The insurance industry is one of the basic service industries in Indian economy,

whose prospect is reflective of the economic resilience of the economy. With th

e globalisation of the economy, India has become the playground of major global
insurance players.
As whole insurance industry is a very large field for research we have chosen li
fe insurance industry of the booming segment of insurance industry, for research
purpose.
The major objectives of the study are as below:
To find out how political, economical, socio-cultural, technological factors aff
ecting this industry by PEST analysis.
To find out how the market condition and what level of competition is there by f
ive force analysis.
To analyse driving forces and key success factors of the industry
To analyze various threats and opportunities for the industry
To focus on current trends and future of the industry.

What is Insurance and How Insurance Work?

According to the U.S. Life Office Management Association Inc. (LOMA), life insur
ance is defined as follows: “Life insurance provides a some of money if the person
who is insured dies whilst the policy is in effect”.
Anybody who has knowledge about life insurance will be tempted to say “yes BUT…” In ot
her words, surly this is far too brief an explanation for a financial service th
at provides a very sophisticated range of savings and investment products, as we
ll as mere compensation for death.
‘Insurance’ is basically a sharing device. The losses to assets resulting from natur
al calamities like fire, flood, earthquake; accidents, etc. are mate out of the
common pool contributed by large number of person who is exposed to similar risk
s. This contribution of many is used to pay the losses suffered by unfortunate f
ew. However the basic principle is that loss should occur as a result of natural
calamities or unexpected events, which are beyond the human control. Secondly i
nsured person should not make any gain out of insurance.
It is natural think of insurance of physical assets such as motor car insurance
or fire insurance but often we forget that creator of all these assets in the hu
man being whose efforts have gone a long way in building up the assets. In that
sense, human life is a unique image-generating asset. Unlike the physical assets
, which decrease in value with passage of time, the individual becomes more expe
rienced and more matured as he advances in age. This raises his earning capacity
and the purpose of life insurance is to protect the income in the event of his
premature death. The individual himself also needs financial security for the ol
d age or on his becoming permanently disabled when his income will stop. Insuran
ce also has an element of savings in certain cases.
Suppose there are 1000 persons all aged 35 years and healthy lives. They are ins
ured for one year against the risk of the death. Each person is insured for Rs.
50,000. If the past experience indicates that 4 out of 1,000 persons, at this ag
e are expected to die during the year, expected amount of death claim to be paid
to the family of four persons would come to Rs. 2, 00,000. The contribution to
be paid by each of the 1,000 persons will come to Rs. 200 per year. Thus, all th
e 1,000 persons share loss caused to the 4 unfortunate families. 996 persons who
survived till one year have not lost anything as they have secured peace of min
d and a feeling of security for their family. While insurance cannot prevent acc
idents or premature death, it can help protect the family of the decreased again
st the loss of the death of the main breadwinner. In return for specified paymen
ts, insurance will provide protection against the incidents of an uncertain even
t- such as premature death.
The business of insurance company called insurer is to bring together persons wh
o are exposed to similar risks, collect contribution (premium) fro them on some
equitable basis and pay the losses (claim) to the unfortunate few who suffer.
The story so far...
Almost 4,500 years ago, in the ancient land of Babylonia, traders used to bear r
isk of the caravan trade by giving loans that had to be later repaid with intere
st when the goods arrived safely. In 2100 BC, the Code of Hammurabi granted lega
l status to the practice. That, perhaps, was how insurance made its beginning. .
In 2100 BC, the Code of Hammurabi granted legal status to the practice. That, p
erhaps, was how insurance made its beginning.
As European civilization progressed, its social institutions and welfare practic
es also got more and more refined. With the discovery of new lands, sea routes a
nd the consequent growth in trade, medieval guilds took it upon themselves to pr
otect their member traders from loss on account of fire, shipwrecks and the like
.
Since most of the trade took place by sea, there was also the fear of pirates. S
o these guilds even offered ransom for members held captive by pirates. Burial e
xpenses and support in times of sickness and poverty were other services offered
. Essentially, all these revolved around the concept of insurance or risk covera
ge. That s how old these concepts are, really.
In 1347, in Genoa, European maritime nations entered into the earliest known ins
urance contract and decided to accept marine insurance as a practice.
The first step…
Insurance as we know it today owes its existence to 17th century England. In fac
t, it began taking shape in 1688 at a rather interesting place called Lloyd s Co
ffee House in London, where merchants, ship-owners and underwriters met to discu
ss and transact business. By the end of the 18th century, Lloyd s had brewed eno
ugh business to become one of the first modern insurance companies.
Insurance and Myth...
Back to the 17th century. In 1693, astronomer Edmond Halley constructed the firs
t mortality table to provide a link between the life insurance premium and the a
verage life spans based on statistical laws of mortality and compound interest.
In 1756, Joseph Dodson reworked the table, linking premium rate to age.
Enter companies...
The first stock companies to get into the business of insurance were chartered i
n England in 1720. The year 1735 saw the birth of the first insurance company in
the American colonies in Charleston, SC. In 1759, the Presbyterian Synod of Phi
ladelphia sponsored the first life insurance corporation in America for the bene
fit of ministers and their dependents. However, it was after 1840 that life insu
rance really took off in a big way. The trigger: reducing opposition from religi
ous groups.
The growing years...
The 19th century saw huge developments in the field of insurance, with newer pro
ducts being devised to meet the growing needs of urbanization and industrializat
ion.
In 1835, the infamous New York fire drew people s attention to the need to provi
de for sudden and large losses. Two years later, Massachusetts became the first
state to require companies by law to maintain such reserves. The great Chicago f
ire of 1871 further emphasized how fires can cause huge losses in densely popula
ted modern cities. The practice of reinsurance, wherein the risks are spread amo
ng several companies, was devised specifically for such situations.
There were more offshoots of the process of industrialization. In 1897, the Brit
ish government passed the Workmen s Compensation Act, which made it mandatory fo
r a company to insure its employees against industrial accidents. With the adven
t of the automobile, public liability insurance, which first made its appearance
in the 1880s, gained importance and acceptance?
In the 19th century, many societies were founded to insure the life and health o
f their members, while fraternal orders provided low-cost, members-only insuranc
e. Even today, such fraternal orders continue to provide insurance coverage to m
embers as do most labs our organizations. Many employers sponsor group insurance
policies for their employees, providing not just life insurance, but sickness a
nd accident benefits and old-age pensions. Employees contribute a certain percen
tage of the premium for these policies.
Classification of Insurance:
Insurance business can be divided into two broad categories,
i. Life, and
ii. Non-life.
Life insurance is concerned with making provision for a specific event happening
to the individual, such as death where as non life (or general insurance) is mo
re commonly concerned with the provision for a specific event, which affects a p
roperty, such as fire, flood, theft etc.
Products:-
As for latest information get in touch with the current insurers – website informa
tion of insurers is provided at the web page for insurers:
Life Insurance: Popular Products: Endowment Assurance (Participating) and Money
Back (Participating). More than 80% of the life insurance business is from these
products.
Tariff Advisory Committee (TAC) lays down tariff rates for some of the g
eneral insurance products. 2001: life insurers have launched new products. Thes
e include linked-products. For details, please visit the websites of life insure
rs.
Life insurance not plays an important role in national economy but also in inter
national economy. Marine cargo insurance provides risk coverage for shippers and
the banks, which finance international trades. This role becomes all the more i
mportant in the context of an active government policy to encourage exports. Ind
ian life insurer operates in more than 30 countries through agencies, branches,
associates companies. These operations earn foreign exchange.
The insurance business is concerned with North America, Western Europe, Japan an
d Oceania. Together these region’s accounts for about 91 % of the world annul prem
ium.
By region’s North America and western Europe are growing moderately while oceanic,
Latin America, eastern Europe and Africa display growth above lone –term trends t
o a global context globalization of life insurance helps companies practices und
erwriting discipline in one regions globalization of the insurance industry rece
ived a big boost.
Countries Insurance Penetration (premium as a% of GDP) Insurance Densit
y (Per Capita Premiums in USD)
United Kingdom 12.71 3028.5
Japan 8.70 3165.1
United States 4.48 1611.4
South Africa 14.04 392.9
Australia 6.04 1193.5
South Korea 9.89 935.6
India 1.77 7.6
China 1.12 9.5
Malaysia 2.13 86.4
Indonesia 0.54 4.0
Brazil 0.36 12.9
India and the world market:
Unfortunately, the progress achieved by the life insurance industry in India, it
compares unfavorably not just with the developed countries. But also even with
the developing world. The global market for the life insurance is estimated to b
e around $ 1412.3 billions.

