Life Insurance In India: Opportunities, Challenges and Strategic Perspective (Response Books)

….From micro insurance to the macro economic environment, Dr Sadhak provides a solid foundation for anyone that wants t...

Author: H. Sadhak

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….From micro insurance to the macro economic environment, Dr Sadhak provides a solid foundation for anyone that wants to understand the transformation of one of the world’s most important insurance markets. As an active participant in this market, both before and after liberalization, the author brings a range of experience that makes the volume extremely useful to everyone from industry newcomers to policymakers and regulators. All of the above would benefit from the wise counsel of Dr Sadhak as they face the challenge of ‘managing change’ in the coming years. Robert J Palacios Senior Economist, South Asia Human Development Sector (World Bank) Life Insurance in India: Opportunities, Challenges and Strategic Perspective by Dr Sadhak is a pioneering work on Indian Life Insurance Industry with a new perspective. The book is a culmination result of research and practical experience for a number of years by an internationally acknowledged financial economist and practicing manager with proactive and visionary thoughts. The book has been written in the context of Globalization, Economic Reforms and Liberalization of Indian insurance and capital markets and overall financial sectors. The scope and dynamics of growth of Indian Life Insurance Industry has been discussed in the light of changes in macro economic environment, demographic transition, changing market structure, changing product–market relationship, emerging convergence in financial markets, etc. Dr Sadhak has also focussed on certain critical issues like Strategic Planning and Market Research, Change in Management Systems dealing with distribution and customers expectation with futuristic perspectives which, I think, would provide immensely helpful guidance to the practicing managers. Tarun Das ADB Adviser, Fiscal Management and Strategic Planning, Ministry of Finance, Government of Mongolia; Former Economic Adviser, Ministry of Finance and Planning Commission, Government of India Dr H Sadhak is one of a rare breed of Industry Executive and Practitioner with serious academic credentials, His new book Life Insurance in India: Opportunities, Challenges and Strategic Perspective rightly puts the spotlight on the new reality facing the industry in India following reforms and globalization. He has dealt with all three components of the life insurance industry—protection, pension and investment—in the overall framework of a rapidly changing financial services marketplace. The historical data and current statistics supplied in the book are of particular importance. Dr Sadhak focuses on risk management as a key management function, which is a relatively new concept for the nationalized sector of the industry in particular. Finally, I am particularly pleased that corporate governance issues have been highlighted. In a globalized economy best management and governance practices are indispensable tools of survival. The old industry and its management culture must change to prosper in the new paradigm. I congratulate Dr Sadhak for his contribution to the process and will look forward to more intellectual output from him in days to come. Dilip Chakraborty Finance Director, Life & Pension Business, Canada Life Limited, UK

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LIFE INSURANCE IN INDIA Life insurance industry in India is transforming with the fast changing economic condition, emerging needs of the rising middle class, and evolutions in the capital markets. With its unique development history, India’s insurance industry has its unique challenges. An accomplished writer and an industry expert, who also has extensive practicing experience in various financial sectors, Dr H Sadhak provided unique and powerful insights on the changes and strategies of the Indian life insurance companies. As an actuary and a practitioner in the pension and insurance industry in Asia, I have thoroughly enjoyed reading this book and I am deeply impressed by the depth and breadth of knowledge of Dr H Sadhak. I would encourage anyone who would like to gain deeper understanding of India’s insurance industry and keep this book in his library. Vanessa Wang FSA, Regional Head of Retirement Consulting, Mercer Asia, Beijing Dr Sadhak’s work Life Insurance in India: Opportunities, Challenges and Strategic Perspective is a comprehensive treatise on Life Insurance industry in India. The book is unique in that it spans both breadth and depth of knowledge. It provides powerful insight with a historical perspective into the life insurance sector. It is a great book in terms of lucidity of presentation of a complex subject. I strongly recommend this book to academicians as well as practicing managers. Pritam Singh Professor of Eminence, Management Development Institute, Gurgaon; Former Director, Indian Institute of Management, Lucknow Long-term drivers for growth in life business are increasing awareness of life-protection, higher income and savings levels and increasing working age population. Factors like booming capital markets and an inclination of consumers to use life products as an investment-cum-protection vehicle, greater awareness spread by players in terms of innovative product design, aggressive marketing and widening distribution also drive life business. A practicing author like Dr H Sadhak harmonizes the drivers to accelerate the process of life business to carry it to a disruptive growth phase. K C Mishra Director, National Insurance Academy, Pune, India

Life Insurance in India

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LIFE INSURANCE IN INDIA

Life Insurance in India Opportunities, Challenges and Strategic Perspective

H Sadhak

Copyright © Manjushree Sadhak, 2009 All rights reserved. No part of this book may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval system, without permission in writing from the publisher. First published in 2009 by Response Books Business books from SAGE B1/I-1 Mohan Cooperative Industrial Area Mathura Road, New Delhi 110 044, India SAGE Publications Inc 2455 Teller Road Thousand Oaks, California 91320, USA SAGE Publications Ltd 1 Oliver’s Yard, 55 City Road London EC1Y 1SP, United Kingdom SAGE Publications Asia-Pacific Pte Ltd 33 Pekin Street #02-01 Far East Square Singapore 048763 Published by Vivek Mehra for SAGE Publications India Pvt Ltd, typeset in 11/13 pt Minion by Star Compugraphics Private Limited, Delhi and printed at Chaman Enterprises, New Delhi. Library of Congress Cataloging-in-Publication Data Sadhak, H. Life insurance in India: opportunities, challenges and strategic perspective/H. Sadhak. p. cm. Includes bibliographical references and index. 1. Life insurance—India. I. Title. HG9163.S23 368.3200954—dc22 2009

2009006971

ISBN: 978-81-7829-846-7 (PB) The SAGE Team: Anjana C. Saproo, Meena Chakravorty, Anju Saxena and Trinankur Banerjee Disclaimer: This Publication has been designed with a view to disseminate academic information. While every effort has been made to enhance reliability of the same from multiple sources, readers must not construe the contents of this book as investment advice. The views expressed by the author are purely personal. Neither the Author nor the Publishers are liable for any discrepancy, which may have appeared. Sound professional advice and services relating to investment by the reader can be sought from professionals in the field. The author(s) of this book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event the author(s) has/have been unable to track any source and if any copyright has been inadvertently infringed, please notify the author(s) and the publisher in writing for corrective action.

To Partha and Cosmica

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Contents

List of Tables Foreword by T S Vijayan Preface Acknowledgements

x xiii xv xviii

Chapter 1

Globalization, Liberalization of Financial Markets and Life Insurance

1

Chapter 2

Reforms and Emerging Economic and Financial Environment in India

30

Chapter 3

Indian Life Insurance—Changing Market Structure and Emerging Opportunities

74

Chapter 4

Product–Market Relationship and Distribution in Convergent Financial Market

158

Chapter 5

Managing Life Insurance Investment

219

Chapter 6

Issues in Life Insurance Governance

295

Chapter 7

Managing Change and Challenges

343

Glossary Bibliography Index About the Author

359 372 378 383

List of Tables

1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13

Extent of Globalization Exports Growth and Share in World Trade Distribution of Household Assets in Financial Instruments in 2000 Asset Allocation of Life Insurance Companies—A Global Scenario Mature Markets: Assets under Management by Institutional Investors—A Gobal Scenario Assets under Management of Insurance Companies in Emerging Markets (in terms of GDP) Global and Regional Growth in GDP and Life Insurance Premium Regional Variation in Market Share, Penetration and Density State and Foreign Ownership, Tariffs and Entry Barriers, 2003

11 12 16 17

Sectoral Real Growth Rates in GDP (at Factor Cost) Macro Economic Aggregates (at Current Prices) BRICs Real GDP Growth: 5-year Period Averages Financial Assets of Banks and Financial Institutions (as on 31 March) Trend in Domestic Savings in India Distribution of Financial Saving (Gross) of the Household Sector in India Changes in Financial Assets of the Household Sector (at Current Prices) Trends in Institutional Investment Stock Market Index, Turnover and Market Capitalization GDP, GDS, HDS and Life Fund PDI, Savings and Life Insurance Premium Inflation, Interest Rates and Life Insurance Savings in India The Population and Life Insurance Business from 1980–81 to 2004–05

32 34 35 41 44

19 20 22 24 26

47 48 52 54 67 69 69 70

List of Tables

3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 3.13 3.14 3.15 3.16 3.17 3.18 3.19 3.20 3.21 3.22 3.23 3.24 3.25 3.26 3.27

Growth of Life Insurance Business in India 1914–48 New Business for the Years 1953–57 Total Business in Force during 1952–57 Distribution of Total Investment of Corporation as on 31 December 1957 LIC—Some Basic Statistics: 1957–2006 LIC of India Investment as on 31 March 2006 Surplus, Share of Government and Taxes Paid by LIC Entry of Private Life Insurance Companies Equity Share Capital of Life Insurance Companies Premium Underwritten by Life Insurers Company-wise Total Life Insurance Premium New Policies Issued by Life Insurers Market Share of Life Insurers First Year Premium Underwritten by Life Insurers during 2006–07 Commission and Operating Expenses of Life Insurers as Per cent of Premium Projected Changes in Indian Demography Health Insurance Coverage in India Income Class-wise Savings Rates in India Post-reforms Projections of Contributions under Pillars 2 and 3 Asset Preference Pattern: Distribution of Households by Type of Instruments Distribution of All Households in Instruments by Income Class Indian Life Insurance Industry in the Context of World, Emerging Market and Asia Life Insurance Penetration and Density in Some Selected Countries in 2004 Top 10 Emerging Markets in Terms of Life Premiums Emerging Markets—Regional Insurance Premium 2004 in US$ Million Key Insurance Indicators of Life Insurance in Emerging Economies (in 2004) Life Insurance in Emerging Markets (2004)

xi

81 81 82 82 85 89 90 94 95 98 99 100 100 101 103 105 109 128 129 138 138 143 144 146 147 148 150

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4.1 4.2


Product–Market Characteristics of Major Global Life Insurance Markets, 2004 New (Premium) Business (Life) Underwritten through Various Intermediaries 2003–04

5. 1 Investment of Life Insurance Corporation of India (as on 31 March) 5. 2 Loans and Debentures Advanced to Various Entities for Infrastructure and Social Purpose 5.3 Growth in Investment of Life Insurance Industry 5.4 Fund-wise Investment of Life Insurance Companies 5.5 Individual Investment of Life Insurance Companies (as on 31 March) 5.6 Fund-wise Pattern of Investment of Life Insurers: Life Fund (as on 31 March) 5.7 Fund-wise Pattern of Investment of Life Insurers: Pension and General Annuity Fund (as on 31 March) 5.8 Fund-wise Pattern of Investment of Life Insurers: Group Excluding Group Pension and Annuity Fund (as on 31 March) 5.9 Fund-wise Pattern of Investment of Life Insurers: Unit Linked Fund (as on 31 March) 5.10 Items and Quotation for WPI 5.11 Money Supply and Consumer Price Index in India

164 186 236 237 237 238 239 241 242 244 245 277 278

Foreword

Life insurance has emerged as the most vibrant segment in the financial sector in India particularly since the liberalization of the market in the year 2000. The growth of life insurance was fuelled by nationalization of the industry in 1956 and Life Insurance Corporation (LIC) has not only played an unparalleled role by spreading the message of life insurance throughout the country, but also a significant role in the economic development of the nation. However, liberalization has provided a further boost to growth by allowing domestic and foreign insurance companies to operate in the Indian market, which not only increased the depth of the market and competition in the marketplace but also improved the service quality, product range and life insurance literacy. However, compared to the importance of life insurance in economy and society, not much standard literature on life insurance is available in India. This book of Dr Sadhak will fill up the vacuum to a great extent. The author has followed a much needed integrated approach, examining the growth of life insurance in the light of globalization and changing dynamics of macro economy. The book deals with a large number of important issues in life insurance critical to growth in post-liberalized competitive marketplace and offers many valuable suggestions for good governance and faster growth of Indian life insurance industry. The author has made a successful attempt to evaluate changes in financial economy and to integrate development of life insurance and contractual savings in the globalized environment. Development of life insurance in the emerging market has also been discussed in the context of globalization and market reforms. Indian financial market including life insurance has come a long way since the days of centralized planning, which has impacted the management of life insurance in a big way, particularly since economic reforms and liberalization. These issues have been discussed in detail with reference to the emerging trend in macro economy, savings market and capital market. One of the lesser known areas of the Indian life insurance industry is the changing dynamics and market structure, which the author has focussed upon, beginning with the 1818 regulation of the industry till today. Readers will be delighted to know many less known facts

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in the context of reforms, liberalization and changing market structure; the scope of future life insurance market including annuity market, health insurance market and microinsurance market have also been discussed. Another interesting area in the life insurance industry is the changing product–market relationship and this has been discussed in the context of convergence of the financial services industry. The author has focussed on some critical issues in marketing and distribution of life insurance products including current practices in distribution and also highlighted strategic issues in marketing. While the author has focussed on scenario planning and marketing research for penetration into the hidden market, he has also suggested a Macro–Micro Model for managing the changes in the marketplace. The book also deals with important issues and relevant investment strategies to manage life insurance funds for better returns. Another important area of focus of the book is risk management in life insurance in the era of volatility and complexities in the market. Readers will also be benefited by the addition of the section on understanding macro economic indicators. Today, governance in life insurance is a very important and most focussed area. The book has dealt at length with various methods of supervision, issues in ethical practices, corporate governance, corporate social responsibilities, etc. This book is a valuable contribution to life insurance literature and I visualize that it will find great acceptability not only amongst the managers in life insurance industry but also amongst all those who have interest in life insurance and the financial services industry. T S Vijayan Chairman LIC of India, Mumbai

Preface

Life insurance industry is an important and integral component of macro economy and has emerged as a dominant institutional player in the financial market impacting the health of economy through its multi-dimensional role in savings and capital market. While the primary role of a life insurance company is to provide insurance coverage for managing personal financial risks, it plays a very crucial role in promoting savings by selling a wide range of products and also actively contributes in promoting and sustaining the capital market of a country. In the emerging economy, characterized by the reduced role of state and declining statesupported social security, the importance and the role of the life insurance industry has increased significantly not only as a risk manager but also as retirement security and annuity provider. Moreover, growing institutionalization of the financial market has also provided a momentum to boost the life insurance companies. Therefore, a reassessment of the role of life insurance in the context of the changing market and economic environment is required for managing life insurance companies effectively. This book is an attempt to work in this direction. Most of the publications available on life insurance in India are basically a kind of historical account which focus on life insurance as an insurance entity rather than an important component of financial services industry. Therefore, a need was felt to study life insurance industry in India in the context of changing dynamics of macro economy and financial markets in the backdrop of ongoing globalization and economic reforms. Moreover, several emerging and crucial issues which are critical to growth such as risk management, business ethics, corporate governance, etc., have not been given the required attention by industry managers. These are not merely the required conditions to enhance customer value but are necessary for strategic market expansion. All these issues have been covered in the seven chapters of this book. In Chapter 1, an insight into the trend of globalization has been provided along with liberalization and its impact on financial market. The changing role of institutional investors and life insurance has also been discussed which is undergoing a significant transformation and gradually emerging as a dominant player in the financial economy in developed and emerging markets industry. Globalization has also opened avenues for the growth of the life insurance industry benefiting the emerging economies and the same has been discussed in the context of market deregulation and its impact on growth of life insurance in emerging markets.

xvi


Globalization and liberalization also induced transformation in the Indian economy, which is experiencing financial market integration and is gradually becoming a service-driven economy. These phenomena of change have been discussed with reference to evolving macro economy, savings and capital markets in Chapter 2. Since the changes in life insurance industry closely depend on changing macro economic variables, we have examined the relationship between the macro economic variables and life insurance market in India. In Chapter 3 one can get an insight into the transition of the Indian life insurance industry since 1818 and evolving market structure from pre-nationalization period to the postliberalization period. In modern economy the life insurance market has expanded in many directions by offering products for various financial needs such as health and retirement. We have also made an attempt to examine the existing market as well as the future market potential for life insurance industry in India. One of the basic questions before the Indian life insurance industry is how to expand the market base in an era of financial market convergence. In spite of opting for several new distribution channels such as bank assurance, corporate agencies and internet marketing, the Indian market base remains more or less stagnant in terms of coverage of insurable population. Probably the problem lies with an appropriate marketing strategy and understanding life insurance market and its customers through scientific marketing research. Therefore, in Chapter 4, the changing product–market relationship has been discussed in the context of financial integration, emerging product market for life insurance, scope and necessity of marketing research and strategic planning and distribution methods to realize market potential and to manage emerging life insurance market. One of the most important responsibilities of any life insurance company is to manage its liability efficiently, to realize the value of the funds of the policyholders received by it as premium income. Therefore, investment management is critical to efficient management of an insurance company. Efficiency in funds management calls for depth in understanding of investment science, particularly the strategic issues. Keeping this in view, various conceptual issues have been briefly discussed and in the light of that the management of investment has been examined by Indian life insurance companies in Chapter 5. Since investment management is basically a function of liability management, which in turn is an important component of risk management, the issue of risk management has been focussed upon in a life insurance company. Here, various issues have been dealt with such as sources of risks, instruments of risk management and practices of risk management in life insurance. Today ‘system of governance’ is one of the most intensely discussed issues all over the world. No business organization can sustain its growth unless it puts in place an appropriate system of governance. However, there may not be any straitjacket ideal solution to this, but a system comprising sound regulatory regime, corporate governance, ethical standard of business and corporate social responsibility, etc., can be put in place. This issue is more important because a life insurance company has to protect the interest of a large number of stakeholders. We have discussed these issues in Chapter 6 of the book.

Preface

xvii

A conclusion has been avoided because the market and its influencing parameters are changing constantly. Moreover, management is a dynamic phenomenon which changes with economic and social expectation, and environment. In view of this, instead of providing any concluding view, some of the important issues have been highlighted which are critical to good management of any life insurance company—to enhance the contribution of managers and employees, expand the market base and optimize the customer value, etc., in Chapter 7. This work is an individual initiative undertaken to enhance insurance knowledge in the interest of millions of customers, managers of life insurance and students of life insurance. The work has been completed in my spare time and at the cost of leisure and sacrifice of family life. I would like to mention that the views expressed in this book except those quoted are my personal views.

xviii


Acknowledgements

Writing an acknowledgement is probably the most difficult task for an author as a book is an outcome of direct and indirect support of many, but only some of whom end up receiving a mention due to several constraints. Yet, I would be failing in my duty if I do not mention the names of at least a few of the many institutions and individuals without whose support this work would have remained incomplete. Of the many institutions which offered me invaluable help by allowing me to study and use their publications, I would specially mention and thank the international reinsurance and research company Swiss Re. I have been immensely benefited by referring to the publications of Life Insurance Corporation (LIC) of India, Reserve Bank of India (RBI), Insurance Regulatory and Development Authority (IRDA), Federation of Indian Chambers of Commerce and Industry (FICCI), New Delhi and many other institutions and would like to thank them all. In addition to the ones mentioned there are many other institutions and authors whose work has enlightened me and they have been cited in this book to make it richer in content. I am grateful to them and would like to thank them all. There are many eminent experts who have provided immense technical support and encouraged me during this work and I am thankful to them all. But I would like to express my sincere thanks to Dr Robert Palacios, Senior Economist, World Bank; Ms Vanessa Wang, Regional Head, Retirement Consulting, Mercer-Asia, Beijing; Dr Tarun Das, former Economic Advisor, Ministry of Finance, Government of India; Dilip Chakraborty, Finance Director, Canada Life Limited, London; Dr Pritam Singh, Former Director, Indian Institute of Management, Lucknow and Dr K C Mishra, Director, National Insurance Academy, Pune for kindly offering their valuable comments on this book. There are many friends and colleagues who have provided immense mental and moral support to bring out this edition. To name just a few of them, I would like to mention my friends and colleagues, namely, Mr T S Vijayan, Chairman, LIC of India; Mr D K Mehrotra, MD; Mr Thomas Mathew T, MD and Mr A K Dasgupta, MD, of Life Insurance Corporation of India, for their encouragement and moral support. There are many other well wishers, who have constantly encouraged me during this work. A few of them are Mr G N Bajpai, former Chairman, LIC

Acknowledgements

xix

and Securities Exchange Board of India (SEBI); Jagdish Capoor, Chairman, Bombay Stock Exchange and Former Dy Governor, Reserve Bank of India; Shailesh Haribhakti, Chairman (Haribhakti & Associates); M N Singh, IPS (Retd.); Yoshihisa Ishii, General Manager, Dai-Ichi Mutual Life Insurance Company, Tokyo; Dr D P Rath, Director, Economic Analysis Department, Reserve Bank of India and Dr Rajesh K Parchure, Gokhle Institute of Economics & Politics. I would also like to thank the anonymous referee who had painstakingly gone through the first draft and offered many valuable suggestions which have improved the quality of this book. I am also thankful to the staff members of Response Books, for successfully bringing out this book. Last but not the least I owe a great deal to my wife Manjushree, son Partha and daughter Cosmica, who stood by me when I used to struggle after office hours. Finally, I would like to mention that while I share my success with all those mentioned above, I alone remain responsible for any shortcomings.

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Chapter 1 Globalization, Liberalization of Financial Markets and Life Insurance Since 1991, Indian economy has undergone a sea change in the wave of globalization and restructuring of domestic economy through a large number of measures in real sector as well as in financial sectors. These measures intended to improve macro economic efficiency and make our production system internationally competitive. Understanding these changes and international marked integration is essential from the point of long-term strategic initiatives of corporate management. The process of globalization has brought structural changes in the financial market and financial intermediaries particularly, institutional investors have emerged as important players in the newly emerging market-based financial structure. In institutionalized financial market, institutional investors such as life insurance, pension funds and mutual funds play an active role as saving immobilizers and resource alligators. Understanding the new role and emerging linkages in an integrated financial market will enable us to estimate the place of life insurance industry in a long-term perspective, particularly in the context of cross-border flow of savings and investment. Globalization has further increased the scope of the life insurance business. Liberalization of financial markets and opening up of the insurance sector to foreign and domestic private operators induced market competition and scope for market expansion. Emerging market, due to their high growth potential, are destinations of foreign investment. Therefore, the need for insurance market liberalization in the interest of national economy and domestic consumers requires to be examined in the light of the ongoing process of market integration and globalization. Therefore, an attempt has been made to highlight these issues as follows: 1. 2. 3. 4.

Financial economy in the era of globalization. Economic reforms and global integration of Indian economy. Contractual savings, institutional investors and life insurance. Globalization and emerging trends in life insurance.

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Financial Economy in the Era of Globalization and Liberalization Financial market plays a crucial role in the economic development of a country through allocation of scarce resources. It transfers resources from savers to borrowers, thus directs resources from the idle sector to the productive sector, therefore, accelerating investment activities in the economy. This allocation function of financial market has been nicely put by Stiglitz (1994): Financial markets essentially involve the allocation of resources. This can be thought of as the brain of the entire economic system, the locus of central decision making; if they fail, not only will the sectors profit be lower than would otherwise have been, but the performance of the entire economic system may be impaired.

Since early 1970s repressive financial policies came under criticism and economists like Gurley and Shaw (1995) advocated the need for institutionalization of savings and investment activities in an economy. They showed that banks and other financial intermediaries can create excess supply of investment over desired savings and influence the rate of growth in an economy. Ramond Goldsmith (1969) advocated the existence of a financial superstructure thereby meaning financial institutions, instruments and market for economic growth. According to him a financial superstructure facilitates the migration of funds to the best use in terms of social return through acceleration of economic growth. Mckinnon also suggested liberalization of the economy, unification of the capital market and doing away with the repressed financial system. Financial intermediaries also play an important role in eliminating market imperfections which arise out of non-dissemination of information about borrowers. According to Kaizuka (1987) distortions in the market can be eliminated or mitigated by several institutional devices, including financial arrangements such as issuing market for securities, besides financial intermediaries. According to Kaufman (1986), financial institutions are ‘expected to embody the essence of integrity and their entrepreneurial drive is well balanced by a strong sense of fiduciary responsibility and that is why financial regulations have always been a part of economic development’. Structural changes in financial markets induced a reverse trend in financial intermediation, that is, financial disintermediation—where the central role of banking is moving away to make room for investment institutions and institutional investors. The process of disintermediation has been introduced by the shift of financial system from credit-based to capital market-based. Institutions such as insurance, pension funds and mutual funds play a central role in capital market-based system unlike the credit-based system, where banks are the key players. Growing emphasis on adopting capital market-based system for economic development in liberalized economies has enhanced the importance of financial disintermediation and the role of institutional investors, particularly contractual savings institutions like life insurance and pension funds for their unique role as the risk transferor,


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asset allocator and contributor to economy-wide development. We may discuss the importance and role of these institutions in the context of globalization and integration of the global financial market.

Globalization Economic liberalization is the gateway of globalization and financial liberalization plays the most crucial role in global economy. Globalization, according to Penguin Dictionary of Economics (Bannock G), ‘Stresses…the geographical dispersion of industrial and service activities (for example research and development, sourcing of inputs, production, distribution) and the cross border networking of companies (for example, through joint ventures) and the sharing of assets.’ According to Herman E Daly, globalization serves the vision of a single, cosmopolitan, integrated global economy. This definition focuses on the cross-border movement of goods, services and resources (financial and human) impacting the domestic and global assets and employment. Globalization, thus focuses on an integrated economic world in which economy is a single market characterized by trade and investment flows, cross-border economic activities in production, investment financing, movement of capital, technology, labour, internationalization of consumption, capital and services. Towards globalization, a country must move to economic liberalization by dismantling entry barriers and licensing system, reduction in physical restrictions on imports, reduction in control on capital and current account, reforming financial system and opening up financial market to private (domestic and foreign) players, reduction in controls on foreign capital (FD and portfolio) flow to the country, etc. Globalization is not a new phenomenon of the current world activities. Economic historians have traced two strong waves of globalization. The first wave of globalization spread over 1870–1914 while the second wave of globalization began roughly in 1960 and is continuing. However, the current wave of globalization is much faster and deeper. Fundamentally, today globalization is a new economic phenomenon and a process to set up a new economic order; globally increased integration and interdependence of production, consumption and services.

Drivers of Globalization The present wave of globalization has been significantly influenced by advances in Information Technology (IT), increased flow of trade and capital, improved resource allocation, productivity, innovation, adaptability and utilization of technology. These have not only reduced the cost of production and distribution but also boosted competition and necessitated the need for cross-border economic activity for all the countries. Therefore, important drivers of globalization are expansion of international trade, internationalization of financial market and migration. According to Baldwin and Martin (1999) both waves of globalization were driven by radical reduction in technical and policy barriers

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to international transactions. But the uniqueness of recent globalization is heavily shaped by the dramatic reduction in communications cost, which is sometimes referred to as ‘the death of distance’. Increased speed of globalization during recent times further strengthened global integration as there were significant improvements in major parameters of global integration. According to ‘Global Development Indicator, 2004’, published by the World Bank, trade in goods as per cent Gross Domestic Product (GDP) went up from 32.5 per cent in 1990 to 40.3 per cent in 2002. During the same period the ratio of commercial service exports to merchandize trade went up from 21.5 per cent to 23 per cent, gross private capital flows as per cent to GDP 10.1 per cent to 20.8 per cent and gross Foreign Direct Investment (FDI) flows as per cent of GDP went up from 2.7 per cent to 5 per cent. International Trade

The most important feature of globalization is the liberalization of trade in goods and services and unrestricted flow of capital across the border, which brings global integration and interdependence among economies. Globalization has a direct positive impact on trade, as observed by Fischer (1998) ‘over the past 50 years the volume of world trade has increased more rapidly than GDP and more economies have become more open to international trade’. Trade liberalization plays an important role in integration of international commodity market through reduction in tariffs and removal of entry barriers. It also opens up possibilities of faster growth and reduction in inequality. Cooper (2002) has observed that: A new trading possibility, brought about by import liberalization or by changes in the prices of foreign goods, is closely analogous to an improvement in technology at home, both enlarge the menu of choice, raises the utility of consumers of the products in question and worsen the terms of trade of producers of competing products.

