Insurance Sector In India

Insurance – A life Savior

Insurance Sector in India – We all know the fact that our life is inherently risky. Consider these situations where suddenly the family bread earner passes away or a family member gets a fatal disease which requires immediate medical attention or all your life savings gets stolen. Won’t it be a time of trauma and stress not only for you but also your near and dear ones? What would you do in such cases if you had not planned for them?

Let me ask you this, Can you fight off all those risks and unexpected disaster all by yourself? If you think so it is great otherwise insurance is the best alternative. Insurance comes to your rescue to provide a sense of security when you are faced with such unexpected incidents. In simple words, insurance means you pay a lump sum amount to get protection against an unforeseen accident of a large magnitude.

How does Growth of Insurance Sector in India Work?

The growth of the insurance sector in India simple answer is economy of scale. When you join coverage, you join other people who are exposed to similar risk. Your insurance covers the whole group rather than individuals, so everyone shares the cost of insurance. Against the cover, the insurance company collects premium from the customers and uses that pool of money to pay the claims. It helps in reducing your financial disaster as the costs are shared among the large group of people. Thus it is a great technique of spreading and transfer or risks.

Let’s take this example, Harry while getting back home from work meets with a major car accident. In such situation the medical expenses that he would have to incur would be huge and could be devastating without Insurance. The physical damage to him can cost lakhs to treat along with the problem of not being able work for a few months at least. But fortunately Harry has insurance cover. Remember the group that we spoke of? The costs would be spread out among everyone. The people in the scheme are actually helping out Harry to offset his medical expenses. In this sense the other people in the group pay the costs when someone else has such problem, knowing when such a problem occurs with them, the same help would be available to their aid growth of insurance sector in india.

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Must know Insurance terms

Insured: The person or organization that is covered by insurance is called the insured.
Insurer: a person or company that promises to pay compensation for an insurance risk, is called the Insurer
Claims: An official request to the insurer by the insured asking for a payment based on the terms of the insurance policy.
Insurable risk: Risks for which it is relatively easy to get insurance.
Coverage: The amount of risk or liability covered by an individual or entity by way of the insurance services sector.
Policy: A contract for insurance between the insurance company and the policyholder.
Premiums: The amount charged for a certain amount of insurance coverage is called the premium.
Reinsurance: A re-insurer assumes part of a risk originally taken by the insurer, which is called the primary company.

Okay, so this was about the growth of the insurance sector in India. I am sure you would have got a good gist about it. But wait, we are here, to not only discuss what insurance is but the Insurance sector in India. India serves as a huge market for Insurance due to its momentous untapped potential. This sector is said to improve the standard of living of the people in an economy as it leads to risk-free lives, promotes entrepreneurship, mobilizes savings and leads to protection of trade and industry which contributes in human progress. India’s economic growth has seen no small contribution from the Insurance Sector in India industry but major inputs. Read on to know all about it.

Milestones in the development of the Insurance sector in India

India has a deep inherent history when it comes to the growth of the insurance sector in India. It has been mentioned in the writings of Manu ( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). These writings talk about bringing together resources to be used in cases of calamities. This concept was a forerunner to the modern day concept of Insurance. After this India has seen huge reforms and evolved with time profoundly being influenced by other countries, specifically England. Life Insurance as a business came into the picture in the early 1800s with Oriental Life Insurance Company in Calcutta. Later in 1912 the Indian Life Assurance Companies Act, 1912 was undertaken, which was the first statutory measure to regulate life business. There was time during the 1950s when there was huge competition among insurance companies and there were claims of unfair trade practices which forced the Government of India to nationalize the life insurance sector. Due to which the Life Insurance Corporation came into existence in the year 1956. The LIC enjoyed monopoly till the late 90s after which the insurance was reopened to the private sector.

Well, this was particularly about the life insurance sector, the history of the general insurance sector in India can be referred to as early as the 17^th century at the time of industrial revolution when trade and commerce were carried out through the sea. The first establishment that this sector saw was in the year 1850 in the form of Triton Insurance Company Ltd, in Calcutta by the British. The general Insurance Sector in India also got nationalized in the year 1972 which brought into existence General Insurance Corporation of India as a company, which commenced its business in January. 1973.

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In the year 1999, following the recommendations of the Malhotra Committee report the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. In the very next year, IRDA opened up the sector for foreign companies who were allowed ownership up to 26%

The Growth Of Insurance Sector In India

India is a growing economy with the increasing number of working population in the country; the disposable income is also increasing.
People feel the need to have a secure life for themselves and their family which encourages them to get covered by insurance.
As the income increases the spending on consumer goods, automobiles, travel which are various insurance lines.
The awareness about insurance among people has been increasing along with the number of providers and the range of products available at competitive prices.
Moreover, the regulatory environment is conducive for the Insurance sector to bloom. All these factors lead to an increase in the universe of potential buyers for insurance such as individuals, companies across businesses.
More than two-thirds of India’s population lives in rural areas which are untapped when it comes to insurance products. Microinsurance can be focused upon to ensure coverage in these areas.

The Insurance Sector in India – Issues and Challenges

Public vs. Private

Looking at industries which were opened up for private participation, led to the weakening of the public sector and making it easier for the new arrivals to prosper. This has not been the case with the insurance sector in India where the Public sector is still dominating after even a decade of opening the doors of this sector. This situation does put some burden on the private sector companies to innovate and differentiate themselves so that they could have a better share in the market.

