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Title: Indian Insurance Industry – Post-liberalisation Landscape
Reference No.: ASCI, Hyderabad
Date: 21/04/2006
Indian Insurance Industry – Post-liberalisation Landscape
“Indian Insurance Industry – Post-liberalisation Landscape1
C.S. Rao2
It is indeed a great privilege to address the august gathering this evening. The Administrative Staff College is an outstanding institution contributing to the deepening and widening of knowledge not only in the area of management but also in exploring various policy options in diverse areas that constitute critical components of the Indian Economic Scene. I am grateful to Dr. M. Narasimham, Chairman of the Staff College for giving me the opportunity to share with you some of the developments taking place in the insurance sector which is slowly claiming its legitimate position in the Indian financial sector. That I should have the opportunity to talk about it when Dr. Narasimham who played a major role in revamping the financial sector, is presiding over this function is a rare privilege. I could not have been more fortunate that this talk is arranged in honour of Sri K.L.N. Prasad who contributed enormously to the development of industry and commerce in Andhra Pradesh and was closely associated with the Financial Sector.
I had the privilege of knowing Sri K.L.N. Prasad in the 1970s when I was Collector and District Magistrate in Krishna District. Inspite of his busy schedule as a Member of Rajya Sabha and a host of Directorships in various companies that demanded a large portion of his time, he never missed an opportunity to participate and contribute to the success of micro initiatives taken by the district administration at the local level. In view of his long association with the financial sector, he would quickly work out the cost benefit analysis of any activity and advise on how to accomplish the task with limited investment. He was a champion of the free enterprise and had he been alive today he would have rejoiced at the transformation that has taken place in all sectors of the economy.
The topic I have chosen for presentation today is the Indian Insurance Scene in the post reforms era. The reforms in insurance sector need to be viewed in the light of the overall economic reforms process pursued by the Government. The Reforms in 1990s undertaken subsequent to the balance of payments crisis encompassed all the sectors of the economy. These reforms were aimed at attaining higher rate of growth. In the industrial sector, state monopoly was abolished virtually and the License Raj was a thing of the past and many entry barriers were dismantled. In the area of international trade, import licensing was abolished and average tariff rates have been substantially reduced and foreign investment has been liberalized. Infrastructure sector has been opened up; however some caps on foreign direct investment in some sectors have been retained considering either the sensitivity of the sector or for want of amendments to the existing Acts. In the past few years some important policy initiatives have been taken for improving Agriculture also.
The reforms process in the financial sector was oriented towards building a strong and resilient banking system. Towards this objective, the regulatory and supervisory norms were tightened while inducing greater accountability and market discipline among the participants. As a result, the banking system acquired strength, efficiency and vibrancy necessary to meet global competition. There has been a noted improvement in financial health of banks in terms of capital adequacy, profitability and asset quality with an increased focus on risk management.
The reforms have paid good dividends. The average annual growth rate in GDP recorded around 6 per cent touching 8 per cent in 2003-2004. Inflation has been moderate. The foreign exchange reserves have been over US $140 billion and foreign debt is being paid ahead of schedule. India has become a production base and an export hub for diverse goods from agricultural products to automobile components to high end services. Indian firms are now a part of global product chains. Large international corporations have established R&D centres in India. The capital market has been buoyant and India is considered as a favourite destination by foreign investors. Trade has risen from 21 per cent to 33 per cent of GDP in a decade. All the above resulted into greater integration of Indian economy with the world economy.
The country has, obviously, benefited from the reform process. It may be recalled that while the reforms in various sectors of the economy were either welcomed or considered essential to overcome a crisis, there was considerable debate on the need for reforms in insurance industry. There were many who maintained that since insurance contracts between insurers and the insured involve special fiduciary obligations, it is better if those obligations are guaranteed by the State ownership of insurance companies. To understand and appreciate the contentions of those who supported the status-quo it is necessary to briefly examine the history of insurance in India.
Life Insurance companies came to India primarily to insure the lives of the Europeans. Oriental Life Insurance Company, the first life insurance company to be established in India was founded in 1818. In the early part of the twentieth century, a large number of Indian entrepreneurs started establishing insurance companies to cater to the needs of the Indians and their establishments. The proliferation of the insurance companies prompted the Government to regulate the life insurance business. In 1912 the Life Insurance Companies Act was passed making it compulsory for the companies to file with the Government the premium rate tables and certified valuation of those companies by an actuary. This Act primarily provided for information to be furnished by the companies to the Government with the comfort provided about their viability through an assessment by an actuary. The Act did not envisage extensive supervision and regulation of the companies by the Government.
The first two decades of the twentieth century saw considerable growth in insurance business. From 44 companies with total business-in-force of Rs.22.44 crore, it rose to 176 companies with total business-in-force of Rs.298 crore in 1938. During the mushrooming of insurance companies many financially unsound concerns were also floated which failed miserably. In this background came the major enactment of the entire Indian insurance history. The Insurance Act 1938 was the first major legislation governing not only life insurance but also non-life insurance to provide strict state control over insurance business.  This legislation is so comprehensive and well drafted that it remains relevant even today and so far only modifications and additions have been made, where required, leaving in tact a substantial portion of the legislation.
