A REPORT

ON
PERCEPTION TOWARDS LIFE INSURANCE AFTER
PRIVATISATON

A report submitted in
partial fulfillment of
The requirements of
MBA Program

BY:
xxxxxxxxxxx

Distribution list

1
1) xxxxxxxxxxxxxxxxxxxxx
2) xxxxxxxxxxxxxxxxxxxxx

2
 ACKNOWLEDGMENT

Learning is a lifelong process; one should not stop learning until dead. I am thankful to
ICFAI Business School for giving me an opportunity to learn and perform under SBI
Life Insurance.

I take this opportunity to express my sincere gratitude and profound regards to Dr.
xxxxxxxxx, my faculty guide, who has always given me motivational boost to go and
perform. I would further like to thank her for her persistence to listen to my problems
and to give apt solutions
.
I would like to thank my company guide Mr. Thirumalai Who in spite of busy schedule
has co- operated with me continuously and indeed, his valuable contribution and
guidance have been certainly indispensable for my project work
.
It would be really injustice on my part if didn’t thank Mr. E. Thirumudi Pandian, Area
sales manager and Mr. M. Arjunan, branch sales manager for their invaluable advice
and enlightening my path at every stage of my project
.
I take this opportunity to thank all the senior executives and every associate of SBI
Life Insurance Co Ltd, without their cooperation I would not be able to complete this
project.

xxxxxxxxxxxxxxxx
IBS-CHENNAI

3
 LIST OF ILLUSTRATIONS

LIST OF FIGURES

S.No TITLE OF FIGURES PAGE No.

1 No of males and females 34
surveyed
2 Educational qualifications 35
of males
3 Educational qualifications 35
of females
4 Popularity percentage of 36
life insurance companies
5 Familiarity of schemes 37
among people
6 Purpose of Insurance 38
7 Ranking of some benefits 39
of insurance (figures
expressed in %)
8 Insurance as the viable 40
option for investment
9 Availability of Insurance 40
Cover
10 Estimate of IT 41
professionals enrolled into
insurance
11 Type of investment 42
interested in
12 Mode of premium 42
payment
13 Services provided by the 43
insurance company
(figures expressed in %)
14 Returns given by the 44
insurance company
(figures expressed in %)
15 Ratings of various 44
insurance companies
16 Privatization of insurance 45
17 Availability of good 46
services after privatization

4
LIST OF TABLES

S.No TITLE OF TABLES PAGE No.

1 Popularity percentage of 36
life insurance companies
2 Familiarity of schemes 37
3 Purpose of Insurance 38
4 Ranking of some benefits 39
of insurance (figures
expressed in %)
5 Estimate of IT 41
professionals enrolled into
insurance
6 Mode of premium 42
payment
7 Ratings of various 44
insurance companies

5
 ABSTRACT

The project deals with the perception of the people towards insurance after the
privatization of the insurance sector. The report tries to find the reason for
opening up of insurance sector and discuss factors which completely change the
picture of the insurance industry in India. We are trying to understand the
perception of people when there are so many national and international
companies have now entered in the Indian market. Whether they still see
insurance as a tax saving product or they start looking towards it as a good
investment opportunity. To actually understand this one need to conduct some
primary and secondary research. In primary research one need to find out
persons monthly income, age, risk appetite, his thinking towards insurance as an
investment or tax benefit product and most importantly about his awareness of
insurance companies and products offered by them in the market. As well as his
knowledge about other investment products in the market and what is his
feedback when they had already invested in such products. We also look
towards one insurance product available in the market as ULIP. We see what its
important features and good aspects of this product, what the risk of investing in
this product are, what are the returns it offered etc.

PURPOSE, SCOPE AND LIMITATIONS

The purpose of this report is to find out the change in the perception of the
people towards life insurance after privatization and to understand and compare
the current insurance market with the market existing before opening up of the
industry for the private and outside players with some current issues and latest
development. This report also takes in to consideration the new innovative and
6
contemporary products available to the customers in the market and to which
level they are satisfied with these products and what is their recommendation for
any changes that should be done in the products.
The project report is structured
according to the data procured from the websites of life insurance companies,
IRDA annual report, and insurance council of Indiaand through the survey
conducted by means of preparing a questionnaire. A small sample size is taken
for conducting the survey. The survey is conducted only in the Chennai so the
statistical data collected, analyzed and results drawn only reflects views and
perception of local residents, professionals about the life insurance and
insurance products. So the results through this effort may vary and deviate from
the actual findings and proceedings.

7
 SOURCES AND METHODS

The main source of materials for collecting and procuring the data includes the
annual IRDA report, the regulatory body for insurance in India and the insurance
council of India and data is also collected by conducting a survey among general
mass using a carefully prepared questionnaire which tries to take in to account
the investment behavior of the people towards life insurance which includes their
yearly investment, investment in a particular product, their satisfaction level with
the service and returns and their recommendations for further improvement in
the product. The analysis and interpretation is done using the data collected by
means of using Microsoft Excel software and represented by means of pie
charts, bar graphs etc. some of the results are also include an element of
assumption where ever the data is not available and incomplete due to some
inevitable reasons so results may vary from the actual findings.

8
 INDUSTRIAL ANALYSIS
Historical Background:
The Indian econom y is currentl y showing signs of vibrancy; it is also
depicting a qualitative change in its composition. The econom y
which had been essentially built on agricultural wealth, has
transformed itself in stages over the period of the five year plans,
initiall y into an econom y, where industr y assumed a leadership role
accompanied by a perceptible change in the last few years or so
with an accent on information technolog y and other service sectors.
Toda y, the Gross Domestic Product of the countr y is predominantly
derived from the services sector. This will naturally have its effect
on the state of capital market of which insurance sector is an
integral part.

Government's decision to accept the recommendations of the

Committee on Reforms in the Insurance Sector and to constitute an
interim Insurance Regulatory Authority, by an executive order in
Januar y 1996, to look into the modifications, the regulator y frame
work of the insurance sector, has resulted in the establishment of a
statutor y body, for regulating the players and in broadening the
sector by admission of new players from the private sector. Such a
development has had a ripple effect leading to the establishment
and development of professional institutions that are connected with
the industr y. Subsequent sections of this report deal with
theseaspects.

