IMPACT OF LPG ON INDIAN INSURANCE INDUSTRY

BACHELOR OF COMMERCE
BANKING & INSURANCE
SEMESTER VI

SUBMITTED BY
KUSHAL MANSUKHANI
SEAT No.

JAI HIND COLLEGE

A ROAD, CHURCHGATE, MUMBAI - 400 020.

DECLARATION

I, KUSHAL MANSUKHANI, student of B. Com. Banking &

Insurance Semester VI (2012-13) hereby declare that I have
completed the Project on IMPACT OF LPG ON INDIAN
INSURANCE INDUSTRY

The information submitted is true & original to the best of my

knowledge.

Signature
KUSHAL MANSUKHANI
SEAT NO.

IMPACT OF LPG ON INDIAN INSURANCE SECTOR

BACHELOR OF COMMERCE
BANKING & INSURANCE
SEMESTER VI

SUBMITTED
IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE AWARD OF DEGREE
OF BACHELOR OF COMMERCE
BANKING & INSURANCE
BY
KUSHAL MANSUKHANI
SEAT No.
JAI HIND COLLEGE
A ROAD, CHURCHGATE, MUMBAI-400 020.

JAI HIND COLLEGE

A ROAD, CHURCHGATE, MUMBAI 400 020

CERTIFICATE
3

This is to certify that Mr. KUSHAL MANSUKHANI of B.Com.

Banking & Insurance Semester VI (2012-13) has successfully
completed the project on IMPACT OF LPG ON THE INDIAN
INSURANCE SECTOR under the guidance of Professor Mrs.
FAYE SALINS

Course Co-ordinator
Principal

Internal Examiner

External

Examiner

College Seal

ACKNOWLEDGEMENT
The success of this final report is the outcome of Guidance and valuable
suggestions provided by all the concerned without whom the report could not fide
on the right back.
I would like to express my sincere gratitude to Coordinator and Guide Mrs Faye
Salins for giving me an opportunity to do this project work.
I express my sense of deep gratitude to. Facultys supervisor of Jai Hind College,
for inclusions and timely suggestions in the preparation of this final report.
Finally, I will be failing in my duty, if I do not thank my parents, brother &
friends and well wishers for their enthusiastic support and who have directly
or indirectly helped in some way or the other in making this final report a
success.

EXECUTIVE SUMMARY
Insurance sector in India is one of the booming sectors of the economy and
is growing at the rate of 15-20 per cent annum. Together with banking services, it
contributes to about 7.8 per cent to the country's GDP. Insurance is a federal
subject in India and Insurance industry in India is governed by Insurance Act,
1938, the Life Insurance Corporation Act, 1956 and General Insurance Business
(Nationalization) Act, 1972, Insurance Regulatory and Development Authority
(IRDA) Act, 1999 and other related Acts.
The total life insurance premium in India is projected to grow Rs 1,230,000
Crore by 2010-11.Total non-life insurance premium is expected to increase at a
CAGR of 25% for the period spanning from 2008-09 to 2010-11.Home insurance
segment is set to achieve a 100% growth as financial institutions have made home
insurance obligatory for housing loan approvals. Health insurance is poised to
become the second largest business for non-life insurers after motor insurance in
next three years. A booming life insurance market has propelled the Indian life
insurance agents into the 'top 10 country list' in terms of membership to the Million
Dollar Round Table (MDRT) - an exclusive club for the highest performing life
insurance agent.
This study focuses on fundamental analysis and it will help me to follow
insurance market closely. Fundamental analysis is the process of looking at a
business at the basic or fundamental financial level. This type of analysis examines
the key ratios of business like EPS, Debt-equity, interest coverage etc., to
determine its financial health.
The major objectives of the study were to find out the factors affecting
insurance industry and to study the performance of various insurance companies.
6

Another major objective was to study the movement of stock prices of insurance
companies with respect to present economic and government polices.
The major findings of the study that emerged after studying the insurance sector
for selecting appropriate company through analyzing economy, industry and
companies are the global economies are getting interrelated; the Indian market will
no longer be limited to domestic economic situation. Agricultural growth rate and
the monsoon both have direct influence on insurance and is responsible for the
economy to become prosperous. Health insurance is poised to become the second
largest business for non-life insurers after motor insurance in next three years.
Finally, the conclusion drawn was that fundamental analysis always holds good
only if the company statement are revealed clearly and analyzed properly.
Investment is serious business and not making decision on vague and fundamental
analysis has a direct impact on insurance market and my important suggestions are
that Insurance companies have lot of opportunities to grow. So investing in these
types of industries help the investors in the long run and before investing in any
company, its required to implement all the data and financial results.

INDEX
SR NO

TOPICS

PAGE NO.