World exports of goods and services which averaged US$ 2.3 billion a year during 1983–92 have more than tripled to an estimated US$ 7.6 billion in 2001 (Hausler 2002). Recent globalization is significantly marked by liberalization of tariffs, particularly since the signing of General Agreement on Tariffs and Trade (GATT) in the late 1940s. Baldwin and Martin (1999) observed that today: The world trade system is viewed by almost all nations as an essential public good, a system that is worthy of support even for purely nationalistic reasons…the GATT and WTO govern almost 70 per cent of World Trade including the European Union’s (EU) external Trade…WTO/GATT membership has grown from 19 nations in the late 1940s to over 120 nations today, the coverage of GATT has been expanded to include agriculture, service and clothing. Additionally, the rules and institutions have been greatly strengthened by creation of the WTO. International Migration

Migration of labour is considered to be an important driver of globalization. Mass migration from poor countries to the rich countries will have a long-term impact on inequality and


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reduction of poverty in poor countries. The present wave of globalization has also witnessed significant increase in migration of labour force from developing to developed countries. The United Nations has estimated that the world stock of migrants was 2.3 per cent of the world population in both 1965 and 1990. It has been further mentioned that the share of migration of people from developing countries in total US immigration rose from 50 per cent in 1960s to 80 per cent in 1990s (Zlotnik 1999). Increased flow of migration from poorer countries to the richer countries helps in global convergence.

Financial Globalization The process of globalization is strongly supported by financial globalization. There is an inextricable relation between increased international trade in goods and services and the increased flow of international capital. It is due to increased trade followed by increase in payments, banking service hedging, etc. Further, increased international trade is also supported by increase in capital flow—FDI and portfolio investment, etc. It has been observed that during the recent wave of globalization, trade liberalization of financial and capital market was strongly supported by increased speed and sophistication of IT. James Tobin (1998) ‘the logic of financial globalization is to increase the elasticity of substitution between the risk adjusted rates of return on local assets and debts and those in dollar markets until the local central bank has no margin within which it is free to determine domestic interest rates’. Financial globalization is often equated to financial integration, though they are different concepts. While financial globalization refers to increased global linkages particularly through cross-border flow of financial resources, financial integration refers to integration of domestic capital market with the global capital market through flow of capital in a liberalized capital account regime. However, our focus is quite broad and includes both the concepts but refers to financial globalization discussed in terms of capital mobility and market integration.

Benefits of Financial Globalization Liberalization and globalization produce immense benefits to the integrated countries. Liberalization creates a conducive climate for faster economic growth, allows upgradation of technology, provides scale economy, expansion of markets domestically and internationally. Economic integration through liberalization can also expand job opportunities in the domestic market and through migration of labour in general. Financial globalization produces higher economic growth through direct and indirect impact on the economy. Direct influence of global financial integration reflects in augmentation of the much required domestic saving which boosts capital investment in investment starved countries. It also provides avenues for better allocation of capital and minimizes risks. Capital flow is accompanied by transfer of technology and finally assists in promoting healthy capital market. Indirect influence of globalization includes integration of domestic economies followed by improving the macro economic policy framework and setting up economic institutions

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and better governance systems. Financial liberalization has forced many countries to open up financial markets and relax the rules of intermediation allowing financial service institutions such as investment banks, asset management companies, mutual funds and pension funds to operate in newly liberalized markets. The forces of change unleashed by financial globalization reflected disintermediation of the banking system, increase in cross-border financial activity, increased competition in savings market and convergence in financial services industry. Financial globalization offers unprecedented benefits to the credit-starved countries which can raise funds by issuing securities in the international market; both borrowers and investors can obtain better terms for borrowing and lending and borrowing at low cost. James Tobin (1998) observed ‘while globalization of financial markets—the liberalization and deregulation of international financial transactions—has made important contribution to the economic progress of developing and emerging economies and can continue to do so, these trends also threatened the monetary sovereignty of these countries’. We may examine some recent trends in cross-border capital flow. International Capital Flows: Financial liberalization through liberation of capital account by many countries has provided momentum to cross-border flow of capital. According to Gerd Hansler (2002) ‘Global gross capital flows in 2000 amounted to US$ 7.5 trillion, a four fold increase over 1990. The growth in cross-border capital movement also resulted in larger net capital flows, rising from US$ 500 billion in 1990 to nearly US$ 1.2 trillion in 2000.’ According to Global Financial Stability Report (International Monetary Fund [IMF] April 2004), Global capital inflow has increased by 3.3 times from US$ 779 billion in 1993 to US$ 2,535 billion in 2003. During the same time, capital inflows to the emerging markets and developing countries increased by 1.6 times from US$ 204.9 billion to US$ 332.8 billion wherein developed countries were the major beneficiaries. Flow of Foreign Investment: Inflow of foreign capital accompanied by FDI is critical for a developing country which may result in improvement of management system, upgrading of production techniques, improvement in quality control and further access to foreign market. FDI has a significant impact on production in the emerging market. By encouraging FDI, developing economies can import the much needed technology, which would further generate spillover for local firms. Saggi (2002) mentioned three types of potential channels of spillover, namely demonstration effect (local firms adopting technologies introduced by multinationals), labour turnover (switch-over of trained labours to local firms enabling technology diffusion) and vertical linkages (multinationals supplying technology to suppliers of intermediate goods). Dobson and Hufbauer (2001) estimated that cumulative foreign investment (mainly FDI) contributed over 6 per cent to the GDP of emerging market countries by 2000. Cooper (2002) has noted that some aggregate evidence credits FDI with a significant growth-enhancing impact, especially where adequate skills are locally available. Free flow of capital, as noted by Feldstein (2000) reduces the risks which owners face by diversifying lending across borders. It also allows transfer of technology and promotes competition in the host country. FDI flow has a definite investment impact in the host country.


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A study by Bosworth and Collins (1999) regarding the impact of capital inflows (FDI, portfolio investment and bank loans) on domestic investment of 58 countries covering Latin America, Asia and Africa noted that an increase of a dollar in capital inflows is associated with an increase in domestic investment of about 50 cents both expressed as percentage of GDP. While FDI appears to produce about one for one increase in domestic investment, no such relationship was observed with respect to other types of capital. Annual flows of FDI now exceed US$ 700 billion and the total stock exceeds US$ 6 billion. Over the past decade, FDI flows have grown at least twice as fast as trade. Gorg and Greenaway (2004) has pointed out that benefits of FDI flows, particularly through location of foreign firms arises through several spillover channels. Gorg has further observed that ‘FDI is a key driver of economic growth and development’. Theory points to reason why spillover might arise, but finding robust empirical evidence to support their evidence is more difficult. This could indicate that the benefits are in fact illusory, that is, multinational firms are effective in protecting their assets. However, they further suggest that for effective spillover, the characteristics of the economic environment are generally much more important: infrastructure, local labour market condition, reliability of communication system, etc., as well as overall macro economic and trade policy climate. Capital flow in emerging markets: According to Global Financial Stability Report (IMF 2004), Global capital flows in emerging and developing countries could not keep pace with total global flows. While total capital inflows increased from US$ 574.1 billion to US$ 2,202.2 billion in developed countries, the same in emerging markets and developing countries increased from US$ 204.9 billion in 1993 to US$ 332.8 billion in 2003. In fact in terms of percentage share it had declined in emerging markets from 26.3 per cent in 1993 to 13.13 per cent in 2003. However, the flow of direct investment to the emerging countries showed a better trend. While the flow of direct investment to emerging countries increased from US$ 70 billion in 1993 to US$ 175.7 billion in 2003, that is, by 2.51 times for the developed countries; the same declined by 0.93 times during the same period. An opposite picture emerged with respect to portfolio investment which increased from US$ 189.9 billion in 1993 to US$ 788.2 billion in 2003, that is, by 4.2 times in developed countries but the portfolio investment in developing and emerging economies declined from US$ 94.7 billion to US$ 62 billion, that is, by 0.65 per cent. Financial globalization has brought significant changes in the financial market, in the form of structural changes pushed forward by institutional investors. Emerging and developing countries are resorting more and more to the process of securitization by issuing debt and equity securities. Global Development Report 2004, released by the World Bank, indicates that bank and trade related lending to low- and medium-income countries has substantially declined from US$ 15,581 million in 1990 to US$ 10,039 million in 2002, while the flow of portfolio investment in (bonds) increased by 11.8 times from US$ 1,076 million to US$ 12,739 million and that in equity increased by 1.6 times from US$ 3,004 million to US$ 4,945 million. However, FDI increased at a higher rate by six times from US$ 24,032 million to US$ 147,086 million. Though total capital flows in emerging and developing countries in absolute volume increased

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from US$ 204.9 billion in 1993 to US$ 332.8 billion in 2003, the share of portfolio investment declined from 46.2 per cent to 18.6 per cent in the same period. Developments in Stock Markets: Stock markets, in a globally integrated financial market facilitate risk sharing, improve efficiency in resource allocation, impact savings decisions and provide liquidity, thus, supporting faster economic growth. Globally integrated stock markets facilitate economic growth by improving liquidity in the market, providing support to resource allocation prospects by creating an environment for flow of savings, reducing uncertainty of capital in the market, thereby reducing risks through global diversification. A well-organized and well-governed capital market can provide financial capital to the economy by attracting savings from domestic savers as well as from foreign investors. The size of the global capital market estimated by adding market capitalization (US$ 31,202.3 billion), debt securities (US$ 51,965.1 billion) and bank assets (US$ 40,627.8 billion) totalled to US$ 123,795.2 billion in 2003, which as percentage of GDP was 342.3. The assets of emerging capital market stood at US$ 9,015.3 billion, that is, 7.3 per cent and as percentage of GDP was 232.9 (IMF 2004). Data provided in World Development Indicators, 2004, further showed that market capitalization as percentage of GDP increased from 45 per cent in 1990 to 74.6 per cent in 2002. However, in India the GDP increase was more than double, that is, from 12.2 per cent to 25.7 per cent. However, portfolio investment is more volatile and volatility is often associated with risks and can produce stock market crisis. On the other hand FDI is more stable and can withstand the crisis. Therefore, many countries prefer FDIs than portfolio investment. In India while FDI increased by about 130 times during 1990–91 to 2003–04, portfolio investment increased by about 475 times.

Globalization and Economic Growth We have noted above that there are numerous benefits which can be derived from economic liberalization in general and financial liberalization in particular. Theoretically, expected benefits of liberalization have also been empirically established by researchers. It has been noted that the average per capita income is higher in countries with more open economic policies and better global linkages than in the countries with less openness in the financial sector. Globalization has helped promote convergence of per capita incomes among countries, per capita incomes have grown faster in globalizing developing countries (those lowering trade barriers) than in rich countries—5 per cent versus 2.2 per cent in 1990s. Non-globalizing developing countries have lagged behind (Hausler 2002, p. 8). Rourke and Kevin (2002) has observed that ‘the trend of rising inequality over the past 200 years, primarily between countries, now appears to have been reversed and the experience of the 19th century suggests that increased globalization will accelerate this decline’. Research of Borensztein et al. (1998) shows that FDI contributes more to domestic growth than domestic investment also FDI is more productive than domestic investment. Liberalization of capital markets attracts foreign


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investment which influences the price of equity, thereby reducing the cost of capital. Research of Bekaert and Harvey (2000) indicated that post-liberalized regulatory reforms bring down the cost of capital and also help to increase inflow of capital. Financial liberalization also imparts structural formats of capital markets and improves disclosures, transparency and corporate governance which commonly create growth prospects in a liberalized country. Prasad et al. (2003) has noted that ‘International financial integration can help to promote domestic financial sector development, which in turn can help to moderate macro economic volatility. However, so far these benefits of financial integration appear to have accrued primarily to industrialized countries.’ The main conclusion of Prasad et al. (2003) on financial globalization is: So far it has proved difficult to find robust evidence in support of the proposition that financial integration helps developing countries to improve growth and to reduce macro-economic volatility. Of course, the absence of robust evidence on these dimensions does not necessarily mean that financial globalization has no benefits and carries only great risks. Indeed most countries that have initiated financial integration have continued along this path despite temporary set back. This observation is consistent with the notion that indirect benefits of financial integration which may be difficult to pick up in regression analysis, could be quite important.

Globalization of Indian Economy It has been observed that the current world has absorbed the wave of globalization and countries are increasingly getting integrated with the world market through free trade, removal of domestic restrictions on capital movement and switching over to market determined exchange rates. In 1980s, India initiated a move towards closer integration of Indian economy with the global market by removing many restrictions. However, a more effective process began only in 1991 when the country confronted serious balance of payment (BOP) crisis. Since then a wide range of measures have been introduced which include reforms in trade, industry, financial and public sectors in order to improve efficiency, productivity and international competitiveness of Indian industries with a view to impart dynamism to the overall growth process with emphasis on liberalization, privatization and globalization. According to Das (2003) the basic characteristics of reforms in India are: 1. Gradual, step-by-step and evolutionary approach, not a big bang, shock therapy or revolutionary approach. 2. General political consensus and strong emphasis on ‘human face’. 3. Preference for decentralization and prioritization and sequencing of reforms. 4. No write-off/rescheduling of external debt. 5. Practically no sacrifice made by people.

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According to Dr R N Ghosh, India’s economic reforms since 1990s have involved two basic sets of policy measures. The first set aims to achieve macro economic stabilization by reducing both fiscal (budgetary) and balance of payments (BOP) deficit. The second set plans to alter the production structure by increasing the role of markets in the economy, directly through privatization or by way of reduction in state investment and interventions and directly through domestic deregulation and trade liberalization. To achieve these objectives—India has taken a number of steps, for example, improve revenue collection, tax/GDP ratio and to reduce public expenditure through fiscal consolidation. Abolition of import licensing on most products, rationalization of customs duty, etc. Number of measures were also introduced to increase productivity, expansion and modernization of Indian industry and to encourage FDI and portfolio investment. The major reforms implemented for globalization include: 1. Indian rupee has been made fully convertible on current account and almost fully convertible for foreign residents. 2. Introduction of market determined exchange rate and abolition of licences for foreign trade. 3. Liberal regime for foreign investment and technology transfer. 4. Gradual reduction of customs duties and removal of foreign exchange control. 5. Liberal policy for external commercial borrowing and outward investment. 6. Liberalization of financial and capital markets.

Extent of Globalization in India The reforms introduced since 1991 have brought some fundamental change in the Indian economy. A desired and decided move from post-independence Nehruvian socialism based on the concept of self-sufficiency and import–substitute industrialization to export directed industrial base economy. The other noticeable change is with respect to global integration through a more competitive market. Economic reforms have resulted into more closer economic and market integration of the Indian economy with global market, which can be seen from the following:

GDP Impact of reforms have been noted in the growth rate of GDP. Overall GDP at factor cost improved from 5.6 per cent in 1990–91 to 6.9 per cent in 2004–05 (Table 1.1). Thanks to reforms, India has been able to overcome the Hindu rate of growth (around 4 per cent) and achieved an average growth rate of about 6 per cent during 1990–91 to 2004–05. Growth impulse created by reforms is expected to continue and sustain.


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TABLE 1.1 Extent of Globalization 1990–91 Overall GDP (at factor cost) (%) Export value (US$ million) Import value (US$ million) Trade balance (US$ million) Invisible (net) (US$ million) Current account balances (US$ million) Capital account (US$ million) External assistance US$ (net) Commercial borrowing (net) Foreign investment (net) (US$ million) (a + b) (a) Direct investment (b) Portfolio investment Foreign exchange reserve (US$ million)

5.6 18,477 27,915 –9,438 –243 –9,680 8,402 2,204 2,254 14,445 5,536 8,909 1,278

2004–05 6.9 80,831 118,961 –38,130 31,699 –6,431 32,175 1,922 5,947 11,944 3,037 8,907 –26,159

Source RBI Annual Report 2004–05 and Government of India Economic Survey 2004–05.

Impact of Trade Reforms Successful trade reforms since 1991 reflected in robust growth of exports and significant change in export components reflected heavily in favour of service exports. Trade in goods and services as ratio of GDP increased from 18 per cent in 1990–91 to 48 per cent in 2004–05, as against merchandize trade from 14.6 per cent to 28.8 per cent during the same period. There was an upward shift in trade of goods and services during the post-reform period which in terms of US dollars increased from 7.9 per cent in the first half of the decade of the 1990s to 15.3 per cent during 2000–01 to 2003–04 led by software and other miscellaneous services (Economic Survey 2004–05). The success of trade reforms and degree of global integration through trade may be noted in terms of increase in export and import in value as well as in GDP terms. It can be noted from Table 1.1 that there was manifold increase in Indian exports and imports. While exports in US dollar (million) increased from US$ 18,477 in 1990 to US$ 80,831 in 2004–05. Imports had increased from US$ 27,915 million to US$ 118,961 million during the same period (Table 1.1). India has also achieved higher growth in exports compared to developing countries as a whole as well as the world growth rate in 2004. Growth rate of Indian export in 1995–2001 was 8.5 per cent as against the world growth of 5.5 per cent. However, in 2004 it had gone up to 28.1 per cent as against 21.6 per cent of world growth. Thanks to domestic reforms in diversification, modernization and policy encouragement (Table 1.2). But India still lags behind China, which has witnessed 35.5 per cent growth in exports in 2004. Though India’s share of exports in world trade increased from 0.7 per cent during

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LIFE INSURANCE IN INDIA TABLE 1.2 Exports Growth and Share in World Trade % Growth in Exports

India China Developing countries World

Exports Share in World Trade

1995–2001

2004

2001

2004

8.5 12.4 7.9 5.5

28.1 35.5 27.0 21.6

0.7 4.3 36.8 100

0.8 6.2 38.7 100

Source Economic Survey (2004–05).

1995–2001 to 0.8 per cent in 2004, it was still far behind China which had a world share of 6.2 per cent in exports in 2004 (Table 1.2). Other indicators of global integration also registered sharp improvement, namely exports/GDP ratio increased from 5.8 per cent in 1990–91 to 11.7 per cent in 2004–05 and imports/GDP ratio increased from 8.8 per cent to 17.2 per cent during the same period.

Merchandize Trade The growth and expansion of India’s merchandize trade is an indication of India’s global integration and openness. The ratio of merchandize trade to GDP increased from 14.6 per cent in 1990–91 to 28.8 per cent in 2004–05. Though still marginal, India’s share in world trade went up from 0.52 per cent in 1990 to 0.84 per cent in 2004–05. According to the United Nations Conference on Trade and Development (UNCTAD), India is among the top 10 exporters in 32 commodities out of 70 leading export items from developing economies (Economic Survey 2004–05).

Invisibles During recent years, India has emerged as one of the leading service exporters in the world. According to IMF’s Balance of Payments Statistics Yearbook 2004, India was the 18th largest service exporter of the world in 2003 with expanded market share of 1.3 per cent (as against 0.6 per cent in 1990). During 2004–05 net invisible surplus of India at 4.6 per cent of GDP was able to finance 83 per cent of trade deficit. The structural shift in service exports shows that since 2000–01, software exports made largest single contribution to invisible exports, whose share increased from 39 per cent in 2000–01 to 48.9 per cent in 2003–04 though it declined marginally to 33.7 per cent in 2004–05. It also has been noted that contribution of software in 1990–91 was nil. India has progressively improved its market share in global IT spending from 1.5 per cent in 2000–2001 to 2.2 per cent in 2004–05 (RBI Annual Report 2004–05).


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Current Account Successful trade reforms and robust export growth also reflected in improvement of current account which recorded surplus from 2001–02 to 2003–04, but returned to deficit in 2004–05. This improvement was led by export growth—merchandize and invisible export, particularly due to increase in invisibles receipts and the invisibles/GDP ratio increased from 2.4 per cent in 1990–91 to 11.2 per cent in 2004–05.

Capital Account Capital account of India’s balance of payments (BOP) gained strength due to improvement in foreign investment due to favourable policies followed by the Government of India. While there has been a decline in the external assistance from US$ 2,204 million in 1990 to US$ 1,922 million in 2004–05 the commercial borrowing increased from US$ 2,254 million in 1990 to US$ 5,947 million (Table 1.1). Similarly, the reforms in India attracted substantial flow of foreign investment which stood at US$ 11,944 million in 2004–05, net foreign investment increased from US$ 103 million to US$ 2,554 million during the same period. India has emerged as a favoured destination of portfolio investment due to attractive valuation of Indian stock market. Portfolio investment had increased from US$ 979 million in 2002–03 to 8,909 in 2004–05. Portfolio investment has integrated global sharing and investment market with India. Net foreign investment/GDP ratio which was virtually nil in 1990–91 stood at 2.1 in 2004–05 and foreign investment/export ratio improved from 0.6 per cent to 17.9 per cent in 2004–05 . It has been noted by Dr Virmani that FDI contributed to 1 per cent of India’s gross fixed capital in 1993, which went up to 3.2 per cent in 2001 (Virmani 2004). The achievement of India as indicated above since 1991 is the result of structural adjustment programme and reforms in the domestic sector. Liberalization in external sector has not only increased efficiency in the domestic sector but removed the near isolation of Indian economy in the global market and closely integrated it with global economy.

Contractual Savings, Institutional Investors and Life Insurance Deregulation and liberalization of national economy had significant impact on institutional investors such as life insurance, pension funds and investment institutions (like mutual funds). These institutions, particularly the life insurance and pension funds provide boost to contractual savings and also support growth and stability to the country’s capital markets. Liberalization of financial markets provides opportunity and incentives to foreign and domestic institutions to operate in country’s savings and capital markets. They not only support growth in domestic savings but also directly assist asset allocation and economic growth.

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Economic growth among others requires an efficient financial system for intermediation and asset reallocation. Institutional investors impart the required efficiency. Vittas (1998) emphasized that institutional investors played a key role in improving clearing and settlement system, they are large and reliable sources of resources and they efficiently allocate resources across regions and industries, efficient in managing risks and uncertainties, operate with lowcost information system and call economy. They also have an advantage of efficiently dealing with corporate management.

Contractual Savings Among institutional investors, contractual savings institution by virtue of differentiated function play a crucial role, particularly in a less-developed country which needs to enhance the growth rate in domestic savings and have an efficient financial sector. In contrast to investment institutions such as mutual funds; contractual saving institutions like life insurance and pension funds stimulate long-term savings that are required for financial and economic development. Since the savings mobilized by these institutions are long-term in nature, they are invested in long-term bonds mainly issued by the government of finance development projects mainly issued by the government. According to Catalan et al. (2000) a developed contractual savings sector contributes to build a more resilient economy—one that would be less vulnerable to interest rates and demand stocks—while creating a more stable business environment—including macro economic stability. The result will be a lower country risk premium hence lower equilibrium interest rates, which increase investment and ultimately accelerate growth.

Life Insurance One of the important contractual savings institutions is life insurance which provides multidimensional services having a significant impact on economic growth. According to Skipper (1998) insurance companies promote financial stability, indemnify individual risks, act as viable substitute for government social security system, and facilitate risk transfer and faster efficient capital allocation. The role of life insurance as contractual savings institutions is often examined in the light of various services it provides in different financial structures. According to Dolar and Meh (2002) there are four competing views of financial structure. The intermediary-based view emphasizes the importance of resource mobilization, identifying good projects, monitoring managers and managing risks, while stressing upon deficiencies of the market-based system. Through these functions, the financial system can increase the quantum and quality of investment within the economy. The market-based view stresses upon the role of markets in diversifying and managing risks while arguing the financial intermediaries can extract information rents from firms.


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Financial services view suggests that financial intermediaries may provide complimentary services to those provided by markets. The emphasis in this system is more on the quality and the level of financial services rather than on the channels through which it is provided. The law and finance view emphasizes on the legal environment and enforcement of contracts. In a developed financial system, the financial market and financial intermediaries efficiently reallocate funds from savers to the users of productive investment. However, the efficiency depends on performing the following in a cost-effective manner: 1. 2. 3. 4.

Mobilization of savings from a cross-section of investors. Supporting healthy growth of domestic capital market. Managing risks. Acquisition of information.

Mobilization of Savings Life insurance is one of the most important financial intermediary in any financial system and contributes to the development of financial markets—savings and capital markets. As an important financial intermediary, insurance industry particularly the life insurance industry assists in accumulation and reallocation of productive capital in the economy. Life insurance companies design financial contracts which can be purchased even by small investors who can invest a small amount periodically, which in turn is invested in capital markets. Life insurance as a financial intermediary boosts savings by helping mobilization of savings at a relatively lower cost from a cross section of people in the economy. It also mitigates moral hazards and adverse selection inducing the less willing savers to save. Contractual nature of savings in life insurance companies promotes the habit of savings and pools a large amount of money in an economy. Hence, life insurance companies not only grow by themselves but also stimulate long-term savings in a country to support economic growth. It has been observed that efficiency in capital accumulation and transfer in the economy depends on the improved efficiency of intermediaries like life insurance. It is evident that insurance savings constitute a relatively high position in household portfolios in many countries. The share of life insurance products in the financial portfolio of households was 29 per cent in UK, 23 per cent in France, 19 per cent in Germany and 18.1 per cent in Japan (Table 1.3). But in India Life Insurance funds accounted only 12.4 per cent of household financial assets in 2004–05 (Reserve Bank of India, Annual Report 2004–05).

Development of Capital Markets Capital markets is the mechanism through which life insurance companies transmit investments, collected as premiums, in the economic system. The investment made by the life insurance companies in the domestic capital markets is quite huge and provides stimulus to the growth

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LIFE INSURANCE IN INDIA TABLE 1.3 Distribution of Household Assets in Financial Instruments in 2000

Deposits and money funds Bonds Equity Equity MFs Bond MFs Balanced MFs Real estate MFs Life insurance—unit linked Life insurance—non-unit linked Pension fund DC Pension fund DB Other

USA (%)

UK (%)

Italy (%)

France (%)

Germany (%)

Japan (%)

15 7 54 9 2 1 0 4 3 6 16 2

20 1 18 4 0.5 0.4 0 12 17 3 20 4

25 19 28 6 6 4 0 2 4 1 0 6

32 3 25 6 1 2 0 5 18 1 0 7

35 10 16 6 2 1 2 0 19 5

53 4 6 1 0 1 0 0.1 18 0 10 4

5

China (%) 69a 4.4 10 – – 4.1b – – 4.2 – – 7.9c

Source Daniele Fano (2005). Notes MFs: Mutual funds; DC: Defined contribution; DB: Defined benefits. For China year 2002: a Deposits; b Housing saving funds; c Cash in hand and other investment.

of the local capital markets. Since life insurance companies invest huge amounts in diversified financial instruments they can absorb higher risks than an ordinary small investor and can provide better rate of return to the investors. However, to make life insurance an important vehicle for savings mobilization and to provide support to the capital market, there is a need to provide flexible regulations for investment of funds by life insurance companies and also the availability of a wide range of financial instruments. Life insurance companies also support the market by absorbing market risks through underwriting new bond and equity issues and thus provide depth to the market. In competitive insurance market, competition among the insurers increases productive efficiency, provides investors with diversified portfolio choice, enhances liquidity and induces better monitoring and corporate governance. Life insurance as a financial intermediary contributes significantly in promoting the capital market. Asset allocation pattern of any life insurance company among the financial instruments provides a significant insight into its support to various segments of market. It can be noted from Table 1.4 that the larger share of assets are invested into fixed income securities like government and corporate bonds while equity investment is relatively low. Traditionally, equity formed a major part of investment in UK while corporate bonds in USA and India—Japan preferred fixed income government bonds and loans. In case of LIC of India, about 60 per cent of assets were invested in central and state government bonds while about 14 per cent of the assets were invested in equity in 2004–05. However, this 14 per cent amounts to Rs 484,930 million as against total investment of Rs 3,431,290 million. Further, capital market investment by insurance companies not only


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TABLE 1.4 Asset Allocation of Life Insurance Companies—A Global Scenario USA Instruments Equity Bonds of which Government bonds Corporate bonds Foreign security Loans Real estates Mortgages Other Memorandum items Total assets in billion US dollars Life insurance Non-life insurance

1994–97 3.9 70.7 18.8 41.5 – – – 12.8 –

– –

Japan

UK

Euro Areas

2002 1994–97

2000 1997

2001

1999

2001

3.6 79.7 17.7 60.8 – – – 11.2 –

16.1 22.2 15.2 3.6 6.6 40.0 – – 6.1

8.8 40.3 27.3 606 14.5 32.2 – – 4.2

55.8 27.9 18.6 9.3 – – – – 16.3

43.4 38.9 17.7 21.2 – – – – 17.7

25.2 39.1 – – – 21.3 4.4

25.9 38.8 – – – 19.6 4.2

9.9

11.5

2,172 758

1,249 312

1,213 22.7

430 –

565 –

– – 2,081 2,479

Source IMF (2004).

provides depth to the market but also supports the transparency, disclosure and corporate governance of the firms and institutions in which insurance companies invest their funds. Insurance companies thus assist wealth distribution through institutionalization of capital market.

