Strategic Analysis of Indian Life Insurance Industry A MANAGEMENT RESEARCH PROJECT ON INSURANCE INDUSTRY 1

Strategic Analysis of Indian Life Insurance Industry Objectives and scope of the project The insurance industry is one of the basic service industries in Indian economy, whose prospect is reflective of the economic resilience of the economy. With th e globalisation of the economy, India has become the playground of major global insurance players. As whole insurance industry is a very large field for researc h we have chosen life insurance industry of the booming segment of insurance ind ustry, for research purpose. The major objectives of the study are as below: To find out how political, economical, socio-cultural, technological factors affect ing this industry by PEST analysis. To find out how the market condition and wha t level of competition is there by five force analysis. To analyse driving force s and key success factors of the industry To analyze various threats and opportu nities for the industry To focus on current trends and future of the industry. 2

Strategic Analysis of Indian Life Insurance Industry Research methodology We have done exploratory research and for that purpose we had used secondary dat a. We had collected this secondary data from various published materials like ne wspapers, magazines, books etc and from Internet web sites. From these various i nformation and data we had done qualitative and quantitative analysis to find ou t impact of various forces, effect of macro environmental factors, major trends and future of the industry. 3

Strategic Analysis of Indian Life Insurance Industry Insurance at a Glance What is Insurance and How Insurance Work? According to the U.S. Life Office Mana gement Association Inc. (LOMA), life insurance is defined as follows: Life insura nce provides a some of money if the person who is insured dies whilst the policy is in effect. Anybody who has knowledge about life insurance will be tempted to say yes BUT In other words, surly this is far too brief an explanation for a financ ial service that provides a very sophisticated range of savings and investment p roducts, as well as mere compensation for death. Insurance is basically a sharing device. The losses to assets resulting from natural calamities like fire, flood, earthquake; accidents, etc. are mate out of the common pool contributed by larg e number of person who is exposed to similar risks. This contribution of many is used to pay the losses suffered by unfortunate few. However the basic principle is that loss should occur as a result of natural calamities or unexpected event s, which are beyond the human control. Secondly insured person should not make a ny gain out of insurance. It is natural think of insurance of physical assets su ch as motor car insurance or fire insurance but often we forget that creator of all these assets in the human being whose efforts have gone a long way in buildi ng up the assets. In that sense, human life is a unique image-generating asset. Unlike the physical assets, which decrease in value with passage of time, the in dividual becomes more experienced and more matured as he advances in age. This r aises his earning capacity and the purpose of life insurance is to protect the i ncome in the event of his premature death. The individual himself also needs fin ancial security for the old age or on his becoming permanently disabled when his income will stop. Insurance also has an element of savings in certain cases. Su ppose there are 1000 persons all aged 35 years and healthy lives. They are insur ed for one year against the risk of the death. Each person is insured for Rs. 50 ,000. If the past experience indicates that 4 out of 1,000 persons, at this age are 4

Strategic Analysis of Indian Life Insurance Industry expected to die during the year, expected amount of death claim to be paid to th e family of four persons would come to Rs. 2, 00,000. The contribution to be pai d by each of the 1,000 persons will come to Rs. 200 per year. Thus, all the 1,00 0 persons share loss caused to the 4 unfortunate families. 996 persons who survi ved till one year have not lost anything as they have secured peace of mind and a feeling of security for their family. While insurance cannot prevent accidents or premature death, it can help protect the family of the decreased against the loss of the death of the main breadwinner. In return for specified payments, in surance will provide protection against the incidents of an uncertain event- suc h as premature death. The business of insurance company called insurer is to bri ng together persons who are exposed to similar risks, collect contribution (prem ium) fro them on some equitable basis and pay the losses (claim) to the unfortun ate few who suffer. The story so far... Almost 4,500 years ago, in the ancient l and of Babylonia, traders used to bear risk of the caravan trade by giving loans that had to be later repaid with interest when the goods arrived safely. In 210 0 BC, the Code of Hammurabi granted legal status to the practice. That, perhaps, was how insurance made its beginning. . In 2100 BC, the Code of Hammurabi grant ed legal status to the practice. That, perhaps, was how insurance made its begin ning. As European civilization progressed, its social institutions and welfare p ractices also got more and more refined. With the discovery of new lands, sea ro utes and the consequent growth in trade, medieval guilds took it upon themselves to protect their member traders from loss on account of fire, shipwrecks and th e like. Since most of the trade took place by sea, there was also the fear of pi rates. So these guilds even offered ransom for members held captive by pirates. Burial expenses and support in times of sickness and poverty were other services offered. Essentially, all these revolved around the concept of insurance or ris k coverage. That s how old these concepts are, really. In 1347, in Genoa, Europe an maritime nations entered into the earliest known insurance contract and decid ed to accept marine insurance as a practice. 5

Strategic Analysis of Indian Life Insurance Industry The first step Insurance as we know it today owes its existence to 17th century E ngland. In fact, it began taking shape in 1688 at a rather interesting place cal led Lloyd s Coffee House in London, where merchants, ship-owners and underwriter s met to discuss and transact business. By the end of the 18th century, Lloyd s had brewed enough business to become one of the first modern insurance companies . Insurance and Myth... Back to the 17th century. In 1693, astronomer Edmond Hal ley constructed the first mortality table to provide a link between the life ins urance premium and the average life spans based on statistical laws of mortality and compound interest. In 1756, Joseph Dodson reworked the table, linking premi um rate to age. Enter companies... The first stock companies to get into the bus iness of insurance were chartered in England in 1720. The year 1735 saw the birt h of the first insurance company in the American colonies in Charleston, SC. In 1759, the Presbyterian Synod of Philadelphia sponsored the first life insurance corporation in America for the benefit of ministers and their dependents. Howeve r, it was after 1840 that life insurance really took off in a big way. The trigg er: reducing opposition from religious groups. The growing years... The 19th cen tury saw huge developments in the field of insurance, with newer products being devised to meet the growing needs of urbanization and industrialization. In 1835 , the infamous New York fire drew people s attention to the need to provide for sudden and large losses. Two years later, Massachusetts became the first state t o require companies by law to maintain such reserves. The great Chicago fire of 1871 further emphasized how fires can cause huge losses in densely populated mod ern cities. The practice of reinsurance, wherein the risks are spread among seve ral companies, was devised specifically for such situations. 6

Strategic Analysis of Indian Life Insurance Industry There were more offshoots of the process of industrialization. In 1897, the Brit ish government passed the Workmen s Compensation Act, which made it mandatory fo r a company to insure its employees against industrial accidents. With the adven t of the automobile, public liability insurance, which first made its appearance in the 1880s, gained importance and acceptance? In the 19th century, many socie ties were founded to insure the life and health of their members, while fraterna l orders provided low-cost, members-only insurance. Even today, such fraternal o rders continue to provide insurance coverage to members as do most labs our orga nizations. Many employers sponsor group insurance policies for their employees, providing not just life insurance, but sickness and accident benefits and old-ag e pensions. Employees contribute a certain percentage of the premium for these p olicies. Classification of Insurance: Insurance business can be divided into two broad categories, i. ii. Life, and Non-life. Life insurance is concerned with making provision for a specific event happening to the individual, such as death where as non life (or general insurance) is mo re commonly concerned with the provision for a specific event, which affects a p roperty, such as fire, flood, theft etc. PRODUCTS:As for latest information get in touch with the current insurers website information of insurers is provided a t the web page for insurers: Life Insurance: Popular Products: Endowment Assuran ce (Participating) and Money Back (Participating). More than 80% of the life ins urance business is from these products. Tariff Advisory Committee (TAC) lays dow n tariff rates for some of the general insurance products. 2001: of life insurer s. life insurers have launched new products. These include linked-products. For details, please visit the websites 7