INSURANCE INDUSTRY : CLASSIFICATION

10 - 12

DEFINATIONS

13 - 14

WORKING OF INSURANCE

15

INDUSTRY ANALYSIS

16

INDIAN INSURANCE INDUSTRY

17 - 19

MILESTONES

20 - 21

MALHOTRA COMMITTEE

22 - 23

PORTERS FIVE FORCE MODEL IN INSURANCE

24 - 25

SECTOR
9

PRE LIBERALIZATION SCENARIO

26 - 27

10

POST LIBERALIZATION SCENARIO

28

11

INDIAN INSURANCE IN 21ST CENTURY

29

12

EMERGING TRENDS IN THE INSURANCE

30

SECTOR
13

TECHNOLOGY TREND IN INSURANCE

31 - 32

MARKET
14

CURRENT MARKET SHARE

33

15

IMPACT OF BUDGET 2004

34 - 35

16

PRIVATE V/S PUBLIC INSURANCE SECTOR

36 - 40

17

RESEARCH DESIGN

41

18

IMPACT OF LIBERALISATION AND

42

PRIVATISATION ON INSURANCE SECTOR

19

IMPACT OF

43

LIBERALISATION AND PRIVATISATION

20

IMPACT OF GLOBALISATION AND

44
8

PRIVATISATION
21

PRESENT SCENARIO OF GLOBALISATION

45 - 47

22

PROSPECTS

48 - 51

23

GRAPHS

52 - 53

24

SUMMARY

54

25

CONCLUSION

55

26

BIBLIOGRAPHY

56

INSURANCE INDUSTRY: CLASSIFICATION

INSURANCE

LIFE
INSURANCE

GENERAL
INSURANCE
9

Fire
insurance

Marine
insurance

Mediclaim

Motor vehicle

Insurance = Collective bearing of Risk

Insurance is nothing but a system of spreading the risk of one onto the
shoulders of many. While it becomes somewhat impossible for a man to bear by
himself 100% loss to his own property or interest arising out of an unforeseen
contingency, insurance is a method or process which distributes the burden of the
loss on a number of persons within the group formed for this particular purpose.
Basic Human trait is to be averse to the idea of risk taking. Insurance,
whether life or non-life, provides people with a reasonable degree of security and
assurance that they will be protected in the event of a calamity or failure of any
sort. Insurance may be described as a social device to reduce or eliminate risk of
loss to life and property. Under the plan of insurance, a large number of people
associate themselves by sharing risks attached to individuals. The risks, which can
10

be insured against, include fire, the perils of sea, death and accidents and burglary.
Any risk contingent upon these, may be insured against at a premium
commensurate with the risk involved. Thus collective bearing of risk is insurance.
Insurance Indemnifies Assets & Income
Every Asset has a value and generates Income to its Owner. There is a
normally expected Life-time for the Asset during which time it is expected to
perform. If the Asset gets lost earlier, being destroyed or made Non-functional
through an Accident or other unfortunate event the Owner is Prejudiced. Insurance
helps to reduce CONSEQUENCES of such Adverse Circumstances which are
called Risks
Insurance is the science of spreading of the risk
It is the system of spreading the losses of an Individual over a group of Individuals

Insurance is a Method of sharing of financial losses

of a few from a common fund formed out of Contribution of the many who
are equally exposed to the same loss
What is uncertainty for an Individual becomes a certainty for a Group. This is the
basis of All Insurance Operations. Thus insurance convert uncertainties to certainty

11

DEFINITIONS

The definition of insurance can be made from two points:

Functional definition.
Contractual definition.

Functional definition

12

Insurance is a co-operative device to spread the loss caused by a particular risk

over a number of persons who are exposed to it and who agree to insure
themselves against the risk.

General Definition
Insurance has been defined to be that in which a sum of money as a premium is
paid in consideration of the insurers incurring the risk of paying a large sum upon
a given contingency.
In the words of John Magee, Insurance is a plan by themselves
which large number of people associate and transfer to the shoulders of all, risks
that attach to individuals.

Fundamental Definition
In the words of D.S. Hansell, Insurance accumulated contributions of all parties
participating in the scheme.

Contractual Definition
In the words of justice Tindall, Insurance is a contract in which a sum of money is
paid to the assured as consideration of insurers incurring the risk of paying a large
sum upon a given contingency.

13

WORKING OF INSURANCE

14

INDUSTRY ANALYSIS
15

The forgoing section in this report had a perspective of overall Economy in

India. The next step is to analyze the particular industry. Once the economic
analysis is over; getting the prospects of the likely trend in the economy, analyzing
the industry would be taken importance, knowing which group are promising in the
year makes possible better entry in to the company. There is however, no perfect
correlation between the economy and the industry on one hand and of industry and
companies on the other.
India has mixed economy, where private and public sector play a complementary
role and promote a planned development. Since from 1991 reforms, even foreign
enterprises and MNCs given an important role to play in the development of the
economy.

INDIAN INSURANCE INDUSTRY

16

Globalization is the key source, which is bringing about an "irreversible

transformation" in the Asian insurance market. India and China are "dynamically"
driving the growth of insurance markets in Asia and the outlook for this industry in
the region is "sanguine" despite short-term uncertainties. Asia is becoming an
important growth engine for global insurers. The changing socio-economic
dynamics present attractive opportunities. According to a latest research report
from HSBC, in order to be long-term winners, life insurance companies in Asia
need to diversify their income streams such that at least 25% of earnings are
sourced overseas, while maintaining a dominant position in the domestic market.
The Indian insurance market in spite of having a history covering almost two
centuries took a turn after the establishment of the Life insurance corporation in
India in 1956. From being an open competitive market to being nationalized and
then back to a liberalized market again, the insurance sector has witnessed all
aspects of contest. The Indian insurance market conventionally focused around life
insurance until recently, a various range of other insurance policies covering
sectors like medical, automobile, health and other classes falling under general
insurance came up, generally provided by the private companies. The life
insurance of India added 4.1% to the GDP of the economy in 2009, an immense
growth since 1999, when the gates were opened for the private company in the
market.

Major Driving Factors

Globalization

Deregulation which is opening up the markets

17

Cheaper and more effective distribution channels

Ongoing industry consolidation

Increment in the policy holder firms

Boost in Merger and Acquisitions activities

Changing socio-economic dynamics

Market offering wider margins

Unique combination of size, age profile and growth prospects

Major Issues, Trends and Opportunities

Continuous increment in intra-Asian trade

Need for diversification in the income streams

Rise in selling investment type products like annuities

Chance to compete directly with financial services companies

Focus on paying out more in claims

Drastic increment in marine and cargo insurance sectors

Developments in countries, who were closely regulated by their government

Lack of proper agent quality

Change in the distribution method

Difficulties in building networks and brands

Hindrance in expansion in some of the emerging markets

Risk management concerns in insurance companies

Global Expansion

Transformation in the organizational system to win customer loyalty

Weak equity markets

Impact of sub-prime

Regulatory and market obstacles in the emerging markets

18

MILESTONES
Some of the important milestones in the life insurance business in India are:
19

1912: The Indian Life Assurance Companies Act enacted as the first statute
to regulate the life insurance business.

1928: The Indian Insurance Companies Act enacted to enable the

government to collect statistical information about both life and non-life
insurance businesses.

1938: Earlier legislation consolidated and amended to by the Insurance Act

with the objective of protecting the interests of the insuring public.

1956: 245 Indian and foreign insurers and provident societies taken over by
the central government and nationalized. LIC formed by an Act of
Parliament, viz. LIC Act, 1956, with a capital contribution of Rs.5 crore
from the Government of India.

The General insurance business in India, on the other hand, can trace its
roots to the Triton Insurance Company Ltd., the first general insurance company
established in the year 1850 in Calcutta by the British.