The service industry is one of the fastest growing sectors in India today. The u
pcoming sectors which are really showing the graph towards upwards are - Telecom
, Banking, and Insurance. These sectors really have a lot of responsibility towa
rds the economy.
Amongst the above-mentioned areas insurance is one sector, which took a lot of t
ime in positioning itself. The insurance business of non-life companies was not
much in problems but the major problem was with life insurance. Life Insurance C
orporation of India had monopoly for more than 45 years, but the picture then wa
s completely different. Previously people felt that “Insurance is only for classes
not for masses” but now the picture is vice-versa.
The story of insurance is probably as old as the story of mankind. The same inst
inct that prompts modern businessmen today to secure themselves against loss and
disaster existed in primitive men also. They too sought to avert the evil conse
quences of fire and flood and loss of life and were willing to make some sort of
sacrifice in order to achieve security. Though the concept of insurance is larg
ely a development of the recent past, particularly after the industrial era – past
few centuries – yet its beginnings date back almost 6000 years.
Life Insurance in its modern form came to India from England in the year 1818. O
riental Life Insurance Company started by Europeans in Calcutta was the first li
fe insurance company on Indian Soil. All the insurance companies established dur
ing that period were brought up with the purpose of looking after the needs of E
uropean community and these companies were not insuring Indian natives. However,
later with the efforts of eminent people like Babu Muttylal Seal, the foreign l
ife insurance companies started insuring Indian lives. But Indian lives were bei
ng treated as sub-standard lives and heavy extra premiums were being charged on
them. Bombay Mutual Life Assurance Society heralded the birth of first Indian li
fe insurance company in the year 1870, and covered Indian lives at normal rates.
Starting as Indian enterprise with highly patriotic motives, insurance companie
s came into existence to carry the message of insurance and social security thro
ugh insurance to various sectors of society. Bharat Insurance Company (1896) was
also one of such companies inspired by nationalism. The Swadeshi movement of 19
05-1907 gave rise to more insurance companies. The United India in Madras, Natio
nal Indian and National Insurance in Calcutta and the Co-operative Assurance at
Lahore were established in 1906. In 1907, Hindustan Co-operative Insurance Compa
ny took its birth in one of the rooms of the Jorasanko, house of the great poet
Rabindranath Tagore, in Calcutta. The Indian Mercantile, General Assurance and S
wadeshi Life (later Bombay Life) were some of the companies established during t
he same period. Prior to 1912 India had no legislation to regulate insurance bus
iness. In the year 1912, the Life Insurance Companies Act, and the Provident Fun
d Act were passed. The Life Insurance Companies Act 1912 made it necessary that
the premium rate tables and periodical valuations of companies should be certifi
ed by an actuary. But the Act discriminated between foreign and Indian companies
on many accounts, putting the Indian companies at a disadvantage.
The formation of IRDA, entrance of private life insurance companies into India w
ith one foreign partner, compulsory training of Insurance agents etc. developmen
ts started to take place. And this was the time when these companies started sea
rching for proper channel partners who can help the organization in expanding it
s network and business in India.
Channel partners are those who are going to be into direct selling of company’s pr
oducts i.e. the insurance policies. They are the link between the customers and
the management or company. These channel partners are people with different prof
iles. They are selected on some grounds like their network of people, their prob
lem handling ability, convincing power and lot many things.
The main idea behind company’s Questionnaire Survey is to find out and analyze the
proper profile that can be recruited by company as a channel partner. Company h
as been focusing on some of the profile that can be very beneficial for the comp
any. For example Chartered Accountants, Tax Consultants, Postal agents, Bank’s Dai
ly Collection Agents etc. the main idea behind targeting the above profile is st
rong client network which is really very important for an insurance company.
The project title is “strategic analysis of life insurance industry i
n india ”. This shows the scope for private insurance companies have great opportu
nities to cover the market and can insure the customer. With the initiation of t
he deregulation in the Indian insurance market, the monopoly of big public secto
r companies in life insurance market has been broken. New private players have e
ntered the market and with their innovative approaches and better use of distrib
ution channels and technology, they are eating in to the shares of established p
ublic sector companies in Indian Insurance Market. Since the deregulation has be
en put in to place, the market share of LIC has come down to 71.4% in life insur
ance market while the private players have captured around 17% market in the gen
eral insurance segment. This report includes the key private players in the insu
rance market such as ICICI Prudential, Kotak Life Insurance Bajaj Allianz, Birla
Sun life, and TATA AIG. It also includes the leading competitors in the life in
surance and general insurance segments along with their market shares.
2.1 Milestone of indian life insurance industry:-
The business of life insurance in India in its existing form started in India in
the year 1818 with the establishment of the Oriental Life Insurance Company in
Calcutta. Some of the important milestones in the life insurance business in Ind
ia are:
1912: The Indian Life Assurance Companies Act enacted as the first statute to re
gulate the life insurance business.
1928: The Indian Insurance Companies Act enacted to enable the government to col
lect 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. LI
C Act, 1956, with a capital contribution of Rs. 5 crore from the Government of I
ndia.
2.2 Need for Life Insurance:
The above definition captures the original, basic, and intention of life insuran
ce: i.e. to provide for one’s family and perhaps others in the event of death, esp
ecially premature death. Originally, policies were to provide for short periods
of time, covering temporary risk situations, such as sea voyages. As life insura
nce becomes more established, it was realized what a useful tool it was for a nu
mber of situation including:
i. Temporary needs/ threats:
The original purpose of life insurance remains an important element, namely prov
iding for replacement of income on death etc.
ii. Regular Savings:
Providing for one’s family and oneself, as a medium to long-term exercise (through
a series of regular payment of premiums). This has become more relevant in rece
nt times as people seek financial independence from their family.
iii. Investment:
Put simply, the building up of savings while safeguarding it from the ravages of
inflation. Unlike regular saving products, investment products are traditionall
y lump sum investments, where the individual makes a one-time payment.
iv. Retirement:
Provision for one’s own later years become increasing necessary, especially in a c
hanging culture and social environment. One can buy a suitable insurance policy,
which will provide periodical payments in one’s old age. This simple example illu
strates the impact premature death can have on a family, where the main earner h
as no life cover.
A simple life insurance policy (term assurance) could have provided Mr. Atol’s fam
ily with a lump sum that could have been invested to provide an income equal to
all or part of his income. We will discuss how to analyze the need for life cove
r and the value of life later in the course.
2.3 Benefits from Life Insurance:
i. It is superior to a traditional saving vehicles:
As well as providing a secure vehicle to build up saving s etc, its provides p
eace of mind to the policyholder. In the event of untimely death, of say the mai
n earner in the family, the policy will pay out of the guaranteed sum assured, w
hich is likely to be significant more than the total premiums paid. With more tr
aditional savings vehicles, such as fixed deposits, the only return would be the
amount invested plus any interest accrued.
ii. It encourages saving and forces thrift:
Once an insurance contract has been entered into, the insured has an obligation
to continue paying premiums, until the end of the term of the policy, otherwise
the policy will lapse. In other words, it becomes compulsory for the insured to
save regularly and spend wisely. In contrast savings held in a deposit account c
an be accessed or stopped easily.
iii. It provides easy settlement and protection against creditors:
Once a person is appointed for receiving the benefits (nomination) or a transfer
of rights is made (assignment), a claim under the life insurance contract can b
e settled easily. In addition, creditors have no rights to any monies paid out b
y the insurer, where the policy is written under trust. Under the Married Women’s
Property Act (M.W.Act), the money available from the policy forms a kind of trus
t, which creditors cannot claim on.
iv. It helps to achieve the purpose of the Life Assured:
If someone receives a large sum of money, it is possible that they may spend the
money unwisely or in a speculative way. To overcome this, the person taking the
policy can instruct the insurer that the claim amount is given in installments.
For example, if the total amount to be received by the dependents is Rs. 2, 00,
000 say Rs.50, 000 can be taken out as a lump sum and the balance paid out in sm
aller installments, say Rs. 5,000 per month.
v. Tax Relief:
The policyholders obtain Income Tax rebates by paying the insurance premium. The
specified forms of saving which enjoy a tax rebate, under section 88 of the Inc
ome Tax Act, include Life Insurance Premiums and contributions to a recognized P
rovident Fund etc.
2.4 Comparison of life insurance to other saving instrument:-
1. Protection
2. Liquidity
3. Tax relief
4. Money when you need it.
1. Protection:
Savings through life insurance guaranteed full protection a
gainst risk of the saver. In life insurance the full sum assured is payable with
bonus whenever applicable whereas in other savings schemes, only the amount sav
ed with interest is payable.
2. Liquidity:
Saving can be made in a relatively “painless” manner because of
the easy installment facility built into the scheme.
3. Tax relief:
Tax relief in Life insurance is available to the insurer for am
ount paid by way of premium for life insurance subject to it rates in force.
4. Money when you need it:
A suitable insurance plan a combination of different plans
can be taken out of meet. Specific needs are likely to arise in future.
Examples:
• Children’s education
• Start in life
• Marriage provision or
• Periodical needs for cash over a stretch of time.
2.5 Insurance Sector Reforms in India:
In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governo
r R. N. Malhotra, was formed to evaluate the Indian insurance industry and recom
mend its future direction.
The Malhotra committee was set up with the objective of complementing the reform
s initiated in the financial sector.
The reforms were aimed at “creating a more efficient and competitive financial sys
tem suitable for the requirements of the economy keeping in mind the structural
changes currently underway and recognizing that insurance is an important part o
f the overall financial system where it was necessary to address the need for si
milar reforms…”
In 1994, the committee submitted the report and some of the key recommendations
included:
Structure:
• Government stake in the insurance Companies to be brought down to 50%
• Government should take over the holdings of GIC and its subsidiaries so that the
se subsidiaries can act as independent corporations
• All the insurance companies should be given greater freedom to operate
Competition:
• Private Companies with a minimum paid up capital of Rs.1bn should be allowed to e
nter the industry
• No Company should deal in both Life and General Insurance through a single entit
y
• Foreign companies may be allowed to enter the industry in collaboration with the
domestic companies
• Postal Life Insurance should be allowed to operate in the rural market
• Only one State Level Life Insurance Company should be allowed to operate in each
state
Regulatory Body:
• The Insurance Act should be changed
• An Insurance Regulatory body should be set up
• Controller of Insurance (Currently a part from the Finance Ministry) should be m
ade independent
Investments:
• Mandatory Investments of LIC Life Fund in government securities to be reduced fr
om 75% to 50%
• GIC and its subsidiaries are not to hold more than 5% in any company (There curr
ent holdings to be brought down to this level over a period of time)
Customer Service:
• LIC should pay interest on delays in payments beyond 30 days
• Insurance companies must be encouraged to set up unit linked pension plans
• Computerization of operations and updating of technology to be carried out in th
e insurance industry
The committee emphasized that in order to improve the customer services and incr
ease the coverage of the insurance industry should be opened up to competition.
But at the same time, the committee felt the need to exercise caution as any fai
lure on the part of new players could run the public confidence in the industry.
Hence, it was decided to allow competition in a limited way by stipulating the m
inimum capital requirement of Rs.100 crores. The committee felt the need to prov
ide greater autonomy to insurance companies in order to improve their performanc
e and enable them to act as independent companies with economic motives. For thi
s purpose, it had proposed setting up an independent regulatory body.

3.1 Insurance Regulatory and Development Authority (IRDA):

Reforms in the Insurance sector were initiated with the passage of the IRDA
Bill in Parliament in December 1999. The IRDA since its incorporation as a statu
tory body in April 2000 has fastidiously stuck to its schedule of framing regula
tions and registering the private sector insurance companies.
The other decisions taken simultaneously to provide the supporting systems to th
e insurance sector and in particular the life insurance companies were the launc
h of the IRDA’s online service for issue and renewal of licenses to agents.
The approval of institutions for imparting training to agents has also ensured t
hat the insurance companies would have a trained workforce of insurance agents i
n place to sell their products, which are expected to be introduced by early nex
t year.
Since being set up as an independent statutory body the IRDA has put in a framew
ork of globally compatible regulations. In the private sector 12 life insurance
and 6 general insurance companies have been registered.
3.2 Duties, Power and Functions of IRDA:
Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA.
1. Subject to the provisions of this Act and any other law for the time bei
ng in force, the Authority shall have the duty to regulate, promote and ensure o
rderly growth of the insurance business and re-insurance business.
2. Without prejudice to the generality of the provisions contained in sub s
ection.
The powers and functions of the Authority shall include.
a. Issue to the applicant a certificate of registration, renew, modify, wit
hdraw, suspend or cancel such registration;
b. Protection of the interests of the policy holders in matters concerning
assigning of policy, nomination by policy holders, insurable interest, settlemen
t of insurance claim, surrender value of policy and other terms and conditions o
f contracts of insurance;.
c. Specifying requisite qualifications, code of conduct and practical train
ing for intermediary or insurance intermediaries and agents.
d. Specifying the code of conduct for surveyors and loss assessors.
e. Promoting efficiency in the conduct of insurance business.
f. Promoting and regulating professional organizations connected with the i
nsurance and re-insurance business.
g. Levying fees and other charges for carrying out the purposes of this Act
.
h. Calling for information from, undertaking inspection of, conducting enqu
iries and investigations including audit of the insurers, intermediaries, insura
nce intermediaries and other organizations connected with the insurance business
;
i. Control and regulation of the rates, advantages, terms and conditions th
at may be offered by insurers in respect of general insurance business not so co
ntrolled and regulated by the Tariff Advisory Committee under section 64U of the
Insurance Act, 1938 (4 of 1938);
j. Specifying the form and manner in which books of account shall be mainta
ined and statement of accounts shall be rendered by insurers and other insurance
intermediaries;
k. Regulating investment of funds by insurance companies;
l. Adjudication of disputes between insurers and intermediaries or insuranc
e intermediaries;
m. Supervising the functioning of the Tariff Advisory Committee;
n. Specifying the percentage of premium income of the insurer to finance sc
hemes for promoting and regulating professional organizations referred to in cla
use (f);
o. Specifying the percentage of life insurance business and general insuran
ce business to be undertaken by the insurer in the rural or social sector; and
p. Exercising such other powers as may be prescribed.

3.3 Insurance Regulatory and Development Authority (IRDA) Act:

The Insurance Regulatory and Development Authority Act was introduced to end the
monopoly of State-owned companies and to invest in the Insurance Regulatory Aut
hority power to control the insurance sector.
These powers inter aria are:
• Imposition of prudential norms such as solvency margins, capital adequacy;
• Requirements and investment guidelines for insurance companies;
• Grant of licenses to new companies, and cancellation, suspension and withdrawal
of licenses given to insurance companies;
• Regulation of fund investment by insurance companies;
• Maintenance of solvency margins;
• Adjudication of disputes between insurers and intermediaries; and
• Tariff fixing.
As per the section 4 of IRDA Act 1999, Insurance Regulatory and Development Aut
hority (IRDA, which was constituted by an act of parliament) specify the composi
tion of Authority the Authority is a ten member team consisting of
a. A Chairman;
b. Five whole-time members;
c. Four part-time members,
(All appointed by the Government of India)
3.4 Regulatory Issues:
The IRDA Bill lies down that the Indian promoter must dilute the stake in the pr
ivate insurance firms from 74 per cent to 26 per cent in ten years. The bill sti
pulates tough solvency margins -- Rs 500 million for life insurance firms, Rs 50
0 million or a sum equivalent to 20 per cent of net premium income for general i
nsurance and Rs 1 billion for reinsurance business.
The insurer has to maintain separate accounts relating to fund of shareholders
and policyholders. The funds of policyholders should be retained within the cou
ntry but does not cover repatriation of profits and dividends. Insurance compani
es under the new regime will have to have exposure to rural and social sectors.
Foreign investment in insurance, the bill states, is crucial to financing infras
tructure and better insurance cover.
One of the reasons for nationalization of the insurance industry (LIC in 1956
and GIC in 1973) was the mismanagement and malpractice of erstwhile private play
ers. But if the statements of IRA officials are anything to go by, the new regul
ations are expected to be on the right track. N I Rangachary, chairman, IRA, has
already provided the timetable for the changes once the Bill is passed. The IRA
has already indicated that it will have tough norms for new participants.
This is the most compelling reason why private sector (and foreign) companies,
which will spread the insurance habit in the societal and consumer interest, ar
e urgently required in this vital sector of the economy.
With the nation s infrastructure in a state of imminent collapse, India couldn
t have afforded to be lumbered with sub-optimally performing monopoly insurance
companies and therefore the passage of the Insurance Regulatory & Development A
uthority Bill on December 2, 1999 heralds an era of cautious optimism where stak
es are high for all parties concerned. For the Govt. of India, Foreign Direct In
vestment (FDI) must pour in as anticipated; for foreign insurers, investments mu
st start yielding returns and for the domestic insurance industry - their market
penetration should remain intact. On the fringe, the customer is pondering whet
her all the hype created on liberalization will actually benefit him.

