every two years, to conduct an actuarial investigation into the financial condition of the corporation,
including a valuation of its liabilities, and submit the report to the central government.
Life insurance offices other than those of Indian insurers were of several types, and of these, non-Indian life offices constituted the most
important group. Then there were provident societies, which were set up with the view to sell life insurance policies of small amounts to
persons of small means, in the traditional form of selling micro insurance products to rural customers.
Thus almost everything about the life insurance sector got streamlined (at least in official records). Everything looked so perfect; LIC became
one of the most important investors in infrastructural projects in the country. But two basic objectives on which the justification for
nationalization of insurance was based were not achieved. Insurance in rural areas was minimal, and the needs of the customers were not
considered.
The situation of non-life (general) insurance was slightly different. It was not nationalized until 1973. It was not done in 1956 because general
insurance was considered part and parcel of the private sector of trade and industry, functioning on a yearly basis. Errors of omission and
commission in the conduct of its business did not directly affect the individual citizen.
Prior to 1973, general insurance was urban-centric, catering mainly to the needs of organized trade and industry. That year, around 107
insurers (including branches of foreign companies operating in the country) were amalgamated.These were grouped into four companies:
National Insurance Company Ltd., Oriental Insurance Company Ltd., New India Assurance Company Ltd., and United India Insurance
Company Ltd., with head offices in Calcutta, New Delhi, Bombay, and Madras, respectively.
The General Insurance Corporation (GIC) was incorporated in 1972 and commenced business on January 1, 1973. Before November 1972,
a number of Indian and many foreign companies did general insurance business in India, and this business was linked with their branches
abroad. In addition, LIC, some mutual companies, and some cooperative societies also offered this product. In fact, on the eve of
nationalization, 68 Indian (including LIC) and 45 non-Indian entities carried out insurance business in India. With nationalization, the
businesses of all these organizations were absorbed by GIC's four subsidiaries.
Thus from 1956 onwards LIC and from 1973 onwards GIC started controling the Indian insurance sector. These players were entrusted with
the task of promoting insurance products to all of India. But they failed to provide better service and products to customers and also were not
able to reach the vast majority of people in the rural areas, because of a highly bureaucratic mindset, corrupt and inefficient administration,
and mismanagement of investable funds. This led to the issue of opening up the market once again to private players. By 1991 the entire
Indian economy was going for Liberalisation, Privatisation, and Globalisation (LPG). Slowly various sectors got privatized to promote healthy
competition for the benefit of Indian customers, but only after almost eight years was the insurance sector in India privatized in 1999.
POST-LIBERALIZATION PERIOD [1991 ONWARDS]
Although Indian markets were privatized and opened up to foreign companies in a number of sectors from 1991 onwards, insurance
remained out of bounds for private players. The government wanted to proceed with caution.
With pressure from the opposition, the government (at the time dominated by the Congress Party) decided to set up a committee headed by
Mr. R.N. Malhotra (the then-governor of the Reserve Bank of India) in April 1993. Liberalization of the Indian insurance market was
recommended in a report released in January 1994 by the Malhotra Committee, indicating that the market should be opened to private-sector
competition, and ultimately, foreign private-sector competition.The committee also investigated the level of satisfaction of the customers of
the LIC, and to everyone's surprise it found that the level of customer satisfaction seemed to be high. Exhibit 4 gives a brief outline of the
committee's recommendations.
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EXHIBIT 4
Outline of Malhotra Committee Recommendations
(1994)
Most of the recommendations resulted from the existing problems with the LIC and GIC. The first recommendation directly pointed to a lack
of professionalism on the part of direct selling agents. The second one openly told about the corrupt bureaucratic mindset of insurance
officials while settling claims. The third, the most important, pointed toward the huge untapped potential of the rural population in India. The
next two recommendations dealt with making the manpower more trained and efficient to cater to the ever-increasing needs of the
customers. The last dealt with the modalities of opening up the insurance sector for private players, both domestic and foreign.
Immediately after the publication of the Malhotra Committee Report, a new committee (called the Mukherjee Committee) was set up to make
concrete plans for the requirements of the newly formed insurance companies. Recommendations of the Mukherjee Committee were never
made public. But from the information that filtered out, it became clear that the committee recommended the inclusion of certain ratios in
insurance company balance sheets to ensure transparency in accounting. But the then-Finance Minister objected. He argued (probably on
the advice of some of the potential entrants) that this could affect the prospects of a developing insurance company.
After the Malhotra Committee report came out, changes in the insurance industry appeared imminent. Unfortunately, due to instability in the
central government, changes in insurance regulation could not pass through the parliament. A dramatic climax came on March 16, 1999,
when the Indian Cabinet approved an Insurance Regulatory Authority (IRA) bill that was designed to liberalize the insurance sector.The bill
was awaiting ratification by the Indian Parliament when the BJP government fell in April 1999, and deregulation was put on hold once again.
An election was held in late 1999, and a new BJP-led government came to power. On December 7, 1999, the new government passed the
