INSURANCE

Insurance is basically risk management device. The losses to assets resulting from natural
calamities like fire, flood, earthquake, accident etc. are met out of the
common pool contributed by large number of persons who are exposed to similar risks. This
contribution of many is used to pay the losses suffered by unfortunate few. However
the basic principle is that losses should occur as a result of natural calamities or
unexpected events which are beyond the human control. Secondly insured person
should not make any gains out of insurance. It is natural to think of insurance of physical
assets such as motor car insurance or fire insurance but often be forget that creator all
these assets is the human being whose effort have gone a long way in building up to
assets. In that scene human life is a unique income generating assets. Unlike physical assets
which decreases with the passage of time. The individual become more experience and
mature as he advances in age.
This raises his earnings capacity and the purpose of lifeinsurance is to protect the income
to individual and provide financial security to his family which is dependent of his
income in the event of his pre mature death. The individual also himself also 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 saving in certain cases.
Insurance is rupees 400 billion business in India and yet its spread in the country is
relatively thin. Insurance as a concept has not being able to make headway in India.
Presently LIC enjoys a monopoly in Life Insurance business while GIC enjoys
it in general insurance business. There has been very little option before the customer
to decide the insurer. A successful passage of the IRA bill have clear the way of private sector
operators in collaboration with their overseas partner. It is likely to bring in a more
professional and focuses approach. More over the foreign players would bring
sophisticated actuarial techniques with them which would facilitate the insurer to
effectively price the product. It is very important that the trained marketing
professionals who are able to communicate specific features of the policy should
shall sell the policy. In the next millennium all the activities would play a crucial role in
the overall development and maturity of the insurance industry.

General Definition of Insurance:In the words of D.S.hansell, Insurance may be defined as a social
d e v i c e providing financial compensation for the effects of misfortune, the paying
being made from the accumulated contributions of all participating in the scheme.

Characteristics of Insurance

Sharing of risk
Co-operative device
Evaluation of risk
Payment on happening of special event
the amount of payment depends on the nature of losses incurred

Need of the Life Insurance:The original basic intention of life insurance is to provide for one family
and perhaps others in the event of death. Originally, polices were to provide for
short periods of time, covering temporary risk situations, such as sea voyages. As life
insurance became more established. It was realized what a useful tool it was in a
number of situations, including:
1. Temporary needs threats:
The original purpose of Life Insurance remains an important element,

namely

providing for replacement of income on death etc.

2. Regular saving:
Providing ones family and oneself, as a medium to long term exercise
(through a series of regular payment of premiums). This has been become more
relevant in recent times as people seek financial independence from their family.
3. Investment:
Put simply, the building up of saving while safeguarding it from ravages of inflation. Unlike
regular saving products are traditionally lump is investments, where the individual
makes are onetime payment.
4. Retirement:
Provision for ones on later years has become increasingly necessary.Especial
ly in charging culture abs social environment; one can buy a suitable insurance
policy which will provide periodical payments on ones old age.

THE EVALUATION OF INSURANCE INDUSTRY IN INDIA:

Life insurance in its modern from is a western concept. The Indian insurance industry is as
old as it is insurance other part of the world. Although life insurance business has been
taking shape for the last 300 years, it came to India with the arrival of Europeans.
First Life Insurance Company was established insurance 1818 as Oriental Insurance,
mainly to provide for windows of Europeans. The companies that follow mainly catered to
Europeans and charged extra premium on Indian Lives. The first insurance company
insuring Indian Lives at standard rates was BOMBAY MUTUAL LIFE INSURANCE
COMPANY which was formed insurance 1870. This was also the year when 1 st
insurance act was passed by the British Parliament.; the years subsequent to the Swadeshi
movement saw the emergence of several insurance companies. At the end of the year
1995 there were 245 insurance companies all t h e i n s u r a n c e c o m p a n y s w e r e
nationalized insurance 1965 and brought under one umbrella. LIFE INSURANCE
CORPORATION OF INDIA (LIC) which enjoyed monopoly of the life insurance business
until near the end of 2000. By enacting the IRDA act 1999. The Government of India
effectively ended Licks monopoly and opened the door for private insurance companys
collaboration of Indian companies with foreign Companies.