Inspite of sound legislative framework the life insurance industry had to be nationalized in 1956 because of threat of insolvencies and gross misuse of policyholders’ funds by the insurance companies. All the life insurance companies were merged into a single corporation and the LIC was created. When the general insurance companies were later nationalized, the model adopted was different and the private companies were organized into four companies fully owned by the Government of India. The intention was that they should compete with each other both on rates and terms of the contract and on levels of service.
On both the occasions, the nationalization of insurance industry was justified on the ground that (i) the State would be in a better position to apply the massive resources generated through insurance for nation building activities; (ii) the existing insurance companies tend to be urban centric and the vast majority of the population that live in the rural areas are denied the benefit of insurance and the State would have the means and the motivation to reach out to this section of the population and (iii) the governance standards in some of the companies were low and that there was a threat of insolvency.
Nationalization did fulfill the major objective which prompted the government to take this historic initiative. The Life Insurance Corporation had become a household name and it operated through 10 lakh agents and had succeeded in penetrating the rural areas and carried the message of insurance to the rural masses. The vast network of offices provides easy access to the customers to avail of the services provided by the Corporation. It may be recalled that long before Banks and other financial institutions entered the business of providing housing loans, the LIC policyholders had access to credit to finance their housing schemes from the Corporation. It extended loans to panchayats and municipal bodies for undertaking water supply and sanitation schemes and was in the forefront for financing long gestation infrastructure projects.
The nationalized general insurance industry had also rendered yeoman service by providing insurance cover for small and medium enterprise located in small towns and major panchayats and initiated a number of schemes to extend cover to householders, small shop keepers and occupational groups involved in hazardous professions. The nationalized industry did give a rural and social orientation to insurance. However, over a period of time it was recognized that there was a wide gap in terms of market potential and its exploitation by the nationalized industry. The companies suffered from overstaffing and poor customer service. There was a growing recognition that the consumer did not benefit in the absence of competition in terms of wider choice and competitive pricing. The reach of the nationalized companies was limited, the range of products offered restricted and the service to the consumers inadequate. It was felt in 1990s that the scale of economic activity attained in the mid-eighties and the momentum generated through the reforms process in other sectors of the economy can not be sustained by state controlled insurance industry and that insurance penetration and enlargement of the market can be accomplished only when a large number of companies compete with each other. It was also realized that the objectives of the nationalization of the industry can largely be accomplished through appropriate regulatory measures and a state monopoly was no longer necessary.
The Malhotra Committee appointed in 1993 to examine the structure of the insurance industry and recommend changes to make it more efficient and competitive concluded that the time was ripe to dispense with state monopoly and allow private enterprise to enter the insurance sector for the following reasons:
(i)                 Competition would result in better customer service and help improve range, quality and price of insurance products;
(ii)               Though nationalized industry has built up large volumes of business, overall insurance penetration is quite low and entry of private players would speed up the spread of life and general insurance;
(iii)             When competition exists in banking, mutual funds, merchant banks and other non-banking financial institutions, there is no reason why the insurance sector should not be exposed to competition;
(iv)              The dominant public opinion was in favour of introducing competition;
(v)                The state owned insurance companies have the financial strength and professional competence to face the competition from the private sector.
In order to make the transition from State monopoly to free market smooth, the Committee recommended that only strong and serious players should be permitted to enter the market and an independent regulatory mechanism should be established to instill confidence among the prospective policyholders in the financial viability of the private insurance companies. The independence of the regulator is also to signal the commitment of the Government to ensure that the private companies can operate on a level playing field and no preference is shown to the State owned enterprises.
The recommendations of the Malhotra Committee were widely discussed and there was support for the opening of the sector with a strong and effective regulatory authority.  The government established an interim regulatory authority by executive order in September 1996 and decided to bring in legislation to establish an independent regulatory authority for the insurance industry along with modifications required to remove the State monopoly in this area.
The enacting of any legislation is a time consuming process even in normal circumstances. In the case of insurance industry however, the issue became more complicated. In December 1996, the government introduced the Insurance Regulatory Authority Bill 1996 for establishment of an authority to protect the interests of holders of insurance policies and to regulate, promote and ensure orderly growth of the insurance industry. The bill was referred to the standing committee of the Ministry of Finance which submitted its report in May 1997. The bill incorporating the recommendations of the standing committee was taken up for consideration but it could not be passed and was withdrawn by the government.   In 1998, a new government came to power at the centre. In the budget speech of 1998, the policy of the government was announced to open up the insurance sector and also to establish a statutory regulatory authority. Accordingly, the Insurance Regulatory Authority Bill 1998 was introduced in the Lok Sabha in December 1998 to permit the entry of private “Indian companies” into the Insurance sector and to make certain consequential amendments to the Insurance Act, 1938. The Bill was referred to the Standing Committee on Finance in January 1999 for examination and report. The standing committee while recommending the Bill suggested some amendments. These amendments were accepted by the government and the Bill was circulated in March 1999. This Bill too could not be taken up for consideration consequent on the dissolution of the Lok Sabha.