Insurance Regulatory and Development Authority (IBJDA) Act, repealing the monopoly conferred to the Life Insurance Corporation in 1956
and to the General Insurance Corporation in 1972.
The authority created by the Act is now called IRDA. It has 10 members. New licenses are given to private companies. IRDA has separated
the life, non-life, and re-insurance businesses; a company has to have separate licenses for each line of business. Each license has its own
capital requirements (around US$24 million for life or non-life and US$48 million for re-insurance). On July 14, 2000, the chairman of the
IRDA, Mr. N. Rangachari, set forth a set of regulations in an extraordinary issue of the Indian Gazette with details of the regulation, which is
given in Exhibit 5. One of the most important aspects was giving priority consideration for marketing insurance products and services to rural
customers. The historical Indian insurance sector reforms are shown in Exhibit 6.
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EXHIBIT 5
IRDA Detailed Regulation as set forth in the July 14, 2000 Indian
Gazette
In less than six years time (2000-2006), 15 life insurance and nine non-life insurance players entered the Indian market. One result was a
gradual decline in the market share of LIC, which led to total changeover in the organization's structure and work culture. This in turn led to
the launch of new insurance products by LIC and also improved service standards.
The impact of privatizing the Indian insurance sector brought about many changes; all were the result of a healthy competitive spirit, which
was completely absent from 1956 to 1999.
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EXHIBIT 6
Milestones in Indian Insurance Sector Reforms (1991-
2000)
1. Market Expansion: Due to improved awareness levels as a result of extensive advertisement campaigns by private players, the insurance
market expanded. However, the rural market remains unexplored, except by LIC in a small way. Private players should develop rural
marketing strategies on war footings.
2. New Product Offerings:The new players are offering a plethora of new and innovative products, mainly from the stables of their
international partners. Customers have tremendous choice from a large variety of products from pure term (risk) insurance to unitlinked
investment products. Customers are offered unbundled products with a variety of benefits as riders from which they can choose. More
customers are buying products and services based on their true needs and not just traditional money-back policies, which are not considered
very appropriate for long-term protection and savings. However, there are still key new products to be introduced, such as health products.
3. Improved Customer Services: As expected, private players have attempted to instill international best practices in service and operational
efficiency through use of latest technologies. Advice and need-based selling is emerging through a much better trained sales force and
advisors.There is improvement in response and turnaround times in specific areas such as delivery of first policy receipt, policy document,
premium notice, final maturity payment, settlement of claims, etc. But various customer satisfaction surveys show that the standards are still
below expectations, and further improvement is required.
4. New Channels of Distribution: Until two years ago, the only mode of distribution of life insurance products was through agents. While
agents continue to be the predominant distribution channel, a number of innovative alternative channels are being offered to consumers.
Some of them are bancassurance, brokers, the Internet, and direct marketing. Though it is too early to predict, the widespread of bank
branch networks in India could lead to bancassurance emerging as a significant distribution mechanism (even for rural marketing).
Many of the major global insurance companies have entered the Indian life insurance market through joint ventures with Indian
companies.These include AIG, New York Life, Allianz, Prudential, Standard Life, Sun Life Canada, ING, MetLife, Cardiff, and Old Mutual.This
has rejuvenated the erstwhile monopoly player LIC, which has responded to the competition in an admirable fashion by launching new
products and improving service standards.
A brief outline of the private players in the life insurance and non-life insurance categories is given in Exhibits 7 and 8. Within five years of
privatization, foreign institutional players started venturing into India to diversify their risk and return in their quest for wealth maximization.
THE INDUSTRY'S PRESENT STATUS
The life insurance sector has grown spectacularly in fiscal year 2005/06, surpassing all expectations of the interested parties. The new
business performance has touched a premium income of Rs. 49,474 cores in 2005/06 as against the corresponding new business premium
of Rs. 25,316 crores in 2004/05-a growth rate of 95.4%. In the previous fiscal year new business grew by only 34.4%.This performance, both
in quantum and in the growth rate percentage, by any measure is an astonishing one, setting new standards for the players in the years
ahead. The growing demand for life insurance has made the life market livelier, and it augurs well for acceleration of the national economy.
The available information on the premium underwritten by life insurers is given in Exhibits 9, 10, and 11. As to first-year premium including
single premium underwritten by life insurers (Exhibit 9), during 2000-2005 the private sector was able to get only 22% of the share, making
LIC the biggest market player even now. And the 22% share was not created from market losses by LIC, but because of additional policies
that the private players were able to sell to new customers. A shift of customers from LIC to the private sector is not happening in a major
way. This shows an increasing potential for the insurance industry in India.
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EXHIBIT 7
Private Life Insurance Players in India (2000-
2006)
With respect to renewal premium (shown in Exhibit 10), only a marginal share is available to private insurers, a mere 4% during 2000-2005.
Private players have to change their marketing strategy to cater to the varied needs of Indian customers, or else the deep-rooted mindset (as