Strategic Analysis of Indian Life Insurance Industry INSURANCE IN INDIA Introduction: Insurance in India can be traced back to the Vedas. For instance, yogakshema, th e name of Life Insurance Corporation of India s corporate headquarters, is deriv ed from the Rig Veda. The term suggests that a form of "community insurance" was prevalent around 1000 BC and practiced by the Aryans. Burial societies of the k ind found in ancient Rome were formed in the Buddhist period to help families bu ild houses, protect widows and children. Bombay Mutual Assurance Society, the fi rst Indian life assurance society, was formed in 1870. Other companies like Orie ntal, Bharat and Empire of India were also set up in the 1870-90s. It was during the swadeshi movement in the early 20th century that insurance witnessed a big boom in India with several more companies being set up. As these companies grew, the government began to exercise control on them. The Insurance Act was passed in 1912, followed by a detailed and amended Insurance Act of 1938 that looked in to investments, expenditure and management of these companies funds. By the mid -1950s, there were around 170 insurance companies and 80 provident fund societie s in the country s life insurance scene. However, in the absence of regulatory s ystems, scams and irregularities were almost a way of life at most of these comp anies. As a result, the government decided nationalizes the life assurance busin ess in India. The Life Insurance Corporation of India was set up in 1956 to take over around 250 life companies. For years thereafter, insurance remained a mono poly of the public sector. It was only after seven years of deliberation and deb ate - after the RN Malhotra Committee report of 1994 became the first serious do cument calling for the re8

Strategic Analysis of Indian Life Insurance Industry opening up of the insurance sector to private players -- that the sector was fin ally opened up to private players in 2001. The Insurance Regulatory & Developmen t Authority, an autonomous insurance regulator set up in 2000, has extensive pow ers to oversee the insurance business and regulate in a manner that will safegua rd the interests of the insured. The insurance sector in India has come a full c ircle from being an open competitive market to nationalization and back to a lib eralized market again. Tracing the developments in the Indian insurance sector r eveals the 360-degree turn witnessed over a period of almost two centuries. Milestone of indian life insurance industry:The business of life insurance in In dia in its existing form started in India in the year 1818 with the establishmen t of the Oriental Life Insurance Company in Calcutta. Some of the important mile stones in the life insurance business in India are: 1912: The Indian Life Assura nce Companies Act enacted as the first statute to regulate the life insurance bu siness. 1928: The Indian Insurance Companies Act enacted to enable the governmen t to collect statistical information about both life and non-life insurance busi nesses. 1938: Earlier legislation consolidated and amended to by the Insurance A ct with the objective of protecting the interests of the insuring public. 1956: 245 Indian and foreign insurers and provident societies taken over by the centra l government and nationalized. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore from the Government of India. Need for Life Insurance: The above definition captures the original, basic, and intention of life insuran ce: i.e. to provide for ones family and perhaps others in the event of death, esp ecially premature death. Originally, policies were to provide for short periods of time, covering temporary risk situations, such as sea voyages. As life insura nce 9

Strategic Analysis of Indian Life Insurance Industry becomes more established, it was realized what a useful tool it was for a number of situation including: i. Temporary needs/ threats: The original purpose of li fe insurance remains an important element, namely providing for replacement of i ncome on death etc. ii. Regular Savings: Providing for ones family and oneself, a s a medium to long-term exercise (through a series of regular payment of premium s). This has become more relevant in recent times as people seek financial indep endence from their family. iii. Investment: Put simply, the building up of savin gs while safeguarding it from the ravages of inflation. Unlike regular saving pr oducts, investment products are traditionally lump sum investments, where the in dividual makes a one-time payment. iv. Retirement: Provision for ones own later y ears become increasing necessary, especially in a changing culture and social en vironment. One can buy a suitable insurance policy, which will provide periodica l payments in ones old age. This simple example illustrates the impact premature death can have on a family, where the main earner has no life cover. A simple li fe insurance policy (term assurance) could have provided Mr. Atols family with a lump sum that could have been invested to provide an income equal to all or part of his income. We will discuss how to analyze the need for life cover and the v alue of life later in the course. Benefits from Life Insurance: i. It is superior to a traditional saving vehicles: As well as providing a secur e vehicle to build up saving s etc, its provides peace of mind to the policyhold er. In the event of untimely death, of say the main earner in the family, the po licy will pay out of the guaranteed sum assured, which is likely to be significa nt more than the total premiums paid. With more traditional savings vehicles, 10

Strategic Analysis of Indian Life Insurance Industry such as fixed deposits, the only return would be the amount invested plus any in terest accrued. ii. It encourages saving and forces thrift: Once an insurance contract has been entered into, the insured has an obligation to continue paying premiums, until t he end of the term of the policy, otherwise the policy will lapse. In other word s, it becomes compulsory for the insured to save regularly and spend wisely. In contrast savings held in a deposit account can be accessed or stopped easily. ii i. It provides easy settlement and protection against creditors: Once a person i s appointed for receiving the benefits (nomination) or a transfer of rights is m ade (assignment), a claim under the life insurance contract can be settled easil y. In addition, creditors have no rights to any monies paid out by the insurer, where the policy is written under trust. Under the Married Womens Property Act (M .W.Act), the money available from the policy forms a kind of trust, which credit ors cannot claim on. iv. It helps to achieve the purpose of the Life Assured: If someone receives a large sum of money, it is possible that they may spend the m oney unwisely or in a speculative way. To overcome this, the person taking the p olicy can instruct the insurer that the claim amount is given in installments. F or example, if the total amount to be received by the dependents is Rs. 2, 00,00 0 say Rs.50, 000 can be taken out as a lump sum and the balance paid out in smal ler installments, say Rs. 5,000 per month. v. It can be enchased and facilitates borrowing: Some contracts may allow the policy can be surrendered for a cash am ount, if a policyholder is not in a position to pay the premium. A loan, against certain policies, can be taken for a temporary period to tide over the difficul ty; some lending institutions will accept a life insurance policy as collateral for a personal or commercial loan. 11

Strategic Analysis of Indian Life Insurance Industry vi. Tax Relief: The policyholders obtain Income Tax rebates by paying the insura nce premium. The specified forms of saving which enjoy a tax rebate, under secti on 88 of the Income Tax Act, include Life Insurance Premiums and contributions t o a recognized Provident Fund etc. Comparison of life insurance to other saving instrument:1. Protection 2. Liquidi ty 3. Tax relief 4. Money when you need it. 1. Protection: Savings through life insurance guaranteed full protection against risk of the saver. In life insuranc e the full sum assured is payable with bonus whenever applicable whereas in othe r savings schemes, only the amount saved with interest is payable. 2. Liquidity: Saving can be made in a relatively painless manner because of the easy installmen t facility built into the scheme. 3. Tax relief: Tax relief in Life insurance is available to the insurer for amount paid by way of premium for life insurance s ubject to it rates in force. 4. Money when you need it: A suitable insurance pla n a combination of different plans can be taken out of meet. Specific needs are likely to arise in future. Examples: Childrens education Start in life Marriage p rovision or Periodical needs for cash over a stretch of time. 12

Strategic Analysis of Indian Life Insurance Industry Role of Life Insurance: Risks and uncertainties are part of life s great adventure -- accident, illness, theft, natural disaster - they re all built into the working of the Universe, w aiting to happen. Role 1: Life insurance as "Investment": Insurance is an attrac tive option for investment. While most people recognize the risk hedging and tax saving potential of insurance, many are not aware of its advantages as an inves tment option as well. Insurance products yield more compared to regular investme nt options, and this is besides the added incentives (read bonuses) offered by i nsurers. You cannot compare an insurance product with other investment schemes f or the simple reason that it offers financial protection from risks, something t hat is missing in non-insurance products. In fact, the premium you pay for an in surance policy is an investment against risk. Thus, before comparing with other schemes, you must accept that a part of the total amount invested in life insura nce goes towards providing for the risk cover, while the rest is used for saving s. In life insurance, unlike non-life products, you get maturity benefits on sur vival at the end of the term. In other words, if you take a life insurance polic y for 20 years and survive the term, the amount invested as premium in the polic y will come back to you with added returns. In the unfortunate event of death wi thin the tenure of the policy, the family of the deceased will receive the sum a ssured. Now, let us compare insurance as an investment options. If you invest Rs 10,000 in PPF, your money grows to Rs 10,950 at 9.5 per cent interest over a ye ar. But in this case, the access to your funds will be limited. One can withdraw 50 per cent of the initial deposit only after 4 years. The same amount of Rs 10 ,000 can give you an insurance cover of up to approximately Rs 5-12 lakh (depend ing upon the plan, age and medical condition of the life insured, etc) and this amount can become immediately available to the nominee of the policyholder on de ath. Thus insurance is a unique investment avenue that delivers sound returns in addition to protection. 13

