Imperfections In Insurance Markets

IMPERFECTIONS IN INSURANCE MARKETS Debabrata Das Ph. D Reader Dept. of Commerce Gauhati University

Objectives  To highlight the changing face of insurance

industry in India  To discuss the issues of a perfectly competitive insurance market  To understand the Insurance Market Imperfections  To have an insight into the information problem existing in the insurance market

The changing Pace of Insurance 1. 2. 3. 4. 5.

Closed Sector to open sector Customization (Flexibility) Insurance marketing to financial planning Single channel to Multiple channels Branding

Private Players Company

Indian Partner

Foreign Insurer

Area

Birla Sun Life

Aditya Birla Group

Sun Life, Canada

Life

OM Kotak

KotakMahindra finance

Old Mutual, South Africa

Life

HDFC-Standard Life

HDFC

Standard Life, UK

Life

Royal Sundaram

Sundaram Finance

Royal Sun, UK

Life & Non- Life

ICICI-Prudential

ICICI

Prudential, UK

Life

Max New York Life

Max India

New York Life, USA

Life

Tata-AIG

Tata Group

AIG, USA

Life & Non- Life

ING Vysya

Vysya Bank

ING Insurance, Netherlands

Life

Aviva

Dabur

CGU Life, UK

Life

MetLife India

Jammu & Kashmir Bank

MetLife, USA

Life

Bajaj Allianz

Bajaj Auto

Allianz

Life & Non- Life

AMP Sanmar

Sanmar Group

AMP, Australia

Life

SBI Life Insurance

SBI

Cardiff, Finance

Life

Private Players in General Insurance Company

Indian Partner

Foreign Insurer

Royal Sundaram

Sundaram Finance

Royal Sun, UK

General Insurance Reliance general Insurance

Reliance Industry

IFFCO-Tokio General Insurance

Indian Farmers Fertilizers

-The Tokio Marine and Fire Insurance

Co-operative Ltd. (IFFCO) Tata-AIG General Insurance

Tata Group

AIG, USA

Bajaj Allianz General Insurance

Bajaj Auto

Allianz AG

ICICI-Lombard General Insurance

ICICI

Lombard Canada Ltd., Canada

Choamandalam General Insurance Co.

Murugappa Group

--

S. Kumars, J&K Bank

Undisclosed

Undisclosed

Chubb, USA

Undisclosed

Yasuda Marine and Fire

Undisclosed

Mitsui Marine and Fire

Citibank

Undecided

Videocon International

Talks with BNP Paribas, AXA, France

Distribution Network Direct Selling – Agents Direct marketing Financial advisors/consultants Indirect Selling – Bundled products with commodity Bundled Products with other financial services Partner Selling – Bancassurance Postal Department Selling through corporates

Bancassurance Arrangements Insurance Company

Bancassurance partner

Allianz Bajaj

Standard Chartered Bank

Birla Sun Life

Citibank

Dabur – CGU

Canara Bank/ Lakshmi Vilas Bank, ABN Amro Bank & American Express Bank

HDFC-Standard Life

Union Bank/Indian Bank

ICICI Prudential Life

ICICI Bank

ING Vysya life

Vysya Bank

LIC

Corporation bank, Oriental Bank of Commerce, Indian Overseas Bank

Met life

J & K Bank

SBI-Cardiff Life Insurance

SBI

Tata-AIG Life Insurance

Citibank

Conditions for a Perfectly Competitive Insurance Market  A large number of buyers and sellers  Sellers’ freedom of entry into and exist from

the market  Sellers produce identical products  Buyers and sellers are well informed about the products and services

Categories of Insurance market Imperfections Market imperfections

Market Power

Barriers to Entry/exit

Information problems

Externalities

Positive

Negative

Economics of scale/scope

Asymmetries Information

Free Rider problems

Non existent information

Lemons

Price Discrimination

Product Differentiations

Adverse selection

Moral Hazard

Principal agent problem

Solutions to Asymmetric Information  Educating/customer about

-Insurance needs product features -Quality and prices of insurance policies -Financial health of the insurers  Establishing stricter system of monitoring salesforce  Conducting deeper investigations of claims.

The human life value concept (HLV) HLV- a part of the general theory of human capital Human Capital - important element of nations wealth - Investments we made in one self with an expectation of future benefits. (Adam Smith) Gary S. Backer – 1991 Nobel awardee for Economics HLV – Capitalised monetary worth of the earning capacity resulting from the economic forces that we incorporated within our being - arises out of its relations to other lives - first applied in 1880, by Jakob L Green, President, Connecticut Mutual Life Insurance Co. - Subject to loss through (1) Premature death (2) Incapacity (3) retirement and (4) Unemployment

HLV is a function of its purpose and value to others General standpoint – Present value of an individuals future net earnings-self maintenance costs Dependents standpoint - value of the benefits the dependents can expect Organizations standpoint – value of services to the firm

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