A fresh Bill was introduced by the new government in the second half of 1999 by incorporating the provisions of the Insurance Regulatory Authority Bill 1998 and the amendments suggested by the standing committee on finance. The amendments pertained to foreign equity being restricted to 26%; name of IRA being changed to IRDA as also emphasis on development of social, rural and unorganized sectors.
The IRDA Bill was passed in December 1999 and became an Act in April 2000. In July 2000, immediately after the first meeting of the Insurance Advisory committee, 11 essential regulations relevant for players entering the Indian market were notified. In October 2000, six licenses to new players in the life and non-life sectors were issued. India thus became a liberalized insurance market.
While the long debates in the 90s and the twists and turns that surrounded the opening up of the sector for private participation had at times, thrown up serious concerns about the implementation of insurance reforms in this country, once the legislation was put through, the actual process of inducting private players into the market had gone off smoothly. I do not think there is any other sector in this country where the transition from state monopoly to free market has been as hassle free as the insurance sector.
The continuity provided by keeping the office of the interim Regulator through those turbulent 4 years between the creation of the office and the passing of the Bill by the Parliament helped the Regulator in understanding the concerns of the Government, the Parliament and the private investors who were anxious to establish private insurance companies. The Regulations that were framed had tried to harmonise the various points of view, without losing focus on internationally accepted best standards. The consultation process adopted by the Regulator with the stakeholders had helped in framing Regulations which not only incorporated some of the internationally acclaimed standards but were also found acceptable to most stakeholders.
It is worth remembering that supervision of insurers is a relatively new phenomenon in India. The legislation providing for regulation of the sector itself was passed in 1938 and in less than two decades, life insurance was nationalized followed by nationalization of non-life business in 1972.
Insurance supervision is one of oversight to ensure that insurers have financial resources required to pay all claims as they fall due; and that insurers treat consumers in an equitable manner in all financial dealings. These twin objectives are achieved to a great extent when the State itself is a provider of insurance. The solvency of insurers is never in doubt when the insurance companies are fully owned by the government and the equitable treatment of the insured is ensured through government supervision coupled with Parliamentary control over these institutions. Insurance supervision has, however, acquired a new significance with the opening up of the sector to private participation five years ago. Since Government protection does not exist, the public needs assurance that their funds are safe and the affairs of the private companies are managed prudently and they would step in when a claim is made. To instill a sense of confidence among the public about the safety of their investments and to assure the new players that they would be provided with a level playing field with no special favours shown to the public sector insurance companies, the Government of India provided for a regulator independent of the Government. This is a significant step taken by Government of India as in many countries the supervision of insurers is done not by an independent regulator but by the Commissioner of Insurance who is normally an employee of the Ministry of Finance.
The opening of the sector has resulted in a large number of business concerns and banking establishments entering the insurance arena resulting in a sudden increase in the capacity to underwrite risk. Most of the senior managers in these establishments come with diverse backgrounds and their appetite for taking risks varies widely. The competitive pressure for obtaining a distinct market share may lead them to adopt unsound practices. The supervisory system has to be, therefore, geared to assess effectively the financial soundness of the insurers and ensure that these companies have safeguards in position so that they are, at all times, in a position to meet their obligations to the policyholders.
These concerns regarding solvency are generally addressed through prudent regulatory measures. Such measures include stringent capital and solvency requirements, prudent investment and reserving rules and regular monitoring of the activities of the insurers to ensure that they comply with the regulations.   In view of limited experience, we had to necessarily turn to international practices in deciding on the appropriate regulatory framework.
Besides monitoring financial solvency of insurance companies, supervision of insurance operations includes in many countries the control of how insurance providers conduct their business. Competition rules, transparency and information requirements form the core of market conduct regulations.  Effective market place operations require the presence of free and open information exchange. Market discipline can provide the right incentives for companies to act prudently and in the best interests of owners and customers. However, when accurate and timely information is not made available, it becomes more difficult for bad performers to be disciplined. The Regulators have to necessarily accord high priority for information dissemination as an effective check against improper market behaviour.
The supervisory philosophies vary from country to country. Some of the developed countries still substantially supervise a wide range of activities. These countries consider that supervisory bodies should not only check the solvency of insurance companies but also verify that an adequate balance exists between premiums and benefits under insurance contracts offered in their markets. Furthermore they ensure that policy forms comply with specific legal provisions for the fair treatment of policy holders. Some other countries have had traditionally a "hands-off" approach to supervision, and rely more on market forces. Governmental authorities of these countries concentrate on control of solvency and allow competitive forces to determine market structure, rate setting, design of insurance contracts and other insurance business related matters.
In both the models there is need to establish by law the functioning rules in regard to capital, solvency, investment and reserving requirements, as well as the rules related to insurance contracts and consumer information. The law should also specify the role and powers of the supervisory authority. A differentiation in the regulations of non-life and long-term insurance operations is also set by law.