Risk Transfer Insurance services create productive impact in the economy by assisting to transfer risk from risk averse individuals and induce savings. They also facilitate risk sharing by reducing transaction cost and diversification of investment portfolios. Liquidity risk is also managed by a financial intermediary more efficiently than an individual, making savings and investment a more attractive proposition.

Information Acquisition In a complex and competitive financial market collecting accurate information about the firms, its management and future growth potential is a matter of cost, processing skill and time. Often it not only becomes difficult but also impossible for an individual investor to carry-out all these activities, but a financial intermediary like a life insurance company can perform this function efficiently and in a cost-effective manner. Financial intermediaries like life insurance companies can gather cost-effective information, process it using their highly skilled managers

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and well-established assessment mechanism to scrutinize and select the best available investment opportunities. They can also monitor the performance of the company and growth of return on their investments. This not only enhances investment efficiency but also improves efficiency in capital allocation in the economy and boosts economic growth.

Emerging Trend in Institutional Investment Growth in assets under management of institutional investors is an indicator of their contribution to financial markets and asset creation. According to Global Financial Stability Report (IMF 2004) total assets managed by the institutional investors (insurance companies, pension, investment and institutional investors) in mature economies increased from US$ 18,248 billion in 1993 to US$ 34,723 billion in 2001, while the assets of insurance companies grew from US$ 6,991 billion to US$ 11,146 billion. The share of insurance in total assets declined from 38 per cent to 32 per cent. In terms of GDP, assets of institutional investors increased from 94.7 per cent in 1993 to 147.2 per cent in 2001 as against increase of bank assets from 23.3 per cent to 26.2 per cent during the same period. This shows that relative importance of banking in financial market declined significantly leaving the marketplace open for institutional investors (Table 1.5). Sharp increase in assets of non-bank institutional investors during 1990s was supported by contractual savings institutions (like life insurance and pension funds) and investment institutions like mutual funds, which increased by 90 per cent during 1993–2001. Further, institutionalization of capital market was strongly supported by contractual savings. The assets of life insurance in terms of GDP increased from 36.3 per cent to 47.3 per cent, of pension funds from 27.7 per cent to 40.3 per cent and of investment companies from 21 per cent to 47 per cent from 1993 to 2001 (Table 1.5). However, the growth of institutional assets in emerging markets could not keep pace with the growth of institutional assets in mature market. As a result the share of emerging markets in total institutional assets declined from 15.5 per cent to 14.4 per cent during the same period. Further, the stock market capital of institutional investors assets also declined from 11.3 per cent to 9 per cent during the said period. Slow growth of institutional assets in emerging market draws attention to inadequate flow of funds to these economies and weak domestic institutional structure and need of reforms in financial markets. Institutional investors in emerging markets are unable to come up to their counterparts in mature market primarily because of low level of insurance penetration, unfunded pension benefit system and lack of lustre to the growth of mutual funds due to underdevelopment of stock markets. However, the economic and market environments are changing in emerging economies. Insurance penetration and density has been increasing rapidly. Reforms in social security system, introduction of contributory pension system (particularly in Latin America and Central Europe) and growth of stock markets boosted up mutual funds and other investment institutions in the emerging market. These developments have been induced by the ongoing phenomena of globalization and reforms in domestic economies.


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TABLE 1.5 Mature Markets: Assets under Management by Institutional Investors—A Global Scenario

Institutional investors (US$ in billions) Insurance companies (US$ in billions) Pension funds (US$ in billions) Investment companies (US$ in billions) Other institutional investors (US$ in billions) Memorandum items (US$ in billions) Hedge funds Mature market bank assets In percentage of institutional investors asset Mature market bank assets Emerging markets Stock market capitals Bond outstanding In percentage of mature market GDP Institutional investors Insurance companies Pension funds Investment companies Other institutional investors Mature market bank assets Bank asset

1993

1999

18,248 6,991 5,332 4,050 1,876

36,596 11,960 10,337 11,168 3,132

36,233 11,519 10,279 11,293 3,143

2000

34,723 11,146 9,515 11,091 2,971

2001

– 4,491

150 5,699

172 5,917

217 6,192

24.6 15.5 11.3 4.2

15.6 14.5 10.1 4.4

16.3 13.9 9.1 4.8

17.8 14.4 9.0 5.4

94.7 36.3 27.7 21.0 9.7

154.4 50.5 43.6 47.1 13.2

151.4 48.1 43.0 47.2 13.1

147.2 47.3 40.3 47.0 12.6

23.3

24.0

24.7

26.2

Source IMF (2004).

Emerging developments also indicate a distinctly different trend in institutional investment in emerging markets. Pension funds have emerged as stronger institutional investors in Latin America and Central Europe due to reforms in social security system whereas in Asia pension funds remained secondary to life insurance companies. Global Stability Report 2004 also noted this and mentioned that ‘In contrast to Latin America and emerging Europe, local life insurance companies are heading the institutional investors in emerging Asia. This is related in part to the Asian tradition of using insurance products as savings products’. It is amply indicated in assets of life insurance companies (in terms of GDP), for example, the assets of life insurance companies in Singapore, Korea, Malaysia was 37.6 per cent, 25.8 per cent and 21 per cent, respectively, while that in Chile, Argentina, Brazil was 19.9 per cent, 4.6 per cent and 2.8 per cent, respectively, in the year 2002. However, highest assets of life insurance among emerging market was in South Africa 60.7 per cent in the same year (Table 1.6). Though, institutionalization of capital market provides the much needed capital requirements for growth as a resource allocator it often produces many unmanageable shocks to the economy. Institutional investors are often sources of stock market volubility, financial crisis and

20

LIFE INSURANCE IN INDIA TABLE 1.6 Assets under Management of Insurance Companies in Emerging Markets (in terms of GDP)

Country Korea Malaysia Philippines Singapore Thailand Hungary Poland Turkey South Africa Argentina Brazil Chile Colombia Mexico Peru India

2000 (%)

2002 (%)

30.2 14.9 3.8 24.4 6.6 4.2 4.3 1.5 – 2.7 2.6 18.6 0.8 1.3 Na 4.52

25.8 21.0 4.0 37.6 8.3 3.8 6.0 Na 60.7 4.6 2.8 19.9 1.0 1.7 2.2 4.73∗

Source IMF (2004). Note ∗Life insurance.

may even create corporate crisis due to funds management activism. To restrain this unwanted development prudent regulatory measures and well-designed corporate governance practices need to be in place.

Globalization and Emerging Trend in Life Insurance Insurance is an integral part of national economy and a strong pillar of financial market. The waves of globalization have also deeply influenced the insurance market worldwide. Financial market globalization has also been strongly supported by globalization of insurance. With increase in trade, direct investment and portfolio investment the demand for insurance services has been ever growing, particularly in the emerging markets. Globalization of insurance market, as part of the overall process of liberalization in emerging and other countries enabled the foreign insurance companies to enter those countries and benefited both. The driving forces of insurance market globalization have been identified as the ‘push factors’ and ‘pull factors’. The push factors are the motives behind the movement of foreign insurance companies to local countries while the ‘pull factors’ are the motives for allowing foreign companies to operate in local market. Important push factors are increasing global trade, growing direct investment, potential future growth in emerging markets, while the important pull factors in emerging markets are requirement of capital, etc.


21

Benefits to Emerging Markets There are several benefits to the countries allowing foreign insurance companies to operate in their countries which can be broadly classified into economy related and insurance marketrelated.

Economy Related Benefits to the Local Country Foreign insurance companies along with local companies add further momentum to mobilization of savings. Institutional net worth in the savings market increases, which also influence the savings behaviour of household and corporate savings. Resources and capital allocation in the domestic market increases due to increased sophistication brought by the foreign insurance companies. It also improves the financial stability in the host country as well as facilitates improvement in production and trade.

Insurance Market-related Benefits Capital structure of the entire insurance industry improves because foreign companies bring fresh capital with them. Market efficiency improves due to information dissemination, global operating knowledge and increased competition. Management efficiency increases because foreign companies bring with them global experience and management innovation. The range of available products increases because foreign companies bring with them a wide range of products and product development expertise. Customer service improves. Increased competition, technology led service and cost competition finally benefits the consumer. Globalization also improves regulatory and governance systems. It also improves market conduct and ethical business standards. The process of insurance globalization is significantly influenced by the GATT/WTO. A major breakthrough was achieved in 1997 with an agreement for liberalization of financial services following which 102 countries committed to remove entry barriers and liberalize their markets. The GATT agreement offers legal security and protection to global insurance players. With the removal of entry barriers in emerging and less-developed countries there has been an increased flow of funds from developed countries to the emerging and less-developed countries. According to Swiss Re (Sigma No. 4/2000) in recent years there has been a strong increase in the demand for insurance in the emerging markets. The average annual growth rate in the emerging markets has since 1990 been twice as high as industrial countries in both life and non-life insurance. There is already an indication of slow growth and saturation of insurance market in industrially developed countries. During 2003, global life business witnessed a decline of 0.8 per cent. However, emerging market life business grew by 6.6 per cent as against –1.7 per cent decline in

22


industrialized countries. In non-life business, while industrialized countries achieved 5.7 per cent growth in real premium income, emerging markets registered 8.5 per cent growth rate in 2003. However, total premium income of emerging market in 2003 was US$ 314,128 million which represented 10.68 per cent of global premium income, whereas share of industrialized countries with US$ 2,626,542 million representing 89.32 per cent of global premium. This is an indication of huge potential emerging market.

Emerging Trend in Global Life Insurance Market One of the major beneficiaries of financial market liberalization and economic reforms is the global life insurance industry. The decade of 1990s saw an upswing in the growth of life insurance industry as well as shift of major activities of life insurance industry from industrialized countries to the emerging markets. Average growth in world and regional premium income to a great extent followed the trend in GDP growth rate except in Asia. While the average GDP growth rate (during 2000–04) of the world was 2.7 per cent the average growth in life insurance premium was 2.3 per cent. Similar trend was noticed in North America where 2.8 per cent GDP growth was followed by 2.4 per cent growth in life premium. It was reversed in Europe where average growth in the life premium as 2.6 per cent was higher than average growth in GDP at 2.1 per cent. However, Asia was lagging with much low growth in the premium 2.5 per cent as against average GDP growth rate of 3.3 per cent during 2000–04 (Table 1.7).

Top 40 Life Insurance Companies in the World Top 40 life insurance companies collected US$ 1,032,905 million with global market share of 55.9 per cent. Top in terms of premium was AIG (premium US$ 66,837 million) having market

TABLE 1.7 Global and Regional Growth in GDP and Life Insurance Premium 2000

2001

Country

GDP

Pre

North America Latin America Europe Asia Africa Oceania World

4.2 4.0 3.6 3.6 3.8 3.8 3.8

7.8 11.0 17.0 3.0 8.9 1.9 9.1

GDP 0.3 0.3 1.5 1.2 3.0 2.6 1.0

2002

2003

Pre

GDP

Pre

–1.5 5.9 –6.6 2.6 4.0 –4.5 –1.8

2.5 –1.0 1.4 2.6 2.9 3.7 2.0

6.3 4.8 0.8 2.1 7.0 –9.3 3.0

GDP 3.0 1.2 1.3 4.2 3.3 2.9 2.7

Source Swiss Re Sigma, (various issues). 6/2001, 6/2002, 6/2003, 6/2004, 6/2005. Note Pre: Premium.

2004 Pre GDP

–2.2 –0.4 –2.1 2.7 –14.8 –8.4 –0.8

4.3 5.4 2.7 5.0 5.3 3.3 4.0

Pre 0.7 17.1 3.8 2.0 –4.7 6.2 2.3


23

share of 3.6 per cent. It may be noted here that Life Insurance Corporation of India (LIC) is the 30th largest company of the world with premium income of US$ 13,746 million and market share of 0.7 per cent. Twelve global companies (having substantial operation outside domestic markets) had 28.2 per cent global market share.

Regional Variation in Market Share In spite of slow growth in premium volume, industrialized countries still dominate the world life insurance market, though its market share has declined from 91 per cent in 2000 to 87.71 per cent in 2004. Interestingly the market share of industrialized America and Europe has increased as against decline in market share of Asia, Africa and Oceania. Market share of America increased from 27.8 per cent in 1997 to 29.45 per cent in 2004 as against that of Europe from 30.39 per cent to 37.57 per cent but in case of Asia it declined significantly from 38.43 per cent to 30.09 per cent. The sharp decline in the Asian market share was led by Japan, the largest life insurance market in Asia, which is undergoing slow growth and financial market downslide. Even South and East Asian countries witnessed slow growth and decline in market share (Table 1.8).

Regional Variation in Life Insurance Density Level of development and depth of insurance industry in a country and continent is often judged in terms of insurance density, that is, per capita spending of insurance and insurance penetration. Insurance premium in terms of GDP and level of penetration and density when viewed in terms of overall GDP also provides an indication of existing and future insurance market potential. Over the years life insurance spending has increased in continents like Latin America, Asia and Africa but still remain much lower than North America, Europe and Oceania. Per capita insurance spending (density) in Asia and Africa still remain low at US$ 147.2 and US$ 30.3 (in 2004) as against in America, Europe and Oceania which where it was US$ 628.4, US$ 848.1 and US$ 851, respectively (in 2004), while global spending has increased from US$ 246.4 in 1997 to US$ 288.7 in 2004. Low level of insurance density in the emerging market countries was mostly due to low per capita and disposable income and pattern of income distribution. However, it shows that with growth momentum being continued in emerging market there is enough scope for expansion of life insurance business.

Regional Variation in Life Insurance Penetration Life insurance penetration, which is premium as percentage of GDP is an important indicator to measure the level of maturity of life insurance market in an economy. During the year 1997–2004, life insurance penetration in the world increased from 4.26 per cent to 4.55 per cent.

29.45 28.36 1.09 37.57 36.96 0.61 30.09 20.93 8.95 0.22 1.43 1.46 100.00 87.71 12.29 0.92

2004 3.19 3.80 0.49 3.85 4.28 0.39 6.27 9.42 2.89 0.55 4.13 4.99 4.26 Na Na 0.50

1997 3.81 4.40 0.69 5.34 5.71 0.94 5.96 8.70 3.01 0.58 3.03 5.43 4.88 5.70 1.94 1.77

2000 3.70 4.12 1.01 4.68 5.10 0.80 5.61 8.26 3.77 0.47 3.41 3.75 4.55 5.14 2.41 2.53

2004

Penetration (%) 461 1,114 21.7 482.5 943.9 10.9 153.0 3,092.0 28.7 27.8 52.7 1,022.6 246.4 Na Na 5.4

1997

Source Swiss Re Sigma, (various issues). 3/1999, 6/2001, 6/2004. Note Market share in per cent; Penetration in premium in per cent of GDP; Density premium per capita.

2000 31.51 30.61 0.90 32.86 32.43 0.43 32.84 26.39 6.21 0.24 1.23 1.57 100.00 91.00 9.00 0.50

1997

Region

America 27.8 North America 26.9 Latin America 0.82 Europe 30.39 Western 30.05 Central/Eastern 0.34 38.43 Asia 31.0 Japan 6.66 South and East Asia 0.27 Middle/East Europe Africa 1.53 Oceania 1.85 World 100.00 Industrialized countries Na Emerging countries Na India 0.42

Market Share (%)

TABLE 1.8 Regional Variation in Market Share, Penetration and Density

586.1 1,525.5 26.6 445.2 1,059.0 10.3 138.8 3,165.1 29.5 13.3 23.5 806.2 239.9 1,497.2 25.3 7.6

2000

Density (US$) 2004 628.4 1,617.2 37.2 848.1 1,430.6 33.7 147.2 3,044.0 49.2 13.8 30.3 851.0 288.7 1,691.1 42.2 15.7

24 LIFE INSURANCE IN INDIA


25

The emerging markets did improve the level of penetration from 1.94 per cent in 2000 to 2.41 per cent in 2004, as against decline of the same from 5.70 per cent to 5.14 per cent in the industrialized countries during the same period, which happened basically due to reforms in insurance sector in emerging markets followed by global movement of insurance industry. An indication of major developments in global life insurance market has been given through changing growth rates, market share penetration and density. However, we may look into some further developments during the period 1997–2004, which produced the above results in the global life insurance market.

India in the Emerging Market Emerging market economies continue to exhibit a positive trend in growth rates in GDP and gradually open up through deregulation in financial and insurance markets. New technology, new products, new distribution system, and improved supervision and regulatory system helped to improve the performance of the life insurance sector in emerging economies. Reforms in the pension and social security system have further supported the growth of life insurance industry in emerging economies—and jointly the emerging economies controlled about 12.3 per cent of global life insurance market. This is going to improve in future as noted by Swiss Re (Sigma No. 5/2005) ‘life insurance expected to grow by 8 per cent between 2005 and 2010 (in emerging markets)’. Though 32 countries are counted in the emerging market, only 10 countries account for 87.3 per cent of premium of total emerging market premium. The top five countries (in 2004) were South Korea (21.7 per cent), China (15.7 per cent), Taiwan (15.1 per cent), South Africa (10.8 per cent) and India (7.5 per cent). Annualized changes in growth in life premium during 1999–2004, for South Korea, China, Taiwan, South Africa and India was –0.3 per cent, 29.4 per cent, 19.6 per cent, 2.4 per cent and 17.7 per cent, respectively. Comparing to the growth rates of top five markets, smaller markets witnessed better growth, for example, Vietnam (76.9 per cent), Saudi Arabia (45.3 per cent), Hong Kong (22 per cent) and Kuwait (24.9 per cent) witnessing continued upsurge in growth rate.

Market Reforms and Growth Rates Growth of emerging markets has been strongly supported by market reforms and dismantling or uniting the entry barriers. For example, countries such as South Korea, Taiwan, Singapore, Philippines, Brazil and Argentina have removed all entry barriers, while in some countries foreign ownership was allowed to a large extent, for example, Indonesia (80 per cent), Vietnam (70 per cent), Malaysia (51 per cent), while in India it is restricted to 26 per cent (Table 1.9).

Latin America

Asia

3 0 0 0 0 1

Chile Argentina Venezuela Colombia

0 10 0 44

Thailand Indonesia Philippines Vietnam

Brazil Mexico

0 0 0

11 92

Taiwan India

Hong Kong Singapore Malaysia

23 57

South Korea China

Life

0 0 0 12

1 0

16 10 0 94

0 0 0

0 86

4 72

Non-life

Market Share of State-owned Insurers (>50 per cent State-owned) (%)

62 53 39 38

32 75

41 48 61 56

87 58 71

33 0

10 2

Life

63 35 50 46

43 58

7 25 29 6

74 53 25

12 0

1 1

Non-life

Market Share of Foreign-owned Insurers (>50 percent Foreignowned) (%)

None No branch offices allowed; 100 per cent foreign ownership allowed for North American Free Trade Agreement (NAFTA) members (limited to 49 per cent for non-NAFTA members) No branch offices allowed None No branch offices allowed No branch offices allowed

None Only joint venture with a 26 per cent foreign participation capital is allowed None None Existing foreign investors may hold 51 per cent, new entries by foreign shareholders into local incorporated companies are limited to 30 per cent Foreign ownership limited to a maximum of 25 per cent Foreign ownership limited to a maximum of 80 per cent None Foreign ownership is limited to a maximum of 70 per cent

None Joint ventures required for entry of foreign life insurers; no restrictions for non-life insurers

Entry Barriers for Foreign Insurers

TABLE 1.9 State and Foreign Ownership, Tariffs and Entry Barriers, 2003 26 LIFE INSURANCE IN INDIA

Lebanon Kuwait

Turkey Iran United Arab Emirates (UAE) Saudi Arabia

Egypt

0 0

0 100 0

69

0 0

64 14

Na

> 4,394,090 Na

6,518,400 (–6.9) 1,391,530

591,870

19,874,560

20,466,430 (20.6) 19,874,560

2004–05P (8)

(Rs in million)

(Table 2.4 Continued)

3,720,520 (28.5) 611,260 (36.0) 109,730

609,420 4,331,780 Na

7,003,400 (21.2) 1,952,470

531,270

14,016,820 16,434,470

–

14,508,540 16,965,740 (14.3) (16.9) 14,016,820 16,434,470

2002–03 (6)

TABLE 2.4 Financial Assets of Banks and Financial Institutions (as on 31 March)

Reforms and Emerging Economic and Financial Environment in India 41

1999–2000 (3)

64.5 35.5

63.0 37.0

3,607,610 14,11,2470 (15.1)

1990–91 (2)

2001–02 (5)

64.0 36.0

69.0 31.0

16,40,0170 18,382,870 (16.2) (12.1)

2000–01 (4)

2003–04 (7)

71.5 28.5

70.8 29.2

20,287,310 23,969,140 (10.4) (18d)

2002–03 (6)

75.8 24.2

26,984,830 (12.6)

2004–05P (8)

Source Reserve Bank of India, 2005b. Notes P: Provisional. >> : Figures repeated. ∗All Scheduled Commercial Banks. As per returns under Section 42 of the RBI Act, 1934 and since 1991 relate to the reporting Friday of March, except the ICICI Bank Ltd. for which the data relate to end of March 2002. ∗∗Non-scheduled Commercial Banks. As per returns under Section 27 of the Banking Regulation Act 1949. Data relate to the last Friday of March. + The data since 1990 are in respect of last reporting Friday of March. ++ Figures pertain to the accounting year of the respective financial institution. # Term-lending institutions include IDBI, NABARD, ICICI, Industrial Finance Corporation of India (IFCI), EXIM Bank, Industrial Investment Bank of India (IIBI), National Housing Bank (NHB) and Infrastructure Development Finance Company (IDFC). Data exclude ICICI from 2001–02 as it was merged with ICICI Bank Ltd. since May 2002 and IDBI from 2004–2005 which was converted into a bank since October 2004. State level institutions include SFCs and SIDCs. @@ Investment institutions include UTI (till 2002 since its conversion into a mutual fund), LIC and GIC and its former subsidiaries. ## Other institutions include Deposit Insurance and Credit Guarantee Corporation (DICGC) and Export Credit Guarantee Corporation (ECGC). Figures in parentheses indicate percentage variation over the previous year. Data of financial assets of banks include: (i) Cash in hand and balances with the Reserve Bank. (ii) Asset with the banking system (iii) Investments (iv) Bank credit (total loans, cash credits, overdrafts, bills purchased and discounted) and (v) Dues from banks.

Percentage share: (a) I in III (b) II in III

Aggregate (I+II)

Banks/FIs (1)




43

by 5.1 times from Rs 1,279,750 million to Rs 6,518,400 million. Therefore, asset growth in banks was 8.8 times higher than assets growth of financial institutions. However, assets growth of investment institutions, including UTI, LIC, GIC and its subsidiaries increased by 7.5 times during 1990–91 to 2004–05. (Table 2.4) While Year-On-Year (YOY) growth rates of bank assets showed an upward increase from 16.7 per cent in 1999–2000 to 20.6 per cent in 2004–05, it was the same for financial institutes. However, assets of Financial Institutions declined from 12.5 per cent in 1999–2000 to –6.9 per cent in 2004–05. Post-reform growth in bank assets and decline in the assets growth of financial institutions was caused by the expansion of banking and decline in activities of All India Development Financial Institutions. Among the financial institutions, the investment institutions namely LIC, GIC and UTI together held 51 per cent of total assets of all financial institutions. Growth rate analysis for financial assets of financial institutions indicate that during the year of reforms, that is, from 1991 to 2000, the assets of all financial institutions and banks increased by 29 per cent on annualized basis. The rate of growth for bank assets increased at a lower rate of 28 per cent than the financial institutions, which registered an annual growth rate of 30.4 per cent. Among the financial institutions, the all India investment institutions registered a faster growth rate of 40 per cent. This was due to the diversification of activities of these institutions, increased focus on stock market investing and the change in government policy of controlling investment activities of such institutions. In the post-reformed period Department of Financial Institutions (DFI) such as IDBI, ICICI focussed more on the banking activities than on their traditional role as term-lending institutions. Industries on the other hand preferred to raise funds for capital by reducing their dependence on the term-lending institutions. Added to these were the emerging growth emphasis on financing development, which replaced the model of bank finance led growth by the model of capital market led growth in India like many market economies abroad.

Emerging Savings Market in India Financial liberalization among others intended to increase domestic savings and improve mobilization and in that process, contractual savings institutions like insurance institutions and pension funds are expected to play a significant role. Increase in savings is expected to increase due to income growth of households and corporates caused by higher growth rates of economy in a more liberalized environment. This increase in savings is expected to channelize into production systems and capital market via contractual savings institutions like insurance and pension funds. Liberalization of financial markets provides these institutions with the opportunity to compete, expand the market and scope to improve mobilization. However, liberalization may not necessarily boost up saving since a liberalized market offers more opportunities to increase consumption, which may exert contractionary impact on savings growth. Therefore, the impact of liberalization will depend on the strength of these two forces, particularly on the savings mobilization strategy and efficiency of the institutions. Quantum of

44


savings in the economy will also be influenced by the policy of taxation, availability of social security and other incentives or disincentives introduced by the state. Economic reforms, financial and insurance market reforms therefore exert a variety of influence on HDS in general and life insurance in particular. Ranade and Ahuja (2001) observed that during the course of insurance and overall financial sector liberalization as real rates of interest rise, typically substitution effect is weaker than the opposing income effect which tends to reduce savings. In the context of insurance reforms as the precautionary motive is diminished due to availability of greater insurance options this avenue also works towards reducing savings. However, India seems to be an exception to this contention and there was no perceptible decline in domestic and HDS in India during the post-liberalized era. In fact the rates of savings remained steady and improved further with the opening up of Indian insurance sector in 2000–01. Domestic saving which oscillated around 23 per cent in terms of GDP, reached its peak at 29.1 per cent in 2004–05.

Gross Domestic Savings (GDS) According to the RBI ‘the Indian savings experience during the period 1970–71 to 1998–99 was marked by a simultaneous secular increase in the rate of GDS (GDS as percentage of GDP at current market prices)’ (RBI, Report on Currency and Finance 1999–2000). During the 1990s household financial savings emerged as the single most important contributor to GDS by contributing over 70 per cent. India has maintained more than 23 per cent growth in average GDS (as percentage of GDP) during 1990s as against 20 per cent in 1980s. Since 2000–01 GDS in India increased steadily from 23.5 per cent in 2000–01 to 29.1 per cent in 2004–05.

HDS One of the most significant development in Indian savings economy in 1990s was the continued increase in financial savings and gradual decline in physical savings of the household sector. TABLE 2.5 Trend in Domestic Savings in India

GDS (a) Public (b) Private (i) Household Financial Physical (ii) Private corporate

1990– 91

1999– 2000

2000– 01

2001– 02

2002– 03

2003– 04

2004– 05

23.1 1.1 22.70 19.3 8.7 10.6 2.7

24.2 –1.0 25.2 20.9 10.6 10.3 4.4

23.5 –2.3 25.8 21.6 10.4 11.3 4.1

23.4 –2.7 26.2 22.6 11.2 11.4 3.6

26.5 –0.7 27.2 23.1 10.3 12.7 4.1

28.9 1.0 27.9 23.5 11.5 12.0 4.4

29.1 2.2 26.8 22.0 10.3 11.7 4.8

Source Reserve Bank of India (2005–06).


45

The share of household sector is the most important component in India’s domestic savings. The share of HDS (as percentage of GDP) in GDS has also gone up substantially from 15.2 per cent in 1980s to 18.3 per cent in 1990s. The share of household savings in GDS increased from 19.3 per cent in 1990–91 to 23.5 in 2003–04 but declined to 22 per cent in 2004–05.

Corporate Sector Savings The 1990s decade was however marked by the gradual increase in share of private corporate sector savings in GDS which went up from 2.7 per cent in 1990–91 to 4.8 per cent in 2004–05. On the contrary, share of public sector savings, which was 1.1 per cent in 1990–91 witnessed continuous decline from –1 per cent in 1999–2000 to –0.7 per cent in 2002–03, but subsequently showed an improvement from 1 per cent in negatives during 1999–2000 to 2002–03 but the share of corporate savings was 4.8 per cent in 2003–04 however this improved to 2.2 per cent in 2004–05.

Savings in Financial Assets The share of financial assets in private savings used to be lower than that of physical savings but the gap between them increased since 2002–03 (Table 2.5). The share of financial assets in HDS in 1999–2000 was 10.6 per cent as against 10.3 per cent, the share of physical assets. Although, in the subsequent years physical assets continued to be higher than financial assets household sector.