As more than 42% of the country's current GDP is being generated

b y the services sector, obviousl y necessary steps are required to be
taken to sustain this process of growth and towards this end a
coordinated approach is necessar y. And insurance being a service

9
industr y could prima facie act as an engine of growth. In this
regard, the history of development of insurance industry in India has
been one of under-performance and under-achievement.
Appreciation for the necessity to cover risks of both personal lives
and property has been very poor. In fact, the growth in the life
insurance market has been mainl y driven by income tax
considerations and this had been the primary reason wh y the urban
population has been a major beneficiary of life policies. Coverage
of property to risks of different types has alwa ys been a secondar y
consideration of its owners and has been prompted by lenders'
requirements. Unless there exists a compulsion on the part of
owners to cover the risks of loss, the industr y shall not move in the
high gear for development. All these characteristics of the current
market are changing, albeit slowly, as a result of the transformation
that has been ushered in with the current developments in the
insurance sector. The compelling reason for the same which was to
provide an opportunity for the consumers to have a choice in the
matter of selection of their risk bearers is slowl y unfolding into a
s ystem whereby newer and newer dimensions are being added to
the product profiles that the companies produce. There is still
considerable work to be done in this area by insurance companies.
But decidedly the first step in this direction has now been taken by
admission of new players and the Authority hopes that this step,
though small in nature, will be a significant one.

In the statements that follow, the Authority portrays some basic and
fundamental statistics that relate to the Indian econom y which are
relevant to the insurance industry. Also added to these statements
is a short table which depicts the state of insurance penetration in
the Indian context. A discerning reader may note that the level of
development of insurance in the country is still not on the same
10
level as the development noticed in the neighborhood but the
increase shown in a period of the past few years is encouraging.

The opening of the market to private participation is a bold

experiment and was necessitated by the public perception of a
necessity to have a free availability of choice to customers. Hopes
were entertained that the opening up of the market will deepen the
insurance penetration, bring about a rationalization of premium
structure, end cross subsidization, provide covers which were
lacking in the market and provide the necessar y resources for
infrastructure development. The functioning of the old insurers gave
enough hopes to nurture and encourage these thoughts. The new
companies have also supported this philosophy by their current
actions; however, they have been active for so little a time that their
effect on the market will be felt onl y in the years to come. Some of
the hopes have been achieved - in the areas of innovation of
products, extension of facilities to cus tomers etc.

CURRENT DEVELOPMENTS IN ULIP

It is nearl y seven years since the Indian insurance market was

opened up. In life insurance, we have seen unprecedented growth
which is continuing. By the end of the financial year 2007-08 we are
likel y to see more than twenty life insurance companies in India. A
frequentl y asked question is: what is the optimum number of
insurance companies that is ideal for India’s needs? Considering
that life insurance penetration is 3% of GDP and that one is aiming
at say 7% or 8% of GDP, that vast sections of people are still not
covered by life insurance and large geographical areas are
untouched by insurance, we can sa y that we have a long wa y to go
and that there is room for more insurance companies. The annual
‘new business’ growth has been around 100% for the last three
11
years and it looks likel y that such a growth will continue for some
time. That such an incredible growth, to a great extent, has been
due to ULIP products is another matter. A significant part of ‘current
issues’ are consequent to such high growth. With current and
projected growth of the Indian econom y at 9% for the foreseeable
future, domestic savings rate can be expected to grow from, or at
least be stable at 23-24%. It follows that unless the sector makes
major strategic errors, growth of life insurance business will remain
high.
Predicting a compan y’s future over long term is difficult enough;
attempting that for a sector in a market is much more risky. Yet when
one discusses ‘current issues in life assurance (CILA)’ one must
devote thought to market-related strategic issues and directions and
to mid-term and long-term solutions. In a recent special issue of
Harvard Business Review on ‘long term planning’ its editor
concludes his observations saying: ‘…the art of managing for the
long term is the art of making the whole greater than the sum of
its parts’. I believe this is apt for our life insurance market. It is
necessar y to create a market that fits the HBR editor ’s comment and
one needs to keep this in mind when analyzing current issues and
identifying solutions. It is also said that ‘building the future is really
about building the present……..and a …. Leader must be careful to
sta y close to the front line-the people who deal with customers and
markets’ (Maurice Levy-HBR). In this context let us look at the
industr y issues in ‘building the present’ and what steps are needed
to resolve them and take the industr y forward in a wholesome,
health y and customer-oriented manner.
It is essential that the life insurance market functions with ‘optimum
efficiency’ and ensures that resources are allocated efficientl y,
‘ensuring customer choice and value’ (Skipper). An efficient market
will have innovative and constantl y improving products, predictable
12
and affordable prices and transparent practices. But no market is
perfect and our life insurance sector has more than its share of
imperfections. In a perfect market a regulator is perhaps not
needed. Information asymmetry between the three viz. insurer-
intermediary-customer is a major imperfection that manifests itself in
several of our operational issues and regulatory interventions. Dr.
Harold Skipper notes: “…within a competitive insurance market
government / regulatory interventions are desirable only if three
conditions exist:
a. Actual or potential market imperfections exist
b. The market imperfections could and do lead to economic
inefficiency or inequity
c. Government (regulator y) action can ameliorate the
inefficiency / inequity.”
All the three mentioned above apply to our life insurance market.
The industr y can do continuing introspection, as is being attempted
in this conference, and reduce if not eliminate imperfections. What
we call ‘issues’ are actually the visible manifestations of
imperfections.
Saving Rates (as % of) GDP at Current Market Prices
1993-941994-951995-961996-971997-98
1998-99
(P)
(Q)
Gross Domestic
Saving 22.5 25.0 25.5 23.3 24.7
22.3
Public 0.6 1.7 2.0 1.7 1.4
0.0
Private 21.9 23.3 23.4 21.6 23.3
22.3

13
Household sector 18.4 19.8 18.5 17.1 19.0
18.5
(a) Financial savings 11.0 12.0 8.9 10.4 10.4
10.9
(b)Physical savings 7.4 7.8 9.6 6.7 8.6
7.6

