An In Depth Analysis Of Insurance Industry

Strategic Analysis of Indian Life Insurance Industry

A MANAGEMENT RESEARCH PROJECT ON INSURANCE INDUSTRY

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Strategic Analysis of Indian Life Insurance Industry

Objectives and scope of the project

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 the 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 life 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 affecting this industry by PEST analysis. To find out how the market condition and what level of competition is there by five 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.

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Strategic Analysis of Indian Life Insurance Industry

Research methodology

We have done exploratory research and for that purpose we had used secondary data. We had collected this secondary data from various published materials like newspapers, magazines, books etc and from Internet web sites. From these various information and data we had done qualitative and quantitative analysis to find out impact of various forces, effect of macro environmental factors, major trends and future of the industry.

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Strategic Analysis of Indian Life Insurance Industry

Insurance at a Glance

What is Insurance and How Insurance Work? According to the U.S. Life Office Management Association Inc. (LOMA), life insurance 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 other words, surly this is far too brief an explanation for a financial service that provides a very sophisticated range of savings and investment products, as well as mere compensation for death. ‘Insurance’ is basically a sharing device. The losses to assets resulting from natural 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 risks. This contribution of many is used to pay the losses suffered by unfortunate few. 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 insured 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 human 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 experienced 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 old age or on his becoming permanently disabled when his income will stop. Insurance also has an element of savings in certain cases. Suppose there are 1000 persons all aged 35 years and healthy lives. They are insured 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 age are

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Strategic Analysis of Indian Life Insurance Industry

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 the 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 mind and a feeling of security for their family. While insurance cannot prevent accidents or premature death, it can help protect the family of the decreased against the loss of the death of the main breadwinner. In return for specified payments, insurance will provide protection against the incidents of an uncertain event- such as premature death. The business of insurance company called insurer is to bring together persons who 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 risk of the caravan trade by giving loans that had to be later repaid with interest when the goods arrived safely. In 2100 BC, the Code of Hammurabi granted legal 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, perhaps, was how insurance made its beginning. As European civilization progressed, its social institutions and welfare practices also got more and more refined. With the discovery of new lands, sea routes and the consequent growth in trade, medieval guilds took it upon themselves to protect 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. So these guilds even offered ransom for members held captive by pirates. Burial expenses and support in times of sickness and poverty were other services offered. Essentially, all these revolved around the concept of insurance or risk coverage. That's how old these concepts are, really. In 1347, in Genoa, European maritime nations entered into the earliest known insurance contract and decided to accept marine insurance as a practice.

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Strategic Analysis of Indian Life Insurance Industry

The first step… Insurance as we know it today owes its existence to 17th century England. In fact, it began taking shape in 1688 at a rather interesting place called Lloyd's Coffee House in London, where merchants, ship-owners and underwriters met to discuss and transact business. By the end of the 18th century, Lloyd's had brewed enough 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 first mortality table to provide a link between the life insurance premium and the average 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 in 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 Philadelphia sponsored the first life insurance corporation in America for the benefit of ministers and their dependents. However, it was after 1840 that life insurance really took off in a big way. The trigger: reducing opposition from religious groups. The growing years... The 19th century saw huge developments in the field of insurance, with newer products being devised to meet the growing needs of urbanization and industrialization. In 1835, the infamous New York fire drew people's attention to the need to provide 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 fire of 1871 further emphasized how fires can cause huge losses in densely populated modern cities. The practice of reinsurance, wherein the risks are spread among several companies, was devised specifically for such situations.

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Strategic Analysis of Indian Life Insurance Industry

There were more offshoots of the process of industrialization. In 1897, the British government passed the Workmen's Compensation Act, which made it mandatory for a company to insure its employees against industrial accidents. With the advent 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 of their members, while fraternal orders provided low-cost, members-only insurance. Even today, such fraternal orders continue to provide insurance coverage to members as do most labs our organizations. Many employers sponsor group insurance policies for their employees, providing not just life insurance, but sickness and accident benefits and old-age pensions. Employees contribute a certain percentage 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 more commonly concerned with the provision for a specific event, which affects a property, such as fire, flood, theft etc. PRODUCTS:As for latest information get in touch with the current insurers – website information 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 general insurance products. 2001:

life insurers have launched new

products. These include linked-products. For details, please visit the websites of life insurers.

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Strategic Analysis of Indian Life Insurance Industry

INSURANCE IN INDIA

Introduction: Insurance in India can be traced back to the Vedas. For instance, yogakshema, the name of Life Insurance Corporation of India's corporate headquarters, is derived from the Rig Veda. The term suggests that a form of "community insurance" was prevalent around 1000 BC and practiced by the Aryans. Burial societies of the kind found in ancient Rome were formed in the Buddhist period to help families build houses, protect widows and children. Bombay Mutual Assurance Society, the first Indian life assurance society, was formed in 1870. Other companies like Oriental, Bharat and Empire of India were also set up in the 1870-90s. It was during the swadeshi movement in the early 20th century that insurance witnessed a big boom in India with several more companies being set up. As these companies grew, the government began to exercise control on them. The Insurance Act was passed in 1912, followed by a detailed and amended Insurance Act of 1938 that looked into investments, expenditure and management of these companies' funds. By the mid-1950s, there were around 170 insurance companies and 80 provident fund societies in the country's life insurance scene. However, in the absence of regulatory systems, scams and irregularities were almost a way of life at most of these companies. As a result, the government decided nationalizes the life assurance business in India. The Life Insurance Corporation of India was set up in 1956 to take over around 250 life companies. For years thereafter, insurance remained a monopoly of the public sector. It was only after seven years of deliberation and debate - after the RN Malhotra Committee report of 1994 became the first serious document calling for the re-

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Strategic Analysis of Indian Life Insurance Industry

opening up of the insurance sector to private players -- that the sector was finally opened up to private players in 2001. The Insurance Regulatory & Development Authority, an autonomous insurance regulator set up in 2000, has extensive powers to oversee the insurance business and regulate in a manner that will safeguard the interests of the insured. 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.

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 India are: 1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business. 1928: The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and non-life insurance businesses. 1938: Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public. 1956: 245 Indian and foreign insurers and provident societies taken over by the central government and nationalized. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore from the Government of India.

Need for Life Insurance: The above definition captures the original, basic, and intention of life insurance: i.e. to provide for one’s family and perhaps others in the event of death, especially premature death. Originally, policies were to provide for short periods of time, covering temporary risk situations, such as sea voyages. As life insurance

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Strategic Analysis of Indian Life Insurance Industry

becomes more established, it was realized what a useful tool it was for a number of situation including: i. Temporary needs/ threats: The original purpose of life insurance remains an important element, namely providing 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 recent 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 traditionally 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 changing culture and social environment. One can buy a suitable insurance policy, which will provide periodical payments in one’s old age. This simple example illustrates the impact premature death can have on a family, where the main earner has no life cover. A simple life insurance policy (term assurance) could have provided Mr. Atol’s family 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 cover and the value of life later in the course.

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 peace of mind to the policyholder. In the event of untimely death, of say the main earner in the family, the policy will pay out of the guaranteed sum assured, which is likely to be significant more than the total premiums paid. With more traditional savings vehicles,

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Strategic Analysis of Indian Life Insurance Industry

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 can 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 be settled easily. In addition, creditors have no rights to any monies paid out by 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 trust, 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 smaller installments, say Rs. 5,000 per month. v. It can be enchased and facilitates borrowing: Some contracts may allow the policy can be surrendered for a cash amount, if a policyholder is not in a position to pay the premium. A loan, against certain policies, can be taken for a temporary period to tide over the difficulty; some lending institutions will accept a life insurance policy as collateral for a personal or commercial loan.

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Strategic Analysis of Indian Life Insurance Industry

vi. 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 Income Tax Act, include Life Insurance Premiums and contributions to a recognized Provident Fund etc.

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 against 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 saved 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 amount 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.

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Strategic Analysis of Indian Life Insurance Industry

Role of Life Insurance: Risks and uncertainties are part of life's great adventure -- accident, illness, theft, natural disaster - they're all built into the working of the Universe, waiting to happen. Role 1: Life insurance as "Investment": Insurance is an attractive option for investment. While most people recognize the risk hedging and tax saving potential of insurance, many are not aware of its advantages as an investment option as well. Insurance products yield more compared to regular investment options, and this is besides the added incentives (read bonuses) offered by insurers. You cannot compare an insurance product with other investment schemes for the simple reason that it offers financial protection from risks, something that is missing in non-insurance products. In fact, the premium you pay for an insurance policy is an investment against risk. Thus, before comparing with other schemes, you must accept that a part of the total amount invested in life insurance goes towards providing for the risk cover, while the rest is used for savings. In life insurance, unlike non-life products, you get maturity benefits on survival at the end of the term. In other words, if you take a life insurance policy for 20 years and survive the term, the amount invested as premium in the policy will come back to you with added returns. In the unfortunate event of death within the tenure of the policy, the family of the deceased will receive the sum assured. Now, let us compare insurance as an investment options. If you invest Rs 10,000 in PPF, your money grows to Rs 10,950 at 9.5 per cent interest over a year. But in this case, the access to your funds will be limited. One can withdraw 50 per cent of the initial deposit only after 4 years. The same amount of Rs 10,000 can give you an insurance cover of up to approximately Rs 5-12 lakh (depending upon the plan, age and medical condition of the life insured, etc) and this amount can become immediately available to the nominee of the policyholder on death. Thus insurance is a unique investment avenue that delivers sound returns in addition to protection.

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Strategic Analysis of Indian Life Insurance Industry

Role 2: Life insurance as "Risk cover: First and foremost, insurance is about risk cover and protection - financial protection, to be more precise - to help outlast life's unpredictable losses. Designed to safeguard against losses suffered on account of any unforeseen event, insurance provides you with that unique sense of security that no other form of investment provides. By buying life insurance, you buy peace of mind and are prepared to face any financial. Role 3: Life insurance as "Tax planning": Insurance serves as an excellent tax saving mechanism too. The Government of India has offered tax incentives to life insurance products in order to facilitate the flow of funds into productive assets. Under Section 88 of Income Tax Act 1961, an individual is entitled to a rebate of 20 per cent on the annual premium payable on his/her life and life of his/her children or adult children. The rebate I deductible from tax payable by the individual or a Hindu Undivided Family. This rebate is can be availed up to a maximum of Rs 12,000 on payment of yearly premium of Rs 60,000. By paying Rs 60,000 a year, you can buy anything upwards of Rs 10 lakh in sum assured. (Depending upon the age of the insured and term of the policy) This means that you get an Rs 12,000 tax benefit. The rebate is deductible from the tax payable by an individual or a Hindu Undivided Family.

