Insurance Industry in India

Chapter 1:
Insurance Industry in India
This chapter starts with an analysis of evolution of insurance in India which is

essential because insurance in India commenced with a de-regulated environ-
ment (or private firms), moved to a regulated/government owned environ-
ment and finally completed a full circle with de-regulation in the year 2000.
The next sub-chapter discusses the dynamic market environment for insur-
ance in India, in lieu of the changing regulations, de-tariffing of the general
insurance industry and discussions about increase in foreign-equity cap. This
sub-chapter examines the environmental factors from the insurer’s point of
view, de-tariffing and its consequences, the porter’s 5 forces analysis, the
kind of change and trajectory that the industry is expected to undergo, the
type of internationalization strategy that a foreign player must pursue. The
next sub-chapter details the role of the authority/regulator in shaping and pro-
moting the business environment and enlists the statutory functions of the IR-
DA (the regulator). The final sub-chapter examines the Indian Market as-is
vis-à-vis other markets; the Asian and Global Insurance markets illustrating
market value, market value forecast, premium share of the total market across
geographies and categories, insurance penetration, insurance density and
competitive landscape comparisons.
2 1 Insurance Industry in India
1.1 Insurance – Introduction and History
Introductory Terms to Insurance

An essential commodity in terms of social security, insurance simplistically defined
has two fundamental characteristics
– Transferring or shifting risk from one individual to a group
– Sharing losses, on some equitable basis, by all members of the group
From an individual’s point of view, insurance is an economic device whereby the in-
dividual substitutes a small certain cost (the premium) for a large uncertain financial
loss (the contingency insured against) that would exist if it were not for the insurance.
The primary function of insurance is to create a counterpart of risk, which is security.
From a social point of view, insurance is an economic device for reducing and
eliminating risk through the process of combining a sufficient number of homoge-
nous exposures into a group to make the losses predictable for the group as a whole
(Vaughan and Vaughan).
Insurance Sector Revisited

Looking back in the Time Machine
Interesting accounts of ancient commerce have revealed the initial attempts of hu-
mans at insurance. Around 6000 years ago, Babylonians, whose home in the Tigris-
Euphrates Valley lay at the crossroads of early world traffic, had developed business
practices to high degrees of sophistication. Babylon, a territory where all important
land trade routes converged, became the clearing house of trade. Though Babylon
built up a worthy commercial system, and its people were the first to enjoy the fruits
of political economy, the travelers were exposed to risks of robbery, pirates and un-
canny winds at the seas. Human ingenuity was set to work and, in course of time, a
practice developed that debt of the trader, both principal and interest, should be ab-
solved if certain specified contingencies occur. By 2000 BC, the Babylonians and an-
cient Hindus were familiar with the essentials of the insurance contract as indicated
by the provisions included in the codes of Hammurabi and Manu; the Babylonian
contract and the code of Hammurabi applying mostly to caravans, and Manu Dhar-
mashastra referring to both seaborne and overland traffic.
Better and more sophisticated insurance came of age in the 11th century, on the
beach of Hastings, when King Harold (who carried a large Personal Disability Insur-
ance) was shot dead by a Norman bowman firing through a narrow slit in the defense
wall. His queen immediately got in touch with the insurance company enclosing a
1.1 Insurance – Introduction and History 3
plan, as required on the claim form showing the path of the arrow. The insurers exam-
ined the policy for a few days and grew desperate at their inability to find a way of le-
gitimately escaping the deal, when a bright “employee” noticed a gap in the defenses.
Keeping the defenses without gap was a policy condition and was Harold’s responsi-
bility, “Here”, he said, “if the gap wasn’t there, the arrow would never have gotten
through, so there can be no claim” and that was how the “loophole” entered the histo-
ry of insurance or more precisely said the ingenuity in drafting the policy document
with clauses and “if-conditions” (Ayyar).
Understanding Insurance
Insurance is a service, which is sought to be commoditized for better conceptualiza-
tion in keeping with the other unification trends running across the world. Insurers
sell a promise to pay or defray on a future date for a predefined contingency. The
function of insurance is to protect a few against the heavy financial impact of the ex-
pected loss by dispersing the losses among many who are exposed to homogenous
risks.
Initially insurance business structure was architected in three dimensions:
– The cross section of people, property or interest
– Pre-determinable risks
– Time ambit of coverage (Mishra and Mishra)
Insurance products were designed around such dimensions. Then started the era of
classification of such products – choices of handling the assorted products created
two classes of insurers – life and non-life; life meant human life.
The discovery driven insurance industry encountered the problem of size. To prune
the vertical risk size another class of insurance business evolved, which is now fa-
mous as reinsurance (Mishra and Mishra).
Augmentation of the Sector

Insurance products slowly incorporated other developments in the society and eco-
nomics. Monetization of economy assorted the income of people into propensity to
consume and propensity to save. Such individual savings were pooled to classes of
investments depending on the economies of scope, scale and prioritization for the
purpose of common social good. There was need to internalize functional efficiency
in mobilizing the savings. Functional efficiency consists of allocative and operative
efficiency. Insurance sector got the share of these savings in the equilibrating process
of allocative efficiency. Thus, the insurance sector found a new way to augment its
business. Insurance products packaged savings features with risk management fea-
tures. The demand for operative efficiency forced insurers to define their core com-
petencies; thus called for compartmentalization of insurance activities either by dic-
tates of operative efficiency or by statutory and prudential regulations.
Originally meant to be a support service, the sector proved its excellence like a sol-
id sphere and developed hydra-headed growth characteristics. The possibilities were
pruned by regulations and that seemed to be the only constraining factor for the all-
engulfing growth possibilities of the sector; which explains, as the global thrust on
deregulation and liberalization compels nations to open up doors for the insurance
sector growth, there is a stampede to enter into the sector.
The cardinal attraction of the insurance sector is harnessing long term funds for
long term investments in ever expanding sectors like infrastructure, technology and
R & D. The earning potential of these sectors seem almost endemic (Mishra and
Mishra).
1.1 Insurance – Introduction and History 5
Tools and Methodology
Tools and methodologies have been used in order to contextually understand the In-
dian life and health insurance market through a scientifically driven approach. They
are as follows
– Porter’s 5 Forces for Industry Analysis
– The PEST Framework for Macroeconomic Environmental Analysis
– Anita McGahan’s Model for evaluating the Dynamic Market Environment
– Ludi’s Internationalization Cube to understand the Internationalization strategy of
foreign players in India
– Ansoff’s Matrix to understand the Marketing Strategy pursued by an insurer
– The 4Ps of Marketing analyzed in depth to understand the Marketing Facets for
both Life and Health Insurance in India
– Certain Service Marketing Tools used, since Insurance is a service
Moreover, certain information has been “boxed” in order to bring specific issues to
the foreground
– The “Management in Action” boxes intend to depict certain strategies that insurers
in India have implemented; serving as best practices or role models for the rest of
the industry.
– “The Regulator Says” boxes throw light on the regulatory developments of conse-
quential importance to the Indian Insurance scenario.
– “Critical Support Functions” boxes detail the significance of certain functions like
Claims Management, Underwriting and Risk Management.
– “Customer Management and Retention” boxes seek to discuss aspects critical to
customer centricity and orientation like Customer Relationship Management, Sim-
plicity of Insurance Contracts etc.
– “Consumer Insight” boxes detail latest survey results or studies offering a deeper
understanding of the Indian consumer thus a subsequent enhancement of latest lo-
cal market knowledge.
1.2 An Analysis of Evolution of Insurance in India
An account of the Indian Economy and Insurance in Context
The Indian economy has been growing rapidly and the growth impulses continued
during 2005–2006. There has been sustained manufacturing activity and impressive
performance of the services sector along with a reasonable recovery in the agricultur-
al sector. The agricultural and allied activities registered a growth of 3.9% due to im-
provement in the agricultural production. The industrial sector improved by 7.6%
and the services sector maintained a higher growth of 10.3%. Thus, the growth in real
GDP was 8.4% during 2005–2006 as opposed to 7.5% in 2004–2005. Within the
services sector, there has been an improved performance in finance, insurance, real
estate and business services. There has been a substantial increase in the GDP ema-
nating from insurance. The deregulation of the sector in 2000 has contributed to in-
surance growth. GDP from insurance sector which constituted 12% of the GDP in
2000–2001, has increased to 19.3% in 2004–2005. The gross domestic savings, a
component of which is the financial savings of the household sector, as a percentage
of GDP increased to 29.1% in 2004–2005.
Figure 1: Financial Savings of the Household Sector – Gross (IRDA)