Some of the important milestones in the general insurance business in India

are:

1907: The Indian Mercantile Insurance Ltd. set up, the first company to
transact all classes of general insurance business.

20

1957: General Insurance Council, a wing of the Insurance Association of

India, frames a code of conduct for ensuring fair conduct and sound business
practices.

1968: The Insurance Act amended to regulate investments and set minimum
solvency margins and the Tariff Advisory Committee set up.

1972: The General Insurance Business (Nationalization) Act, 1972

nationalized the general insurance business in India with effect from 1st
January 1973.

107 insurers amalgamated and grouped into four companies viz. the National
Insurance Company Ltd., the New India Assurance Company Ltd., the
Oriental Insurance Company Ltd. and the United India Insurance Company
Ltd. GIC incorporated as a company.

MALHOTRA COMMITTEE:
In 1993, the first step towards insurance sector reforms was initiated with
the formation of Malhotra Committee, headed by former Finance Secretary and
RBI Governor R.N. Malhotra.
21

OBJECTIVE:
The committee was formed to evaluate the Indian insurance industry and
recommend its future direction with the objective of complementing the
reforms initiated in the financial sector.
INSURANCE COMPANIES IN INDIA:

LIFE INSURERS

GENERAL INSURERS

Public sector

Public sector

1.Life Insurance Corporation Of

India

1.National
Limited

Private sector

2.New India Assurance Company

Limited

1.Bajaj Allianz Life Insurance

Company
Limited
2. Birla Sun Life Insurance Co. Ltd
3. HDFC Standard Life Insurance Co.
Ltd
4. ICICI Prudential Life Insurance Co.
Ltd.
5. ING Vysya Life Insurance
Company
Ltd.
6. Max New York Life Insurance Co.
Ltd
7. Met Life India Insurance Company
Ltd.
8. Kotak Mahindra Old Mutual Life
Insurance
Limited
9. SBI Life Insurance Co. Ltd
10. Tata AIG Life Insurance Company
Limited

3.Oriental
Limited

Insurance

Insurance

Company

Company

4.United India Insurance Company

Limited
Private Sector
1.Bajaj Allianz General Insurance
Co. Limited
2.ICICI
Lombard
Insurance Co. Ltd.

General

3.IFFCO-Tokio General Insurance

Co. Ltd.
4.Reliance General Insurance Co.
Limited
22

11. Reliance Life Insurance Company

Limited.
12. Aviva Life Insurance Co. India
Pvt.
Ltd.
13. Sahara India Life Insurance Co,
Ltd.
14. Shriram Life Insurance Co, Ltd.
15. Bharti AXA Life Insurance
Company
Ltd.
16. Future Generali Life Insurance
Company
Ltd.
17. IDBI Fortis Life Insurance
Company
Ltd.
18. Canara HSBC Oriental Bank of
Commerce Life Insurance Co. Ltd
19. AEGON Religare Life Insurance
Company
Limited.
20. DLF Pramerica Life Insurance Co.
Ltd.
21. Star Union Dai-ichi Life Insurance
Comp. Ltd

5.Royal
Sundaram
Insurance Co. Ltd.

Alliance

6.TATA AIG General Insurance

Co. Limited
7.Export
Credit
Corporation
8.Cholamandalam
Insurance Co. Ltd.

Guarantee
General

REINSURER
1.General Insurance Corporation of
India

PORTERS FIVE FORCE MODEL IN INSURANCE

SECTOR

23

1. Threat of New Entrants. The average entrepreneur can't come along and
start a large insurance company. The threat of new entrants lies within the
insurance industry itself. Some companies have carved out niche areas in
which they underwrite insurance. These insurance companies are fearful of
being squeezed out by the big players. Another threat for many insurance
companies is other financial services companies entering the market. What
would it take for a bank or investment bank to start offering insurance
products? In some countries, only regulations that prevent banks and other
financial firms from entering the industry. If those barriers were ever broken
down, like they were in the U.S. with the Gramm-Leach-Bliley Act of 1999,
you can be sure that the floodgates will open.
2. Power of Suppliers. The suppliers of capital might not pose a big threat, but
the threat of suppliers luring away human capital does. If a talented
insurance underwriter is working for a smaller insurance company (or one in
a niche industry), there is the chance that person will be enticed away by
larger companies looking to move into a particular market.
3. Power of Buyers. The individual doesn't pose much of a threat to the
insurance industry. Large corporate clients have a lot more bargaining power
with insurance companies. Large corporate clients like airlines and
pharmaceutical companies pay millions of dollars a year in premiums.
Insurance companies try extremely hard to get high-margin corporate
clients.

4. Availability of Substitutes. This one is pretty straight forward, for there are
plenty of substitutes in the insurance industry. Most large insurance
24

companies offer similar suites of services. Whether it is auto, home,

commercial, health or life insurance, chances are there are competitors that
can offer similar services. In some areas of insurance, however, the
availability of substitutes are few and far between. Companies focusing on
niche areas usually have a competitive advantage, but this advantage
depends entirely on the size of the niche and on whether there are any
barriers preventing other firms from entering.
5. Competitive

Rivalry. The

insurance

industry

is

becoming

highly

competitive. The difference between one insurance company and another is

usually not that great. As a result, insurance has become more like a
commodity - an area in which the insurance company with the low cost
structure, greater efficiency and better customer service will beat out
competitors. Insurance companies also use higher investment returns and a
variety of insurance investment products to try to lure in customers. In the
long run, we're likely to see more consolidation in the insurance industry.
Larger companies prefer to take over or merge with other companies rather
than spend the money to market and advertise to people.