Gross Domestic
Investment* 23.1 26.1 27.2 24.6 26.2
23.4
GFCF 21.4 22.0 24.6 23.0 22.7
21.4
Change in stocks (-) 0.2 1.6 1.9 (-) 1.2 0.7
0.4
Saving-Investment
Gap@ (-) 0.6 (-) 1.2 (-) 1.8 (-) 1.3 (-) 1.5 (-)
1.0

Public (-) 7.6 (-) 7.1 (-) 5.6 (-) 5.3 (-) 5.3
(-) 6.6
Private 8.9 8.5 4.5 6.7 6.6
7.1
Note:(i) Gross domestic investment denotes gross domestic
capital formation (GDCF)
(ii) Figures may not add up due to rounding off
* : adjusted for errors and omissions;
@ : refers to the difference between the rates of
savings and investment
GFCF : Gross fixed capital formation;
P : Provisional estimates; Q : Quick estimates
Source : Economic Survey, 1999-2000
TABLE-3
Savings of the Household Sector in Financial Assets (Rs. in
crore)
14
Item 1992-931993-941994-951995-961996-97
1997-98P1998-99$
Savings(Gross) of the
Household Sector in Financial
Assets of which 80,387 109,485 145,381 124,986 157,424
178,576207,841
Currency 6,562 13,367 15,916 16,525 13,643
12,78022,131
(8.2) (12.2) (10.9 (13.2) (8.7) (7.2)
(10.6)
Bank Deposits # 29,550 36,200 55,834 39,995 57,367
79,51476,590
(36.8) (33.1) (38.4) (32.0) (36.4) (44.5)
(36.9)
Non-banking Deposits6,035 11,654 11,547 13,198 21,411
7,77515,376
(7.5) (10.6) (7.9) (10.6) (13.6) (4.4)
(7.4)
Life Insurance Fund**7,114 9,548 11,370 13,894 16,188
19,43122,766
8.8) (8.7) (7.8) (11.1) (10.3) (10.9)
(11.0)
Provident and Pension Fund14,814 18,226 21,295 22,292
26,248 32,80838,742
(18.4) (16.6) (14.6) (17.8) (16.7) (18.4)
(18.6)
Claims on Government +3,885 6,908 13,186 9,588 11,701
22,16427,004
(4.8) (6.3) (9.1) (7.7) (7.4) (12.4)
(13.0)
Shares and Debentures ++8,212 10,067 13,474 8,839 6,696
3,777 4,935
(10.2) (9.2) (9.3) (7.1) (4.3) (2.1)
(2.4)
Units of Unit Trust of India5,612 4,705 3,908 262 3,776
595 565
(7.0) (4.3) (2.7) (0.2) (2.4) (0.3)
(0.3)

15
Due to Changes in Coverage of non-banking deposits, figures
prior to 1998-99 are not strictly comparable with those of
1992-96
These data are compiled /revised in December 1999 and
hence, do not tally with the Quick Estimates of CSO released
in February 1999. Constituents may not add up to total due
to rounding off.
Figures in brackets indicate percentages to total Financial
Assets of households.
# Includes deposits with Co- operative non-credit societies.
** Includes State / Central Government and postal insurance
fund. + Includes compulsory deposits.
++ Includes investment in shares and debentures of credit /
non-credit societies, public sector bonds, and investment
in mutual funds (other than UTI)
$ Tentative Estimates
Source: Report on Currency and Finance 1998-99, RBI

Privatization of the Insurance Market in India: From the British

Raj to
Monopoly Raj to Swaraj.

Introduction
Over the past century, Indian insurance industry has gone through big changes.
16
It started as a fully private system with no restriction on foreign participation.
After the independence, the industry went to the other extreme.
It became a state-owned monopoly. In 1991, when rapid changes took place in
many Parts of the Indian economy, nothing happened to the institutional structure
of Insurance: it remained a monopoly. Only in 1999, a new legislation came into
effect signaling a change in the insurance industry structure. We examine what
might happen in the future when the domestic private insurance companies are
allowed to compete with some foreign participation. Because of the time
dependence of insurance contracts, it is highly unlikely that these erstwhile
monopolies are going to disappear.

Insurance in India started without any regulation in the Nineteenth

Century. It was a typical story of a colonial era: a few British insurance
Companies dominating the market serving mostly large urban centers. After the
independence, it took a dramatic turn. Insurance was nationalized. First, the
life insurance companies were nationalized in 1956, and then the general
insurance business was nationalized in 1972. Only in 1999 private insurance
companies have been allowed back into the business of insurance with a
maximum of 26% of foreign holding. In what follows, we describe how and why of
regulation and deregulation. The entry of the State Bank of India with its proposal
of bancassurance brings a new dynamics in the game. We study the
collective experience of the other countries in Asia already deregulated their
markets and have allowed foreign companies to participate. If the experience of
the other countries is any guide, the dominance of the Life Insurance Corporation
and the General Insurance Corporation is not going to disappear any time soon.
Insurance under the British Raj Life insurance in the modern form was first set up
in India through a British company called the Oriental Life Insurance Company in
1818 followed by the Bombay Assurance Company in 1823 and the Madras
Equitable Life Insurance Society in 1829. All of these companies operated in
India but did not insure the lives of Indians. They were there insuring the lives of
Europeans living in India. Some of the companies that started later did provide
insurance for Indians. But, they were treated as "substandard" and therefore had
to pay an extra premium of 20% or more.3policies that could be bought by

17
Indians with "fair value" was the Bombay Mutual Life Assurance Society starting
in 1871.The first general insurance company, Triton Insurance Company Ltd.,
was established in 1850. It was owned and operated by the British. The first
indigenous general insurance company was the Indian Mercantile Insurance
Company Limited set up in Bombay in 1907.By 1938, the insurance market in
India was buzzing with 176 companies (both life and non-life). However, the
industry was plagued by fraud. Hence, a comprehensive set of regulations was
put in place to stem this problem (see Table 1). By 1956, there were 154 Indian
insurance companies, 16 non-Indian insurance companies and 75 provident
societies that were issuing life insurance policies. Most of these policies were
centered in the cities (especially around big cities like Bombay, Calcutta, Delhi
and Madras). In 1956, the then finance minister S. D. Deshmukh announced
nationalization of the life insurance business.