1.2 An Analysis of Evolution of Insurance in India 7
Financial Savings as a Percentage of GDP

The financial savings of the household sector as a percentage of the GDP has in-
creased from 11.9% in 2000–2001, to 16.7% in 2005–2006. Moreover, of this finan-
cial savings of the household sector, insurance funds equated to 13.6% in 2000–2001,
which increased to 14.2% in 2005–2006, peaking at 16% in 2004–2005. All in all, in-
surance funds as a component of the financial savings formed 1% of the GDP in
1991, 1.5% in 2000, 1.6% in 2001 to a 2.4% in 2006 (IRDA). Please see the illustra-
tions below which elucidate a development of financial savings of the household sec-
tor.
Item 2000– 2001– 2002– 2003– 2004– 2005–

2001 2002 2003 2004 2005 2006
Financial savings (FS) 11,90% 12,70% 13,10% 13,80% 14,00% 16,70%

as a % of GDP
Currency (as a % of FS) 6,30% 9,70% 8,90% 11,20% 8,50% 8,80%
Currency (as a % of GDP) 0,70% 1,20% 1,20% 1,50% 1,20% 1,50%
Deposits (as a % of FS) 41,00% 39,40% 40,90% 38,30% 37,00% 47,40%
Deposits (as a % of GDP) 4,90% 5,00% 5,40% 5,30% 5,20% 7,90%
Shares and Debentures 4,10% 2,70% 1,70% 0,10% 1,10% 4,90%
(as a % of FS)
Shares and Debentures 0,50% 0,30% 0,20% 0,00% 0,20% 0,80%
(as a % of GDP)
Claims on Governement 15,70% 17,90% 17,40% 23,00% 24,40% 14,70%
(as a % of FS)
Claims on Governement 1,90% 2,30% 2,30% 3,20% 3,40% 2,50%
(as a % of GDP)
Insurance Funds (as a % of FS) 13,60% 14,20% 16,10% 13,70% 16,00% 14,20%
Insurance Funds (as a % of GDP) 1,60% 1,80% 2,10% 1,90% 2,20% 2,40%
Provident and Pension Funds 19,30% 16,10% 15,00% 13,60% 12,90% 10,00%
(as a % of FS)
Provident and Pension Funds 2,30% 2,00% 2,00% 1,90% 1,80% 1,70%
(as a % of GDP)
Figure 2: Financial Savings of the Household Sector – Gross (IRDA)
Insurance in India has completed a full circle; from being private with minimal
government intervention before 1956, to the nationalization of life insurance and for-
mation of a monopoly (with Life Insurance Corporation of India) in 1956, and na-
tionalization of general insurance in 1972 and finally back to deregulation in 2000.
First, I will present the milestones of the insurance industry before nationalization,
essentially because the denationalized structure brought back to play (in 1999) im-
portant legal rules from 1938.
Milestones of the Evolution of Insurance before nationalization in 1956

The Insurance Act, 1938 was the first comprehensive piece of legislation for Insur-
ance in India. It covered both life and general insurance companies and clearly de-
fined what would come under the life insurance business, the fire insurance business
and so on. It covered aspects ranging from deposits, supervision of insurance compa-
nies, investments, commissions of agents, directors appointed by the policyholders,
among others. This act lost its significance after nationalization in 1956 (of Life In-
surance) and in 1972 (of General Insurance). With the privatization in the late 20th
century, it has returned as the backbone of the current legislation of insurance compa-
nies (Sinha).
Figure 3: Milestones of Evolution of Insurance before Nationalization (Sinha)

Rationale for Nationalization of the Life Insurance Business in 1956

The genesis of nationalization of life insurance in India came from a document pro-
duced by Mr. H.D. Malaviya (on behalf of the Indian National Congress) called “In-
surance Business in India”. In his document, Mr. Malaviya made four important
claims to justify nationalization. First, he argued that insurance is a “cooperative en-
terprise”, under a socialist form of government; therefore it is more suited for the
government to be in the insurance business on behalf of the people. Second, he
claimed that Indian insurance companies were excessively expensive. Third, he ar-
gued that private competition had not improved services to the “public” or to the pol-
icyholders. Preventive activities like better public health, medical check-up, hazard
prevention had not improved, according to him. Fourth, he commented that the lapse
ratios of life policies were very high and leading to “national waste” (Sinha). Several
of his arguments that were analyzed proved to stand on rather weak grounds. For ex-
ample, his claim that Indian insurance companies were very expensive was justified
by comparing the overall expenses of life insurers in India with those of the UK and
the USA. However, the base or denominator he used for India resulted in amplifica-
tion of the figures beyond credible.
Anyway, the nationalization of the Life Insurance business in 1956 was justified by
the government on three distinct grounds. First, the government wanted to use the re-
sources for its own purpose. This clearly meant that the government was unwilling to
Figure 4: Rural Share of Life Insurance Business in India (Annual Reports of LIC for different
years)
pay the market return on assets (otherwise they could have raised the capital whether
insurance companies were public or private). Second it sought to increase the market
penetration through nationalization. There can be two reasons why nationalization
would make more sense than privatization for market penetration (Sinha). [a] The
government, by virtue of being a monopoly, could generate huge economies of scale
and thereby reduce costs of operation and thus reap higher volumes, by transferring
the lower costs into lower prices for the public. [b] Through nationalization, the gov-
ernment may be able to take life insurance to rural areas where it may not be possible
for private insurers to be profitable. This goal was definitely achieved by the newly
formed monopoly to a considerable extent. Please see the illustration below “Rural
share of Life Insurance Business”. The last reason cited for nationalization was that
the government found the number of failures of life insurance companies to be unac-
ceptable.
Thus, with the Life Insurance Corporation Act of 1956, the 245 insurance compa-
nies of both Indian and foreign origin in 1956 were nationalized by the government
acquisition of the management of the companies; and the Life Insurance Corporation
of India was created on 1st September, 1956, as a result; LIC has grown to be the
largest insurance company in India as of 2007.
Rationale for the non-nationalization of the General Insurance Business in 1956

However, general insurance was not nationalized in 1956. The then Finance Minister
addressed it in his speech as follows, “I would like to explain briefly why we have de-
cided not to bring in general insurance into the public sector. The consideration
which influenced us the most is the basic fact that general insurance is a part and par-
cel of the private sector of trade and industry and functions on a year to year basis.
Errors of omission and commission in the conduct of the business do not directly af-
fect the individual citizen. Life Insurance Business, by contrast, directly concerns the
individual citizen whose savings, so vitally needed for economic development, may
be affected by any acts of folly or misfeasance on the part of those in control or be re-
tarded by their lack of imaginative policy.”
Milestones of the Evolution of Insurance after Nationalization in 1956

The diagram below illustrates the key milestones in the evolution of insurance in In-
dia from the nationalization of life insurance in 1956, to the IRDA (Insurance Regu-
latory and Development Authority) act in 1999 that led to the deregulation of the in-
surance industry in India.
Figure 5: Milestones of Evolution of Insurance after Nationalization in 1956 (Sinha)
Nationalization of General Insurance in 1972

General Insurance was nationalized in 1972 (with effect from January 1st, 1973).
There were 107 general insurers operating at that time. These were mainly large city
oriented companies catering to the organized sector (trade and industry). They were
of different sizes, operating at different levels of sophistication and were assigned to
four different subsidiaries (roughly of equal size) of the General Insurance Corpora-
tion (GIC). The four subsidiaries were [1] the National Insurance Company, [2] the
New India Assurance Company, [3] the Oriental Insurance Company, [4] the United
India Insurance Company with head offices in Calcutta (now Kolkata), Bombay
(now Mumbai), New Delhi, and Madras (now Chennai) respectively, collectively
known as NOUN for their initials. There were several goals for setting up such a
structure [a] the subsidiaries were expected to “set up standards of conduct and sound
practices in the general insurance business and render efficient customer service”, [b]
the GIC would assist controlling their expense, [c] the GIC would help in the chan-
neling of funds, [d] this structure would help bring general insurance in rural areas,
[e] GIC was also designated as the national reinsurer, [f] finally, all four subsidiaries
were expected to compete with one another. Most of these goals remained rather elu-
sive and were not achieved to a massive degree (Sinha).
Development of the Life Insurance Industry during the Nationalized Era

