Insurance Industry: Ensuring a secure future

Potential for growth

The insurance sector in India has come a full circle from being an open competitive market to nationalization and back to a liberalized market again. Tracing the developments in the Indian insurance sector reveals the 360-degree turn witnessed over a period of almost two centuries.  

Presently in India, the insurance sector is nationalized; Life Insurance Corporation of India (LIC) and General Insurance Company (GIC) render services along with its 4 subsidiaries. While LIC provides life insurance, GIC is concerned with non life insurance like - motor, marine, fire, health and personal accident insurance.

With an annual growth rate of 15-20% and the largest number of life insurance policies in force, the potential of the Indian insurance industry is huge. Total value of the Indian insurance market (2004-05) is estimated at Rs. 450 billion (US$10 billion). According to government sources, the insurance and banking services’ contribution to the country's gross domestic product (GDP) is 7% out of which the gross premium collection forms a significant part. The funds available with the state-owned Life Insurance Corporation (LIC) for investments are 8% of GDP. According to estimates, private insurance companies collectively have a 10% share of the non-life insurance market.

Despite a large and growing economy, the insurance market in India is not yet of commensurate size. Till date, only 20% of the total insurable population of India is covered under various life insurance schemes, the penetration rates of health and other non-life insurances in India is also well below the international level. With one of the lowest insurance penetration levels in the world, there exists significant potential for further growth in both life and general insurance business.

CII strongly feels that this higher growth and increase in the spread of insurance business cannot occur in isolation. The full potential of the Indian insurance sector can be realized only if all the stakeholders - the public and private insurance players, government bodies and the regulator - work in unison to achieve the common goal.

In India, the concept of insurance was never a given a serious thought, as compared to other countries. People still are under insured, life insurance premium to Gross Domestic Product (GDP) ratio is a mere 1.4% as compared to a healthier rate of 8% amongst other developing countries. The reason being lack of awareness and opportunities combined with poor state of services provided.

IRDA: Changing the face of the industry

Reforms in the Insurance sector were initiated with the passage of the Insurance Regulatory and Development Authority ( IRDA) Bill in Parliament in December 1999. The IRDA since its incorporation as a statutory body in April 2000 has fastidiously stuck to its schedule of framing regulations and registering the private sector insurance companies. Since being set up as an independent statutory body the IRDA has put in a framework of globally compatible regulations.

The Parliament's nod for the (IRDA) bill has changed the whole scenario. With the passage of the bill, entry of private Indian as well as foreign companies, along with existing players, in the insurance sector has added variety and quality to the present insurance services. The other positive impact has been on creation of new employment opportunities. Till now employment in the insurance sector was considered akin to any government job, but now with private participation, has assumed significant importance and become an exciting career option.One of the basic objectives of opening up the insurance sector was to ensure that the private and public sector companies, through competition, reach out to an increasing number of population. Increasing market penetration with adequate safety standards, therefore, become critical factors in overall growth of the insurance sector.

The passage of the IRDA Bill also ended government monopoly by lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign ownership.

Benefits of liberalization

The results of the liberalization are there for everyone to see. The insurance markets -- both life and non-life -- have grown impressively. IRDA is working on a regulatory framework that helps level the playing field for all types of insurance companies, irrespective of their ownership. Since 1999, IRDA has licensed 22 new private Indian insurance companies, an overwhelming number of which have global insurance companies as their partners. To date, the industry has attracted foreign direct investment of $235 million.

Innovative products, smart marketing, and aggressive distribution have enabled fledgling private insurance companies to sign up Indian customers faster than anyone expected. Indians, who had always seen life insurance as a tax saving device, are now suddenly turning to the private sector and snapping up the new innovative products on offer.

The marketplace is getting competitive, but the market share of private insurance companies remains very low -- in the 10-15 percent range. The heavy hand of government still dominates the market, with price controls, limits on ownership, and other restraints.

Other improvements are occurring as well. New insurance products such as product liability insurance, professional liability insurance, small/medium size enterprise insurance, weather insurance, and group health insurance for the poor have been launched. Private insurance companies are also using banks, micro finance institutions and cooperatives to increase their market share and compete with well-entrenched state-owned insurance companies.

Infrastructure and investment

In 2004, Indian insurance companies mobilized over $21 billion, nearly three times as much as in 1999 ($8 billion). In other countries, this kind of capital mobilization provides crucial resources for investment in infrastructure, corporate businesses, long-term bonds, and municipal projects. Once India does more to free insurance companies to invest in such important sectors, it too can gain benefit from this long-term financial resource.

India’s insurance market remains very small compared with some of the major emerging markets. South Africa and South Korea, with a fraction (one-twentieth) of India’s population, do at least twice as much insurance business as Indian companies did in 2004. A vibrant insurance market can support the economy by providing long-term capital -- equity and debt -- to the private sector

Insurance is a capital-intensive industry. It is also a long-gestation business. India’s insurance industry needs capital, and a major source of capital would be from foreign investors, who are now limited to 26 percent ownership. India needs to raise the cap on Foreign Direct Investment (FDI) to attract capital for the industry.

Though, the existing rule says that a foreign partner can hold 26% equity in an insurance company, a proposal to increase this limit to 49% is pending with the government. Since opening up of the insurance sector in 1999, foreign investments of Rs. 8.7 billion have poured into the Indian market and 21 private companies have been granted licenses.

Statistics and figures in the sector

The life insurance industry in India grew by an impressive 36%, with premium income from new business at Rs. 253.43 billion during the fiscal year 2004-2005, braving stiff competition from private insurers. The market share of the state behemoth, LIC, has clocked 21.87% growth in business at Rs.197.86 billion by selling 2.4 billion new policies in 2004-05. But this was still not enough to arrest the fall in its market share, as private players grew by 129% to mop up Rs. 55.57 billion in 2004-05 from Rs. 24.29 billion in 2003-04. The 14 private insurers increased their market share from about 13% to about 22% in a year's time.