About the various player of life insurance sector:

Since being set up as an independent statutory body the IRDA has put in a framew
ork of globally compatible regulations. In the private sector 12 life insurance
and 6 general insurance companies have been registered than after remaining comp
anies are registered.
Here we have described the private life insurance companies registered in which
year wise.
3.5 Private Player in Life Insurance industry:
Sr.No. Registration
Number Date of Reg. Name of the Company
1 101 23.10.2000 HDFC Standard Life Insurance Company Ltd.
2 104 15.11.2000 Max New York Life Insurance Co. Ltd.
3 105 24.11.2000 ICICI Prudential Life Insurance Company Ltd.
4 107 10.01.2001 OM Kotak Mahindra Life Insurance Co. Ltd.
5 109 31.01.2001 Birla Sun Life Insurance Company Ltd.
6 110 12.02.2001 Tata AIG Life Insurance Company Ltd.
7 111 30.03.2001 SBI Life Insurance Company Limited.
8 114 02.08.2001 ING Vysya Life Insurance Company Private Limited
9 116 03.08.2001 Allianz Bajaj Life Insurance Company Ltd.
10 117 06.08.2001 MetLife India Insurance Company Pvt. Ltd.
11 121 03.01.2002 AMP SANMAR Assurance Company Ltd.
12 122 14.05.2002 Aviva Life Insurance Co. India Pvt. Ltd.
13 127 06.02.2004 Sahara India Insurance Company Ltd.
4.2 CURRENT SCENARIO

A wide range of life insurance products are available. These include:

• Group insurance products —endowments, term insurance, annuities, whole life insura
nce, riders
• Individual insurance products —Unit Linked Insurance Plans (ULIPs), pension funds,
guaranteed life products

Source: financial express- Delhi

www.ibef.org
AGGREGATION OF LONG TERM SAVINGS
(i) Total Assets of Life Insurance Companies
2004-2005 2005-2006 2006-2007
2,80,450Cr 3,52,608Cr 4,23,000 Cr

(ii) Total Premium generated

2004-2005 2005-2006 2006-2007
57,708 Cr 66,278 Cr 79,000 Cr
(iii) Industry is growing @ 18 p.a.
(iv) At this growth rate, the future premium income generated will be
2005-2006 2006-2007 2007-2008
94,000 Cr 1,12000 Cr 1,33,000 Cr
(v) Life Insurance funds account for 15% of household savings.
(vi)The industry has the potential to increase the share to 20%.

4.3 INTRODUCTION
1. THE LIFE INSURANCE CORPORATION (LIC) OF INDIA
founded in 1956 is the largest life insurance company in India owned sol
ely by the Government of India. Headquartered in Mumbai, which is considered the
financial capital of India, LIC presently has 7 Zonal Offices and 100 Divisiona
l Offices situated all around the country. In addition to an even distribution o
f 2048 branches located in different towns and cities of India, LIC also has a n
etwork of around one million agents who solicit life insurance policies to the p
ublic.
History of LIC of India
The first 150 years of the British Rule in India were characterized by turbulent
economic conditions. The first war of independence in 1857, the World Wars 1 an
d 2 (1914-1918 and 1939-45) and India s national struggle for freedom in between
had adverse effect on the economy. In addition to this the period of world wide
economic crisis in between the two World Wars termed as the period of Great Dep
ression led to the high rate of bankruptcies and liquidation of most Life Insura
nce Companies in India that existed during that time. These occurrences led to l
oss of faith in insurance of the people of India.
2. ICICI-PRUDENTIAL LIFE INSURANCE COMPANY LTD. :
The ICICI-Prudential Life Insurance Company ltd, with ICICI’ s share at 74 per cen
t and Prudential plc. UK’s share of 26 per cent was incorporated o July 20, 2000,
with an authorized capital of Rs 2.3 billion. The paid up capital is Rs 1.9 bill
ion. It commenced commercial operations on December 19, 2000, becoming one of th
e first few private sector players to enter the liberalized arena.
The World Bank, the Government of India and the Indian Industry, to promote indu
strial development in India by providing project and corporate finance to the In
dian industry, established ICICI LTD., in 1944. Since its inception, it has grow
n from a development band to a financial conglomerate and has become one of the
largest public financial conglomerates and has become one of the largest public
financial institutions in India, financing all the major sectors of the economy.
Founded in 1848, Prudential plc. has grown to become one of the largest provider
s of a wide range of savings products for the individual, including life insuran
ce, pensions, annuities, unit trusts and personal banking. It has a presence in
over 15 countries, and manages assets of over US $259 billion (approximately Rs
11, 3956 billion) as of December 31, 1999. in fact, Prudential’s first overseas op
eration was in India, way back in 1923, to establish life and general insurance
branch agencies.
3. BAJAJ ALLIANZ GENERAL INSURANCE
Bajaj Allianz General Insurance Company Limited or Bajaj Allianz Insurance is a
joint venture between two of the most reputed names in the world of insurance -
Bajaj Finserv Limited and Allianz SE. Both of the names are known for their str
ength, expertise and stability in the insurance sector. While Bajaj Finserv Limi
ted holds the 74% of the paid up capital of Rs. 110 crore, Allianz SE holds the
remaining 26%. It can be added here that Bajaj Finserv Limited has very recently
demerged from Bajaj Auto Limited.
Bajaj Allianz Insurance started its journey on May 2, 2001 when it received the
certificate of Registration from Insurance Regulatory and Development Authority
(IRDA) for conducting General Insurance business in India including Health Insur
ance. As on the end of March 2009, the income of Bajaj Allianz Insurance went up
to Rs. 2,866 crore with a growth of 11% over the previous year. It also registe
red a net profit of Rs. 95 crore, highest by any private insurer, in the last fi
nancial year.
4. SBI LIFE INSURANCE COMPANY LIMITED:
This joint venture has 74% capital participation from the state bank of India (S
BI), with Cardiff contributing 26% in the paid capital of Rs. 2.5 billion.
The SBI is the largest bank in the country with more than 9000 branches.
It has seven associate banks and together they have 30% of the Indian market sh
are. It net worth as on March 2000 stood at Rs. 121.46 billion, with a deposit b
ase of Rs. 196.803 billion. The insurance venture, SBI life, is a step aimed at
being a universal bank as the SBI already as subsidiary for housing finance, mer
chant banking, mutual fund and primary dealership in government papers and facto
ring businesses.
BNP paribus, which is one among the three largest banks in Europe, is th
e holding company of Cardiff, its insurance arm. It was set up in 1973 and speci
alized in long term savings, protection products and creditors insurance. In 199
9, its premium income stood at US $ 4 billion, with assets worth over US $ 23 bi
llion under its management. Based in France, it has the expertise for selling in
surance products through bank and as operation in over 20 countries.
5. HDFC STANDARD LIFE INSURANCE COMPANY LTD. :
HDFC Standard Life Insurance Company Ltd. was incorporated o August 14, 2000. HD
FC is the majority stakeholder with an 81.4 per cent stake. Standard Life holds
a stake of 18.6 per cent.
Incorporated in 1977 with a share capital of Rs 100 million, HDFC has since emer
ged as the largest residential mortgage finance institution in the country, rais
ing its capital to Rs 1.19 billion and an asset base of Rs 150 billion. It opera
tes through 75 locations throughout India, and has an international office in Du
bai, UAE, with service associates in Kuwait, Oman and Qatar.
Standard Life, which has been in the life insurance business for the past 175 ye
ars, is Europe’s largest mutual life assurance company. With an asset base of Rs 6
000 billion, it has the distinction of being accorded the ‘AAA’ rating by Standard &
Poor for the past six years.
6. BIRLA SUN LIFE INSURANCE COMPANY LTD. :
The Birla Sun Life Insurance Company, is a 74.26 joint venture between the Adity
a Birla Group and Sun Life Financial Services of Canada, and has an equity capit
al of Rs 1.5 billion.
The Aditya Birla Group is one of India’s largest business houses, with a turnover
of over $4.75 billion and an asset base of $3.8 billion. The Group is a well-div
ersified conglomerate spanning 40 companies spread across 17 countries.
Sun Life Assurance Co., of Canada, established in 1871, has a strong presence in
Canada, the USA, the Philippines, Hong Kong, and the UK. Its major lines of bus
iness are life insurance, annuities and mutual fund and investment services. In
Canada, the company is especially strong in the corporate life and health insura
nce and savings markets.
7. AVIVA LIFE INSURANCE COMPANY LTD. :
The Aviva Life Insurance Company, a joint venture between Dabur India and CGU, a
wholly owned subsidiary of Aviva Plc., is capitalized at Rs 1 billion.
Established in 1884, Dabur India Limited is one of India’s oldest groups of compan
ies, with interests in ayerdedic specialties, pharmaceuticals, personal care and
health-care products, the annual sales turnover of the group is over Rs 12 bill
ion.
Aviva plc. is the largest life and general insurance group of the UK, and the wo
rld’s seventh largest insurer with world-wide premium income and retail investment
sales of ₤28 billion and more than ₤200 billion in assets under management. Aviva p
lc. is the holding company of the Aviva group of companies which is involved in
the life assurance business, log-term savings, all classes of general insurance
business and fund management.
8. MAX NEW YORK LIFE INSURANCE COMPANY LTD. :
Max New York Life is a partnership between Max India Limited, one of India’s leadi
ng multi-business corporations and New York Life. The paid-up capital of the joi
nt venture is Rs 2.5 billion.
Max India has significant presence in the most vital and fast growing sectors of
the Indian economy, viz., telecommunication services, Electronic components dis
tribution, specialty plastic films and bulk pharmaceuticals. It is also active i
n the emerging knowledge-based areas of health care, financial services and IT.
In 1998, New York Life International Inc., had total revenues amounting to almos
t US $20 billion, and was rated the number one provider of new life insurance po
licies in the USA. In the same year, New York Life was also the leader in insura
nce sales to the growing Indian community in the USA.
9. OM KOTAK MAHINDRA LIFE INSURANCE COMPANY LTD.
The joint venture OM KOTAK MAHINDRA life insurance started off with an initial c
apital of Rs. 1.5 billions, with a 74:26 stake between Kotak Mahindra life insur
ance and old mutual plc.
Kotak Mahindra finance ltd is one of the India’s premier financial groups, with a
range of highly specialized products and services, and a very large client base
of Indian and international firms. Starting as are non-product company in the mi
d eighties, it has evolved into a full service financial conglomerate, covering
auto and consumer finance, assets management, investment banking, securities tra
ding and equity research. It operates across 30 centers in India and in Dubai, L
ondon, New York and Mauritius.
Old mutual plc. is a leading global financial services provider, providing a br
oad range of financial services in the area of insurance, assets management and
banking. It is a leading life insurer in South Africa, with more than 30% market
share.
10. TATA AIG LIFE INSURANCE COMPANY LIMITED:-
Tata AIG life insurance company ltd, is capitalized at Rs. 1.85 billion of which
74% has been brought in by Tata sons and 26% by the American partner.
Tata enterprise with 82 companies, spread over 7 sectors, have an annual turnove
r exceeding US $ 8.8 billion. The Tata group has made pioneering contribution in
various fields including insurance, aviation, iron and steel. The group has had
a long association with India’s insurance sector, having set up the largest insur
ance company viz. new Indian assurance company ltd. (1919), prior to the nationa
lization of this sector.
The American insurance group (AIG) is the leading US based international insuran
ce and financial services organization and the largest underwriter of commercial
and industrial insurance in the USA. Its member companies write a wide range of
commercial and personal insurance products in over 130 countries and jurisdicti
on throughout the world.
4.4 Trends In Life Insurance Business—Unit Linked Insurance Plans
It wasn’t too long back when the good old endowment plan was the preferred way to
insure oneself against an eventuality and to set aside some savings to meet one’s
financial objectives. The traditional endowment policies were investing funds ma
inly in fixed interest Government securities and other safe investments to ensur
e the safety of capital. Thus the traditional emphasis was always on security of
capital rather than yield. However, with the inflationary trend witnessed all o
ver the world, it was observed that savings through life insurance were becoming
unattractive and not meeting the aspirations of the policyholders.
The policyholder found that the sum assured guaranteed on maturity had really de
preciated in real value because of the depreciation in the value of money. The i
nvestor was no longer content with the so called security of capital provided un
der a policy of life insurance and started showing a preference for higher rate
of return on his investments as also for capital appreciation. It was, therefore
found necessary for the insurance companies to think of a method whereby the ex
pectation of the policyholders could be satisfied. The object was to provide a h
edge against the inflation through a contract of insurance. Decline of assured r
eturn endowment plans and opening of the insurance sector saw the advent of ULIP
s on the domestic insurance horizon. Today, the Indian life insurance market is
riding high on the unit linked insurance plans.
4 ULIPs and its Features
Unit linked insurance plans (ULIPs) are insurance plans that combine the benefit
of investment with insurance. They give the investor an option to put a part of
their premium in various investment portfolios and derive the benefits dependin
g upon the performance of the funds chosen by them. ULIPs were launched at an op
portune time when stock markets had just taken off. Being market- linked, they w
ere major beneficiaries of the secular rise in stock markets.
ULIPs have gained high acceptance due to the attractive features they offer. The
se include:
1. Flexibility
1.1. Flexibility to choose Sum Assured.
1.2. Flexibility to choose premium amount.
1.3 Option to change level of Premium even after the plan has started (Top up fa
cility).
1.4. Flexibility to change asset allocation by switching between funds.
2. Transparency
2.1. Changes in the plan & net amount invested are known to the customer.
2.2. Convenience of tracking one’s investment performance on a daily basis.
3. Liquidity
3.1. Option to withdraw money after few years (comfort required in case of exige
ncy).
3.2. Low minimum tenure.
3.3. Partial / Systematic withdrawal allowed
4. Fund Options
4.1. A choice of funds (ranging from equity, debt, cash or a combination).
4.2. Option to choose fund mix based on desired asset allocation.
Traditionally, endowment plans have invested in government securities, corporate
bonds and the money market. ULIPs however, have a broader choice. They invest a
cross the board in stocks, government securities, corporate bonds and money mark
et instruments. Of course, within a ULIP there are options wherein equity invest
ments are capped. The common types of funds available in ULIPs are Bond Fund, Pr
otector Fund, Secure Fund, Balanced Fund, Growth Fund, Index Fund, and Enhancer
Fund. Depending on one’s risk appetite one can choose the fund. However the invest
ment risk is borne by the investor.
The common type of charges, fees and deductions in ULIPs are Premium allocation
charges, Mortality charges, Fund management charges, Policy/administration charg
es, Surrender charges, Fund switching charges and Service tax.
Insurance companies are required to declare the NAV of various ULIPs on a daily
basis. The movement of NAV enables the policy holder to assess the performance o
f his investment and accordingly make intervention in the form of switches, with
drawal and top-ups. After opening up of the insurance sector, Unit-linked insura
nce policies (ULIPs) have become increasingly popular.