By 2000, LIC had 100 divisional offices in 7 zones with 2,048 branches. There were
over 680,000 active agents across India with a total of 117,000 employees in the LIC.
I will now present facets that explicate the development of the life insurance market
in India.
The largest product category of the life insurance market in India has been individ-
ual life insurance. The types of the policies sold were mainly whole life, endowment
and “money back” policies. Money back policies return a fraction of the nominal val-
ue of the premium paid by the policyholder at the termination of the contract. Until
recently, term life policies were not available in the Indian market. Note that even in
2001, individual life business accounted for 92% of all life insurance market. The
number of new policies sold each year went from about 0.95 million a year in 1957 to
around 22.49 million in 2001. The total number of policies in force increased from
5.42 million in 1957 to 125.79 million in 2001. Thus, on both counts there has been a
25-fold increase in the number of policies sold. Of course, during the same period,
the population has grown from 413 million in 1957 to over 1,033 million in 2001. On
a per capita basis, there were 0.0023 new policies in 1957 compared with 0.0218 new
policies in 2001. Total policies per capita went from 0.0131 in 1957 to 0.1218 in
2001. Thus, whether we examine the new policies sold or the total number of policies
in force, there has been a tenfold increase during that period. Therefore, if we exam-
ine the headcount of policies as an indication of penetration, there has been a substan-
tial rise. A part of this rise is directly attributable to a deliberate policy of rural expan-
sion of the Life Insurance Corporation. Between 1985 and 2001, total life business
had grown from below 18 billion rupees to over 500 billion rupees. During that peri-
od, the price index increased fourfold. Thus, if there were no change in life insurance
bought in real terms, it would have accounted for 78 billion rupees worth of business
(Sinha).
In recent years, life insurance saving has played a bigger role in national savings.
Please see the figure below.
Note: The figure is plotted with Gross Domestic Savings as a percent of GDP on
the horizontal axis and Gross Life Premium as a percent of GDP on the vertical axis.
Thus, there are fifty-two data points each pair representing data for a given year.
It clearly reveals a nonlinear relationship between these two variables. Specifical-
ly, at relatively lower levels of saving rate (that correspond to a lower level of in-
come), a rise in saving rate does not lead to a rise in life insurance premium expressed
as a fraction of GDP. However, beyond a threshold; with the threshold value of sav-
ing rate being 20% for India, the life premium as a percent of GDP starts to grow rap-
idly. India seems to have reached that deflection point.
Moreover, we have already seen earlier in this chapter that insurance savings as a
percentage of financial savings has increased over the years (till 2006).
Figure 6: Relationship between national savings and life insurance premium, 1950–1991
(Calculated based on data from the Central Statistical Organization Database)
Deregulation of Insurance in India with the IRDA Act, 1999

With effect from 1st, January, 2000, with the passage of the IRDA Act, the Indian In-
surance Industry was privatized or deregulated. The deregulation was brought about
with the following objectives: to increase coverage of population, propel a choice of
better products with informed decisions, promote competition, encourage the en-
trance and joint partnership of foreign players with the Indian insurers, boost innova-
tion, advance economy of operations, enhance customer centricity and service excel-
lence and improve the efficiency of the public sector companies. The Insurance Reg-
ulatory and Development Authority (IRDA) was formulated as an independent body
that would monitor and shape the insurance business in India. The IRDA has separat-
ed out life, non-life and reinsurance insurance businesses and therefore a company
has to have separate licenses for each line of business. Each license has its own capi-
tal requirements (around USD 24 million for life and non-life and USD 48 million for
reinsurance business). The role and the statutory functions of the IRDA will be dis-
cussed in chapter 1.3 that deals with Authorities and Regulatory environment.
To illustrate the positive direct or indirect effects of deregulation of insurance in In-
dia, I have presented a graph below, which represents the convergence of efficiency
of the four public sector general insurers (now independent of the GIC): [1] the Na-
tional Insurance Company, [2] the New India Assurance Company, [3] the Oriental
Insurance Company, [4] the United India Insurance Company, in 2003. The technical
efficiency of each of the above is used as a parameter of comparison, with the number
of employees (labor), the number of offices (physical capital) and commission paid
as the inputs, and premiums and claims as two alternative measures of outputs. The
relative efficiency was calculated using the data envelopment analysis (DEA), a
mathematical programming framework (Sinha)
The graph depicts that New India Insurance has consistently stayed as the company
with the highest technical efficiency. Moreover, it shows that after some initial
change the relative efficiency level among the public sector general insurance com-
panies converged, in 2003.
Figure 7: Convergence of Efficiency amongst the four public sector general insurers
1997–2003 (Sinha)
1.3 Dynamic Market Environment for Insurance in India
An Era of Change
The insurance industry has experienced significant change over the past few decades.
But never before have the changes been so pronounced, the pace so rapid and the
scope so broad. Insurers are in the midst of a true paradigm shift. Their governing
rules are changing. Their functional bodies are blurring. Buyers are becoming more
sophisticated about services and value, and are ever more demanding. This height-
ened form of consumerism is spurring a new demand pressure on insurance products.
At the same time, the industry is experiencing traditional financial pressures, as
well as new competition, new market entrants, new substitutes for traditional insur-
1.3 Dynamic Market Environment for Insurance in India 15
ance offerings. The industry is responding in many ways. For example, there is an en-
hanced focus on market selection, new and varied distribution channels, bundling
and unbundling of products and services, all in an effort to customize and achieve
greater value while re-engineering and consolidating for efficiency.
The Dynamic Environment and the Insurer’s point of View

In view of the ever-changing landscape of the Insurance Industry in India, insurers
need to revisit the core competencies and the cardinal features of their underlying
strategy.
The schematic diagram below illustrates the key aspects influencing the insurer’s
strategy, conducive to the marketing point of view.
Figure 8: Factors Influencing Company Marketing Strategy (Kotler and Lane)
PEST Analysis
Of the facets illustrated above, it would make logical sense to take an outside-in view
and begin by analyzing the environment, a backdrop amidst which a new firm would
like to enter or an existing insurer would like to relook its strategy. Thus, I have illus-
trated all factors contributory to the environment via the PEST (P-Political/Legal
Factors, E- Economical Factors, S – Social/Cultural Factors, T – Technological/Phys-

ical Factors) framework.
Political Factors: The regulatory aspects of the political factors will be discussed
in chapter 1.3. De-tariffing, the opening up of the market to free pricing and flexible
policy terms and conditions (which came into effect on the 1st January, 2007), is the
most essential aspect that is set to revolutionalize the face of the insurance industry
by directly affecting the insurers, concerned intermediaries, customers and stake-
holders; thus, a separate subsection detailing its prime characteristics will be dedicat-
ed to de-tariffing.
Political Factors Economic Factors

– De-tariffing of general insurance with effect – Increase in contribution of insurance to the GDP
from 1st Jan, 2007 – Increase in gross domestic savings as a
– Safety valve imposed by the IRDA, of not percentage of GDP
changing the terms and conditions of the – Decline in savings in the form of insurance funds
policies till 31st Mar, 2008 – Buoyancy in the Indian stock market
– Investment regulations – Insurance business (first year premium) grew at
– Social and rural sector obligations 47.93% in 2005–2006
PEST
Technological Factors Social Factors
– Building up data warehouses – Insurance penetration stood at 2.53% for life
– Increase in CRM solutions insurance, 0.62% for non-life insurance,
– Increased use of online portals for policy thus huge scope
purchase, renewal, claims processing etc. – Huge middle class
– Impending importance of technology to lower – Increase in lifestyle diseases
costs in a de-tariffed scenario – Higher demand for old age provisions
– Grievance redressal cells – Increasing awareness among the population
– Online Complaints reporting mechanisms with – Growth of insurance catering to certain
the regulatory body groups – Islamic insurance, micro insurance
– Using bank databases to cross sell insurance etc.
products through bancassurance
Figure 9: PEST Analysis (Research and Understanding gathered from several sources and
Author)
Economical Factors:
– Increase in contribution of insurance to the GDP: GDP from insurance sector con-
stituted 12% of GDP in 2000–01, increased to 19.3% in 2004–2005.
– Gross domestic savings as a per cent of GDP increased to 29.1% in 2004–2005.
Savings in the form of life insurance funds accounted for 15.1% of the gross finan-
cial savings.
– A decline in the savings in the form of insurance funds was witnessed, even though
life insurers increased their business during the year.
– Buoyancy in the Indian stock market due to strong macroeconomic fundamentals,

robust corporate results, positive investment climate and sound business outlook.
– Insurance business (first year premium) grew at 47.93% in 2005–2006, surpassing
the growth of 32.49% in 2004–2005
Technological and Social Factors: These are self-explanatory in the illustration. The
“Grievance Redressal Cell” of the technological factors will be elaborated upon in
section 1.3.
De-tariffing and its consequences