TABLE 1
MILESTONES OF INSURANCE REGULATIONS IN THE
20THCENTURY
18
Year Significant Regulatory Event

19
1912 The Indian Life Insurance Company
Act
1938 1938The Insurance Act:
Comprehensive Act to regulate
insurance business in India
1956 Nationalization of life insurance
business in india
1972 1972Nationalization of general
insurance
business in India
1993 Setting up of Malhotra Committee
1994 Recommendations of
Malhotra Committee
1995 Setting up of Mukherjee Committee

1996 Setting up of
(interim) Insurance Regulatory
Authority (IRA)
1997 The
Government gives greater
autonomy to LIC, GIC and its
subsidiaries with regard
to the restructuring of boards and
flexibility in investment norms aimed
at
channeling funds to the
infrastructure sector
1998 The cabinet decides to allow
40% foreign equity in private
insurance companies-26% to
foreign companies and 14% to
NRI’s, OCB’s and FII’s
1999 The Standing Committee headed by
Murali Deora
decides that foreign equity in private
insurance should be limited to 26%.

20
 The
IRA bill is renamed the Insurance
Regulatory and Development
Authority (IRDA)
Bill1999Cabinet clears IRDA
Bill2000President gives Assent to
the IRDA

Bill Sources: Various Monopoly Raj The nationalization of life insurance 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. (3) Bankruptcies of life insurance companies had
become a big problem (at the time of takeover, 25 insurance companies were
already bankrupt and another 25 were on the verge of bankruptcy). The
experience of the next four decades would temper these views.

Life Story of the Life Insurance Corporation The life insurance

industry was nationalized under the Life Insurance Corporation (LIC) Act of India.
In some ways, the LIC has become very successful. (1) Despite being a
monopoly, it has some 60-70 million policyholders. Given that the Indian middle-
class is around 250-300 million, the LIC has managed to capture some 30 odd
percent of it. (2) The level of customer satisfaction is high for the LIC (one of the
findings of the Malhotra Committee, see below). This is somewhat surprising
given the frequent delays in claim settlement. (3) Market penetration in the rural
areas has grown substantially. Around 48% of the customers of the LIC are from
rural and semi-urban areas. This probably would not have happened had the
charter of the LIC not specifically set out the goal of serving the rural areas. One
exogenous factor has helped the LIC to grow rapidly in recent years: a high
saving rate in India. Even though the saving rate is high in India (compared
with other countries with a similar level of development), Indians exhibit high
degree of risk aversion. Thus, nearly half of the investments are in physical

21
assets (like property and gold). Around twenty three percent are in (low
yielding but safe) bank deposits. In addition, some 1.3- percent of the GDP are
in life insurance related savings vehicles. This figure has doubled between 1985
and 1995. Life Insurance in India: A World Perspective In many countries,
Insurance has been a form of savings. Table 2 shows that in many developed
countries, a significant fraction of domestic saving is in the form of (endowment)
insurance plans. This is not surprising. The prominence of some developing
countries is more surprising. For example, South Africa features at the number
two spot. India is nestled between Chile and Italy. This is even more surprising
given the levels of economic development in Chile and Italy. Thus, we can
conclude that there is an insurance culture in India despite a low per capita
income. This bodes well for future growth. Specifically, when the income level
improves, insurance (especially life) is likely to grow rapidly.

Table 2
LIFE INSURANCE PREMIUM AS PERCENTAGES OF THE
GROSS DOMESTIC SAVING (GDS) AND THAT OF GROSS
DOMESTIC PRODUCT (GDP)
22
 Rank Country % of GDS % of GDP
1 United 52.50 7.31
kingdom
2 South Africa 51.55 10.32
3 Japan 32.46 10.10
4 France 26.20 4.91
5 USA 25.20 3.63
6 South Korea 23.66 9.10
7 Finland 23.10 4.98
8 Switzerland 21.92 5.99
9 Netherlands 19.04 4.51
10 Israel 18.84 4.41
11 Sweden 17.88 3.51
12 Australia 17.88 3.48
13 Canada 17.05 3.04
14 Zimbabwe 15.88 6.27
15 Ireland 14.96 4.59
16 Greece 13.87 1.12
17 New Zealand 12.75 3.04
18 Taiwan 12.29 3.64
19 Denmark 12.00 2.71
20 Spain 11.68 2.23`
21 Germany 11.40 2.80
22 Norway 9.57 2.33
23 Belgium 9.13 2.38
24 Portugal 8.76 1.65
25 Austria 6.96 2.10
26 Chile 6.96 1.95
27 India 5.95 1.29
28 Italy 5.60 1.13
29 Malaysia 5.35 2.30
30 Singapore 4.72 2.73

Source: Roy (1999). Figures for 1994.

Malhotra Committee
Liberalization of the Indian insurance market was recommended in a report
released in 1994 by the Malhotra Committee, indicating that the market should
be opened to private-sector competition, and ultimately, foreign private-sector
competition. It also investigated the level of satisfaction of the customers of the
LIC. Curiously, the level of customer satisfaction seemed to be high. The union of

23
the LIC made political capital out of this finding (The following are the purposes
of the committee. (a) To suggest the structure of the insurance Industry, to
assess the strengths and weaknesses of insurance companies in terms of the
objectives of creating an efficient and viable insurance industry, to have a wide
coverage of insurance services, to have a variety of insurance products with a
high quality service, and to develop an effective instrument for mobilization of
financial resources for development. (b) To make recommendations for changing
the structure of the insurance industry, for changing the general policy framework
etc. (c) To take specific suggestions regarding LIC and GIC with a view to
improve the functioning of LIC and GIC. (d) To make recommendations on
regulation and supervision of the insurance sector in India. (e) To make
recommendations on the role and functioning of surveyors, intermediaries like
agents etc. in the insurance sector. (f) To make recommendations on any other
matter which are relevant for development of the insurance industry in India. The
committee made a number of important and far-reaching recommendations.(a)
The LIC should be selective in the recruitment of LIC agents. Train these people
after the identification of training needs.