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Strategic Analysis of Indian Life Insurance Industry

EMERGENCE OF IRDA

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 statutory body in April 2000 has fastidiously stuck to its schedule of framing regulations and registering the private sector insurance companies. The other decisions taken simultaneously to provide the supporting systems to the insurance sector and in particular the life insurance companies were the launch 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 that the insurance companies would have a trained workforce of insurance agents in place to sell their products, which are expected to be introduced by early next year. Since being set up as an independent statutory body the IRDA has put in a framework of globally compatible regulations. In the private sector 12 life insurance and 6 general insurance companies have been registered. 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 being in force, the Authority shall have the duty to regulate, promote and ensure orderly growth of the insurance business and re-insurance business. 2. Without prejudice to the generality of the provisions contained in sub section. The powers and functions of the Authority shall include. a. Issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration;

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Strategic Analysis of Indian Life Insurance Industry

b. Protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance;. c. Specifying requisite qualifications, code of conduct and practical training 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 insurance 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 enquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organizations connected with the insurance business; i. Control and regulation of the rates, advantages, terms and conditions that may be offered by insurers in respect of general insurance business not so controlled 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 maintained 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 insurance intermediaries; m. Supervising the functioning of the Tariff Advisory Committee; n. Specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organizations referred to in clause (f); o. Specifying the percentage of life insurance business and general insurance business to be undertaken by the insurer in the rural or social sector; and p. Exercising such other powers as may be prescribed.

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Strategic Analysis of Indian Life Insurance Industry

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 Authority 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 Authority (IRDA, which was constituted by an act of parliament) specify the composition 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)

Regulatory Issues: The IRDA Bill lies down that the Indian promoter must dilute the stake in the private insurance firms from 74 per cent to 26 per cent in ten years. The bill stipulates tough solvency margins -- Rs 500 million for life insurance firms, Rs 500 million or a sum equivalent to 20 per cent of net premium income for general insurance and Rs 1 billion for reinsurance business.

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Strategic Analysis of Indian Life Insurance Industry

The insurer has to maintain separate accounts relating to fund of shareholders and policyholders. The funds of policyholders should be retained within the country but does not cover repatriation of profits and dividends. Insurance companies 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 infrastructure and better insurance cover. The key to success in opening up the insurance sector in India is regulation. An example of how poor regulation can destroy a market is the mutual fund industry. A combination of improper marketing practice has resulted in a loss of investor faith in that industry. Incidentally, the insurance industry in India itself has gone through the same phase. 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 players. But if the statements of IRA officials are anything to go by, the new regulations 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, are 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 Authority Bill on December 2, 1999 heralds an era of cautious optimism where stakes are high for all parties concerned. For the Govt. of India, Foreign Direct Investment (FDI) must pour in as anticipated; for foreign insurers, investments must start yielding returns and for the domestic insurance industry - their market penetration should remain intact. On the fringe, the customer is pondering whether all the hype created on liberalization will actually benefit him.

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Strategic Analysis of Indian Life Insurance Industry

Insurance Sector Reforms in India: In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor R. N. Malhotra, was formed to evaluate the Indian insurance industry and recommend its future direction. The Malhotra committee was set up with the objective of complementing the reforms initiated in the financial sector. The reforms were aimed at “creating a more efficient and competitive financial system suitable for the requirements of the economy keeping in mind the structural changes currently underway and recognizing that insurance is an important part of the overall financial system where it was necessary to address the need for similar 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 these 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 enter the industry

•

No Company should deal in both Life and General Insurance through a single entity

•

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

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Strategic Analysis of Indian Life Insurance Industry

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 made independent

Investments: •

Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%

•

GIC and its subsidiaries are not to hold more than 5% in any company (There current 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 the insurance industry

The committee emphasized that in order to improve the customer services and increase 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 failure 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 minimum capital requirement of Rs.100 crores. The committee felt the need to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives. For this purpose, it had proposed setting up an independent regulatory body.

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Strategic Analysis of Indian Life Insurance Industry

ECONOMIC LIBERALIZATION

Economic liberalizations in brief refers to the efforts taken by state toward faster economic development by adopting changes in existing economic policy, rules and Regulations and bringing flexibility in administrative control and procedures economic liberalization encourage the use of new technology and improve knowledge in the production process by global participation and marketing.

Need for Global Integration: Recent economic liberalization started few years ago have started bringing in new investments from global giants and the government was hard pressed to facilitate global integration by lowering trade barriers for the free flow of technology, intellectual and financial capital. Additionally, reforms are essential if the Indian economy is to achieve and sustain a growth rate of 7 to 8 per cent per annum. Reaching a faster growth path also implies attracting foreign direct investment inflows of $ 10 Billion every year, up from the current level of $ 3 to $ 3.5 Billion. Thus liberalization of insurance creates an environment for the generation of longterm contractual funds for infrastructural investment. Report on Infrastructure says that 85% of funds for infrastructure development have to come from the domestic industry. It further says that India would need $ 100 Billion over the next five years to meet its infrastructure needs. Given the rate of savings in India, there is much more room to grow and one can expect an additional revenue of about $ 10 Billion a year entering the market to enhance infrastructure. Insurance is definitely going to be one area that will assist in mobilization of these funds.

Multinationals' interest: Multinational insurers are indeed keenly interested in emerging insurance because their home markets are saturated while emerging countries have low insurance penetrations and high growth rates. International insurers often derive a significant part of their business from multinational operations. As early as 1994,

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Strategic Analysis of Indian Life Insurance Industry

many of the UK’s largest life and general insurers derived 40 per cent to 60 per cent of their total premium from outside their home markets. The figure at Commercial Union was 76 per cent in that year. While the impact of global operations on their business may be large, typically foreign insurers take only a small share of an individual country’s market. In Taiwan for example, foreign companies took only a 3 per cent share even seven years after opening up. In Korea, their share was 1 per cent after 20 years. In China, a large and complex market like India, private insurers have not made much headway. Yet, new entrants find insurance attractive because even a small share of a large and growing market can be profitable. The Korean insurance market for example, was only the 30th largest market in the world by premium volume in 1971. It moved up to 6th largest in 1996. In any case, in India multinational insurers will be restricted to a minority shareholding in new companies. The new entrants will therefore be private Indian companies. The other reason why these large MNCs are interested in India is the economies of the insurance market. Insurance companies survive on the principle of spreading of risk. No matter what the size of each player, an insurer cannot afford to operate in a niche market. Operating in a particular region would expose them to the economic downtrends in the region and derail their profits. Insurance companies, being long-term players, also have to avoid sudden dips in earnings to inspire confidence among investors to invest long-term funds. This can be achieved by spreading their operations over a wide geographical area. Moreover, for them, big is not just beautiful, but essential for survival. Which brings us to the avenues for growth? According to the Sigma report on global insurance brought out by the world’s second largest reinsurer Swiss Re - the international market is completely saturated. In the developed world, the growth in life insurance premium has been a meager 1.5%. As compared to this, LIC despite all its handicaps has been growing at a healthy clip of around 20%.

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Strategic Analysis of Indian Life Insurance Industry

Privatization: Start Up Strategy: Potential private entrants therefore expect to score in the areas of customer service, speed and flexibility. They point out that their entry will mean better products and choice for the consumer. Critics counter that the benefit will be slim, because new players will concentrate on affluent, urban customers as foreign banks did until recently. This might seem a logical strategy from the point of view of new players. Start-up costs-such as those of setting up a conventional distribution network-are large and high-end niches offer better returns. However, in the long run 'middlemarket' offers the greatest potential as in terms of it is the second largest market in the world. This may still be an urban market but goes beyond the affluent segment. Insurance, even more than banking, is a volume game. A very exclusive approach is unlikely to provide meaningful numbers. Therefore, private insurers would be best served by a middle-market approach, targeting customer segments that are currently untapped.

Repositioning by Nationalized Sector: Floodgates of competition opened up by the privatization of insurance industry did throw a challenge to the well-protected nationalized sector and it seems they have picked up the gauntlet. LIC and GIC, both are trying to reposition themselves by having re-engineering done on the structure and operations of their respective organizations. Life Insurance Corporation is at present going through presentations from top management consultants. These consultants have been asked to narrate their experiences in countries where the insurance sector has been opened up for private competition so that the public sector player can draw lessons. Based on these, LIC will appoint a consultant which can provide them broad terms of reference on what changes are required to tackle the impending competition.

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Strategic Analysis of Indian Life Insurance Industry

GIC has already identified the areas that need to be activated and given a shape through the four subsidiary companies. Foremost is the area of providing health insurance services. A change in the GIC Act will enable the corporation to float a joint venture company for health insurance. Other areas that the GIC is looking at are savings-linked insurance products and use of alternate distribution channels including banc assurance. Also in progress is the co-ordination of all foreign operations of the group. Even state-owned entities, SBI and UTI have serious plans for insurance sector as the banks have unsurpassed advantages over any other player. The intermediaries are also getting more organized with a little nudging from the IRA. The Reinsurance Consultants Association is planning to convert itself into the Insurance Brokers Association of India in anticipation of the laws being amended to allow insurance broking.

Cross Border Experience: Cross-country experience shows that nowhere in the world have the entry of foreign firms threatened the position of domestic companies. Whether it is Malaysia, where the insurance sector has been open for more than 50 years and foreign companies account for about 10 per cent of market penetration or it is Indonesia, Thailand, China or the Philippines, where the market has been opened more recently, the total market share of foreign companies is less than 10 per cent except in Indonesia where it is about 20 per cent. Closer home, we have the experience of the banking sector where despite the presence of 42 foreign banks, their share in total banking assets is less than 10 per cent. Today hardly 20 per cent of the population in India is insured and insurance premium (life as well as non-life) account for just 2 per cent of GDP as against the G7 average of 9.2 per cent. Consequently, the fear that new companies will displace public companies is misplaced. There is room for more for not only the existing companies but also for any number of competitors.

24

Strategic Analysis of Indian Life Insurance Industry

In China, insurance premium accounted for just over 1 per cent of China's GDP in 1995 but in the four years since the market has been liberalized (albeit partially), spending on insurance has grown at a compound annual rate of 33 per cent. It is not just foreign companies alone that have grown but also the national PICC as well. The story is no different in S Korea. There, the opening of the sector saw the Big Six domestic players, who initially controlled the entire market, increase their business from 7 to 37 trillion won by 1997. Meanwhile foreign companies were not able to capture more than a miniscule 0.7 per cent of the market. The various implications can group into as: 1)

Positive implication

2)

Negative implication.