Analysis of figures for the last three years indicates the growth pattern of uni
t linked business.
TRENDS IN LIFE INSURANCE BUSINESS—UNIT LINKED INSURANCE PLANS
Unit Linked Business (%) Non-linked Business (%)
2006-07 2007-08 2008-09 2006-
07 2007-08 2008-09
Private 82.30 88.75 90.33 17.70
11.25 9.67
LIC 29.76 46.31 62.31 70.24
53.69 37.69
Industry 41.77 56.91 70.30 58.23
43.09 29.70

Competitive advantage of insurance companies:

The LIFE insurance industry has witnessed limited competition till now. But with
the entry of private sector insurance companies the scene will change and compe
tition among various insurance companies will become the name of the game. Insur
ance companies have to face and deal with competition not only in terms of inves
tments performance but also customer service.
Hence an aggressive competitive strategy is the need of the day for the insuran
ce companies in order to gain a competitive niche, survive and proliferate in th
e insurance industry. To be successful in one’s area of business in the presence o
f competitive forces the following model may adopt to fulfill the purpose.
Value chain –the competitive advantages of a firm:
Michael porter, an authority on competitive strategy and competitive advantage,
argues that competitive advantage grows fundamentally out of the value; a firm i
s able to create for its buyer that exceeds the cost of creating it. According t
o him, “competitive advantage stems from many discrete activities can contribute t
o a firm’s relative cost position and creates a basis for differentiation. A syste
matic way is necessary for analyzing the source of competitive advantages.
The concept developed by Michel porter is ‘value chain’ which represents graphically
the activities of the firm and their interlink ages. The value chain reflects t
he history of the firm, its strategy for the future, approach to which it belong
s. The value chain may be similar across firm in the same industry, but differen
t among competitors. Differences among competitors are key source of competitive
advantages.

Value chain-the valuable ingredients:

Value chain of a firm as proposed in general has five generic catego
ries of primary activities for a firm involved in competition in any industry. T
hese categories can be represented in the diagram.
Firm infrastructure

MARGINS

Human Resource Management

Technology Development
Procurements
In Bound
Logistic Operations Out bound logistic Marketing and sales
Services
Wherever there is uncertainty there is risk. We do not have any control over unc
ertainties which involves financial losses. The risks may be certain events lik
e death, pension, retirement or uncertain events like theft, fire, accident, etc
.
Insurance is a financial service for collecting the savings of the public and pr
oviding them with risk coverage. The main function of Insurance is to provide pr
otection against the possible chances of generating losses. It eliminates worrie
s and miseries of losses by destruction of property and death. It also provides
capital to the society as the funds accumulated were invested in productive head
s. Insurance comes under the service sector and while marketing this service, du
e care is to be taken in quality product and customer satisfaction. While market
ing the services, it is also pertinent that they think about the innovative prom
otional measures. It is not sufficient that you perform well but it is also impo
rtant that you let others know about the quality of your positive contributions.
The creativity in the promotional measures is the need of the hour. The adverti
sement, public relations, word of mouth communication needs due care and persona
l selling requires intensive care.
INSURANCE MARKETING: The term Insurance Marketing refers to the marketing of Ins
urance services with the aim to create customer and generate profit through cust
omer satisfaction. The Insurance Marketing focuses on the formulation of an idea
l mix for Insurance business so that the Insurance organisation survives and thr
ives in the right perspective.
MARKETING --MIX FOR INSURANCE COMPANIES: The marketing mix is the combination of
marketing activities that an organisation engages in so as to best meet the nee
ds of its targeted market. The Insurance business deals in selling services and
therefore due weight-age in the formation of marketing mix for the Insurance bus
iness is needed. The marketing mix includes sub-mixes of the 7 P s of marketing
i.e. the product, its price, place, promotion, people, process & physical attrac
tion. The above mentioned 7 P s can be used for marketing of Insurance products
, in the following manner:
1.Product:
A product means what we produce. If we produce goods, it means tangible product
and when we produce or generate services, it means intangible service product. A
product is both what a seller has to sell and a buyer has to buy. Thus, an Insu
rance company sells services and therefore services are their product.
In India, the Life Insurance Corporation of India (LIC) and the General Insuranc
e Corporation (GIC) are the two leading companies offering insurance services to
the users. Apart from offering life insurance policies, they also offer underwr
iting and consulting services. When a person or an organisation buys an Insuranc
e policy from the insurance company, he not only buys a policy, but along with i
t the assistance and advice of the agent, the prestige of the insurance company
and the facilities of claims and compensation. It is natural that the users expe
ct a reasonable return for their investment and the insurance companies want to
maximize their profitability. Hence, while deciding the product portfolio or the
product-mix, the services or the schemes should be motivational. The Group Insu
rance scheme is required to be promoted, the Crop Insurance is required to be e
xpanded and the new schemes and policies for the villagers or the rural populat
ion are to be included. The Life Insurance Corporation has intensified efforts
to promote urban savings, but as far as rural savings are concerned, it is not t
hat impressive. The introduction of Rural Career Agents Scheme
has been found instrumental in inducing the rural prospects but the process is a
t infant stage and requires more professional excellence. The policy makers are
required to activate the efforts. It would be prudent that the LIC is allowed to
pursue a policy of direct investment for rural development. Investment in Gover
nment securities should be stopped and the investment should be channelized in p
rivate sector for maximizing profits. In short, the formulation of product-mix s
hould be in the face of innovative product strategy. While initiating the innova
tive process it is necessary to take into consideration the strategies adopted b
y private and foreign insurance companies.
2.Pricing:
In the insurance business the pricing decisions are concerned with:
i) The premium charged against the policies,
ii) Interest charged for defaulting the payment of premium and credit facility,
and
iii) Commission charged for underwriting and consultancy activities. With a view
of influencing the target market or prospects the formulation of pricing strate
gy
becomes significant. In a developing country like India where the disposable inc
ome in the hands of prospects is low, the pricing decision also governs the tran
sformation of potential policyholders into actual policyholders. The strategies
may be high or low pricing keeping in view the level or standard of customers o
r the policyholders. The pricing in insurance is in the form of premium rates. T
he three main factors used for
determining the premium rates under a life insurance plan are mortality, expense
and interest. The premium rates are revised if there are any significant change
s in any of these factors.
• Mortality (deaths in a particular area): When deciding upon the pricing strategy
the average rate of mortality is one of the main considerations. In a country l
ike South Africa the threat to life is very important as it is played by host of
diseases.
• Expenses: The cost of processing, commission to agents, reinsurance companies as
well as registration are all incorporated into the cost of installments and pre
mium sum and forms the integral part of the pricing strategy
• Interest: The rate of interest is one of the major factors which determines peop
le s willingness to invest in insurance. People would not be willing to put thei
r funds to invest in insurance business if the interest rates provided by the ba
nks or other financial instruments are much greater than the perceived returns f
rom the insurance premiums.
3.Place:
This component of the marketing mix is related to two important facets --
i) Managing the insurance personnel, and
ii) Locating a branch. The management of agents and insurance personnel is found
significant with the viewpoint of maintaining the norms for offering the servic
es. This is also to process the services to the end user in such a way that a ga
p between the services- promised and services -- offered is bridged over. In a m
ajority of the service generating organizations, such a gap is found existent wh
ich has been instrumental in making worse the image problem. The transformation
of potential policyholders to the actual policyholders is a difficult task that
depends upon the professional excellence of the personnel. The agents and the ru
ral career agents acting as a link, lack professionalism. The front-line staff a
nd the branch managers also are found not assigning due weight-age to the degene
ration process. The insurance personnel if not managed properly would make all e
fforts insensitive. Even if the policy makers make provision for the quality upg
rading the promised services hardly reach to the end users.
It is also essential that they have rural orientation and are well aware of the
lifestyles of the prospects or users. They are required to be given adequate inc
entives to show their excellence. While recruiting agents, the branch managers n
eed to prefer local persons and provide them training and conduct seminars. In a
ddition to the agents, the front-line staff also needs an intensive training pro
gram to focus mainly on behavioral management. Another important dimension to th
e Place Mix is related to the location of the insurance branches. While locating
branches, the branch manager needs to consider a number of factors, such as smo
oth accessibility, availability of infrastructural facilities and the management
of branch offices and premises. In addition it is also significant to provide s
afety measures and also factors like office furnishing, civic amenities and faci
lities, parking facilities and interior office decoration should be given proper
attention. Thus the place management of insurance branch offices needs a new vi
sion, distinct approach and an innovative style. This is essential to make the w
ork place conducive, attractive and proactive for the generation of efficiency a
mong employees. The branch managers need professional excellence
to make place decisions productive.
4. Promotion:
The insurance services depend on effective promotional measures. In a country li
ke India, the rate of illiteracy is very high and the rural economy has dominanc
e in the national economy. It is essential to have both personal and impersonal
promotion strategies. In promoting insurance business, the agents and the rural
career agents play an important role. Due attention should be given in selecting
the promotional tools for agents and rural career agents and even for the branc
h managers and front line staff. They also have to be given proper training in o
rder to create impulse buying.
Advertising and Publicity, organisation of conferences and seminars, incentive t
o policyholders are impersonal communication. Arranging Kirtans, exhibitions, pa
rticipation in fairs and festivals, rural wall paintings and publicity drive thr
ough the mobile publicity van units would be effective in creating the impulse b
uying and the rural prospects would be easily transformed into actual policyhold
ers.
5. People:
Understanding the customer better allows to design appropriate products. Being a
service industry which involves a high level of people interaction, it is very
important to use this resource efficiently in order to satisfy customers. Traini
ng, development and strong relationships with intermediaries are the key areas t
o be kept under consideration. Training the employees, use of IT for efficiency,
both at the staff and agent level, is one of the important areas to look into.
6. Process:
The process should be customer friendly in insurance industry. The speed and acc
uracy of payment is of great importance. The processing method should be easy an
d convenient to the customers. Installment schemes should be streamlined to cate
r to the ever growing demands of the customers. IT & Data Warehousing will smoot
hen the process flow. IT will help in servicing large no. of customers efficient
ly and bring down overheads. Technology can either complement or supplement the
channels of distribution cost effectively. It can also help to improve customer
service levels. The use of data warehousing management and mining will help to f
ind out the profitability and potential of various customers product segments.
7. Physical Distribution:
Distribution is a key determinant of success for all insurance companies. Today,
the nationalized insurers have a large reach and presence in India. Building a
distribution network is very expensive and time consuming. If the insurers are w
illing to take advantage of India s large population and reach a profitable mass
of customers, then new distribution avenues and alliances will be necessary. In
itially insurance was looked upon as a complex product with a high advice and se
rvice component.
Buyers prefer a face-to-face interaction and they place a high premium on brand
names and reliability. As the awareness increases, the product becomes simpler a
nd they become off-the-shelf commodity products. Today, various intermediaries,
not necessarily insurance companies, are selling insurance. For example, in UK,
retailer like Marks & Spencer sells insurance products. The financial services i
ndustries have successfully used remote distribution channels such as telephone
or internet so as to reach more customers, avoid intermediaries, bring down over
heads and increase profitability. A good example is UK insurer Direct Line. It r
elied on telephone sales and low pricing. Today, it is one of the largest motor
insurance operator.
Technology will not replace a distribution network though it will offer advantag
es like better customer service. Finance companies and banks can emerge as an at
tractive distribution channel for insurance in India. In Netherlands, financial
services firms provide an entire range of products including bank accounts, moto
r, home and life insurance and pensions. In France, half of the life insurance s
ales are made through banks. In India also, banks hope to maximize expensive exi
sting networks by selling a range of products. It is anticipated that rather tha
n formal ownership arrangements, a loose network of alliance between insurers an
d banks will emerge, popularly known as bancassurance.
Another innovative distribution channel that could be used are the non-financial
organisations. For an example, insurance for consumer items like fridge and TV
can be offered at the point of sale. This increases the likelihood of insurance
sales. Alliances with manufacturers or retailers of consumer goods will be possi
ble and insurance can be one of the various incentives offered.

