Life insurance

The insurance sector in India has come a full circle from being an open competitive market to nationalization and back to a liberalized market again. Tracing the developments in the Indian insurance sector reveals the 360-degree turn witnessed over a period of almost two centuries.

A brief history of the Insurance sector

The business of life insurance in India in its existing form started in India in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta.

Some of the important milestones in the life insurance business in India are:

• 1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business.
• 1928: The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and non-life insurance businesses.
• 1938: Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public.
• 1956: 245 Indian and foreign insurers and provident societies taken over by the central government and nationalised. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore from the Government of India.

The General insurance business in India, on the other hand, can trace its roots to the Triton Insurance Company Ltd., the first general insurance company established in the year 1850 in Calcutta by the British.

Some of the important milestones in the general insurance business in India are:

• 1907: The Indian Mercantile Insurance Ltd. set up, the first company to transact all classes of general insurance business.
• 1957: General Insurance Council, a wing of the Insurance Association of India, frames a code of conduct for ensuring fair conduct and sound business practices.
• 1968: The Insurance Act amended to regulate investments and set minimum solvency margins and the Tariff Advisory Committee set up.
• 1972: The General Insurance Business (Nationalisation) Act, 1972 nationalised the general insurance business in India with effect from 1st January 1973.
• 107 insurers amalgamated and grouped into four companies viz. the National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. and the United India Insurance Company Ltd. GIC incorporated as a company.

Insurance sector reforms

In 1993, Malhotra Committee headed by former Finance Secretary and RBI Governor R.N. Malhotra was formed to evaluate the Indian insurance industry and recommend its future direction.

The Malhotra committee was set up with the objective of complementing the reforms initiated in the financial sector. The reforms were aimed at “creating a more efficient and competitive financial system suitable for the requirements of the economy keeping in mind the structural changes currently underway and recognizing that insurance is an important part of the overall financial system where it was necessary to address the need for similar reforms…”

In 1994, the committee submitted the report and some of the key recommendations included:

1) Structure

• Government stake in the insurance Companies to be brought down to 50%.
• Government should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as independent corporations.
• All the insurance companies should be given greater freedom to operate.

2) Competition

• Private Companies with a minimum paid up capital of Rs.1bn should be allowed to enter the industry.
• No Company should deal in both Life and General Insurance through a single entity.
• Foreign companies may be allowed to enter the industry in collaboration with the domestic companies.
• Postal Life Insurance should be allowed to operate in the rural market.
• Only One State Level Life Insurance Company should be allowed to operate in each state.

3) Regulatory Body

• The Insurance Act should be changed.
• An Insurance Regulatory body should be set up.
• Controller of Insurance (Currently a part from the Finance Ministry) should be made independent.

4) Investments

• Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%.
• GIC and its subsidiaries are not to hold more than 5% in any company (There current holdings to be brought down to this level over a period of time).

5) Customer Service

• LIC should pay interest on delays in payments beyond 30 days.
• Insurance companies must be encouraged to set up unit linked pension plans.
• Computerisation of operations and updating of technology to be carried out in the insurance industry The committee emphasized that in order to improve the customer services and increase the coverage of the insurance industry should be opened up to competition.

But at the same time, the committee felt the need to exercise caution as any failure on the part of new players could ruin the public confidence in the industry. Hence, it was decided to allow competition in a limited way by stipulating the minimum capital requirement of Rs.100 crores. The committee felt the need to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives. For this purpose, it had proposed setting up an independent regulatory body.

Major Policy Changes

Insurance sector has been opened up for competition from Indian private insurance companies with the enactment of Insurance Regulatory and Development Authority Act, 1999 (IRDA Act). As per the provisions of IRDA Act, 1999, Insurance Regulatory and Development Authority (IRDA) was established on 19th April 2000 to protect the interests of holder of insurance policy and to regulate, promote and ensure orderly growth of the insurance industry. IRDA Act 1999 paved the way for the entry of private players into the insurance market which was hitherto the exclusive privilege of public sector insurance companies/ corporations. Under the new dispensation Indian insurance companies in private sector were permitted to operate in India with the following conditions:

• Company is formed and registered under the Companies Act, 1956;
• The aggregate holdings of equity shares by a foreign company, either by itself or through its subsidiary companies or its nominees, do not exceed 26%, paid up equity capital of such Indian insurance company;
• The company’s sole purpose is to carry on life insurance business or general insurance business or reinsurance business.
• The minimum paid up equity capital for life or general insurance business is Rs.100 crores.
• The minimum paid up equity capital for carrying on reinsurance business has been prescribed as Rs.200 crores.