FUTURE SCENARIO:
Before looking insurance future prospectus of the insurance industry, we must take a
look into its past history. The independent India started with private sector insurance
companies. These companies were nationalized by the Union Govt. in 1965 to form
a monopoly known as Life Insurance Corporation of India has being under public
sector for over four decades till the govt. opened the insurance sector for private
companies in 2000.
When the insurance Industry was nationalized, it was consider a land mark and a
milestone on the way to the socialistic pattern of society that India
hadchosen after independence. Nationalization has lent the industry solidity a
ndgrowth which is unparalleled. Forever, along with these achievements there also
grew feelings of Insensitivity to the needs of the market, traditions insurance adoption
of modern practices to upgrades technical skills coupled with a scene of
lethargy which probable lead to a feeling amongst that the insurance industry
was not fully responsive to customers needs.

Definition of 'Privatization'
The transfer of ownership, property or business from the government to the private sector is
termed privatization. The government ceases to be the owner of the entity or business.
The process in which a publicly-traded company is taken over by a few people is also called
privatization. The stock of the company is no longer traded in the stock market and the
general public is barred from holding stake in such a company. The company gives up the
name 'limited' and starts using 'private limited' in its last name.

Potential Benefits of Privatization

1. Improved Efficiency.
The main argument for privatization is that private companies have a profit incentive to cut
costs and be more efficient. If you work for a government run industry, managers do not
usually share in any profits. However, a private firm is interested in making profit and so it is
more likely to cut costs and be efficient. Since privatization, companies such as BT, and
British Airways have shown degrees of improved efficiency and higher profitability.
2. Lack of Political Interference.
It is argued governments make poor economic managers. They are motivated by political
pressures rather than sound economic and business sense. For example a state enterprise may
employ surplus workers which are inefficient. The government may be reluctant to get rid of
the workers because of the negative publicity involved in job losses. Therefore, state owned
enterprises often employ too many workers increasing inefficiency.
3. Short Term view.
A government many think only in terms of next election. Therefore, they may be unwilling to
invest in infrastructure improvements which will benefit the firm in the long term because
they are more concerned about projects that give a benefit before the election.
4. Shareholders
It is argued that a private firm has pressure from shareholders to perform efficiently. If the
firm is inefficient then the firm could be subject to a takeover. A state owned firm doesnt
have this pressure and so it is easier for them to be inefficient.
5. Increased Competition.
Often privatization of state owned monopolies occurs alongside deregulation i.e. policies to
allow more firms to enter the industry and increase the competitiveness of the market. It is
this increase in competition that can be the greatest spur to improvements in efficiency. For
example, there is now more competition in telecoms and distribution of gas and electricity.

However, privatization doesnt necessarily increase competition, it depends on the nature of

the market. E.g. there is no competition in tap water. There is very little competition within
the rail industry.

6. Government will raise revenue from the sale

Selling state owned assets to the private sector raised significant sums for the UK government
in the 1980s. However, this is a one off benefit. It also means we lose out on future dividends
from the profits of public companies.

Disadvantages of Privatization
1. Natural Monopoly:A natural monopoly occurs when the most efficient number of firms in an industry is one. For
example tap water has very significant fixed costs, therefore there is no scope for having
competition amongst several firms. Therefore, in this case, privatization would just create a
private monopoly which might seek to set higher prices which exploit consumers. Therefore
it is better to have a public monopoly rather than a private monopoly which can exploit the
consumer.

2. Public Interest
There are many industries which perform an important public service, e.g health care,
education and public transport. In these industries, the profit motive shouldnt be the primary
objective of firms and the industry. For example, in the case of health care, it is feared
privatizing health care would mean a greater priority is given to profit rather than patient
care. Also, in an industry like health care, arguably we dont need a profit motive to improve
standards. When doctors treat patients they are unlikely to try harder if they get a bonus.
3. Government loses out on potential dividends.
Many of the privatized companies in the UK are quite profitable. This means the government
misses out on their dividends, instead going to wealthy shareholders.
4. Problem of regulating private monopolies.