1. Positive implication:The liberalization of life insurance will benefit the industry in the following ways: It helps transfer of technology in the field of life insurance. New techniques and methods can be used for assessment of risk, fixation of reasonable premium and provide new investment opportunities. This will help in expansion and development of business. It helps in adopting a flexible price policy on new life insurance policies developed and introduce now onward. It will make available in all countries of the world the service of efficient management and financial experts. It can help in development of knowledge of insurance business. Many educational and training institution stand fast functioning this lead to availability of professional managers. It will enlarge the scope of insurance. It will help spread it in rural and small villages also. The life insurance market will become global. The productivity as well as the efficiency also increases. The international competition in the field itself will play an important roll in this direction. Competing ability will increase due to liberalization. All categories of employees serving in life insurance sector will get more satisfaction through good opportunity for training, higher opening in jobs and higher income. 25

Strategic Analysis of Indian Life Insurance Industry

The general public will also be benefited from liberalization of life insurance sector: They can get better choice of selection of policy and insurer. When there is large number of insurer, the insurer is able to select such an insurer whose premium rate is reasonable. The insurers play more attention to the interest of insured. This way interest of the insured is well protected. There will be number of policies based on social security brought out by different insurers. Such schemes include plan like pension scheme, gratuity scheme, medical claim etc. Good employment opportunity in the life insurance sector when a number of new institutions are established in these fields. The employee will also benefit from liberalization life insurance sector: Better opportunity for training and development. Knowledge can be gain about new method of functioning through education and training. The employee gets opportunity for job promotion and other financial nonfinancial benefits. The productivity of employees shall develop due to education and training facility. Working with professional manager benefit the employee in learning the new methods and technique in work situation. The employee will get motivation and their moral will be higher. 2. Negative implication:Cut throat competition liberalization will create acute competition in the life insurance market, which is not in the interest of the industry, customers or the country. This type of acute competition may sometime leads to insolvency of life insurance companies and thereby the policy holders may face serious consequences. This seems far from truth, as the experience shows that nowhere the competition has threatened anybody. The experience of banking sector in our

26

Strategic Analysis of Indian Life Insurance Industry

own country testifies to this effect that despite presence of 42 foreign banks, the balance is not distributed. Total investment assets of the foreign banks are about 10 %. But the impact of the competition has increased the size of the market. End of government monopoly: This liberalization of life insurance sector brings an end to the government monopoly in life insurance sector and private companies may exercise their domination. Dominance of outside companies: foreign companies capture the life insurance sectors as a whole under their dominance, because they possess more efficient insurance techniques, knowledge. As such Indian companies cannot survive before these foreign companies. Shortage of funds for social cause: It is estimated that at present the LIC and GIC invest a total of Rs 90,000 crores to the public/ social sector. This amount is nearly 70-80 % of their total fund available. Although the government is making rules for the private sector companies to invest certain percentages of their premium income in the social sector, the availability of such huge fund is doubtful. Policies of heavy amount – the insurance companies issues policies of heavy amount when at present a policy is available for an insured sum even below Rs. 1,00,007/- where the sum assured against a policy becomes very heavy, economically backward people cannot benefit of insurance. More attention towards profitable policies:- the private sector life insurance companies develop and introduce only those policies that involve the minimum risk burden and more profitable of them. They overlook the interest of the common people. They want taken any special attention to insured the lives of woman, physically handicapped etc. which involve more risk. Neglect the rural lives:- the people who are against the concept of liberalization of insurance sector believe that the domestic as well as foreign private companies neglect the rural areas, by giving more attention in getting people insured from urban areas. This because of the average cost incurred on policies is less in urban areas. Problem of exercising control over insurance companies:

it becomes very

difficult to control Indian and foreign private insurance companies by the government.

27

Strategic Analysis of Indian Life Insurance Industry

Speculative activities: it encourages for more speculative activities by private sector companies. The development of new policies and premium rates are fixed speculatively instead of considering realistic factors. This will promote the attitude of earning larger short-term profits. On long run, the existence of such companies becomes doubtful. Liberalization based on outside pressure: The critics against the view of liberalization have the view that our country because of pressure by World Trade Organization has adopted the liberalization measures. Liberalization to fill up budget deficit –the critics against the view of Liberalization to fill up the budget deficit by disinvestment of more than 50% of shares of LIC. The crores of rupees, thus to be received can be used for filling up the budget deficit. But this argument is proved to be incorrect in view of the fact that the government has already announced its decision in parliament that it won’t reinvest share of LIC. Difficulty in utilizing the physical resources completely –as a result of privatization the business of LIC shall be affected negatively. As a result the vast resources held these companies shall not be utilized fully. Attraction for its employees from out side sources – there is a possibility of drainage of expert employees from the two corporations to the private companies. This is because the private companies offer more lucrative salaries and packages to their employees. Keeping this in mind, the IRDA has come out with regulations for high cadre employees that they can’t leave the corporation easily, to join other places. Lack of government guarantee on polices – the insurance policies issued by state insurers carry Central Government’s guarantee whereas no such guarantee shall be available to the policies issued by the private insurance companies. The insured remain unsecured in this way. No grants available on policies to poor: State insurers have kept provision for certain amount of their profit as grant to policies issued to people in villages and the poor. No such grant can be expected from the private companies.

28

Strategic Analysis of Indian Life Insurance Industry

Employees fear: employees of these insurance companies feel danger to their employment due to process of liberalization measure. While implementing it, these corporation can retrench certain number of employees who are exceeds in need. But this is not tenable as the experience of the other countries shows it otherwise. Public sector GIC and GIC are re-structuring themselves for better and more deployment of staff in diversified companies.

29

Strategic Analysis of Indian Life Insurance Industry

GLOBAL SCENARIO

Life insurance not plays an important role in national economy but also in international economy. Marine cargo insurance provides risk coverage for shippers and the banks, which finance international trades. This role becomes all the more important in the context of an active government policy to encourage exports. Indian 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 and Oceania. Together these region’s accounts for about 91 % of the world annul premium. 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 to a global context globalization of life insurance helps companies practices underwriting discipline in one regions globalization of the insurance industry received a big boost. Countries

Insurance Penetration

Insurance Density (Per Capita

(premium as a% of GDP)

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

30

Strategic Analysis of Indian Life Insurance Industry

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 be around $ 1412.3 billions.

31

Strategic Analysis of Indian Life Insurance Industry

MAJOR PLAYER IN LIFE INSURANCE

About the various player of life insurance sector: Since being set up as an independent statutory body the IRDA has put in a framework of globally compatible regulations. In the private sector 12 life insurance and 6 general insurance companies have been registered than after remaining companies are registered. Here we have described the private life insurance companies registered in which year wise.

Private Player in Life Insurance industry: Sr.

Registration

Date of

Name of the Company

No.

Number

Reg.

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.

32

Strategic Analysis of Indian Life Insurance Industry

1. LIFE INSURANCE CORPORATIOMN INDIA: VISION "A trans-nationally competitive financial conglomerate of significance to societies and Pride of India" MISSION "Explore and enhance the quality of life of people through financial security by providing products and services of aspired attributes with competitive returns, and by rendering resources for economic development." 2. ALLIANZ BAJAJ LIFE INSURANCE COMPANY LTD: Allianz Bajaj life insurance company ltd with a capital base of RS.1.5 billions is a joint venture between ALLIANZ AG and BAJAJ AUTO LTD. The company was incorporated on MARCH 12, 2001 and received the IRDA certificate of registration on august 3, 2001 to conduct life insurance business in India. Bajaj auto ltd. The flagship company of Bajaj group is one of the largest two and three- wheeler manufactures, and forth-largest manufacturer of two- wheelers in the world, with annual

turnover of RS. 42.16 billion. The company enjoys a very

strong brand image in this industry. Founded in 1890, the Allianz Group is one of the world’s leading insurance companies with over a 100 years’ experience in insurance and related services. With a presence in over 70 countries, it is also the largest insurer in Europe. The key business areas of Allianz group include General Insurance (property, engineering, marine, motor, casualty and miscellaneous), reinsurance, risk management, life and health insurance, asset management and pension funds management. Rated ‘AAA’ by Standard & Poor, it has assets over 670 billion DM (Rs 17,160 billion) under its management.

33

Strategic Analysis of Indian Life Insurance Industry

3. 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 companies, with interests in ayerdedic specialties, pharmaceuticals, personal care and health-care products, the annual sales turnover of the group is over Rs 12 billion. Aviva plc. is the largest life and general insurance group of the UK, and the world’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 plc. 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. 4. BIRLA SUN LIFE INSURANCE COMPANY LTD. : The Birla Sun Life Insurance Company, is a 74.26 joint venture between the Aditya Birla Group and Sun Life Financial Services of Canada, and has an equity capital 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 welldiversified 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 business are life insurance, annuities and mutual fund and investment services. In Canada, the company is especially strong in the corporate life and health insurance and savings markets.

34

Strategic Analysis of Indian Life Insurance Industry

5. HDFC STANDARD LIFE INSURANCE COMPANY LTD. : HDFC Standard Life Insurance Company Ltd. was incorporated o August 14, 2000. HDFC 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 emerged as the largest residential mortgage finance institution in the country, raising its capital to Rs 1.19 billion and an asset base of Rs 150 billion. It operates through 75 locations throughout India, and has an international office in Dubai, UAE, with service associates in Kuwait, Oman and Qatar. Standard Life, which has been in the life insurance business for the past 175 years, is Europe’s largest mutual life assurance company. With an asset base of Rs 6000 billion, it has the distinction of being accorded the ‘AAA’ rating by Standard & Poor for the past six years. 6. ICICI-PRUDENTIAL LIFE INSURANCE COMPANY LTD. : The ICICI-Prudential Life Insurance Company ltd, with ICICI’ s share at 74 per cent 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 billion. It commenced commercial operations on December 19, 2000, becoming one of the first few private sector players to enter the liberalized arena. The World Bank, the Government of India and the Indian Industry, to promote industrial development in India by providing project and corporate finance to the Indian industry, established ICICI LTD., in 1944. Since its inception, it has grown 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.

35

Strategic Analysis of Indian Life Insurance Industry

Founded in 1848, Prudential plc. has grown to become one of the largest providers of a wide range of savings products for the individual, including life insurance, 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 operation was in India, way back in 1923, to establish life and general insurance branch agencies. 7. ING-VYSYA LIFE INSURANCE COMPANY PVT. LTD. : As per the joint venture agreement, Vysya Bank holds 49 per cent, ING 26 per cent, and the GMR Group, which has wide ranging interests in fields which as power generation, infrastructure, manufacturing, software and banking, holds 25 per cent. This joint venture is expected to be the first Banc assurance venture in the country. The Vysya Bank, which has equity participation from Bank Brussels Lamberts, is one of the largest private banks in India with 480 retail outlets, the bank, given its significant branch penetration, has a high degree of retail focus. The ING Group, with an asset base of over Rs 284.2 billion is a global financial institution of Dutch origin, which is active in the field of banking, insurance and asset management in over 60 countries. ING Insurance is the world’s second largest life insurance company as per the latest Fortune rankings. It is the third largest financial services company in Europe, and the tenth largest financial services company in the world. 8. MAX NEW YORK LIFE INSURANCE COMPANY LTD. : Max New York Life is a partnership between Max India Limited, one of India’s leading multi-business corporations and New York Life. The paid-up capital of the joint venture is Rs 2.5 billion.

36

Strategic Analysis of Indian Life Insurance Industry

Max India has significant presence in the most vital and fast growing sectors of the Indian economy, viz., telecommunication services, Electronic components distribution, specialty plastic films and bulk pharmaceuticals. It is also active in the emerging knowledge-based areas of health care, financial services and IT. In 1998, New York Life International Inc., had total revenues amounting to almost US $20 billion, and was rated the number one provider of new life insurance policies in the USA. In the same year, New York Life was also the leader in insurance sales to the growing Indian community in the USA. 9. MET LIFE INDIA INSURANCE COMPANY LTD.: The Met Life India Insurance Company, joint venture between the US insurance major Metropolitan Life Insurance Co., the Jammu and Kashmir Bank Ltd., the Pallonji Group and some high net worth individuals, was incorporated in India on April 11, 2001. The company started its operation with an initial capital of Rs 1.25 billion. The Metropolitan Life Insurance Co., established in 1867a, is a member of the Metropolitan Life Group and is licenses in the USA, Canada and a few other countries. Its major lines of business are individual and group life insurance. Pallonji & Co. Pvt. Ltd., is primarily engaged in contracting and has under taken major contract for power generating situation, chemical and fertilizer factories petroleum refineries and gas platform. Ti has also diversified outside in their

main life of

business in to the field of non- convention energy source. 10. OM KOTAK MAHINDRA LIFE INSURANCE COMPANY LTD. The joint venture OM KOTAK MAHINDRA life insurance started off with an initial capital of Rs. 1.5 billions, with a 74:26 stake between Kotak Mahindra life insurance and old mutual plc.