In our country we have tried to follow these principles by framing the law and the rules in as clear and unambiguous way as possible. We decided to follow a prescriptive rather than an indicative model so far as regulation is concerned.   Keeping in view the history of bankruptcies and unhealthy practices that lead to the nationalization of the insurance industry, a conscious decision was taken to allow only strong corporates with proven track record to enter the insurance market. This has been sought to be achieved by prescribing a high level of entry level capital coupled with stringent solvency requirements. In order to avoid fragmentation of the market and to prevent entry of unsound operators the minimum capital requirement has been placed at Rs.100 crs for company. 
The Authority decided not to fix a limit with regard to the number of entrants. Instead a strict criteria for awarding licenses has been put in place. The basic features that the Authority laid emphasis on are:
Financial strength, track record and reputation of the promoters with regard to compliance with regulations and the strength of internal control systems; commitment to contribute to India~s development as a regional insurance hub and an international financial centre. IRDA has been keen to see the industry develop in terms of product innovation and the use of alternative distribution channels. Applicants with a strong record in these areas, or in specialist and niche fields, and who are committed to underwrite health insurance business have received favourable consideration. The emphasis is on encouraging only those applicants who have a sound track record in their respective fields. Many of the Indian promoters have collaborated with foreign insurance companies who had long years of experience in marketing insurance products in emerging markets. A verification with the home regulator of these companies was done to ascertain their record of compliance with regulations.
While rigorous scrutiny of applicants at the entry level would ensure that only companies with sound finances are licensed to do insurance business, it is equally important that they remain solvent at all times. Insurance is a long term business and those who wish to enter the business should have the ability to inject more capital as the business expands. In order to protect the interests of the policyholders the solvency requirements have been placed at 1.5 times the normal solvency requirements or Rs.50 crs whichever is higher. While the Insurance Act prescribed that assets should match the liabilities the prudential requirement has been kept deliberately at a higher level so that there is complete protection to the policyholders.
The life insurance contracts in India are not pure term contracts but mostly endowment contracts where the policyholder expects the company to return to him at the end of the contract period what he has paid as premium with a reasonable return. A proper management of these resources is a major task undertaken by the insurance company. While in most countries the Regulations do not prescribe the manner in which these funds are to be invested, in India the Insurance Act itself prescribed the investment pattern to be adopted by the insurers. Fund management is a highly specialized activity and it is often contended by the insurers that rigid patterns prescribed under the Act leave little flexibility to the managers to obtain maximum return. There is merit in this contention and it is true that a balance is struck between safety and proper return. The rigidities of the system are partly overcome by the insurers by offering Unit Linked policies where the policyholder is given the opportunity to choose the investment pattern depending on his risk appetite. While it is a transparent unbundled product, it is essential that proper disclosures are made by the companies upfront so that the investor knows what risks he has to shoulder when he opts for this product. The Government proposes to address the concerns of the insurers on investments when it undertakes the amendment of the Insurance Act.
Prudential investment norms have been notified to further enhance the financial flexibility and risk management ability of insurers, and for better management of investment portfolios. We believe that as financial complexity and contagion exposure increases with globalisation, prudent investment management becomes increasingly critical to insurers in maintaining stability in their operations. In addition guidelines on related-party transactionsto ensure management integrity and public accountability in the conduct of insurance business have to be in place. The guidelines issued by the Authority reinforce the fiduciary duty owed by insurers to properly manage insurance funds in an independent and transparent manner for the interest of policyholders at all times. The total investment portfolio of the insurers as on 31-03-2005 stands at Rs. 4,65,864 crores compared to Rs.2,18,472 crores as on 31-03-2001. The share of the investment in infrastructure out of the total investment of Rs.4.65 lakh crs is Rs.49,810 crs.
Sound regulations coupled with periodic inspections to ensure adherence to the regulations is the best protection that can be offered to policyholders. In addition to a rigorous scrutiny of the companies at the entry level, diligent monitoring of their activities with special reference to maintenance of solvency margins and prudent investment policy would ensure that the companies remain viable with ability to meet their commitments. The experience so far in India is that the local partners are sound with an excellent track record in their respective fields, and their foreign collaborators are very well established insurance companies with vast experience in both developed and emerging insurance markets. 
The high initial capital requirements and the cap on Foreign Direct Investment at 26% did not deter the Indian entrepreneurs and the major foreign insurance companies from collaborating to form Indian insurance companies. We have today 14 private life insurance companies and 8 private general insurance companies doing business in this country. They obviously feel that these stipulations are irritants but are not strong enough to be a deterrent for entry of private players into this area. It is nearly six years since the Government monopoly was removed and it would be worth examining what the expectations were in 2000 and how far they were realized.  Since it would take sometime to collect information as of 31st March, 2006, let us look at the figures at the end of 31st March 2005 and assess the progress made in a 5 year period.
Those who followed the debate on entry of private companies into insurance would recall that arguments that clinched the decision in favour of private sector entry were:
(i)                 that the sector would grow much faster than what has been witnessed so far;
(ii)               that the public sector companies have the strength to withstand competition;
(iii)             that insurance business would generate resources for investment in infrastructure which requires long term finance;
(iv)              the consumer would benefit with a better choice of products complemented by high quality of service;
(v)                that the availability of insurance coverage itself would spur economic activity as availability of risk cover at a reasonable cost would allow the individuals and corporates to take initiatives which they would otherwise be reluctant to take;and
(vi)              new avenues like health insurance and pension would be opened up with the expertise that is available in the rest of the world.