a result of 24 years' market domination by LIC) of Indian customers will take more time to change in favor of private insurers.When we check
the total premium (shown in Exhibit 11), private insurers' share comes to only 9%, leaving LIC as the single biggest market leader even after
six years of privatization.
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EXHIBIT 8
Private Non-Life Insurance Players in India (2000-2006)
EXHIBIT 9
First Year Premium Including Single Premium Underwritten by Life Insurers (2001-
2005)
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EXHIBIT 10
Renewal Premium Underwritten by Life Insurers (2001-
2005)
Though this looks somewhat less than promising for the private insurers, they were able to perform well in India in comparison with the
Chinese insurance sector. A study by Fok and Panthaky [2005] revealed that private players were able to win only 1.9% of the life business
in China, where in India private players won almost 13% of life business in 2003. Thus the growth potential of the insurance sector in India
and the prospect for private players are much better than in the Chinese insurance market. What is required now is to carefully study the
Indian market, identify various strategic options, and finally develop some new insurance products as per the requirements of Indian
customers.
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EXHIBIT 11
Total Premium Underwritten by Life Insurers (2001-
2005)
When we consider the total number of life insurance policies issued by both LIC and private players (Exhibit 12), again LIC has the highest
market share. But while that share was almost 92% in 2004-2005, that was down from 97% in 2002-2003. This leaves no doubts that growth
in insurance policies sold by private companies is going to be manifold in the years to come.
WHAT LIES AHEAD
India is currently standing at a crossroads. On the one hand, it is enjoying a remarkable period of economic growth in many sectors,
substantial improvement in purchasing power, increasing brand consciousness, changing consumption patterns, and rapid spread of the
communication network, offering vast business potential for the corporate sector. On the other hand, the nation is trying to cope with more
than 300 million people living below the poverty line in rural/backward areas, screaming for attention. If the nation expects to hit a high-growth
trajectory in the years to come, it should carefully consider the needs of its hungry and financially insecure millions. A key aspect to uplifting
the quality of their lives is to provide a sense of security in the form of varied kinds of custom-made insurance products at affordable rates.
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EXHIBIT 12
Number of New Policies Issued by Life Insurers (2002-
2005)
In July 2000 it was made obligatory for insurance companies to do a stipulated percentage of their business in the rural and social sectors.
But while initiatives were developed to fill the supply-demand gap for credit for the rural poor by a network of banks, little awareness was
created for insurance catering to the various needs of these people.
From politicians to industrialists and from academicians to financial experts, the buzz phrase is" The real India lives in the villages." All smart
marketers (comprised of previously opened sectors like FMCG, Banking, Textile, Automobile, Pharmaceutical, IT, etc., as well as the more
recently opened up Insurance), Indians as well as multinationals, have been quick to identify the tremendous market potential of rural India.
For the country's mega marketers, rural marketing has become inevitable due to the fact that it is becoming the most important route to
growth. No wonder corporate India is directing a sizable portion of its marketing budget to target the rural consumer.
Rural India provides a large and latent consumer base. Home to over 700 million people, it represents not only 70% of India's population but
also over 12% of the world population. The rural population is spread over about 627,000 villages, and about 90% of them are in villages with
2,000 people or less.
After liberalization of the insurance sector, more than a dozen companies entered into business during 2000-2006. These new companies
started operating from metros and urban areas. As a result, the urban population got more attention and it led to more insurance penetration
in urban areas as compared to rural markets, even though the urban segment in India is very small compared to the rural segment. Yet the
majority of the rural population is exposed to risks similar to or even higher than those of their urban counterparts.
Thus, micro insurance can become an effective financial tool to fill the gap and to effectively address the problem of rural marketing of
insurance products.
Micro insurance is a form of insurance that offers limited protection for a low contribution (hence the term "micro"). It is aimed at poor sections
of the population and designed to help them cover themselves collectively against risks. If properly developed on scientific lines, micro
insurance can have enormous potential for transforming the lives of the rural poor. It can be effectively linked to provide health insurance,
accident insurance, and social security for rural communities. The formal institutions are unable to reach the poor and weaker sections of the
rural areas due to factors such as low creditworthiness of the poor and high transaction costs. Other informal groups, such as NGOs and
service-oriented organizations that have proximity to the rural poor, motivate the people to buy insurance and therefore are the right
alternative channel to take up such activities. Sometimes, they work in remote areas where the existing insurers have limited access. As
most of them are self-sustaining units and have longstanding relationships with members, chances of moral hazard are also much less.
Self-help groups (SHGs), NGOs, cooperatives, or any other organizations that play an active role in empowering the rural poor, can be
considered to carry out micro insurance activities. In order to tap the potential in the rural sectors and with a view to increasing the
penetration of insurance, such organizations can assume the role of intermediary/corporate agents or develop a new channel on the lines of