Contractual Savings Contractual savings such as life insurance, pension funds along with banks and mutual funds along with banks play an important role in household savings market as fund mobilizer and resource allocators. Deepening of market also supports growth of institutional investors and the same has been noted in India too. Analysis of instrument wise distribution of Household Savings in Financial Assets (HSFA) indicate a steady increase in the share of contractual savings like insurance, pension and PF. The share of contractual savings in total household financial savings declined from 34.6 per cent in 1980–81 to 33.2 per cent in 1990–91 but increased steadily to 37.5 per cent in 1998–99. Non-contractual savings on the other hand declined from 66.8 per cent in 1990–91 to 62.5 per cent in 1998–99. However, since 2001–02 there has been a sharp decline from 31.1 per cent to 26.4 per cent in 2003–04.

Institutional Share in Household Financial Assets Since 1991, several reforms have been undertaken during 1990s and the Indian capital market has witnessed a significant structural change. However, these reforms had very little impact

46


on the savings preference of the household sector. The share of capital market instruments like shares and debentures in HDS has witnessed a significant decline during the post-reform period. These instruments together accounted for 14.3 per cent of total HDS in 1990–91, it went up substantially to 23.3 per cent in 1991–92, but declined sharply during the subsequent period and touched to 2.5 per cent in 1998–99. Similarly, the share of units of UTI and mutual funds in household financial savings after witnessing an increase in 1991–92 declined sharply. The share of mutual funds including UTI, was 9.1 per cent in 1990–91, it went up to 16.4 per cent in 1991–92, only to decline subsequently and to reach to 1 per cent in 1998–99 and further to—0.7 per cent in 2003–04. Traditional investments such as bank deposit, life insurance, PF and Public Provident Fund (PPF) continued to enjoy the support of investors. Data in (Table 2.6), indicates that the share of bank deposit in household financial savings went up from 33.3 per cent in 1990–91 to 41.8 per cent in 1998–99, while the share of PPF and PF went up from 18.9 per cent to 22.7 per cent and that of insurance funds went up from 9.5 per cent to 10.5 per cent during the same period. By the end of March 2004, the share of banks, life insurance, PF and PPF was 39.4 per cent, 13.2 per cent, respectively. Interest rates have an important influence on savings and impact the FOFs from household sector to other sectors as well as to various instruments of investment. While low rate of interest improves the competitive capacity of domestic industries in international market it may also discourage domestic savings. Indian industry, vociferously demanded reduction of interest rates and it became one of the important objectives of financial sector reforms in India and there has been a substantial decline in real rate of interest. One significant point to be noted here is that inspite of decline in real rate of return from bank deposits and other contractual savings, the preference of investors remained mostly unaltered. The decade of 1990s is marked by financial sector reforms and all efforts have been made to open up the capital markets and to promote a capital market-based economy. However, they have failed to induce confidence in the household sector and to attract HDS to capital markets. This is probably due to the fact that reforms could not create an environment of fundamental based market structure hence, market imperfection continued and volatility persisted. Moreover, transition period was also marked by lack of sequencing of reforms as well as too many reforms within a very short period, without having a sufficient infrastructure.

Emerging Trend in Capital Market Market Structure Indian capital market has undergone radical transformation since 1991 due to the reforms introduced in economy and particularly in the financial sector. Macro economic reforms have transformed the economy from agriculture dependent to service dependent, altered the composition of HDS in favour of financial assets and also impacted the structure of interest rates, savings and FOFs. Economic reforms also brought down overall inflation rate, imparted stability in the rate of growth, and provided freedom to private initiatives and private investment. All

0.0 0.1 (0.0) 0.0 –2.2 0.0 1.2 20.2 (2.8) 4.7 15.57 13.5 (1.9) 12.8 0.3 0.4

0.0 1.1 (0.2) 1.4 –0.0 –0.7 0.0 0.4 24.0 (3.3) 5.0 19.0 13.0 (1.8) 12.4 0.3 0.4 13.2 1.8

6. Provident and pension fund #

Source Reserve Bank of India, Annual Reports (various issues). Notes Figures in bracket indicate household financial savings in terms of GDP. # Preliminary; P: Provisional.

14.1 (2.0)

100 (14.0) 10.5 1.5 41.6 5.8 36.7 0.9 4.0

100 (13.7) 9.2 1.3 39.4 (5.4) 37.1 0.4 2.0

Financial saving(gross) # 1. Currency # 2. Deposits # (i) With banks (ii) With non-banking companies (iii) With co-operative banks and societies (iv) Trade debt (net) 3. Shares and debentures # (i) Private corporate business (PCB) (ii) Co-operative banks and societies (iii) Units of UTI (iv) Bonds of public sector undertakings (PSUs) (v) Mutual funds (other than UTI) 4. Claims on government # (i) Investment in government securities (ii) Investment in small savings, etc. 5. Insurance funds # (i) Life insurance funds (ii) Postal insurance (iii) State insurance

2003–04P

2004–05

Item

15.0 2.0

14.9 16.5 (2.1) 15.5 (0.3) 0.4

1.3 17.4 (2.3) 2.5

–0.1 1.7 (0.2) 0.8 0.0 –0.5 0.1

100 (13.1) 8.95 (1.2) 40.9 (5.4) 35.56 2.7 2.0

2002–03P

16.1 2.0

12.1 14.2 1.8 13.5 0.3 0.4

1.8 17.9 2.3 5.8

–2.1 2.7 0.3 1.5 0.1 –0.6 0.0

100 12.7 9.7 1.2 39.4 5.0 35.3 2.6 3.6

2001–02P

TABLE 2.6 Distribution of Financial Saving (Gross) of the Household Sector in India

19.3 2.3

14.0 13.6 1.6 12.9 0.2 0.5

1.3 15.7 1.9 1.7

0.1 4.1 0.5 3.1 0.0 –0.4 0.1

100 11.9 6.3 0.7 41.0 4.9 32.5 2.9 5.6

2000–01

22.8 2.8

11.3 12.1 1.5 11.2 0.3 0.6

3.4 12.3 1.5 0.9

–0.4 7.7 0.9 3.4 0.0 0.8 0.1

100 12.2 8.8 1.1 36.3 4.4 30.8 1.7 4.3

1999–2000


(3) 67 378 894 870 1,019 960 1,423 1,512 1,326 1,580 1,839 1,286 2,218 6,035 11,654 11,547 13,198 25,980 6,733 7,670 3,981 7,131 7,470 5,299 764

(4) 207 915 1,037 1,235 1,376 1,556 1,779 2,159 2,589 3,423 4,415 5,599 7,003 7,114 9,548 11,370 13,894 16,121 19,410 23,428 28,644 33,861 41,236 52,126 62,206

(5) 490 2,122 2,480 2,865 3,052 3,759 4,188 5,055 6,509 7,552 9,508 11,155 12,501 14,814 18,323 21,414 22,343 30,390 32,267 46,408 53,907 48,042 46,611 48,271 54,182

(6) 105 712 1,784 1,243 1,976 3,107 3,413 3,092 3,680 5,478 6,758 7,883 4,845 3,885 6,908 13,186 9,588 11,783 22,162 28,220 28,985 39,007 51,940 62,560 74,001

(7) 68 412 510 646 555 762 1,394 1,768 813 1,136 2,655 4,972 6,800 8,212 10,067 13,473 8,839 6,631 4,464 5,105 16,308 11,148 9,634 7,122 7,554

8 14 31 114 122 222 567 586 943 1,196 1,427 2,179 3,438 9,087 5,612 4,705 3,908 262 3,776 595 1,887 1,811 –934 –1,856 –1,617 –1,856

9

Life Provident Claims on Shares and Non-banking Insurance and Pension Government Debentures Units of Deposits Fund Fund + ++ UTI 50 373 643 429 –164 41 –44 –280 504 359 –763 –453 –414 –1,398 –1,190 –1,148 –252 –708 –770 –6,870 –1,023 183 –6,173 –219 –215

10

Trade Debt (Net)

2,110 12,118 13,621 16,097 18,790 23,549 25,562 31,849 36,106 39,958 48,233 58,908 68,045 80,354 109,618 145,501 124,337 158,519 171,740 207,103 236,351 248,774 289,953 336,609 417,675

11

Changes in Financial Assets (2 to 10)

Source Hand Book of Statistics on the Indian Economy 2004–05. Notes + includes compulsory deposits. ++ includes investment in shares and debentures of credit/non-credit societies, public sector bonds and investment in mutual funds (other than UTI). $: Preliminary estimates. P: Provisional.

355 754 1,625 5,550 965 5,194 2,026 6,661 2,776 7,978 2,938 9,859 2,220 10,603 3,090 14,510 4,815 14,674 4,256 14,747 7,655 13,987 6,251 18,777 8,157 17,848 6,562 29,518 13,367 36,236 15,916 55,835 16,525 39,941 13,643 50,902 12,780 74,099 21,822 79,433 20,845 82,892 15,632 94,703 28,156 112,935 28,447 134,620 42,200 178,839

(2)

(1)

1970–71 1980–81 1981–82 1982–83 1983–84 1984–85 1985–86 1986–87 1987–88 1988–89 1989–90 1990–91 1991–92 1992–93 1993–94 1994–95 1995–96 1996–97 1997–98 1998–99 1999–2000 2000–01 2001–02P 2002–03P 2003–04$

Currency

Year

Bank Deposits

TABLE 2.7 Changes in Financial Assets of the Household Sector (at Current Prices)


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these factors provided momentum to capital market growth. Reforms in Indian capital market have strengthened the regulatory mechanism. Though the overall market control remains with the Ministry of Finance, Government of India, market supervision rests with SEBI. Reforms have reduced the entry barriers and a large number of financial intermediaries have entered the capital market. Financial sector reforms in India were aimed at broadening the market, increasing the depth of liquidity and transparency in the market. According to the Ministry of Finance the overall strategy for broader financial sector reforms, was: to make a wider choice of instruments accessible to the public and producers. This requires a regulatory framework which gives reasonable protection to investors without smothering the market with regulation. It requires breaking up of monopolies and promotion of competition in the provision of service to the people. It requires the development of new markets such as securities, markets for public debt instruments and options, futures and Forward market for financial instruments and commodities’ (Ministry of Finance, 1993).

With these objectives in view, the Government of India took several measures towards institutional reforms, investors protection, transparency in market transactions, increasing the liquidity, innovation of new products and introduction of technology. The government has also introduced many new regulations and reversed old regulations in tune with changing market environment and also put in place a world-class regulation to move quickly towards market economy. With the repeal of Capital Issues (Control) Act 1947 in May 1992 the government control ceased over the pricing of public issues, fixing premium and rates of interest. SEBI Act 1992 entrusted statutory powers to SEBI, for promoting and developing securities market and to protect interest of investors. Enactment of SEBI Act was the first attempt to promote a welldeveloped and well-regulated securities market in India. Securities Contract (Regulation) Act 1956—introduced to integrate and regulate securities market and powers under Securities (Regulation) Act 1953—was delegated to SEBI. A number of steps have been taken to remove the constraints of growth, to make market operation transparent, investor friendly and technologically efficient. Reforms have also been introduced in banking, corporate security and in the government securities market.

Capital Market Regulation Since then SEBI has taken several steps to integrate capital market, to bring investor friendly transparency and issued a number of guidelines which include: SEBI (Merchant Bankers) Regulations 1992, SEBI Guidelines for Disclosure and Investors protection 1992, SEBI (Stock brokers and sub-brokers) Regulation 1992, SEBI (Mutual Funds) Regulation 1993, SEBI

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(Debenture Trustee) Rules and Regulations 1993, SEBI (FIIs) Regulation 1995 and SEBI (Substantial Acquisition of Shares and Take Over)Regulation 1997. Depositories Act 1996 was passed in 1996 to facilitate establishment of National Securities Depositories Ltd (NSDL) and Central Depositories Service Ltd (CDSL), Securities Contract (Regulation) Act 1956 was amended in 1995 to lift the ban on options trading in securities and further in 1999 to introduce derivative trading accounting standard, in order to bring disclosures and accounting standard of listed companies measures were initiated in 1999–2000. During the year 1999–2000, SEBI appointed a committee on corporate governance which has submitted its report. The recommendations have been accepted, SEBI has also appointed a committee of experts to suggest measures to promote and regulate venture capital funds. The recommendations of the committee have been accepted by SEBI. As a result of the reform initiatives, Indian capital market has undergone tremendous transformation. Some such changes have been reflected in the following: Institutionalization of Market

There has been a significant change in market characteristics and Indian market tended towards institutionalization due to the increasing presence of mutual funds, foreign institutional investors and increased market penetration of domestic financial institutions. Free Pricing of Securities

Abolition of Controller of Capital Issue (CCI) has provided freedom to domestic issuers to price their issues independently. They are also allowed to raise capital from the global capital market by issuing Alternative Dispute Resolutions (ADRs) and Global Depository Receipts (GDRs). The entry norms for capital issue and continuing disclosure norms for the issuers were introduced. Flow of Information

Due to the introduction of continuing disclosure norms, increasing presence of FIIs, and investment research; frequency and extent of flow of information has increased which facilitates investors to take informed decisions. Technology-led Transparency and Safety

Due to the introduction of latest technology in stock exchanges, the trading system has changed, locational constraints have been removed, level of transparency has increased and the transaction cost has come down. Level of safety in the secondary market has increased due to shortening of trade cycles, introduction of electronic book entry and dematerialization of scrips. Credit Rating

The number of rating agencies has increased and they are providing important services regarding issue quality, market research, etc., to the investors, enabling them to take data-based informed decision.


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Market Intermediaries

There has been a significant growth as well as qualitative change with respect to market intermediaries, merchant bankers, stock brokers, etc. The number of registered brokers increased from 6,711 (out of which 616 were corporate members) in 1995 to 9,192 (out of which 3,316 were corporate members) in March 2000. SEBI also introduced the capital adequacy and prudential regulations for brokers, sub-brokers and other intermediaries. Regulatory Norms

SEBI has laid down the regulatory norms and code of conduct for mutual funds, merchant bankers, underwriters and market intermediaries. Decline in Transaction Costs

The reforms in the securities market has a favourable impact on transaction costs in the securities market. Average transaction costs declined for all types of investors. Transaction costs also declined for retail investors of dematerialized deliveries. Decline in transaction costs provided the opportunity for higher returns to investors and also made the Indian market more competitive for foreign investors.

Trend in Resource Mobilization The reforms in the corporate securities market have changed the pattern of resource allocation, extended the market beyond the geographical boundary (due to introduction of screen-based trading and fast track settlement). Several measures have also been introduced in the government securities market to strengthen the market structure, which has helped the growth of secondary market and introduction of several innovative products in the marketplace. These reforms have successfully dismantled the entry barriers and today there are domestic and foreign financial institutions such as mutual funds, broking firms, insurance companies operating in the Indian market. The confidence of domestic and foreign institutions have been strengthened due to introduction of capital adequacy norms, strict disclosure prudential regulation and introduction of world-class regulatory mechanism to protect interest of investors. Indian economy has slowly integrated itself with global economy and financial markets. Resource Mobilized by Corporate

With the liberalization of financial market and reforms in corporate security market, Indian corporates are resorting to equity financing by mobility funds from primary equity market by issuing capital instead of loan financing. New capital issued by the corporate sector increased by three times from Rs 43,122 million in 1990–91 to Rs 130,792 million in 2004–05. The year 1995–96, saw the highest number of issues, that is, 1,663 raising an amount of Rs 159,976 million in domestic primary market (RBI, Handbook of Statistics on Indian Economy 2004–05).

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Decline in Debt Financing

One important development immediately after liberalization of Indian capital market was a spurt in debt financing by the corporates. This was observed in predominant share of debt instruments in resource mobilization through public issue in the primary market. According to SEBI (Quoted in Indian Securities Market—National Stock Exchange of India [NSEI] 2000) the share of debt instruments in resources raised through public issue increased from 27.61 per cent in 1995–96 to 84.66 per cent in 1998–99. However, it maybe noted that dependence on debt financing declined gradually. The share of debenture in total capital raised by the corporate declined from 69 per cent in 1990–91 to 25 per cent in 1995–96 and 12 per cent in 2004–05. It is because debt financing is relatively costlier than equity financing and stock market reforms have made this more attractive. Resource Raised in International Market

In addition to raising funds in the domestic capital markets more and more corporates are going to the international markets and raising capital through ADR and GDR. However, FOFs through ADR and GDR have started declining from US$ 613 million in 2004–05. One of the reasons is that FIIs have increased their direct investment in the Indian capital market which has gone up from US$ 1,505 million in 2001–02 to US$ 8,280 million in 2004–05. However, during the year 2004–05, there was an increase (8.2 per cent) in resources raised by the private corporate from the international market through ADR/GDR and foreign currency convertible bonds. TABLE 2.8 Trends in Institutional Investment (Rs in million) FIIs Net Investment Year 2001–02 2002–03 2003–04 2004–05

Mutual Funds Net Investment

Equity

Debt

Equity

Debt

80,670 25,270 399,590 441,230

6,850 1,600 58,050 17,590

–37,960 –20,670 13,080 4,480

109,590 126,040 227,010 169,870

Source Reserve Bank of India, Annual Report (various issues). Fund raising through ADRs/GDRs

Reforms have opened up the foreign markets to Indian corporates and started raising funds by issuing ADRs and GDRs since 1992–93. Therefore, in addition to raising funds in the domestic capital markets more and more corporates are going to the international markets and raising capital through ADR and GDR.


53

The amount raised through the Euro issue increased from Rs 2,510 million in 1992–93 to Rs 61,100 million in 1994–95, though it declined subsequently to Rs 4,960 million in 1995–96 but went up to Rs 34,870 million in 1999–2000. As the percentage of total funds raised through corporate securities it was at its peak at 16.8 per cent in 1993–94. FOFs through ADR and GDR has started declining from US$ 613 million in 2004–05. One of the reasons is that FIIs have increased their direct investment in the Indian capital market, which has gone up from US$ 1,505 million in 2001–02 to US$ 8,280 million in 2004–05. However, during the year 2004–05, there was an increase (8.2 per cent) in resources raised by the private corporate from the international market through ADR/GDR and foreign currency convertible bonds.

Mutual Funds Though mutual funds (including UTI) have expanded their scope of operation by launching a variety of schemes their share in the household financial savings declined. The share of UTI in HDS declined from 5.8 per cent in 1990–91 to 0.7 per cent in 2004–05. While that of mutual funds (excluding UTI) declined from 3.4 per cent in 1999–2000 to 0.24 per cent in 2004–05. Net resource mobilized by all mutual funds declined by 20 per cent from Rs 75,084 million in 1990–91 to Rs 30,146 million. Highest ever net mobilization (Rs 474,827 million) was in 2003–04. Gross mobilization in 2004–05 was higher at Rs 8,415,350 million as against Rs 5,913,790 million in 2003–04. However, the most preferred schemes are debt/income schemes which constituted about 95 per cent of gross mobilization in 2003–05. Net asset of mutual funds increased from Rs 140,410 million in 2003–04 to Rs 1,505,810 million in 2004–05.

Development in Secondary Market The reforms in the capital market have brought enormous quantitative and qualitative changes in the Indian capital market and it has grown exponentially in terms of growth of stock exchange, growth of market intermediaries, increase in the amount raised, growth of market capitalization, increase in turnover and the growth of investors population, etc. There has also been a change in the financing pattern of the private–corporate sector—a shift from debt financing to equity financing. Moreover the All India Financial Institutions, which earlier depended on the government and other financial institutions for cheap finance, had to turn to the market for necessary capital. Reforms in the financial market in general and in the capital market in particular have provided the much needed boost to the secondary market. Increase in the number of stock exchanges, improvement in the management of exchanges, upgradation of technology, setting up of clearing corporation, de-materialization of securities, curtailing settlement period, etc.,

54


have imparted speed in transaction and also reduced transaction costs. All these institutions have made the Indian market comparable to markets in the developed countries. Therefore, the secondary market has witnessed phenomenal growth in terms of number of listed companies, market capitalization, turnover, etc., during post-reform period. The number of stock exchanges in India increased from 19 in 1990–91 to 22 in 1999–2000. Taking into account the Interconnected Stock Exchange of India, it is 23. However, two major exchanges namely, Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) together accounted for more than 98 per cent in 2003–04, total turnover of all exchanges in India was Rs 16,204,970 million out of which Rs 1,602,151 million, that is, 98.87 per cent was accounted by BSE and NSE. Listed companies—there was a significant increase in the number of listed companies in India from 6,229 in 1990–91 to 9,877 in 1999–2000, that is, an increase of 58.6 per cent during 1990s. However, there has been a significant decline since then and it declined to 5,528 in BSE during 2003–04. Number of listed companies in BSE and NSE by the end of 2004–05, stood at 4,731 and 970, respectively. The decline was due to delisting of companies and merger and acquisition of some companies. Market capitalization—there was an impressive increase in market capitalization in BSE and NSE. Annualized average market capitalization increased by 186 times from Rs 90,830 million in 1990–91 to Rs 16,984,280 million in 2004–05. However, the increase during 1995–96 to 2004–05 was 3.2 times, very close to rise in market capitalization of NSE which witnessed annualized market capitalization by 3.8 times—from Rs 3,409,410 million in 1995–96 to Rs 12,969,690 million in 2004–05. At the end of March 2005, market capitalization of BSE was Rs 16,984,280 million as against Rs 15,855,850 million of NSE (Table 2.9). TABLE 2.9 Stock Market Index, Turnover and Market Capitalization Turnover (Rs in million)∗

Index Year 1990–91 1995–96 2000–01 2001–02 2002–03 2003–04 2004–05

Sensex 1,049.53 3,288.68 331.29 3,206.29 4,492.19 5,740.52 6,779.22

Nifty 366.18 556.48 1,336.49 1,077.13 1,036.10 1,428.13 1,808.53

BSE 360,110 500,630 10,000,320 3,072,920 3,140,730 5,026,200 5,187,080

Source Hand Book of Statistics on Indian Economy. ∗Annual Average. Note

NSE 672,880 2,945,030 13,395,100 5,131,670 6,179,880 10,995,350 11,400,710

Market Capitalization (Rs in million)∗ BSE 90,830 5,264,760 5,715,530 6,122,240 5,721,980 12,012,070 16,984,280

NSE – 3,409,410 7,706,220 5,805,640 6,165,370 8,884,900 12,979,690


55

Market turnover—the market took an upturn, particularly with the introduction of screenbased trading. Turnover during 1993–94 to 1999–2000, rose by 914 per cent. Similarly, the turnover ratio increased from 50.9 per cent in 1993–94 to 132.3 per cent in 1996–97 and moved further to 245.3 per cent in 1999–2000. Annualized turnover of BSE and NSE during 2004–05 was Rs 16,984,280 million and Rs 12,979,690 million, respectively. Stock market intermediaries—ever since reforms have been initiated, there has been a significant increase in market intermediaries. By the end of March 2004, there were 78 registrar and share transfer agents, 55 bankers to the issue, 123 merchant bankers and 47 underwriters registered with SEBI. Investor’s population—Indian capital market also witnessed a significant growth in investors population as indicated in the growth of NSDL accounts, which has gone up to 6 million in 2005 as against 3.8 million in 2004. If we add the number of Central Depository Services Limited (CDSL) it would increase further.

Development in the Debt Market Debt market is considered to be the pulse of macro economic development and the future direction of economy can be judged by monitoring the movement of the debt market. Although, the Indian debt market expanded significantly during 1990s it remained to be a small market compared with the debt markets of developed countries. While debt markets in developed countries are much larger than equity markets, they are different in India. While the ratio of equity market capitalization to GDP is 60 per cent, the ratio of debt market capitalization to GDP is about 30 per cent in India. Debt market in India is still in the process of development. Debt Market in India have suffered from chronic neglect on the part of policy makers, despite the fact that there is clear evidence of fairly strong debt preference among households for their financial investment portfolio. Very little has been done to create the infrastructure required for an efficient developed debt Capital Market. In fact, the debt markets in India are currently at a similar stage of their evolutions as the equity markets were prior to the reform process in the early years of 1990’s. (Sen et al. 2003: 3)

Corporate Debt Markets A study of EPW Research Foundation observed: The broad magnitude of domestic debt stock has risen from about 30% of GDP in the mid1990s to 36% now, but, interestingly the sharpest expansion has taken place in sovereign debt (from 21% to 25% of GDP). Increase in commercial debt, on the other hand, has been very

56


moderate from 9.8% to 10.8% of GDP. Also, of the later, a preponderant part (over 45%) has been the result of resource mobilisation by the top four FI’s. (Economic and Political Weekly, February 17–23, 2000)

Important reasons behind the poor development of debt market are (a) sourcing cheap capital from the market by the government, which kept the market suppressed, (b) corporate preference for loan capital to market borrowing for financing their activities and (c) absence of active secondary market for debt, which kept investors away. The main segments of Indian debt markets are: government securities, PSU bonds and corporate debt securities; sovereign debts (14 day Treasury bills, 91 day Treasury bills, 364 day Treasury bills); dated government securities are issued by the central and state government; commercial debts (CDs and CPs) corporate debentures and bonds (debentures, bonds, floating rate notes, PSU Bonds, etc.). The participants in the debt markets are: government, RBI, financial institutions, industry and individual investors. Debt market development needs to focus on targeting small investors. Since household sector is the largest contributor to national savings (around 70 per cent), this segment must be attracted to the debt market. Attracting small investors requires improving market microstructure and medium to long-term products for retail investors. In addition to these, as (Sen et al. 2003) suggested to initiate the process of inducing savers to move to market-based debt instruments to begin with those having high risk-taking capacities through removal of tax concessions from all small savings schemes and flattering of the yield curve for small savings schemes of different maturities.

Government Securities Market in India In order to activate and expand the government securities market, government has initiated several measures to improve activities in the primary and secondary market by introducing new products, improving the liquidity and by expanding the base of investors. Some of the important measures are introduction of the 14-day Treasury Bills in 1997; introduction of auction system for central government securities including T-Bills; introduction of the system of Primary Dealers (PDs) and Satellite Dealers (SDs); innovations of new instruments such as Zero Coupon Bonds, Index Linked Bonds, Floating rates, 14-Day, 19-Day, 182-Day and 382-Day T-Bills; introduction of delivery versus payment system for settling scruples; Subsidiary General Ledger (SGL) account; introduction of settlement period of T+0 or T+5 between SGL participants and upto T+5 days for transaction; liquidity support to Public Distribution System (PDS) and abolition of Tax Deduction at Source (TDS) on government securities; setting up of debt clearing corporation, etc. Structural changes in the securities market have also impacted the government securities market particularly in terms of primary issues of central and state government. An upsurge in government bond market has been noticed in 1990s gross issue of Government of India Bonds


57

increased from Rs 1,110,000 million in 2001 to Rs 1,202,130 million in 2002, but declined to Rs 1,195,000 million. However, market capitalization went up from Rs 541,710 million in 2001 to Rs 9,963,410 million in 2004. Given the present scenario of predominant preference of riskfree investment, corporate preference for debt financing and the growing market penetration by the central and state government, Indian debt market has the potential of tremendous growth.

Derivatives Market Derivatives are important instruments for risk management and price discovery. In a volatile financial market derivative instruments like futures and options enable investors to manage risks against market fluctuations. Though derivatives came into limelight in 1970, they have recently emerged as a powerful hedging mechanism among the investors, particularly among the institutional investors. Today, scientific risk management strategy cannot be thought of by excluding derivatives. There are two major types of derivatives, namely, Over The Counter (OTC) instruments including Interest swaps and options, currency swaps and options, FRAs, etc., and exchange traded instruments including interest rate futures and options, currency futures and options, and stock market index futures and options. After a considerable amount of deliberations, SEBI approved derivative trading in Indian market. To start with, approval was granted for trading in futures contracts based on S&P CNX Nifty Index of NSE and BSE-30 (Sensex) Index. NSE introduced derivative trading on 12 June 2000. BSE introduced Sensex futures on 9 June 2000. The derivative products that are available in India include index futures, index option, stock option and single stock future. However, single stock future is most popular with 55–65 per cent in NSE and in BSE index futures, which contribute to about 60 per cent of market share (SEBI Annual Report 2003–04). During 2004–05, turnover in derivatives increased by about three times in NSE from Rs 1,431,420 million to Rs 25,867,380 million and in BSE it increased by two times from Rs 91,030 million to Rs 191,730 million.

Foreign Institutional Investors Liberalization of Indian capital market has provided easy entry of foreign capital to India and the flow of foreign funds has increased significantly during the post-reform period. Foreign funds are coming to India in the form of FDI and in the form of portfolio investment, through FIIs. FIIs are very active in the Indian stock market and play a very crucial role in market movement. However, since they operate under a global investment strategy, their activities often impact the market even adversely. The sales and purchase of such FIIs are not only influenced by the conditions of Indian market but also by the developments in the other markets of the world.