Privatizations create private monopolies, such as the water companies and rail companies.
These need regulating to prevent abuse of monopoly power. Therefore, there is still need for
government regulation, similar to under state ownership.
5. Fragmentation of industries.
In the UK, rail privatization led to breaking up the rail network into infrastructure and train
operating companies. This led to areas where it was unclear who had responsibility. For
example, the Hatfield rail crash was blamed on no one taking responsibility for safety.
Different rail companies have increased the complexity of rail tickets.
6. Short-Termism of Firms.
As well as the government being motivated by short term pressures, this is something private
firms may do as well. To please shareholders they may seek to increase short term profits and
avoid investing in long term projects. For example, the UK is suffering from a lack of
investment in new energy sources; the privatized companies are trying to make use of
existing plants rather than invest in new ones.

History of Indian Insurance

Insurance in India started without any regulation in the Nineteenth Century. It Was a typical
story of a colonial era: a few British insurance companies dominating the market serving
mostly large urban centers. After the independence, it took a dramatic turn. Insurance was
nationalized. First, the life insurance companies were nationalized in 1956, and then the
general insurance business was nationalized in 1972. Only in 1999 private insurance
companies have been allowed back into the business of insurance with a maximum of 26% of
foreign holding. In what follows, we describe how and why of regulation and deregulation.
The entry of the State Bank of India with its proposal of bancassurance brings a new
dynamics in the game. We study the collective experience of the other countries in Asia
already deregulated their markets and have allowed foreign companies to participate. If the
experience of the other countries is any guide, the dominance of the Life Insurance
Corporation and the General Insurance Corporation is not going to disappear any time soon.

Insurance under the British Raj

Life insurance in the modern form was first set up in India through a British company called
the Oriental Life Insurance Company in 1818 followed by the Bombay Assurance Company
in 1823 and the Madras Equitable Life Insurance Society in 1829. All of these companies
operated in India but did not insure the lives of Indians. They were there insuring the lives of
Europeans living in India. Some of the companies that started later did provide insurance for
Indians. But, they were treated as "substandard" and therefore had to pay an extra premium of
20% or more. The first company that had policies that could be bought by Indians with "fair
value" was the Bombay Mutual Life Assurance Society starting in 1871.
The first general insurance company, Triton Insurance Company Ltd., was established in
1850. It was owned and operated by the British. The first indigenous general insurance
company was the Indian Mercantile Insurance Company Limited set up in Bombay in 1907.
By 1938, the insurance market in India was buzzing with 176 companies (both life and nonlife). However, the industry was plagued by fraud. Hence, a comprehensive set of regulations
was put in place to stem this problem (see Table 1). By 1956, there were 154 Indian insurance

companies, 16 non-Indian insurance companies and 75 provident societies that were issuing
life insurance policies. Most of these policies were centered in the cities (especially around
big cities like Bombay, Calcutta, Delhi and Madras). In 1956, the then finance minister S. D.
Deshmukh announced nationalization of the life insurance business.

Monopoly Raj
The nationalization of life insurance was justified mainly on three counts.
(1) It was perceived that private companies would not promote insurance in rural areas.
(2) The Government would be in a better position to channel resources for saving and
investment by taking over the business of life insurance.
(3) Bankruptcies of life insurance companies had become a big problem (at the time of
takeover, 25 insurance companies were already bankrupt and another 25 were on the verge of
bankruptcy). The experience of the next four decades would temper these views.

Life Story of the Life Insurance Corporation

The life insurance industry was nationalized under the Life Insurance Corporation (LIC) Act
of India. In some ways, the LIC has become very successful.
(1) Despite being a monopoly, it has some 60-70 million policyholders. Given that the Indian
middle-class is around 250-300 million, the LIC has managed to capture some 30 odd percent
of it.
(2) The level of customer satisfaction is high for the LIC (one of the findings of the Malhotra
Committee, see below). This is somewhat surprising given the frequent delays in claim
settlement.
(3) Market penetration in the rural areas has grown substantially. Around 48% of the
customers of the LIC are from rural and semi-urban areas. This probably would not have
happened had the charter of the LIC not specifically set out the goal of serving the rural areas.
One exogenous factor has helped the LIC to grow rapidly in recent years: a high saving rate
in India. Even though the saving rate is high in India (compared with other countries with a
similar level of development), Indians exhibit high degree of risk aversion. Thus, nearly half
of the investments are in physical assets (like property and gold). Around twenty three
percent are in (low yielding but safe) bank deposits. In addition, some 1.3- percent of the
GDP are in life insurance related savings vehicles. This figure has doubled between 1985 and
1995.