The Authority has notified 27 Regulations on various issues which include Registration of Insurers, Regulation on insurance agents, Solvency Margin, Re-insurance, Obligation of Insurers to Rural and Social sector, Investment and Accounting Procedure, Protection of policy holders’ interest etc. Applications were invited by the Authority with effect from 15th August, 2000 for issue of the Certificate of Registration to both life and non-life insurers. The Authority has its Head Quarter at Hyderabad.

Protection of the interest of policy holders:

IRDA has the responsibility of protecting the interest of insurance policyholders. Towards achieving this objective, the Authority has taken the following steps:

• IRDA has notified Protection of Policyholders Interest Regulations 2001 to provide for: policy proposal documents in easily understandable language; claims procedure in both life and non-life; setting up of grievance redressal machinery; speedy settlement of claims; and policyholders’ servicing. The Regulation also provides for payment of interest by insurers for the delay in settlement of claim.
• The insurers are required to maintain solvency margins so that they are in a position to meet their obligations towards policyholders with regard to payment of claims.
• It is obligatory on the part of the insurance companies to disclose clearly the benefits, terms and conditions under the policy. The advertisements issued by the insurers should not mislead the insuring public.
• All insurers are required to set up proper grievance redress machinery in their head office and at their other offices.
• The Authority takes up with the insurers any complaint received from the policyholders in connection with services provided by them under the insurance contract. 

General Insurance Companies:

Private Sector Companies

• Aditya Birla Health Insurance Co. Ltd.
• Bajaj Allianz General Insurance Co. Ltd.
• Bharti AXA General Insurance Co.Ltd.
• Cholamandalam General Insurance Co. Ltd.
• Future Generali India Insurance Co.Ltd.
• HDFC ERGO General Insurance Co. Ltd.
• ICICI Lombard General Insurance Co. Ltd.
• IFFCO-Tokio General Insurance Co. Ltd.
• Kotak General Insurance Co. Ltd.
• L&T General Insurance Co. Ltd.
• Liberty Videocon General Insurance Co. Ltd.
• Magma HDI General Insurance Co. Ltd.
• Raheja QBE General Insurance Co. Ltd.
• Reliance General Insurance Co. Ltd.
• Royal Sundaram Alliance Insurance Co. Ltd
• SBI General Insurance Co. Ltd.
• Shriram General Insurance Co. Ltd.
• TATA AIG General Insurance Co. Ltd.
• Universal Sompo General Insurance Co.Ltd.

Health Insurance Companies

• Apollo Munich Health Insurance Co.Ltd.
• Star Health Allied Insurance Co. Ltd.
• Max Bupa Health Insurance Co. Ltd.
• Religare Health Insurance Co. Ltd.
• Cigna TTK Health Insurance Co. Ltd.

This collaboration with the foreign markets has made the Insurance Sector in India only grow tremendously with a high current market share. India allowed private companies in insurance sector in 2000, setting a limit on FDI to 26%, which was increased to 49% in 2014. IRDAI states –  Insurance Laws (Amendment) Act, 2015 provides for enhancement of the Foreign Investment Cap in an Indian Insurance Company from 26% to an Explicitly Composite Limit of 49% with the safeguard of Indian Ownership and Control.

Private insurers like HDFC, ICICI and SBI have been some tough competitors for providing life as well as non-life products to the insurance sector in India.

The Future Of Insurance Sector In India

Though LIC continues to dominate the Insurance sector in India, the introduction of the new private insurers will see a vibrant expansion and growth of both life and non-life sectors in 2017. The demands for new insurance policies with pocket-friendly premiums are sky high. Since the domestic economy cannot grow drastically, the insurance sector in India is controlled for a strong growth.

With the increase in income and exponential growth of purchasing power as well as household savings, the insurance sector in India would introduce emerging trends like product innovation, multi-distribution, better claims management and regulatory trends in the Indian market.

The government also strives hard to provide insurance to individuals in a below poverty line by introducing schemes like the

• Pradhan Mantri Suraksha Bima Yojana (PMSBY),
• Rashtriya Swasthya Bima Yojana (RSBY) and
• Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY).

Introduction of these schemes would help the lower and lower-middle income categories to utilize the new policies with lower premiums in India.

With several regulatory changes in the insurance sector in India, the future looks pretty awesome and promising for the life insurance industry. This would further lead to a change in the way insurers take care of the business and engage proactively with its genuine buyers.