Client Servicing

Making potential customers understand about insurance products in a simple and meaningful way poses a big challenge in front of the insurance sector in India companies. There are certain formalities which need to be dealt with and all this can become complicated if the customers do not understand the jargons that have been used. It demotivates them as then the fear of being cheated comes to their mind. But this can be avoided if the terms are explained in a simple and transparent manner and the benefits of the offer are briefed well enough.

Staying profitable

This fact cannot be ignored that profitability is one of the major concerns about this industry. According to a research, the break-even period in the life insurance business has increased from the expected 9-10 years to about 13-15 years now. The insurance sector is already under the pressure of massive expansion costs but also has to face the problem of diminishing volumes as policy lapses increase year on year. Considering the fact that India is a price sensitive market and the increasing competition has dropped the premium rates making it difficult for the companies to manage the expense ratio.

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Insurance Companies

According to the insurance sector report by IRDA, as at the end of September 2013, there are fifty-two insurance sector companies operating in India, out of which twenty-four are in the life insurance business and other twenty-seven are in a non-life insurance business.

Insurance companies have been divided mainly into two parts;

Source- IRDA Annual Report (2012-13)

Life insurance companies which cater to only one product in insurance which is providing life insurance. Companies in the public sector include Life Insurance Corporation of India (LIC) and private sector includes companies like AEGON Religare Life Insurance, Edelweiss Tokio Life Insurance Co. Ltd, Aviva India, Shriram Life Insurance, Bajaj Allianz Life Insurance, HDFC Standard Life Insurance Company Limited, ICICI Prudential Life Insurance Company Limited, IDBI Federal Life Insurance etc.
General insurance companies which cater to various products in insurance such as health insurance, marine insurance, car insurance, property insurance etc. but except life insurance. To name a few the public sector includes companies like Oriental Insurance comp. Ltd., United India Insurance Comp. Ltd., New India Assurance comp. Ltd., National Insurance comp. ltd. and private sector includes Bharti AXA General Insurance, Future Generali India Insurance, HDFC ERGO General Insurance, ICICI Lombard etc.

The insurance sector in India compared to the Global scenario

Source- IRDA Annual Report (2012-13)

Globally, the share of life insurance business in total premium was 56.8 percent. However, the share of life insurance business in the Asian region was only 28.9 percent, which is in contradiction with the global trend.
For India, the share of life insurance business in total insurance business was very high at 80.2 percent while the share of non-life insurance business was small at 19.8 percent.
In the life insurance business, India is ranked 10^th among the 88 countries, for which data are published by Swiss Re. During 2012, the life insurance premium in India declined by 6.9 percent (inflation-adjusted). During the same period, the global life insurance premium increased by 2.3 percent.
India’s share in the global life insurance market was 2.03 percent during 2012, as against 2.30 percent in 2011. The non-life insurance sector witnessed a significant growth of 10.25 percent (inflation-adjusted) during 2012. Insurance Sector performance is far better when compared to the global non-life premium, which expanded by meager 2.6 percent during the same period.
However, the share of Indian non-life insurance premium in global non-life insurance premium was small at 0.66 percent and India ranks 19th in the global non-life insurance market.

Way Ahead

The prospects of the Indian insurance sector look promising and optimistic. The insurance sector has registered a robust growth standing at US$ 72 billion in 2012 and likely to grow to US$ 280 billion by 2020. India has had a favorable regulatory environment which boosts foreign player participation in this huge untapped. The decision of liberalizing the insurance sector and allowing private participation has enabled its consistent growth over the years. Moreover, the consumers were made an available number of choices in terms of products and insurance providers which increased the standard of service quality. Raising the foreign direct investment (FDI) limit from 26 percent to 49 percent in the sector is viewed as a key element to stimulate the insurance industry in India.

Quick Statistics and Future Projections

Source- IRDA Annual Report (2012-13)

Total premiums collected by the general and the life insurance industry in FY 2012–2013 amounted to Rs 3.75 trillion (US$ 59.07 billion).
The general insurance industry grew by 19.6 percent in April–May period of FY 2013–14.
Non-life insurers collected premiums worth Rs 13,552.46 crore (US$ 2.13 billion) in the first two months of the current year, as compared to Rs 11,333.54 crore (US$ 1.78 billion) during the corresponding period of the previous year.
According to Mr. TS Vijayan, Chairman, IRDA the insurance business in India is estimated to reach Rs 4 trillion (US$ 63.01 billion) in FY 2013–14.
The chairman considers that insurance penetration in India has the probability to rise to 5–6 percent from the current 3.86 percent.
Life Insurance Council, the industry body of life insurers in the country, has forecasted a compounded annual growth rate (CAGR) of 12–15 percent over the next five years for the segment.
India’s insurable population is anticipated to grow to 750 million by 2020, with life expectancy projected to reach 74 years around the same period. The council believes that this favorable Indian demography would cause more people seeking out life insurance.
Also, the council predicts life insurance penetration – a percentage of insurance premium to GDP – to reach 5 percent by 2020 from its current 3.2 percent.
Confederation of Indian Industry (CII) predicts the growth rate for India’s insurance industry in FY 2013–14 to be around 5 percent.
It also forestalls 60 percent of non-life insurance companies to record average growth of more than 10 percent.

Considering the various factors we can surely say that there is adequate potential for positive growth of the Indian insurance industry given the concentrated efforts of the regulator, government, and players in the framework of rising demand for insurance.