Life Insurance in India: A World Perspective

In many countries, insurance has been a form of savings. Table 2 shows that in many
developed countries, a significant fraction of domestic saving is in the form of (endowment)
insurance plans. This is not surprising. The prominence of some developing countries is more
surprising. For example, South Africa features at the number two spot. India is nestled
between Chile and Italy. This is even more surprising given the levels of economic
development in Chile and Italy. Thus, we can conclude that there is an insurance culture in
India despite a low per capita income. This bodes well for future growth. Specifically, when
the income level improves, insurance (especially life) is likely to grow rapidly.

Table 2 LIFE INSURANCE PREMIUM AS PERCENTAGES OF THE GROSS DOMESTIC SAVING (GDS)
AND THAT OF GROSS DOMESTIC PRODUCT (GDP)

The General Insurance Corporation

Although efforts were made to maintain an open market for the general insurance industry by
amending the Insurance Act of 1938 from time to time, malpractice escalated beyond control.
Thus, the general insurance industry was nationalized in 1972. The General Insurance
Corporation (GIC) was set up as a holding company. It had four subsidiaries: New India,
Oriental, United India and the National Insurance companies (collectively known as the
NOUN). It was understood that these companies would compete with one another in the
market. It did not happen. They were supposed to set up their own investment portfolios. That
did not happen either. It began to happen after 29 years. The NOUN has kicked off an internal
exercise to segregate the entire investment portfolio of the GIC (in 2001). The GIC has a
quarter of a million agents. It has more than 2,500 branches, 30 million individual and group
insurance policies and assets of about USD 1,800 million at market value (at the end of
1999). It has been suggested that the GIC should close 20- 25% of its nonviable branches
(Patel, 2001). The GIC has so far been the holding company and re-insurer for the state-run
insurers. It reinsured about 20% of their business.

Two Committee Reports: One Known, One Unknown

Although Indian markets were privatized and opened up to foreign companies in a number of
sectors in 1991, insurance remained out of bounds on both counts. The government wanted to
proceed with caution. With pressure from the opposition, the government (at the time,
dominated by the Congress Party) decided to set up a committee headed by Mr. R. N.
Malhotra (the then Governor of the Reserve Bank of India).

Malhotra Committee
Liberalization of the Indian insurance market was recommended in a report released in 1994
by the Malhotra Committee, indicating that the market should be opened to private-sector
competition, and ultimately, foreign private-sector competition. It also investigated the level
of satisfaction of the customers of the LIC. Curiously, the level of customer satisfaction
seemed to be high. The union of the LIC made political capital out of this finding
The following are the purposes of the committee.
(a) To suggest the structure of the insurance industry, to assess the strengths and weaknesses
of insurance companies in terms of the objectives of creating an efficient and viable insurance
industry, to have a wide coverage of insurance services, to have a variety of insurance
products with a high quality service, and to develop an effective instrument for mobilization
of financial resources for development.
(b) To make recommendations for changing the structure of the insurance industry, for
changing the general policy framework etc.
(c) To take specific suggestions regarding LIC and GIC with a view to improve the
functioning of LIC and GIC.
(d) To make recommendations on regulation and supervision of the insurance sector in India.
(e) To make recommendations on the role and functioning of surveyors, intermediaries like
agents etc. in the insurance sector.
(f) To make recommendations on any other matter which are relevant for development of the
insurance industry in India.

The committee made a number of important and far-reaching recommendations.

(a) The LIC should be selective in the recruitment of LIC agents. Train these people after the
identification of training needs.
(b) The committee suggested that the Federation of Insurance Institute, Mumbai should start
new courses and diploma courses for intermediaries of the insurance sector.
(c) The LIC should use an MBA specialized in Marketing (a similar suggestion for the GIC
subsidiaries).
(d) It suggested that settlement of claims were to be done within a specific time frame
without delay.
(e) The committee has several recommendations on product pricing, vigilance, systems and
procedures, improving customer service and use of technology.
(f) It also made a number of recommendations to alter the existing structure of the LIC and
the GIC.
(g) The committee insisted that the insurance companies should pay special attention to the
rural insurance business.
(h) In the case of liberalization of the insurance sector the committee made several
recommendations, including entry to new players and the minimum capital level
requirements for such new players should be Rs. 100 crores (about USD 24 million).
However, a lower capital requirement could be considered for a co-operative sectors' entry in
the insurance business.
(i) The committee suggested some norms relating to promoters equity and equity capital by
foreign companies, etc.