5.3.1 POLITICAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY:

Within India political ambitions and rise of communalism, fissiparous tendencies
are on the rise and may well continue for quite some time to time. Therefore, i
t expected that the insurance companies might consider offering political risk c
overage also. The only area where Indian insurers consider giving cover is with
regard to customs duty change under certain conditions.
Certain type of political risk at the international level has serious implicatio
ns for exporters. The term ‘political risk’ has a wider connotation than commonly un
derstood or assumed. It covers events arising not just from politics, but risks
in the course of international transactions. In this connection, it may be noted
that export credit insurance has evolved out of uncertainties relating to inter
national trade, particularly due to problems arising out of foreign legal jurisd
iction, political changes and currency exchange difficulties faced by many devel
oping countries.
Prohibition for Investment: -
The funds of policyholders are prohibited from being directly / indirectly inves
ted outside India as per section 27 – C.
Manner and conditions of investment: -
Subject to the above provisions contained in Section 27 -/ 27- A / 27 B, the
IRDA may,
• In the interest of the policyholders, specify the time, manner and other conditi
ons of investment by insurer.
• Give specific directions applicable to all insurers for the time, manner and oth
er conditions subject to which the policyholder’s funds should be invested in the
infrastructure and social sectors.
• After taking into account the nature of business and to protect the interest of
the policyholders, issue directions to insurers relating to time, manner and oth
er conditions of the investments provided the latter are given a reasonable oppo
rtunity of being heard.
 Insurance business in rural / social sector: -
All insurers are required to undertake such percentage of their insurance busine
ss, including insurance for crops, in the rural social sector as specified by th
e IRDA. They should discharge their obligations to providing life insurance poli
cies to persons residing in the rural sector, workers in the unorganized sector
or to economically vulnerable classes of society and other categories of persons
as specified by the IRDA.
Capital requirement: -
The paid up equity of an insurance company applying for registration to
carry on life insurance business should be Rs 100 Crores.
Renewal of registration: -
An insurer, who has been granted a certificate of registration, should have the
registration renewed annually with each year ending on March 31 after the commen
cement of the IRDA Act. The application for renewal should be accompanied by a f
ee as determined by IRDA regulations, not exceeding one forth of one percent of
the total gross premium income in India in the preceding year or Rs 5 Crores or
whichever is less, but not less than Rs 50000 for each class of business as per
Section 3-A.
Requirements as to Capital: -
The minimum paid up equity capital, excluding required deposits with the RBI and
any preliminary expenses in the formation of the country, requirement of an ins
urer would be Rs 100 crore to carry on life insurance business and Rs 200 crore
to exclusively do reinsurance business as per Section 6.
Investment of funds outside India: -
Insurers outside India as per Section 27-C cannot invest the funds of po
licyholders.
Insurance business in Rural Sector: -
After the commencement of the IRDA Act, 1999, every insurer would have to undert
ake such percentage of life insurance business in the rural sector as may be spe
cified by the IRDA in this behalf. It is mandatory for the new companies to meet
the obligations relating to the rural and unorganized sector as per section 32-
B.
Power to investigation or inspection: -
The IRDA may, at any time, order in writing a person as investigating authority
to investigate the affairs of any insurer and report to it.
Government has power to change the tax policy against life insurance industry.
• Health insurance rebate,
• Pension saving rebate,
• Mede claim premium rebate,
• P.P.F., E.P.F., NSC all are tax exempted saving,
• All life insurance policy are tax exempted saving ,
• Agricultural income is tax exempted,
• House rent allowances,
• Post office saving,
• Expenses on dreaded diseases are tax exempted.
• Recently there is issue to increase FDI level from 26% to 49%.
Role of the government: -
As insurance is an important service sector, hence it is highly regulated by gov
ernment. Since 1956 insurance sector was highly regulated by government of India
. On March 16, 1999, the Indian cabinet approved on Insurance Regulatory Authori
ty Bills that was designed to liberalize the insurance sector.
Two governments in India have fallen over the issue of liberalization of the ins
urance sector (which was nationalized in 1971). But the government of A.B. Vajpa
yee as gone ahead to announce the liberalization of this sector announcement was
made in November 1998.
Government’s objectives for liberalization of insurance: -
The main objective of opening of insurance sector to the private insurers is as
under:
1. To provide better coverage to the Indian citizens.
2. To augment the flow of long-term financial resources to finance the grow
th of infrastructure.
Important government guidelines for private players for entering into Indian lif
e insurance market:
1. Private companies with a minimum paid-up capital of Rs. 1bn should be al
lowed to enter the industry.
2. No company should deal in both life and general insurance through a sing
le entity.
3. Foreign companies may be allowed to enter the industry in collaboration
with the domestic companies.
4. Postal life insurance should be allowed to operate in the rural market.
5. Only one state level life insurance company should be allowed to operate
in each state.
6. Foreign investors can invest up to 26% of the equity of their joint vent
ure with Indian firms.
Government will prevail on grounds that the Rs. 4.5 billion India needs for infr
astructure development in the five years from 1997-98, cannot materialize if the
insurance sector is not opened up.
BODIES THAT REGULATE THE SECTOR:
For better regulation purpose of the insurance sector the government has establi
shed following bodies;
1. IRA: Insurance Regulatory Authority.
2. IRDA: Insurance Regulatory and Development Authority.
3. TAC: Tariff Advisory Committee.
1. IRA: Insurance Regulatory Authority:
The IRA, under the chairmanship of Rangachary, was set-up in January 1996. the I
RA Bill has to be passed by parliament to make the IRA a statutory body.
Comprehensive legislation aimed at reviewing the insurance Act of 1938 and repea
ling the life insurance corporation Act of 1956 have to be passed.
The IRA is also preparing an internal rating system to screen all applications,
as entry will be in phases. The joint venture status of life insurance companies
(with majority holding of the domestic partner) is likely to be approved by the
parliament. Consensus also seems to be emerging on the minimum of Rs. 1 bn capi
tal stipulations for new insurance companies.
The IRA has stipulated a minimum rural presence for all companies. The exhaustiv
e guidelines have been issued for the appointment of intermediaries (brokers, ag
ents, surveyors and actuaries).
• Feature of IRA:
1. The Bill allowed for up to 26% foreign equity participation in the insur
ance sector.
2. The current India monopoly companies were required to bring down their e
quity holding to 26% within a period of 10 years.
• Government pronouncement:
1. IRA will be sole Authority, which will be responsible for awarding of, l
icenses i.e. little or no government or political interference in licensing proc
ess.
2. No restriction on the number of licenses.
3. No composite license for life insurance business.
4. Licensing to be only on national basis (no city by city approach)
5. IRA allowed for up to 26% foreign equity participation in the life insur
ance sector.
6. The current Indian monopolies companies are required to bring down their
equity holding to 26% within a period of 10 years.
• IRA proposals:
1. New player should start their business within 15-18 months.
2. Trafficking of licenses not to be permitted.
3. IRA to seek business plan with 5-year protection for all applicants.
4. A system of direct brokers to be introduced.
5. IRA to vet top management appointments.
2. IRDA: Insurance Regulatory and Development Authority:-
The Insurance Regulatory and Development Authority, constituted under the IRDA A
ct, 1999, provide for the establishment of an authority to protect the interest
policyholders, to regulate, promote and ensure orderly growth of the life insura
nce industry.
• Business Requirement:-
A company will not be issued a license unless the IRDA is satisfied with the sou
nd financial condition, the general character of management, the volume of busin
ess, the capital structure, earning prospects for the insurers and that the inte
rests of the general public will be served if registration is granted to the ins
urer.
Foreign insurance companies have been allowed to have a maximum 26% share holdin
g. No life insurance company can be registered under the Act unless they have a
paid up capital of Rs. 100 crores. Every life insurer shall deposit with the res
erve bank of India one percent of the total gross premium written in India in an
y financial year, not exceeding Rs. 10 crores.
This amount would not be susceptible to any assignment or charge nor would it be
available for the discharge of any liabilities other than liabilities arising o
ut of policies issued, so long as any such liabilities remain undercharged.
• Investment of Assets:-
Every insurer is required to invest, and keep invested, assets equivalent to not
less than the net liabilities as follows: (a) 25 % in government securities, (b
) a least 25% of the said sum in government securities or other approved securit
ies and (c) the balance in any approved investment rated as “very stron” or more by
reputed rating agencies, which include various debt instruments on which dividen
d on its ordinary shared for the five years immediately preceding or for at leas
t five out of the six or seven years immediately preceding have been paid and wh
ich have priority in payment over ordinary shares of the company in winding up.
The IRDA may in the interest of the policyholder’s directions relation the time, m
anner and other conditions and investments of assets to be held by an insurer. T
he IRDA may also direct the insurer to realize the investment, if it sees the in
vestments to be unsuitable or undesirable. The Act prohibits an insurer from dir
ectly or indirectly investing policyholder funds outside India.
Further, every insurer has to always maintain an excess of the value of his asse
ts over the amount of his liabilities of not less than Rs. 50 crores in the case
of an insurer carrying of life insurance business. If at any time an insurer do
es not maintain the required solvency margin, he is required to submit a financi
al plan, as per directions issued by the IRDA, indicating a plan of action to co
rrect the deficiency within three months.
In order to ensure that the company does not risk the money of the policyholder’s,
the Act provides that an insurer who does not comply with the aforesaid provisi
ons may be deemed to be insolvent and may be would up by the court.
Insurers are required to get an actuary to investigate the financial conditions
of the life insurance business including a valuation of liabilities every year i
n order to ensure continual compliance.
In order to maintain transparency in its dealings, insurers would have to keep s
eparate account relating to funds of shareholders and policyholders.
• Consequences of non-compliance: -
A company failing to comply with the act shall be liable for panel action. Furth
er, IRDA is empowered to investigate into the affairs of the company. Failure to
comply with the directions may lead to cancellation of the license for the comp
any. Also, if the IRDA has reason to believe that a company is doing business in
a manner likely to be prejudicial to the interest of policyholders, it is requi
red to report to the central government.
The central government may base on the report, appoint an administrator to manag
e the affairs of the company. This would act as a further assurance to the consu
mers, as their interests would at all times be a priority and that in the event
that the company acts in the manner prejudicial to their interests, than an admi
nistrator would be appointed to serve their needs.
The court may also wind up the company if it fails to deposit or keep deposits a
s per the requirements of the act or if the continuance of the company is prejud
icial to the interest of the policyholders or public interest. But an insurance
company cannot be wound up voluntarily or on the grounds that by reasons o its l
iabilities it cannot continue its business, except for the purpose of affecting
an amalgamation or a reconstruction of the company. Therefore, a company after i
ssuing a policy cannot escape liability by seeking voluntary winding up.
The four amendments, made in the life insurance Bill by the Lok Sabha, are as un
der:
1. The Insurance Regulatory and Development Authority should give priority
to health insurance.
2. Policyholder’s fund will be invested in the social sector and infrastructu
re. The percent may be specified by the IRDA and such regulations will apply to
all insurers operating in the country.
3. Insurers will be expected to undertake a certain percent of business in
rural areas, and cover workers in the unorganized and informal sectors and econo
mically backward classes.
4. In the event of insurers failing to fulfill the social sector obligation
s, a fine of Rs. 25 lakh would be imposed the first time. Subsequent failures wo
uld result in cancellation of licenses.
3. TARIFF ADVISORY COMMITTEE:
The tariff advisory committee established under the Act is empowered to control
and regulate the rates, terms, and etc. that may be offered by insurers in respe
ct of any risk or of any category of risks. It is provided that in fixing, amend
ing or modifying such rates etc. the committee shall try to ensure as far as pos
sible that there is no unfair discrimination between risk of essentially the sam
e hazard and also that consideration is given to past and prospective loss exper
ience. Every insurer is required to make payment to the TAC of the prescribed an
nual fees.
• Tax Policy And Insurance Sector:
Another factor, which affects the insurance sector, is the tax policy. The tax r
eforms in India are such that it encourages the citizens to invest in the insura
nce sector.
The tax policy of the government is particular relevant for life insurance which
is a long-term contract and inculcates among the policyholders the habit of sav
ing. Taxation of returns on investment influences, investment decisions and high
rates of taxation will discourage the desire to save. Already in India there ar
e complaints that the rates of return on life policies are not what they could b
e. Therefore tax incentives play a vital role in determining the attractiveness
of such policies. Such tax breaks are available in many countries and have helpe
d in the development of their life sector. In western countries the gain from th
e proceeds of a life insurance policy is paid free of tax. Provided the policy s
atisfies certain qualifying conditions. Non-qualifying policies get basic rate t
ax relief, though higher rate taxpayers may still have to pay tax on the gain, a
lthough at a reduced rate. The insurance companies can use such tax concessions
rate. The insurance companies can use such tax concessions to design products fo
r different categories of taxpayers.
The other factors, which affect the insurance sector, are the employment law, an
d government stability. These are the factors, which affect the insurance indust
ry.
• Investment decisions mandated by government:
Insurers are required to fulfill certain social commitments as well. As many of
the social welfare measures companies are not just regulated, but have been mand
ated to hand over a portion of their funds to the state for investment in infras
tructure and for social development through government bonds and securities. In
India, the pattern was, accordingly, prescribed in great detail by the governme
nt. This was not in the form of guidelines, but as a legal obligation under the
insurance Act, 1938.

