INSURANCE INDUSTRY : POTENTIAL UNLOCKED BY
REFORMS
The Indian Insurance industry traces its origins way back to 1818, when the oriental
Life Insurance Company was founded in Kolkata. The first real insurance regulation
in India came in the form of the Life Insurance Act of 1912. The industry was further
regulated and streamlined by the Indian Insurance Companies Act in the year 1928.
This act enabled Indian Government to better keep track of all the insurance
companies operating in India. There were 154 Indian life insurance companies, 16
non-Indian insurance companies and 75 provident societies issuing life insurance
policies in 1956 when the Insurance industry was nationalized with LIC becoming
the only insurance provider. The Indian insurance industry till the early 1990s had
been a concentrated and tightly regulated sector with only a few public sector
insurance companies operating.
All this changed, with the opening up of the Indian economy in 1990, and the
formation of the Malhotra committee to assess functionality and initiate reforms in
the industry. The committee called for more autonomy and an independent
regulatory authority. Subsequently, the Insurance Regulatory and Development
Authority Act (IRDA act) was passed in 1999 and IRDA was formed in 2000 to
encourage private participation and end the public sector exclusivity. The main role
of IRDA was to protect the policy holder’s interests and develop a framework for the
sustainable growth of the industry. At around the same time, Foreign Direct
Investment (FDI) was also allowed in the industry with a cap of 26%.
This marked the inauguration of a new era in the Insurance industry in India with
the entry of private sector and international insurers and explosion in the number of
innovative products available. It also helped streamline the distribution channels,
and also some channels were introduced through banks and online systems. Thus
began the journey of one of the most successful reforms in Indian Industry and
today the number of Insurance companies has grown from 5 (pre-reforms) to 21
Source: IRDA Annual Report 2008
today.
During the financial year 2007-08, the total Life insurance premiums has grown by a
mammoth 29% to `2013.51 billion ($42 billion). The strong growth is not an isolated
phenomenon, as the industry has been growing at a CAGR of more than 20% in real
terms for over a decade.
Insurance as an Investment
Insurance is a constraint due to its
mandatory/ compulsory nature
Insurance is a vital way to protect my
family
I use insurance to protect against financial
loss
I use insurance mostly as a means to
improve my finances (i.e. wealth
accumulation)
Customer Perception of Insurance in India (%): “Do you agree or disagree with
the following statements?”
Strongly Disagre Agre Strongly Agree
Disagree
Source: e
Capgemini analysis, 2007 e
Life products are seen in India primarily as a means of improving financial health. In
the recent years, soaring Indian equity markets have also fueled interest in unit-
linked insurance plans (ULIPS), which combine insurance coverage and equity
investments in a single policy. These hot products have even eclipsed interest in
more traditional endowment, term and whole-life policies, and accounted for more
than 80% of the premiums collected by the insurance industry in fiscal 2008 further
demonstrating the attitude among customers that life products are a means of
saving money and accumulating wealth.
Source: IRDA Annual Report 2008
The above graph further lends evidence to the attractiveness of Insurance as an
investment product. There has been a steady growth in both the household savings
and the share of insurance in the household savings over the years. The only
bottleneck to the industry could be the distribution network.
Even the distribution network has
also grown to a massive 11815
offices spread across the lengths and
widths of the country. The
encouraging fact is that majority of
this growth in the distribution
network has been primarily driven by
the private insurers who currently
Source: IRDA Annual Report 2008 have a reach of 8785 centers, almost
thrice that of the incumbent LIC
which has 3030 centers.
Insurance penetration,
measured as a ratio of
gross premiums to the
country’s gross domestic
product (GDP), rose from
1.5% in 1990 to 2.3% in
Source: IRDA Annual Report 2008
2000 to 4.6% in 2008,
whereas the world average
is 7.1% of GDP and
insurance penetration of
other Asian economies are
in the region of 10-20%.
This signifies the large
untapped growth
opportunities available in
the Indian Insurance
industry.
Insurance density, which
measures gross premiums
per capita, shot up from
$9.90, in 2000 to $47 in
2008. According to the
insurance density, India is
among the lowest-spending
nations in Asia in respect of
purchasing insurance
despite the scorching
growth that has been seen
Source: IRDA Annual Report 2008 in the industry. A mere 20%
of the insurable population
aged 20 to 60 years is
currently covered by life
insurance.
The tremendous growth in the industry might make one think that the rapid growth
stage of the industry has reached an end and that the industry reached a maturity
stage. Both the Insurance density and the Insurance penetration values point out
that Indian insurance industry is at the cusp of another rapid growth phase. With
the Indian populace becoming more aware of the different insurance products and
the necessity of insurance, the growth can only increase exponentially, with the
period 2010-2015 being touted to be “the golden age” of the insurance industry.