Chapter 4 Impact of Liberalisation on Life Insurance Sector

4.1 Reforms in the Insurance Sector

4.2 Benefits of Competition in the Life Insurance Sector

4.3 Evaluation of IRDA

4.4 Ten Strategies adopted by LIC to remain Market Leader

4.5 Selected References

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4.1 Reforms in the Insurance Sector:

As a part of the economic liberalisation programme initiated in 1991, the Government of India appointed a Committee1 on Reforms of the Insurance Sector under the chairmanship of R. N. Malhotra in the year 1993, which recommended in 1994, the opening up of the insurance business to private participation. It also recommended the setting up of a separate regulatory and development authority for the insurance sector. Some of the key recommendations relating to insurance were: 1. Life Insurance Corporation of India (LIC) should as early as possible publish a revised mortality table. Further revisions should be made every ten years. The first year and renewal cost ratios should be brought down to 60% and 11% respectively. 2. The investments of LIC should be modified as: (a) In central Government securities being not less than 20%, (b) In state Government securities and Government guaranteed securities inclusive of the central government securities being not less than 40%, (c) In socially oriented sectors as may be prescribed by the government from time to time inclusive of central government securities, state government securities and Government guaranteed securities being not less than 50%. 3. The marketing of life insurance to the relatively weaker sections of society, including working women who earn income of their own has to be tackled more effectively. 4. Reinsurance matters relating to life insurance business are relatively less complex as compared to general insurance. LIC by virtue of its financial strength has capacity to absorb the risks fully. As one of the largest life insurers in the Afro-Asian region, LIC should play a more dynamic role as a reinsurer than is the case at present. 5. An insurance company should have separate accounts and funds for its pension business, distinct from those relating to other life business. 6. The insurance companies should also have adequate professional capability and financial solvency. Insurers everywhere are therefore subject to regulation by the state in some form or the other. So there is an urgent need to activate the insurance regulatory apparatus even in the present nationalised insurance sector.
1

Government of India (1994), Report of the Committee on Reforms in the Insurance Sector, Ministry of Finance,

Department of Economic Affairs, Insurance Division, New Delhi.

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7. Steps should be initiated for the establishment of a strong, effective, a highly professional and compact insurance regulatory authority in the form of a statutory autonomous board on lines of Securities and Exchange Board of India (SEBI). 8. The insurance regulatory authority should have an independent source for financing its establishment and activities. 9. LIC and GIC should improve their technical proficiency by upgrading their information support and by developing a strong research and development departments in their respective organisations. 10. Governments stake in LIC should to be brought down to 50%. 11. LIC has a capital of Rs. 5 crore, contributed entirely by the Central Government. This amount is not adequate for a life insurer of the size of LIC. The present capital may be raised to Rs. 200 crores. 12. The private sector should be allowed to enter insurance business. No single company should be allowed to transact both life and general insurance business. Number of new entrants should be controlled. Minimum paid up capital for a new entrant be Rs. 100 crore. 13. Regulatory and Prudential norms as well as conditions for ensuring level playing fields among insurers should be finalised early so that intending entrants into the insurance business would be aware of the stipulations they would have to comply with. 14. LIC should take steps to introduce regular term assurance plans, develop and market long term unit-linked life insurance plans with uniform risk covers. LIC should pay interest for the period of delay exceeding say, 30 days from the date of maturity or intimation of death, in settlement of claims, irrespective of cause of delay. The rate of interest should be around the average rate earned on life insurance funds. 15. To reduce litigation, institution of Ombudsman should be set up. 16. Licensing of insurance agents by the Controller of Insurance should be discontinued. The committee emphasised that in order to improve the customer services and increase the coverage, the insurance industry should be opened up to competition. But at the same time, the committee felt the need to exercise caution as any failure on the part of new players could ruin the public confidence in the industry. Hence, it was decided to allow competition in a limited way by stipulating the minimum capital requirement of Rs.100 crore. The committee felt the need to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives. For this purpose, it had

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proposed setting up an independent regulatory body. Accordingly Insurance Regulatory and Development Authority (IRDA) was set up.