58


Net investment of FIIs in India has increased substantially from Rs 134 million in 1992–93 to Rs 458,820 in 2004–05. Out of Rs 458,820 million and Rs 441,230 million, that is, 96 per cent was invested in equity and Rs 17,590 million was invested in debt instrument. Investment in equity instruments increased by 10.4 per cent whereas investment in debt declined by 30 per cent in 2004–05 over the previous year (SEBI Annual Report 2003–04). It has been observed that the FIIs sales and purchases have a very strong influence on the monthly movement of stock market indices in India. Though often their purchase and sales are not that significant compared to the market volume their entry and exit always creates disproportionate psychological impact, which may not be a very healthy sign for long-term growth of the market. The brief review of developments in capital market during the post-reform period indicates that the market has not only expanded in terms of various transactions, introduction of a number of new instruments but also several prudential norms have been put in place by the regulator to promote and protect a healthy and stable environment. Market stability is very crucial for financial institutions to work. This is also very essential for growth of life insurance companies, since they are long-term investors and need to manage long-term liabilities. The size, structure and growth of capital market has a strong bearing on the performance of life insurance companies. Developments in the Indian capital market indicate long-term potential of life insurance industry.

Life Insurance and Macro Economy—Indian Experience Life insurance business is significantly influenced by the state of economy of a country and the major impacting factors are rate of growth of GDP, domestic savings, household financial savings, disposable income, etc. The size of the life insurance market is also influenced by the growth of population rate, social security system, health care system, changes in customs and social practices, changes in attitude, risks, etc. It has been observed that societies in which the standard of living has been steadily improving experience a higher insurance penetration. Market competition exerts a very positive influence on market expansion, higher life insurance penetration as well as higher life insurance density. Recent upsurge in Indian economy particularly since the liberalization and market reforms leading to competition has created tremendous opportunities for growth of life insurance industry. In this chapter an attempt has been made to focus on some key factors of growth of Indian life insurance industry in the context of emerging macro economic changes.

Determinants of Life Insurance Demand The determinants of insurance demand and the interrelationship between insurance and economic growth have been examined by many eminent authors such as Outreville (1996), Cargill and Troxel (1979), Babbel (1985), Browne and Kim (1993), Rubayah and Zaidi (2000),


59

Ward and Zurbruegg (2000). Outrevile’s work is notable for establishing links between development of insurance market and the development of financial sector in the economy. He observed that the levels of financial development directly affect the development of the life insurance sector. Ward and Zurbruegg (2000) studied the relationship between development of insurance sector and the growth of economy. However, empirical analysis of Ward and Zurbruegg suggest that the role of insurance in the economy may be varied across the countries. They observed that growth in the insurance sector, potentially has an effect on the economic growth via the short run dynamics of the lagged premium terms in the restricted VAR, through the long run equilibrium relationship between the markets or both. They found this relationship in many countries such as Australia, Canada, France, Italy and Japan. Studies conducted by these authors have also identified major macro economic and other factors impacting the demand for life insurance. Accordingly, the major macro economic factors are: Income level—per capita and disposable income, inflation and price level, price of insurance, comparative return on investment of life insurance, demographic factors, etc. The income level has a very strong influence on life insurance demand in any country. Cargill and Troxell (1979) and Babbel (1985), studied the impact of income level on life insurance by using disposable personal income, income per capita and found that there exists a very positive relationship between income level and the insurance demand. However, inflation has a very negative effect on the demand for life insurance. It has been observed by Browne and Kim (1993), Outreville (1996), Cargill and Troxell (1979) that high inflation exerts a very strong dampening effect on life insurance demand because of rise in cost of living which makes life insurance purchase costlier and less attractive. These authors have also examined the relationships between the return of life insurance and the yields on the competitive savings products. Cargill and Troxell (1979) observed that a higher interest rate on alternative savings products tends to make insurance products less attractive, on the other hand a higher rate of return on life insurance tends to attract individuals to purchase insurance from them. Price of insurance also has an important influence on the demand for life insurance as noted by Rubayah and Zaidi (2000) and Lim and Haberman. They observed that the price of insurance is significantly and inversely related to the demand for life insurance. A higher insurance cost is a discouraging factor for the demand of life insurance. Lim and Haberman also noted that the elasticity of demand with respect to price change is—1.115. The demand for life insurance tends to have a greater magnitude of change when there is a small change in the price change of insurance. A small percentage of reduction in the price change would help to increase the demand for life insurance. Among other factors, life expectancy at birth plays an important role in influencing the growth and demand for life insurance in a country. A higher life expectancy at birth plays an important positive role in influencing the demand for life insurance. A higher life expectancy is positively related to the life insurance demand.

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Measuring Impact of Macro Economy on Development of Insurance Market Life insurance plays an immensely important role in economy as mentioned in the earlier part of the chapter. There are several yardsticks to measure this role and relationship of life insurance and macro economy in the context of market development. However, the most important yardsticks to measure the level of development for life insurance markets are: life insurance penetration and life insurance density.

Life Insurance Penetration and Density Life insurance penetration is calculated as life insurance premium as a percentage of GDP of a country and life insurance density is the premium per capita. However, the level of economic development and population has a very strong influence on the level of development of financial as well as life insurance market. This relationship has been examined with the help of continent wise and country specific data of Swiss Re in Table 1.8. Level of GDP has significant influence on the level of life insurance premium, for example in 2004 Europe with 35.65 of world GDP accounted for 37.57 per cent life insurance premium in the world market, while North America and Canada together with 31.3 per cent of world GDP accounted for 28.35 of world’s life insurance premium, whereas Africa with a share of 1.9 per cent of world GDP accounted only for 1.4 per cent of world’s life insurance premium. On the other hand Asia with 24.5 per cent of world GDP accounted for 30.1 per cent life insurance premium in the world market (Swiss Re Sigma No. 2/2005). It can be noted that North America (USA and Canada) with 31.3 per cent of world GDP in 2004 accounted for 28.3 per cent of world’s life insurance premium, whereas Africa with 1.9 per cent of world GDP accounted for 1.4 per cent of world life insurance premium. Other continents like Europe with 35.6 per cent GDP accounted for 37.6 per cent premium, while Asia with—24.5 per cent of world GDP accounted for 31.1 per cent of world premium. This relationship has also been reflected in the life insurance penetration level. As against world penetration of 4.55 in 2004, Asian life insurance penetration was 5.58, Europe 4.68, North America 4.12 and the lowest 1.1 in Latin America. However, since the level of density is decided by life premium and population it is little different than penetration in the United States. In fact, the density level was highest in North America with US$ 1,617.2. Level of density was also much better in continents with higher GDP and lower population, for example, Oceania (US$ 851) and Europe (US$ 848.1), while in highly populated continents like Asia it was (US$ 147.2). Though in general, higher level of GDP causes higher life insurance penetration, yet, at the country level the penetration level maybe lower than the level of GDP, whereas low GDP countries have achieved better penetration. It can be noted that higher GDP countries such as


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USA, Japan, UK and France had penetration level of 4.22 per cent, 8.26 per cent, 8.92 per cent and 6.38 per cent, respectively. However, some countries with lower GDP, had better penetration level, for example, South Africa had the highest level of penetration 11.43 per cent, followed by Taiwan 11.06 per cent. India with reasonably higher level of GDP had low level of penetration 2.5 per cent (as against world penetration of 4.55 per cent). It can be mentioned that the level of penetration in a developed country like USA may be lower than the world average due to the fact that here other segments like pension and mutual funds are highly developed and a large amount of savings are directed there, resulting in lower penetration of life insurance. Density is the other important indicator of life insurance and macro economic relationship. Since density is measured as the premium per capita; higher premium and lower population will generate higher density level. This can be noted with respect to low population high premium countries which have achieved better density such as Switzerland (US$ 3,275.1), UK (US$ 3,190.4), Japan (US$ 3,044), Belgium (US$ 2,291.2) and France (US$ 2,150.2). Density in highly populated countries like India and China was quite low with US$ 15.7 and US$ 27.3 in 2004, respectively. It is therefore evident that industrially developed and mature economies have achieved better penetration and density indicating that macro economy and life insurance market is very closely related.

Trend in Growth of Selected Macroeconomic Variable and Life Insurance in India During recent times, Indian economy has been performing well and the momentum of growth has picked up particularly since liberalization, which was initiated in the 1990s. Though the overall growth rate during the last decade fluctuated it remained well above many emerging economies of the world. With further reforms initiated in early 1990s, there has been a significant structural change in macro economy and in the process service sector has emerged as the leading sector and engine of growth. In the previous sections we have already noted the trend in growth rates of GDP, domestic and household savings, etc., and would like to examine the relationship between life insurance and these macro economic variables. But before proceeding further, we must briefly examine the past trend in growth of life insurance business, which was predominantly influenced by the LIC of India.

Trend in Growth of Life Insurance Since nationalization, Indian life insurance has registered a very significant growth and gradually increased its share in household financial savings and premium income has also done reasonably well. Growth of insurance can be seen in terms of growth of life funds assets, number of policyholders and premium income. Growth in life fund is considered to be an important indicator of growth of life insurance industry and as can be seen from Table 3.5, LIC

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has performed exceedingly well. LIC, after nationalization of 256 life insurance companies, started with a life fund of Rs 410.40 crore, which in course of time increased rapidly and stood at Rs 463,147.62 crore by the end of March 2006. Similarly, the total assets of LIC keeping pace with the Life Fund have increased from Rs 465.04 crore in 1958 to Rs 552,447.33 crore in March 2006 and LIC has emerged as the largest financial institution in India. High growth of Life Fund and assets of LIC was possible due to significant growth in New Business, which got a boost during the post-liberalization period. Premium income of LIC increased from Rs 88.65 crore in 1958 to Rs 90,759.20 crore in March 2006. LIC started with Rs 1,474 crore SA under 56.86 lakh in force policies which went upto Rs 1,282,467.87 crores SA under 1,796.63 lakh inforce policies in March 2006. An overall view of Indian life insurance market can be obtained through data released by IRDA. Accordingly the total premium underwritten by the Indian life insurers went up from Rs 55,747.55 crore in 2002–03 to Rs 105,875.77 crore in 2005–06 (see Table 3.11) and the total number of policies underwritten by Indian Life Insurance went up from Rs 25,370,674 crore in 2002–03 to Rs 35,462,117 crore in 2005–06 (Table 3.13). This is a clear indication of positive outcome out of competitive market environment in a liberalized economy.

Interdependence of GDP, HDS and Life Insurance Funds Since middle of 1980s, Indian economy has moved away from low level of GDP growth (termed Hindu rate of growth) which has substantially impacted the growth rates in Gross Domestic Saving (GDS), which scaled up from 18.2 per cent of GDP in 1984–85 to 31.1 per cent in 2004–05. Higher growth rates in GDS were strongly supported by savings in the household sector. Overall growth in GDP and HDS have significantly influenced the growth of Indian life insurance. In fact, growth of LIC’s premium income in general, has been higher than the growth rate in GDP, except during the last two years when it was lower than that in 2001–02. Further, if we add the premium income of other private insurance companies, growth rates are higher than shown below. This leads us to the crucial question about the nature of relationship between macro economic growth and development of the insurance industry. A new dimension of this relationship has been opened up by financial liberalization and reforms in Indian insurance sector. Reforms and liberalization expected to exert significant impact on income, savings and insurance purchase and financial reforms are expected to improve allocation of savings. We have made an attempt to examine the relationship between various macro economic variables and life insurance purchase by the household sector and also the impact of financial liberation and insurance sector reform. Pearson Correlation Matrix analysis has been carried out with the help of data relating to GDP, personal disposable income, household financial savings and share of life insurance funds in household financial savings to examine the impact of these factors on life insurance purchase. Since life insurance purchase is also influenced by the rate of inflation, rate of interest and return from alternative investment, we have also made an attempt to examine the impact of inflation, interest rates, etc., on life insurance purchase.


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We have selected yearly inflation rate for Industrial Workers (IW), above five years deposit rates of commercial banks, dividend on units of UTI and return and gross return on life insurance funds (LIC). Finally, growth of population is expected to be directly related to the sales growth of life insurance. We have therefore, carried out Pearson Correlation Matrix analysis for population and Sum Assured (SA).

Pearson’s Correlation Matrix The findings in general are quite significant and reveal a strong relationship between life insurance demand and various macro economic variables. Relationship between GDP, GDS, HDS and Life Insurance

GDP is a reflection of overall growth of economy, which has its impact on disposable income savings and consumption. High growth rate is expected to boost savings and thus support higher demand for financial instruments by the household sector. It can be observed from Chart 2.1 that growth rates in GDP have in general influenced growth rates in GDS and savings in life insurance (LI Fund). It can also be noted that there is a direct positive relationship except for the year 1951–52 to 1955–56 when in spite of decline in GDP growth rate savings in general and life insurance savings in particular higher growth rates were registered. Perhaps this was due to the fact that saving motives such as interest rates and tax incentives were stronger to push up savings and particularly that of life insurance. Further, during 2002–03 there was a sharp decline in the life insurance savings in spite of increased growth rates in GDS, it was because LIC registered a lower growth rate in life insurance business. A closer look at Chart 2.2 will reveal that HDS has mostly followed the GDS growth rate; it is because the other two sectors, that is, public private and corporate sector have minimal role in domestic savings. It can be seen from Table 2.5 that the contribution of private sector is around 4 per cent (in GDP terms) while that of public sector is negative since 1999–2000. However, growth in life insurance fund (premium) followed the growth trend of HDS. It can also be observed that growth of life insurance fund kept pace with the growth of HDS except for a short period 1979–80 and 1989–90. In fact for many years life funds show higher growth than HDS. However, as indicated in Chart 2.2 opening up of the insurance market to private players has not brought a radical change in the trend from what was noticed in the pre-liberalization period, except a very sharp decline in the year 2002–03. In order to examine the extent of relationships among the above selected variables (GDP, GDS and HDS) with Life Insurance Fund, Pearson Correlation Matrix analysis was carried out and the analysis indicated that overall there are very strong positive correlations among the selected variables with the life insurance fund. Also the correlations were statistically significant at 1 per cent significance level. Among the variables household domestic savings appear to have very high correlation (0.992) with Life Insurance Fund, followed by GDS (0.981) and GDP (0.977) and all were highly significant at 1 per cent level of significance. All these indicate that

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LIFE INSURANCE IN INDIA FIGURE 2.1 Growth Rate of GDP, GDS and LI Fund (Premium)

FIGURE 2.2 Growth Rate of Gross Domestic Savings, Household Savings and Life Insurance Premium (Fund)

when there is an increase in savings and national productivity it has a direct impact (positive) on the life insurance sale. Relationships between PDI, HDS, HSFA and Life Insurance Funds

PDI is another important variable determining the growth of life insurance market. We have therefore, examined this issue and also carried out Pearson Correlation Matrix Analysis. PDI


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is arrived at after deduction of payment of direct taxes and other miscellaneous receipts of the government from personal income. PDI is distributed between HDS and private final consumption. It can be seen from the data that in terms of GDP, PDI was 89.3 per cent while household sector savings was only 6.2 per cent. While the same declined to 85.4 per cent for PDI, it increased to 23.3 per cent in 2002–03. Savings as percentage of PDI was 14.5 per cent in 1950–51 but declined to 3.6 per cent in 2002–03. Therefore, in relative terms though savings volume increased during 1950–51 to 2002–03, but more and more funds from PDI were diverted to private final consumption leaving a small amount to be saved from PDI. This also affected growth of Life Insurance Fund, which failed to keep pace with PDI (Chart 2.3). FIGURE 2.3 Personal Disposible Income, HHS, FS in HHS, LF

However, there seem to be strong relationships among these factors, when Pearson Correlation Matrix analysis was carried out with data relating to PDI, HDS, HSFA and Life Insurance Fund. Our analysis indicated that overall there are very strong positive correlations among the selected variables with the life insurance fund and the correlations were statistically significant at 1 per cent significance level. Among the variables PDI (0.991) and HSFA (0.990) appear to have very high correlation with Life Insurance Fund, followed by HDS (0.988) and all were highly significant at 1 per cent level of significance. All these indicate that PDI and household investment in financial assets have a strong impact (positive) on the life insurance sale.

Inflation, Interest Rate and Life Insurance Growth Inflation is expected to have a negative correlation with life insurance demand since it exerts damping effect, because high inflation pushes up the cost of living thus making insurance

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purchase less attractive. Data in the Table 2.10 shows inflation (consumer price index for industrial workers) and YOY growth of Life Insurance Funds. In general, the year of low inflation witnessed higher growth in life insurance but for some exceptions. Rate of interest and competitive yield is said to be negatively rated to life insurance selling, since higher interest rates in other alternative savings and instruments may discourage purchasing life insurance. The impact of inflation interest rates, return from alternate investment and life insurance has been studied with the help of annualized consumer price index for IWs and deposit rates of commercial banks. Rate of interest is realized on Mean Life Fund of LIC, UTI Dividend Rates. Pearson Correlation Matrix analysis was performed and the analysis indicated a strong correlation between the variables, particularly consumer price index (–0.524), bank interest rate (–0.696) and UTI (–0.246) have a negative correlation with life insurance premium (New Business) as expected. Of the selected variables, bank interest has greater negative correlation with life insurance business, followed by Consumer Price Index (CPI), while UTI has a low correlation. Thus, when the bank interest rate and the inflation decreases life insurance New Business increases. Similarly, there is moderate correlation between LIC’s return and the CPI (0.360), bank interest (0.461) and UTI (0.457).

Population Growth and Life Insurance Population growth is expected to have a positive relationship with life insurance growth. To test this relationship Pearson Correlation Matrix analysis was performed with population, life insurance premium (New Business) and number of policies (New Business) for the period 1981–2005. Pearson Correlation Test was carried out and the results are given in the following part of the chapter. The analysis indicated a very strong correlation with the selected variables, particularly life New Business both premium income (0.867) and number of policies (0.913) seem to have very strong correlations with population growth. This confirms the belief that greater the population growth greater is the potential for life insurance (Table 2.13) It can be observed from the statistics given that there is a significant relationship between the demand for life insurance and various macro economic variables. The high growth of GDP induces economic effect through higher per capita and disposable income and savings, which in turn creates favourable market and demand for life insurance. On the other hand life insurance also provides support to the capital market and generation of savings data pertaining to Indian life insurance and macro economic variables broadly indicate a close relationship and interdependence between economic variables and life insurance demand. However, it has also been observed that in India while the economy in general and disposable income and savings in particular have registered significant growth, life insurance demand has not picked up (or alternatively the life insurance industry could not capitalize the growth of income and savings). Therefore, in order to capitalize the growth potential particularly in the post-liberalized economy, concerted efforts need to be made to spread financial literacy,

1950–51 1951–52 1952–53 1953–54 1954–55 1955–56 1956–57 1957–58 1958–59 1959–60 1960–61 1961–62 1962–63 1963–64 1964–65 1965–66 1966–67 1967–68 1968–69 1969–70 1970–71 1971–72 1972–73 1973–74 1974–75 1975–76 1976–77 1977–78 1978–79

Year

9,934 10,566 10,366 11,282 10,678 10,873 12,951 13,349 14,874 15,675 17,167 18,196 19,566 22,482 26,220 27,668 31,305 36,649 38,823 42,750 45,677 48,932 53,947 65,613 77,479 83,269 89,739 101,597 110,133

Na 6.36 –1.89 8.84 –5.35 1.83 19.11 3.07 11.42 5.39 9.52 5.99 7.53 14.9 16.63 5.52 13.15 17.07 5.93 10.12 6.85 7.13 10.25 21.62 18.08 7.47 7.77 13.21 8.4 2.33 2.84 6.09 4.24 2.56 5.69 –1.21 7.59 2.19 7.08 3.1 2.12 5.06 7.58 –3.65 1.02 8.14 2.61 6.52 5.01 1.01 –0.32 4.55 1.16 9 1.25 7.47 5.5

GDP GDP Market GDP Market at Factor Cost Price Price (at current (at current (at current prices) prices) prices) 887 985 861 888 1,005 1,370 1,584 1,384 1,207 1,748 1,989 2,127 2,479 2,763 3,129 3,870 4,375 4,355 4,721 6,104 6,649 7,367 7,872 10,999 12,380 14,346 17,408 20,142 23,676

GDS (Rs in crore)

HDS (Rs in crore) 6.16 5.52 6.15 5.81 6.73 9.62 9.10 7.47 6.83 8.30 7.30 7.04 7.84 7.20 7.15 9.40 10.30 8.76 8.63 10.39 10.15 10.67 10.43 12.17 10.43 11.70 13.20 14.13 15.45

HDSs YOY HDS Growth as % of (%) GDP

Na 612 Na 11.05 583 –4.74 –12.59 637 9.26 3.14 655 2.83 13.8 719 9.77 36.32 1,046 45.48 15.62 1,178 12.62 –12.63 997 –15.37 1.66 1,016 1.91 24.24 1,301 28.05 13.79 1,254 –3.61 6.94 1,281 2.15 16.55 1,533 19.67 11.46 1,618 5.54 13.25 1,875 15.88 23.68 2,602 38.77 13.05 3,223 23.87 –0.46 3,210 –0.4 8.4 3,349 4.33 29.29 4,440 32.58 8.93 4,634 4.37 10.8 5,219 12.62 6.85 5,624 7.76 39.72 7,985 41.98 12.56 8,080 1.19 15.88 9,743 20.58 21.34 11,849 21.62 15.71 14,354 21.14 17.55 17,015 18.54

GDS YOY Growth (%)

TABLE 2.10 GDP, GDS, HDS and Life Fund

Na –35 38.46 38.89 12 10.71 –3.23 –3.33 10.34 43.75 8.7 30 26.15 –4.88 12.82 9.09 8.33 17.31 13.93 15.11 18.13 14.29 21.3 24.43 –1.23 19.57 24.68 16.46 15.92

Life Insurance Savings of Household YOY Growth (%)


20 13 18 25 28 31 30 29 32 46 50 65 82 78 88 96 104 122 139 160 189 216 262 326 322 385 480 559 648

Life Insurance Savings of Household (Rs in crore)


GDS (Rs in crore) 24,314 27,136 31,355 34,368 38,587 46,063 54,167 58,951 72,908 87,913 10,699 13,130 14,398 16,296 19,361 25,143 29,877 31,721 35,218 37,469 46,861 49,009 53,224 64,228 77,640 –

Source Centre for Monitoring Indian Economy (CMIE).

Year 1979–80 1980–81 1981–82 1982–83 1983–84 1984–85 1985–86 1986–87 1987–88 1988–89 1989–90 1990–91 1991–92 1992–93 1993–94 1994–95 1995–96 1996–97 1997–98 1998–99 1999–00 2000–01 2001–02 2002–03 2003–04 2004–05

GDP GDP Market GDP Market at Factor Cost Price Price (at current (at current (at current prices) prices) prices) 120,841 9.72 –5.2 143,764 18.97 7.17 168,600 17.28 5.97 188,262 11.66 3.06 219,496 16.59 7.68 245,515 11.85 4.31 277,991 13.23 4.45 311,177 11.94 4.33 354,343 13.87 3.83 421,567 18.97 10.47 486,179 15.33 6.7 568,674 16.97 5.57 653,117 14.85 1.3 748,367 14.58 5.12 859,220 14.81 5.9 1,012,770 17.87 7.25 1,188,012 17.3 7.34 1,368,208 15.17 7.84 1,522,547 11.28 4.79 1,740,985 14.35 6.51 1,936,831 11.25 6.06 2,089,500 7.88 4.37 2,271,984 8.73 5.79 2,463,324 8.42 3.98 2,760,025 12.04 8.51 3,105,512 12.52 6.91

(Table 2.10 Continued) GDS YOY Growth (%) 2.69 11.61 15.75 9.61 12.28 19.37 17.59 8.83 23.68 20.58 21.69 22.77 9.57 13.2 18.85 29.87 18.8 6.2 11.01 6.38 25.1 4.56 8.62 20.67 20.88 – HDS (Rs in crore) 16,690 19,868 21,225 23,216 28,165 35,067 39,795 45,072 59,157 70,657 86,955 109,897 110,736 131,073 158,310 199,358 216,140 233,252 268,437 326,802 404,401 452,268 513,110 574,681 671,692 –

HDSs YOY Growth (%) –1.91 19.04 6.83 9.38 21.32 24.51 13.48 13.26 31.25 19.44 23.07 26.38 0.76 18.37 20.78 25.93 8.42 7.92 15.08 21.74 23.74 11.84 13.45 12 16.88 –

Life Insurance Savings of Household HDS (Rs in as % of crore) GDP 13.81 739 13.82 859 12.59 982 12.33 1,149 12.83 1,283 14.28 1,453 14.32 1,676 14.48 2,005 16.69 2,453 16.76 3,311 17.89 4,152 19.33 5,338 16.96 6,623 17.51 6,766 18.42 9,197 19.68 11,016 18.19 13,523 17.05 15,574 17.63 18,737 18.77 22,572 20.88 27,684 21.64 32,679 22.58 46,104 23.33 40,508 24.34 48,722 – –

Life Insurance Savings of Household YOY Growth (%) 14.04 16.24 14.32 17.01 11.66 13.25 15.35 19.63 22.34 34.98 25.4 28.56 24.07 2.16 35.93 19.78 22.76 15.17 20.31 20.47 22.65 18.04 41.08 –12.14 20.28 –



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TABLE 2.11 PDI, Savings and Life Insurance Premium (Rs in crore)

Year 1950–51 1955–56 1960–61 1965–66 1970–71 1975–76 1980–81 1985–86 1990–91 1995–96 2000–01 2001–02 2002–03 2003–04

PDI (Figs in Million)

Savings of Household Sector (HS)

HDS in Fin. Assets

Life Insurance Fund

(1)

(2)

(3)

(4)

8,876 9,574 14,638 22,975 37,891 67,810 120,642 224,371 461,192 949,191 1,776,815 1,967,576 2,108,935

89.3 88.0 85.3 83.0 83.0 81.4 83.9 80.7 81.0 79.9 85.0 86.2 85.4

612 1,046 1,254 2,602 4,634 9,743 19,868 39,795 109,897 216,140 458,215 513,110 574,681 671,692

6.2 9.6 7.3 9.4 10.1 11.7 13.8 14.3 19.3 18.2 21.9 22.6 23.3 24.3

62 429 456 1,072 1,371 3,918 8,610 18,538 49,640 105,719 222,721 253,964 254,439 314,261

0.6 3.9 2.7 3.9 3.0 4.7 6.0 6.7 8.7 8.9 10.7 11.2 10.3 13.0

20 31 50 96 189 385 859 1,676 5,338 13,523 32,679 44,157 41,027

0.2 0.3 0.3 0.3 0.4 0.5 0.6 0.6 0.9 1.1 1.6 1.9 1.6

Source EPW Research Foundation. Note Figures in italic indicate in GDP term. TABLE 2.12 Inflation, Interest Rates and Life Insurance Savings in India

Year 1984–85 1985–86 1986–87 1987–88 1988–89 1989–90 1990–91 1991–92 1992–93 1993–94 1994–95 1995–96 1996–97 1997–98 1998–99 1999–2000 2000–01 2001–02 2002–03 2003–04

Inflation Consumer Price UTI Dividend Index (a) Rate (July–June) 6.3 6.8 6.7 8.8 9.4 6.1 11.6 13.5 9.6 7.5 10.1 10.2 9.4 6.8 13.1 3.4 3.8 4.3 4.0 3.9

14.25 15.25 16.00 16.50 18.00 18.00 19.50 25.00 26.00 26.00 26.00 20.00 20.00 20.00 13.50 13.75 10.00 – – –

Commercial Gross Rate of Interest Life Ins. Savings Bank Deposit Realized on Mean of Household Rate Life Fund of LIC (YOY Growth %) 11.00 11.00 11.00 10.00 10.00 10.00 11.00 13.00 11.00 10.00 11.00 13.00 12.75 11.75 11.00 10.25 9.72 8.25 5.875 5.375

9.46 9.87 10.30 10.50 10.95 11.13 11.44 11.95 11.56 12.43 12.21 12.29 12.39 12.37 11.96 12.08 11.60 11.59 10.40 10.08

13.25 15.35 19.63 22.34 34.98 25.40 18.56 24.07 2.16 35.93 19.78 22.76 15.17 20.31 20.47 22.65 18.04 41.08 –12.14 20.28

Source Accounts Statistics of India 1950–51 to 2002–03, EPW Research Foundation, Mumbai, 2004.