37

Strategic Analysis of Indian Life Insurance Industry

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 mid eighties, it has evolved into a full service financial conglomerate, covering auto and consumer finance, assets management, investment banking, securities trading and equity research. It operates across 30 centers in India and in Dubai, London, New York and Mauritius. Old mutual plc. is a leading global financial services provider, providing a broad 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. 11. SBI LIFE INSURANCE COMPANY LIMITED: This joint venture has 74% capital participation from the state bank of India (SBI), 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 share. It net worth as on March 2000 stood at Rs. 121.46 billion, with a deposit base 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, merchant banking, mutual fund and primary dealership in government papers and factoring businesses. BNP paribus, which is one among the three largest banks in Europe, is the holding company of Cardiff, its insurance arm. It was set up in 1973 and specialized in long term savings, protection products and creditors insurance. In 1999, its premium income stood at US $ 4 billion, with assets worth over US $ 23 billion under its management. Based in France, it has the expertise for selling insurance products through bank and as operation in over 20 countries.

38

Strategic Analysis of Indian Life Insurance Industry

12. 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 turnover 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 insurance company viz. new Indian assurance company ltd. (1919), prior to the nationalization of this sector. The American insurance group (AIG) is the leading US based international insurance 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 jurisdiction throughout the world.

39

Strategic Analysis of Indian Life Insurance Industry

CURRENT SCENARIO

Life Insurance Industry is growing at the rate of 68 % respectively.

COM PANY M ARKET SHARE( IN %) 82 .3%

Bajaj Allianz ING Vysya AMP Sanmar SBI Life TATA AIG HDFC Standard ICICI Prudential BIRLA Sunlife AVIVA

0.2%

0.9%

2.6%

% 8. 0

0.5%

5.6%

40

2.0% 0.4% 1.4%1.3% 1.8% 0.3%

Kotak Mahindra Max New York Met Life LIC

Strategic Analysis of Indian Life Insurance Industry

FIRST YEAR PREMIUM-AUGUST 2004 % of No. of policies/

% of No. of lives

%of

N

pre

no.

covered under

lives

O.

miu

of

group schemes

covered

Sr

Company

Premium u/w

Schemes

AUGU

UP

m

AUGU

UP

polic AUGU UP TO under

ST

TO

UP

ST

TO

ies

AUG

UP

UST

TO

UP TO

AUG

AUGUS

UST

T

AUGU TO ST

AUG UST

1. 2.

Baja Allianz ING Vysya

3957.4

14395. 2.03

1

73

762.05

2606.2 0.37

17251

AMP Sanmar

521.22

8125

1823.2 0.26

5. 6. 7. 8. 9.

12768. 1.80

7

21

1598.3

9150.0 1.29

3

7

HDFC

2011.4

9671.5 1.36

Standard

5

2

ICICI

8803.5

39977. 5.63

Prudential

8

55

TATA AIG

BIRLA

Sun 4561.8

18150. 2.56

1082.9

5623.2 0.79

1

0

1089.9

3626.4 0.51

3

8

York

4

52,208

2.02

3492

0.46

0

5898

0.23

2705

1232

0.16

3349

21305

0.82

7613

3412

0.45

94848

264883

10.24

15253

7967

1.04

16197

129927

5.02

15459

5921

0.77

5318

57363

2.22

38821

1816

2.23

25818

31965

1.24

0.63

5162

19335

0.75

0.39

11034

49047

1.90

0.21

7812

35009

1.35

0.85

3810

34867

1.35

35

AVIVA

New 1459.3

3142

3

60

11. Max

0.92

3

6

Mahindra

schemes

8

life

10. Kotak

T

1

4374.2

SBI Life

group

8

5 4.

AUGUS

7

7 3.

7023

ST

11759

4802 2

5705

2952 1

4567

1622 5

6356.3 0.90 5

15379

6550 5

41

Strategic Analysis of Indian Life Insurance Industry

348.36

12. Met Life

1522.8 0.21

3164

4 13. LIC Total

1048

0.14

5618

84501

1799441 69.59

9

127451

58447

82.4

153424

7023

91.6

60959

.85

1.09

0

1

186

3

8

158022

71014

100

168004

7665

100

79170

.55

3.06

2

083

2585751 100

6

PREM IUM U/W IN AUGUST 2OO4(Rs in Lakhs) Series1 140000

PREMIUM

120000 100000 80000 60000 40000 20000

LI C

aj aj

A

lli an z IN G Vy A M sy P a Sa nm ar SB IL TA ife H TA D FC A IG St IC an IC da IP rd ru de B nt IR LA ial Su nl ife K ot A ak VI V M A ah in M dr ax a Ne w Y or k M et Li fe

0

B

3.27

COMPANY

The life insurance industry underwrote new business premium of Rs.1, 86,605.46 lacks during the month of July 2004.

42

Strategic Analysis of Indian Life Insurance Industry

The life insurance industry underwrote new business premium of Rs.1, 86,605.46 lakh during the month of July 2004, taking the cumulative premium underwritten during the current year 2004-05 to Rs.5, 52,515.95 lakh. LIC underwrote premium of Rs.4, 57,019.23 lakh i.e., a market share of 82.72 per cent, followed by ICICI Prudential and Birla Sun Life with premium underwritten (market share) of Rs.31, 173.97 lakh (5.64 per cent) and Rs.13, 591.67 lakh (2.46 per cent) respectively. While LIC’s market share declined from 90.12 per cent for the period ended July 2003, all new life insurers increased their market share, over the corresponding previous year numbers. Cumulatively, the new players underwrote first year premium of Rs.95, 496.72 lakh. In terms of policies underwritten, the market share of the new players and LIC was 8.30 per cent and 91.70 per cent as against 6.09 per cent and 93.91 per cent respectively in the corresponding period in the year 2003-04. The premium underwritten by the industry up to July, 2004, towards individual single and non-single policies stood at Rs.81, 244.37 lakh and Rs.3, 39,644.37 lakh respectively accounting for 1,85,806 and 57,95,219 policies. The group single and non-single premium accounted for Rs.1, 21,352.74 lakh and Rs.10, 274.47lakh. The total Individual premium and Group premium underwritten was Rs.4, 20,888.74 lakes and Rs.1,31,627.21 lakes respectively as against Rs. 2,66,468.62 lakes and Rs.62,636.22 lakes underwritten in the corresponding period of the previous year. The number of lives covered by the industry under the various group schemes was 17, 95,705 during the period ended July 2004. LIC covered 11,89,843 lives under the group schemes accounting for 66.26 per cent of the market, followed by SBI Life with 1,70,035 lives (9.47 per cent), Tata-AIG with 1,13,730 lives (6.33 per cent) and MetLife with 78,883 lives (4.39 per cent). The accompanying table does not include the numbers for Varishtha Pension Bima Yojana. Premium underwritten by LIC under this pension scheme during the period April - July 2004 was Rs.1, 07,264.83 lakh towards 54,740 policies.

43

Strategic Analysis of Indian Life Insurance Industry

Future Possibilities (Next 5-10 Years) Job opportunities are likely to increase manifold. The number of people working in the insurance sector in India is roughly the same as in the UK with a population that is 1/7 India's; the US with a population 1/4 the size of India has nearly 4 times the number. In the emerging markets, the picture is no less encouraging. In S Korea, the no of full time employees more than doubled over a ten-year period. Thailand added 50 per cent more jobs in four years. The liberalization of the insurance sector promises several new jobs opportunities for those employed in the finance sector that are equipped with degrees in finance. Finance professionals who had witnessed a slump in the job market would be a much-relieved lot to hear about the privatization of the insurance sector. Let us look into the type of jobs that will be created once the private players come on the scene. Certainly, it won't be far different from the traditional streams in any other industry. There will be demand for marketing specialists, finance experts, human resource professionals, engineers from diverse streams like the petrochemical and power sectors, systems professionals, statisticians and even medical professionals. Apart from this, there will be high demand for professionals in the streams like Underwriting and claims management and actuarial sciences. There could be a huge inflow of funds into the country. Given the industry's huge requirement of start-up capital, the initial years after opening up are bound to see a strong inflow of foreign capital. Moreover, given that the break-even, typically, comes much later than in the case of other sectors, odds are that the first remittance of dividend will not happen before a good 10-15 years. In the areas of reinsurance, huge capacity is likely to be created with players like Swiss Re and Munich Re keenly observing the unfolding saga of liberalization of insurance industry in India. Not only the outward reinsurance will reduce, it is bound to attract inward reinsurance from the neighboring countries and regions. If the regulator is forward looking and legislature is supportive, this trend may well lead to the creation of a Lloyds like market for the direct as well as reinsurance businesses.

44

Strategic Analysis of Indian Life Insurance Industry

However, increased competition is very likely to result in rate reductions in certain classes of business, but in those areas that have so far been crosssubsidized an increase in rates may be possible. Overall, the rate reductions may outweigh the increases, thus bringing down the re-insurance premium volume available. Apart from pure re-insurance activities, which is providing insurance protection, a revolution will come in service related fields like training, seminars, workshops, know-how transfer regarding risk assessment and rating, risk inspections, risk management and devising new policy covers, etc. Also, with more players in the market, there will be significant increase in advertising, brand building, and keen pricing not ridiculous pricing and this will benefit whole lot of ancillary industries. Another effect of de-regulation will be that, projects, especially mega-projects where one needs the capacities of the international re-insurance market, will get exposed to international trends to an even greater extent than is the case today. This will affect rates too. Areas like the personal lines segment, where we also expect to see substantial growth as also new types of covers, would usually not be affected by international trends in the same way as, there is much less need for global re-insurance support. Substantial shift in the distribution of LIFE insurance in India is likely to take place. Many of these changes will echo international trends. Worldwide, insurance products move along a continuum from pure service products to pure commodity products. Initially, insurance is seen as a complex product with a high advice and service component. Buyers prefer a face-to-face interaction and place a high premium on brand names and reliability. As products become simpler and awareness increases, they become off-theshelf, commodity products. Sellers move to remote channels such as the telephone or direct mail. Various intermediaries, not necessarily insurance companies, sell insurance. In the UK for example, retailer Marks & Spencer now sells insurance products. In some countries like Netherlands and Japan, insurance is marketed using post office's distribution channels. At this point, buyers look for low price. Brand loyalty could shift from the insurer to the seller.