• Pattern of investment specified for life insurance:

Type of investment Percentage
(1) Government Securities 25%
(2) Government securities or other approved securities Not less than 50%

(3) Approved investments

(a) Infrastructure and social sector
(b) Other govern by exposure norms
Not less than 15%

Not exceeding 35%

5.3.2 ECONOMICAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY
Interest rate at bank and interest rate of P.F variation very much affect to lif
e insurance industry, because people always attract by higher return. Therefore,
they do not prefer lower return policy. Unemployment also affects insurance ind
ustry, because the unemployment people will not have earning, so saving also aff
ect to life insurance sector Life insurance industry will directly affected by E
arthquake, Monsoon, and Natural calamity. Because of these events turns into lot
s of death, so the life insurance companies have to pay claim against policy. In
fant mortality rate and maternity mortality rate are also affecting to life insu
rance. Typical Indian want luxurious product against low income, so that they pr
efer installment or annuity (EMI), so that they may not have extra saving to inv
est in life insurance.
Adequacy of capital:
Capital adequacy is a matter of attention in view of the nature of the life insu
rance business, where in the case a contingency arises, the insurers should be i
n a position to meet its long-term contractual obligations and pay up the dues o
r claims. In that sense, life insurance is a capital-intensive business and must
be backed by an adequate capital base on the part of the owners and the compani
es should not be running their business purely on other people’s money. So minimum
start up amounts and long running capital adequacy norms are absolutely essenti
al, in consideration of this, the Malhotra committee suggested and subsequently
the IRDA stipulated a minimum capital base of Rs 1 bn for any entity wanting to
enter the life insurance business.
Increased Economical Activity:
Although economic activity has slowed down since 1996, sooner or later there wil
l be an upswing. The increase in the growth rate in various sectors accompanied
by the growth in trade in the context of fulfilling of commitments to the WTO wi
ll signal a growth in the demand for insurance covers of new types. For example,
aviation insurance cover will be on an increasing scale in view of the need for
more frequent air travel for men and for transporting materials. This would nec
essitate substantial property, liability and personal insurance.

Interest Rates: -
During the last years the government has rationalized interest rate creates bett
er business opportunities for the life insurance sector because the substitute p
roducts are graded lower by the customers. On the other hand the value of the ho
ldings of the insurance companies will increase.
Rationalized of the interest rates is still expected, and it is an opportunity f
or the company.
Low interested rates mean low investment return for reinsures causing negative i
mpact on their overall net profitability as pricing is to a certain extent sensi
tive to interest rate fluctuations. The negative impact therefore, lead to high
er pricing level for reinsures in order to sustain their profitability. But, in
reinsurance market, which is characterized by over capitalization a resulting in
tense competition. The opportunity for such rate increases practically remains v
ery slim and even non-existent. As a result, reinsures are under tremendous pres
sure to cut their operational cost to safeguard profitability. Furthermore, low
interest rates discourage and even prevent any outflow of capital from reinsuran
ce business to capital markets, causing current over capitalization in reinsuran
ce market to continue. A positive outcome is that low inflation rates, if sustai
ned for a considerable period, usually bring some relief to reinsures from the r
esulting lower than forecast claims payment. Also, this can lead stability to re
insures administrative cost.
As interest rates fall, bond value rise, and insurers feel richer. On the liabil
ity side, reserves are not explicitly discounted so lower interest rates do not
increase reserves, lower inflation means lower expected future claims payments w
hich lowers required reserves. This in turn increase surplus, again allowing ins
urers to feel richer. Therefore, low interest rates and low inflation result in
higher assets, lower liabilities, hence greater surplus and greater risk capacit
y resulting in less demand for, and greater surplus of reinsurance.
Low interest rates and low inflation reduce the ability of reinsures to off set
technical losses by using financial products and should, as a consequences, forc
e market competition downloads. However, this will also serve to weaken the bala
nce sheets of insurers and create an increase in the demand for balance sheet pr
otections. Lastly, these conditions move risk from the liability side of the bal
ance sheet to the asset side while actually generating new needs for cover.

Inflation rate: -
Inflation can also be one of the causes to change the scenario of the insurance
sector. High inflation for instance, would tend to reduce the insurance business
, particularly life, because the real value of the money paid back to the policy
holder on maturity of the policy would go down and would, therefore, lose its at
traction for the investor. At the most, the insuring public may prefer pure risk
plans (terms insurance), which have a low premium outlay.
The response to an inflationary situation will depend on what benefit the insure
d is looking for. In a situation of high inflation, clients would prefer policie
s where the savings portion is periodically returned while the risk portion is m
aintain for the duration of the contract. Those who prefer risk protection are l
ikely to opt for long term policies, which may also be preferred because they ar
e likely to be low premium policies. A flexible system, under which the sum insu
red, is increased from time to time so that the real value of the cover is maint
ained, and could give a boost to the market under conditions of high inflation.
Fortunately, the rate of inflation in India has been contained to less than 5 pe
rcent for a fairly long time and unless it goes out of hand, it is not likely to
dampen the market.
Market related factors:
These are the factors, which governs the entire life insurance sector. This incl
udes internal as well as the external factors. We have seen the various factors
like technological, economical and will see the political and government factors
, environmental factors and competitive analysis of insurance sector in the next
session.
These all factors have changed the trend of life insurance sector, which is show
n in the following figure.
Stage 1
Stage 2 Stage 3 Stage 4
Closed market,
Entry is controlled by state. Barriers to entry are high expertise to operate
is essential, license can be obtained. Barriers to entry reduced systems expert
ise can be brought. Entry costs are low and capital requirements are same fo
r all.

® ® ® ®

From the above figure we can see that now day’s strength of brand is very importan
t aspect for the success in this sector. Of course you should have strong distri
bution channel without which growth is not possible.
Customer satisfaction: -
Since the customer is the focus of any service industry, every such industry con
tinuously strives for greater variety and better quality of products, improvemen
t in its delivery system, cost effectiveness, easy access, and quick response to
perceived needs – in short qualitatively superior service. Indian life insurance
companies already have a sizable line up of the products. The difference between
them and the foreign operators perhaps lies in the service provided, because th
ere is still not enough concern on the part of the Indian companies, with custom
er satisfaction, on time renewals, claims settlements, etc. if high standards ha
ve been achieved else where, it is not impossible to attain the same in India to
o.
The concept of “sales” is now redefined as a long – standing relationship. The relatio
nship does not end with the conclusion of the transaction, but has to be durable
and of a long term nature. Hence, improved in performance of the company will n
ot be synonymous with only basic cost reduction or larger business, but the new
measure of performance will be set in terms of service to the customer. One can
anticipate greater insistence from pressure groups like customer forums to keep
customer satisfaction at the top of the list of priorities of the insurers.

5.3.3 SOCIO-CULTURAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY:

The basic social factors that affect the life insurance sector are as under: -
Population
Life style
Educational level
Level of earning
 Societal benefits
These are the major social factors, which affect the life insurance sector. We w
ill discuss all of them in brief>
Population:
Growth in the population is a major factor pushing up the demand. It is also goi
ng to exert a special influence on the life insurance market in other ways. Apar
t from exerting pressure on demand for goods and services, and through that, ill
effects of uncontrolled growth of population also could spur the growth of dema
nd. For example, overcrowding in public places of entertainment, public support,
or too many vehicles on the road can result in hazards like stampedes and pollu
tion, which require covers and still are not sold on a large scale today. Thus t
he positive as well as the negative aspects of population growth are going to sp
ur demand.
Life style:
The peculiar lifestyle of a country or an age also influences the insurance busi
ness. Change therein produces different demands for life insurance. For e.g. All
over the world, family size is shrinking and the fact that in decades to come,
both presents are more frequently likely to work outside the home will mean that
there could be a greater possibility of property loss. Similarly, a larger numb
er of vehicles on the roads for people commuting to their jobs or business would
mean larger incidence of accidents. This will increase the demand for life insu
rance products.
Of course, there is also the other possibility that wherever it is possible, som
e people will try to spend a part of their time working at home either because t
hey would like to be with their families or because they find it more convenient
. Activities like life insurance and financial services are particularly well su
ited for such arrangements.
With time becoming scarcer for most people who pack in a full day, there is a hi
gher demand for convenience and service. Companies will respond by trying to sho
rten the transaction time for the delivery of products and services and creating
distribution systems that can reach clients wherever they are and whenever they
want to use them, so as to ensure convenient access to service providers.
In recent times, there has been a surge in the high end business of the LIC. For
instance, as against 90 policies each worth more than Rs 10 million in 1999-200
0, the number was as high as 900 policies in the next year. Or again, the number
of jeevan shri policies jumped from 88,000 to a total of 2,33,000 policies in t
he same period.
However, consumers’ behavior cannot be adequately and accurately predicted. The yo
unger generation is overwhelmingly influenced by consumerism. If this trend cont
inues or increases with increasing income, there will be fewer propensities to s
ave or insure, as a result of which the increasing purchasing poser may not be r
eflected in the life insurance market.
Crumbling social values, the deteriorating law and order situation, the growing
incidence of crime, extortion, abduction, etc., are posing a new category of ris
ks which need to be covered through suitably designed policies.
Thus these are how changing life style of the citizens is affecting the life ins
urance industry.
Level of education:
India is one of the developing countries: the level of education is very low her
e. The literacy rate is very poor. More than 50% of the population is still uned
ucated or more or less not educated. Thus the people are not able to understand
the concept of the life insurance. Among the educated people the quality of the
education is still a big question mark. Thus the awareness is not created and it
has become a big challenge for the industry. Thus one of the factors, which aff
ect the life insurance sector, is low level of education.
 Level of earning:
Another factor, which affects the life insurance sector, is the level of earning
. In India the rule of 80-20 is working. The 80% of the total population is havi
ng the 20% of the wealth and the 20% of the total population is having 80% of to
tal wealth. Thus the richer are richer and poorer are poorer. Due to this the li
fe insurance sector is affected very much.
Societal benefits:
In view of the fact that large sections of India have inadequate life insurance
cover, an important social responsibility of the government relates to spreading
it far and wide. In addition, the government attempts to extent life insurance
with certain social obligations in view in both urban and the rural areas throug
h such means special schemes for the weaker sections, and by tilting of the life
insurance companies’ investments in favour of social developments.
The social changes emerging in the country provide opportunities for insurers to
sell financial services products such as family health care programmed, retirem
ent plans disability insurance, long-term care for senior citizens and different
employee benefit plans.
It is not the total population but the insurable population which is material fo
r the conclusion of potential. Apart from the usual demographic and other well k
nown factors such as age group, income level, sex-wise distribution, and literac
y level, a realistic assessment of this potential has to be based on several oth
er relevant factors. Many invisible factors like religious faiths and social val
ues too need to be considered. As such, there is considerable difficulty in accu
rately estimating the potential and crude estimates can be misleading. The estim
ate will also vary according to the criteria used to measure if.
In principal, every individual is a potential candidate for life insurance. In r
eality, financial status limits this potential, not only because of the practica
l consideration of the insurable worth of a person to the insurer in financial t
erms, but more so due to the prospect’s capacity to pay life insurance premium aft
er meeting other pressing needs. Again, there are many practical factor affectin
g ‘ insurability” such as old age, past and present illness, and physical and mental
impairments.
In addition, the cost of reaching out to a very large number of customers, if th
ey are dispersed, becomes important. In that sense, the cost and profitability o
f exploiting the potential, which is otherwise attractive, limit the opportunity
. The sheer size of the numbers, there fore is not crucial itself.
For assessing the practical business potential of life insurance, the eligible p
opulation needs to be “Qualified” in relation to other factors including those menti
oned above. Thus, in the opinion of some experts, out of the population in the i
nsurable age group,
Only the main workers (i.e., excluding marginal workers) with adequate income ma
y be considered as the actual insurable population.
The population in the age group 15-55 is usually regarded as the insurable popul
ation, since this can be considered as the main “active” age group ( in the sense of
working, earning. And supporting others), and beyond this range life risk may b
e considered to be not worth insuring.
There is one opinion, which suggests that in our country the age group 15-55 as
the base is not totally suitable. Due to various factors including the unemploym
ent problem, real earning starts from around the age of 25 for salaried persons.
For others, particularly small entrepreneurs, traders and businessman, the star
ting age is a little higher. Only in the affluent sector of society life insuran
ce can be taken before personal earning starts. Thus, number wise life insurance
below the age of 25 is not so significant (although amount wise it need not be
so). On the other hand, people over the age of 50 rarely apply for fresh life in
surance, mainly because in India the normal retirement age is around 60 years. A
lso, a high percentage of the population in the lower income group does not rema
in “insurable” after the age of 50. thus, in our country the practical age range for
 insurable population actually narrows down to 25 to 50.