the referral model to popularize micro activities, as they do not require any additional capital base. There is also demand for allowing co-
operatives to take up micro insurance as per the specific requirements of the targeted rural poor masses, which, however, require a minimum
capital of Rs. 100 crores under the existing regulatory setup. Section 8A of the Insurance Act (Amended) defines these as Insurance Co-
operative Societies, thereby not preventing them to act as insurers.
How would NGOs, SHGs, co-operative federations, or similar social groups fare in micro insurance activities? One should look at their SWOT
(Strengths, Weaknesses, Opportunities, Threats) analysis to have a broad outline, and accordingly appropriate strategies can be formulated
to have some kind of co-operative links with these non-profit social groups.
It is clear from Exhibit 13 that these groups have more chance of succeeding in the marketing of insurance products to rural people. There
are 14 official languages in India and also Hindi, but in remote rural areas there are large numbers of different dialects used by different rural
communities. This itself may pose a Herculean task for the insurance players-to understand these dialects first, then talk with these rural
people, then take them into confidence, then make them to understand the benefits of insurance, then finally convince them to buy insurance
products, parting with their little savings in anticipation of a future loss. It may take years for a new player to change the mindset of the
illiterate rural population. In contrast, SHGs, NGOs, and other types of social groups have already reached the level where they can
effectively convince the rural population of the benefits of insurance with little training and support. Already the concept of micro financing has
gained momentum in rural areas, which was the result of active involvement of these social groups.
The opportunities available with these social groups are many, with no major competitor with similar strengths in these rural areas. Most
potential weaknesses and threats can be easily removed by effective training of the existing self help group employees, appointing a few
experienced officials, making minimal initial investment to develop infrastructure and technical support, and developing proper networking of
the rural markets to diversify/spread the risk. These social groups can be used as an effective distribution channel for rural insurance
marketing.
In addition, the existing insurance players should develop suitable insurance products that specifically meet the needs of the rural population.
Most of the existing products being launched by the private players (and also by LIC) are tested in international markets and meant for mainly
urban population, then launched either in their original form or slightly modified in accordance with India's urban population. Product design
methodology developed by Fok [2005] can be adopted for this purpose, and is given in Exhibit 14.
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EXHIBIT 13
SWOT Analysis of Social Groups: Potential Partners for Rural Insurance
Markets
The existing insurance payers can effectively use this model before launching some ready-made products developed for urban markets
directly to rural markets. By adopting this disciplined approach to all product development, costly mistakes can be avoided, and ultimately it
increases the chance of the new product achieving both good sales and healthy profitability (Fok [2005]). Each of the four gates should be
carefully monitored by senior management to reduce the risk of wasting resources on developing a poor product, which helps in aborting
nonviable products at an early stage and freeing up creative resources for the development of other products. A new product passes the first
stage only if it demonstrates customer need through intensive market research (both desk and consumer-based). When the product passes
through the second stage, it is almost ready to meet customer needs, making it financially viable. In the third and most crucial stage, the
product is actually tested. Finally, the product is launched into the market, feedback is gathered, then gradually further product development
strategies are followed to prolong the product's life cycle.
The model given in Exhibit 15 can be adopted by the insurance players while developing various strategies for promoting the newly identified
products for the rural population. This model takes into account the vast landscape of Indian terrain and the existing system of distribution,
and also tries to incorporate the role of the social groups as the ultimate intermediaries between the rural population and the insurance
companies.
Presently LIC does have some advantage over other private players in terms of distribution channels. It has many rural centers through
which it popularizes its products. The private players already have joint ventures with Indian partners, most of which also have long-standing
credibility in the minds of Indian customers. Thus, what is required to reap the full potential of the robust rural population is a well-planned
strategy for strengthening the distribution channel by joining hands with banks having a good track record of rural marketing. Many co-
operative banks are in most of the rural areas. Apart from this, many of the nationalized banks have well-developed rural networks (the most
prominent player is SBI). Subsequently it is necessary to identify the SHGs, NGOs, and other social groups and to develop the skills required
and also the infrastructure facilities for the distribution system. Then, as already mentioned, develop the network in such a way that the flow
from top to bottom becomes very smooth and efficient. Once the system becomes operational, slowly and steadily marketing of insurance
products to the rural population becomes a reality. This is the best networking model, though of course, depending on different circumstances
and situations, modifications can be made to it. The main advantage of this model is that it takes care of the diversified characteristics of the
rural population by allowing the social groups to participate in distributing the insurance products. Only these groups know about the diversity
of the rural population.