(b) The committee suggested that the Federation of Insurance Institute, Mumbai
should start new courses and diploma courses for intermediaries of the
insurance sector. (c) The LIC should use an MBA specialized in Marketing (a
similar suggestion for the GIC subsidiaries). (c) It suggested that settlement of
claims were to be done within a specific time frame without delay. (d) The
committee has several recommendations on product pricing, vigilance, systems
and procedures, improving customer service and use of technology. (f) It also
made a number of recommendations to alter the existing structure of the LIC and
the GIC. (g) The committee insisted that the insurance companies should pay
special attention to the rural insurance business. (h) In the case of liberalization
of the insurance sector the committee made several recommendations, including
entry to new players and the minimum capital level requirements for such new
players should be Rs. 100 crores (about USD 24 million). However, a lower
capital requirement could be considered for a co-operative sectors' entry in the
insurance business. (i) The committee suggested some norms relating to

24
promoters’ equity and equity capital by foreign companies, etc.Mukherjee
Committee 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 Finance Minister objected.
He argued (probably on the advice of some of the potential entrants) that it could
affect the prospects of a developing insurance company.

Insurance Regulatory Act (1999) After the report of the Malhotra Committee
came out, changes in the insurance industry appeared imminent. Unfortunately,
Instability in Central Government, changes in insurance regulation could not pass
through the parliament. The dramatic climax came in 1999. On March 16,1999,
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. However, the BJP Government fell in April 1999. The
deregulation was put on hold once again. An election was held in late1999. A
new BJP-led government came to power. On December 7, 1999, the new
government passed the Insurance Regulatory and Development Authority (IRDA)
Act. This Act repealed 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 ten members. New licenses are being given
to private companies (see below). IRDA has separated out life, non-life and
reinsurance insurance businesses. Therefore, a company has to have separate
licenses for each line of business. Each license has its own capital requirements
(around USD24 million for life or non-life and USD48 million for
reinsurance).Some Details of the IRDA Bill 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 that details of the regulation.

Regulations

25
The first covers the Insurance Advisory Committee that sets out the rules and
regulation. The second stipulates that the "Appointed Actuary" has to be a
Fellow of the Actuarial Society of India. Given that there has been a dearth of
actuaries in India with the qualification of a Fellow of the Actuarial Society
of India, this becomes a requirement of tall order. As a result, some companies
have not been able to attract a qualified Appointed Actuary (Dasgupta, 2001).
The IRDA is also in the process of replacing the Actuarial Society of India by a
newly formed institution to be called the Chartered Institute of Indian Actuaries
(modeled after the Institute of Actuaries of London). Curiously, for life insurers the
Appointed Actuary has to be an internal company employee, but he or she may
be an external consultant if the company happens to be a non-life insurance
company. Third, the Appointed Actuary would be responsible for reporting to the
IRDA a detailed account of the company. Fourth, insurance agents should have
at least a high school diploma along with training of 100 hours from a recognized
institution. More than a dozen institutions have been recognized by the IRDA for
training insurance agents (the list appears online at
http://www.irdaonline.org/press.asp).Fifth, the IRDA has set up strict guidelines
on asset and liability management of the insurance companies along with
solvency margin requirements. Initial margins are set high (compared with
developed countries). The margins vary with the lines of business (for example,
fire insurance has a lower margin than aviation insurance). Sixth, the disclosure
requirements have been kept rather vague. This has been done despite the
recommendations to the contrary by the Mukherjee Committee
recommendations. Seventh, all the insurers are forced to provide some coverage
for the rural sector. (1) In respect of a life insurer, (a) five percent in the first
financial year; (b) seven percent in the second financial year; (c) ten percent in
the third financial year; (d) twelve percent in the fourth financial year; (e) fifteen
percent in the fifth year (of total policies written direct in hat year). (2) In respect
of a general insurer, (a) two percent in the first Financial year; (b) three percent in
the second financial year; (c) five percent thereafter (of total gross premium
income written direct in that year).New Entry Immediately after the passage of
the Act, a number of companies announced that they would seek foreign
partnership. In mid-2000, the following companies made public statements that

26
they already were in the process of setting up insurance business with foreign
partnerships (see Table 3). However, not all the partnerships panned out in the
end (see below) There are three other companies with "in principal" approvals:(1)
Max New York Life. It is a partnership between Delhi based pharmaceutical
company Max India and New York Life, the New York based life insurance
company.(2) ICICI Prudential Life Insurance Company. This is a joint venture
between Mumbai based Industrial Credit & Investment Corporation and the
London based Prudential PLC. (3) IFFCO Tokio General Insurance Company. It
is a joint venture between Indian Farmers' Fertilizer Cooperative and Tokio
Marine and Fire of Japan. To date (end of April 2001), the following companies
have thus been granted licenses: ICICI -Prudential, Reliance General, Reliance
Life, Tata-AIG General, HDFC-Standard Life, Royal-Sundaram, Max-New York
Life, IFFCO-Tokio Marine, Birla-SunLife, Bajaj-Allianz General, Tata-AIG Life,
ING-Vyasa, Bajaj-Allianz Life, SBI-Cardiff Life. Note that all of these companies
are either in the life insurance business or in the non-life insurance business. No
license has been granted for reinsurance business so far (the size of the
reinsurance business can be 10-20% of the total revenue). No stand-alone
health insurance company has been granted license so far. Enter the Dragon On
December 28, 2000, the State Bank of India (SBI) announced a joint venture
partnership with Cardif SA (the insurance arm of BNP Paribas Bank). This
partnership won over several others (with Fortis and with GE Capital). The entry
of the SBI has been awaited by many. It is well known that the SBI has long
harbored plans to become a universal bank (a universal bank has business in
banking, insurance and in security). For bank with more than 13,000 branches all
over India, this would be a natural expansion. In the first round of license issue,
the SBI was absent. There were several reasons for this delay. First, the SBI was
seeking a foreign partner to help with new product design. Second, it did not
want the partner to become dominant in the long run (when the 26% foreign
investment cap is eventually lifted). It wanted to retain its own brand name. Third,
it wanted a partner that is well versed in the universal banking business. This
ruled out an American partner (where underwriting insurance business by banks
have been strictly forbidden by law). Cardif is the third largest insurance
company in France. More than 60% of life insurance policies in France are sold

27
through the banks. Fourth, the Reserve Bank of India (RBI) needed to clear
participation by the SBI because in India banks are allowed to enter other
businesses on a "case by case" basis. Over the course of the next twelve
months, the SBI will sell insurance in 00 branches. Over a period of 2-3 years it
will expand operation in 500 branches. Initially it will hold 74% ownership of the
joint venture company with Cardif. Over time, it will dilute its holding to 50-
60%.The SBI entry is groundbreaking for several reasons. This was the first for a
bank to enter the insurance market. This kind of synergy between a bank and an
insurance company is extremely rare in many parts of the world. In Continental
Europe, it is called bancassurance (in France) or allfinanz (in Germany). Second,
even though the regulators have said that banks would not (generally) be
allowed to hold more than 50% of an insurance company, the SBI was allowed to
do so (with a promise that its share would be eventually diluted).