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Strategic Analysis of Indian Life Insurance Industry

In other markets, notably Europe, this has resulted in bancassurance: banks entering the insurance business. The Netherlands led with financial services firms providing an entire range of products including bank accounts, motor, home and life insurance, and pensions. Other European markets have followed suit. In France over half of all life insurance sales are made through banks. In the UK, almost 95% of banks and building societies are distributing insurance products today. In India too, banks hope to maximize expensive existing networks by selling a range of products. Various seminars and conferences on banc assurance are taking place and many bankers have clearly shown their inclination to enter insurance market by leveraging their strengths in the areas of brand image, distribution network, and face to face contact with the clients and telemarketing coupled with advanced information technology systems. The mergers of Citibank with Travelers in USA and of Winterthur, the largest Swiss Co. with Credit Suisse are recent examples of the phenomenon likely to sweep India too. Insurers in India should also explore distribution through non-financial organizations. For example, insurance for consumer items such as refrigerators can be offered at the point of sale. This piggybacks on an existing distribution channel and increases the likelihood of insurance sales. Alliances with manufacturers or retailers of consumer goods will be possible. With increasing competition, they are wooing customers with various incentives, of which insurance can be one. Another potential channel that reduces the need for an owned distribution network is worksite marketing. Insurers will be able to market pensions, health insurance and even other general covers through employers to their employees. These products may be purchased by the employer or simply marketed at the workplace with the employer’s co-operation. Worldwide interest in E-commerce and India's predominant position in information technology and software development is also likely to be a major factor in the marketing of insurance products in the immediate future. The Internet account is increasing in arithmetic progression and the trend has already been set by some of the leading insurers and insurance brokers worldwide.

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Strategic Analysis of Indian Life Insurance Industry

Finally, some potential Indian entrants into insurance hope to ride their existing distribution networks and customer bases. For example, financial organizations like ICICI, HDFC or Kotak Mahindra intend to tap the thousands of customers who already buy their deposits, consumer loans or housing finance. Other hopeful entrants anticipate specific alliances such as with hospitals to provide health cover.

Summery: Over the past three years, around 40 companies have expressed interest in entering the sector and many foreign and Indian companies have arranged anticipatory alliances. The threat of new players taking over the market has been overplayed. As is witnessed in other countries where liberalization took place in recent years we can safely conclude that nationalized players will continue to hold strong market share positions, but there will be enough business for new entrants to be profitable. Opening up the sector will certainly mean new products, better packaging and improved customer service. Both new and existing players will have to explore new distribution and marketing channels. Potential buyers for most of this insurance lie in the middle class. New insurers must segment the market carefully to arrive at appropriate products and pricing. Recognizing the potential, in the past three years, the nationalized insurers have already begun to target niches like pensions, women or children.

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Strategic Analysis of Indian Life Insurance Industry

MARKETING PERSPECTIVE

Distribution perspective (The key differentiator): It has been over two years since the Indian insurance market has opened up, and the new entrants in market have set up shop in every major city. The public sector companies have already established themselves in the market. But there are multiple challenges faced by these insurance companies, of which two are critical: Designing of products suiting the market. Using the right distribution channels to reach the customer. While the companies have been quite successful in dealing with the first of these challenges using and technical know how of the partners, most are still grappling with the right channel mix for the reaching potential customers. This paper discuss the distribution channel from the prospective of the sociocultural Ethos of the market and channels fit into it, along with where the various companies face challenges and bottlenecks. Whenever any debate arises about the intermediaries and distribution channels, the discussion veers to: technology and its impact on distribution. However, die authors believes that the basic existential problems being faced by the channels in this market need to be looked in to first, and then the queans of enablers-technology, tools, training, learning to be taken up. Insurance has to be sold the world ever, and the Asian market is to no exception. The Touch point with the ultimate customer is the distributors or the producers, and the role played by them in insurance market is critical.

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Strategic Analysis of Indian Life Insurance Industry

It is the distributor who makes the difference in terms of the quality of advice for choice of product, servicing of policy post sale and settlement of claims. In the Asian markets, with their distinct cultural and social ethos, these conditions will play a major role in shaping the distribution channels and their effectiveness. In today’s scenario, insurance companies must move from selling insurance to marketing an essential financial product. The distributors have to become trusted financial advisors for the clients and trusted business associates for the insurance companies. This calls for leveraging multiple distribution channels in a cost effective and customer friendly manner. For example, in the developed markets, producers form the major channels of distribution, while the web as a complementary channel is catching up slowly. According to a Forrester survey, 88% of the life insurance executives responding identified agents as the primary channel of distribution. The distinction of channels in the developed markets is: personal distribution systems include all channels like agencies of different models and brokerages, banc assurance, and work site marketing. Direct response distribution systems are the method whereby the client purchases the insurance directly. This segment, which utilizes various media such as the internet, telemarketing, direct mail, call centers, etc., is just beginning to grow. Distribution Scenario in the Indian Market: In today’s Indian life insurance market, the challenge to insurers and intermediaries is two pronged: •

Building faith about the company in the mind of the client.

•

Intermediaries being able to build personal credibility with the clients.

Traditionally, tied agents have been the primary channels for insurance distribution in the Indian market; the public sector insurance companies have their

49

Strategic Analysis of Indian Life Insurance Industry

branches in almost all parts of the country and have attracted local people to become their agents. The agents are from various segments in society and collectively cover the entire spectrum of society. A person who has lived in the locality for many years sells the products of the insurance company with a local branch nearby. This ensures the last mile touch point being closer to the customer. Of course, the profile of the people who acted as agents suggests they may not have been sufficiently knowledgeable about the different products offered, and may not have sold the best possible product to the client. Nonetheless, the customer trusted the agent and company. This arrangement worked adequately in the absence of completion. In today’s scenario agents continue as the prime channel for insurance distribution in India, as is the case in most market, supported by call centers to a small extent. almost all the new players follow this model primarily because the regulation for other channels are yet to be put in place. However, there is great excitement in the industry over the impending

broker’s

regulations, and companies are planning possible channels in their enthusiasm to increase volumes. The beliefs that all these channels will grow and seamlessly integrate to bring in business seem a fallacy. What have emerged are a much more difficult and evolving market scene with exiting players, more new players coming in, and global practices and ideas being tested. But none of this has changed the fundamental character of the market, which we believe will take more time than expected.

Summary: The current state of insurance distribution in India is still in flux. On one hand, insurer are awaiting regulations to be approved

for brokerages and banc

assurance to be truly Launched on the other hand they are trying the corporate models of intermediaries. In addition, the traditional models in the markets.

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Strategic Analysis of Indian Life Insurance Industry

There is no right and wrong in all this. The success of marketing insurance depends on understanding the social and cultural needs of the target population, and matching the market segment with the suitable intermediary segment. In addition, a major segment of the Indian population has low disposable income, meaning that every penny won will be obtained after a lot of persuasion and the expected value for money is high. All intermediaries cannot sell all lines of business profitability in all market. There should be clear demarcation in the marketing strategies of the company from this perspective. Client should also receive price differentials for using different channels. This not a new concept, as the public sector property $ casually companies are giving discounts in lieu of agency commission. The channel composition should not be homogeneous but should reflect the larger society. For example: Agents from different economic, social strata, and different age and gender. Brokers stretching from corporate to NGO ARE to milk co-operative. These intermediaries need to be empowered with the right learning, training and development tools and technology enablers. Coupled with the right product mix, this will help the insurers to survive and flourish in this competitive market.

VALUE CHAIN ANALYSIS: 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 competition among various insurance companies will become the name of the game. Insurance companies have to face and deal with competition not only in terms of investments performance but also customer service.

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Strategic Analysis of Indian Life Insurance Industry

Hence an aggressive competitive strategy is the need of the day for the insurance companies in order to gain a competitive niche, survive and proliferate in the insurance industry. To be successful in one’s area of business in the presence of 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 is able to create for its buyer that exceeds the cost of creating it. According to him, “competitive advantage stems from many discrete activities can contribute to a firm’s relative cost position and creates a basis for differentiation. A systematic 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 the history of the firm, its strategy for the future, approach to which it belongs. The value chain may be similar across firm in the same industry, but different 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 categories of primary activities for a firm involved in competition in any industry. These categories can be represented in the diagram. Firm infrastructure

MARGINS

Human Resource Management Technology Development Procurements In

Operations

Out

Marketing

Bound

bound

and sales

Logistic

logistic

52

Services

Strategic Analysis of Indian Life Insurance Industry

Risk Management in Life Insurance

Sources of risk: Designing any strategy to manage future risks of any organization need the understanding of the risk and their Origin and direction – linked to our environment, which is quite dynamic. The world changes so fast that neither information systems nor management practices are able to capture the potential trend and the direction of the change. This leads to uncertainty and inability to initiate proactive measures. The major changes that have been noticed are: changes in demographic structure – mortality, life style, killer diseases (like AIDS and SARS) impacting the demographic composition; impact on financial services of rapid globalization, Information explosion and unanticipated volatility in financial markets. These changes have made the Law of Averages, which has been traditionally used by Life Insurance Corporation (LIC) to discount the impact of risks, has become nearly redundant and therefore, there is a search for a new model methodology and Management strategies to face the challenges of various types of risks that are being confronted by life insurance companies. As we proceed to discuss strategy, let us examine the import types of risks. Types of risks: It is virtually impossible to provide a list of risks in life insurance operation basically due to the fact that risks are associated with multidimensional changes associated with the factors mentioned above. However, the major focuses of risks of insurance business are related to macro-economic factors, pricing, claims, credit, spreads, and investment risks which can be classified in two ways: one from the actuarial point of view and the other from the financial market point of view.

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Strategic Analysis of Indian Life Insurance Industry

Actuarial view of risks is basically classified as: 1. Asset – Liability Risks: Arising from mismatch between assets and liability of a life insurance company due to fluctuation in interest rates, inflation causing changes in value of assets and liabilities. 2. Asset Risks: Arising from default of borrowers causing or decline in market value of investment assets. 3. Pricing Risks: Arising from uncertainty in mortality, claims, leakages, management expenses and income from premium, investment and real estate. 4. Miscellaneous Risks: Arising from changes in regulatory regime and requirements, taxation, malpractices at operational level and inefficiency in management practices, lack of accountability and fiduciary responsibility. 5. Financial view of risks: The actuarial concept of risks as mentioned above can however be broaden and decomposed into six generic types from the financial sector economist’s view these risks are: 1) Actuarial Risks: Associated with issuance of insurance policies and related liabilities. These risks arise due to higher cost of raising funds, higher underwriting losses than projected etc. 2) Systematic or Mack risks: Associated with asset liability mismatch, arising out of changes in interest rate, inflation etc.

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Strategic Analysis of Indian Life Insurance Industry

3) Credit Risks: Associated with default of borrowers of funds. 4) Liquidity Risks: Associated with funding crisis arising out of unforeseen demand for funds to meet obligations. 5) Legal Risks: associated with financial contracts, frauds, violation of regulation etc.