Mukherjee Committee
Immediately after the publication of the Malhotra Committee Report, a new committee
(called the Mukherjee Committee) was set up to make concrete plans for the requirements of
the newly formed insurance companies. Recommendations of the Mukherjee Committee
were never made public. But, from the information that filtered out it became clear that the
committee recommended the inclusion of certain ratios in insurance company balance sheets
to ensure transparency in accounting. But the Finance Minister objected. He argued (probably

on the advice of some of the potential entrants) that it could affect the prospects of a
developing insurance company.

Insurance Regulatory Act (1999)

After the report of the Malhotra Committee came out, changes in the insurance industry
appeared imminent. Unfortunately, instability in Central Government, changes in insurance
regulation could not pass through the parliament.
The dramatic climax came in 1999. On March 16, 1999, the Indian Cabinet approved an
Insurance Regulatory Authority (IRA) Bill that was designed to liberalize the insurance
sector. The bill was awaiting ratification by the Indian Parliament. However, the BJP
Government fell in April 1999. The deregulation was put on hold once again.
An election was held in late 1999. A new BJP-led government came to power. On December
7, 1999, the new government passed the Insurance Regulatory and Development Authority
(IRDA) Act. This Act repealed the monopoly conferred to the Life Insurance Corporation in
1956 and to the General Insurance Corporation in 1972. The authority created by the Act is
now called IRDA. It has ten members. New licenses are being given to private companies
(see below). IRDA has separated out life, non-life and reinsurance insurance businesses.
Therefore, a company has to have separate licenses for each line of business. Each license has
its own capital requirements (around USD24 million for life or non-life and USD48 million
for reinsurance).
Some Details of the IRDA Bill
On July 14, 2000, the Chairman of the IRDA, Mr. N. Rangachari set forth a set of regulations
in an extraordinary issue of the Indian Gazette that details of the regulation.
Regulations
The first covers the Insurance Advisory Committee that sets out the rules and regulation.
The second stipulates that the "Appointed Actuary" has to be a Fellow of the Actuarial
Society of India. Given that there has been a dearth of actuaries in India with the qualification
of a Fellow of the Actuarial Society of India, this becomes a requirement of tall order. As a

result, some companies have not been able to attract a qualified Appointed Actuary
(Dasgupta, 2001). The IRDA is also in the process of replacing the Actuarial Society of India
by a newly formed institution to be called the Chartered Institute of Indian Actuaries
(modeled after the Institute of Actuaries of London). Curiously, for life insurers the
Appointed Actuary has to be an internal company employee, but he or she may be an external
consultant if the company happens to be a non-life insurance company.
Third, the Appointed Actuary would be responsible for reporting to the IRDA a detailed
account of the company.
Fourth, insurance agents should have at least a high school diploma along with training of
100 hours from a recognized institution. More than a dozen institutions have been recognized
by

the

IRDA

for

training

insurance

agents

(the

list

appears

online

at

http://www.irdaonline.org/press.asp).
Fifth, the IRDA has set up strict guidelines on asset and liability management of the insurance
companies along with solvency margin requirements. Initial margins are set high (compared
with developed countries). The margins vary with the lines of business (for example, fire
insurance has a lower margin than aviation insurance).
Sixth, the disclosure requirements have been kept rather vague. This has been done despite
the recommendations to the contrary by the Mukherjee Committee recommendations.
Seventh, all the insurers are forced to provide some coverage for the rural sector.
(1) In respect of a life insurer,
(a) five percent in the first financial year;
(b) seven percent in the second financial year;
(c) ten percent in the third financial year;
(d) twelve percent in the fourth financial year;
(e) fifteen percent in the fifth year (of total policies written direct in that year).
(2) In respect of a general insurer,
(a) two percent in the first financial year;
(b) three percent in the second financial year;

(c) five percent thereafter (of total gross premium income written direct in that year).

New Entry
Immediately after the passage of the Act, a number of companies announced that they would
seek foreign partnership. In mid-2000, the following companies made public statements that
they already were in the process of setting up insurance business with foreign partnerships
(see Table 3). However, not all the partnerships panned out in the end (see below).