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LIFE INSURANCE IN INDIA TABLE 2.13 The Population and Life Insurance Business from 1980–81 to 2004–05

Year 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Premium 148.79 158.39 181.21 191.25 225.57 286.69 373.49 531.62 715.93 980.98 1,195.85 1,405.05 1,616.58 1,899.81 2,055.75 2,332.13 2,612.94 3,195.17 3,986.60 4,756.10 5,590.75 6,965.00 8,288.87 10,885.93 11,192.31

Population

Number of Policies

668.31 683.30 698.07 713.17 728.58 744.34 760.43 776.87 793.66 810.82 828.35 846.26 883.90 899.90 916.00 939.50 955.20 971.00 988.00 1,005.00 1,012.40 1,027.60 1,043.50 1,060.00 1,076.90

1,954,424 2,103,134 2,231,385 2,366,057 2,699,654 3,285,607 3,868,316 4,693,788 5,979,260 7,392,251 8,645,386 9,238,264 9,957,848 10,725,633 10,874,682 11,020,825 12,268,476 13,311,294 14,843,687 16,976,782 19,656,663 22,491,304 24,278,775 27,740,916 31,122,534

Source CMIE, Annual Report of LIC (various issues).

to create awareness about personal financial risk management, market marketing-driven distribution management, customer-focussed service management, and technology and knowledge-based funds management. The insurance market in India during the post-liberalized period transformed itself from a supply directed market to demand determined market and an upsurge in multiproduct—multiinstitution, competition is very eminent. Understanding this emerging market dynamics and institutionalizing the same in a futuristic corporate policy will enable the insurance companies to capitalize.

Convergence and Financial Market Integration Recent reforms and growing globalization in financial services also produced an important phenomenon called integration in financial services, which occurs whenever production or distribution of a financial service traditionally associated with one of the three major financial sectors is by actors from another sector. Terms such as bancassurance, allfinanz, universal banking and financial conglomerates, are all used to convey some notion of integration.


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The process of integration has opened up avenues for expansion of business and scope for new products. The process of financial services integration has offered tremendous opportunities for launching innovative new products, entering into new areas of business, improving the scale of operation, reducing cost, improving the balance sheets and quality of risk management. However, these are not without any cost and financial institutions need to reposition themselves in the marketplace with new vision, mission and goals. What is more important is to institutionalize the new vision and goal by promoting market friendly organizational culture and a new set of operational rules and management philosophies. This is a challenge for the management of a company. Transition does not come without a cost or pains. However, transitional costs can be reduced and pains can be minimized only by forward-looking strategic initiatives. There are several forms of financial services convergence or integration. In a fully integrated form all financial services are produced and distributed by a single entity like a corporation. In such a form, a corporation may offer commercial banking, investment banking, insurance and other financial services. In most cases, we particularly find integrated financial services. However, in most of the cases we find a partial integration offering two to three services like German banks, which offer universal banking services (commercial banking and investment banking) and also insurance and other services through separate subsidiaries. Other variant of integration is to offer various services under a parent company—services produced by one subsidiary and sold by other for example in France or UK bank assurance. In France either banks promote insurance companies or insurance companies promote banks. Insurance services produced by an insurance company sold by a bank. We may quote some instances of integration in major markets such as Australia, France, UK and USA. In Australia four major banks operate in conglomerates in all areas of commercial and investment banking, in life and non-life insurance and in pension (Bain and Harper 1999). In France there is a close link between banks and insurance services, and bank assurance is a major source of income. Most of the life insurance products sold by banks are tax saving simple products. According to Daniel (1999), in 1998 banks accounted for 61 per cent of total life premium and 63 per cent of new premium production in France. A close tie integration is also observed in the Netherlands, where non-life insurance has historically been more prominent than life insurance but this is changing especially as banks have moved aggressively into life insurance marketing. In 1998, banks accounted for an estimated 75 per cent of new life premium (Skipper 2000). In UK life insurance products are being sold by subsidiaries promoted by banks. These subsidiaries sell life insurance products through a number of channels such as direct sales, brokers, representatives (agents) or bank branches. Direct sale is quite strong in UK as distributors like Lloyds TBS transact about 20 per cent of sales via direct response. In Canada there is greater integration between banks and insurance since large number of banks have been promoted by insurance companies and a large number of insurance companies are promoted by banks. The Canadian financial services business is concentrated and is

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becoming more so with consolidation and demutualization, driven by competition. The largest six banks control about 85 per cent of the Canadian bank assets and the largest six insurers, most mutual, control 70 per cent of insurance assets (Skipper 2000). Financial services in USA moved towards greater integration particularly after Financial Services Modernisation Act (also known as Gramm–Leach–Bliley Act) 1999. More and more banks have started selling life insurance products particularly individual annuities and according to some estimates they write nearly 15 per cent of annuity consideration. The trend of global convergence in financial services is gaining momentum in India, particularly after reforms since 1991 removing the entry barriers. Early 1990s witnessed the trend in integration when many public sector institutions and banks set up their non-core business, for example, IDBI started banks and mutual funds; LIC started mutual funds, housing finance; and many banks like SBI entered into mutual funds, housing finance and subsequently life insurance. This trend further gained momentum with opening up insurance to the private sector. Private financial institutions such as Housing Development Finance Corporation Ltd. (HDFC) and ICICI entered into the insurance business. The process of integration further strengthened with more and more banks taking up insurance selling, with this bank assurance has emerged as an important channel of distribution. With further reforms, the process of integration is expected to move forward by breaking the existing obstacles. However, financial integration has its own pitfalls through negative externalities via systematic risks. It also tends to have an adverse impact on competition. Moreover, integration may create regulatory complexities since there are more than one regulators such as RBI for banking, IRDA for insurance, SEBI for securities market and Pension Fund Regulatory and Development Authority (PFRDA) for pension market. To tackle regulatory problems there is need for a super regulator. Alternatively, a strong coordination among these regulators through a coordinating mechanism is required.

Future Prospects The irreversible process of recent waves of globalization have swept the national barriers of economy. Tremendous flow of trade in goods and services, FDI and portfolio investment positively impacted the growth of emerging economies. Globalization has created a tremendous impact on financial sector development via influence on market micro structure and governance which is essential for FDI and portfolio investment. Life insurance companies are important institutional investors in the emerging market characterized by institutionalization of market and globally they have grown significantly in a liberalized market environment. Insurance industry has been immensely benefited by opening up the sector to foreign participants. Though life insurance in mature markets has saturated to some extent, tremendous scope for expansion exists in emerging market due to low level of penetration, density, etc.


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The process of globalization has impacted India significantly and large number of measures have been taken to integrate Indian market with global economy which has made India an important destination of investment and global economic activities. Indian life insurance market, which is already an important player among the emerging markets, is poised for further growth following the liberalization of insurance market; emergence of competitive insurance market with entry of domestic and foreign players; consistency in high growth momentum in GDP, domestic savings, disposable income, booming capital market, etc. However, experience of global economies, particularly the emerging markets, indicates that India needs to follow-up further reforms in the financial economy.

Chapter 3 Indian Life Insurance—Changing Market Structure and Emerging Opportunities Indian life insurance market has undergone tremendous structural changes since 1818, when the first life insurance company was established in Calcutta. Life insurance industry in India progressed from a loosely regulated market controlled by two groups of private life insurance companies in the early phase to a non-competitive monopoly phase where the industry was represented by a single entitity, that is, LIC of India in a planned economic environment. From government controlled monopoly, the industry moved on to the third phase into a competitive market environment with the presence of many private sector and public sector life insurance companies under a well-designed regulatory environment. In all the three phases, the characteristics and structure of the life insurance market was quite distinct, having different dimensions of regulation of supervision, reach and strategic orientation. However, in every phase, Indian life insurance industry strengthened itself in terms of reach, concern about consumers and management strategy. Life insurance also played a very crucial role in development of national economy, particularly during the post-nationalization period. But the most dynamic phase of possible growth has begun with the deregulation and liberalization of the insurance sector. Insurance industry has not only been deregulated but the regulator has taken a number of initiatives for healthy growth. In this chapter we have discussed about this trend of transformation and further scope of expansion and growth of life insurance industry in India in the light of the following. 1. Changing market structure—pre-nationalization to post-nationalization. 2. Emerging health insurance market in India. 3. Pension reforms and emerging annuity market in India.


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4. Informal sector and microinsurance market in India. 5. Scope for expansion of life insurance market in India. 6. Indian life insurance in the global context.

Indian Life Insurance—Changing Market Structure Introduction The concept of market structure is an important issue of financial market analysis and a critical factor of strategic planning for corporate management. Market structure enlighten us about economic characteristics of market and business dimension and underlying opportunities and constraints. Market structure analysis also provides meaningful ideas about evolutionary process of any market in the context of changing politico-economic environment of a country. However, the analysis often suffers from bias as there are differences between perspectives of economists and managers. While an economist focuses on general economic problem related to pricing, competition, economic welfare, etc., managerial concern is centered around market regulation, product development and distribution, post-sales servicing, customers benefits, corporate profitability, etc. These objectives are however not contradictory, rather closely interlinked to promote a well regulated customer-centric industry market. Therefore focus of any market structure analysis is with relation to the explicit market objectives of core economic and managerial issues. However, whatever way the market structure is considered, the customers, suppliers of products, product pricing and substitutability of products remains the focal point. In economic analysis of markets—number of suppliers (here life insurance companies), buyers of the products (life insurance policyholders) and products (life insurance plans) are the major criteria to distinguish market structure. Accordingly, a market can be perfectly competitive with a large number of insurance companies and policyholders. In a perfectly competitive life insurance market there would be many sellers with products, in a monopoly market there is a single seller of products without core substitute. In a monopolistic market there are many sellers of a differentiated products, while in oligopoly there are few sellers with standardized or non-standardized products. These definitions of market structure from economist’s point of view is closer to managerial perspective of market since the nature of competition structure influences the strategic action and identification of product–market relationship. Market regulation is an integral part of market structure since regulation in a competitive market environment attempts to promote healthy competition and protect the consumers whereas in a non-competitive monopoly market it protects the interest of consumers. Therefore, central to all market environment are the customers and their benefits in terms of optimization of return and value addition to their investment. We have examined this issue of market structure and market environment of life insurance industry in this chapter. A well regulated market structure is a critical condition for growth of any financial service including life insurance. While a well-regulated competitive market protects the interest of the

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consumers, imparts efficiency in resource allocation, risk management and decentralization of economic benefits as well as economic well-being, which in turn supports the market to expand further, an unregulated non-competitive market may stagnate and may even tend to become a burden for the society. However, the structure of financial market is greatly influenced by the political economic process and is always a dynamic phenomenon. Life insurance which is an important constituent of financial economy is no exception to this process and always evolves around the economic and financial system of the country. Indian life insurance industry and market have always been influenced by political and economic policies and mood of the people, since 1818 when the first few insurance companies were established in India. Since then Indian life insurance industry has undergone cycles of changes but these changes have always provided new impetus of growth to the industry. Life insurance industry since 1818 has witnessed three distinct phases of growth: 1. Life insurance in pre-nationalization period (from1818 to 1956). 2. Life insurance in post-nationalization period (from 1956 to 2000). 3. Life insurance in post-deregulation period (from 2000 onwards).

Market Structure during Pre-nationalized Period Life insurance in its modern form came to India from England. The journey of Indian life insurance industry started from the then British capital of India—Calcutta with the establishment of the British Insurance company Oriental Life Insurance Society in 1818. This was followed by establishment of Bombay Life in Bombay in the year 1823 and Madras Equitable Life in Madras in the year 1829 and Madras Widows in 1834. In 1850, a non-life insurance company called Triton Insurance Company started in Calcutta. During this period many overseas companies came to India, the prominent ones are ‘Medical, Invalid and General’(incorporated in London in 1841); ‘The Universal Life Assurance Company’ established in London in 1836, opened its branch in India in 1840. Another British company known as the Colonial Life Assurance Company came to India under the auspices of Standard Life Assurance Company in 1846. The great social reformer of India, Raja Ram Mohan Roy also took serious interest to establish life insurance for Hindu widows. During this period Indian insurance industry was a city-centric phenomenon, it followed discriminatory practices in product pricing and basically served the colonial masters. Many life insurance companies did not cover lives of Indians and even those who were selling policies to Indian would charge 10 per cent or more from indigenous policyholders. This raised protests from many and forced the British companies to sell policies to indigenous policyholders at equal premium. The year 1870 is remarkable in the history of insurance in India, since it witnessed the birth of an Indian insurance. The first Indian Life Insurance to sell insurance to Indian nationals at normal rate was Bombay Mutual Life Assurance Society established in 1870. Another milestone of Indian insurance movement was the formation of Hindu Family Annuity Fund in 1872 in


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Calcutta by Pandit Ishwar Chandra Vidyasagar. These were followed by formation of Oriental Government Security Life Assurance Company in May 1874, by a distinguished actuary Mr D M Dastur. Another notable entity is ‘Indian Life’, which was formed in 1892 by some citizens of Goa settled in Karachi. During 1876 and 1893 a large number of small society funds were established in various provinces on community lines. Apart from the associations and funds, a large number of provident societies were also formed. The year 1883 was the beginning of postal insurance in India, when a scheme of life insurance and monthly allowance was introduced for its employees by the postal department. Initially whole life policies were allowed but the endowment assurance was introduced in 1898. Growth of national movement in India provided a new momentum to the Indian life insurance and saw the beginning of formation of many companies which brought significant changes in the life insurance landscape. A purely Indian company ‘Bharat Insurance’ was established in Lahore in the year 1896, in the very next year ‘Empire of India’ was formed in Bombay. Spirit of nationalism gave birth to ‘Swadeshi Movement’ (1905–06) urging people to buy Indian and be Indian. This resulted into establishing Indian enterprises by Indians in many fields of trade and commerce. Insurance industry was no exception to this movement. Swadeshi Movement led to the formation of the first Indian life insurance company, namely, ‘National Insurance Company’ in 1906. On the same day of formation of National Insurance Company by Mr Pannalal Banerjee another company namely ‘National Indian Insurance Company’ was formed by Sir Rajendra Nath Mukherjee in Calcutta. In the same year, that is, 1906 another Indian company ‘United India’ was established in Madras by M/S Lingam Brothers. Another great company ‘Hindustan Cooperative Insurance Company’ was established in a room at Jorasako, the house of Rabindranath Tagore. In 1908, Swadeshi Life Insurance Company was formed in Bombay, which changed its name to Bombay Life in 1913. Swadeshi movement also witnessed the formation of India’s first general insurance company ‘The Indian Mercantile’ in 1907.

Life Insurance Regulation Regulatory supervision has an important impact on the development of market structure. Though life insurance business started in 1818 in India it took about a century to formalize insurance regulatory supervision. Till 1912, life insurance business and life insurance companies were governed and regulated by Indian Companies Act (1866). Regulatory supervision was very weak during this period and insurance companies did not bother much about the consumer’s interest. However, things improved after an act was put in place in 1912 called the Insurance Act 1912 exclusively for regulation of life insurance industry. Under 1912 Act two sets of legislations were passed. 1. The Life Insurance Companies Act 1912. 2. The Provident Insurance Societies Act 1912.

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The Life Insurance Act 1912 introduced a measure of control under which the rate tables and periodic valuation required to be certified by an actuary. However, the law was discriminatory since Indian companies were required to keep a deposit with the government but no such deposits were required for foreign companies. Subsequent to two legislations in 1912 no legislative initiatives were taken till 1928 because of the involvement of Great Britain in the First World War. Passing of the Insurance Act 1912 saw many Indian and foreign companies ceased to New Business. However, many new companies were established. Immediately two companies, namely, The Western India Life Insurance Company Ltd. at Satara and The Industrial and Prudential Life Insurance Co. Ltd. in Bombay in the year 1913 were established. In the same year, that is, 1913 two other companies, ‘Mysore Life Assurance Co.’ Mysore, and ‘The East and West Insurance Company’ in Bombay were established. During the War, that is, from 1914–18 there was a slack in the formation of new companies but since 1919 a fresh momentum to open new companies was witnessed and in 1919 itself as many as nine companies were formed. During the 10-year period from 1919, 39 companies were promoted many of them with active support of national leaders. Formation of all these companies helped to increase New Business which went on from Rs 29 million in 1918 to Rs 49 million in 1914 and further to Rs 154 million in 1928. At the end of the period there were 412,446 policies in force with aggregate SA of Rs 711.1 million. The number of life offices increased from 42 in 1919 to 56 in 1927 (Saga of Security). The year 1928 was also remarkable for another reason. In 1928, The Indian Insurance Offices’ Association and the Indian Life Assurance Offices Association came into existence, the former being the representative of general insurance companies. Another outstanding event happened in 1928 with the passing of Indian Insurance Act 1928. This Act stated that the surplus shall be allocated to shareholders and to policyholders in the proportion in which the profits were allocated during the 10 years immediately preceding the commencement of the winding up. It also provided for disposal of surplus assets in the event of liquidation of an insurance company. The Indian Insurance Act 1928 also required every insurance company which conducted transactions in any class of insurance business in British India to submit annual statements showing details of its business both in and outside India. Legislation allowed the government to collect statistical information from foreign and Indian insurance companies operating in India. In the decade following 1928, there was an unprecedented growth of new companies in India. It has been recorded in the Blue Book (as the Indian Insurance year Book came to be known) that during 1929–39, 176 new companies were promoted Calcutta took the lead and more than 20 companies were established in Calcutta, followed by Bombay with 13 companies, Delhi with 6 companies and Madras with 5 companies. Some important companies formed during this period were Metropolitan Insurance Company Ltd. in 1930 in Calcutta, Aryasthan


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Insurance Company Ltd. in 1933 in Calcutta, The South India Cooperative Insurance Society Ltd. in 1932 in Madras, The Canara Mutual Assurance Co in 1935 at Udipi, Sunlight of India Insurance Company in 1932 at Lahore, Free India at Kanpur, etc. Insurance Act 1938: A Landmark Regulation

Rapid increase in number of insurance companies and growth in New Business also prompted several malpractices, such as increase in lapsed policies, doubtful valuation, unhealthy competition and undesirable rivalry. There were a number of free insurance societies, which were exploiting the trusting masses. Also a number of frauds were detected. As a remedial measure to stop unhealthy competition of foreign companies, indiscriminate growth—both of insurance companies and provident companies, malpractices and frauds, all demanded some sort of control at the highest level and the government could not remain silent for long. A committee under Chairmanship of Mr S C Sen was appointed to examine various aspects of insurance operations. This committee held a wide range of interaction with a large number of people. Recommendations of this committee were widely debated and finally a bill was passed which became the Insurance Act 1938. It covers several aspects of the insurance business such as deposit mobilization, commission of agents, policyholders servicing, supervision of insurance companies and appointment of directors. Subsequent insurance legislation in India is drawn with reference to Insurance Act 1938. The salient features of the Act are: 1. Constitution of a department of insurance under a superintendent vested with wide powers of supervision and control of all kinds of insurance companies. 2. Regulation for the compulsory registration of insurance companies and for filing of returns of investment and financial conditions. 3. Provision for deposit to prevent insurers of inadequate financial resources or speculative concern from commencing business. 4. Provision that 55 per cent of net life fund of an Indian or a non-Indian insurer should be vested in the Indian Government and approved securities with at least 25 per cent in Indian government securities. 5. Prohibition of rebating, restriction of commission, licensing of agents, etc. Maximum rates of commission were fixed at 40 per cent for first year premium and 5 per cent of renewal premium with respect to life assurance policy. 6. Actuarial and financial regulations such as valuation of assets and liabilities, solvency margins and submission of annual financial statements. Subsequent insurance legislation the Insurance Regulatory and Development Authority Act 1999, replaced Insurance Act 1938. However, it was the backbone of Indian insurance industry till 1999, the most vibrant insurance industry before 2000 was governed by the Insurance Act 1938.

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The Second World War disrupted the growth of life insurance industry. Even though the industry maintained its growth momentum. ‘New Business in India during the early war years fluctuated from Rs 46.6 crores in 1,939 to Rs 36.1 crores in 1940 to Rs 42.9 crores in 1942’ (Saga of Security, p. 202). The year 1943 was remarkable in many ways, namely, due to the formation of many prominent companies such as ‘Jay Bharat’ at Bombay, ‘New Great’ at Baroda, ‘Prithvi’ at Madras and also there was steady growth in business which was Rs 629.94 million in 1943 and went up to Rs 1,227.8 million in 1945. This trend of steady growth continued till it reached its peak at Rs 1,314 million in 1946. Another development during this period was the decline in percentage share of foreign insurers in total business, which declined from 16.2 per cent in 1938 to 9.3 per cent in 1945. A turbulent time started with the country attaining freedom on 15 August 1947. Partition of the country took its toll on the life insurance business. At the time of partition, 150 branches of insurance companies were located in Pakistan. Though many companies shifted their offices in the Indian territory, most could not shift their records. Therefore, ‘Evacuee Insurance Companies’ Association’ was formed with Mr Santhanam as the Chairman, by the end of 1947 Inter-Dominion Agreement on insurance was introduced in India and Pakistan to solve business related issues arising out of partition but nothing could be achieved. In March 1948, insurance companies met in Calcutta and finally decided to severe connections with Pakistan. During post-partition period the government initiated steps to put the industry on the correct path. Following the Cowasjee Jehangir Committee report, a bill was introduced in April 1946 providing for adequate control on expenses, capital structure, voting rights, excessive remuneration, part time and common executives, etc. Based on this a fresh bill was introduced which ultimately became the Insurance Amendment Act 1950.

Progress in Life Insurance Business 1914–57 Though the first insurance company was established in 1818, no business statistics are readily available upto 1914. Insurance Year Book 1914, provided some information for 1914 onwards. In 1914, there were 44 life insurance companies in India with total in-force business to the tune of Rs 22.44 crore and life fund of Rs 6.36 crore (Table 3.1). By 1948 the number of insurance companies increased to 209 out of which 189 were Indian companies. Total in-force policies serviced by these companies were 3,016,000 as against 748,997 in 1914. Total life fund amounted to Rs 150. 39 crore in 1948 as against Rs 6.36 crore in 1914. The first Annual Report of LIC of India—(1 September 1956 to 31 December, 1957) provides some information of the status just before nationalization in 1956. According to the figures published in this report the total number of policies underwritten in India and outside India was 796,030 and 35,461, respectively in 1955 (Table 3.2). Sum Assured (SA) under these policies


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was Rs 240.51 crore and Rs 20.33 crore, respectively. Total number of in-force policies and sum assured under them was 47.92 lakhs and Rs 1,220 crore in 1955. In fact life insurance industry was virtually stagnating before nationalization, but got a boost since nationalization. While the number of in-force policies in 1954 and 1955 was less than 48 lakhs, it went up nearly to 57 lakhs in 1957, the SA under these policies increased from Rs 1,220 crore in 1955 to Rs 1,474 crore in 1957 (Table 3.3). TABLE 3.1 Growth of Life Insurance Business in India 1914–48 Sl No. 1.

2.

3.

4.

1914 Number of insurers (a) Indian

44 44

(b) Non-Indian Total number of policies in force (a) Indian

– –

(b) Non-Indian (c) Indian outside India Total business in force (Rs in crore) (a) Indian

22.44 22.44

(b) Non-Indian (c) Indian outside India Total life funds (Rs in crore)

– – 6.36

1930

1940

1945

1948

– 748,997

195 179 (91.79) 16 1,628,381

215 200 (93.02) 15 2,714,000

209 189 (90.43) 20 3,016,000

513,925 (68.61) 220,703 14,369 258.42

1,371,963 (84.25) 181,247 75,171 304.03

2,376,000 (87.55) 261,000 77,000 573.07

2,791,000 (90.15) 234,000 202,000 712.76

84.89 (32.85) 69.76 3.77 20.53

225.51 (74.17) 60.12 18.40 62.41

459.43 (80.17) 91.85 21.79 1,07.4

566.38 (79.46) 101.08 45.30 150.39

68 68

Source Report on the activities of the Life Insurance Corporation of India during the period 1st September, 1956 to 31st December, 1957, LIC of India. Note Figures in brackets show percentage of the total. TABLE 3.2 New Business for the Years 1953–57 In India

Outside India

Year

Number of Policies

SA (in crore)

1953 1954 1955 1956 1957

574,749 740,093 796,030 549,401 810,738

156.26 237.60 240.51 187.69 277.67

Number of Policies 30,441 32,682 35,461 17,956 5,055

SA (in crore) 14.66 17.65 20.33 12.59 5.40

Source Report on the activities of the Life Insurance Corporation of India during the period 1st September, 1956 to 31st December, 1957, LIC of India.

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LIFE INSURANCE IN INDIA TABLE 3.3 Total Business in Force during 1952–57 In India

Year 1952 1953 1954 1955 1956 1957

Number of Policies (in lakh)

Outside India SA and Bonuses (in crore)

40.17 925 41.67 970 45.05 1,091 45.16 1,128 Figures not available 54.17 1,375

Total


SA and Bonuses (in crore)


SA and Bonuses (in crore)

2.66 2.72 2.77 2.76

70 77 86 92

42.83 44.39 47.82 47.92

995 1,047 1,177 1,220

2.69

99

56.86

1,474


It has been indicated earlier that before nationalization the life insurance industry was suffering from many malpractices, money was being misused by many promoters and many companies were in insolvency. Investment management was in doldrums. Therefore, total investment of the entire life insurance industry at the time of nationalization was meagre and stood at Rs 381.90 crore in 1957. Out of the total investment of Rs 318.90 crore, Rs 260.61 crore was invested in Indian and state government bonds and other approved securities, while Rs 69.14 crore was invested in debentures and shares of joint stock companies (Table 3.4). TABLE 3.4 Distribution of Total Investment of Corporation as on 31 December 1957 (Rs in crore) Indian, state government and other approved securities Debentures and shares of joint stock companies in India Mortgages of properties House property Other investments Total investment

260.61 69.14 13.86 21.38 16.91 381.90


Mortality Table Life insurance business is driven by mortality table, which is used for fixing premium. Mortality table is normally based on the statistics collected through mortality investigation. Indian insurance companies used to refer to Oriental Mortality (OM) Table which was based on British experience during 1925–35. However, the first Indian Mortality Table was Oriental


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Government Security Life Assurance Co. Ltd. (1905–25) it was updated in 1970s and 1990s and further modified in 1994–96.

Market Structure during Post-nationalized Period Prelude to Nationalization During this period Indian life insurance industry gained new momentum of growth. There was increased competition which expanded the insurance market further. However, Indian life insurance still remained an urban phenomenon and suffered from many deficiencies. 1. Per capita insurance in India was only Rupee one and eight annas (Rs 1.50) which increased to Rs 8 by 1944 and Rs 25 by 1955 as against Rs 2,000 in USA, Rs 1,300 in Canada and Rs 600 in UK (Tryst with Trust 1991). Further growth and competition generated many malpractices such as frequent liquidation of insurance companies and depriving policyholders savings. 2. Managing agency system also contributed inefficiency. A team of managing agents used to control and direct several firms and used them as source of credit. 3. Malpractices crept into the insurance industry due to acquisition of insurance companies by financiers who used them for their own interest. 4. Sir Cowasji Jehangir Committee was appointed by the Government in April 1945 to enquire into the unwanted development in insurance industry pointed out at acquisition of interest in insurance companies by payment of exorbitant price of shares, manipulation of life funds of insurance companies, payment of large emoluments to the financiers or officers appointed by them, interlocking between banking and insurance companies (Tryst with Trust 1991). 5. Investment management of insurance companies was questionable. Government for the first time obtained detailed returns of investments made by the management and the findings were appalling. 6. Loans had been given on any kind of security—good, bad, indifferent, etc. Sometimes there was no security at all. Policyholders money was used to finance enterprises irrespective of their intrinsic merits. 7. During 1945–55, 25 insurers went into liquidation. In 1953–54, 75 insurance companies were unable to declare bonus (Tryst with Trust 1991). All these adverse developments influenced the thoughts of the government about corrective measures.

Nationalization—A Landmark Decision Post-independent India adopted socialistic pattern of society and economic for faster growth and there was a countrywide mood to promote nationalized financial sector. Imperial Bank

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was nationalized in 1955. This was followed by the announcement of nationalization of the life insurance industry, which was announced by the then Finance Minister Shri C D Deshmukh on 19 January 1956 on All India Radio (AIR). The finance minister announced that: This afternoon the Government has promulgated an ordinance regarding life insurance. All life insurance companies, Indian as well as foreign, doing business in India came under Government Management and control. This is the first and preparatory step towards the nationalization of life insurance.