PRE-LIBERALIZATION SCENARIO
Indian History: Time to turn the clock back-and open up insurance
Fifty years ago, India had a bustling, if somewhat chaotic, entirely private
insurance industry. The year after Independence, 209 life Insurance companies
were doing business worth Rs712.76 crore (which grew to an amazing Rs 295,758
25

crore in 1995-96). Foreign insurers had a large market share 40 per cent for general
insurance but there were also plenty of Indian companies, many promoted by
business houses like the Tatas and Dalmias. The first Indian-owned life insurance
company, the Bombay Mutual Life Assurance Society, was set up in 1870 by six
friends. It Insured Indian lives at the normal rates instead of charging a premium of
15 to 20 percent as foreign insurers did. Its general insurance counterpart, Indian
Mercantile Insurance Company Ltd., opened in Bombay in 1907.
A plethora of insufficiently regulated players was a sure recipe for abuse,
especially because there was no separation between business houses and the
insurance companies they promoted. The Insurance Act, 1938, introduced state
controls on insurance, including mandatory investments in approved securities, but
regulation remained ineffective. In 1949, Purshottamdas Thakurdas, chairman of
the Oriental Assurance Company, admitted: "We cannot deny that, today, there is a
tendency on the part of insurance companies in general to make illicit gains. Can
we overlook the cutthroat competition for acquiring business? And still worse is
the dishonest practice of adjusting of accounts." After a 1951 inquiry, the
government was dismayed that companies had high expense and premium rates,
were speculating in shares, and giving loans regardless of security. No wonder that
between 1945 and 1955, 25 insurers went into liquidation and 25 transferred their
business to other companies.
This reckless record stoked the pro-nationalization fires. The 1956 life insurance
Nationalization was a top-secret intrigue; for fear that unscrupulous insurers would
siphon funds off if warned. The government resolved to first take over the
management of life insurance companies by ordinance, then their ownership. The
then finance minister C.D. Deshmukh later wrote: 'Seth Ramakrishna Dalmias
extraction of Rs.225 crore (misappropriation by the Bharat Insurance Company)
was a heaven-sent opportunity. We were ready to nationalize, with every detail
26

worked out." On 19 January 1956, the news was announced on the radio, though
even the director- general of AIR was not shown the speech. The next morning, at
9 am, while executives were frantically seeking details over the trunk telephone,
says Deshmukh in his autobiography, our officers walked into the respective
insurance offices, showed their authority and then took over the business. I believe
this will be regarded as one of the best kept secrets of the Government of India in
all times to come." The ordinance transferred control of 245 insurers to the
government. LIC, established eight months later, took over their ownership.
General Insurance had its turn in 1972, when 107 insurers were amalgamated into
four companies headquartered in the four metros, with GIC as a holding
company. Nationalization brought some benefits. Insurance spread from an urbanoriented, high-end business to a mass one. Today, 48 per cent Of LIC's new
business is rural. Net premium income in general insurance grew from Rs222 crore
in 1973 to Rs 5,956 crore in 1995- 96. Yet, rigid controls hamper operational
flexibility and initiative so both customers service and work culture today are
dismal. The frontier spirit of the early insurers has been lost. Insurance companies
have also been timid in managing their investment portfolios. Competition between
the four GIC subsidiaries remains illusory. If Nationalization ever had a purpose, it
has been served. It's now time to turn back the clock in some respects, and open up
the sector again. The government already intends to insist on large minimum
capital requirements, a strong regulator, and a healthy distance between insurers
and industry. To ensure that history doesn't repeat itself

POST LIBERALIZATION SCENARIO

27

While no aspect of the reform process in India has gone smoothly since its
inception in 1991, no individual initiative has stirred the proverbial hornets'
nest as much as the proposal to liberalize the country's insurance industry.
However, the political debate that followed the submission of the report by the
Malhotra Committee has presumably come to an end with the ratification of
the Insurance Regulatory Authority (IRA) Bill both by the central Cabinet
and the standing committee on finance. This section traces the evolution of the
life insurance companies in the US from firms underwriting plain vanilla
insurance contracts to those selling sophisticated investment contracts
bundled with insurance products. In this context, it brings into focus the
importance of portfolio management in the insurance business and the nature
and impact of portfolio related regulations on the asset quality of the
insurance companies. It also provides a rationale for the increased
autornatisation of insurance companies, and the increased emphasis on agentindependent marketing strategies for their products. If politicized, regulations
have potential to adversely affect the pricing of risks, especially in the non-life
industry, and hence the viability of the insurance companies. Finally, the
backdrop of US experience provides some pointers for Indian policymakers.

INDIAN INSURANCE IN 21ST CENTURY:

2000: IRDA starts giving licenses to private insurers: ICICI prudential and HDFC
Standard Life insurance first private insurers to sell a policy
28

2001: Royal Sundaram Alliance first non life insurer to sell a policy
2002: Banks allowed selling insurance plans. As TPAs enter the scene, insurers
start setting non-life claims in the cashless mode
2007: First Online Insurance portal, https:/// set up by an Indian Insurance
Broker, Bonsai Insurance Broking Pvt Ltd.
The Government of India liberalized the insurance sector in March 2000 with
the passage of the Insurance Regulatory and Development Authority (IRDA)
Bill, lifting all entry restrictions for private players and allowing foreign
players to enter the market with some limits on direct foreign ownership.
Minimum capital requirement for direct life and Non-life Insurance company
is INR1000 million and that for reinsurance company is INR 2000 million. In
the 2004-05 budgets, the Government proposed for increasing the foreign
equity stake to 49%, this is yet to be effected. Under the current guidelines,
there is a 26 percent equity cap for foreign partners in direct insurance and
reinsurance Company.

EMERGING TRENDS IN THE INSURANCE SECTOR

Market by 2015, particularly in countries like India and China. The IRDA is the
major body, which is providing better opportunities for the private player in India.

29

GIC & LIC's monopoly market approach is no more prevalent in India. The new
market scenario for insurance is growing; no doubt it is a flying bird.
Change is the eternal law of nature. Everything is changing according to the need
of the time. Economic growth and social development in present scenario is due to
sudden change in industrial policy and economic planning. Globalization has been
the basic mantra after 1991, so every one thinks of being global. Liberalization,
privatization and globalization is the basic concept of success in all aspect of
development. Competition is tough now due to globalization. Business has
positioned the entire economy, and industrialists think about making things global.
There are no stringent rules or regulations for making any business house or
industry. Government gives more emphasis on export and entrepreneurship. This is
a changing world. Everyone has to compete for better success. Marketing is the
major concept for developing any type of business. After globalization, marketing
has taken a new dimension and it is the most challenging task now. The new
horizon of marketing in the field of finance and insurance in present scenario is a
good sign of development.