Strategic Analysis of Indian Life Insurance Industry Role 2: Life insurance as "Risk cover: First and foremost, insurance is about ri sk cover and protection - financial protection, to be more precise - to help out last life s unpredictable losses. Designed to safeguard against losses suffered on account of any unforeseen event, insurance provides you with that unique sens e of security that no other form of investment provides. By buying life insuranc e, you buy peace of mind and are prepared to face any financial. Role 3: Life in surance as "Tax planning": Insurance serves as an excellent tax saving mechanism too. The Government of India has offered tax incentives to life insurance produ cts in order to facilitate the flow of funds into productive assets. Under Secti on 88 of Income Tax Act 1961, an individual is entitled to a rebate of 20 per ce nt on the annual premium payable on his/her life and life of his/her children or adult children. The rebate I deductible from tax payable by the individual or a Hindu Undivided Family. This rebate is can be availed up to a maximum of Rs 12, 000 on payment of yearly premium of Rs 60,000. By paying Rs 60,000 a year, you c an buy anything upwards of Rs 10 lakh in sum assured. (Depending upon the age of the insured and term of the policy) This means that you get an Rs 12,000 tax be nefit. The rebate is deductible from the tax payable by an individual or a Hindu Undivided Family. 14

Strategic Analysis of Indian Life Insurance Industry EMERGENCE OF IRDA Insurance Regulatory and Development Authority (IRDA): Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in Parliament in December 1999. The IRDA since its incorporation as a statutory body in April 2000 has fastidiously stuck to its schedule of framing regulation s and registering the private sector insurance companies. The other decisions ta ken simultaneously to provide the supporting systems to the insurance sector and in particular the life insurance companies were the launch of the IRDAs online s ervice for issue and renewal of licenses to agents. The approval of institutions for imparting training to agents has also ensured that the insurance companies would have a trained workforce of insurance agents in place to sell their produc ts, which are expected to be introduced by early next year. Since being set up a s an independent statutory body the IRDA has put in a framework of globally comp atible regulations. In the private sector 12 life insurance and 6 general insura nce companies have been registered. Duties, Power and Functions of IRDA: Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA. 1. Sub ject to the provisions of this Act and any other law for the time being in force , the Authority shall have the duty to regulate, promote and ensure orderly grow th of the insurance business and re-insurance business. 2. Without prejudice to the generality of the provisions contained in sub section. The powers and functi ons of the Authority shall include. a. Issue to the applicant a certificate of r egistration, renew, modify, withdraw, suspend or cancel such registration; 15

Strategic Analysis of Indian Life Insurance Industry b. Protection of the interests of the policy holders in matters concerning assig ning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of con tracts of insurance;. c. Specifying requisite qualifications, code of conduct an d practical training for intermediary or insurance intermediaries and agents. d. Specifying the code of conduct for surveyors and loss assessors. e. Promoting e fficiency in the conduct of insurance business. f. Promoting and regulating prof essional organizations connected with the insurance and re-insurance business. g . Levying fees and other charges for carrying out the purposes of this Act. h. C alling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance inter mediaries and other organizations connected with the insurance business; i. Cont rol and regulation of the rates, advantages, terms and conditions that may be of fered by insurers in respect of general insurance business not so controlled and regulated by the Tariff Advisory Committee under section 64U of the Insurance A ct, 1938 (4 of 1938); j. Specifying the form and manner in which books of accoun t shall be maintained and statement of accounts shall be rendered by insurers an d other insurance intermediaries; k. Regulating investment of funds by insurance companies; l. Adjudication of disputes between insurers and intermediaries or i nsurance intermediaries; m. Supervising the functioning of the Tariff Advisory C ommittee; n. Specifying the percentage of premium income of the insurer to finan ce schemes for promoting and regulating professional organizations referred to i n clause (f); o. Specifying the percentage of life insurance business and genera l insurance business to be undertaken by the insurer in the rural or social sect or; and p. Exercising such other powers as may be prescribed. 16

Strategic Analysis of Indian Life Insurance Industry

Insurance Regulatory and Development Authority (IRDA) Act: The Insurance Regulatory and Development Authority Act was introduced to end the monopoly of State-owned companies and to invest in the Insurance Regulatory Aut hority power to control the insurance sector. These powers inter aria are: Impo ition of prudential norms such as solvency margins, capital adequacy; Requiremen ts and investment guidelines for insurance companies; Grant of licenses to new c ompanies, and cancellation, suspension and withdrawal of licenses given to insur ance companies; Regulation of fund investment by insurance companies; Maintenanc e of solvency margins; Adjudication of disputes between insurers and intermediar ies; and Tariff fixing. As per the section 4 of IRDA Act 1999, Insurance Regulatory and Development Aut hority (IRDA, which was constituted by an act of parliament) specify the composi tion of Authority the Authority is a ten member team consisting of a. A Chairman ; b. Five whole-time members; c. Four part-time members, (All appointed by the G overnment of India) Regulatory Issues: The IRDA Bill lies down that the Indian promoter must dilute the stake in the pr ivate insurance firms from 74 per cent to 26 per cent in ten years. The bill sti pulates tough solvency margins -- Rs 500 million for life insurance firms, Rs 50 0 million or a sum equivalent to 20 per cent of net premium income for general i nsurance and Rs 1 billion for reinsurance business. 17

Strategic Analysis of Indian Life Insurance Industry The insurer has to maintain separate accounts relating to fund of shareholders a nd policyholders. The funds of policyholders should be retained within the count ry but does not cover repatriation of profits and dividends. Insurance companies under the new regime will have to have exposure to rural and social sectors. Fo reign investment in insurance, the bill states, is crucial to financing infrastr ucture and better insurance cover. The key to success in opening up the insuranc e sector in India is regulation. An example of how poor regulation can destroy a market is the mutual fund industry. A combination of improper marketing practic e has resulted in a loss of investor faith in that industry. Incidentally, the i nsurance industry in India itself has gone through the same phase. One of the re asons for nationalization of the insurance industry (LIC in 1956 and GIC in 1973 ) was the mismanagement and malpractice of erstwhile private players. But if the statements of IRA officials are anything to go by, the new regulations are expe cted to be on the right track. N I Rangachary, chairman, IRA, has already provid ed the timetable for the changes once the Bill is passed. The IRA has already in dicated that it will have tough norms for new participants. This is the most com pelling 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. With the nation s infrastructure in a state o f imminent collapse, India couldn t have afforded to be lumbered with sub-optima lly performing monopoly insurance companies and therefore the passage of the Ins urance Regulatory & Development Authority Bill on December 2, 1999 heralds an er a of cautious optimism where stakes are high for all parties concerned. For the Govt. of India, Foreign Direct Investment (FDI) must pour in as anticipated; for foreign insurers, investments must start yielding returns and for the domestic insurance industry - their market penetration should remain intact. On the fring e, the customer is pondering whether all the hype created on liberalization will actually benefit him. 18

Strategic Analysis of Indian Life Insurance Industry Insurance Sector Reforms in India: In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor R. N. Malhotra, was formed to evaluate the Indian insurance industry and recomm end its future direction. The Malhotra committee was set up with the objective o f complementing the reforms initiated in the financial sector. The reforms were aimed at creating a more efficient and competitive financial system suitable for the requirements of the economy keeping in mind the structural changes currently underway and recognizing that insurance is an important part of the overall fin ancial system where it was necessary to address the need for similar reforms In 19 94, the committee submitted the report and some of the key recommendations inclu ded: Structure: Government stake in the insurance Companies to be brought down t o 50% Government should take over the holdings of GIC and its subsidiaries so th at these subsidiaries can act as independent corporations All the insurance comp anies should be given greater freedom to operate Competition: Private Companies with a minimum paid up capital of Rs.1bn should be allowed to enter the industry No Company should deal in both Life and General I nsurance through a single entity Foreign companies may be allowed to enter the i ndustry in collaboration with the domestic companies Postal Life Insurance shoul d be allowed to operate in the rural market Only one State Level Life Insurance Company should be allowed to operate in each state 19