A tariff market is one where the premium rates, policy terms and deductibles are con-
trolled and to be applied uniformly by all the underwriters. The market portfolio mix
for general insurers on tariff/non-tariff covers during the tariff regime were as fol-
lows: 73.09% of the overall premiums were tariffed, and 29.91% was non-tariffed.
Health formed a part of the non-tariffed portfolio which implied that insurers could
set their own prices and adopt flexible policy terms and conditions.
The primary effects of the tariffed regime were
– Cross subsidization: Profitable businesses like fire and motor which were tariffed
paid for un-profitable businesses of a company like health and marine cargo insur-
ance (which were non-tariffed), thus making these (health and marine cargo insur-
ance) available to customers at throw away prices. The profitable businesses, thus
cross-subsidized the unprofitable businesses. This is also the core reason for the
absence of any standalone health insurance company until 2006, because such an
insurer would not be able to compete with the general insurers, for whom health
insurance was one of the businesses that could be easily subsidized despite exorbi-
tant claim-to-premium ratios at 130%.
– “Good” customers paid for “bad” customers: In a tariffed regime, where prices
were uniform, all the “good” customers, who had a better risk management history
with lower risks and thus consequently fewer claims, ended up paying for “bad”
customers with higher risks. In fact the tariffed regime, induced complacency in
the customer, who had no incentive to improve their risk profile or management as
he would get reimbursed anyway.
– Underwriting skills smothered: The biggest defect of the tariffed regime was the
complete dearth of underwriting skills. For businesses that were tariffed, under-
writing was rule based rather than risk based (as it should be for insurance); and for
businesses that weren’t tariffed, underwriting did not matter on account of depend-
ency on the profitable tariffed businesses. Thus although underwriting is the core
activity defining the profitability of an insurance company, the tariffed regime nul-
lified its significance.
– Complete lack of quality data: Risk profiling, customer history, data warehouse,
data mining, management information systems were deemed insignificant and just
investments with a rather negative net present value because of their irrelevance to
the pricing of an insurance product; thus subsequently leading to complete lack of
quality data available to insurers and intermediaries, and reliance on outdated in-
formation that was provided by the Tariff Advisory Committee.
The movement from a tariffed to a de-tariffed regime will occur in a phased manner
In order to prevent cut-throat competition with the lifting of tariffs, the IRDA has de-
cided to move from the tariffed to a de-tariffed regime in a phased manner. This
phased process would act as a safety valve for insurers and help preserve the sanctity
of the industry.
– Phase 1:
• What is it? Opening up of the free market pricing policy with effect from 1st of
January, 2007. However, insurers cannot change their policy terms and condi-
tions during this phase (of the businesses that belonged to the tariffed part of the
portfolio mix)
• Process of Preparation in this phase includes:
• – Data compilation and stratification
• – Data warehousing, analysis of data and sending data to the appointed actuary
– Phase 2:
• What is it? With effect from 1st April, 2008, insurers can change their policy
terms, conditions, wordings, tariff rules and regulations. This phase would in-
clude launching new or redefined products.
• Process of Preparation in this phase includes:
• In order to launch new products with options to choose perils and add-on covers
and considerations on “what are the most urgent requirements of the customer?”,
define product concepts like [a] policies purely on first loss covers, [b] policies
on selective perils basis, [c] policies considering agreed value covers etc.
Effects and Consequences of Lifting of Tariffs

In order to understand the consequences of de-tariffing, I will present its impact on
various facets of the Indian insurance archetype that would invariably alter the trail
of progression of the industry as a whole. This account of effects would also serve in
understanding the nature of change and trajectory of industry evolution on Anita Mc
Gahan’s Model for strategies in dynamic environments.
Please see the illustration below depicting the various facets while considering ef-
fects of de-tariffing.
Figure 10: Facets while considering the effects of de-tariffing (Author)
Please find below Porter’s 5 Forces for industry analysis, as there are several ele-
ments in the 5 forces analysis that overlap with the current rage that de-tariffing
brings. Thus they will have to be discussed in congruence.
Note with respect to the Porter’s 5 Forces Illustration: All aspects related to de-tar-
iffing are marked with a “D” followed by a “+” sign indicating it has a positive effect
on insurers, “–” sign indicating it has a negative effect on insurers, and “+/–” sign if it
has both positive and negative effect on insurers. The points in the illustration that are
not preceded with a “D” are unrelated to the de-tariffing aspect and would have pro-
gressively occurred irrespective of the de-tariffed scenario.
TPA = Third Part Administrator
Facets explicated
Marketing Facets
– Pricing:
• Industry experts predict that fire and motor premiums would go down by
30–35% (these were part of the tariffed, thus profitable businesses). This is at-
tributed to the tendency of players to undercut one another, due to free market
Barriers to Entry
✔ FDI Ceiling
✔ Capital requirements
✔ Experience with respect to
understanding of the market
✔ Elaborate distribution requirements
Buyer/Customer Power ✔ “Lock-in” of buyers Suppliers’ Power
✔ D+ Widening product range ✔ D– Reduced commission
✔ D– Increasing price offered by reinsurance
sensitivity of customers Industry Rivalry companies with de-tariffing
✔ D± Increased competition ✔ D– Initial effects of ✔ D- Increased efficiency of
in a de-tariffed scenario Detarifed scenario Brokers necessitated
✔ D– Large corporate clients ✔ Industry concentration in both ✔ Limited actuaries in the
✔ D– Switching costs life and non-life marked
✔ D+ Good risk customer ✔ Foreign players entering ✔ Reinsurance concentration
will not longer subsidize bad ✔ Restricted competition due ✔ Lock in & high switching
risk customer to regulations costs for firms
✔ Low penetration, thus less ✔ Solvent Margin requirements ✔ Cession to the National
number of buyers ✔ Low penetration of Insurer
✔ Yearly renewal for non-life insurance ✔ Dependence on IT providers
products ✔ Dependence on TPAs
✔ Multiple distribution ✔ Orphaned customers due
✔ Sale of Bancassurance Threat of Substitutes to high attribution of
✔ D– Increased competition, thus agents
substitutes due to de-tariffing
✔ Government pension schemes
✔ Tax savings instruments
✔ Emerging substitutes
✔ Switching costs of customers
✔ Dependence on Children in rural
India
Figure 11: Porter’s Five Force Analysis of the Insurance Industry (Author through
accumulated readings and research)
pricing policy, thus resulting in some type of cut-throatism and a price war. [Ini-
tial ill effects of a de-tariffed scenario – Industry Rivalry, Porter’s 5 forces.]
• Health and marine premiums will have to rise due to end of cross-subsidization
by their profitable counterparts (motor and fire).
• There will be a rise of sophisticated price segmentation methods: for example,
having location based pricing in place, people in cities would pay higher premi-
ums than those in suburbs.
– Products:
• De-tariffing will propel competition because of a need to differentiate, thus pro-
mote heightened innovation in product design; for example, there may be health
insurance products developed for people with specific hereditary diseases which
were not in existence earlier.
– Distribution channels:
• Need of an innovative combination of distribution channels to increase the num-
ber of touch points with the customers and maximize customer reach via channel
effectiveness.
• Achieving operational efficiencies in channels would be inevitable; as prices

would go down initially and costs will have to be kept at an all time low, if the
stipulated solvency margins have to be maintained.
Customers
– “Good” customers will cease to subsidize “bad” customers, as each customer
would pay premiums based on his/her risk profile [Good customers will no longer
subsidize bad customers – Buying Power, Porter’s 5 Forces]
– Due to de-tariffing, competition would heighten and consequently result in new
and innovative products, thus resulting in increased consumer choice and height-
ened customer centricity and service. [Increased competition in a de-tariffed sce-
nario – Buying Power, Porter’s 5 forces]
– Price sensitivity of customers will increase in areas where competition results in an
initial price fight. [Increasing price sensitivity of customers – Buying Power,
Porter’s 5 forces]
– The obvious consequence of the de-tariffed regime is increasing customer aware-
ness and aggravated premium tension.
– The moral hazard will end with high risk customers coming in the spot light as
they can no longer find “cover” under the low risk customers.
– The information asymmetry would reduce as customers would be willing to dis-
close more information to get a better risk rating in case they are good customers;
thus complete and furnished information from customers would be rewarded with
discounts.
– Policyholders would be incentivized to improve their risk portfolio, as doing so
would be compensated for.
– Large corporate clients’ bargaining power would be enhanced in the fire and motor
portfolio where prices will be slashed; however, corporate clients would be lost in the
health insurance area where prices will have to be increased to ensure the profitability
of these businesses. [Large Corporate Clients – Buying Power, Porter’s 5 forces.]
Reserving
– The IRDA (regulatory authority) has stipulated regulations with respect to the sol-
vency margin that companies must adhere to; solvency margin is the extent to
which assets need to be over the liabilities for the insurer. In lieu of the same, insur-
ers cannot indulge in price wars to the extent that their solvency margins will be
hurt, thus serving as a necessary evil. Moreover, insurers are answerable to the
shareholders for their bottom line, which is why they cannot afford to let it get af-
fected too drastically.
Regulations
– The IRDA (regulatory authority) has disallowed cross subsidization of businesses
in light of the solvency margin argument; however, if insurers do need to cross
subsidize, they can do so by presenting a proposal to the IRDA with a justification
for the same.
– Actuaries have been appointed to insurers to help them in their underwriting activ-
ities and rate making process.
– The phased process sequenced by the IRDA acts as a safety valve (as discussed
earlier).
Reinsurance
– If competition based on price increases, it would imply reduced prices, however
same liabilities or better put, increased liability for the same price suggests that the
insurers would pass on more liabilities to the reinsurer (who in turn gives commis-
sion to the insurer for the percentage of premium received and obviously even car-
ries partial risk of the insurer in return). More liabilities to the reinsurer without
corresponding increase in premium would reduce the commissions that insurers
can get out of reinsurers. [Reduced commission offered by reinsurers in case of de-
tariffing – Supplier’s Power , Porter’s 5 forces.]
Investments
– Price reduction by insurers would call for more efficient management of their in-
vestment portfolio and thus cautious and conscientious pooling of resources to
reap maximum returns, in order to be able to augment their bottom line and sustain
their solvency margins.
Risk Management and Underwriters