TECHNOLOGY TREND IN INSURANCE MARKET ARE

AS FOLLOWS

30

Computerization:
Initially, in the late 1950s the insurance companies used Unit Record
Machines (Electro Magnetic Machines) to process data punched into cards.
Computers were introduces in the mid 1960s and by the 1980s the Unit Phased
Machines were phased out and the entire process was computerized. This brought
about greater efficiency and quick service delivery

Internet:
Today, the internet has completely changed the service delivery process.
Internet is today used to even sell insurance policies. Internet is, in fact, proving to
be one of the widely used distribution networks for selling insurance policies. Also
internet is used for sending premium notices to policy holders through e-mails.
Companies like LIC (www.licindia.com), ICICI (www.iciciprudential.com) all
have websites from which people can get the information about their
products, prices, various schemes, and lots of other information. People can
also purchase the product through this website.

Electronic Clearance Service (ECS):

Almost all the big organizations today provide the ECS facility to its
customers. A policy holder having an account in any bank which is a member of
the local clearing house can opt for ECS debit to pay premiums. The advantage
31

here is that once the option is exercised, the policy holder need not visit a branch
for paying the premium or collecting the receipts. On the day indicated by the
policy holder, the premium amount will be directly debited to the bank account of
the policyholder and the receipt will be issued by the designated branch office.

Call Centres and SMS services:

Almost all the insurance companies have their own call centres which cater
to the phone based queries of the policyholders. This service is 24x7 and they have
the Interactive Voice Response (IVR) systems at all the branches

CURRENT MARKET SHARE

32

IMPACT OF BUDGET 2004

The finance ministers reform to strengthen risk management in banking The

Finance Bill has some brilliant promises to offer and yet there are adverse to the
33

financial service sector.

The decision to permit 49 per cent foreign direct investment (FDI) in insurance is
welcome. The industry will agree that there is an acute need for it to grow and to
write more business. If one were to analyze the growth of some new private sector
insurance players the underlying strength seems to be their ability to get more
capital and meet the solvency requirement perform, write more business and grow
faster. Lets not forget that these insurance companies will be able to tap the capital
market in two to three years.
The best performer in the sector have also expanded their capital to about Rs. 700
to 800 crore. A look at the non performers suggests that they do not have adequate
capital to grow. Hence the increase in the FDI limit would help. More importantly,
this will give greater control to the foreign partners in areas of management control
and governance. They will now be more willing to bring in their expertise in
product development, technology, and implement best practices.
The striking future of the Finance Bill is that the government has accepted defined
contribution as the way forward for pension reforms, particularly for new
government employees.
One could have expected some clarity on the subject of multiple regulators for
pension. Though there be some benefits having a separate pension regulator, one
supposes that there would be a strong case for just one regulator both the pension
and insurance sectors. The government must examine the confusion that may arise
on account of having multiple regulators.
Banking and insurance companies are significant players in the securities market
today. Midsize public sector banks may have made a turnover of about Rs. 40,000
crore on securities trade and larger banks would have made two to three times the
34

number. The transaction tax of a 0.15 per cent would certainly eat away a good
part of banks profits.
Likewise, all services rendered by banks (except the fund based assistances) would
attract service tax. Banks would be able to conveniently pass on some of these
costs to the customers. So, each time an individual goes and gets a demand draft or
pay order, they will end up paying much more than the existing rates. However, if
competition becomes acute, banks would have to bear it, which is bad news for the
banking companies.

PRIVATE V/S PUBLIC INSURANCE SECTOR

Private players in the life insurance business are growing at a scorching pace.
Within three years of their inception, they have seized about 14 per cent of the
market.
Compare this to new generation private-sector banks, which took nine years for 20
per cent share in the Indian banking industry. And after seven years in the industry,
in 2000, private mutual funds accounted for just 9 per cent of a market that had
been dominated by the Unit Trust of India.
35

There's another dimension to the insurance numbers game. While the private
insurance companies have attained 13 to 14 per cent share of the overall insurance
market, their share in the key metros (Mumbai and Delhi) is as high as 30 to 40 per
cent.
"We have to struggle to complete a deal in the metros now, because
policyholders are comparing products and asking for better deals," says S B
Mathur, chairman of the Life Insurance Corporation of India.
Private insurance companies are essentially joint ventures with global insurance
companies holding a maximum of 26 per cent stake. The foreign partners are
investing heavily in the Indian market and, thereby, driving sales, because they see
India emerging as one of the biggest markets in the Asian region.
"India will become the biggest market for us in the next three to four years,"
predicts Dan Bardin, Prudential Corporation Asia managing director south
Asia and greater China.
Private players have certainly done their bit to increase the penetration levels of
insurance, mainly by creating alternative distribution channels--such as
associations with banks, brokers and corporate agents.
"Our bancassurance channel--with tie-ups with four banks--contributes almost 70
per cent of our total sales," says Aviva CEO Stuart Purdy.
OM Kotak Mahindra Life, which is ranked eighth among private players, is also
leaning towards alternative distribution channels that will contribute to 45 per cent
of total sales, in line with the contribution from its tied agency force.
In sharp contrast, most of the LIC's policies continue to be sold through its tiedagency network. The state life corporation acknowledges that it is unable to
maintain its lead in some metros: penetration by the private-sector insurers has
come of age and they are giving the LIC a run for its money.
The multi-channel approach adopted by private insurance companies has proved to
be a boon in terms of costing and their ability to capture business. Earlier, most
36

private insurance companies focused their energies on the top 20 cities. Today they
are moving to smaller cities.
"The potential in smaller cities is increasing and companies are moving to smaller
cities and towns because these are increasingly becoming more prosperous with a
rise in agricultural income. With the increase in buying power, this has fuelled
growth opportunities for us," says Max New York Life CEO Anuroop Tony
Singh.
AMP Sanmar, another private player, has tied up with various chit funds and
transport finance companies in the country, where it is selling life policies on the
back of fixed deposits and bonds. A senior company official cites the example of
Vijaywada where a significant portion of the income is derived from farming
activities.
"The rural populace is managing their money well and no longer keeping it under
their beds. They have mobile phones and have opened bank accounts. They are not
very different from their urban counterparts when it comes to purchasing life
insurance covers," he points out.
And that's making the private sector optimistic about its future in the Indian
insurance market. "We [private insurers] are becoming an alternative to LIC. If a
customer has already bought an LIC plan, his second policy is likely to be bought
by the private insurance sector on account of various reasons--more specifically
flexibility and transparency," says OM Kotak Mahindra Life CEO Shivaji Dam.
Perhaps this partly explains why the LIC has increased its advertising spend
multifold since the insurance sector was privatized. Its ad spend more than doubled
to Rs 81 crore (Rs 810 million) in fiscal 2003, against Rs 37 crore (Rs 370 million)
in 1999-2000, prior to the industry being privatized.
Of course, the private insurance sector has also been steadily increasing its ad
spend, from Rs 29 crore (Rs 290 million) in fiscal 2001 when the industry opened
up, to Rs 92 crore (Rs 920 million) the following year. In fiscal 2003, private
insurers spent Rs 143 crore (Rs 1.43 billion) on advertising.
37