Strategic Analysis of Indian Life Insurance Industry Regulatory Body: The Insurance Act should be changed An Insurance Regulatory body should be set up Controller of Insurance (Currently a part from the Finance Min istry) should be made independent Investments: Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50% GIC and its subsidi aries are not to hold more than 5% in any company (There current holdings to be brought down to this level over a period of time) Customer Service: LIC should pa y interest on delays in payments beyond 30 days Insurance companies must be enco uraged to set up unit linked pension plans Computerization of operations and upd ating of technology to be carried out in the insurance industry The committee em phasized that in order to improve the customer services and increase the coverag e of the insurance industry should be opened up to competition. But at the same time, the committee felt the need to exercise caution as any failure on the part of new players could run the public confidence in the industry. Hence, it was d ecided to allow competition in a limited way by stipulating the minimum capital requirement of Rs.100 crores. The committee felt the need to provide greater aut onomy to insurance companies in order to improve their performance and enable th em to act as independent companies with economic motives. For this purpose, it h ad proposed setting up an independent regulatory body. 20

Strategic Analysis of Indian Life Insurance Industry ECONOMIC LIBERALIZATION Economic liberalizations in brief refers to the efforts taken by state toward fa ster economic development by adopting changes in existing economic policy, rules and Regulations and bringing flexibility in administrative control and procedur es economic liberalization encourage the use of new technology and improve knowl edge in the production process by global participation and marketing. Need for Global Integration: Recent economic liberalization started few years ago have started bringing in ne w investments from global giants and the government was hard pressed to facilita te global integration by lowering trade barriers for the free flow of technology , intellectual and financial capital. Additionally, reforms are essential if the Indian economy is to achieve and sustain a growth rate of 7 to 8 per cent per a nnum. Reaching a faster growth path also implies attracting foreign direct inves tment inflows of $ 10 Billion every year, up from the current level of $ 3 to $ 3.5 Billion. Thus liberalization of insurance creates an environment for the gen eration of longterm contractual funds for infrastructural investment. Report on Infrastructure says that 85% of funds for infrastructure development have to com e from the domestic industry. It further says that India would need $ 100 Billio n over the next five years to meet its infrastructure needs. Given the rate of s avings in India, there is much more room to grow and one can expect an additiona l revenue of about $ 10 Billion a year entering the market to enhance infrastruc ture. Insurance is definitely going to be one area that will assist in mobilizat ion of these funds. Multinationals interest: Multinational insurers are indeed keenly interested in emerging insurance becaus e their home markets are saturated while emerging countries have low insurance p enetrations and high growth rates. International insurers often derive a signifi cant part of their business from multinational operations. As early as 1994, 21

Strategic Analysis of Indian Life Insurance Industry many of the UKs largest life and general insurers derived 40 per cent to 60 per c ent of their total premium from outside their home markets. The figure at Commer cial Union was 76 per cent in that year. While the impact of global operations o n their business may be large, typically foreign insurers take only a small shar e of an individual countrys market. In Taiwan for example, foreign companies took only a 3 per cent share even seven years after opening up. In Korea, their shar e was 1 per cent after 20 years. In China, a large and complex market like India , private insurers have not made much headway. Yet, new entrants find insurance attractive because even a small share of a large and growing market can be profi table. The Korean insurance market for example, was only the 30th largest market in the world by premium volume in 1971. It moved up to 6th largest in 1996. In any case, in India multinational insurers will be restricted to a minority share holding in new companies. The new entrants will therefore be private Indian comp anies. The other reason why these large MNCs are interested in India is the econ omies of the insurance market. Insurance companies survive on the principle of s preading of risk. No matter what the size of each player, an insurer cannot affo rd to operate in a niche market. Operating in a particular region would expose t hem to the economic downtrends in the region and derail their profits. Insurance companies, being long-term players, also have to avoid sudden dips in earnings to inspire confidence among investors to invest long-term funds. This can be ach ieved by spreading their operations over a wide geographical area. Moreover, for them, big is not just beautiful, but essential for survival. Which brings us to the avenues for growth? According to the Sigma report on global insurance broug ht out by the worlds second largest reinsurer Swiss Re - the international market is completely saturated. In the developed world, the growth in life insurance p remium has been a meager 1.5%. As compared to this, LIC despite all its handicap s has been growing at a healthy clip of around 20%. 22

Strategic Analysis of Indian Life Insurance Industry Privatization: Start Up Strategy: Potential private entrants therefore expect to score in the areas of customer se rvice, speed and flexibility. They point out that their entry will mean better p roducts and choice for the consumer. Critics counter that the benefit will be sl im, because new players will concentrate on affluent, urban customers as foreign banks did until recently. This might seem a logical strategy from the point of view of new players. Start-up costs-such as those of setting up a conventional d istribution network-are large and high-end niches offer better returns. However, in the long run middlemarket offers the greatest potential as in terms of it is the second largest market in the world. This may still be an urban market but goes beyond the affluent segment. Insurance, even more than banking, is a volum e game. A very exclusive approach is unlikely to provide meaningful numbers. The refore, private insurers would be best served by a middle-market approach, targe ting customer segments that are currently untapped. Repositioning by Nationalized Sector: Floodgates of competition opened up by the privatization of insurance industry d id throw a challenge to the well-protected nationalized sector and it seems they have picked up the gauntlet. LIC and GIC, both are trying to reposition themsel ves by having re-engineering done on the structure and operations of their respe ctive organizations. Life Insurance Corporation is at present going through pres entations from top management consultants. These consultants have been asked to narrate their experiences in countries where the insurance sector has been opene d up for private competition so that the public sector player can draw lessons. Based on these, LIC will appoint a consultant which can provide them broad terms of reference on what changes are required to tackle the impending competition. 23

Strategic Analysis of Indian Life Insurance Industry GIC has already identified the areas that need to be activated and given a shape through the four subsidiary companies. Foremost is the area of providing health insurance services. A change in the GIC Act will enable the corporation to floa t a joint venture company for health insurance. Other areas that the GIC is look ing at are savings-linked insurance products and use of alternate distribution c hannels including banc assurance. Also in progress is the co-ordination of all f oreign operations of the group. Even state-owned entities, SBI and UTI have seri ous plans for insurance sector as the banks have unsurpassed advantages over any other player. The intermediaries are also getting more organized with a little nudging from the IRA. The Reinsurance Consultants Association is planning to con vert itself into the Insurance Brokers Association of India in anticipation of t he laws being amended to allow insurance broking. Cross Border Experience: Cross-country experience shows that nowhere in the world have the entry of forei gn firms threatened the position of domestic companies. Whether it is Malaysia, where the insurance sector has been open for more than 50 years and foreign comp anies account for about 10 per cent of market penetration or it is Indonesia, Th ailand, China or the Philippines, where the market has been opened more recently , the total market share of foreign companies is less than 10 per cent except in Indonesia where it is about 20 per cent. Closer home, we have the experience of the banking sector where despite the presence of 42 foreign banks, their share in total banking assets is less than 10 per cent. Today hardly 20 per cent of th e population in India is insured and insurance premium (life as well as non-life ) account for just 2 per cent of GDP as against the G7 average of 9.2 per cent. Consequently, the fear that new companies will displace public companies is misp laced. There is room for more for not only the existing companies but also for a ny number of competitors. 24