Three days before the deadline that the IRDA had set upon itself (October 25, 2000), it issued
three companies with license papers:
(1) HDFC Standard Life. This will be jointly set up by India's Housing Development Finance
Company - the largest housing finance company in India and the Scotland based Standard
Life.
(2) Sundaram Royal Alliance Insurance Company. It is a partnership created by Sundaram
Finance and three other companies of the TVS Group of Chennai (Madras) and the London
based Royal & SunAlliance.
(3) Reliance General Insurance. This company is fully owned by Mumbai based Reliance
Industries which has operations in textile, petrochemicals, power and finance industries.

There are three other companies with "in principal" approvals:

(1) Max New York Life. It is a partnership between Delhi based pharmaceutical company
Max India and New York Life, the New York based Life Insurance Company.
(2) ICICI Prudential Life Insurance Company. This is a joint venture between Mumbai based
Industrial Credit & Investment Corporation and the London based Prudential PLC.
(3) IFFCO Tokio General Insurance Company. It is a joint venture between Indian Farmers'
Fertiliser Cooperative and Tokio Marine and Fire of Japan. To date (end of April 2001), the
following companies have thus been granted licenses: ICICI -Prudential, Reliance General,
Reliance Life, Tata-AIG General, HDFC Standard Life, Royal-Sundaram, Max-New York
Life, IFFCO-Tokio Marine, Birla-SunLife, Bajaj-Allianz General, Tata-AIG Life, ING-Vyasa,
Bajaj-Allianz Life, SBICardiff Life. Note that all of these companies are either in the life
insurance business or in the non-life insurance business. No license has been granted for
reinsurance business so far (the size of the reinsurance business can be 10-20% of the total
revenue). No stand-alone health insurance company has been granted license so far.

Enter the Dragon

On December 28, 2000, the State Bank of India (SBI) announced a joint venture partnership
with Cardif SA (the insurance arm of BNP Paribas Bank). This partnership won over several
others (with Fortis and with GE Capital). The entry of the SBI has been awaited by many. It
is well known that the SBI has long harbored plans to become a universal bank (a universal
bank has business in banking, insurance and in security). For a bank with more than 13,000
branches all over India, this would be a natural expansion. In the first round of license issue,
the SBI was absent. There were several reasons for this delay. First, the SBI was seeking a
foreign partner to help with new product design. Second, it did not want the partner to
become dominant in the long run (when the 26% foreign investment cap is eventually lifted).
It wanted to retain its own brand name. Third, it wanted a partner that is well versed in the
Universal banking business. This ruled out an American partner (where underwriting
insurance business by banks have been strictly forbidden by law). Cardif is the third largest
insurance company in France. More than 60% of life insurance policies in France are sold
through the banks. Fourth, the Reserve Bank of India (RBI) needed to clear participation by
the SBI because in India banks are allowed to enter other businesses on a "case by case"
basis. Over the course of the next twelve months, the SBI will sell insurance in 100 branches.
Over a period of 2-3 years it will expand operation in 500 branches. Initially it will hold 74%
ownership of the joint venture company with Cardif. Over time, it will dilute its holding to
50-60%. The SBI entry is groundbreaking for several reasons. This was the first for a bank to
enter the insurance market. This kind of synergy between a bank and an insurance company
is extremely rare in many parts of the world. In Continental Europe, it is called bancassurance
(in France) or allfinanz (in Germany). Second, even though the regulators have said that
banks would not (generally) be allowed to hold more than 50% of an insurance company, the
SBI was allowed to do so (with a promise that its share would be eventually diluted).