As we travel 5 years down the line, we find that most of these expectations have been found to be realistic and the benefits are being reaped though the pace at which the benefits are materializing could have been better.   The total premium collected by the insurers, both life and non-life in the year 2004-05 is Rs.1,00,335 crores (Rs.82,854 crores in life and Rs.17481 crores in non-life) compared to Rs.44,705 crores ( Rs.34,898 crores in life and Rs.9807 crores in non-life) during the year 2000-2001. This represents an 125% increase in the last four years over the base year 2000-01. If we take the four year block prior to the opening of the sector, we find that the total premium collected in 1996-97 was Rs.23,625 crores (life:Rs.16277 crores; non-life Rs.7,348 crores) which has grown to Rs.44,705 crores by 2000-2001 representing an increase of 89%. 
The assumption that the sector has the potential to grow at a much faster rate than what we had witnessed when it was under State monopoly has been established beyond all doubt.
It would be worthwhile examining at this stage the relative contributions of the private and public sector in this expanding industry. In the case of life insurance the private sector accounts for 9% of the gross premium with the remaining 91% accounted for by Life Insurance Corporation (LIC). The issue for consideration is whether the acquisition of the market share by the private companies is at the expense of the LIC. The LIC’s gross premium has grown by 115% in 2004-05 over the premium collected in 2000-01. If we compare this post liberalization growth with the growth for the corresponding number of years prior to 2000, we find that between 1996-97 and 2000-2001 the LIC registered a growth in gross premium of 114.36% (Rs.16277 crs in 96-97 to Rs.34898 crs in 2000-01). The LIC has obviously not lost its growth momentum and the market share of the private players has come out of an enlarged market. I do believe that this enlargement of the market is mostly due to the efforts of the private players themselves. The private insurers realized that the strength of the LIC lies in traditional products and their vast network covering a large number of middle income customers. They realized that the high network individuals and the young professionals understand investment products and they have not been tapped to the full extent and they would be willing to experiment with new products if there are reasonable prospects of higher return than the conventional products. The new insurers introduced Unit Linked Products and created a new market segment hitherto unknown.
In the case of general insurance also the premium registered an increase of 78% in 2004-05 over the period obtaining in 2000-01. (Rs.17480 crores in 2004-05 compared to Rs.9807 crores in 2000-01). During this period the percentage growth in the premium of public sector was 43% compared to 33% registered during 1996-97 to 2000-01. Even here the premium of the private sector did not come at the expense of the public sector though private sector accounts for 20% of the premium collected in 2004-05.
Indian insurance business, which remained underdeveloped with low levels of insurance penetration and insurance density has shown signs of improvement. The insurance penetration i.e. premia as percentage of GDP has increased from 2.32% in 2000 to 3.17% in 2004. The insurance density i.e. premium per capita has increased from USD 9.90 in 2000 to USD 19.70 in 2004. The overall world rankings in terms of total premium volumes have improved from 23rd in 2000 to 19th in 2004 and our share in the world market has increased from 0.41% to 0.65% during the same period. The world ranking in terms of life insurance premium volumes has improved from 20th in 2000 to 18th in 2004 and the share in world market has increased from 0.50% to 0.91%. Similarly in non-life insurance rankings in terms of premium volumes has improved from 29th in 2000 to 27th in 2004 and the share of world market has increased from 0.25% to 0.31%. While the improvements are not dramatic, we are confident that we are moving in the right direction.
As regards products, there is no denying that there is a wide array of products for the consumer to choose from. The insurers undertake periodic surveys to assess the requirements of different sections of the population and devise appropriate products to suit their needs. The foreign promoter brings to the Indian insurance scene his long years of experience in various markets, developed and the emerging markets. There is a bewildering variety of products and most consumers feel the need for expert guidance from the Agents and the marketing force to enable them to select the right policy.
The expanding market demands a large agency force. The insurers have, therefore, been recruiting agency force on a continuous basis. Presently there are more than 20 lakh individual agents and nearly 5000 Corporate Agents. A significant development noticed last year is the arrangements entered into between the insurers and Commercial Banks for marketing the contracts either as Corporate Agents or on referral basis providing database to the insurers.
In order to introduce an element of professionalism in the insurance intermediaries an elaborate training and testing arrangements were introduced by the Authority. The demand for tied agency force has led to a situation where the resources of the institutes providing training have been stretched. The inspections by   the Authority of these institutes have revealed a number of areas        where improvements were called for.   It was noticed that some of the institutes did not have the infrastructure to conduct classes and the faculty was drawn on an ad hoc basis and the courses conducted in a short span as a result of which many of the agents did not receive adequate training. It was also noticed that the licensed training institutes allowed franchisees to conduct training on their behalf which was irregular. The insurers, in their anxiety to recruit agents, did not pay any attention to the type of training imparted. The Authority had, during 2004, streamlined the system of training and impressed on the insurers the need for greater attention being paid to the training of their agency force. The revised guidelines were issued after extensive consultations with the stakeholders and it is hoped that this effort would result in improving the quality of the agency force. The Authority is keen that the agency force should be properly equipped as the insurance products are no longer simple and the agent should be able to assess the requirements and advise on the appropriate policy.