4.2 Benefits of Competition in the Life Insurance Sector:

By the end of March 2008-2009, there were 22 life insurance companies including LIC. These numbers of companies have given rise to competition between them. The biggest beneficiary of the competition between various life insurance companies has been the consumer. A wide range of products, customer-focused service and professional advice has become the important ingredient of every companys strategy. The introduction of ULIPs has brought about a new level of transparency and flexibility because the policyholders now have the choice of deciding how much premium they want to pay, the level of their sum assured and the fund in which they would like to invest their money. The life insurance sector has undergone a structural change from a purely traditional advisor driven business to a number of distribution channels like bancassurance, corporate agents, direct marketing etc. Many leading banks in India have tied up with insurance companies to distribute their products to account holders. Another area of substantial improvement is in the service attitude and delivery of insurance products. With IRDA making strict guidelines regarding time bound settlement of claims the service levels of insurance companies are steadily rising to make customer the focus of each initiative. Today the customers need not rely only on insurance advisor, but have multiple avenues in the form of websites of every company, premium calculator on every insurance company website, email service, facsimile and the traditional mailing service. As per IRDA, the insurance company is required to settle a claim within thirty days of receipt of all requirements. However, if the claim warrants further verification, the company should complete its procedures within six months from receipt of written intimation of the claim. If the company settles the claim beyond six months period, the interest is payable by the company on the claim amount. IRDA2 has issued grievances redressal guidelines for insurance companies to be implemented from 1st August 2010.

Business Standard, Mumbai Edition dated 30-07-2010.

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Insurance companies will now have a system and procedure for receiving, registering and disposing of grievances in their offices. One of the innovations that the life insurers have introduced is opening up of call centres. These centres act not only as enquiry offices for new business to be developed but also function as points of reference and records for claims which have arisen. Some of the new insurers have found it possible to settle claims within 24 to 48 hours3. The institution of Insurance Ombudsman has great importance and relevance for the protection of interest of policyholders and also to build up their confidence in the system. To satisfy the various needs of customers, life insurance products are being customised. Insurance today has emerged as an attractive and stable investment alternative that offers not only life protection but also competitive returns when compared with traditional saving products like fixed deposits, recurring deposits and post office deposits. New technology is playing an important role in the insurance sector. Technology will help in reaching the customer quickly and with less cost which will help the company to tap niche markets as the company can offer benefits like riders, customer service effectively.

With the privatization of the insurance industry, the benefits are not restricted to the customer alone, but extend to the society at large, by generating employment opportunities to many. It is generally believed by the private life insurance companies that it is expensive to do business in rural areas. In rural areas mass marketing of life insurance products is required. There is a need to identify the right agents to harness the full potential of the rural markets. With a view to giving a fillip to micro insurance, the performance in these sectors has now been benchmarked to the insurance policies satisfying the definition of micro insurance. With the help of Group Micro Insurance Plans, an affordable life insurance cover can be provided to the people in the rural areas.

IRDA Annual Report 2000-2001.

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 Opportunities Created by Liberalisation:4 1. Privatization of insurance sector in India has eliminated the monopolistic business of Life Insurance Corporation of India. This may help to cover the wide range of risk in general insurance and also in life insurance. 2. Privatisation will also result in introduction of new and varied products as per the needs of consumers in India. 3. It would also result in better customer services and help improve the variety and price of insurance products. 4. The entry of new player with foreign equity participation would speed up the spread of both life and general insurance. It will increase the insurance penetration and insurance density. 5. Entry of private players will ensure the mobilization of funds that can be utilized for the purpose of infrastructure development. 6. Allowing of commercial banks into insurance business will help to mobilization of funds from the rural areas because of the availability of vast branches of the banks. 7. Most important not the least tremendous employment opportunities will be created in the field of insurance which is a burning problem of the presence day today issues.

4.3 Evaluation of IRDA:

IRDA has been doing a very good job in the insurance sector. Some of the recent positive moves by IRDA which has benefited the customers and life insurance industry are as follows: 1. IRDA5 has made it mandatory for all insurers to disclose their financial statements to the public, even if they are not to get listed on stock exchanges. This move will bring in transparency and enable policy-holders to gauge the financial strength of insurance firms. 2. As per IRDAs direction6, all the life insurers have to compute economic capital from end of March 2010. With this direction the life insurers will need to assess risks and compute the capital needed to cover them.