Strategic Analysis of Indian Life Insurance Industry In China, insurance premium accounted for just over 1 per cent of China s GDP in 1995 but in the four years since the market has been liberalized (albeit partia lly), spending on insurance has grown at a compound annual rate of 33 per cent. It is not just foreign companies alone that have grown but also the national PIC C as well. The story is no different in S Korea. There, the opening of the secto r saw the Big Six domestic players, who initially controlled the entire market, increase their business from 7 to 37 trillion won by 1997. Meanwhile foreign com panies were not able to capture more than a miniscule 0.7 per cent of the market . The various implications can group into as: 1) 2) Positive implication Negativ e implication. 1. Positive implication:The liberalization of life insurance will benefit the in dustry in the following ways: It helps transfer of technology in the field of li fe insurance. New techniques and methods can be used for assessment of risk, fix ation of reasonable premium and provide new investment opportunities. This will help in expansion and development of business. It helps in adopting a flexible p rice policy on new life insurance policies developed and introduce now onward. I t will make available in all countries of the world the service of efficient man agement and financial experts. It can help in development of knowledge of insura nce business. Many educational and training institution stand fast functioning t his lead to availability of professional managers. It will enlarge the scope of insurance. It will help spread it in rural and small villages also. The life ins urance market will become global. The productivity as well as the efficiency als o increases. The international competition in the field itself will play an impo rtant roll in this direction. Competing ability will increase due to liberalizat ion. All categories of employees serving in life insurance sector will get more satisfaction through good opportunity for training, higher opening in jobs and h igher income. 25

Strategic Analysis of Indian Life Insurance Industry The general public will also be benefited from liberalization of life insurance sector: They can get better choice of selection of policy and insurer. When ther e is large number of insurer, the insurer is able to select such an insurer whos e premium rate is reasonable. The insurers play more attention to the interest o f insured. This way interest of the insured is well protected. There will be num ber of policies based on social security brought out by different insurers. Such schemes include plan like pension scheme, gratuity scheme, medical claim etc. G ood employment opportunity in the life insurance sector when a number of new ins titutions are established in these fields. The employee will also benefit from l iberalization life insurance sector: Better opportunity for training and develop ment. Knowledge can be gain about new method of functioning through education an d training. The employee gets opportunity for job promotion and other financial nonfinancial benefits. The productivity of employees shall develop due to educat ion and training facility. Working with professional manager benefit the employe e in learning the new methods and technique in work situation. The employee will get motivation and their moral will be higher. 2. Negative implication:Cut thro at competition liberalization will create acute competition in the life insuranc e market, which is not in the interest of the industry, customers or the country . This type of acute competition may sometime leads to insolvency of life insura nce companies and thereby the policy holders may face serious consequences. This seems far from truth, as the experience shows that nowhere the competition has threatened anybody. The experience of banking sector in our 26

Strategic Analysis of Indian Life Insurance Industry own country testifies to this effect that despite presence of 42 foreign banks, the balance is not distributed. Total investment assets of the foreign banks are about 10 %. But the impact of the competition has increased the size of the mar ket. End of government monopoly: This liberalization of life insurance sector br ings an end to the government monopoly in life insurance sector and private comp anies may exercise their domination. Dominance of outside companies: foreign com panies capture the life insurance sectors as a whole under their dominance, beca use they possess more efficient insurance techniques, knowledge. As such Indian companies cannot survive before these foreign companies. Shortage of funds for s ocial cause: It is estimated that at present the LIC and GIC invest a total of R s 90,000 crores to the public/ social sector. This amount is nearly 70-80 % of t heir total fund available. Although the government is making rules for the priva te sector companies to invest certain percentages of their premium income in the social sector, the availability of such huge fund is doubtful. Policies of heav y amount the insurance companies issues policies of heavy amount when at present a policy is available for an insured sum even below Rs. 1,00,007/- where the su m assured against a policy becomes very heavy, economically backward people cann ot benefit of insurance. More attention towards profitable policies:- the privat e sector life insurance companies develop and introduce only those policies that involve the minimum risk burden and more profitable of them. They overlook the interest of the common people. They want taken any special attention to insured the lives of woman, physically handicapped etc. which involve more risk. Neglect the rural lives:- the people who are against the concept of liberalization of i nsurance sector believe that the domestic as well as foreign private companies n eglect the rural areas, by giving more attention in getting people insured from urban areas. This because of the average cost incurred on policies is less in ur ban areas. Problem of exercising control over insurance companies: government. i t becomes very difficult to control Indian and foreign private insurance compani es by the 27

Strategic Analysis of Indian Life Insurance Industry Speculative activities: it encourages for more speculative activities by private sector companies. The development of new policies and premium rates are fixed s peculatively instead of considering realistic factors. This will promote the att itude of earning larger short-term profits. On long run, the existence of such c ompanies becomes doubtful. Liberalization based on outside pressure: The critics against the view of liberalization have the view that our country because of pr essure by World Trade Organization has adopted the liberalization measures. Libe ralization to fill up budget deficit the critics against the view of Liberalizati on to fill up the budget deficit by disinvestment of more than 50% of shares of LIC. The crores of rupees, thus to be received can be used for filling up the bu dget deficit. But this argument is proved to be incorrect in view of the fact th at the government has already announced its decision in parliament that it wont r einvest share of LIC. Difficulty in utilizing the physical resources completely a s a result of privatization the business of LIC shall be affected negatively. As a result the vast resources held these companies shall not be utilized fully. A ttraction for its employees from out side sources there is a possibility of drai nage of expert employees from the two corporations to the private companies. Thi s is because the private companies offer more lucrative salaries and packages to their employees. Keeping this in mind, the IRDA has come out with regulations f or high cadre employees that they cant leave the corporation easily, to join othe r places. Lack of government guarantee on polices the insurance policies issued by state insurers carry Central Governments guarantee whereas no such guarantee s hall be available to the policies issued by the private insurance companies. The insured remain unsecured in this way. No grants available on policies to poor: State insurers have kept provision for certain amount of their profit as grant t o policies issued to people in villages and the poor. No such grant can be expec ted from the private companies. 28

Strategic Analysis of Indian Life Insurance Industry Employees fear: employees of these insurance companies feel danger to their empl oyment due to process of liberalization measure. While implementing it, these co rporation can retrench certain number of employees who are exceeds in need. But this is not tenable as the experience of the other countries shows it otherwise. Public sector GIC and GIC are re-structuring themselves for better and more dep loyment of staff in diversified companies. 29

Strategic Analysis of Indian Life Insurance Industry GLOBAL SCENARIO Life insurance not plays an important role in national economy but also in inter national economy. Marine cargo insurance provides risk coverage for shippers and the banks, which finance international trades. This role becomes all the more i mportant in the context of an active government policy to encourage exports. Ind ian life insurer operates in more than 30 countries through agencies, branches, associates companies. These operations earn foreign exchange. The insurance busi ness is concerned with North America, Western Europe, Japan and Oceania. Togethe r these regions accounts for about 91 % of the world annul premium. By regions Nor th America and western Europe are growing moderately while oceanic, Latin Americ a, eastern Europe and Africa display growth above lone term trends to a global co ntext globalization of life insurance helps companies practices underwriting dis cipline in one regions globalization of the insurance industry received a big bo ost. Countries United Kingdom Japan United States South Africa Australia South K orea India China Malaysia Indonesia Brazil Insurance Penetration (premium as a% of GDP) 12.71 8.70 4.48 14.04 6.04 9.89 1.77 1.12 2.13 0.54 0.36 Insurance Densi ty (Per Capita Premiums in USD) 3028.5 3165.1 1611.4 392.9 1193.5 935.6 7.6 9.5 86.4 4.0 12.9 30

Strategic Analysis of Indian Life Insurance Industry India and the world market: Unfortunately, the progress achieved by the life insurance industry in India, it compares unfavorably not just with the developed countries. But also even with the developing world. The global market for the life insurance is estimated to b e around $ 1412.3 billions. 31