– The switch from a tariffed to a de-tariffed regime calls for a transition from rule
based underwriting to risk profile based underwriting.
– This would imply classification of risks into class rated risks and individual rated
risks.
• Class rates: where risks of a class have similar risk factors and individual varia-
tions are not financially significant; for example motor risks in India
• Individual rates: where each risk has significant variation in risk factors and the
financial magnitude justifies individual rating – for example engineering risks
(Bhattacharya).
– More time and money will need to be invested in risk profiling through and data
collection.
– Low pricing will not be the basis for creating the best company; it will be based up-
on risk acceptance, service delivery standards and commensurate remunerative
pricing.
– Efforts will have to be made to overcome the steep learning curve with respect to
sophistication in risk management practices.
– Underwriters will have to team up with the marketing department and rate policies
based on claims data collected at a micro level which would include [a]product
level knowledge per se, [b]enhanced customer domain knowledge and correspon-
ding merit rating of the same
– Use of IT and innovative techniques to improve decision making via data ware-
housing, data mining and other business intelligence systems augmenting micro
level data analysis will have to be used to improve efficiency and quality of deci-
sion making.
Brokers
– The de-tariffed regime would enhance the broker’s role and transform him into a
financial advisor; as Mr. Sunderasan, the Chair Professor of National Insurance
Academy put it “The Broker will be the eyes of the insurer and the voice of the
customer.” This means he will use his proximity to the customer and market intel-
ligence to help design new products, develop new markets and improve pricing
strategies. The broker’s role as the voice of the customer would imply: a require-
ment analysis of the prospective insured, matching the price within the desired
budget, using customer (insured) response to provide feedback to the insurers, and
enhancing his value addition by providing a bundle of services. [Increased effi-
ciency of the brokers necessitated – Supplier’s Power, Porter’s 5 Forces]
– Brokers may face reduced margins from insurers (on account of price cutting
mechanisms the effects of which will have to be borne by all the intermediaries in-
volved) and may even be compelled to switch from a commission based model to a
fee based one.
Transition to a de-tariffed regime will have deep, certain and temporary financial im-
pact on the insurers before the industry cycles settle. In order to find a way to create a
lasting value in the customer’s mind, there is a need to ensure fair pricing, balance
between the interests of insurer, insured and other stakeholders. Since a price war is
in the offing, unmindful viability of the insurers will need to be kept in check and it
would be essential to moor pricing on sound technical base to prevent the market
from going out of control. Finally priorities with respect to growth versus profit need
to be defined as both may elude for some time.
Anita Mc Gahan’s Model for Strategies in Dynamic Environments

Anita Mc Gahan’s model helps analyze the nature of change and interpret the trajec-
tory of industry evolution. Based on the kind of change (architectural or foundation-
al), the nature of the industry trajectory is determined. In architectural change, core
activities and in foundational change, core assets are threatened.
Figure 12: Anita McGahan’s Model (McGahan & Mapping and Interpretation by Author)
Core activities are defined as recurring actions that create value both by making the
industry’s suppliers more willing to transact and by generating greater willingness to
pay among industry’s buyers. Core assets are durable resources that make the firm
more efficient or effective at performing core activities and can include intangibles
such as brand and knowledge capital. Core assets are threatened with obsolescence
when a new approach accelerates their real rate of depreciation (McGahan).
Thus in this case,
– The old “core” activities include [a] rule based underwriting, [b] reliance on oth-
ers: intermediaries like Third Party Administrators for activities like claims man-
agement and with minimal interference by insurers.
– Core assets would be [a] historical customer data [b] distribution network [c] rela-
tionship with intermediaries [d] cushion of assets over liabilities (solvency mar-
gin) [e] investment portfolio.
In context of [i] the account on consequences of de-tariffing and [ii] the increasing of
the FDI cap (equity participation that foreign investors can have in their Indian coun-
terparts from 26% to 49%) that is in the offing, the nature of change can be defined as
“intermediating” wherein core activities are threatened but core assets are not. The
new core activities would be [a] accurate risk assessment & management, [b] risk
driven underwriting, [c] efficient and responsive claims management and [d] effec-
tive fraud management minimizing errors of omission and commission replacing old
“core” activities which include [a] rule based underwriting, [b] detachment on insur-
ers with respect to claims management, by ignorant dependence on Third Party Ad-
ministrators. However, core assets remain intact and will only have to be strength-
ened to improve their efficiency and effectiveness towards the newly established core
activities.
LUDI’s Internationalization Cube (Kaufmann, Panhans and Poovan)

To conclude our discussions on the dynamic market environment and industry analy-
sis, I would present the suggested internationalization strategy for foreign insurers in
India by means of the Ludi’s Internationalization cube.
In the cube
– National Focus: when the concerned firm decides to expand base within its home
country without venturing abroad.
– Export Orientation: when the firm would like to make use of the market opportuni-
ties abroad and export products while not setting base in the foreign location.
– Business Transfer: would imply the firm setting base in the foreign location as a
replica of the business done back home, however, this would be customized to
serve the local market in the foreign base through local partners, investment and
strategy.
– Global Integration: would imply when this contribution from business transfer
would be looped into the supply chain of providing the finalized product to the
world market or a subset of it.
The current best strategy for foreign players in India is Business Transfer, with for-
eign value creation and independence with respect to integration across borders (as in
the business at the foreign location – India in this case, would not be dependent on the
business at the home location). Moreover, foreign firms must pursue entry by means
of a joint venture with Indian insurers or partners in order to get access to the market
know how and existing customer base and consequently share their risk management
expertise and responsiveness in claims management.
Please see the illustrations below.
Figure 13: LUDI’s Cube (Kaufmann, Panhans and Poovan & Mapping and Interpretation by
Author)
1.4 Authorities and Regulatory Environment 27
1.4 Authorities and Regulatory Environment

The Insurance Regulatory and Development Authority (IRDA) is a national
agency of the Government of India, based in Hyderabad. It was formed by an act of
Indian Parliament known as IRDAAct 1999, which was amended in 2002 to incorpo-
rate some emerging requirements. Mission of IRDA as stated in the act is “to protect
the interests of the policyholders, to regulate, promote and ensure orderly growth of
the insurance industry and for matters connected therewith or incidental thereto.”
The role of the IRDA as a developer

The role of the IRDA as a developer includes
• Shouldering the responsibility of developing a nascent insurance market
• Striking a right balance between developing and regulating the industry
• Protection of Policy holders’ Interests – Mission of IRDA
• Interests of policy holders as the prime objective while framing regulations (Prab-
hakara)
The Statutory functions of the IRDA

The statutory functions of the IRDA include
1. Issue to the applicant a certificate of registration, renew, modify, withdraw, suspend
or cancel such registration. The applicants may be the insurer, broker or the TPA.
The Regulator Says: License to Operate for an Insurer

An insurance company gets a license to operate from the regulator once it re-
ceives approvals for the 3-staged application process (R1 through R3) from the
IRDA. The IRDA by clearing an R1 (stage 1) application gives in-principle ap-
proval to a proposed insurance venture. The R1 application contains the details
of promoters of the proposed insurance company, capital structure, directors and
key persons, proposed external auditors, financial projections, regions in which
business will be transacted, and the manner in which rural and social obligations
will be fulfilled. The R2 application contains details of geographical spread, dis-
tribution, sales promotions, underwriting, investments, IT, customer services, re-
tention limits and reinsurance training, internal controls, expenses of administra-
tion, premium rates for products along with rebates. The R3 application contains
the classes of business which may be transacted and a confirmation from the
stakeholders on the company’s capitalization (Syed).
2. Protection of the interests of the policyholders in matters concerning assignment

of policy, nomination by policyholders, insurable interest, settlement of insurance
claim, surrender value of policy and other terms and conditions of contracts of in-
surance.
The mission statement of the authority attaches immense importance to the pro-
tection of the policyholders’ interest. In order to achieve this, the IRDA has set up
a cell that handles grievances against insurers. Grievances received by the authori-
ty are taken up with insurers for examination/re-examination and speedy resolu-
tion. A greater awareness amongst the policyholders was seen about the existence
of a Grievance Cell at the Authority. The Regulations for Protection of Policy-
holders’ interests, 2002 requires every insurer to have an effective grievance re-
dressal system. Policyholders who have complaints against insurers are required
to first approach the grievance/customer cell of the concerned insurer. If they do
not receive a response from the insurer within a reasonable period of time or are
Insurer Grievances Reported Total Resolved Pending Break up according

as on during during as on to the nature
31st March, the year the year 31st March, of grievance
2005 2006 2006 2006
(i) (ii) (iii) (iv)
Public 707 1331 2038 1488 550 279 101 149 21