5.3.4 TECNOLOGICAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY:

Internet as an intermediary in the current Indian market customer is not aware a
bout the intrinsic value of insurance. He thinks of insurance only in the mount
of March as a tax saving measure. The security provide by an insurance cover is
rarely thought about. In such a scenario Internet can be an effective medium for
educating the consumers about insurance. It serves as a single window for disse
minating product, process and procedural information to the consumers.
Product development and target marketing through the Internet: with increase in
the number of insurance companies there will be a need for market segmentation a
nd subsequently product designed for each of them. In such a scenario Internet c
an be a effective channel for pushing product specific information to a particul
ar market segment. Consumer feedback about a particular product as well as sugge
stions for different types or covers can also be generated through the Internet.
Retail marketing is a commonly expected concept and the providers of the retail
products and service will try out for larger market and market share. There woul
d be cut through competition and the real benefit would be to the customers in t
erms of better products, distribution, pricing, post transaction service and tec
hnology. Technology will perhaps be the single largest driver of the retail thru
st. The entire strategy will evolve around the absolute ability of the organizat
ion. The customer will demand for greater convenience of excess to the product/
service and all at low cost of delivery. There fore the use of technology and sp
ecifically the Internet with realigned strategies would be one of the key factor
s to success. Constraints of locations, timing and accessibility would not be a
hurdle for either customers or businesses.
Maintaining the database
The most important facto that is affecting the insurance industry is the marinat
ing the database of the customers. The insurance industry having a huge list of
the customers.
In order to maintain it in manual format it is really the work of stupidity. Wit
h the change in time the computers has taken the work of this things. Thus with
the development of the technology it has becoming possible to maintain such huge
database very easily. A person can switch over to the computer and get the deta
ils of the customer very easily. Thus maintaining the database has really become
easy due to the development in technology.
E-business insurance in India: -
The Internet has played a vital role in transforming the business of the 21st ce
ntury. Computers are now being used extensively for creating a storing data, inf
ormation with the help of complex and sophisticated technological tools in every
kind of business. This change having been widely accepted, the advantages are n
umerous such as fast processing improved. Efficiency, cost reduction among sever
al other benefits. However, with every positive change, there is an evil attache
d and technology is no exception. In technical is an evil attached and technolog
y is no exception. In technical terms, increased sophistications of technology b
rings with it, an increased factor of risk involved. The risk can be of various
attributes, for example, the risk of data being lost due to a virus attack, the
theft of important and confidential information and so on, which ultimately resu
lts in losses for the business entity. With this change in the business process,
insurers have to devise new methods for assessing, underwriting and servicing c
laims for the so-called e-business insurance.
Insurers face challenges to ascertain risks, in order to quantify them because s
uch risks don’t have any past data, which makes it all the more difficult for actu
aries. Moreover, what financial impact a particular risk can have is very diffic
ult to be determined. For example, if some hackers obtain credit card informatio
n of few customers, it’s a loss for banks, their credibility, customers and also t
heir brand. Will an insurance policy cover all of this is million dollar questio
n hence; the difficulty is to design a cover first of all, which really answers
the needs of customers. But even after designing and pricing such products with
difficulty, the challenge to underwrite and handle claims for such policies rema
ins existent.
Impact on distribution channels: -
Distribution channels are the most important part of the insurance industry. The
scenario is continuously changing in this industry. In future the customers are
expected to be more technology – oriented, better informed, more knowledgeable an
d more demanding. The insurers will have to offer all types of channel to custom
er and it is the customer who will have the right to choose the channel suiting
him/ her. Dual income families with young children, singles with long working da
ys and flexi-timers all demand high level of sophistication and ease when it com
es to service. Hence the companies have to be very careful and cautious in cater
ing to the needs of these customers who provides a good amount of business to th
e insurers.
Thanks to the technological advancement and increased de regulation and sophisti
cation, the carriers and producers can now reach the customers in different ways
as has been proved in the US market and other developed nations the web is exte
nsively used for the access of information but when it comes to the purchase of
policy, the offline mode is preferred. The private players in India seems to hav
e identified this and have put substantial information on there websites regardi
ng policies, quotes and contact information among other routine stuff.

One important component of industry and competitive analysis involves delving in

to the industry’s competitive process to discover what the main sources of competi
tive pressure are and how strong each competitive force is. This analytical step
is essential because managers cannot devise a successful strategy without in-de
pth understanding of the industry’s competitive character.
Even though competitive pressures in various industries are never precisely the
same, the competitive process works similarly enough to use a common analytical
framework in gauging the nature and intensity of competitive forces.
The state of competition in an industry is a composite of five competitive force
s.
1. The rivalry among competing sellers in the industry.
2. The potential entry of new competitors.
3. The market attempts of companies in other industries to win customers ov
er to their own substitute products.
4. The competitive pressures stemming from supplier-seller collaboration an
d bargaining.
5. The competitive pressures stemming from seller-buyer collaboration and b
argaining.
Figure shows porter’s five-forces model of competition.

The five-force model developed by porter in 1980, guides the analysis of an orga
nization’s, Environment and attractiveness of the life insurance industry. The nat
ure and degree of competition in an industry hinge on five forces, which include
the threat of substitute, bargaining power of buyers, the bargaining power of s
uppliers, the threat of new entrants and degree of rivalry between the existing
competitors.
5.4.1 Threat of new entrants: -
The future of life insurance market scenario will be marked by the active presen
ce of many international players, beside several Indian players. As far as life
insurance industry there would be fewer entries due to more specialized firm
with lower expenses ratios and better capitalization.
Threat of entry is determine by the entry barriers which act to prevents firms f
rom entering the industry. In life insurance industry entry barriers is moderate
so that it becomes profitable, it attracts new entrants, thereby increasing the
number of competitors.
The Indian market is highly brand oriented, it is difficult to introduce new bra
nd. The acceptability of new brand is also very low.
The capital requirement in life insurance is Rs. 100 crores, which attract more
companies to invest in. promoters, can hold paid up equity capital up to 26% in
an Indian insurance company. In case promoters hold more than 26% of the paid up
equity capital, they shall divest the excess shares in the phased manner within
a period of ten year.
Tax exemption structure makes the industry attractive.
High level of competition in life insurance industry become giant player came in
to the market.
High profit in life insurance industry act as a magnet to firms outside the indu
stry motivating potential entrants to commit the resources needed to hurdle entr
y barriers.
But again due to potential market, private giants and international player try t
o enter in to the market in the large scale with their proper homework with cust
omized and products too. An Indian private are well – developed and has capacity t
o face challenges, foreign companies foresee good prospects for new business by
alliances and partnership with domestic outfits .
Registration: Every insurer is required to obtain a certificate of registration
from the controller of insurance. The registration is required to be renewed aft
er a period of three years.
Economies of scale: Economies of scale is difficult to find in the initial stage
of entry into the market because of experience as evidence by the theory of exp
erience curve.
5.4.2 Bargaining power of buyer: -
Now a day competition is increasing in the each and every sector, and as a
competition in the market increase the bargaining power of the buyer will get
increase. So buyers bargaining power is high.
Market is highly segmented.
Buyers in this industry are very return oriented and it switches easily.
The switching cost of buyer over brand or close substitute products: The life in
surance industry has the uniqueness of providing risk protection, which does hav
e any substitute. Thus the switching cost has no place. As far as the substitute
products are concerned they are providing the service of saving and tax benefit
s but still they lag in the risk coverage factor.
If buyers buy insurance then switching cost become high. High switching cost cre
ates buyers lock in and makes a buyer’s bargaining power.
Buyers have a strong competitive force when they are able to exercise bargaining
leverage over premium, service or other terms of sale.
5.4.3 Bargaining power of Suppliers: -
Limited Actuaries in the Market
 Reinsurance Concentration
Cession to the National Insurer
Dependence on IT Providers
Policy designer tend to have less leverage to bargain over premium and other ter
ms of sale when the company they are supplying a major customer.
Suppliers bargaining power increase if reduced administrative cost and also redu
ced claim procedure time.
Insurance is tax exempted so that suppliers bargaining power increases.
Suppliers then have a big incentive to protect and enhance their customer’s compet
itiveness via reasonable premium, better service and ongoing advances in the tec
hnology of the item supplied.
Supplier’s ability to integrate forward: the private players can integrate forward
to increase the volumes of business by providing customized and tailor-made pol
icies whereas existing players whereas lack on this point.
Brand identity: there is certainty among the minds of people in relation to exis
tence and payment of claims from the existing players whereas the solvency of pr
ivate players is not certain.
5.4.4 Threat from Substitutes:-
Life insurance sector can be featured in three factors. They are saving, risk an
d tax benefit.
• SAVING:
As far as saving are concerned, Existences of a large number are saving through
PPF, EPF. Most of customer saving their money in bank, post deposit. Many custom
ers invest their money in share market, purchase Gold & Silver also.
The substitute products for the industry are as follow:
Term deposits in bank (5.25-8 %)
Investment in government securities. (4-5%)
Money market investment (for corporate)
Capital market (around 13% p.a. for developing country like India)
There is threat of increasing market potential of NSC, Government debenture etc.
If investments in insurance policies are made with the objective of tax benefits
then there are other investment avenues, which offer similar benefits.
• RISK COVERAGE:
For risk coverage, there is no close substitute of the products. The risk protec
tion is provided by this sector only. No other instrument provides assurance aga
inst risk.
• TAX BENEFIT:
There are various substitute of this feature of life insurance. Some of the subs
titute which provides tax benefit is:
• PPF
• NSE
• POST OFFICE SECURITIES.
• INVESTMENT IN THE MUTIAL FUND.
• OTHER TAX SAVING INSTRUMENT.
Thus these are the substitute of the life insurance industry. But the core compe
tency of this sector is the risk protection providing capacity, which no other s
ector can provide.
5.4.5 Rivalry among the exiting player:-
As a result of privatization competitive conditions will prevail in which entry
of companies buyers will exercise control.
 There is cut- thought competitions among rivals in life insurance industry.
There are mainly 13 private organizations and one public organization in life in
surance competition.
The insurance sector is showing high market growth rate, which enables the insur
ance companies to achieve its own market growth through the growth in market pla
ce. As per the study conducted by the monitor group, the size of the Indian gene
ral insurance market was of the order rs.10000 crores in 2001. The annual growth
rate is expected to be 15%.
All the insurance companies deal in identical policies, as service levels offere
d are similar. Hence, there is no product differentiation. Post- privatization,
product and service differentiation exist between public company-private compani
es.
Ministry of finance controls all the insurance companies that are in the industr
y at present. Hence, there are less chances of exit. Also, post privatization th
ere will be less chances of exit, as the ministry of finance and insurance regul
atory and development authority1999 will govern the insurance companies.
Nationalized players have negligible computerization and use of management infor
mation system (MIS). Although they are planning to implement software developed
by CMC for fulfilling the MIS requirements across various levels of offices. Pri
vate players will make extensive use of MIS as well as will have more or less a
paperless office.