It would not be out of place to mention here the importance of the field force being really trained and educated. Being the person on the spot as a representative of the insurer, it is essential that the agent recognizes and understands the need of the prospect. Having identified the need, it is his duty to ensure a need-based selling. In the absence of a need-based selling, the contracts are not likely to last long and the policyholder looks for the earliest opportunity to quit. The large attrition rate in the contracts bears silent testimony to this fact. In this regard, another important factor that should be touched upon is the unhealthy and illegal practice of paying rebates to solicit business. Sec. 41 of the Insurance Act, 1938 strictly prohibits rebating for procuring business. Apart from the statutory imposition, the practice also is generally responsible for the poor retention ratios. Although the retention ratios of insurance companies have been progressively showing improvement, a great deal needs to be done in this area. A well-trained agent, fulfilling his role as the primary underwriter, can contribute a great deal in the accomplishment of this task.
The institution of corporate agents was a new experiment started by the Authority to facilitate sale of insurance policies through existing institutions which are in contact with a large section of the population in the discharge of their normal activities. The Corporate Agent model is expected to bring down costs of procurement of business substantially to the insurance company while benefiting the corporate with fee based income which improves its revenue stream. The insured himself, should feel comfortable with this model as he would be dealing with an Institution that is familiar to him. In parts of Europe the Bancassurance model has worked well and the experience of the three parties to the transaction, namely, the Bank, the insurance company and the customer has been positive. You would notice in India too the insurers are keen to have working arrangements with Banks so that they have access to their databank which is a valuable resource for the insurer to build his customer base. I am confident that in the years to come Bancassurance would be a critical intermediary in the spread of insurance in the country.
The introduction of brokers in the Indian insurance industry in the liberalized scenario is another significant development. Brokers act as representatives of the policyholders although they are paid by the insurers. As a result, they are expected to bring better service to the clients in several areas like:
·        Monitoring the insurance market, the credibility of the players and the quality of services they render
·        Analyzing the various products available in the market and assist the clients in choosing the products that suit their requirement
·        Helping the client in the completion of the proposals, conclusion of the contract and render subsequent service, if any
·        Assisting the client in the settlement of claims.
Although the agent is also expected to render most of these services, for several reasons this has not been achieved in the Indian context. Being better equipped with higher training and with no nexus with the insurers, the brokers are expected to deliver these services to the client in a more objective fashion.
The general insurance market is largely driven by brokers. They package the client’s requirements and negotiate with the insurers on the rates and terms and conditions of the contract. The relevance of the broker is limited in the Indian context as the insurers have no flexibility in determining the rates or the terms. Both are laid down by the Tariff Advisory Committee and any deviation would invite penalties. 
In spite of the constraints inherent in a tariff regime, we have witnessed a significant growth in the number of applicants for grant of broker~s license. The brokers are obviously testing the market in preparation for the detariffing that should normally take place when the market is freed from monopoly. The Authority realize that tariffs and free market do not go together. However, as an initial step the Authority has tried to remove the constraints that are placed in the brokers participating in the market. The rules originally prohibited payment of commissions to brokers if the company for whom insurance is placed with an insurer has more than subscribed share capital of Rs.10 lakhs. This has been relaxed and the brokers are now permitted to earn commission for arranging insurance to companies with a share capital upto Rs.15 crs. This measure was initiated to help brokers get acquainted with the market before the market is freed from the constraints of predetermined tariff.
There has been a persistent demand for freeing the general insurance market from the rigidities inherent in a regime where tariffs are prescribed by an outside agency. It has been argued that the insurers should be able to determine what risks they are prepared to underwrite and the rate at which they would underwrite the risk. It was also pointed out that the present system of having tariffs in some risks and free rates for others is leading to distortions in pricing as the insurers are underwriting risks not covered by tariff at throwaway prices in order to gain access to lucrative fire and engineering covers which are covered by tariff.
The Authority recognizes that the consumer would normally stand to gain when there is a free market. We are also convinced that de-tariffing is an essential pre-requisite for the healthy growth of the market. It has to be, however, recognized that absence of data and lack of experience in underwriting could upset the market with adverse consequences for the insurer as well as the insured if tariffs are withdrawn abruptly.