Sector (73.01%)
Private 23 196 219 204 15 9 0 6 0
Sector (93.15%)
Total 730 1527 2257 1692 565 288 101 155 21
(74.97%) 50.9% 17.88% 27.43% 3.72%
Figure 14: Status of Grievances – Non-Life Insurers 2005–2006 (IRDA)
Insurer Grievances Reported Total Resolved Pending Break up according

as on during during as on to the nature
31st March, the year the year 31st March, of grievance
2005 2006 2006 2006
(i) (ii) (iii) (iv)
Public 992 851 1843 467 1376 109 212 590 465
Sector (25.33%)
Private 133 540 673 270 403 36 92 157 118
Sector (40.11%)
Total 1125 1391 2516 737 1779 145 304 747 583
(29.29%) 8.15% 17.08% 41.98% 32.77%
Figure 15: Status of Grievances – Life Insurers 2005–2006 (IRDA)

dissatisfied with the response of the company, they may approach the Grievance
Cell of the IRDA. Please see the tables below, depicting the status of grievances of
non-life insurers and life insurers in 2005–2006.
The figures 1692 in the first table and 737 in the second table depict the number of
grievances resolved by Insurance ombudsmen in non-life and life areas respec-
tively over the year 2005–2006. In the table (i) through (iv) signify the following:
(i) signifies grievance due to non-settlement/delay in settlement of claim
(ii) signifies grievance due to repudiation/partial settlement of claim
(iii) signifies policy issues (non-renewal/cancellation/non-issuance/other issues
related to policy)
(iv) signifies other reasons
3. Specifying requisite qualifications, code of conduct and practical training for in-
termediaries or insurance intermediaries and agents.
The IRDA has specified mandatory training and pre-recruitment exams for indi-
vidual and corporate agents that they need to clear before licensing.
4. Specifying the code of conduct for surveyors and loss assessors.
The code of conduct for surveyors and loss assessors is specified in the IRDA
Regulations for Surveyors and Loss Assessors, 2000.
5. Promoting efficiency in the conduct of insurance business.
For example, the Authority raised the limit of losses required to be surveyed by a
licensed surveyor and loss assessor for settlement of claims for the flash floods in
Surat, Gujrat as a special case for a period of two months from the date of issue of
the order.
6. Promoting and regulating professional organizations connected with insurance
and reinsurance business.
IIRM (the Institute of Insurance and Risk Management), in order to achieve its
mission of spreading insurance education, continues to receive cooperation from
international bodies, relevant institutions and insurance regulatory authorities.
7. Levying fees and other charges for carrying out the purposes of the Act.
The Authority levies both registration and renewal fees from the insurers and vari-
ous intermediaries associated with the insurance business. The registration fee for
an insurer for example, is Rs. 50,000 and the renewal fees are 1/10th of 1 percent
of gross direct premium written in India, subject to a minimum of Rs. 50,000 and
a maximum of Rs. 50 million.
8. Calling for information from, undertaking inspection of, conducting enquiries and
investigations including audit of the insurers, intermediaries, insurance intermedi-
aries and other organizations connected with the insurance business.
9. The de-tariffing of the general insurance business and file and use guidelines
prescribed by the IRDA to best deal with de-tariffing; setting up an agenda for in-
surers to permit a desired switch, in order to smoothly transit from a tariffed
regime which called for no underwriting skills to a regime where prices need to
be set based on prudent risk assessment and underwriting.
10. Specifying the form and manner in which books of accounts shall be maintained
and statements of accounts shall be rendered by insurers and other insurance in-
termediaries.
11. Regulating investment of funds by the insurance companies.
Please see the illustrations below; they depict the investment regulations for life
and non-life insurance businesses.
12. Regulating maintenance of margin of solvency.
Every insurer is required to maintain a certain solvency margin. Solvency mar-
gin is defined as the excess of assets over liabilities; the main purpose of which is
to ensure that insurers have sufficient financial muscle especially in a service
like insurance, where costs cannot be pre-accounted for, implying costs are real-
ized after the price/premium has already been paid for, making the business
highly susceptible to uncertainty.
13. Adjudication of disputes between insurers and intermediaries or amongst vari-
ous insurance intermediaries (IRDA).
14. Specifying the percentage of life insurance business and general insurance busi-
ness to be undertaken by the insurers in the rural and social sector.
As part of the initiatives to increase the spread of insurance to rural and socially
backward sectors, the Authority notified the Regulations on obligations of insur-
Type of Investment Percentage

1 Government Securities 25%
2 Government Securities or other approved securities Not less
(Including 1 above) than 50%
3 Approved investments as specified in Schedule
Infrastructure and Social Sector: Not less
Explanation: Infrastructure and Social Sector shall have the meaning as than15%
in given in regulation 2(h) of IRDA (Registration of Indian Insurance
Companies) Regulations, 2000 and as defined in the IRDA (Obligations
to Rural and Social Sector) Regulations, 2000 respectively.
Others to be governed by Exposure/Prudential norms specified Not exceeding
in Regulation 5 20%
4 Other than in Approved Investments to be governed by Not exceeding
Exposure/Prudential norms specified in Regulation 5 15%
Figure 16: Investment Regulations for the Life Insurance Business (IRDA)
Type of Investment Percentage

1 Central Government Securities being not less than 20%
2 State Government Securities and other Guaranteed securities
including (i) above being not less than 30%
3 Housing and loans to State Government for Housing and Fire Fighting
equipment, being not less than 5%
4 Investments in Approved Investments as specified in Schedule 2
a Infrastructure and Social Sector:
Explanation: Infrastructure and Social Sector shall have the meaning Not less than
as in given in regulation 2(h) of IRDA (Registration of Indian 10%
Insurance Companies) Regulations, 2000 and as defined in the
IRDA (Obligations to Rural and Social Sector) Regulations,
2000 respectively.
b Others to be governed by Exposure/Prudential norms specified in Not exceeding
Regulation 5 30%
5 Other than in Approved Investments to be governed by Not exceeding
Exposure/Prudential norms specified in Regulation 5 25%
Figure 17: Investment Regulations for the General Insurance Business (IRDA)
ers to the rural and social sectors in the year 2000 consequent upon the amend-
ment of the Insurance Act, 1938. The obligations require
– Life Insurers to fulfill – 7, 9, 12, 14, 16 and 18% of total policies in first six
years of operation as rural obligations.
– General Insurers to fulfill – 2, 3 and 5% of total gross premium in I, II and
subsequent years as rural obligations.
– 5000, 7000, 10000, 15000, 20000 and 25000 of lives as social sector obli-
gations by all insurers in first six years of operation (Prabhakara)
15. Moreover, by virtue of the IRDA’s regulatory role in the area of consumer pro-
tection, the Authority has been instrumental in implementing the following:
– Introduction of cashless transactions by third party administrators in health in-
surance
– Maintenance of minimum solvency margins as mentioned earlier
– Protection of policyholder’s interests regulations, 2002
– Widening of distribution channels in order to increase insurance accessibility
– Entry of banks in the “bancassurance” model
– Monitoring of the underwriting policy through file and use
– Formulation of the Grievance Redressal Cell as discussed
– Formulation of a committee to study existing grievances’ mechanisms to for-
mulate uniform guidelines and prescribe improvement steps for the insurers
– Promotion of micro-insurance to reach rural areas

– Prescribing guidelines for insurers with respect to simplicity of contracts et al
to reduce the principal agent problem between the insurer and the insured and
thereby diminish the occurrence of grievances on account of errors of omis-
sion, or frauds on account of errors of commission.
The Regulator Says: FDI Cap
“Overseas companies are allowed to own a maximum insurance companies in

India” unshackled the industry control seven years ago as part of a phased lib-
eralization financial services business. However, a federal proposal owner-
ship limit to 49% has run into political headwinds, communists and unions
lobbying against higher Recently (18th, May 2007), Allianz, based in Munich
partnered with Bajaj Auto in ventures for general and has been granted the op-
tion to raise its equity holdings companies from 26% to 50% (Bhattacharjee);
thus [a] the state is considering the proposal (put forth raise the cap on over-
seas ownership of insurance companies a full-fledged regulation is definitely
in the offing.
1.5 Status Quo –

