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ECONOMIC HIGHLIGHTS
An Unhealthy Trend
Public Sector Insurance Holds Sway
By Dr. Vinod Mehta
The year 2000 was a watershed for the Indian insurance
industry when the Insurance Regulatory and Development Authority (IRDA) invited
applications from private companies for registration to start insurance business in India. With this initial step the 40-year-old
monopoly of the two state-owned insurance companies, namely, the Life Insurance
Corporation of India (LIC) and the General Insurance Corporation of India (GIC)
came to an end.
The economic reforms initiated in 1991 had envisaged
liberalization of not only the industrial sector but also of the financial
sector, including the insurance business.
The liberalization of the industrial sector was relatively easy as a large
number of private companies were already operating in the country, but the
liberalization of the insurance business
was a different proposition as it was wholly state owned and the existing laws
did not allow the setting up of private insurance company.
There was an intense opposition from various interest groups
including trade unions, employees of the state-owned companies to privatization
of their existing companies or allowing foreign investment in the insurance
business. Strangely enough, the Left
wing political parties and some of the right wing organizations were on the
same wave length in opposing privatization of insurance business. Any way the insurance sector was opened up and
many big Indian industrial and financial houses started joint ventures with
established foreign companies in insurance business
The Indian insurance sector when it was opened up had a low
market penetration. The full potential had not been tapped in the past 40 years
even by the state owned companies. Indian population has crossed one billion mark. Of this around 27% of the
population lives in urban areas, while 73% in rural areas. About 300 million
people constitute the middle class
which can afford both life and non-life insurance policies. But less then 8% of the total population has insurance
cover. According to the National Council of Applied Economic Research, the
insurable population is around 240 million. Of this only 20% have insurance and
that covers only 25% of their needs. According to the Institute of Chartered
Accountants the Indian life and non-life
insurance business accounted for
merely 0.42% of the world’s life and non-life business.
There were two main reasons for this low penetration of
insurance business in India. First,
the two state-owned companies did not make much efforts to spread the insurance
culture in the country despite the fact that they had set up branches in all
parts of the country. Their primary concern was for mobilization of funds for
government. Since there was no competition, premium rates fixed were quite high
by world standards. This closed the insurance door to a large number of people
who wanted insurance but could not afford it. Moreover, the services offered
were of poor quality; the insurance products offered were also of limited
range.
The second, factor for low penetration was the psyche of the
Indian people. Life insurance has been considered as a saving instrument
rather than a pure risk cover. In a pure risk cover the insurer does not
get anything after the term is over even though he had made contributions for a
number of years. Therefore, term insurance or pure risk cover had never been an
attractive proposition. This is true even today. The endowment and money-back
insurance products which combine pure risk cover as well as return of money
after a stipulated period have remained relatively quite popular with the
people. Some of these products have been named as children’s education policy
or daughter’s marriage policy.
Till recently, the taxation system was such that it
reinforces the perception that insurance policy is a saving instrument as it
allows tax rebate on contribution made in the form of premium as is the case of provident fund,
infrastructure bonds etc. The bias in favour of endowment policies has also
been due to the fact that the state-owned company has been giving a relatively
higher commission on endowment and
money-back policies rather than on pure risk cover policies. The commission given to the insurance agents ranges from 25
to 30% for money-back policies, compared to 10 to 15% for pure risk policies. The
things have now been slowly changing for the last six years. The new tax rebate system has become neutral
between various savings schemes, including insurance that has far-reaching
implications for the insurance industry in the coming years.
The insurance market, however, after six years of opening up
is still dominated by the two state-owned companies, namely, LIC in life insurance
sector and GIC in general insurance like motor, vehicle, fire, theft, marine,
medical and so on. Some of the well-
known Indian private companies which have come up in collaboration with foreign
companies in the past six years have been gaining foothold in the Indian
insurance market. The fear of the state-owned
companies that they will lose out to private foreign companies has not come
true. It appears that the private companies
are expanding faster than state-owned companies in a relative sense, but it is
the whole insurance market that is expanding.
It has reported a healthy growth of over 51% in premium under written
for the first nine months of the last fiscal.
As per the statistics prepared by the Insurance Regulatory
and Development Authority (IRDA), the industry underwrote a premium of
Rs.19,893.38 crore for the nine-month period in the last fiscal, compared to
Rs.13,153.12 crore in the corresponding period of the previous fiscal.
In terms of number of policies sold, the industry reported a
growth of 27.45 per cent by selling 1.78 crore policies (1.39 crore). While the private sector posted a growth of
64.41 per cent to garner a market share of 12.46 per cent, the LIC reported an
increase of 23.5 per cent in number of policies sold with a market share of
87.54 per cent.
The LIC is responding to the new situation by upgrading its
technology and improving its customer service.
The private insurance companies cannot match its branch network. As a result what appears to be happening is that
private insurance companies are restricting themselves to “high networth
individuals” while the LIC is looking after the masses. This is an unhealthy trend which needs to be
looked into by Insurance Regulatory and Development Authority (IRDA). The private insurance companies should also
go into small towns and villages.
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