4 5 6

http://ezinearticles.com/?Effect-of-Liberalisation-in-Insurance-Industry&id=3760856 The Economic Times, Mumbai Edition dated 29-1-2010. The Economic Times, Mumbai Edition dated 16-03-2010.

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3. IRDA 7 is considering imposing an extra solvency margin requirement for insurance companies that do not lower management expenses below the prescribed ceiling. Life insurers have to cap management expenses at 22% of their overall expenses after five years of operations. An insurance company needs to have a solvency margin of 1.5% of the total sum assured. The insurance companies have to provide Rs.150, for risk worth Rs.100 that they underwrite. 4. The IRDA8 has asked all the life insurance companies to disclose out to the customers the commission they pay to the agents on each policy with effect from July 1, 2010. 5. IRDA9 brought out a new regulation called as Standardization of terms and conditions of ULIP and treatment of lapsed policies for the benefit of ULIP policy holders by capping the surrender charge on policies that are returned after a year at 15%. This is a big benefit for the policy holders as the maximum surrender charges are now 15% for the first year which comes down to 5% for the fourth year and 2.5% for the fifth year. 6. IRDA10 has suggested to the insurers that they should keep the policy document simple so that the customers are able to understand the products main features and are able to take an informed decision. 7. IRDA11 has made ULIPs more attractive to investors by raising the risk cover, by lowering charges and also to offer guaranteed maturity benefits to protect policyholders even when stock market crashes. There will now be a lock-in period of five years. 8. IRDA12 has announced that from September 1, 2010, ULIPs will offer a guaranteed annual return of 4.5% on pension plans. 9. IRDA13 launched the grievance call centre for insurance prospects and policy holders as well as an email service to register complaints about insurance companies on 20-07-2010 at Hyderabad.

7 8 9

Business Standard, Mumbai Edition dated 27-03-2010. The Economic Times, Mumbai Edition dated 28-04-2010. The Economic Times, Mumbai Edition dated 19-05-2010. Business Standard, Mumbai Edition dated 05-06-2010. The Economic Times, Mumbai Edition dated 21-06-2010. Business Standard, Mumbai Edition dated 29-06-2010. The Times of India, Mumbai Edition dated 21-07-2010.

10 11 12 13

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10. Under the new guidelines14 issued by IRDA from 1st September 2010, for ULIPs insurance companies cannot load expenses (money deducted from premiums as expenses) during initial period of policy. They have to be distributed over the lock-in period of five years which is required to get tax benefits.

4.4 Ten Strategies adopted by LIC to remain Market Leader:

LIC was not self-made. It was chosen from among many, more than 50 years back Chosen to be made the only operator in life insurance. But the acid test came in 1999. The sector was de-regularised with multiple private operators entering the sector. But most predicted an end of LIC, if not an untimely demise. But Life Insurance Corporation of India has emphatic ally proven that it has a long life ahead. The private life insurers are yet to do a la Airtel or la RCom. A more honest statement would be that they are unable to do it. When even giants like AIG reeled, LIC found opportunity in distress. Their November 2008 launch, Jeevan Aastha, a close ended single premium plan went on to become a smash hit, with a record breaking first premium collection of Rs. 10,000 crore within 45 days. From its long-back status of the chosen insurer, LIC has become the choice insurer. LIC EDGE 1: Focus on Core Business: In an ever changing business and investment environment, where the temptations for losing ones way have been numerous for a financial company, it stands to LICs credit that it has never lost its focus on its core business insuring lives. This has ensured LICs edge against competing investment platforms like recurring deposits, mutual funds, or equities. Because the pitch is, an LIC policy does all that, but it also insures life. LIC EDGE 2: People Power: There is no doubt that people power continues to be LICs trump card. Even in 2008-09, LIC registered a 12.66% growth in its formidable army of agents, which now stands more than 13.44 lakh. Even while comparable financial organisations like SBI struggle to have a performance linked pay structure in place, this is a human resource pool that works entirely on performance status. LICs Post Recruitment Orientation Training (PROT) is reputed to make top performers from average sellers. It also goes to

14

The Times of India, Mumbai Edition dated 01-09-2010.