Measuring Risk: Risk management however, calls for risk identification and risk measures. A number of methods have been in use to measure the risks in an insurance company, though there is no single best measure yet like VaR (Value at Risk), which is widely used for banking industry. Most widely used measures in life insurance companies are: Actual and Expected Experience Monitoring Risk Based Capital (RBC)/Ratios/ Target Scenario Analysis Stress Testing Cash Flow Testing (CFT) Cash Flow Matching (CFM) Duration and Convexity Analysis Performance Attribution/Exchanges by Source In A/E ratio analysis actual experience to budget plan and pricing is monitored to see to what extent liability Assumptions are met. In RBC analysis ‘the ratio of RBC to adjusted statutory surplus is used as the standard for Surplus adequacy related to risk’. In scenario analysis liabilities and assets of a portfolio is examined under different Macro-economic assumption, while stress testing is conducted by using scenario to find out extraordinary losses arising out of a particular widely used to examine the whether asset in matching the liabilities of a portfolio. Under CFT analysis, basic

55

Strategic Analysis of Indian Life Insurance Industry

asset/liability analyses are undertaken to verify that sufficient reserves are maintained particularly for generated income controls (GICs) and annuity products, while under CFM liabilities are matched with cash flows. There are many other measures to monitor the portfolio risks – and normally a company simultaneously uses a set of measures. While in convexity analysis the price sensitivity of duration to a change in the interest rate is monitored, in duration analysis price sensitivity of portfolio or security is examined in return to change in interest rates. Performance attribution test is conducted to find out the risk factors Causing losses by comparing the actual performance with pre-designed performance. Risk management practices Like Risk management methods there are a variety of techniques used by the life insurance companies to manage risks. According to Babbel and Santomero of Wharton School, ‘it appears that a common practice has Evolved such that four elements have become key steps to implementing broad based risk management system.’ Standards and Reports – setting up underwriting risk classification and review standards and standardization of financial reporting system. Underwriting Authority and Limit - To exercise internal control on managers. Investment guidelines and strategies – to exercise control over desired asset liability mismatch. Incentive Scheme – to relate compensation to risk and earnings. Since there is no uniform technique to manage the entire gamut of risks inline insurance company there are several methods and developed practices to manage actuarial risks, through pricing system, solvency margin etc. However, recent developments indicate that ‘static assumptions regarding loss distribution failed to manage risks arising out of interest rate volatility. Another risk factor is the incentives to agents and marketing staff, which encourages them to sell more new policies, replace old polices, and all these increase the overall risks for the company. In the areas of systematic risks, top

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Strategic Analysis of Indian Life Insurance Industry

on the list of risk management technique is the Asset Liability Management (ALM) because it not only covers interest rate volatility but also non-interest risks arising out of embed options in the policy. Further, ALM is used to manage product specific risks as well as companywide risks. A survey of global consulting firm, Milliman USA, of Risk Management Practices of US Life Insurance companies shows that more than 75 per cent of the companies indicated that they use the following Risk Management practices: Risk Insurance: Diversification of Assets Diversification of Liabilities Selective underwriting Continual Process Improvement Hedging via Capital Market Stochastic Pricing Risk Adjusted Pricing Targets. Risk limits set the maximum exposure to risk factors and risk tolerance of the Management. Reinsurance allows risk transfer to another party through a reinsurance agreement. Diversification of assets minimizes the impact of unsystematic risks on the portfolio while diversification of liabilities is achieved by offering diverse products. Hedging in capital markets is aimed at reducing the adverse impact of interest rate fluctuation achieved through derivatives, futures, forward trading, options and swaps. It may be mentioned here that insurance supervision, to strengthen the risk management practices, focuses more and more on the capital of an insurance company against the benchmark of assured risks in addition to the statutory solvency margin. In the US, the risk based capital laws now in effect in all states require commissioners to take specified actions when a firms’ risk based capital ratio, defined as the ratio of actual ratio to risk based capital, falls below a certain threshold (Cumming, Philips and Smith 1997). Even in Europe, the solvency project is centered on the risk based capital model: In a capital based solvency system, risk bearing business will be linked to more risk capital.

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Strategic Analysis of Indian Life Insurance Industry

Risk management scenario in India: So far in India, very scanty attention has been given to risk management in life insurance companies. Neither is any systematic and structured risk management practice followed in insurance companies nor have any specific guidelines on risk standards, techniques and risk management been developed. Of course IRDA guidelines on Investment Management and Asset, Liabilities and Solvency margin of insurers indirectly deal with Risk Management. The risk management prevailing in Indian companies is of a very rudimentary type. Indian financial markets, particularly during the post-liberalized era have witnessed significant understanding. Global intervention, changes in interest rate etc. have increased the risk exposure. It is therefore necessary to create awareness about the necessity of risk management as well as to develop expertise in this discipline. However, risk management practices can be successfully implemented through institutionalization of the risk management culture and creating a necessity for adopting it. Management may also consider introducing certain incentives and disincentives – incentives for maximizing policyholders’ return through risk management and disincentives for non-implementation of risk management which adversely affect asset value and policyholders’ benefits. Risk management has its cost also and they include the cost of professional training, technology, time and shortterm losses due to rigid implementation of risk policies. However managements should be willing to bear this cost in their own long term interest. In view of the poor state of the risk management practices in India, the following steps are urgently required. Risk standards: A uniform practice of risk management needs to be introduced through the life insurance industry. This calls for introduction of Insurance Industry Risk Standard (IIRS) incorporating the entire gamut of risk management and risk oversight. Risk Management must include the fiduciary responsibility of board and managers, risk management objectives, responsibilities of various entities, checks and balances,

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Strategic Analysis of Indian Life Insurance Industry

independent risk oversights. For these, there is need for adequate education and training, which also may preferably be uniform industry wide. Oversight: Independent review of risk management practices and risk measurements are required at frequent interval by the primary fiduciary and manager fiduciary. This review should include analyzing policy compliance, due diligence, monitoring investment guidelines, investment strategies, risk limits, and evaluation of investment models. If required, revision redesigning of models, strategies, risk limits may be done within the overall guidelines and parameters of the regulator. Institutionalizing Risk Management: Separating Risk Monitoring (RM) from operational functions can institutionalize risk management practices. Monitoring should be entrusted to the entity not involved in operational matters. Though implementation will be reviewed by the primary fiduciary like board, top management, yet there is a necessity for independent monitoring through designated person. Many organizations appoint a Chief Risk Officer (CRO) who is a reasonably senior level executive reporting to the chief executive of the organization. However, for better coordination and monitoring a risk management committee (RMC) can be set up which would be assisted by the CRO. RMC would be a high power committee report directly to the board on quarterly basis. RMC would monitor implementation of Risk Standard, Risk Limit, ALM, measures, analyze investment strategy in relation to portfolio objectives and predetermine risk limits. Risk Governance : The risk management system to protect assets from depletion may be made stronger through implementation of risk governance. Risk governance can be established either through ‘risk control’ or through ‘risk reward’. In either of these models, there is a necessity for improving risk knowledge, risk information and

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Strategic Analysis of Indian Life Insurance Industry

competitive risk Practices. Genuine risk reporting and starting of risk information will strengthen risk governance. However, the goal of risk governance can be achieved if the top management and board are truly interested and sincere. Risk management should not be thought and the regulatory requirement, but an integral part of strategy and way of corporate life.

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Strategic Analysis of Indian Life Insurance Industry

PEST ANALYSIS

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, it expected that the insurance companies might consider offering political risk coverage 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 implications for exporters. The term ‘political risk’ has a wider connotation than commonly understood 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 international trade, particularly due to problems arising out of foreign legal jurisdiction, political changes and currency exchange difficulties faced by many developing countries. Prohibition for Investment: The funds of policyholders are prohibited from being directly / indirectly invested 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 conditions of investment by insurer.

•

Give specific directions applicable to all insurers for the time, manner and other conditions subject to which the policyholder’s funds should be invested in the infrastructure and social sectors.

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Strategic Analysis of Indian Life Insurance Industry

•

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 other conditions of the investments provided the latter are given a reasonable opportunity of being heard.

Insurance business in rural / social sector: All insurers are required to undertake such percentage of their insurance business, including insurance for crops, in the rural social sector as specified by the IRDA. They should discharge their obligations to providing life insurance policies 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 commencement of the IRDA Act. The application for renewal should be accompanied by a fee 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 insurer would be Rs 100 crore to carry on life insurance business and Rs 200 crore to exclusively do reinsurance business as per Section 6.

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Strategic Analysis of Indian Life Insurance Industry

Investment of funds outside India: Insurers outside India as per Section 27-C cannot invest the funds of policyholders. Insurance business in Rural Sector: After the commencement of the IRDA Act, 1999, every insurer would have to undertake such percentage of life insurance business in the rural sector as may be specified 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 government. Since 1956 insurance sector was highly regulated by government of India. On March 16, 1999, the Indian cabinet approved on Insurance Regulatory Authority Bills that was designed to liberalize the insurance sector.

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Strategic Analysis of Indian Life Insurance Industry

Two governments in India have fallen over the issue of liberalization of the insurance sector (which was nationalized in 1971). But the government of A.B. Vajpayee 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 growth of infrastructure.

Important government guidelines for private players for entering into Indian life insurance market: 1. Private companies with a minimum paid-up capital of Rs. 1bn should be allowed to enter the industry. 2. No company should deal in both life and general insurance through a single 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 venture with Indian firms. Government will prevail on grounds that the Rs. 4.5 billion India needs for infrastructure development in the five years from 1997-98, cannot materialize if the insurance sector is not opened up.

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Strategic Analysis of Indian Life Insurance Industry

BODIES THAT REGULATE THE SECTOR: For better regulation purpose of the insurance sector the government has established 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 IRA 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 repealing 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 capital stipulations for new insurance companies. The IRA has stipulated a minimum rural presence for all companies. The exhaustive guidelines have been issued for the appointment of intermediaries (brokers, agents, surveyors and actuaries). Feature of IRA: 1. The Bill allowed for up to 26% foreign equity participation in the insurance sector. 2. The current India monopoly companies were required to bring down their equity holding to 26% within a period of 10 years.

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Strategic Analysis of Indian Life Insurance Industry

Government pronouncement: 1. IRA will be sole Authority, which will be responsible for awarding of, licenses i.e. little or no government or political interference in licensing process. 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 insurance 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 Act, 1999, provide for the establishment of an authority to protect the interest policyholders, to regulate, promote and ensure orderly growth of the life insurance industry. Business Requirement:A company will not be issued a license unless the IRDA is satisfied with the sound financial condition, the general character of management, the volume of business, the capital structure, earning prospects for the insurers and that the interests of the general public will be served if registration is granted to the insurer.

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Strategic Analysis of Indian Life Insurance Industry

Foreign insurance companies have been allowed to have a maximum 26% share holding. 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 reserve bank of India one percent of the total gross premium written in India in any 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 out 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 securities 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 dividend on its ordinary shared for the five years immediately preceding or for at least five out of the six or seven years immediately preceding have been paid and which 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, manner and other conditions and investments of assets to be held by an insurer. The IRDA may also direct the insurer to realize the investment, if it sees the investments to be unsuitable or undesirable. The Act prohibits an insurer from directly or indirectly investing policyholder funds outside India. Further, every insurer has to always maintain an excess of the value of his assets 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 does not maintain the required solvency margin, he is required to submit a financial plan, as per directions issued by the IRDA, indicating a plan of action to correct the deficiency within three months.

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Strategic Analysis of Indian Life Insurance Industry

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 provisions 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 in order to ensure continual compliance. In order to maintain transparency in its dealings, insurers would have to keep separate 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. Further, 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 company. 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 required to report to the central government. The central government may base on the report, appoint an administrator to manage the affairs of the company. This would act as a further assurance to the consumers, 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 administrator would be appointed to serve their needs. The court may also wind up the company if it fails to deposit or keep deposits as per the requirements of the act or if the continuance of the company is prejudicial 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 liabilities it cannot continue its business, except for the purpose of affecting an amalgamation or a

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Strategic Analysis of Indian Life Insurance Industry

reconstruction of the company. Therefore, a company after issuing 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 under: 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 infrastructure. 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 economically backward classes.