Strategic Analysis of Indian Life Insurance Industry MAJOR PLAYER IN LIFE INSURANCE About the various player of life insurance sector: Since being set up as an independent statutory body the IRDA has put in a framew ork of globally compatible regulations. In the private sector 12 life insurance and 6 general insurance companies have been registered than after remaining comp anies are registered. Here we have described the private life insurance companie s registered in which year wise. Private Player in Life Insurance industry: Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 Registration Number 101 104 105 107 109 11 0 111 114 116 117 121 122 127 Date of Reg. 23.10.2000 15.11.2000 24.11.2000 10.0 1.2001 31.01.2001 12.02.2001 30.03.2001 02.08.2001 03.08.2001 06.08.2001 03.01.2 002 14.05.2002 06.02.2004 HDFC Standard Life Insurance Company Ltd. Max New York Life Insurance Co. Ltd. ICICI Prudential Life Insurance Company Ltd. OM Kotak M ahindra Life Insurance Co. Ltd. Birla Sun Life Insurance Company Ltd. Tata AIG L ife Insurance Company Ltd. SBI Life Insurance Company Limited. ING Vysya Life In surance Company Private Limited Allianz Bajaj Life Insurance Company Ltd. MetLif e India Insurance Company Pvt. Ltd. AMP SANMAR Assurance Company Ltd. Aviva Life Insurance Co. India Pvt. Ltd. Sahara India Insurance Company Ltd. Name of the C ompany 32

Strategic Analysis of Indian Life Insurance Industry 1. LIFE INSURANCE CORPORATIOMN INDIA: VISION "A trans-nationally competitive fin ancial conglomerate of significance to societies and Pride of India" MISSION "Ex plore and enhance the quality of life of people through financial security by pr oviding products and services of aspired attributes with competitive returns, an d by rendering resources for economic development." 2. ALLIANZ BAJAJ LIFE INSURA NCE COMPANY LTD: Allianz Bajaj life insurance company ltd with a capital base of RS.1.5 billions is a joint venture between ALLIANZ AG and BAJAJ AUTO LTD. The c ompany was incorporated on MARCH 12, 2001 and received the IRDA certificate of r egistration on august 3, 2001 to conduct life insurance business in India. Bajaj auto ltd. The flagship company of Bajaj group is one of the largest two and thr ee- wheeler manufactures, and forth-largest manufacturer of two- wheelers in the world, with annual turnover of RS. 42.16 billion. The company enjoys a very str ong brand image in this industry. Founded in 1890, the Allianz Group is one of t he worlds leading insurance companies with over a 100 years experience in insuranc e and related services. With a presence in over 70 countries, it is also the lar gest insurer in Europe. The key business areas of Allianz group include General Insurance (property, engineering, marine, motor, casualty and miscellaneous), re insurance, risk management, life and health insurance, asset management and pens ion funds management. Rated AAA by Standard & Poor, it has assets over 670 billion DM (Rs 17,160 billion) under its management. 33

Strategic Analysis of Indian Life Insurance Industry 3. AVIVA LIFE INSURANCE COMPANY LTD. : The Aviva Life Insurance Company, a joint venture between Dabur India and CGU, a wholly owned subsidiary of Aviva Plc., i s capitalized at Rs 1 billion. Established in 1884, Dabur India Limited is one o f Indias oldest groups of companies, with interests in ayerdedic specialties, pha rmaceuticals, personal care and health-care products, the annual sales turnover of the group is over Rs 12 billion. Aviva plc. is the largest life and general i nsurance group of the UK, and the worlds seventh largest insurer with world-wide premium income and retail investment sales of 28 billion and more than 200 billion in assets under management. Aviva plc. is the holding company of the Aviva grou p of companies which is involved in the life assurance business, log-term saving s, all classes of general insurance business and fund management. 4. BIRLA SUN L IFE INSURANCE COMPANY LTD. : The Birla Sun Life Insurance Company, is a 74.26 jo int venture between the Aditya Birla Group and Sun Life Financial Services of Ca nada, and has an equity capital of Rs 1.5 billion. The Aditya Birla Group is one of Indias largest business houses, with a turnover of over $4.75 billion and an asset base of $3.8 billion. The Group is a welldiversified conglomerate spanning 40 companies spread across 17 countries. Sun Life Assurance Co., of Canada, est ablished in 1871, has a strong presence in Canada, the USA, the Philippines, Hon g Kong, and the UK. Its major lines of business are life insurance, annuities an d mutual fund and investment services. In Canada, the company is especially stro ng in the corporate life and health insurance and savings markets. 34

Strategic Analysis of Indian Life Insurance Industry 5. HDFC STANDARD LIFE INSURANCE COMPANY LTD. : HDFC Standard Life Insurance Comp any Ltd. was incorporated o August 14, 2000. HDFC is the majority stakeholder wi th an 81.4 per cent stake. Standard Life holds a stake of 18.6 per cent. Incorpo rated in 1977 with a share capital of Rs 100 million, HDFC has since emerged as the largest residential mortgage finance institution in the country, raising its capital to Rs 1.19 billion and an asset base of Rs 150 billion. It operates thr ough 75 locations throughout India, and has an international office in Dubai, UA E, with service associates in Kuwait, Oman and Qatar. Standard Life, which has b een in the life insurance business for the past 175 years, is Europes largest mut ual life assurance company. With an asset base of Rs 6000 billion, it has the di stinction of being accorded the AAA rating by Standard & Poor for the past six yea rs. 6. ICICI-PRUDENTIAL LIFE INSURANCE COMPANY LTD. : The ICICI-Prudential Life Insurance Company ltd, with ICICI s share at 74 per cent and Prudential plc. UKs s hare of 26 per cent was incorporated o July 20, 2000, with an authorized capital of Rs 2.3 billion. The paid up capital is Rs 1.9 billion. It commenced commerci al operations on December 19, 2000, becoming one of the first few private sector players to enter the liberalized arena. The World Bank, the Government of India and the Indian Industry, to promote industrial development in India by providin g project and corporate finance to the Indian industry, established ICICI LTD., in 1944. Since its inception, it has grown from a development band to a financia l conglomerate and has become one of the largest public financial conglomerates and has become one of the largest public financial institutions in India, financ ing all the major sectors of the economy. 35

Strategic Analysis of Indian Life Insurance Industry Founded in 1848, Prudential plc. has grown to become one of the largest provider s of a wide range of savings products for the individual, including life insuran ce, pensions, annuities, unit trusts and personal banking. It has a presence in over 15 countries, and manages assets of over US $259 billion (approximately Rs 11, 3956 billion) as of December 31, 1999. in fact, Prudentials first overseas op eration was in India, way back in 1923, to establish life and general insurance branch agencies. 7. ING-VYSYA LIFE INSURANCE COMPANY PVT. LTD. : As per the join t venture agreement, Vysya Bank holds 49 per cent, ING 26 per cent, and the GMR Group, which has wide ranging interests in fields which as power generation, inf rastructure, manufacturing, software and banking, holds 25 per cent. This joint venture is expected to be the first Banc assurance venture in the country. The V ysya Bank, which has equity participation from Bank Brussels Lamberts, is one of the largest private banks in India with 480 retail outlets, the bank, given its significant branch penetration, has a high degree of retail focus. The ING Grou p, with an asset base of over Rs 284.2 billion is a global financial institution of Dutch origin, which is active in the field of banking, insurance and asset m anagement in over 60 countries. ING Insurance is the worlds second largest life i nsurance company as per the latest Fortune rankings. It is the third largest fin ancial services company in Europe, and the tenth largest financial services comp any in the world. 8. MAX NEW YORK LIFE INSURANCE COMPANY LTD. : Max New York Lif e is a partnership between Max India Limited, one of Indias leading multi-busines s corporations and New York Life. The paid-up capital of the joint venture is Rs 2.5 billion. 36

