Max Newyork

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OVERVIEW OF THE INDUSTRY

A well development and evolved insurance sector is needed for economic development as it is provides long term funds for infrastructure development and the same time strengthen the risk taking ability. Life insurance is also now being regarded as a versatile financial planning tool in India. India being a country having a huge population of around one billion people with only 33.2% of the insurance population in India possessing life insurance. The country has a vast potential that has been left untapped till now. Therefore, what this has led to is the flooding of life insurance market with a number of private players which in collaboration with recognized foreign company’s promises to deliver the best of services at the least price. All these companies are trying to grasp the maximum of market share in life insurance sector. For that they are developing a channel i.e. recruiting world-class insurance advisors/agents who sell their products or policies. But what a consumer needs or what he perceives about life insurance still needs to be answered these are some questions I have tried to answer in the project. This report is trying to give the detail about Consumer Perception about Life Insurance in India. Thus by going through the report one will get to know about the life insurance and the opinion in the mind of the consumer about his judgment and perceptions.

INSURANCE Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a

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potential loss, from one entity to another, in exchange for a premium. Insurer, in economics, is the company that sells the insurance. Insurance rate is a factor used to determine the amount, called the premium, to be charged for a certain amount of insurance coverage. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice. Indemnification An entity seeking to transfer risk (an individual, corporation, or association of any type, etc.) becomes the 'insured' party once risk is assumed by an 'insurer', the insuring party, by means of a contract, called an insurance 'policy'. Generally, an insurance contract includes, at a minimum, the following elements: the parties (the insurer, the insured, the beneficiaries), the premium, the period of coverage, the particular loss event covered, the amount of coverage (i.e., the amount to be paid to the insured or beneficiary in the event of a loss), and exclusions (events not covered). An insured is thus said to be "indemnified" against the loss events covered in the policy. When insured parties experience a loss for a specified peril, the coverage entitles the policyholder to make a 'claim' against the insurer for the covered amount of loss as specified by the policy. The fee paid by the insured to the insurer for assuming the risk is called the 'premium'. Insurance premiums from many insureds are used to fund accounts reserved for later payment of claim, in theory for a relatively few claimants, and for overhead costs. So long as an insurer maintains adequate funds set aside for anticipated losses (i.e., reserves), the remaining margin is an insurer's profit.

INSURANCE AS A PRODUCT •

Insurance is a contingent product whose utility is tested only in the event of an accident or a disaster.

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It always has a negative connotation in the mind of the buyer—it deals with losses to the buyer.

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It is a product of future delivery and and subject to benefit realization only on the occurrence of the contingent event.

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It is a technical product that has a lot of legal jargon and with numerous legal principles peculiar to it making it difficult to comprehend.

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It is a contingent financial promise made by the security provider and its benefit can be realized only after fulfilling a number of stipulations, often, unexplained at the time of commencement of contract.

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It is a product or service that has to be resold annually to the same buyer and hence personal relationship and mutual trust are essential.

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As with all service products it has limitations, whose import is highlighted only after the event. The fine print in the policy assumes a big role in the event of a claim.

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Both the contractual parties have passive roles unless an unfortunate claim event of a claim.

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There is no emotional or psychological satisfaction in the purchase of insurance. It is a sense of relief.

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Since claim amounts vary substantially both the contractual parties are wary of each other’s interest , motives and actions.

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Experience of each customer is highly individualized with no standards to judge the performance and reputation of an insurer.

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Moral hazard on either side plays an important role in claim negotiation.

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Product innovations to keep abreast of changes in technology, political, economic, and social spheres provide a far wider market.

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LIFE INSURANCE One of the major types of insurance is life insurance. Life insurance companies sell life insurance, annuities and pensions products. Life insurance provides a monetary benefit to a decedent's family or other designated beneficiary, and may specifically provide for burial, funeral and other final expenses. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity. In most countries, life insurers are subject to different regulatory regimes and different tax and accounting rules. Insurance companies are generally classified as either mutual or stock companies. This is more of a traditional distinction as true mutual companies are becoming rare. Mutual companies are owned by the policyholders, while stockholders (who may or may not own policies) own stock insurance companies. Global insurance premiums grew by 9.7% in 2004 to reach $3.3 trillion. This follows 11.7% growth in the previous year. Life insurance premiums grew by 9.8% during the year, thanks to rising demand for annuity and pension products.

NEED FOR LIFE INSURANCE As life insurance became more established, it was realized what a useful tool it was for a number of situations, including – I)

Temporary needs/ threats - The original purpose of life insurance remains an important element, namely providing for replacement of income on death etc. Typically in the case of the breadwinner dying an early death.

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Regular Saving - Providing for ones 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.