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EXHIBIT 14
Product Design
Methodology
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EXHIBIT 15
Networking Model for Effective Rural Marketing of Insurance
Products
Given the vast potential for insurance products in rural India, we expect different strategies to emerge in the coming years. Possible options
include:
1. Depending on various needs of the rural customers, suitable custom-made products should be developed and also should segment the
markets according to the characteristics of the rural population.
2. Savings-oriented insurance products that provide flexibility in premium payment should be introduced. For example, the payment schedule
could be linked to the harvest season, with an option for top-up payments by farmers in periods of surplus incomes.
3. A facility should be provided for making irregular premium payments due to natural disasters without affecting the continuity of the
insurance coverage.
4. New approaches should be created to leverage the extensive rural banking services. For example, insurers could sell insurance products
on the backs of banking products widely made available by way of "Kisan" credit cards, which is a facility to farmers that assures credit
disbursement over the long term. This could be a useful basis on which to design life insurance cum-pension products, especially for farming
households.
5. Innovative distribution approaches through partnerships with village-level institutions and non-governmental organizations (various social
groups) should be developed. Such entities, if involved closely and trained properly, could provide a variety of outsourced service support to
insurers, thereby helping to lower distribution and claims costs.
6. New ways of covering rural families through bundled life and non-life insurance products should be developed. The IRDA recently
announced that such product bundling will be allowed for the micro insurance sector, thereby providing comprehensive insurance benefits to
rural people at a lower cost.
SUMMARY
With the opening up of India's insurance industry, private sector operators in collaboration with overseas partners are likely to bring in a more
professional and focused approach. Hence, in this millennium, the insurance industry likely will play an important role in changing the
country's economic landscape.
The Insurance Regulatory and Development Authority has issued many regulations for the business conduct of insurance companies so as
to promote growth of the insurance business in India without disturbing its financial stability. There has been growth not only in the number of
insurance companies but also in the premium collected. A similar increase was observed in insurance penetration. Considering the
improvements, it is now time to consolidate and review some of the regulations with the changing scenario of global integration, high growth
in domestic products caused by increased contribution from the services sector, interest of FIIs in the Indian markets, and the operations of
financial conglomerates. In light of the above, it is increasingly important to trace market practices and install a strong supervisory system.
The stability and robustness of the insurance industry depends not only on the selection of sound players to enter the market but also on
ensuring that they remain financially sound throughout their operations.
For any industry to grow, it is necessary that there should be many innovative products available to consumers, suitable to their needs and at
appropriate prices. As of now many products are available that are tailor-made to different segments of the population, but mainly for the
urban market. These innovations to some extent have brought in shifts in the market share between the public sector and private sector
companies. Thus, the success of the insurance industry will primarily depend upon meeting the rising expectations of the consumers.
Projections for the growth and development of the Indian insurance sector are based on the urban markets, but rural markets remain largely
untapped. A concentrated effort from LIC as well as various private players towards tapping that market is needed to boost the insurance
sector in the years to come. There exists huge potential for the wealth maximization of private institutional investors, private wealthy families,
individuals, and public sector enterprises.
[Sidebar]
The modern concept of insurance practices in India started during the British rule in 1818 when Oriental Life Insurance Company was established in
Calcutta. India became independent from British rule in 1946, and by 1956 the insurance sector was nationalized, with the Life Insurance Corporation
of India created by combining almost 245 private life insurance companies; 107 private non-life companies combined in 1973 to form the General
Insurance Corporation. But since the very purpose of nationalizing the insurance sector got sidelined due to the monopolistic power it enjoyed,
coupled with the bureaucratic mindset of LIC and GIC, insurance again was opened to private players in 1999. During 2000-2006, almost 15 life and
13 non-life private insurance players (mosdy joint ventures between Indian and foreign players) started operations in India, indicating the willingness
of foreign institutional investors to enter the Indian insurance sector. But through all these major changes the actual impact was felt only in major
urban areas, while the vast majority of the rural population was excluded from the insurance sector. Around the world, scholars and financial experts
believe that in the next 5 to 10 years, India and China are going to be the targets for insurance companies. So far, most of the insurance companies
in India are not actively tapping the huge potential of the rural markets. Unless the rural markets are given priority consideration, all predictions about
future insurance industry potential in India are going to be distant dreams. The present insurance business is not even able to penetrate 20%-30% of
the total population of 1.095 billion, and the projected population figure by 2025 will be approximately 1.501 billion. The order of the day will be to
refocus on micro insurance in India to capture the huge potential of rural customers.
[Reference] » View reference page with links