The Authority has in September, 2005 announced a roadmap where it laid stress on an orderly transition from the present tariff market to free market.   It was announced that insurers can determine their rates and terms from 1st January, 2007 for all risks that they undertake. If a free market scenario is to be largely successful, knowledge management should occupy the top slot in strategic management. In a market free of tariffs, any responsible insurer should have in place internal capabilities to do underwriting, have rating support and develop policy terms and conditions which would pass scrutiny by any judicial body. We feel that the function of underwriting and rating of insurance business should be independent of the business development function. We would like to ensure that sound underwriting principles are not sacrificed for gaining access to business. Just as actuaries are in short supply, so are people who have specialized in underwriting. They have to be recruited and properly trained. The road map provides sufficient time to the insurers to identify the right kind of people and place them in appropriate positions to undertake this work when the tariff regime is replaced by free tariffs on 1st January, 2007. In order to feel confident that the process of eventual detariffing is being properly planned by the insurers, the Authority has been conducting review programs at various stages. Wherever constraints are faced by the insurers, it is our earnest desire to ensure that steps are taken to tide over such hardships. We are confident that the new regime would be successfully implemented, looking at the progress achieved in this area.
The Authority has suggested that so far as policy terms and conditions are concerned, the insurers may adopt the existing conditions. However, where the insurer wishes to modify the terms; the approval of the Authority would be required.  In respect of risks which are rated on the basis of international market terms, they may continue to be governed by the terms and conditions acceptable to the reinsurer.
The General Insurance Council which consists of all the general insurers has considered the road map and they seem to be convinced that they would be able to adhere to the road map laid out by the Authority. There was some apprehension about motor tariff and all the insurers have stressed the need for detariffing motor premium along with the rest. We see no difficulty in agreeing to this suggestion. However, we would like to ensure that no vehicle which has a valid registration and has permission to ply on the road goes without a proper insurance cover. We have, therefore, suggested creation of a Declined Motor Insurance Pool. It is believed that the General Insurance Council has created two sub-committees to monitor the preparedness of insurers to meet the challenges of a detariffed regime and to work out the modalities for creation of the Declined Motor Insurance Pool.
We have come a long way in our road to deepen the insurance market. The overall growth has shown positive signs. Global players are interested in this market. There is vast untapped potential with a major portion of household savings parked in the Banking sector. A large portion of those savings can migrate to insurance.   We are on the threshold of a free market where the prices are decided by the players themselves. It is hoped and expected that in their anxiety to access more business, the insurers do not resort to aggressive methods of expansion throwing caution to the winds. While the initial trends in such a scenario may indicate rapid growth, it might lead to a situation wherein the commitments made by the insurers would not be capable of being honoured. It is detrimental not only to the business interests of insurers but also to the welfare of the industry itself in the long run. In an emerging market, in particular, it could lead to disastrous results, and cause severe set back to the reforms process initiated in this sector.
The economy itself is growing consistently at a high rate with inflation in check. The Government is making a major effort at improving infrastructure through public-private partnership. Insurance industry has a major role to play in nurturing this partnership and in providing the required resources to sustain investments in infrastructure. One hopes that the insurers would not be found wanting in this effort at transforming the Indian economy.
A glimpse of the global life insurance scenario would reveal that while the growth has either reached a point of saturation or turned negative in the developed countries, it has shown a great potential in the emerging markets. India in particular has experienced a buoyant market and has grown steadily since the opening up of the sector. The prerequisites of global competitiveness are, developing world class products that meet the aspirations of the global customer; delivering service to match his rising expectations; and managing costs to remain competitive and sustain growth. This will require technology and developing world-class competencies in the workforce.
Insurance contracts, particularly in the life arena, are basically long term contracts and succeeding in the long term requires a rigorous asset/liability management in an uncertain business environment where interest rates are demonstrating tremendous volatility. This demands vast expertise in risk management and it becomes imperative for an insurance company to groom and develop a cadre of risk managers. The looming threat of terrorism which has itself become global, deadly lifestyle diseases like AIDS and potential ones demand a paradigm shift in risk management and a consequent departure from conventional mortality investigations. Further, natural disasters which are putting the most scientific assessments to shame, pose unending challenges to our actuarial skills.
In light of these sensitivities, solvency margin will continue to be critical parameter to be monitored by the Regulator to ensure that the company is in a position to meet its obligations. This will be a continuing challenge for the new players who are on a growth path as they will be called upon to inject additional capital to meet the increasing liabilities.
Today, the total insurance penetration i.e premiums as a percent of GDP is just over 3.0 in India against a world average of 8.06. This shows the potential for growth of the insurance industry and provides a great opportunity to all the players in this sector. In such a landscape, the market shares of different players would not be a very vital factor; what is relevant is the total accretion of new business.
Insurers can gain reasonable market share if they come up with schemes that are socially meaningful and are an alternative to state-provided social security schemes. There can also be a collaboration between the insurers and the State and Central governments so that target groups are identified and they fund a portion of the premia. Here implementation is the key and all insurance companies should come together to create a greater awareness and see it as a means of fulfilling their corporate social responsibility.
The social obligations can largely be met through micro insurance programmes. The success of micro insurance programmes will depend on creatively designing demand driven products along with client-friendly collection and delivery mechanisms. However, the ultimate success of such programmes will depend on the commitment and passion with which they are implemented.