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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 investment, where the individual makes a one-time payment. IV)

Retirement - Provision for one’s own later years becomes increasingly necessary, especially in a changing cultural and social environment. One can buy a suitable insurance policy, which will provide periodical payments in one’s old age.

ADVANTAGE OF LIFE INSURANCE (I)

It is superior to a traditional saving vehicle

As well as providing a secure vehicle to build up savings etc, it 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 the guaranteed sum assured, which is likely to be significantly more than the total premiums paid. With more traditional savings vehicles, such as fixed deposits, the only return would be the amount invested plus any interest accrued. (II)

It encourages saving and forces thrift

Once an insurance contract has been entered into, the insured has an obligation to continue paying premiums, until the end of the term of the policy; otherwise the policy will lapse. In other words, it becomes compulsory for the insured to save regularly and spend wisely. In contrast savings held in a deposit account 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.P Act), the money available from the policy forms a kind of trust which cannot be attached by judgment creditors. (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. (V)

It can be encashed and facilitates quick borrowing:

Some contracts may allow the policy to be surrendered for a cash amount, if a policyholder is not in a position to pay the premium. A loan, from certain policies, can be taken for a temporary period to tide over the difficult. Some lending institutions will accept a life insurance policy as collateral for a personal or commercial loan.

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(VI) Tax Relief The policyholder obtains Income Tax rebated 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., section 10 (10D) & other sub-sections of Section 80 of the Income Tax Act.

INSURANCE SECTOR IN INDIA Introduction The insurance sector is of considerable importance to every developing economy; it inculcates the savings habit, which in turn generates long-term invest able funds for infrastructure building. The nature of insurance business ensures constant inflow of funds - the payout is staggered and contingency related - thereby making it readily available for investment on infrastructure building. Insurance is one sector whose contribution to GDP is quite significant. Post independence, the Indian Government nationalized the private life insurance companies with a view to raise funds for the infrastructure developments, which lagged behind pathetically. The scatter of general insurance companies was brought under one umbrella – the General Insurance Company in 1972. Nationalization however brought with it the public sector bureaucracies, cumbersome procedures and inefficiencies but still these nationalized companies managed to have millions of policyholders who had no other options. Any attempt to even suggest private participation with a view to instill healthy competition and efficient services was only met with stiff resistance. While the early 90s brought forth liberalization on all major economic fronts, the insurance was left untouched. But before long, the passage of IRDA bill in 1999 paved the way for the liberalization of the Indian insurance sector.

History Insurance is a federal subject in India and has a history dating back to 1818. Life and general insurance in India is still a nascent sector with huge potential for various global players with the life insurance premiums accounting to 2.5% of the country's GDP while general insurance premiums to 0.65% of India's GDP. The Insurance sector in India has gone through a number of

phases and changes, particularly in the recent years when the Govt. of India in 1999 opened up the insurance sector by allowing private companies to solicit insurance and also allowing FDI up to 26%. Ever since, the Indian insurance sector is considered as a booming market with every other global insurance company wanting to have a lion's share. Currently, the largest life insurance company in India is still owned by the government. Insurance in India has its history dating back till 1818, when Oriental Life Insurance Company was started by Europeans in Kolkata to cater to the needs of European community. Preindependent era in India saw discrimination among the life of foreigners and Indians with higher premiums being charged for the latter. It was only in the year 1870, Bombay Mutual Life Assurance Society, the first Indian insurance company covered Indian lives at normal rates. At the dawn of the twentieth century, insurance companies started mushrooming up. In the year 1912, the Life Insurance Companies Act, and the Provident Fund Act were passed to regulate the insurance business. The Life Insurance Companies Act, 1912 made it necessary that the premium rate tables and periodical valuations of companies should be certified by an actuary. However, the disparage still existed as discrimination between Indian and foreign companies. The insurance sector went through a full circle of phases from being unregulated to completely regulated and then currently being partly deregulated. It is governed by a number of acts, with the first one being the Insurance Act, 1938. The Insurance Act, 1938 The Insurance Act, 1938 was the first legislation governing all forms of insurance to provide strict state control over insurance business. Life Insurance Corporation Act, 1956 Even though the first legislation was enacted in 1938, it was only in 19 January 1956, that life insurance in India was completely nationalized, through the Life Insurance Corporation Act, 1956. There were 245 insurance companies of both Indian and foreign origin in 1956. Nationalization was accomplished by the govt. acquisition of the management of the companies. The Life Insurance Corporation of India was created on 1st September, 1956, as a result and has grown to be the largest insurance company in India as of 2007. General Insurance Business (Nationalisation) Act, 1972

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The General Insurance Business (Nationalisation) Act, 1972 was enacted to nationalise the 100 odd general insurance companies and subsequently merging them into four companies. All the companies were amalgamated into National Insurance, New India Assurance, Oriental Insurance, United India Insurance which were headquartered in each of the four metropolitan cities. Insurance Regulatory and Development Authority (IRDA) Act, 1999 Till 1999, there were not any private insurance companies in Indian insurance sector. The Govt. of India then introduced the Insurance Regulatory and Development Authority Act in 1999, thereby de-regulating the insurance sector and allowing private companies into the insurance. Further, foreign investment was also allowed and capped at 26% holding in the Indian insurance companies.