REFERENCES
Bhattacharya, A., and O'Neil Rane. "Nationalisation of Insurance in India." The Indian Economy, pp. 378-397.
Campbell, David. "Industry Restructuring in Asia." Insurance Digest, PWC, Asia Pacific Edition (April 2004), pp. 22-25.
Dror, D., and C. Jacquier. "Micro-insurance: Extending Health Insurance to the Excluded." International Social Security Review, 52 (1999), pp. 71-95.
Fok, Robert, and Khushroo Panthaky. "China and India: Opportunities too Big to Ignore." Insurance Digest, PricewaterhouseCoopers, Asia Pacific
Edition (February 2005), pp. 5-17.
Fok, Robert. "Desigining the Next Generation of Products." Insurance Digest. PricewaterhouseCoopers Asia Pacific Edition (October 2005), pp. 20-
27.
Hong, Z. "Corporate Insurance Market in the People's Republic of China: Some Macro and Micro Perspectives." Managerial Finance,Vol. 29, No. 5/6
(2003), pp. 65-78.
Keneley, M. "Control of The Australian Life Insurance Industry: An Example of Regulatory Externalities within the Australian Financial Sector 1870-
1945!'Australian Economic History Review, Vol. 45, No. 1 (2005).
Pearson, R. "Towards An Historical Model of Services Innovation: The Case of Insurance Industry, 1700-1914." Economic History Review, Vol. L,
No. 2 (1997), pp. 235-256.
Sinha, T. "Privatization of the Insurance Market in India: From the British Raj to Monopoly Raj to Swaraj." CRIS Discussion Paper Series, 2002.X.
Tienyu, H. "The Determinants of the Demand for Life Insurance in an Emerging Economy-The Case of China." Managerial Finance, Vol. 29, No. 5/6
(2003), pp. 82-94.
To order reprints of this article, please contact Dewey Palmieri at dpalmieri@iijournals.com or 212-224-3675
K.B. SUBHASH
is a senior lecturer, faculty of commerce at Goa University in Goa, India.
subhash@unigoa.ac.in
DEEPTI BHAT
received her MFS from Goa University and is presently working as junior stock dealer with Cub Share Broking Services Ltd, Goa,
India.
bhatdeepti22@yahoo.co.in
References
• References (10)
Subjects: Studies, Insurance industry, Nationalization, Rural areas