But it's not the increased spend on advertising alone that has helped private players
in grabbing market share. One of the key differential factors responsible for their
growing market is the 150,000-odd life insurance advisors of the private insurance
companies.
"The private insurance agents sell better than their counterparts at the LIC. Life
insurance advisors of private sector insurance companies adopt the need-based
selling approach, unlike the LIC's agency force that pushes the number of
policies," says Dam.
This also gets reflected in the average sum assured by private insurance companies
being higher than that of the LIC. Policies sold by the private players tend to be of
a higher value.
For instance, Birla Sun Life's average premium stands at Rs 24,500, while that of
OM Kotak Mahindra Life is equally high at Rs 20,400. Against this is the LIC's
average premium of Rs 3,200.
Of course, there's also a difference in the target client of the private and the staterun insurance companies. While the private players are targeting the upper middleclass and high net-worth individuals, the LIC aims for the masses through its
2,048 branches spread across semi-rural and rural towns.
Meanwhile, private insurance companies are capitalizing on global relationships.
"Business deals are often a call away since we capitalize on AIG's global
relationship with multinational companies such as GE and Kodak," says Tata AIG
Life Ian Watts.
OM Kotak has gone a step further and tied up with Swiss Life International so that
it can capitalize on the latter's relationship with 300 multinational subsidiaries and
affiliates.
But it's not as if LIC has lost out on group insurance. The insurance major's group
business reached new heights in fiscal 2004, recording a 119 per cent growth in
new premium income and 50 per cent increase in the number of lives covered.
38

Still, new business income for private companies has grown at 146 per cent in
fiscal 2004, compared to the 18 per cent average industry growth in new premium
income for the same period.
"The key in product sales lies in offering unbundled and transparent products that
give customer value," points out Dam.
The biggest draw in insurance in fiscal 2004 was unit-linked plans. Ninety-five per
cent of the policies sold by Birla Sun Life and over 80 per cent of the 436,000
policies sold by ICICI Prudential were unit-linked plans.
And even though the LIC was late (January 2004) in pushing its unit-linked
product "Bima Plus", it managed to mop up a premium income of Rs 373 crore (Rs
billion) with the sale of just under 1.7-lakh unit-linked policies, the highest sales
figure in the industry.
The advantage with unit-linked plans is that they offer policyholders transparency
in terms of costs, annual returns and bonus calculations. With many companies
guaranteeing the capital investment (some like Birla Sun Life even guarantee 3 per
cent assured returns on its unit-linked plans), the interest in unit-linked plans only
increased.
And the switch from traditional products to unit-linked plans gained momentum as
the Sensex climbed higher: the returns on such policies are linked to the equity
market.
"The stock market has helped to a certain extent and has contributed to our growth
and performance," agrees Birla Sun Life CEO Nani Javeri.
Aviva has shown a compounded aggregate growth rate of 36 per cent since the
inception of its fund. Returns on OM Kotak's balanced and growth funds stand
at 31.79 to 43.25 per cent respectively.
Dam claims that OM Kotak has sold several policies of Rs 25-50 lakh (Rs 2.5-5
million) since the "savvy investor thinks it best to invest in unit-linked products."
He adds: "Growth is coming faster in insurance companies with unit-linked plans."
39

RESEARCH METHODOLOGY

HYPOTHESIS
To study the effect of liberalization, privatization and globalization on
insurance industry
To study the movement of stock prices of insurance companies with respect
to present economic and government polices

SCOPE OF THE STUDY

The present study is carried to know the following aspects.
40

 The study aims to understand the analysis and impact of LPG on insurance
sector.
This study will provide the relevant information about the economy,
industry, and different companies in insurance sector

IMPACT OF LIBERALISATION AND PRIVATISATION

ON INSURANCE SECTOR
POLICIES AFTER LIBERALISATION:
Under the recommendation of Malhotra Committee the Insurance Regulatory And
Development Authority was set up to monitor and control the Insurance industry
some of the initiatives taken by the government after Insurance sector reforms are:

Government to have not more than 50 per cent stake in insurance

companies.

Insurance sector to be opened up for private companies and any number of

insurance enterprises can operate.

Private players with minimum paid up capital of Rs.1 billion should be

given opportunity to do business.
41

Foreign companies can enter Indian market through joint ventures with
Indian companies.

IMPACT OF LIBERALISATION AND PRIVATISATION

The state controlled Insurance companies like LIC and GIC faced stiff
competition from private insurance companies post reforms. The monopoly of the
national Insurance companies came to an end. The private Insurance companies
were able to exploit the shortcomings in the state run Insurance companies. The
private insurance companies launched a variety of new insurance products like
health care, pension plans, annuity plans, income protection, market linked
products, which were welcomed by the end customers. The business for the private
sector boomed in both urban and rural sector alike.