Broken Marriages Several partnerships broke down during the year 2000.
Probably the most dramatic breakdown took place between Hindustan Times (a
newspaper group) and the Commercial Union of the UK. The management of
Hindustan Times realized that they are heavily reliant on a steady daily cash flow
(Kumari, 2001). Insurance is a completely different business. Their shareholders
would revolt if they faced large one-time losses (common in insurance
business).Similarly, by the end of July 2000, Kotak-Mahindra and Chubb
declared their divorce. Dabur Group and Allstate also parted company. Allianz
and Alpic broke their partnership.Re-pairing of Partners A curious trend has
developed by the end of 2000. Several divorced partners have come back to the
field to tie knots to some other partners. Dabur has decided to tie the knot with
another divorcee - Commercial Union. Allianz has announced a new partnership
with the giant Indian scooter-maker Bajaj.Back to the Future: Mostly Swaraj with
a Foreign Twist At present, 312 million middle class consumers in India have
enough financial resources to purchase insurance products like pension, health
care, accident benefit, life, property and auto insurance. Only 2.5 per cent of this
insurable population, however, have insurance coverage in any form. The
potential premium income is estimated at around US $80 billion. This will place
India as the sixth largest market in the world (after the US, Japan, Germany, UK

28
and France).
Lessons from China China is the most populous country in the world (at
1.2 billion); India is a close second (just over a billion). Both have followed the
path of deregulation and privatization - China started it in 1979 and India in 1991.
Comparisons of these processes are described in Sinha and Sinha (1997). In
this section, I will concentrate only on the insurance industry in the two countries.
The insurance business in India has a premium volume of $8.3 billion n 1999
whereas in China the premium volume is $16.8 billion in 1999. However,
premium per capita is not all that dissimilar: $13.7 per person in China and $8.5
in India in 1999. As a percent of GDP, insurance is 1.93% in India and 1.63% in
China in 1999 (all data from Sigma, 2000).In China, the People's Insurance
Company of China (PICC) had a monopoly between 1949 and 1959. In 1959,
insurance business was deemed capitalistic and all forms of insurance were
suspended (and the insurance business was taken over by the Peoples Bank of
China). The insurance business reopened in 1979, the PICC reassumed its old
role as the monopoly. There are many differences in the way China and India
have handled deregulation. First, in China, the China Insurance Regulatory
Commission (CIRC) was set up in November 1998, well after the first Insurance
Law was promulgated in 1995. In India, the IRDA was launched first with the
authority to issue licenses. It took almost a year before it issued licenses for the
first set of private insurance companies. Second, in China, foreign insurers need
to have a representative office for three years before they can submit a proposal
for operation (in practice, this has been reduced to two years in some cases).
In India, there is no such requirement. Third, foreign insurers can only own
1825% of the total value of the market (although, in reality, it has been much
less than that in Shanghai). In India, the limit is set at 26% per company. In
China, there is no limit at the company level. Thus, a foreign company can own
100% of an approved insurance company in China. Fourth, in India, the licenses
are national. A company with a license can operate in any part of the country.
In China, on the other hand, foreign companies are restricted to operation in
two metropolitan areas: Shanghai and Guangzhou. Fifth, the IRDA is a
Law-implementing body. It can only interpret the laws that have been passed by
the Indian Parliament. On the other hand, it seems that the CIRC has been a

29
Law-making body, it is setting up rules as it sees fit. Sixth, China seems to
Have been forced to issue insurance licenses to a host of foreign companies by
the end of 2000 simply because it wanted an assured entry into the World Trade
Organization (WTO). In India, there is no such pressure as India is already a
part of the WTO.Quo Vadis, Insurance? In this section, we gaze into the future of
the insurance industry in India. A number of trends are already emerging.
Convergence In many other regions around the world, one sure sign is emerging
in the insurance business. Different parts of the financial sectors are converging
This happened first in European Union (with the so-called Third Directive). It is
now happening in the United States with the effective repealing of the Glass-
Steagall Act of 1933. In India, it will surely come. Not everybody in India,
however, believes so. For example, the Insurance Regulatory Development
Authority (IRDA) chairman N. Rangachari said that India is not yet ready for the
convergence of all financial sectors under one supervisory authority as
suggested by the banking division of the finance ministry. The RBI (Reserve
Bank of India) has erected a firewall between banks and insurance companies to
protect investor interests. With the insurance sector transforming from total
regulation to being opened up after 35 years, fears have been expressed on how
it would move. However, the convergence is already happening on the ground in
a “curious way” as 10 out of 12 insurance proposals received for license by the
IRDA have come in from companies who are in the pure or applied finance
sector. It may appear curious, but clearly the companies who want to enter the
insurance sector see some kind of a synergy between their existing business and
insurance. Monitor Group Report how would the insurance market be divided up
between the incumbent Life Insurance Corporation and the newcomers? The
Monitor Group (from Boston) has published a study at the end of 1999 (reported
in Business Today, 2000). It estimates that the $5 billion market of life insurance
in India (figure for 1998) will become a $23 billion market by 2008. The report
estimates that the LIC will have some 70-80% of the market whereas the new
companies will share some 20-30%. The bright prognostics for the LIC come
from several key observations. (1) The LIC has a vast distribution network in the
rural and semi-urban areas. This would be hard to duplicate. (2) The LIC has had
a real annual growth rate of 8% over the last decade. This is much larger than