In order to succeed in any of the business it is very necessary to make and foll
ow the strategies. Strategies are very important for any of the business. Follow
ing are the general strategies, which are recommending to the insurance sector.
One approach is to focus upon product quality, which will instill confidence in
minds of the customers that they would be offered best product from out of the s
everal available products.
The other approach, is to focus on the customers need, would involve a heavy inv
estment in developing relationships with policyholders. Under this approach, one
can expect a range of products and services designed to give the customer what
he specially desires.
The third approach is of greater market segmentation under which the population
should be divided into several homogeneous groups and product, and services woul
d be targeted towards such selected markets. The effort would be to “tie” clients to
their company- by customized combination of coverage, easy payment plan, risk m
anagement advice, and convenient quick claim handling.
Porter Generic Strategies:
One of the expert Michel porters has identified three internally consistent gene
ric strategies, which can be used singly or in combination: overall cost leaders
hip is clearly under stable. In a differentiation strategy, a company seeks to b
e unique in its industry along some dimensions that are widely valuable by the c
ustomer. May be the lowest cycle time for settling a claim under say, a med clai
m policy could be differentiating factor. In a cost focus, a company seeks a cos
t advantage in its target segment, while in differentiation focus; a company see
ks a differentiation target.
Marginal Different Product:
Another strategy would be for the companies to design products that will make co
mparison-shopping difficult. They could offer a wide variety of covers with marg
inal differences and varying prices, whose terms and conditions are difficult to
compare for consumers who may not have sufficient experience in purchasing insu
rance and who would find it difficult to make a clear choice. If the consumer is
 offered a unique policy, he will have no alternative coverage with which can be
compared. Given the combination policy, which can offer protection against a nu
mber of losses, the consumer will find comparison even more difficult.
Designing New Strategies:
The existing insurance companies cannot be satisfied with concentrating on the c
onsolidation of their existing markets, but have to achieve further growth and p
enetration. They must, therefore, concentrating on strengthening existing points
of service, designing new channel of distribution, direct contact with their ul
timate customers, and front line employee empowerment. They also need to refresh
their marketing set up. The new comers, on the other hand give priority to tapp
ing the market, left unexploited by the public sector companies.
Move towards Rural Market:
It is one of the most important suggestions; data says that rural market is stil
l uncovered by this sector. We believe that the sector should move towards tie r
ural market. Insurance penetration can be achieved by tapping the neglected Rura
l Markets. There is vast potential for insurance growth in the rural sector. A r
ecent survey by foundation for research, training and Education in insurance (FO
RTE) suggests that insurance can be sold profitably to rural communities in Indi
a. The survey reveals that
• There is distinct hierarchy of needs in rural areas.
• Rural people find security in groups.
• The saving habit is very strong in rural areas.
• Average saving across the most important socio-economic strata comes to 30-35% o
f annual income or Rs. 13,500 annually, which is significant.
• There is high level of awareness about life insurance and fairly high-level abou
t 36% already own life insurance.
• 51% of these who own life insurance would like to buy more.
• Amongst the savers, a significant percentage does not save through formal finan
cial modes or institutions.
• Rural buyers of insurance prefer a half yearly mode of premium payment to coinci
de with the time of the harvest.
Thus there are very much chances for any of the companies to work over this scen
ario. So we believe and suggest all the players to move towards the rural areas.
Motivation of sales force:
A life insurance company should constantly be involved in the process of motivat
ing the sales force in the turbulent times. The following strategies are recomme
nding;
• Building relationship is real perk. One should be sure to build in networking ti
mes for agents during the program-in addition to entertainment and education.
• Web should be frequently used for creating gift ideas.
• Hold sales contests in the forth quarter. It is the best times ti motivates agen
ts who wants to qualify for a trip.
• Consider a contrast within the contest ‘for- top-tier producers; additional reward
s for additional milestones that are met, such as air and guest room upgrades.
Use of Internet:
The present scenario is such that the products sold with the help of Internet. T
he technological advancement is such that force the companies to take such steps
. Still the full-fledged use of Internet is not done in our country. As suggesti
on earlier the Internet based life insurance will help the companies to reduce t
he transaction cost and time. At the time it can improve the quality of service
to its customers, which is the mission of the company.
Company should concentrate on the quality of the premium received this will help
the companies to reduce its underwriting losses. Appointing of proper and effic
ient agent as well as effective direct marketing could do this.
By way of training the excessive staff, which is a major problem in the company,
the company could reduce management expense to a large extent.

OT- analysis of the industry shows opportunity and threat the industry is likely
to face. OT analysis of Indian life insurance industry shows the comparative st
rengths and weakness of Indian life insurance industry with rest of the world an
d also major opportunities and threats the Indian life insurance industry is fac
ing.
5.6.1 Opportunities:
Today’s human life becomes full uncertain, so they prefer protection against the r
isk. Therefore they prefer life insurance. This is the opportunity for the life
insurance sector.
Easy accesses to development in the more advance market provide further opportun
ity to upgrade their working. Technological, financial or specific area based av
enues of absorbing improved system are also now more easily available. So, that
insurance companies working efficiently and fast service.
Increased economic activities: increase in the economic activity has become the
opportunity for the life insurance sector. The activity such as development in t
he automobile industry, development in the shipping industry. The growth in the
GDP shows the opportunity for this industry. The growth rate expected this year
7-7.5%. So this is also one of the opportunities for the life insurance sector.
Uncovered market:
The Indian insurance market is the one of the least markets in the world. Indi
a has a population 1044.15 million out of which only 77.7 million have a life in
surance policy. Almost 300 million people in the country can afford to buy life
insurance but of this only 20 % have an insurance cover. Thus there lies a big
opportunity for the life insurance industry. No doubt lots of marketing and pr
omotional efforts have to be done for trapping the uncovered portion of the huge
market. India’s insurance has long way to catch up with the rest of the world. Ac
cording to the institute of charted financial analyst of India. India is the 23r
d largest insurance market in the world. India accounts for just 0.4% of the glo
bal insurance market which is very low. the ratio’s of premium to GDP for India s
tands at only 3% against 5.2% in US ,6.5%in UK.
To enter into rural market where customer awareness about insurance is low by ef
fective and efficient marketing strategies.
To sell insurance products through electronic Medias.
Natural calamities: natural calamities taking place now days have created a conc
ern for life insurance among the public. Because of natural calamities like eart
hquake, flood, and cyclone people have become conscious about benefits and need
of insurance. Thus through a calamity it has become a considerably big opportuni
ty for the industry.
Growing population: the growth in the population (approximately 1.7%) is very hi
gh. It is said that one Australia is added in our country every year. Thus poten
tial customers for the life insurance industry. It has become an opportunity for
the life insurance industry.
The lack of comprehensive social security system combined with a willingness to
save means that Indian people demand for pension products will be large. Thus, i
t has become an opportunity for the life insurance industry.
India has traditionally been a highly savings oriented country. Needless to say,
if the insurance market is properly tapped, it is possible to raise life insura
nce premium as a percentage of GDP from its existing level. Thus, it has become
an opportunity for the life insurance industry.
To use Internet and e-commerce technologies to dramatically cut the costs and/or
to pursue new sales-growth opportunities. With the help of technology it has be
come easy for the companies to reach the customer quickly, easily, efficiently a
nd in a better way. Also the companies can cut down the cost of operation up to
considerable level. Thus technology has thrown lots of opportunity for the com
pany.
Liberalized government policy toward insurance sector: the government has libera
lized the government policy in the life insurance sector. Now a day role of gove
rnment has changed. Due to liberalized policy of government the country is benef
ited in earning foreign inflows: the domestic company can also collaborate with
foreign country and can create synergy. Thus there is great opportunity for thos
e who can trap it. Exist the option of joint venture& alliance etc. for companie
s to create Synergy, value as well as competitive capabilities for the firms.

5.6.2 Threats:
Private entrants are naturally targeting the profitable and more lucrative segme
nts, by providing better service, new products and flexibility. They are targeti
ng the bigger corporate the other clients in the well established metropolitan c
enter. These new entrants succeeded in eating share of the existing entities. Th
is creates threat among rival firms itself.
Decreased in bank rate: the decreased bank rate is the biggest threat for the li
fe insurance sector. Fluctuation in the bank rate makes big difference for the l
ife insurance industry. It has become threats for the life insurance industry.
Interest rate of P.F and bank saving create threat to insurance sector. All othe
r saving is obviously the threat for life insurance sector.
Increasing intensity of competition among industry rivals-may cause squeeze (fal
l) on profit margins. Consumer’s education- consumers are more and more confused b
ecause the market players are offering large number of product range. As at pres
ent the awareness level is not much, it is only because the education level is o
nly 62 %( in which only 10% are well educated).
Fraud in insurance sector: the major problem fraud, which affects the life insur
ance sector.
The flight of talent to new entrants is already in evidence, and could be on t
he rise for some time to come. Retaining qualified and competent executives will
be considerable challenges for existing companies.
One very serious danger that the government on units is likely to face is that e
ven if at some point of time, the government does decide to disinvest a portion
of its equity; they may not be fully free from government interference. They cou
ld face a peculiar problem that although paper and in terms of legal definition
they would not be public sector units. In effects, their working could be no dif
ferent from what it was before their ownership pattern change. This could be gen
uine threats since they would be competing with units which are free from such a
rtificial and unnecessary restrictions.
The new units, equipped with state of arts equipment and innovative procedure wo
uld have an in-built edge over the erstwhile public sector units, which until re
cently had no such opportunity and incentives. Due to possible negative impact o
n employment, there were no serious efforts at updating technology and equipment
. The resultant inadequate investment in infrastructure could lead to their lagg
ing behind in the race.

The SWOT analysis of Insurance sector is as follows:-

1.Strength-Very good policies of life coverage.
2.Weaknesses:-unable to conveince the people about the products.There are not mu
ch advisors for the insurance companies
3.Oppourtunities:-Untapped rural sector and small towns
4.Threats:-growing competation from larger MNC s.
The most important task of a financial manager is to interpret the financial inf
ormation in such a manner, that it can be well understood by the people, who are
not well versed in financial information figures. The technique, by which it is
so done, knows as ‘Ratio Analysis’.
(1) Percentage (2) Rate (3) Proportion
• Ratio Analysis is an important technique of financial analyses. It depicts the e
fficiency or shortfall of the organization in the form of trend Analysis.
• Different ratio appeal to different people managements, having the task of runni
ng business efficiency, will interest in all ratios.
• A Supplier of goods on credit will be partially interested in liquidity ratios,
which indicate the ability of the business to pay its bills.
• Existing and future shareholders will indicate the ability of business to p.
• Existing and future shareholders will interest in investment ratios, which indic
ate the level of return that can be expected on an investment in business.
• Major customers, intent on having a continuing source of supply, will be interes
ted in the financial stability, as reveled by the capital structure, liquidity a
nd profitability ratios.
• Debenture and loan stock holders will be interested in ability of a business wil
l be interested in the ability of a business to pay interest, and ultimately to
repay capital.
• A banker, gibing only short-term loans, will be interested mainly in the liquidi
ty of the business, and its ability to repay those loans.
STEPS IN RATIO ANALYSIS
Step 1: Collection of information, which are relevant from the financial statem
ents and then to calculate different ratios accordingly.
Step 2: Comparison of computed ratios of the same organization or with the indu
stry ratios.
Step 3: Interpretation, drawing of the inference and report-writing

ADVANTAGE OF RATIO ANALYSIS

Ratio analysis is a very important and useful tool for financial analysis. It se
rves much purpose and is useful not only for internal management but also for pr
ospective investors, creditors and other outsiders. The following are the import
ant uses (advantages) of Ratio Analysis.
(1) It is important and useful too check upon the efficiency with which the
working capital is being used (managed) in a business enterprise
(2) It helps the management of business concern in evaluating its financial
position and efficiency of performance.
(3) It serves as a short of health test of business firm, because with the h
elp of this analyses financial managers can determine whether the firm is financ
ially healthy or not
(4) A Ratio Analysis covering a number of past accounting (financial), perio
ds clearly shows the trend of changes in the business position.
(5) It helps in making financial estimates for the future.
(6) It helps the task of managerial control to a great extent.
(7) It helps the credit suppliers and investors in evaluating a business fir
m as a desirable debtor or as a potential investment outlet.
(8) With the help of this analysis standard ratios can be established and th
ese can be used for the purpose the comparison of a firm’s progress and performanc
e
(9) This analysis communicates important information regarding financial str
ength and standing, earning capacity, debt capacity, liquidity position, capacit
y to meet fixed commitments.
(10) This analysis may be employed for the purpose of comparing the working resu
lt and efficiency of
performance of a business enterprise with that of other enterprises engaged in
the same industry.
(11) It helps the management or a business concern to discharge their basic func
tions of planning, coordinating, controlling, etc.
(12) It serves as an instrument for testing management efficiency.
(13) It sometimes provides a useful tool for decisions on certain Policy matters
.
LIMITATIONS OF RATIO ANALYSIS
(1) Accounting ratios (calculated under the system of the ratio analysis) wi
ll be correct only if the accounting data (figures), on which they are based, ar
e correct.
(2) It is mainly a historical analyses or an analysis of the post financial
date.
(3) In regard to profits of a business concern ratio analysis may in certain
circumstances be misleading.
(4) Continuously changes in price levels (or purchasing power of money) seri
ously affect the validity of comparison of accounting ratios calculated for diff
erent accounting (financial) periods and make such comparisons very difficult.
(5) The Comperisation become difficult also on account of difference in the
definition of several financial accounting terms like gross profit, operating pr
ofit, net profit and account of considerable diversity in practice as regards th
eir measurement.
(6) The validity of comparison is also seriously affected by window dressing
in the basic financial statements and by differences in accounting methods used
by different business concerns.
(7) A single ratio will not be able to convey much information required for
proper decision-making.
(8) This analysis gives only a part of the total information required for pr
oper decision-making.
(9) Ratio analysis should not be taken as substitute for sound judgment.
(10) It should not be overlooked that business problems cannot be solved simple
mechanically through ratio analysis or other types of financial analysis.