42

IMPACT OF GLOBALISATION AND PRIVATISATION

While nationalized insurance companies have done a commendable job in

extending the volume of the business, opening up insurance sector to private
players was a necessity in the context of globalization of financial sector. If
traditional infrastructural and semipublic goods industries such as banking,
airlines, telecom, power etc., have significant private sector presence, continuing a
state of monopoly in provision of insurance was indefensible and therefore, the
globalization of insurance has been done as discussed earlier. Its impact has to be
seen in the form of creating various opportunities and challenges.
The introduction of private players in the industry has added colours to the dull
industry. The initiatives taken by the private players are very competitive and
have given immense competition to the on time monopoly of the market LIC.
Since the advent of the private players in the market the industry has seen
new and innovative steps taken by the players in the sector. The new players have
43

improved the service quality of the insurance. As a result LIC down the years have
seen the declining in its career. The market share was distributed among the private
players. Though LIC still holds 75% of the insurance sector the upcoming nature
of these private players is enough to give more competition to LIC in the near
future. LIC market share has decreased from 95%(2002-03) to 81% (2004-05). The
following company holds the rest of the market share of the insurance industry.
The life insurance of India added 4.1% to the GDP of the economy in 2009, an
immense growth since 1999, when the gates were opened for the private
company in the market.

PRESENT SCENARIO OF GLOBALISATION

In a tough battle to expand market shares the private sector life insurance industry
consisting of 14 life insurance companies at 26% have lost 3% of market share to
the state owned Life Insurance Corporation (LIC) in the domestic life insurance
industry in 2006-07. According to the figures released by Insurance Regulatory &
Development Authority, the total premium of these 14 companies have shot up by
90% to Rs 19,471.83 crore in 2006-07 from Rs 10, 252 crore.
LIC with a total premium mobilization of Rs 55,934 crore has been able to retain a
market share of 74.26 % during the reporting period. In total the life insurance
industry in first year premium has grown by 110% to Rs 75, 406 crore during
2006-07. The 2006-07 performance has thrown a few surprises in the ranking
among the private sector life insurance companies. New entrants like Reliance Life
and SBI Life had shown a huge growth of over 381% and 210% respectively
44

during the year. Reliance Life which has become one of the top five companies
ended the year with a premium of Rs 930 crore during the year.
Though ICICI Prudential Life Insurance remained as the No 1 private sector life
insurance company during the year. Bajaj Allianz overtook ICICI Prudential in
terms of monthly market share in March, for the first time ever. Bajaj's market
share among private players in non-single premium for March stood at 29.1% vs.
ICICI Prudential's 23.8%. Bajaj gained 4.6 percentage point market share among
private sector players for FY07.
Among other private players, SBI Life and Reliance Life continued to do well,
each gaining 4% market share in FY07. SBI Life's growth was driven by
increasing contribution from ULIP premiums. Another notable development of the
2006-07 performance has been the expansion of retail markets by the life insurance
companies. Bajaj Alliannz Life insurance has added 20 lakhs policies while ICICI
Prudential has expanded over 19 lakhs policies during the year.
With the largest number of life insurance policies in force in the world, Insurance
happens to be a mega opportunity in India. Its a business growing at the rate of
15-20 per cent annually and presently is of the order of Rs 450 billion.
Together with banking services, it adds about 7 per cent to the countrys GDP.
Gross premium collection is nearly 2 per cent of GDP and funds available with
LIC for investments are 8 per cent of GDP.
A well-developed and evolved insurance sector is needed for economic
development as it provides long term funds for infrastructure development and at
the same time strengthens the risk taking ability. It is estimated that over the next
ten years India would require investments of the order of one trillion US dollar.
The Insurance sector, to some extent, can enable investments in infrastructure
development to sustain economic growth of the country.
Insurance is a federal subject in India. There are two legislations that govern the
sector- The Insurance Act- 1938 and the IRDA Act- 1999. The insurance sector in
India has become a full circle from being an open competitive market to
nationalization and back to a liberalized market again. Tracing the developments in
45

the Indian insurance sector reveals the 360 degree turn witnessed over a period of
almost two centuries.
Saturation of insurance markets in many developed economies has made the
Indian market more attractive for international insurance players, according to
'Booming Insurance Market in India (2008-2011). Further,
Total life insurance premium in India is projected to grow US$ 266 billion
by 2010-11
Total non-life insurance premium is expected to increase at a compound
annual growth rate (CAGR) of 25 per cent for the period spanning from
2008-09 to 2010-11
The home insurance segment is set to achieve a 100 per cent growth as
financial institutions have made home insurance obligatory for housing loan
approvals
In the next three years, health insurance is poised to become the second
largest business for non-life insurers after motor insurance

With a huge population base and large untapped market, insurance industry is a big
opportunity area in India for national as well as foreign investors. India is the fifth
largest life insurance market in the emerging insurance economies globally and is
growing at 32-34% annually. This impressive growth in the market has been
driven by liberalization, with new players significantly enhancing product
awareness and promoting consumer education and information. The strong
growth potential of the country has also made international players to look at the
Indian insurance market. Moreover, saturation of insurance markets in many
developed economies has made the Indian market more attractive for international
insurance players, according to "Booming Insurance Market in India (20082011)".

46

PROSPECTS

Total life insurance premium in India is projected to grow Rs 1,230,000

Crore by 2010-11.
Total non-life insurance premium is expected to increase at a CAGR of 25%
for the period spanning from 2008-09 to 2010-11.
With the entry of several low-cost airlines, along with fleet expansion by
existing ones and increasing corporate aircraft ownership, the Indian
aviation insurance market is all set to boom in a big way in coming years.
Home insurance segment is set to achieve a 100% growth as financial
institutions have made home insurance obligatory for housing loan
approvals.
Health insurance is poised to become the second largest business for non-life
insurers after motor insurance in next three years.
A booming life insurance market has propelled the Indian life insurance
agents into the 'top 10 country list' in terms of membership to the Million
Dollar Round Table (MDRT) - an exclusive club for the highest performing
life insurance agents.
47

General Insurance
The total number of general insurers registered with IRDA has gone up to
22, with the registration of SBI General Insurance Company Limited, a joint
venture general insurance company promoted by State Bank of India and Insurance
Australia Group, Australia, as a general insurer in December 2009. Moreover,
L&T General Insurance is readying to launch its operations in the next three to five
months.
The Gross Premium underwritten by public sector non-life insurers for the
April-December 2009 period posted year-on-year growth of 11.37 per cent
as compared to the year-on-year growth of 7.93 per cent posted by private
sector non-life insurers. t
he non-life insurance sector grew 9.95 per cent in April-December 2009,
compared to the corresponding period last year. According to IRDA data,
out of the US$ 5.46 billion premium underwritten by the industry during the
April-December 2009 period, US$ 3.24 billion came from the four public
sector companies as compared to US$ 2.91 billion during the same period
in 2008.
Project Insurance
48

Insurance companies are also witnessing increasing demand for project

insurance in the last few months. Corporate are beginning to demand project
insurance across sectors such as power generation with the cover beginning right
from the start of the project till it is declared ready for commercial use. Some of
the big projects also take cover for financial loss arising out of delay in completion.
Industry players estimate that premiums collected from project insurance will
be around US$ 216.2 million for the industry as a whole and is expected to
increase significantly.
Oriental Insurance Company Ltd will be offering comprehensive project
insurance for the Tata Power Project at Mundra in Gujarat.