He further added that ‘Nationalization of life insurance is a further step (after the nationalization of Imperial Bank) in the direction of more effective mobilization of people’s savings’. On 18 February 1956, a Finance Bill was introduced in the parliament. Subsequently, after a select committee and Presidents assent the bill became an Act on 17 July 1956. The LIC Bill was passed on 19 June 1956, an act to provide for the nationalization of life insurance business in India by transferring all such business to a corporation established for the purpose and to provide for regulation and control of the business of the corporation and for matters connected therewith and incidental there to—LIC of India was born by merging 245 Indian and foreign life insurance companies operating in India (Annexure 3.A.1).

Growth of Life Insurance Market during 1956–2000 Since nationalization of life insurance, the Indian market has undergone significant changes and the industry has witnessed multifaceted growth and passed through several stages of ups and downs. During this period life insurance industry played a bigger role in the national economy by actively participating in national reconstruction and economic planning. India embarked upon economic planning and life insurance emerged as an important supplier of resource for the planning process since 1956. Moreover, acceptance of socialistic pattern of society and the aim to eliminate poverty also imposed immense social responsibility on LIC to spread the message of life insurance in rural areas and among the under privileged after LIC of India was formed by merging 245 private companies. LIC has played its role quite successfully. However, before we examine its performance let us see the circumstances leading to the formation of LIC of India. During 1956–2000, Indian life insurance market was completely dominated by LIC of India. It was state monopoly but it definitely worked for the people and the country. The objectives of nationalization were achieved to a great extent if we look into the performance and spread of LIC starting with a very little base of insurance understanding. One of the greatest non-financial achievement of LIC is spreading knowledge about the necessity of life insurance throughout the country and setting up offices even in remote villages in rural areas. Moreover, it has been able to create trust even among ordinary and illiterate people. A comparative position of LIC in two periods, namely, in 1957 and 2005 would indicate that LIC has completed a successful journey since its formation (Table 3.5).


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TABLE 3.5 LIC—Some Basic Statistics: 1957–2006 Sl No. 1. Business in Force No. of policies (in lakh) Sum assured (in crore) (Individual assurance only) 2. Premium Income First year (in crore) Renewal (in crore) Total premium (in crore) 3. Policy Payments Death claim (in crore) Maturity claim (in crore) Total 4. (a) Life fund (in crores) (b) Total assets (in crore) 5. Investment (Rs in crore) 6. Government’s share (5%) in valuation surplus (in crore) 7. Number of divisional offices 8. Number of branches 9. Number of agents on roll 10. Number of employees on roll 11. Expense ratio

As on 31 December 1957

As on 31 March 2000

As on 31 March 2006

56. 86 1,474.00

1,013.89 536,450.82

1,796.63 1,282,467.87

13.72 74.35 88.65

4,956.10 19,251.88 27,461.71

12,805.56 56,915.71 90,759.20

7.89 20.81 28.70 410.41 465.04 381.90 14.50

1,637.70 7,628.55 9,266.25 154,043.73 161,002.22 139,032.15 2,65.02

3,769.04 24,743.42 28,512.46 463,147.62 552,447.33 524,017.25 621.77

33 240 207,373 30,768 27.30%

100 2,048 714,615 122,867 21.16%

101 2,048 1,052,283 113,184 14.47%

Source First Statutory Report of LIC (presented to Parliament on 13.03.59 for the first sixteen months from 01.09.56 to 31.12.57) Annual Report of LIC for the year 1999–2000 and 2005–06. Mobilization of Savings

Since nationalization, Indian life insurance industry has registered a significant growth and gradually increased its share in household financial savings. As noted earlier the share of insurance funds in household financial savings has increased from 12.1 per cent in 1999–2000 to 13.0 per cent in 2004–05, while the share of life insurance funds increased from 11.2 per cent to 12.4 per cent during the same period. In terms of GDP it went up from 1.5 per cent to 1.8 per cent. This was a significant achievement of life insurance industry considering the fact that till 2000, the industry was represented by LIC of India alone. Increase in Life Fund and Assets

Growth in Life Fund is considered to be an important indicator of growth of life insurance industry. An organization which began its journey with a mere asset base of about Rs 465.04 crore in the first year has successfully accumulated an asset base of Rs 5,524,473.3 crore by 31st March 2006, that is, an increase of about 940 times. Similarly, the Life Fund of LIC increased by about 996 times, from Rs 410.41 crore in 1957 to Rs 4,631,476.2 crore in 2006. (Table 3.5)

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This is an excellent achievement for LIC which sells long-term intangible products like life insurance. This is an excellent achievement particularly in view of the low rate of literacy and lower level of per capita disposable income in India. New Business Growth

High growth of Life Fund and assets of LIC was possible due to significant growth in New Business, which however got a boost during the post-liberalization period. First time in 1999, LIC sold more than one crore (1.48 crore) policies in a single year and in 2006 it crossed the 3 crore mark by selling 3.15 crore policies. During 1999–2000 New Business (Individual Assurance including Annuity) of LIC was Rs 92090.01 crore (SA) under 172.12 lakh policies which increased further to Rs 288,522.55 crore under 31,585,917 policies in 2005–06. Rural Thrust in New Business

What is more significant is the growing rural thrust not only in terms of opening up offices, recruiting agents and development officers in rural areas, but rural penetration in terms of New Business. As per the rural/social sector definition of IRDA, New Business from rural areas amounted to Rs 609,718.5 (SA) under 7,466,484 policies representing 23.65 per cent and 21:21 share of policies and SA, respectively, during the year 2005–06 (LIC Annual Report 2005–06). Similarly, policy payment towards death and maturity claim increased from Rs 28.70 crore in 1957 to Rs 28,512.46 crore in 2006. Growth Rates—New Business

During 1951–2006, LIC has expanded in many dimensions including New Business, assets and investment. An analysis of growth rate would give us an indication of decadal performance. We may analyze New Business in terms of SA and number of policies. Two outstanding years of achievement in SA growth were 2002 (54.34 per cent) and 1995 (32.08 per cent). The decadal average growth in SA under New Business during 1960–69, 1970–79, 1980–89, 1990–99 and 2000–06 was 8.7 per cent, 8.6 per cent, 24 per cent and 18.5 per cent, respectively, indicating that so far the best decade of growth was 1980s (1980–89) which had average growth of 24 per cent. The performance of nationalized LIC of India, as assessed in terms of only few areas revealed that LIC has been able to fulfil the expectations of the policymakers, with its outstanding achievement in almost every aspect—providing a Personal Financial Risk Management (PFRM), expanding the life insurance market, spreading insurance in rural areas, promoting savings habit among the people, contributing to national development particularly through socially oriented investment and creating employment opportunities for millions of people in the country. While implementing national planning the Indian government created many national institutions which played a significant role in building today’s India and LIC is one such precious institution of India.


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Premium Income

Increase in life fund and assets was possible due to significant increase in business of LIC. While the first year premium income went up from Rs 13.72 crore in 1957 to Rs 12,805.56 crore in 2006, the total premium income increased from Rs 88.55 crore in 1956 to Rs 27,461.71 crore in March 2000 and thereafter to 90,759.20 crore in March 2006. Total premium income per employee increased from Rs 0.288 lakhs in 1956 to Rs 80.187 lakhs in 2006. In-force Policies

Total number of in-force policies went up from 56.86 lakhs in 1957 to 1,013.89 lakhs in 2000 and thereafter a huge increase to 1,796.63 lakhs in 2006. The number of in-force policies per branch and division was 0.23 lakhs and 1.72 lakhs in 1957 which has gone upto 0.88 lakhs and 17.79 lakhs respectively, for per branch and divisional office. Claims Settlement

During the year 2005–06 LIC has settled a total of 120.90 lakh claims for Rs 28,512.46 crore. During 2005–06 LIC has settled 115.63 lakhs maturity claims amounting Rs 24,743.42 crore and 5.27 lakh death claims amounting to Rs 3,769.04 crore. This has been possible due to massive computerization, networking, thrust on Customer Relationship Management (CRM), etc. Network of Offices

Office network is an important input for growth in order to reach to the customers for mobilization of business and to take service to the doorsteps of customers. Realizing this LIC moved to build up its office network by opening branch and divisional offices throughout the country. In 1957 LIC started its journey with 33 divisional offices mostly in the metropolitan and urban areas, the number has gone up to 101 and most of these new divisions are in the smaller cities, similarly, the number of branches to start with was 240 in 1957 it increased to 2,048 and most of the new branches are in semi-urban and rural areas. Out of 2,048 branches, 1,248 branch offices of LIC are located in rural areas. Besides 2,048 branches, LIC has opened 24 satellite offices by March 2006 for providing services at the doorstep of the customers. LIC’s strategic planning for market penetration takes into account the segmentation and development of rural and urban market. There is a strong network of agents to cater to the needs of rural people. Massive Use of Information Technology

LIC is one of the organizations in India which has gone for massive use of technology. It has its own Software Development Centre (SDC), engaged in upgrading existing technology and developing new technology. In LIC, all the jobs processed in branch offices have been mechanized, 2,042 branches (out of 2,048) are now connected through wide area network, LIC has its own portal providing various services, including policy status, bonus calculation, loan quotation, list of lapsed policies, A similar portal has been in place for the agents as well. LIC

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has also put in place facilities of internet payments, electronic clearing system, ATMs, etc. LIC has also put in place a massive data warehousing system in house IT system thus providing tremendous support to management decisions and improving service quality with speed. Foreign Operation

In the past nationalization period, LIC has not only expanded its offices and marketing network in India but it has also opened several subsidiaries and branch offices. Branches

LIC has its branch offices at Port Louis (Mauritius), Suva and Laukota (Fiji) and at Wembley (United Kingdom). Subsidiaries and Joint Venture

LIC (International) BSC (C), Bahrain is a subsidiary of the corporation opened in 1989 which operates in the states of Bahrain, Saudi Arabia, Kuwait and United Arab Emirates (UAE) through chief agents and brokers. This company has opened a branch office in Muscat at Oman. A joint venture is being set up by LIC Saudi Arabia. In Nepal—LIC Nepal Ltd. is functioning as a joint venture between LIC of India and M/S Vishal Group of Companies in the Kingdom of Nepal launched in 2001 and in Sri Lanka LIC has established LIC Lanka Ltd. It is a joint venture company between LIC of India and M/S Bartleet Group of Co. Ltd., launched in 2004. LIC (Mauritius) offshore—a joint venture company between LIC of India and GIC of India. Agents and Employees

There has been a substantial increase in the number of agents on role which has increased by about five times between 1957 (207,373) and 2006 (1,052,283). The corporation has launched an innovative scheme called the ‘Urban and Rural Career Agents’ with a view to attract educated youth to take up LIC agencies. By March 2005, there were 25,856 urban career agents and 46,418 rural career agents. Thus LIC has directly provided employment opportunity to millions in addition to providing regular employment which has gone up by more than three times from 30,768 in 1957 to 113,184 in 2006. Investment

Investment of LIC of India before the enactment of IRDA Act 1999 used to be guided by the Insurance Act 1938. According to this Act 25 per cent of the assets were to be invested in government securities and 25 per cent in government and other approved securities. Out of the remaining 50 per cent, 35 per cent could be invested in bonds/stocks and publicly traded securities while the remaining 15 per cent could be invested in other areas. However, this was modified in 1958 and as per modification of Section 27A of Insurance Act, investment norms were laid down. 1. Not less than 20 per cent to be invested in central government securities. 2. Not less than 25 per cent as loans including (1) to be invested in NHB.


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3. Not less than 50 per cent including (2) should be invested in state government securities. 4. Not less than 75 per cent should be invested in socially oriented sector including public sector, cooperatives sector, house building by policyholders, own your own home scheme including (3). During the post-nationalization period investment of LIC has gone up astonishingly merely from Rs 381.90 crore by 31 December 1957 to Rs 524,017.25 crore on 31 March 2006 and emerged as the largest investor in the country (Table 3.6). TABLE 3.6 LIC of India Investment as on 31 March 2006 Investment in India (A) Amount (Rs in crore)

% to Total

Investment Outside India (B) Amount (Rs in crore)

1. Loan 57,534.93 11.00 117.77 2. Stock exc. securities 462,237.61 88.37 793.77 3. Special deposits 0 0.00 0 with central govt. 4. House property 0 0.00 35.58 5. Other investment 3,293.18 0.63 4.41 Total 523,065.72 100.00 951.53 Grand total (In India and Out of India) [G] 4,138,009.5

% to Total

Total (A + B) Amount (Rs in crore)

% to Total

12.37 57,652.00 83.42 463,031.38 0.00 0

11.00 88.36 0.00

3.74 35.58 0.46 3,297.59 100.00 524,017.25

0.0068 0.63 100.00

Source LIC Annual Report 2005–06.

Total investment of LIC stood at Rs 524,017.25 crore, of which Rs 523,065.72 crore, that is, 99.82 per cent was invested in India and Rs 951.53 crore, that is, 0.18 per cent was invested abroad. Investment in Stock Exchange Securities dominated LIC’s investment of the total investment of Rs 462,237.61 crore in India, 88.37 per cent was invested in Stock Exchange Securities. Out of Rs 951.53 crore investment abroad Rs 793.77 crore, that is, 83.42 per cent was invested in Stock Exchange Securities. Second highest component was loan and 11 per cent and 12.37 per cent was invested in India and abroad, respectively. (A more detailed discussion on investment maybe seen in Chapter 5.) Socially Oriented Investment

LIC’s investment in developmental and socially oriented sector has been increasing steadily. Significant amount of investment has gone into electricity, housing, water and sewerage, transport and industrial development. Data for socially oriented investment in December 1957 is not available. However, by March 1970 Rs 513.21 crore, that is, 33.9 per cent of total investment was in socially oriented sector. The socially oriented investment further increased to Rs 358,400.76 crore by March 2006 which was 68.39 per cent of total investment of the corporation.

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Surplus and Taxes Paid to the Government

Performance of LIC also reflected in valuation surplus which increased from Rs 7,613 crore in 2000–01 to Rs 12,463.00 crore. As per the LIC Act 1956, 5 per cent of this surplus goes to the Government of India—which has sharply increased from Rs 383.77 crore in 2000–01 to Rs 621.77 crore in 2005–06. LIC also pays a huge amount of tax which was Rs 3,967.75 crore in 2006 excluding service tax (Table 3.7). TABLE 3.7 Surplus, Share of Government and Taxes Paid by LIC (Rs in crore) Year 2000–01 2001–02 2002–03 2003–04 2004–05 2005–06

Valuation Surplus 7,613 8,667 9,767.00 10,987.60 13,951.69 12,463.00

Government’s Share in Valuation Surplus 383.77 433.25 488.10 548.13 696.60 621.77

Taxes Paid to the Government∗ 709.65 868.17 1,258.62 1,506.28 5,365.16 3,967.75

Source LIC Annual Reports. ∗Does not include service tax. Note

Market Structure—Post-liberalization Period Insurance industry particularly the LIC of India has witnessed significant growth with respect to insurance coverage, premium mobilization and contribution to socio-economic development. LIC launched a wide range of products, providing cover to the most vulnerable section and served the cause of development. However, insurance industry remains primarily a supplydriven industry. Though it has done exceedingly well, much more remained to be done in terms of expansion of market size, consumer service and to provide wider product choice to the customers. Meanwhile, the global economy underwent a radical change in 1990s and a new economic order was established in India along with many countries of the world, with the new economic order supply-driven structure was replaced by the demand-driven market structure through liberalization and entry of private sector players.

Prelude to Reform A new chapter was added to the Indian economy with far-reaching consequences when structural reforms were initiated in 1991 in the aftermath of BOP crisis. Several segments of financial markets were deregulated and opened up to domestic and foreign private investment. However, it took about a decade to liberalize Indian insurance sector due to political sensitivity. Prior to opening up the insurance market lots of public debate was generated. The Government of


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India also appointed two high-powered committees to look into the details and to suggest future course of action for the Indian insurance sector.

Malhotra Committee The Government of India appointed a high-powered committee under the Chairmanship of R N Malhotra, who was earlier the Governor of RBI. The committee released its report in 1994. The terms of reference of the committee was to suggest the structure of insurance industry, to assess the strength and weakness of the insurance companies in terms of creating an efficient and viable insurance industry, to develop instruments for mobilization of financial resources for development, to improve functioning of LIC and GIC, to make recommendations for changing the structure of insurance industry, to make recommendations on regulation and supervision of the insurance sector in India, etc. The committee made several far-reaching recommendations regarding the structure of the insurance industry, regulation, supervision and functioning of LIC and GIC. To improve functioning of LIC, the committee recommended that LIC should be selective in recruiting agents and must provide suitable training after identifying the training needs, Insurance Institute Mumbai should start courses for insurance sector intermediaries, LIC should also recruit Master of Business Administration (MBA) for marketing, claims should be settled within a given time frame. The committee also recommended to improve servicing, product development, pricing, IT, etc. The committee made far reaching recommendation regarding altering the structure of LIC and GIC. It also recommended entry of new players and capital requirement of Rs 100 crore for such players, though lower capital requirements were suggested for co-operative sector’s entry into insurance. The committee also recommended special attention to rural sector.

Insurance Regulatory Act (1999) The Malhotra Committee Report set the tone of change in the Indian insurance sector and deregulation followed subsequently. Indian cabinet approved the Insurance Regulatory Authority (IRA) Bill on 6 March 1999 which was aimed at liberalizing Indian life and general insurance industry. However, due to political instability the bill could not be ratified by the Indian parliament. The bill was subsequently termed as IRDA Act and passed in the Parliament on 7 December 1999. With the passing of the bill the monopoly position of LIC was removed and private companies were allowed to operate in the Indian insurance market. After the IRDA bill was passed in the Parliament, private insurance companies were given licences to operate in the Indian market. Joint ventures between Indian and foreign companies were allowed but FDI was limited to 26 per cent of Rs 100 crore capital of life companies and Rs 200 crore for non-life companies. Indian insurance market witnessed a silent revolution

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with the IRDA in place. IRDA, in the light of with its Mission Statement came out with several guidelines/circulars/orders in the interest of healthy growth of the Indian insurance industry, protection of consumers’ interest and orderly management of insurance companies. Mission Statement of IRDA

In its Annual Report 2000–01 IRDA, stated its Mission Statement, as following: 1. To protect the interest of and secure fair treatment to policyholders. 2. To bring about speedy and orderly growth of the insurance industry (including annuity and superannuation payments), for the benefit of the common man and to provide long-term funds for accelerating growth of the economy. 3. To set, promote, monitor and enforce high standards of integrity, financial soundness, fair dealing and competence of those it regulates. 4. To ensure that insurance customers receive precise, clear and correct information about products and services and make them aware of their responsibilities and duties in this regard. 5. To ensure speedy settlement of genuine claims, to prevent insurance frauds and other malpractices and put in place effective grievance redressal machinery. 6. To promote fairness, transparency and orderly conduct in financial markets dealing with insurance and build a reliable management information system to enforce high standards of financial soundness among market players. 7. To take action where such standards are inadequate or ineffectively enforced. 8. To bring about optimum amount of self-regulation in day-to-day working of the industry consistent with the requirements of prudential IRDA regulations, published in the Gazette of India on 14 July 2000 set the direction for future insurance industry in India. The Act stipulates several provisions in this respect. Protection of Interest of Policyholders

The IRDA Act 1999 mandates the IRDA to protect the interest of policyholders and to regulate promote and ensure orderly growth of the insurance industry. Maintenance of Solvency Margin

As per the provision of the IRDA Act 1999 (and subsequent provision) every life insurer is required to maintain an excess value of his assets over the value of his liabilities of not less than Rs 500 crore (Rs 100 crore in case of a reinsurer) or a sum of equivalent based on a prescribed formula, as determined by regulation not exceeding 5 per cent of mathematical reserve and a percentage not exceeding 1 per cent of the sum at risk for the policies on which the sum at risk is not negative, whichever is highest.


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Rural and Social Sector Business

IRDA Act 1999, stipulated that every insurer after the commencement of the Act is to ensure that a specified percentage of business is done in the rural and social sector. Rural sector was defined where population is not more than 5,000, density is not more than 400 per sq km and at least 75 per cent of male working population is engaged in agriculture (this was subsequently modified marginally). According to this, a life insurer to ensure rural business from 5 per cent in the first financial year to 15 per cent in the fifth year. A social sector, according to the Act includes unorganized sector, informal sector, economically vulnerable or backward classes and other categories of persons both rural and urban with respect to all insurers. Accordingly number of lives to be insured varies from 5,000 in the first financial year to 20,000 in the fifth year. Appointed Actuary

Introduction of appointed actuary system is yet another milestone of the IRDA Act. All life insurance companies must have an appointed actuary. Appointed actuary must be a fellow member of the Actuarial Society of India, should possess a certificate of practice issued by the Actuarial Society of India and must fulfil certain conditions specified in the appointed Actuary Regulations. Actuarial Standard

IRDA issued qualifications of Actuary Regulation and prescribed powers and duties of the appointed actuary. Actuarial Society of India, which was entrusted by IRDA, has come out with a Guidance Note (GN) on appointed actuaries and life insurance covering professional standard, responsibilities of appointed actuary towards maintaining the solvency of the insurer, meeting reasonable expectations of the policyholders and to ensure that the new policyholders are not misled with regard to expectations. Accounting Standard

Regulations have been issued for preparation of financial statements and auditor’s report of insurance companies. The regulations broadly conform to the accounting standards issued by the Institute of Chartered Accountants of India (ICAI). Agents Qualification and Training

IRDA has prescribed minimum qualification and training of agents. Accordingly, an insurance agent should have at least a high school diploma and must undergo certain hours of training from a recognized institution. Entry of Private Life Insurance Companies

With the passing of the insurance bill in the Parliament, several private companies applied for transacting life and non-life business in India. However, very few were issued licences. The

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first Indian private sector life insurance company to be issued a licence was HDFC Standard Life in October 2000. During the financial year 2000–01 seven private sector life insurance companies including HDFC Standard Life Insurance Company Ltd., ICICI Prudential Life Insurance Company Ltd., Birla Sunlife Insurance Company Ltd., Max New York Life Insurance Company Ltd., Kotak Mahindra Old Mutual Life Ins. Ltd., Tata AIG Life Ins. Co. Ltd., and SBI Life Ins. Co. Ltd. were issued licences. In the Financial year 2001–02 four companies, namely, ING Vysya Life Ins. Co.Pvt. Ltd., Bajaj Allianz Life Ins. Co. Ltd., Met Life India Ins. Co. Pvt. Ltd. and AMP Sanmar Life Insurance Company were issued licences, while in the year 2004 and 2005 one each, namely, Sahara India Insurance (February 2004) and Shriram Life Insurance Ltd. (November 2005) was issued licence. Since then 13 private sector companies have been conducting transactions in the Indian life insurance market. By March 2006, there were 15 life insurance companies including LIC of India (Table 3.8). TABLE 3.8 Entry of Private Life Insurance Companies Name of the Insurance Company HDFC Standard Life Ins. Co. Ltd. Max New York Life Ins. Co. Ltd. ICICI Prudential Life Ins. Co. Ltd. Kotak Mahindra Old Mutual Life Ins. Ltd. Birla Sun Life Ins. Co. Ltd. Tata AIG Life Ins. Co. Ltd. SBI Life Ins. Co. Ltd. ING Vysya Life Ins. Co.Pvt. Ltd. Bajaj Allianz Life Ins. Co. Ltd. Met Life India Ins. Co. Pvt. Ltd. Reliance Life (Formerly AMP Sanmar) Aviva Life Ins. Co. India Pvt. Ltd. Sahara India Ins. Co. Ltd. Shriram Life Ins. Co. Ltd.

Date of Reg. 23 October 2000 15 November 2000 24 November 2000 10 January 2001 31 January 2001 12 February 2001 20 March 2001 2 August 2001 3 August 2001 6 August 2001 January 2002 14 May 2002 6 February 2004 17 November 2005

Source IRDA Annual Report (2003–04).

Capital of Life Insurance Companies One of the most debated issue in post-liberalized life insurance industry is the FDI component of capital in the private sector life insurance companies, which at present is 26 per cent of minimum capital of Rs 100 crore. All the Indian companies except Sahara India were promoted as joint ventures with foreign equity participation, Sahara India was promoted as a 100 per cent Indian private sector company. Though initially AMP Sanmar was promoted with foreign equity, it became a wholly owned company after it was acquired by Reliance. As per the existing provision foreign partners can contribute to maximum 26 per cent of capital as FDI (Table 3.9).


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TABLE 3.9 Equity Share Capital of Life Insurance Companies (Rs in crore) Name of the Insurance Company HDFC Standard Life Ins.Co.Ltd. ICICI Prudential Life Ins.Co.Ltd. Max New York Life Ins.Co.Ltd. Om Kotak Life Ins. Co. Ltd. Birla Sun Life Ins. Co.Ltd. Tata AIG Life Ins. Co. Ltd. SBI Life Ins. Co. Ltd. ING Vysya Life Ins. Co. Pvt. Ltd. Met Life India Ins. Co. Pvt. Ltd. Bajaj Allianz Life Ins. Co.Ltd. Reliance Life (Formerly AMP Sanmar) Aviva Life Ins. Co. India Pvt. Ltd. Sahara India Ins. Co. Ltd. Shriram Life Ins. Co. Ltd. Sub Total LIC of India Total

2004–05

2005–06

320.00 620.00 925.00 1,185.00 466.08 557.43 211.76 244.58 350.00 460.00 321.00 447.00 350.00 490.00 325.00 490.00 235.00 235.00 150.07 150.23 217.100 331.00 319.80 458.70 157.00 157.00 – 125.00 4,347.81 5,885.95 5.00 5.00 4,352.81 5,890.95

Foreign Promoter 113.08 308.10 144.93 63.59 119.60 116.22 127.40 127.40 61.10 39.06 0.00 119.26 0.00 32.50 1,355.35 – 1,355.35

Indian Promoter 506.92 876.90 412.50 180.99 340.40 330.78 362.60 362.60 173.90 111.17 331.00 339.44 157.00 92.50 4,530.60 5.00 4,535.60

FDI (%) 18.60 26.00 26.00 26.00 26.00 26.00 26.00 26.00 26.00 26.00 00.00 26.00 00.00 26.00 – – –

Source IRDA Annual Report (2005–06).

Merger and Acquisition in Life Insurance Industry Indian life insurance market has also witnessed first acquisition of an existing company by an Indian corporate. This was the case of AMP Sanmar. AMP Sanmar was promoted by Indian company Sanmar and its Australian partner AMP. However, the partnership could not continue. It was reported that Sanmar wanted to withdraw from the life insurance business in India. Subsequently, Indian Corporate Reliance Capital Limited acquired the entire equity capital of AMP and Sanmar group in AMP Sanmar Life Insurance Co. Ltd. and the name was changed to Reliance Life Insurance Co. Ltd. and fresh certification of incorporation was issued by the Registrar of Companies, Tamil Nadu on 17 January 2006. AMP Sanmar on 4 October 2005 and has been renamed as Reliance Life Insurance Company Ltd. This is the first case of acquisition in the life insurance sector. Company wise equity capital of life insurance companies is shown in Table 3.9. It can be noted that total equity capital of all the companies increased from Rs 2,234.13 crore in 2002–03 to Rs 3,238.71 crore in 2003–04. Contribution of Indian and foreign promoters accounted as Rs 2,461.37 crore and Rs 782.33 crore, respectively.