30
industrial growth. Therefore, the LIC has a head start. (3) As life insurance
benefits accrue over time, it becomes more expensive to switch - because
switching would mean a loss of accrued benefits. The general insurance
business is expected to grow from USD 1.8 billion (1998) to 12 billion in 2008.
The Monitor Group Report predicts that the private companies would have an
easier access to the general insurance business. The market share of the
newcomers will be 40-50% of the total market. Cause for better market
penetration for the new companies come from the fact that it makes no difference
for the insured to switch companies. Unlike life insurance, it is not expensive to
switch insurers. However, the lack of good data would hamper the newcomers
(see below).Reinsurance The GIC has decided to spin off its reinsurance
business as a separate company to be called Indian Reinsurer. The insurance
business in India is less than USD $1 billion at present (2000). In the near term
(three to five years), it is expected to double in size for two simple reasons. (1)
Under the new regime, the reinsurance requirements are higher (as a
percentage of total insurance business). (2) Privately run non-life insurance
companies have a higher reinsurance requirement in the early years. Aftermath
of the Gujarat Earthquake On January 26, 2001, an earthquake measuring 6.9
on the Richter scale hit parts of Gujarat. Many buildings toppled. An estimated
20,000 persons were killed - most of them in Bhuj district of Gujarat (around
18,000). Estimated damage was in the order of magnitude of USD 5 billion -
most of it uninsured.
The disaster was once in a lifetime event. In a curious way, it will help the new
entrants in the insurance industry in India. It is well known in the psychology
literature that disasters make people more aware of their insurance needs. Given
what happened in Gujarat, most Indians will now have a higher awareness about
buying an insurance policy than they would have otherwise. No amount of
advertisement by the insurance companies (both life and general) could have
achieved this. Ironically, India's national insurance companies began to exclude
earthquake cover in the new policy forms adopted from 1 April 2000 and began
to offer the protection as a buy-back on the recommendation of the Tariff
Advisory Committee (TAC) report. Many policyholders were unaware of the
change and so the relatively few individuals and companies that have been

31
 prudent enough to buy insurance may discover that, in the case of the Gujarat
event, they are uninsured. Some Areas of Future Growth Life Insurance The
traditional life insurance business for the LIC has been a little more than a
savings policy. Term life (where the insurance company pays a predetermined
amount if the policyholder dies within a given time but it pays nothing if the
policyholder does not die) has accounted for less than 2% of the insurance
premium of the LIC (Mitra and Nayak, 2001). For the new life insurance
companies, term life policies would be the main line of business.
Health Insurance Health insurance expenditure in India is roughly 6% of GDP,
much higher than most other countries with the same level of economic
development. Of that, 4.7% is private and the rest is public. What is even more
striking is that 4.5% are out of pocket expenditure (Berman, 1996). There has
been an almost total failure of the public health care system in India. This
creates an opportunity for the new insurance companies. Thus, private insurance
companies will be able to sell health insurance to a vast number of families who
would like to have health care cover but do not have it.
Pension The pension system in India is in its infancy. There are generally three
forms of plans: provident funds, gratuities and pension funds. Most of the
pension schemes are confined to government employees (and some large
companies). The vast majority of workers are in the informal sector. As a result,
most workers do not have any retirement benefits to fall back on after retirement.
Total assets of all the pension plans in India amount to less than USD 40 billion.
Therefore, there is a huge scope for the development of pension funds in India.

Questionnaire

Name__________________________________________
Age_____
Gender: Male/Female
Educational Qualification:

32
 a) Engineering
b) CA/MBA
c) MCA
d) Others
If Others. Specify_______________________
Email id __________________________________

1. Tick the life insurance companies you are familiar with:-

1) LIC 2) ICICI-Prudential
3) SBI Life 4) Bajaj-Allianz
5) Max New York Life 6) Birla Sun Life

2. Tick the types of schemes you are familiar with:-

1) Term plan
2) Endowment plan
3) Money Back plan
4) ULIP ( Unit Linked Insurance Plan)
5) Child plan
6) Pension plan

3. Tick on what the life insurance company provides?

a) Security for life
b) Investment Opportunity
c) Tax Benefits
d) High returns
e) Pension

33
4. Rank the following benefits of Insurance on a 1-5 scale:

_____ Financial Expenses

_____ loved Ones’ future security
_____ Exemption from tax
_____ Mortgage payments/Rent fund
_____ College/School Education

5. Do you think insurance is the viable option for investment?

Yes No
Why?.....................................................................................................
........................................
6. Do you have any insurance cover?
Yes No

If Yes, then which

company?.......................................................................................................

7. What type of investment are you interested in?

Short term Long term ULIP

Why?..................................................................................................................
..........................
…………………………………………………………………………………………
……

8. What is idea behind your investment in insurance?

Tax Benefit Future Security HighReturns

34
9. What is the mode of your premium payment?

1) Monthly
2) Quarterly
3) Half-Yearly
4) Yearly

10. Are you happy with the services provided by the insurance company?
Yes No

11. Are you happy with the returns given by the insurance company?
Yes No

12. Which is the most trusted insurance company at present? (Both in the public and the
private sector)
Rate on the basis of 1-5 scale 1- least trusted …. 5- Most trusted (Tick the
appropriate no.)

LIC 1 2 3 4 5
SBI-Life 1 2 3 4 5
ICICI-Prudential 1 2 3 4 5
Bajaj-Allianz 1 2 3 4 5
Birla- Sun Life 1 2 3 4 5

13. Entry of large no. of private insurance companies is good for the public?

Yes No

14. After privatization whether the public is getting good products/service?

Yes No
35
15. What do you think about the role of the IRDA?

Regulator ………………. ….
Facilitator……………………
A govt. body…………………

ANALYSIS OF THE SURVEY

The survey was conducted to understand the knowledge and perception of the people
towards life insurance after privatization. The response is quantified by means of
response obtained in the form of answers and views put forward by the people in a survey
conducted. The survey includes response from professionals, businessmen, daily workers,
and housewives and working in different sectors and fields in Chennai. Almost everyone
knew insurance and relates insurance with LIC and those who have invested in insurance
products mainly invested for availing tax exemption and all traditional reasons of
36
investing like risk coverage and loved ones future security while some of them also said
that insurance is not a good option for investment due to inflation and when long term
gains were considered. Use of bar, line graphs, tables and pie diagrams are done to
represent the findings of the survey.