Opening doors for private players and FDI The insurance premium in India accounted for a mere 2% of GDP as against the world average of 7.8% and G-7 average of 9.2% during 90s. The insurance premium as a percentage of savings in India is 5.95% as compared to 52.5% in UK. The nationalised insurance companies could barely unearth the vast potential of the Indian population since the policies lacked flexibility and the Indian life insurance products are not linked to the contemporary investment avenues. LIC had a total premium income of $5 billion during 1995-96 and General Insurance recorded a net premium of $1.3 billion. LIC’s income has grown substantially on an average of 10% as against the industry’s 6.7% in the rest of Asia. LIC has catered its services to more than 5 million people living below poverty line with a subsidized premium rate. Claim settlement ratio of LIC stood at 95% and GIC at 74% which much higher than the global average of 40%. But the other side of the coin gives a dismal picture. Large-scale operations and bureaucracies entangled in the public sector companies were the main areas of concern of the nationalized insurers. The state owned insurance companies did not show any initiative to venture into the rural areas to sell crop insurance or any other personal insurance. Another area, which requires an in-depth study, is the pension segment. Indian demand for pension products will be huge keeping in mind the lack of a comprehensive social security system leading to an upward trend in the savings sentiments. But LIC despite its optimal performing abilities brought in pension premium only to the tune of $22 million. Hence innovative measures to convert the pension products into lucrative saving instruments became the need of the day by which the investors would be allowed to deploy funds before the annuities

commence and to invest them in different schemes that would yield a relatively higher income. Another potential area insufficiently served was the health insurance and other personal insurance products such as householders, shopkeepers, personal accident, travel insurance and professional indemnity covers, which constitute only 12 per cent of Indian general insurance premium. General Insurance Company’s Mediclaim scheme served only 2.5% of the total population. The Indian health insurance products were not comprehensive in nature – there was no cover against disability. More liberalised reforms are inevitably essential not only to drive the Indian economy towards an annual growth rate of 7% to 8% but also to sustain the growth. A faster growth would attract foreign direct investment (FDI) inflow of $10 billion every year as against the current FDI in the range of $3 billion. Given the saving scenario in India, there is much more growth potential and the liberalised insurance sector will mobilise the long-term funds for infrastructural investments. Factors changed due to privatization: (I) MARKET EXPANSION: There has been an overall expansion in the market. This has been possible due to improved awareness levels thanks to the large number of advertising campaigns launched by all the players. The scope of expansion is still unlimited as virtually all the players are concentrating on large cities and towns-except by LIC to an extent there was no significant attempt to tap the rural markets but the private companies are also targeting the untapped rural market. (II) NEW PRODUCT OFFERINGS: There has been a plethora of new and innovative products offered by the new players, mainly from the stable of their international partners. Customers have tremendous choice from a large variety of products from pure term (risk) insurance to unit-linked investment products. Customers are offered unbundled products with a variety of benefits as riders from which they can choose. More customers are buying products and services based on the true needs and not just traditional money-back policies, which is not considered very appropriate for long-term protection and savings. However, there are still some key new products yet to be introduced. (III) CUSTOMER SERVICE: Not unexpectedly, this was one area that witnessed the most significant change with the entry of new players. There is an attempt to bring in international best practice in service and operational 9

efficiency through use of latest technologies. Advice and need based selling is emerging through much better trained sales force and advisors. There is improvement in response and turnaround times in specific areas such as delivery of first policy receipt, policy document, premium notice, final maturity payment, settlement of claims etc. However, there is a long way to go and various customer surveys indicate that the standards are still below customer expectation levels.

(IV) CHANNELS OF DISTRIBUTION: Till two years back, the only mode of distribution of life insurance products was through Agents. While agents continue to be the predominant distribution channel, today a number of innovative alternative channels are being offered to consumers. Some of them are banc assurance, brokers, Internet and direct marketing. Though it is too early to predict, the wide spread of bank branch network in India could lead to banc assurance emerging as a significant distribution mechanism.