Some demographic factors like the growing insurance awareness of the insurance, retirement planning, growing middle class and young insurable crowd will substantially increase the growth of the Insurance sector in India.

International Insurance Market

Globally, the insurance industry experienced strong premium growth in 2015, at 5.6 percent, whereas growth in 2016 is expected to be noticeably slower, at 4.4 percent. Total premiums are expected to reach €4.6 trillion, up from €4.4 trillion in 2015.

What factors help explain the industry’s performance? The global insurance industry is undergoing turbulent times with the continuing low interest rate environment, a challenging equity market, and tightening regulatory changes, such as the US Department of Labor (DOL) rule and new US tax guidelines. Meanwhile, consumers’ shift to hybrid online and offline research and purchasing has largely concluded in developed markets and is accelerating in developing markets with the spread of mobile phones. These changes, along with the impact of price-comparison websites and other technology developments, plus the race to implement digital processes, are tectonic shifts forcing insurers to adjust their business models.

Mature markets in North America and Western Europe required the deployment of considerable strength to address these trends. With life eroding and P&C flattening, the mature markets have exhibited slower growth rates than insurance in emerging markets, and the figures in our report are beginning to reflect these major fault lines by business segment and geography.

Specifically, preliminary reports at the segment level globally suggest that health had the highest growth rate from 2015 to 2016, at 6 percent followed by P&C at 4.2 percent, while life saw a slowdown in growth of gross written premiums (GWP) from 4.8 percent in 2015 to 3.8 percent in 2016.

At the regional level, EMEA recorded moderate growth in the P&C and health insurance segments, while life is expected to decline. Growth in the Americas region has been characterized by strong progress in health and moderate growth in the P&C segment. Life is expected to be a bit volatile, owing to changes in US regulations, and is projected to end 2016 with a slight decline in the Americas overall. In APAC, on the other hand, the insurance industry grew in all three segments, with health generating double-digit growth.

At the business segment level, preliminary reports revealed some important trends:

• Life: Most regions, except the Americas and Western Europe, saw positive life growth in 2016, but the amount of the increase, as well as the factors responsible, varied by region. In a marked departure from 2015, Asian countries, such as China, Hong Kong (analyzed as a separate entity), and India, achieved the strongest gains. Of all life products, endowments experienced the most growth, mainly driven by emerging Asia and the United States, whereas Unit-linked (UL) products have seen a decrease in the United States and Western Europe. The key profit indicator life return on equity (RoE) rose from 11 percent in 2014 to 11.8 percent in 2015, but is expected to stabilize at the lower level of 10 percent going forward.
• P&C. The global P&C insurance industry has remained stable over the past five years, growing at a steady 4 to 5 percent. It is also expected to grow at 4.2 percent for the year 2016, increasing the size of the global P&C market to €1.39 trillion. At the regional level, although the APAC region accounts for only 23 percent of the total P&C market, it has been the major driver of growth, growing at an average rate of 9 percent per annum (p.a.) since 2013, and is expected to grow even faster in the future. In contrast, the Americas and the EMEA regions, accounting for 49 percent and 29 percent of the global market, respectively, are expected to grow at a scant 2 to 3 percent over the next two years.

Longer term, we believe P&C will see declining if not negative growth, at least in mature markets, due to, for example, safer and fewer cars and more technology for risk prevention in homes and factories.

Global distribution trends vary by product and region. In life insurance, while bancassurance dominates the distribution space in many Asian and European geographies, brokers are more popular in North America. P&C insurance remains, as before, more dominated by agents and brokers, but we see a rapid increase in the popularity of direct distribution modes in many geographies. Analyses of the performance of direct players, in some geographies, also reveal that they are able to outperform their markets. The role of direct will be highly important in mastering the cost reduction challenge, particularly the effects of digital attackers and price-comparison websites. While direct is starting to stagnate in Western Europe, the big change is that all customers are becoming hybrid, implying much greater price transparency hence further cost pressure as well as the need to change the operating model of non-direct to fully multi- or omnichannel. Companies seeking top growth opportunities in the global insurance markets can explore both the fastest-growing markets and the largest developed markets. As the slowing growth rates suggest, however, most carriers will also need to search farther afield. Looking ahead, at the geographic level, Latin America and the Middle East are expected to be the fastest growing regional markets, that is, offering double-digit rates of annual GWP growth. In the APAC region, the top line is expected to grow at a brisk pace with health as its fastest growing segment.