Lessons from China

China is the most populous country in the world (at 1.2 billion); India is a close second (just
over a billion). Both have followed the path of deregulation and privatization - China started
it in 1979 and India in 1991. Comparisons of these processes are described in Sinha and
Sinha (1997). In this section, I will concentrate only on the insurance industry in the two
countries. The insurance business in India has a premium volume of $8.3 billion in 1999
whereas in China the premium volume is $16.8 billion in 1999. However, premium per capita
is not all that dissimilar: $13.7 per person in China and $8.5 in India in 1999. As a percent of
GDP, insurance is 1.93% in India and 1.63% in China in 1999 (all data from Sigma, 2000).
In China, the People's Insurance Company of China (PICC) had a monopoly between 1949
and 1959. In 1959, insurance business was deemed capitalistic and all forms of insurance
were suspended (and the insurance business was taken over by the Peoples Bank of China).
The insurance business reopened in 1979, the PICC reassumed its old role as the monopoly.
There are many differences in the way China and India have handled deregulation. First, in
China, the China Insurance Regulatory Commission (CIRC) was set up in November 1998,
well after the first Insurance Law was promulgated in 1995. In India, the IRDA was launched
first with the authority to issue licenses. It took almost a year before it issued licenses for the
first set of private insurance companies. Second, in China, foreign insurers need to have a
representative office for three years before they can submit a proposal for operation (in
practice, this has been reduced to two years in some cases). In India, there is no such
requirement. Third, foreign insurers can only own 25% of the total value of the market
(although, in reality, it has been much less than that in Shanghai). In India, the limit is set at
26% per company. In China, there is no limit at the company level. Thus, a foreign company
can own 100% of an approved insurance company in China. Fourth, in India, the licenses are
national. A company with a license can operate in any part of the country. In China, on the
other hand, foreign companies are restricted to operation in two metropolitan areas: Shanghai
and Guangzhou. Fifth, the IRDA is a law-implementing body. It can only interpret the laws
that have been passed by the Indian Parliament. On the other hand, it seems that the CIRC
has been a lawmaking body, it is setting up rules as it sees fit. Sixth, China seems to have
been forced to issue insurance licenses to a host of foreign companies by the end of 2000

simply because it wanted an assured entry into the World Trade Organization (WTO). In
India, there is no such pressure as India is already a part of the WTO.

Health Insurance
Health insurance expenditure in India is roughly 6% of GDP, much higher than most other
countries with the same level of economic development. Of that, 4.7% is private and the rest
is public. What is even more striking is that 4.5% are out of pocket expenditure (Berman,
1996). There has been an almost total failure of the public health care system in India. This
creates an opportunity for the new insurance companies. Thus, private insurance companies
will be able to sell health insurance to a vast number of families who would like to have
health care cover but do not have it.

Pension
The pension system in India is in its infancy. There are generally three forms of plans:
provident funds, gratuities and pension funds. Most of the pension schemes are confined to
government employees (and some large companies). The vast majority of workers are in the
informal sector. As a result, most workers do not have any retirement benefits to fall back on
after retirement. Total assets of all the pension plans in India amount to less than USD 40
billion. Therefore, there is a huge scope for the development of pension funds in India. The
finance minister of India has repeatedly asserted that a Latin American style reform of the
privatized pension system in India would be welcome (Roy, 1997). Given all the pros and
cons, it is not clear whether such a wholesale privatization would really benefit India or not
(Sinha, 2000).

Other Non-Life Insurance

The flurry of activities of the new companies in the life insurance market has not been
repeated in other types of insurance. The reason is basic: lack of data. Unless the new
companies have access to reliable data on accidents of different kinds under Indian
conditions, it would be hard to offer a competitive menu of policies.
Insurance Policies: Types
Two main types: General and Life
1) General Insurance
General Insurance = Every Insurance plan EXCEPT life insurance plan

Name

Sub categories
medical insurance, accident, property and

Personal Insurance policies

vehicle insurance
protection against natural and climatic disasters for

Rural Insurance policies

agriculture and rural businesses

coverage

Industrial Insurance policies

for

project,

construction,

contracts,

fire,

equipment loss, theft, etc.

protection against loss and damage of property during

Commercial Insurance policies

transportation, transactions, marine insurance etc.

2) Life Insurance Types

Whole life plan

You pay the premium till you retire or till the term of the
policy.

Your family will get money ONLY after you die.

You MUST DIE to get back the money.

Insurance company collect premium form the insured for the

certain period of time like 15, 20, 25, 30 years.

Endowment

If you die within that term, the company will pay huge
money to your family.

If you dont die within that term, company will return the
premium you paid + some interest or bonus on it.

So, you DONOT NEED TO DIE to get back the money.

You keep paying premium for given period (5,10,20 etc.

years)

Term Plan

If you die within that period, your family gets huge money.

But if you dont die within that period, you will not get a
single penny from the company.

So, you MUST DIE to get back the money.

Good part- Term Plans have cheaper premium than other

plans.

ULIP(Unit

Linked

You pay regular premium to the company.