If any one analyses the history of the growth of insurance since reforms, it is marked by allround growth of all players. More or less all players (including the market leader LIC) have aggressively recruited and trained advisors, appointed agents, launched new products, improved customer service standards and revamped/expanded their distribution networks. If at all there are major difference between players it was only in time lag in launching of service. Every player will like the customers to believe that its service standards are the best or that its agents are the most informed and ethical, but it is debatable whether there are any significant differences. In other words, each company is trying to be “everything to everybody”.

Our argument is that the strategy of being everything to everybody is risky. Some players justify the above strategy on the basis that the Indian market is huge and it can accommodate everybody. Still, in a market where it is difficult to distinguish one self sufficiently on services or on any other parameter to be able to change a premium, it will lead to unmitigated price competition to the detriment of all players. One may achieve sales turnover, but margins and profitability will suffer severely. In the insurance industry where large amounts of capital are required, this is risky.

While there is room for a few scale players with a finger in every pie, it is profitable for other players to focus on different segments to survive and thrive in a multi-firm open environment. While each company has to choose its own unique positioning on its unique strengths, the belowmentioned generic positioning alternatives appear worth considering. Needless to say the positioning choices discussed here are not mutually exclusive and can be overlapping. Global investors prefer Indian insurance markets: Multinational insurers are keenly watching the transformation of the Indian insurance sector, mainly because the domestic markets have become saturated for the respective insurer. International insurers capture a significant part of their business from their multinational operations only. UK’s largest life and non-life insurers acquired 40% to 60% of their total premium from their multinational operations. The foreign investors are finding the Indian market more attractive because even a small share of a growing market looks lucrative. The other reason as to why the global insurers are interested in investing their funds is the nature of the Indian markets. Generally insurance companies operate on the principle of spreading. Spreading the area of operations over a wide geographical area would eliminate sudden dips in earnings due to the unexpected risk spread. Sigma Report presented by the world’s second largest reinsurer Swiss Re on global insurance, reports complete saturation of international market. Effects of global insurance More job opportunities: Opening of the insurance sector to the foreign investors has led to a renaissance in the Indian economy. Job opportunities show bright signals. The people working in insurance sector in India are approximately the same as in the UK, which has 1/7th of Indian population. There is the new concept of bancassurance that has paved the way for more job opportunities in the financial sector. There would be demand for specialists in the area of marketing, finance and human resource management apart from the demand for technical expertise from professionals in the field of underwriting and claims management subjects. Inflow of foreign capital: There would be huge inflow of funds into the country with foreign capital splurging in the Indian insurance companies as start up capital.

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Indigenous reinsurance: Even the reinsurance sector looks for opulence with global players like Swiss Re and Munich Re keen on entering into the insurance industry in India. While there will be a deep fall in the outward reinsurance, India would receive inflow of funds from the neighboring countries. If the legislative support offers a congenial atmosphere, a la Lloyds in India is not far off. Technology transfer: Apart from the above monetary aspects, there would also be a revolution in the transfer of technologies and knowledge from the global participants in the fields of training, risk management, underwriting, introduction of new policies etc. With more participants in the market, there would be healthy competition with increased advertisement expenditure for brand building. There would be scientific pricing methods. In the liberalised insurance era, we have 14 life insurance players apart from the public sector Life Insurance Corporation of India and 9 general insurance companies apart from the 4 state owned companies viz. The United India Insurance, New India Assurance, Oriental Insurance, National Insurance Company. The private insurers have already proved their success by way of performance during the current financial year by way of 71% growth in the premium income. The investors worldwide are keeping their fingers crossed pending the announcement of the increased cap in the FDI investment in the Indian insurance companies to 49% from 26%.

IRDA The Insurance Regulatory and Development Authority (IRDA) is a national agency of the Government of India, based in Hyderabad. It was formed by an act of Indian Parliament known as IRDA Act 1999, which was amended in 2002 to incorporate some emerging requirements. Mission of IRDA as stated in the act is "to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto." Reasons for Incorporation The law of India has following expectations from IRDA 1. To protect the interest of and secure fair treatment to policyholders.

2. To bring about speedy and orderly growth of the insurance industry (including annuity and superannuation payments), for the benefit of the common man, and to provide long term funds for accelerating growth of the economy. 3. To set, promote, monitor and enforce high standards of integrity, financial soundness, fair dealing and competence of those it regulates. 4. To ensure that insurance customers receive precise, clear and correct information about products and services and make them aware of their responsibilities and duties in this regard. 5. To ensure speedy settlement of genuine claims, to prevent insurance frauds and other malpractices and put in place effective grievance redressal machinery. 6. To promote fairness, transparency and orderly conduct in financial markets dealing with insurance and build a reliable management information system to enforce high standards of financial soundness amongst market players. 7. To take action where such standards are inadequate or ineffectively enforced. 8. To bring about optimum amount of self-regulation in day to day working of the industry consistent with the requirements of prudential regulation.

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