No of males and females software professionals surveyed

Even though, the private sector insurance companies are increasing, the most sought after
insurance company even among people is LIC which has the highest market share in
India. This is also depicted by the pie-chart as shown above.

CATEGORY RESPONSE (in %)

1. LIC 80.64
2. ICICI 67.74
3. BAJAJ 61.29
4. Birla 41.93
37
 5. HDFC 45.16
6. SBI 61.29

Among many plans available, the most preferred one among the mass is money back
plan. This plan helps you to withdraw your money at regular intervals and still staying
insured. This plan is famous for its high liquidity advantage. The other product gaining
popularity is ULIP (unit linked insurance plan), as its serve multiple purpose, it give high
returns, tax benefit, life insurance , critical illness cover and is admired for its flexibility
for paying premium amount.

SCHEMES RESPONSE (in %)

1. Term plan 25.8

2. Endowment plan 38.7
3. Money back 67.74
4. ULIP 58.06

Objective for investment in Insurance

38
Among the surveyed people about 61.29% view insurance tax saving product. Life
insurance plans of some private insurance companies are giving 100% tax exemption.
Even the IT returns are also 100% tax free on annual basis. After that around 46 percent
buy insurance to cover risk followed by good returns and savings objective.

CATEGORY RESPONSE (in %)

1. Life Insurance 45.16

2. Investment 32.25
3. Tax Benefit 61.29
4. High Returns 22.58
5. Savings 29.03

Ranking of some benefits of insurance (figures expressed in %)

39
Among some benefits of insurance, loved ones’ security secured the least percentage i.e.
overall the highest rank. So, people take insurance so that their loved ones and they
themselves get secured and enjoy the life cover.

CATEGORY RESPONSE (in %)

1. Final Exp. 254
2. Loved ones’ security 187
3. Income Needs 200
4. Housing Loans 316
5. Children Edu. 374

Insurance as the viable option for investment

40
Among the surveyed, 80% of them said that insurance is the viable option for investment.
The reasons were there that it is the medium of tax benefit, risk coverage and regular
savings. But, 20% of them said that it is not favorable for investment due to inflation and
comparatively less returns than other financial instruments.

Availability of Insurance Cover

Among the people surveyed, 90% of them said that they had life-insurance cover but only
10% of them were devoid of insurance but were planning to take one in the future.

Estimate of IT professionals enrolled into insurance

41
About 54.83% of IT professionals have chosen LIC as their premier insurance investment
company. And the rest all insurance companies having their insurance cover are far less
as compared to LIC. So, this illustrates that even the IT professionals have faith in LIC as
their most favored life insurance company.

INSURANCE COMPANY RESPONSE (in %)

1. LIC 54.83
2. Birla Sun-Life 6.45
3.ICICI 12.90
4.MetLife 3.22
5. Bajaj- Allianz 6.45
6. ING-Vyasa 3.22
7. SBI-Life 6.45
8. Tata- AIG 3.22
9. HDFC 3.22
10. Reliance 6.45

42
 Type of investment interested in

About 54.83% people said that the type of investment which they are interested in is long
term investment. This is because they wanted to reap benefits for a longer term. Long life
insurance cover will naturally give them high risk coverage and higher returns.

Mode of premium payment

About 38.7% of them said that they paid their premium through quarterly and yearly
mode. And only 22.58% favored monthly and half yearly medium of premium payment.

MODE OF PREMIUM RESPONSE (in %)

PAYMENT

1. Quarterly 38.7
2. Monthly 22.58
3. Half- yearly 22.58
4. Yearly 38.7

Services provided by the insurance company (figures expressed in %)

43
About 90.32% of people said that they were happy with the services provided by the
insurance company. And only 6.45% were not satisfied. This shows that life insurance
companies are fairly performing well especially in India.

Returns given by the insurance company (figures expressed in %)

About 70.96% of people have view that they were happy with the returns given by the
insurance companies. But 22.58% were not. The reason for their dissatisfaction is that
they think that other financial instruments like bonds, shares, debentures, securities and
mutual funds are other good options for investment and they think that insurance does not
provide investment opportunity for the short term.

Ratings of various insurance companies

LIC of India is the most preferred life insurance company even among software
professionals as depicted through the above bar graph. It has a rating of 4.64. The other
private life insurance companies are having less percentage of share of it.

INSURANCE COMPANY RATING

44
 1. LIC 4.64
2. SBI-Life 4.03
3. ICICI 3.12
4. Bajaj- Allianz 3.16
5. Birla- Sun Life 3.12
Privatization of insurance

78 % people of those surveyed were of the view that privatization is good for the public.
This is because they think that the many private insurance companies have come up with
some attractive plans like ULIPs which are fetching good returns even for a short period.
Only 22% of them think that that investing in a private insurance company is risky
because the returns are not guaranteed.

Availability of good services after privatization

About 70.96 % of people think the insurance companies are providing good services even
after privatization. This is because they have come up with some new schemes and plans
which are innovative and are giving better returns even for a short period than compared
to plans pertaining to public sector insurance company like LIC. Only 19.35% think that
services are not good after privatization as they have less belief on these private life
insurance companies or they do not consider life insurance as important investment
option and also the private insurance companies have high premium allocation charges
and high surrender charges, fixed charges and other formalities.

45
 CONCLUDING REM ARKS
Unit Linked products are finall y products of choice. If you feel
equipped to manage your investments on your own or are not
comfortable with long lock-ins or you can't make the most of these
tax breaks, you may be better off investing elsewhere after securing
your life insurance needs.
1. There is a great need to disclose the risk involved in the schemes
properly to the investor/insurance seeker by the
insurance/investment companies.
2. The Insurance Regulator y and Development Authority has to issue
set of guidelines on ULIP policies offered in the market.
3. The charges in the initial years should be brought down.
4. The high returns (above 20 per cent) are definitel y not
sustainable over a long term, as they have been generated during
the biggest Bull Run in recent stock market.
5. Investors/Insurance seeker has to take switching charges into
consideration as the y have a long-term implication on the returns
generated.

46
 REFERENCES
1. www.irdaonline.com
2. www.licindia.com
3. www.lifeinsurancecouncil.com
4. www.sbilife.co.in

47