It should be realized that in the end, customer is supreme. Steps should be taken to ensure that the obligations that have been dealt at length earlier are fulfilled without causing any hardship to the customer. It may be the avowed desire of several corporate entities to achieve this goal but ultimately, how much of it is really being done is what matters. Time and again, it has been reiterated that a satisfied customer functions as the greatest brand ambassador for an entity. It is high time we recognized the rights of the customer and gear ourselves to meeting his needs. Customers will be guided by two important considerations: price and quality of the service. While a high level of service is required, for the buyers price is extremely important. This growth in customer sophistication poses problems for insurers. The profit margin, if any will be squeezed, as we shall have to provide services which customers would demand.
The opening of the insurance sector for private participation raised hopes of the emergence of health insurance as specialized line of business with stand alone health insurance companies catering to the health needs of the public at large. It was believed by many that health services in the country are geared to meeting the requirements of the health insurance companies. There is nothing unreasonable about these expectations.
The healthcare industry in India has come a long way from the days when those who could afford it had to travel abroad to get highly specialized services such as cardiac surgery, while others had to do without it. Today, patients from neighboring countries in Asia, and in some cases from some parts of the developed world are coming to India to receive specialized medical treatment. Not only is India meeting international standards, but at prices that compare very favorably with developed countries.
In the recent past, there have been several innovations in the healthcare services industry in India, giving patients a new experience of healthcare. The innovations in products and services have made hospitals a one stop location for people~s healthcare needs and these innovations have given patients better service.

In India, healthcare is delivered through both the public healthcare system and the private sector. The public healthcare system consists of healthcare facilities run by the central and state governments, which provide services free of cost or at subsidized rates to the general public in rural and urban areas. The government funds allocated to healthcare sector have always been low in relation to the population of the country. In the private sector healthcare industry, healthcare facilities are owned and run by for-profit companies and non-profit or charitable organizations. Healthcare facilities run by charitable organizations also provide services at subsidized rates or free of cost depending on the income of the patient.
Initially, the government imposed high custom duties on imported medical equipment making it difficult for private individuals to set up hospitals that provided specialized care using sophisticated equipment. As a result, there were very few privately run large hospitals but there were many small private practitioners who provided primary and secondary care. Another, limitation faced by the private sector was low penetration of medical insurance which meant that almost everyone paid out of their pocket. Therefore, many could not afford to go to private hospitals, as the fees were much higher than the government-run hospitals. Gradually, with the rising population and number of people suffering from diseases that required specialized care, together with the limited government spending on healthcare, the quality of services at government run hospitals suffered. The existing government facilities were simply not enough to cater to the burgeoning population, whether it was primary, secondary or tertiary care. .

The private sector investment in the healthcare industry really took off in the 1990s after the liberalization of the Indian economy. The number of privately run large hospitals and non-profit and charitable hospitals began to increase. The non-profit hospitals catered to low-income families that could not afford to go to corporate hospitals even though they felt that government hospitals were not providing the best care.
Even though insurance industry was opened up to private sector in 2000, the penetration of medical insurance still remained very low. It is estimated that only around 10 per cent of the Indian population are covered under some sort of healthcare whether it is private health insurance or government schemes.

The innovations whether in business models, in marketing & promotion or in the use of technology, have created unique experiences for patients. Although medical insurance was introduced in the country in the late eighties, it suffered from a lack of trust among the public; and the product itself was under cloud for several reasons associated with its abuse. Moral hazard was quoted to be the biggest factor for its undoing. Besides, the delays associated with settlement of bills; poor servicing of the policies etc. were quoted to be the reasons for the product not taking off the way it should have. The institution of Third Party Administrators (TPAs) was introduced in the liberalized regime in order to obviate several of these ills. The institution itself ran into rough weather during the initial days but has come to stabilize itself and the number of complaints with regard to poor servicing of the health insurance contracts has certainly reduced in recent time.
The potential in the health segment is tremendous considering the huge untapped market. An observation of the trends of hospitalization irrespective of the economic standards of the people would indicate that it is merely a lack of awareness in the general masses about the benefits of health insurance. A great deal needs to be done in this area. Several steps have already been taken to improve the situation; and positive results have been achieved. But one should admit that there is still a great hiatus between what has been achieved and the actual potential.
The thrust to health insurance could come only when stand alone health insurance companies start functioning in India. The Health Insurance Working Group constituted by the IRDA made several recommendations including reduction in entry level capital, greater level of FDI and separate regulations to supervise health insurance companies. The detariffing of the general insurance premium itself would pave the way for scientific pricing of health insurance products and better administration of this portfolio by insurers. The IRDA has only recently licensed a stand alone health insurance company. I hope that this is only the beginning and many more would follow.
Insurance business is a long term business and has a long gestation period.  It is possible that, considering the huge expenses upfront, the insurers may not reap any margins in the initial years. This should not act as a deterrent and all those who have entered the field are aware of it and are here for the long term. India is viewed by many multi-national insurance companies as a vast market waiting to be tapped. They have great expectations from the market and are willing to invest and wait for the returns to flow. They have confidence in the regulatory framework and the judicial system. I am confident that the market would grow with many players joining the fray. 

 1 KLN Prasad Memorial Lecture delivered at the Administrative Staff College of India on 21.4.2006
 2 Chairman, Insurance Regulatory and Development Authority                go top
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