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Globalization Of Indian Insurance Sector: Issues And Challenges

1.1 Insurance Sector

The word "Fear" has only four alphabets like love but both of them have very different e meaning. Whatever man (male or female) does for the love of their families always starts with the background of fear. Generally so many times we have been asking our selves that, what will happen if we were not there, but we keep on asking rather then doing something for it. Time is precious, it never stops for any one and we are living in the world of uncertainty; the uncertainty of job, the uncertainty of money, the uncertainty of property and like this the story goes continuous for the whole life of a man.

A thriving insurance sector is of vital importance to every modern economy. Firstly because it encourages the habit of saving, secondly because it provides a safety net to rural and urban enterprises and productive individuals. And perhaps most importantly it generates long- term invisible funds for infrastructure building. The nature of the insurance business is such that the cash inflow of insurance companies is constant while the payout is deferred and contingency related.

This characteristic feature of the business makes insurance companies the biggest investors in long-gestation infrastructure development projects in all developed and aspiring nations. This is the most compelling reason why private sector (and foreign) companies, which will spread the insurance habit in the societal and consumer interest are urgently required in this vital sector of the economy. Opening up of insurance to private sector including foreign participation has resulted into various opportunities and challenges in India.

1.2 LIFE INSURANCE MARKET

The Life Insurance market in India is an underdeveloped market that was only tapped by the state owned LIC till the entry of private insurers. The penetration of life insurance products was 19 percent of the total 400 million of the insurable population. The state owned LIC sold insurance as a tax instrument, not as a product giving protection. Most customers were under- insured with no flexibility or transparency in the products. With the entry of the private insurers the rules of the game have changed.

The 12 private insurers in the life insurance market have already grabbed nearly 9 percent of the market in terms of premium income. The new business premium of the 12 private players has tripled to Rs 1000 crore in 2002- 03 over last year. Meanwhile, with regard to state owned LIC's new premium business has fallen.

Innovative products, smart marketing and aggressive distribution. That's the triple whammy combination that has enabled fledgling private insurance companies to sign up Indian customers faster than anyone ever expected. Indians, who have always seen life insurance as a tax saving device, are now suddenly turning to the private sector and snapping up the new innovative products on offer.

The growing popularity of the private insurers is evidenced in other ways. They are coining money in new niches that they have introduced. The state owned companies still dominate segments like endowments and money back policies. But in the annuity or pension products business, the private insurers have already wrested over 33 percent of the market. And in the popular unit-linked insurance schemes they have a virtual monopoly, with over 90 percent of the customers.

The private insurers also seem to be scoring big in other ways- they are persuading people to take out bigger policies. For instance, the average size of a life insurance policy before privatization was around Rs 50,000. That has risen to about Rs 80,000. But the private insurers are ahead in this game and the average size of their policies is around Rs 1.1 lakh to Rs 1.2 lakh- way bigger than the industry average.

Buoyed by their quicker than expected success, nearly all private insurers are fast- forwarding the second phase of their expansion plans. No doubt the aggressive stance of private insurers is already paying rich dividends. But a rejuvenated LIC is also trying to fight back to woo new customers.

1.3 INSURANCE TODAY

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.

With the setup of Insurance Regulatory Development Authority (IRDA) the reforms started in the Insurance sector. It has become necessary as if we compare our Insurance penetration and per capita premium we are much behind then the rest of the world. The table above gives the statistics for the year 2000.

With the expected increase in per capita income to 6% for the next 10 year and with the improvement in the awareness levels the demand for insurance is expected to grow.

As per an independent consultancy company, Monitor Group has estimated a growth form Rs. 218 Billion to Rs. 1003 Billion by 2008. The estimations seems achievable as the performance of 13 life Insurance players in India for the year 2002-2003 (up to October, based on the first year premium) is Rs. 66.683 million being LIC the biggest contributor with Rs. 59,187 million. As of now LIC has 2050 branches in 7 zones with strong team of 5,60,000 agents.

2. REVIEW OF LITERATURE:

The insurance sector was opened up for private participation seven years ago. The reasons that prompted the government to bring in reform in the insurance sector are well known. While the Public Sector insurance companies made enormous contribution in the spread of awareness about insurance, and expanded the market, it was recognized that their reach was still limited, the range of products offered restricted and the service to the consumer inadequate. It was also felt that the rapid economic growth witnessed in the 90s couldnt be sustained without a thriving insurance sector.

It was also recognized that India has a vast potential that is waiting to be tapped and this could be achieved when sufficient competition is generated and it is exposed to the developments in the rest of the world. The insurance sector was, therefore, opened up for private sector participation with provision for limited foreign equity exposure. We have now seven years experience of the public and private sector together operation in the market. Considering the importance of foreign participation, the present paper is designed to study the impact of globalization on Indias insurance sector and the various challenges and opportunities for Indian Insurance companies. Though various aspects of insurance have been studied so far, not much attention has been paid to this area of the insurance industry. A brief survey of the studies done on insurance taking into consideration various aspects including the related ones is presented briefly.

The insurance industry in India has witnessed different eras and is more than 150 years old. From the days when there were several private companies, to nationalization, and to privatization, the industry has come with a full circle. Prior to independence more than two hundred private insurance companies were doing business particularly in life insurance arena.

and suggested that it should extend its business to non-salaried persons.

Recognizing the importance of insurance sector as an important source of low cost term funds, the government has taken steps to open up the insurance sector. The Insurance Regulatory Authority (IRA) Bill allows 26 percent foreign equity in domestic insurance companies and additional 14 percent by investors comprising Non-Resident Indians, Overseas Corporate Bodies and Financial Institutional Investors (Report on Development Banking in India, 1998).

LIC would continue to play a major role in the life insurance market. This would, in turn, prompt the private companies to innovate, find niche markets and expand into the rural areas. As a result the insurance penetration would increase and the customer would stand to gain, said by Mr. C S Rao, Chairman, IRDA while his speech on theme Indian Insurance Industry: New Avenues for Growth at FICCI Conference held October 18-19, 2004, at New Delhi.

3. Research Methodology

This research under consideration is an attempt to study the impact of globalization on Indian insurance sector and also the challenges and opportunities that exists for Indian insurance companies. The research would be descriptive in nature.

In the proposed study, secondary data have been used, collected through published books, articles in magazines & journals, and Internet websites.

4. Findings of the study:

4.1 Impact of Globalisation

While nationalized insurance companies have done a commendable job in extending the volume of the business, opening up insurance sector to private players was a necessity in the context of globalization of financial sector. If traditional infrastructural and semipublic goods industries such as banking, airlines, telecom, power etc., have significant private sector presence, continuing a state of monopoly in provision of insurance was indefensible and therefore, the globalization of insurance has been done. Its impact has to be seen in the form of creating various opportunities and challenges.

by: Piers kelvin
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Globalization Of Indian Insurance Sector: Issues And Challenges