The Indian Market as-is vis-à-vis other Markets
This section will primarily deal with establishing the context of the Indian insurance
market vis-à-vis the Asian and the Global Insurance market.
The primary results for this chapter include
– Market Value
• India: The Indian insurance market grew by 14% in 2005 to reach a value of
$ 25.1 billion (Datamonitor).
• Asia: The Asia-Pacific insurance market grew by 3.7% in 2005 to reach a value
of $ 763.5 billion (Datamonitor).
• World: The global insurance market grew by 4.7% in 2005 to reach a value of
$ 3,151 billion (Datamonitor).
– Market Value Forecast
• India: In 2010, the market is forecast to have a value of $ 40.5 billion, an in-
crease of 61.3% since 2005 (Datamonitor).
1.5 Status Quo – The Indian Market as-is vis-à-vis other Markets 33
• Asia: In 2010 the market is forecast to have a value of $ 941.5 billion, an in-
• World: In 2010, the market is forecast to have a value of $ 3,997 billion, an in-
– Market Segmentation I
• India: Life insurance accounts for 80.6% of gross premiums written within the
market (Datamonitor).
• Asia Pacific: Life insurance accounts for 75.2% of gross premiums written
within the market (Datamonitor).
• World: Life insurance accounts for 57.6% of gross premiums written within the
– Market Segmentation II
• India: India accounts for 3.3% of gross premiums written within the Asia-Pacif-
ic insurance (Datamonitor).
• Asia: Japan accounts for 63.5% of gross premiums written within the market
(Datamonitor).
• World: The Americas account for 39.9% of gross premiums written within the
Market Definition
The insurance market consists of the non-life insurance sector and the life insurance
sector. The value of the market is shown in terms of gross premium incomes. The life
insurance sector covers all life insurance products including annuities, which can be
linked to retirement savings plans. The non-life insurance sector consists of the acci-
dent and health and the property and casualty insurance segments.
The insurance market depends on a variety of economic and non-economic factors
and future performance is difficult to predict. The forecast given below is not based
on a complex economic model, but is intended to propose a rough idea, thereby sug-
gesting the direction in which the market is likely to move. This forecast is based on a
correlation between past market growth and growth of base drivers, such as house
price growth, GDP growth and long-term interest rates. Any currency conversions
used in the following information have been calculated using constant 2005 annual
average exchange rates.
For the purpose of the data, Asia-Pacific comprises of Australia, China, India,
Japan, South Korea, Singapore, and Taiwan. Europe comprises Belgium, the Czech
Republic, Denmark, France, Germany, Hungary, Italy, the Netherlands, Norway,
Poland, Russia, Spain, Sweden, and the United Kingdom. The Americas comprises
the US, Canada, Brazil, and Mexico. The global market comprises Asia-Pacific, Eu-
rope, and the Americas (Datamonitor).
Illustration 1: The illustration below gives key highlight and a comparison be-
tween the Indian, Asia-Pacific, and Global Insurance Market.
Criteria Indian Asia Pacific Global

Insurance Insurance Insurance
Market Market Market
Total Gross Premiums in 2005 $ 25.1 Billion $ 763.5 Billion $ 3150.7 Billion
and CAGR for the 5 year period and 15.3% and 2.5% and 5%
(2001 to 2005)
Most lucrative segment in 2005, Life Insurance, Life Insurance, Life Insurance,
Premium written, Equivalent to $ 20.2 Billion, $ 574.4 Billion, $ 1,815.6 billion,
what % of market value 80.6% 75.2% 57.6%
Performance of the market, Performance Performance Performance
Anticipated CAGR for the forecasted to forecasted to forecasted to
5 year period, decelerate, 10%, accelerate, 4.3%, decelerate, 4.9%,
Market Value by the end of 2010 Gross premium Gross premium Gross premium
of $ 40.5 billion of $ 941.5 billion of $ 3,997 billion
Figure 18: Illustration 1 – Key highlights of the Indian Insurance vis-à-vis the Asia Pacific and
Global Insurance Markets (Datamonitor)
Illustration 2: The illustration below gives the insurance market value in USD
Billion for the market in India vis-à-vis that of Asia Pacific and the World.
Note: The Market Value measured in $ Billion represents the amount of premium
collected by the respective industry in $ Billion. If one gives a quick glance at the
graph, one might feel that the Indian Insurance Market forms a fair proportion of the
Asia-Pacific Insurance Market, which in turn contributes to a fair amount of the
Global Insurance premium. However, a closer look would reveal that the vertical axis
scale is logarithmic, implying the units in which the scale proceeds are not constant,
in fact represent a geometric progression. I had to make use of this scale, in order to
be able to view the market value of the Indian Insurance on the graph, which was al-
most invisible in a constant distance scale. However, before one jumps to conclu-
sions, one would have to note that for comparison sake, all premiums have been con-
verted into USD. Thus there are two points to note from this graph [a] The Indian In-
surance Industry is in a highly nascent stage in the global scenario, as is vivid by the
proportion of premium with respect to that Asia-Pacific and consequently with re-
spect to that of the Global Scene. This goes in lines with the low penetration of Insur-
ance in India (being 2.53% of the GDP). [b] However, the graph further amplifies the
starkness of comparison because all figures are in dollars and thus ignoring the pur-
chasing power parity concept and the fact that tariffs were controlled during this peri-
od that left companies with limited choice to determine prices based on good under-
writing skills, and risk management techniques.
Figure 19: Illustration 2 – Market Value Comparison Chart (Datamonitor)
Illustration 3: Depicts the Market Value comparison between the Indian, Asia Pa-
cific and World Insurance Markets with respect to growth rates of premiums using
CAGR (Compounded Annual Growth Rate)
This graph depicts that the Insurance premium growth rate of India is greater than
that of the Global rate which in turn is greater than the Asia-Pacific rate, while of
course the base is smaller (as we have seen in the previous illustration). The Indian
insurance market grew by 14% in 2005 to reach a value of $ 25.1 billion. The com-
pound annual growth rate of the market in the period 2001–2005 was 15.3%. The
Asia-Pacific insurance market grew by 3.7% in 2005 to reach a value of $ 763.5 bil-
lion. The compound annual growth rate of the market in the period 2001–2005 was
2.5%. The global insurance market grew by 4.7% in 2005 to reach a value of $ 3,151
billion. The compound annual growth rate of the market in the period 2001–2005 was
5% (Datamonitor).
Figure 20: Illustration 3 – Market Value (% Growth) Comparison Chart (Datamonitor)
Illustration 4: This illustration depicts the share of life and non-life insurance in
each of the markets – India, Asia Pacific and World.
Figure 21: Illustration 4 – Market Segmentation – Life & Non-Life (Datamonitor)

Illustration 5: Depicts the Indian Insurance’s contribution to the Asia Pacific Mar-
ket Value as a percentage of premium, and in turn Asia Pacific Insurance contribution
to the Global Insurance Paradigm as a percentage of premium. It gives geography-
based market segmentation.
Graph [a] indicates that India accounts for 3.3% of gross premiums written within
the Asia-Pacific insurance market. In comparison, China generates a further 7.9% of
Asia-Pacific market value.
Figure 22: Illustration 5 – Market Segmentation – By Geography (Datamonitor)
Graph [b] indicates that the Americas account for 39.9% of gross premiums writ-
ten within the global insurance market. In comparison, Europe and Asia Pacific gen-
erate a further 35.8% and 24.2% respectively of global gross premiums written.
Thus India accounted for 0.7986% of the global gross premiums written in 2005.
A Snapshot of the Competitive Landscape

[a] The competitive landscape of the Indian Insurance Market
India’s large rural population is migrating to urban areas, creating a large “new cus-
tomer” demographic for India’s insurance companies. India’s booming economy is
also conducive to a positive performance from insurance companies. India’s leading
insurance company is the Life Insurance Corporation of India (LIC). The company
has more than 2,000 branch offices located all over India, with its corporate office in
Mumbai.
India’s second largest insurance company and its largest non-life insurance compa-
ny, New India Assurance, is India’s first entirely Indian-owned general insurance
company. The company’s revenue for the fiscal year 2005 increased 37.5% on the
previous year to reach a 2005 of $18.6 billion. India’s public sector general insurance
companies are in the process of restructuring their operations to cope with the com-
petitive pressures unleashed by the private players.
[b] The competitive landscape of the Asia-Pacific Insurance Market

Japan’s life insurance market continues to dominate Asia-Pacific’s insurance land-
scape. However, the declining birth rate and aging population of Japan have created a
substantial alteration in the insurance needs of the Japanese. As the consumer demo-
graphic diversifies, companies need to widen their insurance packages, particularly
with regard to life insurance. Nippon Life Insurance Company, the leading insurance
company in Japan and Asia-Pacific, is responding to this by focusing more on their
medical insurance plans as opposed to death protection.
Nippon’s revenue in the fiscal year ending March 2006 reached $ 62.9 billion; this
represents a 6.5% increase on the previous year, a recovery from the declining rev-
enues Nippon Life Insurance Company faced in the previous fiscal year. Income from
insurance and reinsurance premiums constituted 70% of the company’s revenue.
Dai-Ichi Mutual Life Insurance Company, Asia-Pacific and Japan’s second largest
insurance company, had 11.5 million individual insurance policies in force in the fis-
cal year ending March 2006. The company’s premium income was $ 30.9 billion, a
4% fall on the previous year, although its total revenues rose by 6% to $ 45.9 billion.
[c] The competitive landscape of Global Insurance Market