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LICs credit that it didnt opt for Voluntary Retirement Scheme (VRS) or retrenchment for its salaried employee base, instead making them productive through Human Resource Development (HRD) initiatives. LIC EDGE 3: Claim Performance: LIC continues to be the most believable life insurer around, based on actual claim performance. During 2008-09, LIC settled over 1.49 crore claims, with 97% maturity claims settled on or before date, and 93% of non early death claims settled within 20 days of intimation. Outstanding claims under death are 2.21% and that under maturity is just 0.26%. LIC EDGE 4: Technology Edge: Post de-regularization, LIC had moved swiftly to implement the latest paradigms in the area of Information Technology (IT) implementation, so that the new agile competitors dont have an advantage over it. Lately, LIC has started setting the standards in IT implementation, and its new Electronic Document Management System (EDMS) project all set to be completed shortly, it will be LIC who is going to enjoy a huge edge due to technology. LIC EDGE 5: Alternate Channels: It was once thought that alternate channels like bancassurance would sound the death-bell for LIC. Instead the company quickly adapted to the possibilities of the bancassurance model, and today has tie-ups with many banks on corporate agency model. LIC EDGE 6: Rural Reach: Instead of waiting for the urban markets to get more and more saturated, LIC early on diversified its attention to rural markets, and with excellent results. LIC continuously recruits and develops special rural agents, and the insurer has opened a lot of satellite office in rural areas. Some plans like Jeevan Mangal and the New Jana Raksha plan have been quick hits with farmers and rural people. LIC EDGE 7: Widest Portfolio: LIC has a variety of plans catering to the different needs of different segments of the society. LIC also has Pension Plans and Group Schemes. Whatever be the need, LIC has a suitable policy to match that need. From conventional plans like endowment assurance, and money back plans to the contemporary unit-linked plans to serve a wider category of customers, LIC offers Unit-Linked

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Health Insurance Plan, Term Insurance Plans, Plans for Women, Pension Plans, and a wide range of Children's Plans, too. LIC EDGE 8: Investment Business: LIC continues to be the countrys largest investor.
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LIC is also powering the nations

infrastructure, corporate debt, and government securities. Apart from profits, this gives the organization a lot of leverage with the Government, corporates, and the various funds. LIC EDGE 9: Sensing Dangers Ahead: LICs response to the Swaroop Committee ( which has recommended that the agents commission on life insurance and unit linked insurance products to be scrapped by 2011 ) has been quite rational. The organisation reiterated that insurance continues to be a sold product and not a bought one, and as such the agents should not be meted out a bad deal. LIC EDGE 10: Credible Ownership: Needless to say, LIC ownership continues to be a major competitive advantage. The 100% ownership by the government makes it risk proof and in the present economic climate, it is a huge advantage recognised by the customers.

4.5 Selected References:

1. Business Standard, Mumbai Edition dated 05-06-2010. 2. Business Standard, Mumbai Edition dated 06-08-2010. 3. Business Standard, Mumbai Edition dated 19-05-2010. 4. Business Standard, Mumbai Edition dated 27-03-2010. 5. Business Standard, Mumbai Edition dated 29-06-2010. 6. Business Standard, Mumbai Edition dated 30-07-2010. 7. Business Standard, Mumbai Edition dated 30-07-2010. 8. Government of India (1994), Report of the Committee on Reforms in the Insurance Sector, Ministry of Finance, Department of Economic Affairs, Insurance Division, New Delhi . 9. http://ezinearticles.com/?Effect-of-Liberalisation-in-Insurance Industry&id=3760856

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www.ptc.india.com

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10. IRDA Annual Report 2006-2007. 11. IRDA Annual Report 2007-2008. 12. IRDA Annual Report 2008-2009. 13. IRDA Annual Report 2009-10 14. IRDA Annual Report 2010-11 15. IRDA Annual Report 2011-12 16. The Economic Times, Mumbai Edition dated 16-03-2010. 17. The Economic Times, Mumbai Edition dated 19-05-2010. 18. The Economic Times, Mumbai Edition dated 21-06-2010. 19. The Economic Times, Mumbai Edition dated 28-04-2010. 20. The Economic Times, Mumbai Edition dated 29-1-2010. 21. The Times of India, Mumbai Edition dated 01-09-2010. 22. The Times of India, Mumbai Edition dated 21-07-2010. 23. www.ptc.india.com

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