Strategic Analysis of Indian Life Insurance Industry Max India has significant presence in the most vital and fast growing sectors of the Indian economy, viz., telecommunication services, Electronic components dis tribution, specialty plastic films and bulk pharmaceuticals. It is also active i n the emerging knowledge-based areas of health care, financial services and IT. In 1998, New York Life International Inc., had total revenues amounting to almos t US $20 billion, and was rated the number one provider of new life insurance po licies in the USA. In the same year, New York Life was also the leader in insura nce sales to the growing Indian community in the USA. 9. MET LIFE INDIA INSURANC E COMPANY LTD.: The Met Life India Insurance Company, joint venture between the US insurance major Metropolitan Life Insurance Co., the Jammu and Kashmir Bank L td., the Pallonji Group and some high net worth individuals, was incorporated in India on April 11, 2001. The company started its operation with an initial capi tal of Rs 1.25 billion. The Metropolitan Life Insurance Co., established in 1867 a, is a member of the Metropolitan Life Group and is licenses in the USA, Canada and a few other countries. Its major lines of business are individual and group life insurance. Pallonji & Co. Pvt. Ltd., is primarily engaged in contracting a nd has under taken major contract for power generating situation, chemical and f ertilizer factories petroleum refineries and gas platform. Ti has also diversifi ed outside in their business in to the field of non- convention energy source. 1 0. OM KOTAK MAHINDRA LIFE INSURANCE COMPANY LTD. The joint venture OM KOTAK MAHI NDRA life insurance started off with an initial capital of Rs. 1.5 billions, wit h a 74:26 stake between Kotak Mahindra life insurance and old mutual plc. main l ife of 37

Strategic Analysis of Indian Life Insurance Industry Kotak Mahindra finance ltd is one of the Indias premier financial groups, with a range of highly specialized products and services, and a very large client base of Indian and international firms. Starting as are non-product company in the mi d eighties, it has evolved into a full service financial conglomerate, covering auto and consumer finance, assets management, investment banking, securities tra ding and equity research. It operates across 30 centers in India and in Dubai, L ondon, New York and Mauritius. Old mutual plc. is a leading global financial ser vices provider, providing a broad range of financial services in the area of ins urance, assets management and banking. It is a leading life insurer in South Afr ica, with more than 30% market share. 11. SBI LIFE INSURANCE COMPANY LIMITED: Th is joint venture has 74% capital participation from the state bank of India (SBI ), with Cardiff contributing 26% in the paid capital of Rs. 2.5 billion. The SBI is the largest bank in the country with more than 9000 branches. It has seven a ssociate banks and together they have 30% of the Indian market share. It net wor th as on March 2000 stood at Rs. 121.46 billion, with a deposit base of Rs. 196. 803 billion. The insurance venture, SBI life, is a step aimed at being a univers al bank as the SBI already as subsidiary for housing finance, merchant banking, mutual fund and primary dealership in government papers and factoring businesses . BNP paribus, which is one among the three largest banks in Europe, is the hold ing company of Cardiff, its insurance arm. It was set up in 1973 and specialized in long term savings, protection products and creditors insurance. In 1999, its premium income stood at US $ 4 billion, with assets worth over US $ 23 billion under its management. Based in France, it has the expertise for selling insuranc e products through bank and as operation in over 20 countries. 38

Strategic Analysis of Indian Life Insurance Industry 12. TATA AIG LIFE INSURANCE COMPANY LIMITED:Tata AIG life insurance company ltd, is capitalized at Rs. 1.85 billion of which 74% has been brought in by Tata son s and 26% by the American partner. Tata enterprise with 82 companies, spread ove r 7 sectors, have an annual turnover exceeding US $ 8.8 billion. The Tata group has made pioneering contribution in various fields including insurance, aviation , iron and steel. The group has had a long association with Indias insurance sect or, having set up the largest insurance company viz. new Indian assurance compan y ltd. (1919), prior to the nationalization of this sector. The American insuran ce group (AIG) is the leading US based international insurance and financial ser vices organization and the largest underwriter of commercial and industrial insu rance in the USA. Its member companies write a wide range of commercial and pers onal insurance products in over 130 countries and jurisdiction throughout the wo rld. 39

Strategic Analysis of Indian Life Insurance Industry CURRENT SCENARIO Life Insurance Industry is growing at the rate of 68 % respectively. COM PANY M ARKET SHARE( IN %) 82 .3% Bajaj Allianz ING Vysya AMP Sanmar SBI Life TATA AIG HDFC Standard ICICI Prudent ial BIRLA Sunlife AVIVA Kotak Mahindra Max New York Met Life LIC 0.2% 0.9% 0.5% 2.6% 5.6% 2.0% 0.4% 1.4%1.3% 1.8% 0.3% % 8 . 0 40

Strategic Analysis of Indian Life Insurance Industry FIRST YEAR PREMIUM-AUGUST 2004 Sr N O. AUGU ST UP TO ST Company Premium u/w % of No. of policies/ pre miu m UP AUG UST 1. 2. 3. 4. 5. 6. 7. 8. 9. Baja Allianz I NG Vysya AMP Sanmar SBI Life TATA AIG HDFC Standard ICICI Prudential BIRLA life AVIVA 3957.4 1 762.05 521.22 4374.2 7 1598.3 3 2011.4 5 8803.5 8 Sun 4561.8 6 10 82.9 1 10. Kotak Mahindra 11. Max York 1089.9 3 New 1459.3 4 14395. 2.03 73 2606 .2 0.37 7 1823.2 0.26 5 12768. 1.80 21 9150.0 1.29 7 9671.5 1.36 2 39977. 5.63 5 5 18150. 2.56 60 5623.2 0.79 0 3626.4 0.51 8 6356.3 0.90 5 15379 4567 5705 11759 38821 15459 15253 7613 2705 8125 17251 7023 7 3492 8 1232 1 3412 8 7967 3 5921 3 1816 35 4802 2 2952 1 1622 5 6550 5 0.85 3810 34867 1.35 0.21 7812 35009 1.35 0.39 11034 49047 1.90 0.63 5162 19335 0.75 2.23 25818 31965 1.24 0.77 5318 57363 2.22 1.04 16197 129927 5.02 0.45 94848 264883 10.24 0.16 3349 21305 0.82 0.46 0 5898 0.23 AUGU ST UP TO AUG UST Schemes % of No. of lives no. of ies UP TO AUG UST 0.92 3142 52,208 covered under group schemes ST AUGUS T %of lives covered gr oup schemes UP TO AUGUS T 2.02 polic AUGU UP TO under AUGU TO 41

Strategic Analysis of Indian Life Insurance Industry 12. Met Life 13. LIC Total 348.36 127451 .85 158022 .55 1522.8 0.21 4 58447 1.09 71014 3.06 82.4 0 100 3164 153424 1 168004 2 1048 9 7023 186 7665 083 0.14 91.6 3 100 5618 60959 8 79170 6 84501 3.27 1799441 69.59 2585751 100 PREM IUM U/W IN AUGUST 2OO4(Rs in Lakhs) Series1 140000 120000 PREMIUM 100000 80000 60000 40000 20000 0 lli an z IN G Vy A M sy P a Sa nm ar SB IL TA ife H TA D FC A IG St IC an IC da IP rd ru de B nt IR LA ial Su nl ife K ot A ak VI V M A ah in M dr ax a Ne w Y o r k M et Li fe B aj aj A COMPANY The life insurance industry underwrote new business premium of Rs.1, 86,605.46 l acks during the month of July 2004. 42 LI C

Strategic Analysis of Indian Life Insurance Industry The life insurance industry underwrote new business premium of Rs.1, 86,605.46 l akh during the month of July 2004, taking the cumulative premium underwritten du ring the current year 2004-05 to Rs.5, 52,515.95 lakh. LIC underwrote premium of Rs.4, 57,019.23 lakh i.e., a market share of 82.72 per cent, followed by ICICI Prudential and Birla Sun Life with premium underwritten (market share) of Rs.31, 173.97 lakh (5.64 per cent) and Rs.13, 591.67 lakh (2.46 per cent) respectively . While LICs market share declined from 90.12 per cent for the period ended July 2003, all new life insurers increased their market share, over the corresponding previous year numbers. Cumulatively, the new players underwrote first year prem ium of Rs.95, 496.72 lakh. In terms of policies underwritten, the market share o f the new players and LIC was 8.30 per cent and 91.70 per cent as against 6.09 p er cent and 93.91 per cent respectively in the corresponding period in the year 2003-04. The premium underwritten by the industry up to July, 2004, towards indi vidual single and non-single policies stood at Rs.81, 244.37 lakh and Rs.3, 39,6 44.37 lakh respectively accounting for 1,85,806 and 57,95,219 policies. The grou p single and non-single premium accounted for Rs.1, 21,352.74 lakh and Rs.10, 27 4.47lakh. The total Individual premium and Group premium underwritten was Rs.4, 20,888.74 lakes and Rs.1,31,627.21 lakes respectively as against Rs. 2,66,468.62 lakes and Rs.62,636.22 lakes underwritten in the corresponding period of the pr evious year. The number of lives covered by the industry under the various group schemes was 17, 95,705 during the period ended July 2004. LIC covered 11,89,843 lives under the group schemes accounting for 66.26 per cent of the market, foll owed by SBI Life with 1,70,035 lives (9.47 per cent), Tata-AIG with 1,13,730 liv es (6.33 per cent) and MetLife with 78,883 lives (4.39 per cent). The accompanyi ng table does not include the numbers for Varishtha Pension Bima Yojana. Premium underwritten by LIC under this pension scheme during the period April - July 20 04 was Rs.1, 07,264.83 lakh towards 54,740 policies. 43