4.

In the event of insurers failing to fulfill the social sector obligations, a fine of Rs. 25 lakh would be imposed the first time. Subsequent failures would 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 respect of any risk or of any category of risks. It is provided that in fixing, amending or modifying such rates etc. the committee shall try to ensure as far as possible that there is no unfair discrimination between risk of essentially the same hazard and also that consideration is given to past and prospective loss experience. Every insurer is required to make payment to the TAC of the prescribed annual fees. TAX POLICY AND INSURANCE SECTOR: Another factor, which affects the insurance sector, is the tax policy. The tax reforms in India are such that it encourages the citizens to invest in the insurance sector.

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Strategic Analysis of Indian Life Insurance Industry

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 saving. Taxation of returns on investment influences, investment decisions and high rates of taxation will discourage the desire to save. Already in India there are complaints that the rates of return on life policies are not what they could be. Therefore tax incentives play a vital role in determining the attractiveness of such policies. Such tax breaks are available in many countries and have helped in the development of their life sector. In western countries the gain from the proceeds of a life insurance policy is paid free of tax. Provided the policy satisfies certain qualifying conditions. Non-qualifying policies get basic rate tax relief, though higher rate taxpayers may still have to pay tax on the gain, although at a reduced rate. The insurance companies can use such tax concessions rate. The insurance companies can use such tax concessions to design products for different categories of taxpayers. The other factors, which affect the insurance sector, are the employment law, and government stability. These are the factors, which affect the insurance industry. 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 mandated to hand over a portion of their funds to the state for investment in infrastructure and for social development through government bonds and securities. In India, the pattern was, accordingly, prescribed in great detail by the government. This was not in the form of guidelines, but as a legal obligation under the insurance Act, 1938.

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Strategic Analysis of Indian Life Insurance Industry

Pattern of investment specified for life insurance:

Type of investment

Percentage

(1) Government Securities

25%

(2)

Government

securities or

other Not less than 50%

approved securities (3) Approved investments (a) Infrastructure and social Not less than 15% sector (b) Other govern by exposure Not exceeding 35%

norms

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Strategic Analysis of Indian Life Insurance Industry

ECONOMICAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY Interest rate at bank and interest rate of P.F variation very much affect to life insurance industry, because people always attract by higher return. Therefore, they do not prefer lower return policy. Unemployment also affects insurance industry, because the unemployment people will not have earning, so saving also affect to life insurance sector Life insurance industry will directly affected by Earthquake, Monsoon, and Natural calamity. Because of these events turns into lots of death, so the life insurance companies have to pay claim against policy. Infant mortality rate and maternity mortality rate are also affecting to life insurance. Typical Indian want luxurious product against low income, so that they prefer installment or annuity (EMI), so that they may not have extra saving to invest in life insurance.

Adequacy of capital: Capital adequacy is a matter of attention in view of the nature of the life insurance business, where in the case a contingency arises, the insurers should be in a position to meet its long-term contractual obligations and pay up the dues or 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 companies 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 essential, 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 will 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 will 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 72

Strategic Analysis of Indian Life Insurance Industry

air travel for men and for transporting materials. This would necessitate substantial property, liability and personal insurance. As far as cover against business interruption is concerned, the pace of business and of change today is so fast that even the most careful assessment of exposure time, and the most liberal coverage cannot protect the insured adequate in the event of a loss be on the increase and insurance companies cannot afford to ignore the vast potential in this business.

Interest Rates: During the last years the government has rationalized interest rate creates better business opportunities for the life insurance sector because the substitute products are graded lower by the customers. On the other hand the value of the holdings of the insurance companies will increase. Rationalized of the interest rates is still expected, and it is an opportunity for the company. Low interested rates mean low investment return for reinsures causing negative impact on their overall net profitability as pricing is to a certain extent sensitive to interest rate fluctuations. The negative impact therefore, lead to higher pricing level for reinsures in order to sustain their profitability. But, in reinsurance market, which is characterized by over capitalization a resulting intense competition. The opportunity for such rate increases practically remains very slim and even non-existent. As a result, reinsures are under tremendous pressure to cut their operational cost to safeguard profitability. Furthermore, low interest rates discourage and even prevent any outflow of capital from reinsurance business to capital markets, causing current over capitalization in reinsurance market to continue. A positive outcome is that low inflation rates, if sustained for a considerable period, usually bring some relief to reinsures from the resulting lower than forecast claims payment. Also, this can lead stability to reinsures administrative cost.

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Strategic Analysis of Indian Life Insurance Industry

As interest rates fall, bond value rise, and insurers feel richer. On the liability side, reserves are not explicitly discounted so lower interest rates do not increase reserves, lower inflation means lower expected future claims payments which lowers required reserves. This in turn increase surplus, again allowing insurers to feel richer. Therefore, low interest rates and low inflation result in higher assets, lower liabilities, hence greater surplus and greater risk capacity 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, force market competition downloads. However, this will also serve to weaken the balance sheets of insurers and create an increase in the demand for balance sheet protections. Lastly, these conditions move risk from the liability side of the balance 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 policyholder on maturity of the policy would go down and would, therefore, lose its attraction 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 insured is looking for. In a situation of high inflation, clients would prefer policies where the savings portion is periodically returned while the risk portion is maintain for the duration of the contract. Those who prefer risk protection are likely to opt for long term policies, which may also be preferred because they are likely to be low premium policies. A flexible system, under which the sum insured, is increased from time to time so that the real value of the cover is maintained, and could give a boost to the market under conditions of high inflation. Fortunately, the rate of inflation in India

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Strategic Analysis of Indian Life Insurance Industry

has been contained to less than 5 percent 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 includes 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 shown in the following figure. Stage 1

Stage 2

Stage 3

Stage 4

Closed market,

Barriers to entry

Barriers to entry Entry costs are low

Entry is controlled are high expertise

reduced

systems and

by state.

to operate is

expertise

can

essential, license

brought.

capital

be requirements

are

same for all.

can be obtained.

Scarce resource is →Permission from state

→

Scarce resource is expertise

→

Scarce resource is capital

→

Scarce resource is brand

From the above figure we can see that now day’s strength of brand is very important aspect for the success in this sector. Of course you should have strong distribution channel without which growth is not possible.

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Strategic Analysis of Indian Life Insurance Industry

Customer satisfaction: Since the customer is the focus of any service industry, every such industry continuously strives for greater variety and better quality of products, improvement 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 there is still not enough concern on the part of the Indian companies, with customer satisfaction, on time renewals, claims settlements, etc. if high standards have been achieved else where, it is not impossible to attain the same in India too. The concept of “sales” is now redefined as a long – standing relationship. The relationship 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 not 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.

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Strategic Analysis of Indian Life Insurance Industry

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 will discuss all of them in brief>

Population: Growth in the population is a major factor pushing up the demand. It is also going to exert a special influence on the life insurance market in other ways. Apart 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 demand. For example, overcrowding in public places of entertainment, public support, or too many vehicles on the road can result in hazards like stampedes and pollution, which require covers and still are not sold on a large scale today. Thus the positive as well as the negative aspects of population growth are going to spur demand.

Life style: The peculiar lifestyle of a country or an age also influences the insurance business. 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 number of vehicles

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Strategic Analysis of Indian Life Insurance Industry

on the roads for people commuting to their jobs or business would mean larger incidence of accidents. This will increase the demand for life insurance products. Of course, there is also the other possibility that wherever it is possible, some people will try to spend a part of their time working at home either because they would like to be with their families or because they find it more convenient. Activities like life insurance and financial services are particularly well suited for such arrangements. With time becoming scarcer for most people who pack in a full day, there is a higher demand for convenience and service. Companies will respond by trying to shorten 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 1999-2000, 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 the same period. However, consumers’ behavior cannot be adequately and accurately predicted. The younger generation is overwhelmingly influenced by consumerism. If this trend continues or increases with increasing income, there will be fewer propensities to save or insure, as a result of which the increasing purchasing poser may not be reflected 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 risks which need to be covered through suitably designed policies. Thus these are how changing life style of the citizens is affecting the life insurance industry.

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Strategic Analysis of Indian Life Insurance Industry

Level of education: India is one of the developing countries: the level of education is very low here. The literacy rate is very poor. More than 50% of the population is still uneducated 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 affect 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 having the 20% of the wealth and the 20% of the total population is having 80% of total wealth. Thus the richer are richer and poorer are poorer. Due to this the life 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 through 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, retirement 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 for the conclusion of potential. Apart from the usual demographic and other well known

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Strategic Analysis of Indian Life Insurance Industry

factors such as age group, income level, sex-wise distribution, and literacy level, a realistic assessment of this potential has to be based on several other relevant factors. Many invisible factors like religious faiths and social values too need to be considered. As such, there is considerable difficulty in accurately estimating the potential and crude estimates can be misleading. The estimate will also vary according to the criteria used to measure if. In principal, every individual is a potential candidate for life insurance. In reality, financial status limits this potential, not only because of the practical consideration of the insurable worth of a person to the insurer in financial terms, but more so due to the prospect’s capacity to pay life insurance premium after meeting other pressing needs. Again, there are many practical factor affecting ‘ 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 they are dispersed, becomes important. In that sense, the cost and profitability of 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 population needs to be “Qualified” in relation to other factors including those mentioned above. Thus, in the opinion of some experts, out of the population in the insurable age group, Only the main workers (i.e., excluding marginal workers) with adequate income may be considered as the actual insurable population. The population in the age group 15-55 is usually regarded as the insurable population, 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 be considered to be not worth insuring.

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Strategic Analysis of Indian Life Insurance Industry

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 unemployment problem, real earning starts from around the age of 25 for salaried persons. For others, particularly small entrepreneurs, traders and businessman, the starting age is a little higher. Only in the affluent sector of society life insurance 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 insurance, mainly because in India the normal retirement age is around 60 years. Also, a high percentage of the population in the lower income group does not remain “insurable” after the age of 50. thus, in our country the practical age range for insurable population actually narrows down to 25 to 50.

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Strategic Analysis of Indian Life Insurance Industry

TECNOLOGICAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY: Internet as an intermediary in the current Indian market customer is not aware about 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 disseminating 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 and subsequently product designed for each of them. In such a scenario Internet can be a effective channel for pushing product specific information to a particular market segment. Consumer feedback about a particular product as well as suggestions 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 would be cut through competition and the real benefit would be to the customers in terms of better products, distribution, pricing, post transaction service and technology. Technology will perhaps be the single largest driver of the retail thrust. The entire strategy will evolve around the absolute ability of the organization. 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 specifically the Internet with realigned strategies would be one of the key factors 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 marinating the database of the customers. The insurance industry having a huge list of the customers.

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Strategic Analysis of Indian Life Insurance Industry

In order to maintain it in manual format it is really the work of stupidity. With 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 details 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 century. Computers are now being used extensively for creating a storing data, information with the help of complex and sophisticated technological tools in every kind of business. This change having been widely accepted, the advantages are numerous such as fast processing improved. Efficiency, cost reduction among several other benefits. However, with every positive change, there is an evil attached and technology is no exception. In technical is an evil attached and technology is no exception. In technical terms, increased sophistications of technology brings 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 results in losses for the business entity. With this change in the business process, insurers have to devise new methods for assessing, underwriting and servicing claims for the so-called e-business insurance. Insurers face challenges to ascertain risks, in order to quantify them because such risks don’t have any past data, which makes it all the more difficult for actuaries. Moreover, what financial impact a particular risk can have is very difficult to be determined. For example, if some hackers obtain credit card information of few customers, it’s a loss for banks, their credibility, customers and also their brand. Will an insurance policy cover all of this is million dollar question 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 remains existent.