Other Developments in Post-liberalization Period Liberalization of life insurance market has brought many dimensional changes along with competition, world-class insurance regulation, better protection of consumers, wide range of

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new products, increased awareness among the consumers, compulsory education of sales force, etc. There is also an increased awareness about health insurance and microinsurance and many companies are launching these products. Regulation for Healthy Development

In the post-liberalized era, IRDA attempted to promote a healthy and competitive insurance market by introducing several regulatory measures. Upto March 2004, IRDA issued 33 regulations for this which include appointment of actuary; actuarial report and standard; qualification of actuary; assets liability and solvency margin of insurer; obligation of insurers to rural social sector; advertisement and disclosures; licensing of agents, brokers and corporate agents; investment regulations; protection of policyholders interest, etc. Regulations improve the quality and depth of markets as well as increase competition, which ultimately enhances the value for customers. Thus regulation serves the industry as well as all the stakeholders of the industry. Therefore, regulation should not be seen as a controlling mechanism but as an aid to the development of industry, IRDA regulations serve this purpose. New Products

One of the significant developments in the Indian life insurance market is the widening of the product basket. The new life insurance companies promoted as joint ventures between Indian and foreign companies launched a variety of new products. A whole range of insurance and retirement products, children’s products, investment products, etc. 1. During 2000–01, 20 new products which included term assurance, endowment, whole life money back, single premium bond, endowment, etc. 2. During 2002–03, IRDA cleared 102 products, a large number being unit linked and pension products. 3. During 2003–04, IRDA cleared 105 new products, a large number of new products cleared were endowment and conventional life insurance products. This is a very positive development in life insurance industry in India since it provided a wider scope to the consumers to select a product of choice and need. Moreover, it enabled the life insurance industry to improve its strength to compete with Other Financial Institutions (OFIs). Licenced Life Insurance Agents

Agents play a very important role in life insurance business since they act as linkage between a life insurance company and the buyers of insurance products. Agents play a very crucial role in countries with lower level of education and act as financial advisers and assist the customers to take need-based informed decisions. Therefore, they need to be well trained. IRDA has emphasized on this and introduced minimum hours of compulsory training to agents. Agents


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in India obtain the necessary licence from IRDA to transact insurance business. There has been a substantial increase in the number of agents since IRDA was established in 1999. Number of licences (new and renewal) issued by IRDA till 31 March 2004 was 1,538,672 out of which 816,897 were urban agents and 721,775 were rural agents. Therefore, out of the total agents appointed about 53.09 per cent were urban agents while 47.91 per cent were rural agents. Business Growth during the Post-liberalized Period

Liberalization of the insurance industry leading to entry of private life insurance companies has intensified competition which has helped market expansion in the post-liberalized era. The life insurance market has also become healthier due to a number of regulatory initiatives of IRDA. There is a significant improvement in insurance literacy, information dissemination and informed decision-making by the consumers. Moreover, product diversification has provided a wider choice to the consumers to select need-based products. Increase in the number of trained agents and entry of corporate agents and brokers provided a new impetus to channel management and distribution leading to life insurance penetration in wider segments of the market. All these developments have been reflected in higher sales and better growth of life insurance business. The Indian insurance industry was opened in August 2000 and new registrations were granted on 23 October 2000. Private sector companies have entered the Indian life insurance market in Financial Year 2000–01 but not much contribution was made by them. Further no authentic business data is available for the period 2001–02. Keeping this in view we have examined the post-liberalization business growth during the period 2003–04 to 2004–05. We discuss below some of the important development during this period. Opening of life insurance market provided the much needed boost to business growth in terms of increase in premium and policies. Post-liberalized period also witnessed significant expansion in network and geographical spread. LIC achieved significant growth during the pre-liberalized period and by the end of March 2001, in-force policies serviced by LIC stood at 11.32 crores under the SA of Rs 734,368.08 crore and annual premium received through these policies was to the extent of Rs 36,063.29 crore. However, the entry of private sector induced competition in the market and total premium income jumped to Rs 50,094.46 crore in 2001–02. The growth momentum sustained during subsequent years and total premium income doubled in the next four years from Rs 50,094.46 crore in 2001–02 to Rs 105,875.77 crore in 2005–06. Since opening up of market to the private sector, the Indian life insurance industry entered into a growth trajectory by maintaining undisrupted growth in premium income from 11.28 per cent in 2002–03 to 27.78 per cent in 2005–06. However, this has been possible due to unprecedented growth in the first premium income, particularly in single premium which was 74.11 per cent in 2004–05 and 69.40 per cent in 2005–06 (Table 3.10).

GROWTH

IN

PREMIUM INCOME

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LIFE INSURANCE IN INDIA TABLE 3.10 Premium Underwritten by Life Insurers (Rs in lakh)

Insurers

2001–02

2002–03

2003–04

2004–05

2005–06

A. First year premium LIC 1,958,877.25 1,597,676.15 1,698,929.64 1,165,823.94 1,372,803.17 Private sector 26,850.90 754,772.99 422,309.25 244,070.58 96,568.97 Total 1,985,728.15 1,694,245.12 1,943,000.22 1,588,133.19 2,127,576.16 (33.97) (14.65) (14.68) (–14.68) B. Single premium – – – 899,482.42 1,478,784.14 LIC 272,193.91 134,148.09 Private sector 1,033,630.51 1,750,978.05 Total (69.40) (74.11) C. Renewal premium LIC 3,023,313.69 3,865,172.79 4,617,830.54 5,447,422.62 6,227,635.05 481,386.89 216,293.48 67,962.05 Private sector 403.48 15,337.18 Total 3,023,717.17 3,880,509.97 4,685,792.58 5,663,716.10 6,709,021.94 (18.46) (20.85) (20.75) (28.34) D. Total premium LIC 4,982,190.94 5,462,848.94 6,316,760.00 7,512,728.98 9,079,222.36 772,750.82 1,508,353.79 312,032.63 Private sector 27,254.81 111,906.15 Total 5,009,445.75 5,574,755.09 6,628,792.80 8,285,479.80 10,587,576.65 (27.78) (24.31) (18.91) (11.28) Source IRDA Annual Report for the year 2003–04 and 2005–06. Note First year premium include single premium.

The growth rate in renewal premium declined from 28.34 per cent in 2002–03 to 18.46 per cent in 2005–06. Declining growth rate in renewal premium income was primarily due to high growth rate in single premium business. However, growth in absolute volume of renewal premium income year after year is an indication of increased business conservation ratio as well as improvement in quality of underwriting. Though the high growth rate in first year premium including single premium income was fuelled by growth in sales of unit linked products influenced by upbeat stock market. Continued growth in premium income strongly supported high growth in GDP and domestic savings in India. Real GDP growth in India in 2004–05 and 2005–06 was 7.5 per cent and 8.4 per cent, respectively, while GDS registered a growth rate of 29.1 per cent in 2004–05 (Table 3.11).

Dominant Private Sector Companies During the year 2005–06, total market share of private sector companies accounted for 14.25 per cent. However, only five companies cornered 10.65 per cent. Top five companies in terms


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TABLE 3.11 Company-wise Total Life Insurance Premium (Rs in crore) Insurers LIC

2000–01 34,892.02

2001–02

49,821.91 (42.79) ING Vysya – 4.19 HDFC Std Life 0.002 33.46 BSLI 0.32 28.26 ICICI Prudential 5.97 116.38 Kotak Life – 7.58 Tata AIG∗ – 21.14 SBI Life – 14.69 Bajaj Allianz – 7.14 MNYL 0.16 38.95 Met Life – 0.48 Reliance Life – 0.28 Aviva – – Sahara – – Shriram Life – – Private Sector 6.45 272.55 (4,124.31) Total 34,898.47 50,094.46 (43.54)

2002–03 54,628.49 (9.65) 21.16 148.83 143.92 417.62 40.32 81.21 72.39 69.17 96.59 7.91 6.47 13.47 – – 1,119.06 (310.49) 55,747.55 (11.28)

2003–04

2004–05

2005–06

63,533.43 75,127.29 90,792.22 (16.30) (18.25) (20.85) 88.51 338.86 425.38 297.76 686.63 1,569.91 537.54 915.47 1,259.68 989.28 2,363.82 4,261.05 150.72 466.16 621.85 253.53 497.04 880.19 225.67 601.18 1,075.32 220.80 1,001.68 3,133.58 215.25 413.43 788.13 28.73 81.53 205.99 31.06 106.55 224.21 81.50 253.42 600.27 – 1.74 27.66 – – 10.33 3,120.33 7,727.51 15,083.54 (178.83) (147.65) (95.19) 66,653.75 82,854.80 105,875.76 (19.56) (24.31) (27.78)

Source: Insurance Regulatory and Development Authority (IRDA). 2006. Annual Report 2005–06, Hyderabad. Notes ∗Figures revised for the year 2002–03 and includes the group business. Figures in the bracket represent the growth over the previous year in per cent. – represents business not started. 1 crore = 10 million.

of market share were ICICI Prudential (4.02 per cent), Bajaj Allianz (2.95 per cent), HDFC Standard Life (1.48 per cent), Birla Sunlife Insurance (1.19 per cent) and SBI Life (1.01 per cent).

Growth in New Policies Premium income increases due to increase in sales and there has been a significant increase in sales of life insurance policies since 2001–02. During the four years period, that is, from 2002–03 to 2005–06, new policies sold by life insurance companies increased from 2.54 crore to 3.55 crore. However, growth rates in new policies are not consistent with growth rates in premium income. Growth rates in policies derived out of data in Table 3.12 shows that after 12.8 per cent in 2003–04, it declined to 8.4 per cent in 2004–05 and further increased to 35.3 per cent in 2005–06, while the premium income grew steadily from 18.91 per cent in 2003–04, to 24.31 per cent in 2004–05 and further to 27.78 per cent in 2005–06 (Table 3.11 and 3.12).This is basically due to the changing focus of life insurance companies on high net worth individuals and to sell high SA policies as well as changing preference and general increase in the ability of the customers to go for high SA policies.

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LIFE INSURANCE IN INDIA TABLE 3.12 New Policies Issued by Life Insurers

Year 2002–03 2003–04 2004–05 2005–06

LIC

Private Sector

24,545,580 (96.75) 26,968,069 (94.21) 23,978,132 (91.48) 31,590,707 (89.08)

825,094 (3.25) 1,658,847 (5.79) 2,233,075 (8.52) 3,871,410 (10.92)

Total 25,370,674 (100) 28,626,916 (100) 26,211,198 (100) 35,462,117 (100)

Source IRDA Annual Report for the year 2003–04 and 2005–06.

Market Share (New Business) Before 2000, life insurance market in India was dominated by LIC and its share in the life insurance market was about 98–99 per cent, the rest being managed by postal insurance and state insurance corporation. As such, LIC never had 100 per cent market share. During postliberalization the market share of LIC declined in the expanded market—which is quite natural in a competitive market. However, decline in the market share of any existing company would be reflected more sharply in the New Business market, rather than in total premium. Market share of private sector life insurers increased rapidly from 1.35 per cent in 2001–02 to 35.48 per cent in 2005–06 while in total premium it increased from 0.54 per cent to 14.25 per cent during the same period. By the end of March 2006, market share of private sector in first premium, single premium, renewal premium and total premium was 35.48 per cent, 15.55 per cent, 7.18 per cent and 14.25 per cent, respectively. This indicates the intense nature of growing competition in life insurance market in India (Table 3.13). TABLE 3.13 Market Share of Life Insurers Insurers A. First Year Premium LIC Private sector B. Single Premium LIC Private sector C. Renewal Premium LIC Private sector D. Total Premium LIC Private sector

2001–02 (%)

2002–03 (%)

2003–04 (%)

2004–05 (%)

2005–06 (%)

98.65 1.35

94.30 5.70

87.44 12.56

73.41 26.59

64.52 35.48

– –

– –

– –

87.02 12.98

84.45 15.55

99.99 0.01

99.60 0.40

98.55 1.45

96.18 3.82

92.82 7.18

99.46 0.54

97.99 2.01

95.29 4.71

90.67 9.33

85.75 14.25

Source IRDA Annual Report for the year 2003–04 and 2005–06. Note First year premium includes single premium.


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New Business and Market Share in 2006–07 Detail business information for the year 2006–07 is not available. However, the information about first year premium income including single premium has been released by IRDA (Table 3.14). TABLE 3.14 First Year Premium Underwritten by Life Insurers during 2006–07 Market Share Insurers LIC Private sector Total

Premium 55,934.69 (118.11) 19,471.83 (89.92) 75,406.52 (110.06)

Policies 38,229,292 (21.01) 79,22,274 (104.64) 46,151,566 (30.14)

Premium 74.18 25.82 100

Policies 82.33 17.17 100

Source http://www. irdaindia.org. Note First year premium income includes individual (single and non-single) and group business (single and non-single).

Products Proliferation Opening up the market to private sector has not only fuelled the growth in premium income and selling of life insurance policies, but also widened the product range in the marketplace. Pre-liberalized life insurance market was primarily dominated by endowment type plans but the post-liberalized market witnessed a variety of new plans such as children’s plans, pension and retirement and the unit linked plans. However, the most important was the unit linked plan which became most popular due to customer friendly features such as easy liquidity, flexibility and transparency. Though life market still remains the biggest contributor of premium, the contribution annuity, pension and health insurance is growing. During 2005–06, the contribution of life, annuity, pension and health to first premium income was 73.57 per cent, 4.30 per cent, 22.10 per cent and 0.02 per cent as against 77.27 per cent, 6.7 per cent, 15.55 per cent and 0.47 per cent, respectively, in the previous year. A very positive trend has been observed with respect to pension, which is increasing at a fast rate. Distribution of first premium into linked and non-linked products indicates a trend of consolidation of linked products. Linked products underwritten in 2005–06 was Rs 16,060.67 crore as against Rs 8,247.74 crore, that is, a growth rate of 95 per cent, whereas premium under non-linked products increased to Rs 19,804.33 crore in 2005–06 from Rs 17,069.37 crore, that is, a growth rate of 16 per cent. Further, linked and non-linked business accounted for 44.78 per cent and 55.22 per cent in 2005–06 as against 32.54 per cent and 67.46 per cent, respectively, in 2004–05. There is a growing emphasis on health insurance. A number of life plans were launched with health riders but 2005–06 saw the launch of insurance cover especially for cancer as well as diabetes care. Post-liberalized competition in the life insurance market thus created new markets for new products and offered structured solution to wider need of risk management.

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Benefit Payments During the last five years, there has been a significant increase in life insurance business in India, which has enhanced the benefits payments to the policyholders. According to IRDA Annual Report 2005–06 (p.20) that benefits payments have virtually doubled from Rs 17,484.11 crore in 2001–02 to Rs 35,264.40 crore in 2005–06. It can also be noted that benefits payments more or less remained within the range of 33 per cent to 36 per cent of premium underwritten, but in fact declined since 2003–04 from 36.20 per cent to 33 per cent in 2005–06, which is healthy sign. However, a large amount of such payments are made by LIC. In fact in 2005–06, LIC paid benefits of Rs 33,956.79 crore comprising 37 per cent of premium underwritten while private insurers paid Rs 1,307.61 crore comprising 9 per cent of premium underwritten.

Expenses of the Life Insurers Expense management is a critical issue in life insurance operation, as such expenses should not exceed the prescribed limit. Further, a major expense of life insurance operation is payment of commission which accounts for about 80 per cent of the total operating expenses. It has been noted from the total commission payment as per cent of gross premium has steadily declined from 9.29 per cent in 2003–04 to 2005–06. This has happened due to expansion of alternative channels like Bancassurance, etc. Moreover, increase in sale of single premium policies also impacted commission expenses. In 2005–06, while the industry level operating expense was 8.16 per cent, the same for LIC was 6.65 per cent of gross premium underwritten (as against 8.31 per cent in 2004–05). Operating expense of private insurers, in 2005–06 was 23.72 per cent as against 28.85 per cent in 2004–05. However, the overall trend is an indication of decline in operation’s expenses for the industry (Table 3.15). Evolution of Indian life insurance industry since 1818 in three distinct phases gives us an idea of changing structure of the life insurance market. The first phase starts from 1818 to 1956—which can be further subdivided into a period 1818–1930s and late 1930s to 1956. While the period 1818–1930s can be identified as monopolistic duality among the foreign and Indian companies, the later part of this phase witnessed quite intensive competition among the Indian companies. It can be identified as a market with monopolistic competition in duality. In fact, during the initial period life insurance market was loosely divided into two markets; foreign insurance companies who were basically insuring non-Indians and Indian insurers focussing primarily on Indians. There is even a differentiation in product pricing. There was no regulation of significance before Insurance Act 1938, insurance companies were privately managed and customer’s interest were rarely protected. The second phase (1956–2000–01) of life insurance industry in India was characterized by state monopoly but was regulated better than the earlier phase because of implementation of the Insurance Act, 1938, owing to public accountability of state run LIC of India. Therefore,


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TABLE 3.15 Commission and Operating Expenses of Life Insurers as Per cent of Premium Sl No. 1. First year commission as % first year premium 2. Single premium commission as % of single premium underwritten 3. Renewal commission as % renewal premium underwritten 4. Total commission as % of total premium underwritten 5. Operating expenses as % of gross premium underwritten 6. Commission as % operating expenses

2001–02

2002–03

2003–04

2004–05

2005–06

14.43

17.22

17.78

24.06

22.52

–

–

–

1.54

1.09

5.62

5.80

5.77

5.62

5.45

9.12

9.27

9.29

8.57

8.16

9.43

9.70

9.93

10.22

8.16

97.62

95.86

93.47

83.87

89.94

Source IRDA Annual Report (various issues). Note @ include single premium.

the state monopoly could achieve much better results than the pre-monopoly phase to advance and protect policyholders interest and contribution to nation building. The third phase, which began with deregulation of life insurance industry since 2000 has entered into a phase which can be identified as a perfectly competitive market structure with a number of products but mostly standardized in the light of country’s regulation. There is also better dissemination of information required by the consumers for taking informed decisions. Indian life insurance market thus travelled from loosely regulated non-standardized productbased market to a well-regulated competitive market with virtually standardized life insurance products. However, there is scope for further improvement in life insurance market and to make it customer centric by introducing a competition ‘policy’, ‘ethical standard in selling’, ‘business practices’ and ‘corporate governance’.

Health Insurance Market in India Emerging Concern Health care financing and management has emerged as an important concern particularly in the post-globalized market economy in developing countries. The current concern arises due to the absence of proper delivery of health care services, absence of institutionalized financing mechanism, inability of poor and deprived sections of society to have access to such services and growing ageing causing increased dependency ratio. Restructuring of economy in the post-globalized era, reducing the role of the state as a provider of social goods including health care and growing reliance on market-dictated service benefits had deprived the poor who were unable to purchase such services from private suppliers in the market.

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In the new market environment, while state has been made to play the secondary role, health insurance has assured significant importance and is expected to play a dominant role for health care financing. Health insurance has achieved immense importance in India and is expected to play a very significant role. Health insurance has been defined as the insurance which provides single or multiple payments on the occurrence of certain health-related events. These events can occur more than once (Reekie 2004). This definition provides a direction to various health-related problems which are captured into health insurance policies which include: 1. 2. 3. 4. 5. 6. 7.

Capital disability policies. Permanent health insurance policies. Dreaded disease (critical illness) policies. Long-term care policies. Major medical expenses policies. Hospital cash policies. Ongoing medical expenses policies.

Capital disability policy covers finances of the insured in the event of becoming disabled and benefits are payable either in lump sum or as an income. Under Permanent health insurance policy a regular income is paid to the insured if he/she is fully or partially unable to follow his/ her occupation, the Dreaded Disease policy pays an amount on certain listed diseases when a person is diagnosed to have any of them. Long-term care policy provides financial security against the risk of hospitalization or treatment at home of elderly people. Hospital cash policy provides a certain amount of cash for hospitalization of an insured. Compliment of this policy is the Major Medical Expenses policy. However, an insurance company would operate keeping in view the bottom line and profitability, which can be ensured by minimizing costs. This is done through cost sharing and managed health care. In case of sharing, premium exceeds claims plus costs plus reserves. Management usually applies to disability products and expenses products and in managed health care, the insurer actively participates in prevention, recovery and well-being of policyholders (Reekie 2004). Though both options are there before an insurance company, managed health care is often considered to be a better option due to preventive nature of the system.

Changing Demography of India The concern for health care in India was further added by the fast changing demographic character in India, particularly with regard to ageing. According to revised UN estimates in World Population Prospects (2000), Indian population is likely to increase to 1,531 million in 2050 from 1,017 million in 2000 (Table 3.16), but the number of older people, that is 60 years and above would increase by more than three times from 7.55 per cent to 20.14 per cent during the same period. This would have many fold impact on the economy. The two most


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TABLE 3.16 Projected Changes in Indian Demography (in million) Age Group 0–14 years 15–59 years >= 60 years Total

2000 347 (34.14) 593 (58.31) 77 (7.55) 1,017

2015 345 (27.68) 782 (62.79) 119 (9.56) 1,246

2025 337 (24.63) 865 (63.15) 167 (12.22) 1,369

2030 327 (23.08) 895 (63.16) 195 (13.76) 1,417

2035 313 (21.53) 919 (63.17) 223 (15.30) 1,455

2040 300 (20.20) 937 (63.10) 248 (16.70) 1,485

2050 285 (18.60) 938 (61.26) 308 (20.14) 1,531

Source Population Division, Department of Economic and Social Affairs, United Nations Secretariat ‘World Population Prospects’: the 2002 Revision and World Urbanization Prospects. http//esa.un.org/unpp. Note Figures in bracket show percentage of total population.

significant impacts would be first, the demand for health services particularly for the older people would rise expanding the scope of health insurance market. Second, the increased demand of retirement provision for pensioners and therefore scope for pension business. In fact, the old age dependency ratio will go up from 13 per cent in 2000 to 32.8 per cent in 2005. Therefore, there would be increased demand for old age provisions such as savings and health services. The concern for good health has been growing and the Indian government is also making an effort through increased budgetary allocation. Central government’s plan and non-plan expenditure on health and family welfare has gone up by three times from Rs 1,756 crore in 1995–96 to Rs 7,680 crore in 2004–05. Similarly, combined expenditure of central and state government on health increased from Rs 4,566 crore in 1995–96 to Rs 40,352 crore in 2004–05. However, as a percentage of total expenditure, this allocation has declined from 4.5 per cent to 4.4 per cent and as a percentage of social sector expenditure it has marginally increased from 24.1 per cent to 23 per cent during 1995–96 to 2004–05 (Economic Survey 2004–05, Government of India). National Health Policy (NHP) 2002 aims at achieving an acceptable standard of good health for overall improvement in health services in the country particularly for the underserved and underprivileged section of society which requires increased investment. The NHP envisaged increase in public health investment from current level of 0.9 per cent of GDP to 2 per cent of GDP by 2010. National Common Minimum Programme (NCMP) envisages raising public spending on health to at least 2–3 per cent of GDP with focus on primary health care and specially by stepping up public investment on control of communicable diseases and special attention to health care of the poorer section.

Present Status of Health Care and Financing in India Health care financing and health insurance in India still remained to be poorly developed and in a chaotic state, resulting in deprivation of poor and Socially Vulnerable Sections (SVS) of

106


society. According to World Health Organization (WHO 2004), India spends about 5.1 per cent of GDP on health (which is currently 6 per cent of GDP) and 82 per cent of the total health expenditure is spent by private sector and almost all of these are out of pocket expenditures and particularly on curative care. As a result of small public spending, the poor have been deprived of health care benefits in the country.

Present Status of Health Care in India State sponsored health care in India consists of Central Government Health Scheme (CGHS), Employee State Insurance and Voluntary Insurance Schemes like Mediclaim Insurance scheme provided by four subsidiaries of GIC, namely, National Insurance, United India, New India Assurance and Oriental Insurance Company. In addition to the state-owned LIC other private insurance companies also provide health insurance as a rider. The benefits through these schemes mostly goes to the organized sector, and therefore the existing system is vastly inadequate.

Employee State Insurance Scheme (ESIS) The first major initiative for social security in India was launched in 1952 through an Act of Parliament in 1948. ESI includes the organized sector employees out of labour force of 411.5 million (INR 2003), ESI has covered 8 million workers. According to Manpower Profile 2003, ESIS covered about 28 per cent of organized sector workers.

Central Government Health Scheme (CGHS) CGHS is a contributory health scheme launched in 1954 to provide medical coverage to working and retired employees and families. CGHS gets budgetary support from the Government of India. There are currently about 1 million cardholders and the total number of beneficiaries is 4.3 million (Gupta and Trivedi 2005).

Universal Health Insurance (UHI) Scheme for Below Poverty Line (BPL) Families In 2003, the Government of India introduced the UHI for the poor. All the four public sector non-life insurance companies offer this scheme at a premium of Rs 365 a year for an individual or Rs 548 for a family of five. The government provides subsidy of Rs 100 to per BPL family.

Mediclaim Mediclaim was introduced by the four subsidiaries of GIC. Mediclaim launched in 1986 can be purchased for any person between 5 and 70 years of age for a total SA of Rs 5 lakhs. Premium paid under this policy is tax deductible upto a maximum of Rs 10,000.


107

Jana Arogya Bima Policy Apart from Mediclaim, the government also introduced a subsidized Health Insurance Scheme called Jana Arogya in 1996, which covers the poor for hospitalization with a 1 per cent to 1.5 per cent premium.

Community-based Health Insurance This is a group scheme launched for people below the poverty line. The scheme was launched in July 2003.

Private Sector Insurance Companies Private sector insurance companies have introduced variants of Mediclaim, which include health insurance policy on the line of Mediclaim providing benefits of hospitalization, personal accident cover, etc.

Critical Illness Policy It is a defined benefit policy and the insurer pays the SA on the diagnosis of 10 critical identified disease.

Hospital Cash Policy Under this policy the insurer pays a fixed amount upto a predetermined limit of each day spent in hospital irrespective of the actual amount spent. The inadequacy of health coverage in India can be gauged from the data in Table 3.15 which shows that little more than 85 million people have been covered by various health insurance schemes which could reach only to an insignificant number of people. This brings us to the fore the role of market and need for more active participation of insurance companies in the health insurance sector.

Health Coverage in India The state-supported social insurance scheme in India is very much fragmented and the nonuniform informal sector is often beyond the reach of a large section of population particularly those in the unorganized sector. With the opening up of the Indian economy through liberalization and structural reforms, economic growth rate is moving up. However, the number of workforce in organized sector is falling and approximately 10 per cent of workforce. According to Anand (2002) there were 397 million labour forces in India out of which 369 million, that is, 93 per cent belonged to the informal sector.

108


Though, this segment contributes about 63 per cent of value added to the overall GDP of the country and constitutes about 65 per cent of total employment in urban areas. It remains out of the ambit of formal social security. In view of economic importance, this segment needs to be served with directed initiatives, which will not only be a necessity to provide a fillip to economic growth but will further expand health insurance market.

Health Insurance Market after Deregulation With the deregulation of Indian insurance market, it was expected that health insurance will get a boost. In fact IRDA took a significant step to promote health insurance and made a provision in the Insurance Act, 1938, that preference will be given to register the applicant who agrees to carry on life insurance or non-life business for providing health cover to individual or groups of individuals. In order to protect the interest of policyholders, a provision was made that the rider would not account more than 30 per cent of premium of the basic product. But in some cases of critical illness this can go upto 100 per cent of the premium of basic product. IRDA also framed regulations to facilitate Third Party Administrator (TPA) to provide a linkage between insurance companies and policyholders.

Growth of Health Insurance Business Mediclaim: Premium under Mediclaim has increased substantially from Rs 25 crore in 1996 to Rs 1,370.14 crore in 2003–04, that is, by 18 per cent. This is one of the fastest growing segments of non-life business, next to motor portfolio. According to IRDA Annual Report 2003–04, the public sector non-life insurers accounted for 89.19 per cent of the health premium as against 93.37 per cent in the previous year. Premium underwritten by public sector companies increased to Rs 1,222 crore in 2003–04 from Rs 1,083.29 crore in 2002–03. As against that the health insurance premium of private sector increased to Rs 147.99 crore from Rs 76.88 crore during the same period. The market share of private companies increased from 6.63 per cent in 2002–03 to 10.8 per cent in 2003–04 (Table 3.17). The slow growth rate of health insurance is a cause of concern and even IRDA has focussed on the issue in its Annual Report 2003–04. Accordingly, in order to increase the access of health insurance and to cover a wider section of people there is a necessity for better efforts of coordination between various stakeholders, initiate measures aimed at building confidence among the general public, reduce probability of rejecting genuine claims, standardization of treatment of similar diseases, removal of cost of moral hazards, building up a comprehensive data warehouse to facilitate decisions on pricing of insurance products and hospitalization service. IRDA report further states that insurance companies have no interface with hospital establishments in determining the reasonableness of charges relating to quality of medical care provided, no benchmark and no standard for billing these services, owing to the hidden cost in health care delivery system.


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TABLE 3.17 Health Insurance Coverage in India (in million) Schemes The employees state insurance scheme CGHS Railway health scheme Defence employees Ex-servicemen Mining and plantation Health insurance (public sector—non-life) Health insurance (private sector—non-life) Health insurance and life insurance companies (public and private) State sponsored scheme Employer run facilities/reimbursement scheme of private sector Employer run facilities/reimbursement scheme for public sector Community health scheme Total

Beneficiaries 25.3 4.3 8 6.6 7.5 4 10 0.8 0.23

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