Fiscal year 2005 was marked by the impact of hurricanes in the US and other natural
disasters, which threatened earnings for insurers. This followed a year of below aver-
age major damage costs in 2004.
Allianz Group is one of the leading companies in the global insurance market. In
fiscal 2005, its gross premiums written in property and casualty increased by 0.6% to
$ 54.8 billion, while life and health statutory premiums rose by 6.5% to $ 59.8 bil-
lion. Allianz considers Europe to be its core market, and France, Germany, and Italy
showed strong growth in premiums written.
Another major player in the global market is AIG. In fiscal 2005, it reported that in
its general insurance division net premiums written had increased by 3% on 2004, to
reach $ 41.9 billion. The group has an extensive international property and casualty
insurance operation, and also a personal lines business focused on high net worth
clients and car insurance. In its life insurance and retirement services business, pre-
miums, deposits, and other income amounted to $ 66.4 billion, a marginal decrease
on the previous fiscal year.
Both Allianz and AIG have partnered with Indian counterparts and have ventured
into the Indian foray – Allianz with the Bajaj group (the biggest producer of two
wheelers in India) and AIG with the Tata Group (one of the biggest conglomerates in
the country).
Illustration 6: Depicts market value forecast in $ billion for the Indian Insurance
market vis-à-vis the Asia Pacific and Global Insurance market. It suggests; in 2010,
the Indian insurance market is forecast to have a value of $ 40.5 billion, an increase of
61.3% since 2005. In 2010 the Asia-Pacific insurance market is forecast to have a val-
ue of $ 941.5 billion, an increase of 23.3% since 2005. In 2010, the global insurance
market is forecast to have a value of $ 3,997 billion, an increase of 26.9% since 2005.
Figure 23: Illustration 6 – Market Value Forecast – 2010 (Datamonitor)

Notice the use of the logarithmic scale here as well, in order to permit viewing of
the Indian market vis-à-vis the Asian and World.
Illustration 7: Suggests the market value forecast up to 2010, in terms of the com-
pounded annual growth rate (CAGR). The CAGR of the Indian Insurance market in
the period 2005–2010 is predicted to be the highest at 10%, followed by the Global
Insurance CAGR at 4.9%, and the Asia Pacific CAGR at predicted to be 4.3%. The
smaller base obviously for the CAGR in India justifies the higher growth rate; how-
ever, the current CAGR from 2000–2005 for India stood at 15.3%. The decrease in
the relative CAGR from 15.3% to 10% for the Indian insurance market can be ex-
plained because the base has obviously increased for India from 2001 to the new
point of comparison in 2005; thus an apparent reduction in CAGR is justified.
Figure 24: Illustration 7 – Market Value (%Growth) Forecast – 2010 (Datamonitor)
Illustration 8: Projects the development of insurance penetration in the life area

across continents and selected countries over the years 2003 through 2005. Insurance
penetration is measured as the ratio (in percent) of the premium to the GDP. Insur-
ance penetration for a country is a measure depicting reach. Interesting facets to note
for the same are: the world life insurance penetration stood at 4.34%, the US at
4.14%, Germany at 3.06%, Asia at 5.16%, Japan at 8.32%, Taiwan remarkably high
at 11.17%, China at 1.78%, India at 2.53% and Mexico at 0.68%.
Figure 25: Illustration 8 – Insurance Penetration Comparison Chart in the Life Insurance Area
(IRDA)
Illustration 9: Projects the Insurance Density comparison chart for the life insur-
ance area across continents and selected countries. Insurance density is defined as the
insurance premium per capita or the ratio of the insurance premium of the nation to
Figure 26: Illustration 9 – Insurance Penetration in the Non-Life Insurance Area for the years
2003 through 2005 (IRDA)
the population of the nation. Two points to note are [a] the scale used in the illustra-
tion below is logarithmic scale to permit visualization of the figures of countries like
India, China, Egypt and Latin America. [b] However, since the figures depict the in-
surance density in dollars, it does not factor in the purchasing power parity concept.
The Insurance density (in 2005) for the world life stood at 299.5, the US at 1753.2,
Germany at 1042.1, Asia at 149.6, Japan at 2956.3, Taiwan remarkably high at
1699.1, China at 30.5, India at 18.3 and Mexico at 49.9. It is interesting to note that a
“small” country like Taiwan has such high insurance penetration and insurance den-
sity rates. Although Mexico had a very low penetration rate in the Life Area 0.68%,
its insurance density is almost 3 times of India.
Illustration 10: Projects the Insurance penetration rates comparison chart for the
non-life insurance area for the years 2003–2005. The world over, insurance penetra-
tion in life is higher than that of non-life areas.
Figure 27: Illustration 10 – Insurance Density in the Life Insurance Area for the years 2003
through 2005 (IRDA)
Illustration 11: Projects the insurance density development comparison chart for
non-life areas. In general, the insurance density for non-life is lower than that of life.
In the case of India it was as low as 4.4 for non-life in 2005.
Figure 28: Illustration 11 – Insurance Density in the Non-Life Insurance Area for the years
2003 through 2005 (IRDA)

Insurance Industry in India

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Chapter 1:

Insurance Industry in India

This chapter starts with an analysis of evolution of insurance in India which is

1.1 Insurance – Introduction and History

Introductory Terms to Insurance

Insurance Sector Revisited

Augmentation of the Sector

Tools and Methodology

1.2 An Analysis of Evolution of Insurance in India

An account of the Indian Economy and Insurance in Context

Figure 1: Financial Savings of the Household Sector – Gross (IRDA)

Financial Savings as a Percentage of GDP

Item 2000– 2001– 2002– 2003– 2004– 2005–

Financial savings (FS) 11,90% 12,70% 13,10% 13,80% 14,00% 16,70%

Figure 2: Financial Savings of the Household Sector – Gross (IRDA)

Milestones of the Evolution of Insurance before nationalization in 1956

Figure 3: Milestones of Evolution of Insurance before Nationalization (Sinha)

Rationale for Nationalization of the Life Insurance Business in 1956

Rationale for the non-nationalization of the General Insurance Business in 1956

Milestones of the Evolution of Insurance after Nationalization in 1956

Figure 5: Milestones of Evolution of Insurance after Nationalization in 1956 (Sinha)

Nationalization of General Insurance in 1972

Development of the Life Insurance Industry during the Nationalized Era

Deregulation of Insurance in India with the IRDA Act, 1999

1.3 Dynamic Market Environment for Insurance in India

The Dynamic Environment and the Insurer’s point of View

Figure 8: Factors Influencing Company Marketing Strategy (Kotler and Lane)

Factors, E- Economical Factors, S – Social/Cultural Factors, T – Technological/Phys-

Political Factors Economic Factors

– Buoyancy in the Indian stock market due to strong macroeconomic fundamentals,

De-tariffing and its consequences

Effects and Consequences of Lifting of Tariffs

Figure 10: Facets while considering the effects of de-tariffing (Author)

• Achieving operational efficiencies in channels would be inevitable; as prices

Risk Management and Underwriters

Anita Mc Gahan’s Model for Strategies in Dynamic Environments

LUDI’s Internationalization Cube (Kaufmann, Panhans and Poovan)

Please see the illustrations below.

1.4 Authorities and Regulatory Environment

The role of the IRDA as a developer

The Statutory functions of the IRDA

The Regulator Says: License to Operate for an Insurer

2. Protection of the interests of the policyholders in matters concerning assignment

Insurer Grievances Reported Total Resolved Pending Break up according

Public 707 1331 2038 1488 550 279 101 149 21

Figure 14: Status of Grievances – Non-Life Insurers 2005–2006 (IRDA)

Insurer Grievances Reported Total Resolved Pending Break up according

Figure 15: Status of Grievances – Life Insurers 2005–2006 (IRDA)

Type of Investment Percentage

Type of Investment Percentage

– Promotion of micro-insurance to reach rural areas

The Regulator Says: FDI Cap

“Overseas companies are allowed to own a maximum insurance companies in

1.5 Status Quo –

Criteria Indian Asia Pacific Global

Figure 19: Illustration 2 – Market Value Comparison Chart (Datamonitor)

Figure 20: Illustration 3 – Market Value (% Growth) Comparison Chart (Datamonitor)

Figure 21: Illustration 4 – Market Segmentation – Life & Non-Life (Datamonitor)

Figure 22: Illustration 5 – Market Segmentation – By Geography (Datamonitor)