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Strategic Analysis of Indian Life Insurance Industry

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 and more demanding. The insurers will have to offer all types of channel to customer 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 days and flexi-timers all demand high level of sophistication and ease when it comes to service. Hence the companies have to be very careful and cautious in catering to the needs of these customers who provides a good amount of business to the insurers. Thanks to the technological advancement and increased de regulation and sophistication, 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 extensively 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 have identified this and have put substantial information on there websites regarding policies, quotes and contact information among other routine stuff.

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Strategic Analysis of Indian Life Insurance Industry

PORTER FIVE-FORCE ANALYSIS

One important component of industry and competitive analysis involves delving into the industry’s competitive process to discover what the main sources of competitive pressure are and how strong each competitive force is. This analytical step is essential because managers cannot devise a successful strategy without indepth 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 forces. 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 over to their own substitute products. 4. The competitive pressures stemming from supplier-seller collaboration and bargaining. 5. The competitive pressures stemming from seller-buyer collaboration and bargaining.

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Strategic Analysis of Indian Life Insurance Industry

Figure shows porter’s five-forces model of competition.

Firms in othe r industry offe ring substitute products

Suppliers Of Raw-materials, inputs

Rivalry among competing sellers

Buyers

Firms in othe r industries offering substitute products

The five-force model developed by porter in 1980, guides the analysis of an organization’s, Environment and attractiveness of the life insurance industry. The nature 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 suppliers, the threat of new entrants and degree of rivalry between the existing competitors.

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Strategic Analysis of Indian Life Insurance Industry

1. Threat new entrants: The future of life insurance market scenario will be marked by the active presence 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 from 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 brand. 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 into the market. High profit in life insurance industry act as a magnet to firms outside the industry motivating potential entrants to commit the resources needed to hurdle entry barriers. But again due to potential market, private giants and international player try to enter in to the market in the large scale with their proper homework with customized and products too. An Indian private are well – developed and has capacity to 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 after a period of three years.

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Strategic Analysis of Indian Life Insurance Industry

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 experience curve. Legislation or government action: special permission is required from the government to enter in the insurance sector. With the tariff advisory committee to control the rates, rules and regulation, and with the control of IRDA and the government’s attitude to serve to the needs of the people with social objectives, the multinationals may face breathing and developmental problems.

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 insurance industry has the uniqueness of providing risk protection, which does have 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 benefits but still they lag in the risk coverage factor. If buyers buy insurance then switching cost become high. High switching cost creates 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.

3.

Bargaining power of Suppliers: -

Policy designer tend to have less leverage to bargain over premium and other terms of sale when the company they are supplying a major customer. Suppliers bargaining power increase if reduced administrative cost and also reduced claim procedure time. Insurance is tax exempted so that suppliers bargaining power increases.

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Strategic Analysis of Indian Life Insurance Industry

Suppliers then have a big incentive to protect and enhance their customer’s competitiveness via reasonable premium, better service and on going advances in the technology 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 policies whereas existing players whereas lack on this point. Brand identity: there is certainty among the minds of people in relation to existence and payment of claims from the existing players whereas the solvency of private players is not certain.

4.

Threat from Substitutes:-

Life insurance sector can be featured in three factors. They are saving, risk and 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 customers 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.

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Strategic Analysis of Indian Life Insurance Industry

RISK COVERAGE: For risk coverage, there is no close substitute of the products. The risk protection is provided by this sector only. No other instrument provides assurance against risk. TAX BENEFIT: There are various substitute of this feature of life insurance. Some of the substitute 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 competency of this sector is the risk protection providing capacity, which no other sector can provide.

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 insurance competition. The insurance sector is showing high market growth rate, which enables the insurance companies to achieve its own market growth through the growth in market place. As per the study conducted by the monitor group, the size of the Indian general 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 offered are similar. Hence, there is no product differentiation. Post-

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Strategic Analysis of Indian Life Insurance Industry

privatization, product and service differentiation exist between public company-private companies. Ministry of finance controls all the insurance companies that are in the industry at present. Hence, there are less chances of exit. Also, post privatization there will be less chances of exit, as the ministry of finance and insurance regulatory and development authority1999 will govern the insurance companies. Nationalized players have negligible computerization and use of management information system (MIS). Although they are planning to implement software developed by CMC for fulfilling the MIS requirements across various levels of offices. Private players will make extensive use of MIS as well as will have more or less a paperless office.

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Strategic Analysis of Indian Life Insurance Industry

OT ANALYSIS

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 strengths and weakness of Indian life insurance industry with rest of the world and also major opportunities and threats the Indian life insurance industry is facing. Opportunities: Today’s human life becomes full uncertain, so they prefer protection against the risk. 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 opportunity to upgrade their working. Technological, financial or specific area based avenues 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 the 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. India has a population 1044.15 million out of which only 77.7 million have a life insurance 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 promotional 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. According to the institute of charted financial analyst of India. India is the 23rd largest insurance market in the world. India accounts for just 0.4% of the global insurance market which is very low. the ratio’s of premium to GDP for India stands at only 3% against 5.2% in US ,6.5%in UK.

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Strategic Analysis of Indian Life Insurance Industry

To enter into rural market where customer awareness about insurance is low by effective and efficient marketing strategies. To sell insurance products through electronic Medias. Natural calamities: natural calamities taking place now days have created a concern for life insurance among the public. Because of natural calamities like earthquake, flood, and cyclone people have become conscious about benefits and need of insurance. Thus through a calamity it has become a considerably big opportunity for the industry. Growing population: the growth in the population (approximately 1.7%) is very high. It is said that one Australia is added in our country every year. Thus potential 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, it 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 insurance 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 become easy for the companies to reach the customer quickly, easily, efficiently and 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 company. Liberalized government policy toward insurance sector: the government has liberalized the government policy in the life insurance sector. Now a day role of government has changed. Due to liberalized policy of government the country is benefited in earning foreign inflows: the domestic company can also collaborate with foreign country and can create synergy. Thus there is great opportunity for those who can trap it. Exist the option of joint venture& alliance etc. for companies to create Synergy, value as well as competitive capabilities for the firms.

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Strategic Analysis of Indian Life Insurance Industry

Threats: Private entrants are naturally targeting the profitable and more lucrative segments, by providing better service, new products and flexibility. They are targeting the bigger corporate the other clients in the well established metropolitan center. These new entrants succeeded in eating share of the existing entities. This creates threat among rival firms itself. Decreased in bank rate: the decreased bank rate is the biggest threat for the life insurance sector. Fluctuation in the bank rate makes big difference for the life 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 other saving is obviously the threat for life insurance sector. Increasing intensity of competition among industry rivals-may cause squeeze (fall) on profit margins. Consumer’s education- consumers are more and more confused because the market players are offering large number of product range. As at present the awareness level is not much, it is only because the education level is only 62 %( in which only 10% are well educated). Fraud in insurance sector: the major problem fraud, which affects the life insurance sector. The flight of talent to new entrants is already in evidence, and could be

on the

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 even 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 could 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 different from what it was before their ownership pattern change. This could be genuine threats since they would be competing with units which are free from such artificial and unnecessary restrictions. The new units, equipped with state of arts equipment and innovative procedure would have an in-built edge over the erstwhile public sector units, which until recently had no such opportunity and incentives. Due to possible negative impact

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Strategic Analysis of Indian Life Insurance Industry

on employment, there were no serious efforts at updating technology and equipment. The resultant inadequate investment in infrastructure could lead to their lagging behind in the race.

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Strategic Analysis of Indian Life Insurance Industry

KEY STRATEGY TO SUCCESS

In order to succeed in any of the business it is very necessary to make and follow the strategies. Strategies are very important for any of the business. Following 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 several available products. The other approach, is to focus on the customers need, would involve a heavy investment 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 would 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 management advice, and convenient quick claim handling.

Porter Generic Strategies:

One of the expert Michel porters has identified three internally consistent generic strategies, which can be used singly or in combination: overall cost leadership is clearly under stable. In a differentiation strategy, a company seeks to be unique in its industry along some dimensions that are widely valuable by the customer. May be the lowest cycle time for settling a claim under say, a med claim policy could be differentiating factor. In a cost focus, a company seeks a cost advantage in its target segment, while in differentiation focus; a company seeks a differentiation target.

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Strategic Analysis of Indian Life Insurance Industry

Marginal Different Product:

Another strategy would be for the companies to design products that will make comparison-shopping difficult. They could offer a wide variety of covers with marginal differences and varying prices, whose terms and conditions are difficult to compare for consumers who may not have sufficient experience in purchasing insurance 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 number of losses, the consumer will find comparison even more difficult.

Designing New Strategies:

The existing insurance companies cannot be satisfied with concentrating on the consolidation of their existing markets, but have to achieve further growth and penetration. They must, therefore, concentrating on strengthening existing points of service, designing new channel of distribution, direct contact with their ultimate 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 tapping 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 still uncovered by this sector. We believe that the sector should move towards tie rural market. Insurance penetration can be achieved by tapping the neglected Rural Markets. There is vast potential for insurance growth in the rural sector. A recent survey by foundation for research, training and Education in insurance (FORTE) suggests that insurance can be sold profitably to rural communities in India. The survey reveals that There is distinct hierarchy of needs in rural areas. Rural people find security in groups. 97

Strategic Analysis of Indian Life Insurance Industry

The saving habit is very strong in rural areas. Average saving across the most important socio-economic strata comes to 30-35% of annual income or Rs. 13,500 annually, which is significant. There is high level of awareness about life insurance and fairly high-level about 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 financial modes or institutions. Rural buyers of insurance prefer a half yearly mode of premium payment to coincide with the time of the harvest. Thus there are very much chances for any of the companies to work over this scenario. 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 motivating the sales force in the turbulent times. The following strategies are recommending; Building relationship is real perk. One should be sure to build in networking times 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 agents who wants to qualify for a trip. Consider a contrast within the contest ‘for- top-tier producers; additional rewards for additional milestones that are met, such as air and guest room upgrades.

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Strategic Analysis of Indian Life Insurance Industry

Use of Internet: The present scenario is such that the products sold with the help of Internet. The 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 suggestion earlier the Internet based life insurance will help the companies to reduce the 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 efficient 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.

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Strategic Analysis of Indian Life Insurance Industry

BIBLIOGRAPHY

Planed P.S and Shah R.S; Insurance in India, Response books-2003 Insurance 4th edition CIB Puplicaion-2002

Magazine Life insurance vol 1 ICFAI PRESS 2002 Life insurance vol 2 ICFAI PRESS 2002 Insurance industry Emerging Trends ICFAI PRESS 2002 Insurance law and regulation vol 1ICFAI PRESS 2002

Web site: www.irdaindia.org www.equitymaster.com www.licindia.com www.iciciprulife.com www.incometaxindia.gov.in

Newspaper: Economic times Times of India Business standard

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