Health Insurance
The health insurance market stood at around US$ 1.5 billion in 2008-09 and is
expected to grow to US$ 9 billion by 2016-17. While health insurance policies are
mostly provided by general insurance companies, life insurers contribute about five
per cent to the overall health insurance business.
Apollo DKV Health Insurance has renamed itself Apollo Munich Health
Insurance as a part of its five-year strategic plan to gain a five per cent
market share. Apollo Munich is a joint venture between Asias largest
integrated healthcare provider, The Apollo Hospitals Group, and Germanybased Munich Re's segment, Munich Health.
Max India is planning to invest US$ 43.25 million in its health insurance
joint venture (Max Bupa) and will launch a product over the JanuaryJune
2010 period.
Star Health and Allied Insurance expects to invest US$ 38.9 million during
the current financial year to grow its health insurance business, taking the
total invested capital to US$ 67 million.
US-based health insurer CIGNA is looking at entering the Indian market.
Reinsurance

49

Reinsurance is a contract between the insurance company (insurer) and a

third party (re-insurer), wherein the latter will protect the former by paying losses
sustained by it under the original contract of insurance.
Re-insurers from London, as well as other parts of Europe, see significant
potential in the re-insurance market in India. Top four global re-insurers,
Lloyds, Swiss Re, Munich Re and Berkshire Hathaway are amongst those
eyeing India.

Bancasssurance
Private insurers have adopted bancassurance in a much bigger way than the
state-owned Life Insurance Corporation (LIC) in the recent years. Bancassurance is
distribution of insurance products through a bank's network.
In 2009-10, private insurers forked out US$ 44.4 million as commission for
banassurance, while the payout by LIC for this distribution model was US$
25,948.
Investment Policy
The FDI limit in the insurance space for foreign players is capped at 26 per
centpermissible under the automatic route subject to a licence from the
official regulator, IRDAbut the government is planning to raise it to 49
per cent and a bill to give effect to the proposal is pending in the Rajya
Sabha.
IRDA has stipulated that the mandatory ceding by every general insurer in
the country to the national reinsurer General Insurance Corporation (GIC),
would continue to remain at 10 per cent as under current regulations.

50

IRDA has also allowed insurance companies to offer 'Health plus Life
Combi Product', a policy that would provide life cover along with health
insurance to subscribers.
Pension Fund Regulatory and Development Authority (PFRDA) would
launch a low-cost pension scheme on April 1, 2010, to provide social
security cover to economically weaker sections like rickshaw pullers,
barbers and daily-wage labourers.

GRAPHS

51

NON SINGLE PREMIUM OF INSURERS YEAR 2008-09

52

SUMMARY

53

Insurance sector in India is one of the booming sectors of the economy and
is growing at the rate of 15-20 per cent annum. Together with banking services, it
contributes to about 7.8 per cent to the country's GDP. Insurance is a federal
subject in India and Insurance industry in India is governed by Insurance Act,
1938, the Life Insurance Corporation Act, 1956 and General Insurance Business
(Nationalization) Act, 1972, Insurance Regulatory and Development Authority
(IRDA) Act, 1999 and other related Acts.
The total life insurance premium in India is projected to grow Rs 1,230,000
Crore by 2010-11.Total non-life insurance premium is expected to increase at a
CAGR of 25% for the period spanning from 2008-09 to 2010-11.Home insurance
segment is set to achieve a 100% growth as financial institutions have made home
insurance obligatory for housing loan approvals. Health insurance is poised to
become the second largest business for non-life insurers after motor insurance in
next three years. A booming life insurance market has propelled the Indian life
insurance agents into the 'top 10 country list' in terms of membership to the Million
Dollar Round Table (MDRT) - an exclusive club for the highest performing life
insurance agent.

CONCLUSION
54

Thus, in the last on basis of above the discussion we can conclude that need for
private sector entry is justifiable on the basis of enhancing the efficiency of
operation, achieving greater density and insurance coverage in the country and for
greater mobilization of long-term savings for long gestation infrastructure projects.
In the wake of such competition it is essential for the government monopolies (LIC
and GIC) that they quickly up-grade their technology, restructure themselves on
more efficient lines and operate as broad run enterprise. New players should not be
treated as rivalries to government companies, but they can supplement in achieving
the objective of growth of insurance business in India.

BIBLIOGRAPHY
55

 Annual Reports of LIC (from 1999 2007). Insurance Principles and

Practice by M.N. Mishra S Chand Publishers 2008 Edition.
Rao CS (2007). The Regulatory Challenges Ahead J. Insurance Chronicle
7: 10
Jain AK (2004). J. Insurance Inst. India 30: 53.
Peter D (1999). Innovate or Die, J. Economist. 1(2): 41-55.
Rao TSR (2000). The Indian Insurance Industry the Road Ahead J.
Insurance Chronicle 3(I): 31.
Sabera K (2007). Changes in insurance sector (A Study on Public
Awareness). J. Insurance Chronicle 7(1): 37.
Sukla AK (2006). The impact of LPG on life insurance. J. Insurance Inst.
India 32: 10.
WEBSITES
http://www.irda.gov.in/Defaulthome.aspx?page=H1
http://www.marketingteacher.com/lesson-store/lesson-plc.html
http://www.answers.com/topic/product-life-cycle
http://www.netmba.com/marketing/product/lifecycle/
http://www.du.ac.in/fileadmin/DU/Academics/course_material/EP_16.pdf

http://www.frost.com/prod/servlet/mcon-mktmeasures-life-cycle.pag

http://www.kotak.com

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