Classification Codes 9179 Asia & the Pacific, 9130 Experiment/theoretical treatment, 8200 Insurance Industry
Locations: India
Companies: General Insurance Corp of India Ltd (NAICS: 524130 )
Author(s): K B Subhash, Deepti Bhat
Author Affiliation: K.B. SUBHASH
is a senior lecturer, faculty of commerce at Goa University in Goa, India.
subhash@unigoa.ac.in
DEEPTI BHAT
received her MFS from Goa University and is presently working as junior stock dealer with
Cub Share Broking Services Ltd, Goa, India.
bhatdeepti22@yahoo.co.in
Document features: Tables, Graphs, Diagrams, References
Publication title: The Journal of Wealth Management. London: Winter 2007. Vol. 10, Iss. 3; pg. 65, 23 pgs
ISSN: 15347524

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India privatizes insurance: Will it attract investor funds?

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The new private usurers

Capital requirements and share transfers

* reinsurance business - Rs200 million.

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Subjects: Insurance industry, Legislation, Privatization, Regulation

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INDIA: An Industry on a Growth Trajectory

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Subjects: Growth rate, Reinsurance, Insurance companies, Business forecasts, Globalization

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The role of insurance in health care management in India

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Estimating future health insurance expenditure

Health insurance operational costs

Issues and concerns

- Rejection and unwarranted reimbursement delays.

- Pricing for comprehensive total care.

- Inadequate medical care coverage.

International health insurance reform

- A shift to economic and medical efficiency.

- The introduction of health care activity budgeting and evaluation.

- Weakened providers and strengthened state.

Indian and global statistics

- Hospital/nursing home run by the government.

The main policy exclusions are:

- All pre-existing diseases.

- Corrective, cosmetic or aesthetic dental surgery or treatment.

- Spectacles, contact lens and hearing aid.

- Primarily diagnostic expenses not related to sickness/injury.

- Treatment for pregnancy, childbirth, miscarriage, abortions etc.

- Covers people between the ages of three months to 65 years.

Why health insurance?

The reasons for health insurance-based services include:

Third party administrators (TPAs)

- renew their licenses three yearly through IRDA;

Changing attitudes - from self-centric to consumer oriented

The global comparison

The desired strategies

Regulation - the catalyst

Private insurance as a catalyst for progress

Bottleneck: lack of health statistics

2. Bahadur, A. (2001), Healthcare Industry, Confederation of Indian Industry, India.

11. Matlani, A. (2004), Current Trends, Medvarsity, New Delhi.

15. Rao, C.S. (2003), Annual Report 2002-03, IRDA, Hyderabad.

Table II: Estimate of total health expenditure in India - 1990-1991

Table III: Estimated health insurance expenditure

Table V: Real GDP growth: five year averages in four countries

Table VI: Top ten markets in 2004

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New life insurance players in India hit some speed bumps

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