Company invests it in Debt and Equity markets. [click Me to

know more about Debt and Equity Markets]

The profit generated by this investment, will be given to you

Insurance Policy)

no matter you die or not.

Thus you get the benefit of risk cover as well as the

investment gains.

You DONOT NEED TO DIE to get back the money.

They pay higher return than Endowment.

Nationalization of Insurance business

In 1972, Government

of India passed of the General Insurance Business

(Nationalisation)
Act,

With this Act, Government took control of all the private insurance companies of
India
and created 4 companies
National Insurance Company Ltd

General Insurance.HQ: Kolkata

New India Assurance Company Ltd

General InsuranceHQ: Mumbai

Oriental Insurance Company Ltd

General InsuranceHQ: New Delhi

United India Insurance Company Ltd.

General InsuranceHQ: Chennai

Foreign Direct Investment in Insurance

up to 26% is allowed.Update: 49% allowed after Mamta Left the UPA alliance.

For example Bajaj Allianz Life Insurance Company Limited is a joint venture
between
The Indian Company Bajaj (that scooter maker, has 74% stakes in this

company.)
The Foreign Company Allianz AG (German Company, has 26% stakes in this

company)

Similar arrangement was present in Max New York Life Insurance Company
But the New York Life sold its stakes and left the game hence the new name

of the company is Max Life Insurance Company. [You might have seen the ads on
TV about its name change.]

Reform in Insurance sector already done by IRDA

If an Insurance company has been in business for 10 years, it can launch IPO.

Mobility / Portability in Health Insurance= if youre unhappy with your Health

(Medical) insurance company, you can change it.

LIC

Life Insurance Corporation of India

100% owned by Government.

Started in 1956

HQ: Mumbai

Motto: Yogakshemam Vahamyaham (taken from Gita, meaning I carry what you
require.)

Provides Life Insurance, Health Insurance

GIC- Reinsurer

Suppose LIC sells 1000 life insurance policies, each with a 1 crore policy limit (e.g. I,
the customer pay Rs.10,000 premium every year and If I die my family should get 1 crorethat type of Policy).

Theoretically, the LIC could lose 1000 crores in a day, if every customer dies on the
same day!

So to prevent itself from such a loss, LIC itself should take some insurance from a
third insurance company (GIC).

for example I, the LIC Manager shall continue to pay the GIC 1 lakh every month,
and in return GIC insures that if my company LIC has to pay more than 100 crores in
policy claims within 1 week, then GIC will cover the cost.

So, This third party, General Insurance Corporation of India (GIC) = Reinsurer.

GIC is the ONLY Reinsurer in India.

Types of Insurance

Companies which provide Life insurance in India

Public Sector

Life Insurance Corporation of India

Private Sector

AEGON Religare Life Insurance

Edelweiss Tokio Life Insurance Co. Ltd

Aviva India

Shriram Life Insurance

Bajaj Allianz Life Insurance

Bharti AXA Life Insurance Co Ltd

Birla Sun Life Insurance

Canara HSBC Oriental Bank of Commerce Life Insurance

Star Union Dai-ichi Life Insurance

DLF Pramerica Life Insurance

Future Generali Life Insurance Co Ltd

HDFC Standard Life Insurance Company Limited

ICICI Prudential Life Insurance Company Limited

IDBI Federal Life Insurance

IndiaFirst Life Insurance Company

ING Life Insurance

Kotak Life Insurance

Max Life Insurance

PNB MetLife India Life Insurance

Reliance Life Insurance Company Limited

Sahara Life Insurance

SBILife Insurance Ltd.

TATA AIA Life Insurance

Conclusions
It seems unlikely that the LIC and the GIC will shrivel up and die within the next decade or
two. The IRDA has taken a "slowly slowly" approach. It has been very cautious in granting
licenses. It has set up fairly strict standards for all aspects of the insurance business (with the
probable exception of the disclosure requirements). The regulators always walk a fine line.
Too many regulations kill the incentive for the newcomers; too relaxed regulations may
induce failure and fraud that led to nationalization in the first place. India is not unique
among the developing countries where the insurance business has been opened up to foreign
competitors. From Table 4, we observe that the openness of the market did not mean a
takeover by foreign companies even in a decade. Thus, it is unlikely that the same will
happen in India, especially when the foreign insurers cannot have a majority shareholding in
any company.