Insurance Industry in India

• Insurance is a contract that is generally represented by a policy, wherein

an individual or an entity gets some financial protection or
compensation against losses from an insurance company.
• Insurance is a way of managing risks. So, when you buy insurance, you
are transferring the cost of any potential loss to the insurance company
against a premium/ fee.
• These insurance companies invest these funds in a secure manner so
that they grow and when there is a claim, the payout can be made
without any hassle.
 Recent Trends in Insurance sector
1. Opening up of insurance sector
• Private Companies with a minimum paid up capital of Rs.1bn are
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.
2. Insurance Penetration and Density in India
• The measure of insurance penetration and density
reflects the level of development of insurance sector in
a country. indicates the level of development of insurance sector in a
country
• While insurance penetration is measured as the percentage of insurance
premium to GDP, insurance density is (per capita premium).
3. Restructuring of GIC
Government has taken over the holdings of GIC and its subsidiaries so that
these subsidiaries can act as independent corporations.
4. FDI in insurance
• 100% foreign ownership is permitted for insurance intermediaries. Currently,
foreign entities can only own a maximum of 49% in insurance companies.
• Foreign participation in the Indian insurance industry, has been tightly guarded
by the government out of fear of backlash from the strong workers unions.
5. New initiatives taken in the insurance sector
(a) Micro Insurance
In order to facilitate penetration of micro insurance to the lower income
segments of population, IRDAI has formulated the micro insurance
regulations. Micro Insurance Regulations, 2005 provide a platform to
distribute insurance products, which are affordable to the rural and urban
poor and to enable micro insurance to be an integral part of the country’s
wider insurance system.
(a) Corporate Governance Guidelines for insurance companies
Corporate Governance guidelines have been issued for insurance
companies which are effective from April 1, 2010. This is to ensure that
the structure, responsibilities and functions of the Board of Directors and
senior management of the company fully recognize the expectations of all
stakeholders as well as of the regulator.
c) Guidelines on credit insurance
New guidelines on trade credit insurance have been issued by the IRDA in
December 2011 These guidelines specify that a policy holder should
necessarily be a supplier of goods and services and his loss should be by
non-receipt of trade receivables.
6. New Entrants in the insurance Sector
Since the opening up pf the insurance sector, more number of insurers
participants are added in the industry, operating in the life, non-life and
reinsurance segments including Export Credit Guarantee Corporation and
Agricultural Insurance Company.
7. Growth of Life and non-life Insurance
There was a tremendous growth in the insurance industry in the post
liberalisation period. The non-life insurance segment is also growing. The fastest
growing segments under the no-life insurance is the motor vehicle and health
sectors.
8. Consumer Grievance Redressal Cell
The Consumer Grievance Redressal Cell of the Insurance Regulatory and
Development Authority (IRDA) looks into complaints from policy holders.
Issues and Challenges
While a range of economic and financial reforms have helped the
insurance sector grow, there remains a host of challenges which need to
be addressed for harnessing the full potential of the sector:
1. Lack of Consumer Awareness: In spite of opening of the insurance
sector for private participation, the levels of insurance penetration and
density are very low. The main reason for low penetration is lack of
awareness about the insurance products and its benefits. It is important
to educate general public about the benefits of insurance, how to select
an insurance product and to educate them about the grievance redress
mechanism in case they are not satisfied with the services provided and
have a complaint against financial service providers.
2. Negative Consumer Experience and Perception: The industry has been
plagued by perceptions of slow, unreliable and at times harassing
consumer delivery. A lot of new entrants have worked at addressing the
barriers through their consumer interactions and working models, the
same needs to be strengthened across, especially with the onset of
social media. Insurers should identify areas, which are most vulnerable
to frequent critical comments, analyze the reasons for such
underperformance, and take steps to enhance the service delivery.
3. Poor offtake of micro-insurance- Micro insurance (life, disability and
health) coverage of the economically disadvantaged sections of Indian
society is dismally low. Several factors have impeded the growth of
micro insurance in the country. Like - low financial literacy of the target
sector, lack of adequate products, poorly designed policies, low quality
of products, rejections during claims settlement has led to lack of trust with the
customer. On the distribution front, limited incentive on a low premium
products makes it difficult to cover operational costs of reaching out to the
customers.
For micro insurance to succeed, demand has to be created through building
awareness among the target segment, creating simple and need based products
and most importantly, simplifying the processes of underwriting and claims
management.
4. Agency led Distribution Model: With reduced commission structures,
high attrition rates and dwindling perception attractiveness of agency
as a career options, the agency channel is under stress. This has led to
reduced dependence on and subsequently significant reduction in
number of offices in the private space.
5. Distribution Costs: Life insurance companies spend a significant
portion of their budget to set-up and streamline the operating model
and the distribution process towards business acquisition and a high
operating expenses. Accordingly, inefficient agent recruitment and
high employee attrition increase the operational costs. For insurers
to realize the highest value from distribution, they must define an
operating model which supports a multiproduct, multi-channel
distribution model that compliments an insurer’s revenue objectives
and profit margins.
6. Lack of Product Innovations and Customizations: There have always
been a few life insurers who have sought to identify niche markets
like women-oriented products, worksite marketing, children future
protection markets and pension markets.
But these have not been happening on a consistent basis. The industry’s
business model needs to constantly innovate and evolve. However, off
late this is witnessing a change with increasing number of insurers
looking to introduce new and innovative products aimed at meeting
evolving customer needs.
7. Pension and retirement products : There is a big gap in the current
product portfolios. While the demographics (percentage share of 60+
is expected to go up to 12 per cent by 2030) support the need for a
product, it has remained largely under-leveraged by consumers and
marketers alike on account of a. low consumer awareness and thus
perceived relevance b. Difficulty in providing long term insurance
guarantees c. long gestation period of returns etc.
8. Intense Market Competition: The Indian insurance industry is gradually
evolving and thus remains highly competitive. The insurance public and
private players compete on the basis of reliability, financial strength and
stability, ratings, underwriting consistency, service, business ethics,
price, performance, capacity, policy terms and coverage conditions. In
addition, the company also faces competition from other financial
institutions such as banks, securities firms etc. which have started cross
selling products that directly or indirectly competes with various
insurance products. Given the inability of general insurers to
differentiate on the basis of product offerings along with the lack of
customer awareness towards product features, the competition will
mainly be price led, which will further impact margins for the sector.
9. Human Resource Challenge: The insurance market is now filled with
players, who are mature, globally prominent and big players, each of them
has ability to influence the market, check attrition and ensuring
availability of continuous talent further up the challenge in this area.
10. Regulatory Challenges: As the competition gets acute, the customer
becomes more aware. The regulators with a view of driving transparency,
consumer protection, simplifying portfolio and creating a long term
sustainable eco-system and business model have driven a few frequent
changes in the regulations. Some of the key changes which played a
dominant role in charting the course for the industry were the
introduction of cap in charges on linked products, restrictions on pension
and index-linked products, and persistency norms for agents; while the
general insurance sector was affected by price de-tarrification and motor
third party risk pooling arrangements.
[Link] in Global Financial Markets: Though, coordinated actions
by several governments did restore some confidence in the volatile
global markets, market participants remained jittery. As a result,
whenever there is a withdrawal of foreign portfolio investments from
Indian equity and debt markets, investment returns booked by
insurers are likely to suffer.
[Link] and Profitability: Insurers’ fascination for top line growth at any
cost has resulted in inefficient operating models and hence inferior
operating ratios as compared to global benchmarks, in both life and
non–life. Clubbed with high claims costs and regulatory constraints
have led to tightening of insurer margins, impacting category
profitability.