Strategic Analysis of Indian Life Insurance Industry Future Possibilities (Next 5-10 Years) Job opportunities are likely to increase manifold. The number of people working in the insurance sector in India is roughly the same as in the UK with a populat ion that is 1/7 India s; the US with a population 1/4 the size of India has near ly 4 times the number. In the emerging markets, the picture is no less encouragi ng. In S Korea, the no of full time employees more than doubled over a ten-year period. Thailand added 50 per cent more jobs in four years. The liberalization o f the insurance sector promises several new jobs opportunities for those employe d in the finance sector that are equipped with degrees in finance. Finance profe ssionals who had witnessed a slump in the job market would be a much-relieved lo t to hear about the privatization of the insurance sector. Let us look into the type of jobs that will be created once the private players come on the scene. Ce rtainly, it won t be far different from the traditional streams in any other ind ustry. There will be demand for marketing specialists, finance experts, human re source professionals, engineers from diverse streams like the petrochemical and power sectors, systems professionals, statisticians and even medical professiona ls. Apart from this, there will be high demand for professionals in the streams like Underwriting and claims management and actuarial sciences. There could be a huge inflow of funds into the country. Given the industry s huge requirement of start-up capital, the initial years after opening up are bound to see a strong inflow of foreign capital. Moreover, given that the break-even, typically, comes much later than in the case of other sectors, odds are that the first remittanc e of dividend will not happen before a good 10-15 years. In the areas of reinsur ance, huge capacity is likely to be created with players like Swiss Re and Munic h Re keenly observing the unfolding saga of liberalization of insurance industry in India. Not only the outward reinsurance will reduce, it is bound to attract inward reinsurance from the neighboring countries and regions. If the regulator is forward looking and legislature is supportive, this trend may well lead to th e creation of a Lloyds like market for the direct as well as reinsurance busines ses. 44

Strategic Analysis of Indian Life Insurance Industry However, increased competition is very likely to result in rate reductions in ce rtain classes of business, but in those areas that have so far been crosssubsidi zed an increase in rates may be possible. Overall, the rate reductions may outwe igh the increases, thus bringing down the re-insurance premium volume available. Apart from pure re-insurance activities, which is providing insurance protectio n, a revolution will come in service related fields like training, seminars, wor kshops, know-how transfer regarding risk assessment and rating, risk inspections , risk management and devising new policy covers, etc. Also, with more players i n the market, there will be significant increase in advertising, brand building, and keen pricing not ridiculous pricing and this will benefit whole lot of anci llary industries. Another effect of de-regulation will be that, projects, especi ally mega-projects where one needs the capacities of the international re-insura nce market, will get exposed to international trends to an even greater extent t han is the case today. This will affect rates too. Areas like the personal lines segment, where we also expect to see substantial growth as also new types of co vers, would usually not be affected by international trends in the same way as, there is much less need for global re-insurance support. Substantial shift in th e distribution of LIFE insurance in India is likely to take place. Many of these changes will echo international trends. Worldwide, insurance products move alon g a continuum from pure service products to pure commodity products. Initially, insurance is seen as a complex product with a high advice and service component. Buyers prefer a face-to-face interaction and place a high premium on brand name s and reliability. As products become simpler and awareness increases, they beco me off-theshelf, commodity products. Sellers move to remote channels such as the telephone or direct mail. Various intermediaries, not necessarily insurance com panies, sell insurance. In the UK for example, retailer Marks & Spencer now sell s insurance products. In some countries like Netherlands and Japan, insurance is marketed using post office s distribution channels. At this point, buyers look for low price. Brand loyalty could shift from the insurer to the seller. 45

Strategic Analysis of Indian Life Insurance Industry In other markets, notably Europe, this has resulted in bancassurance: banks ente ring the insurance business. The Netherlands led with financial services firms p roviding an entire range of products including bank accounts, motor, home and li fe insurance, and pensions. Other European markets have followed suit. In France over half of all life insurance sales are made through banks. In the UK, almost 95% of banks and building societies are distributing insurance products today. In India too, banks hope to maximize expensive existing networks by selling a ra nge of products. Various seminars and conferences on banc assurance are taking p lace and many bankers have clearly shown their inclination to enter insurance ma rket by leveraging their strengths in the areas of brand image, distribution net work, and face to face contact with the clients and telemarketing coupled with a dvanced information technology systems. The mergers of Citibank with Travelers i n USA and of Winterthur, the largest Swiss Co. with Credit Suisse are recent exa mples of the phenomenon likely to sweep India too. Insurers in India should also explore distribution through non-financial organizations. For example, insuranc e for consumer items such as refrigerators can be offered at the point of sale. This piggybacks on an existing distribution channel and increases the likelihood of insurance sales. Alliances with manufacturers or retailers of consumer goods will be possible. With increasing competition, they are wooing customers with v arious incentives, of which insurance can be one. Another potential channel that reduces the need for an owned distribution network is worksite marketing. Insur ers will be able to market pensions, health insurance and even other general cov ers through employers to their employees. These products may be purchased by the employer or simply marketed at the workplace with the employers co-operation. Wo rldwide interest in E-commerce and India s predominant position in information t echnology and software development is also likely to be a major factor in the ma rketing of insurance products in the immediate future. The Internet account is i ncreasing in arithmetic progression and the trend has already been set by some o f the leading insurers and insurance brokers worldwide. 46

Strategic Analysis of Indian Life Insurance Industry Finally, some potential Indian entrants into insurance hope to ride their existi ng distribution networks and customer bases. For example, financial organization s like ICICI, HDFC or Kotak Mahindra intend to tap the thousands of customers wh o already buy their deposits, consumer loans or housing finance. Other hopeful e ntrants anticipate specific alliances such as with hospitals to provide health c over. Summery: Over the past three years, around 40 companies have expressed interest in enteri ng the sector and many foreign and Indian companies have arranged anticipatory a lliances. The threat of new players taking over the market has been overplayed. As is witnessed in other countries where liberalization took place in recent yea rs we can safely conclude that nationalized players will continue to hold strong market share positions, but there will be enough business for new entrants to b e profitable. Opening up the sector will certainly mean new products, better pac kaging and improved customer service. Both new and existing players will have to explore new distribution and marketing channels. Potential buyers for most of t his insurance lie in the middle class. New insurers must segment the market care fully to arrive at appropriate products and pricing. Recognizing the potential, in the past three years, the nationalized insurers have already begun to target niches like pensions, women or children. 47

Strategic Analysis of Indian Life Insurance Industry MARKETING PERSPECTIVE Distribution perspective (The key differentiator): It has been over two years si nce the Indian insurance market has opened up, and the new entrants in market ha ve set up shop in every major city. The public sector companies have already est ablished themselves in the market. But there are multiple challenges faced by th ese insurance companies, of which two are critical: Designing of products suitin g the market. Using the right distribution channels to reach the customer. While the companies have been quite successful in dealing with the first of these cha llenges using and technical know how of the partners, most are still grappling w ith the right channel mix for the reaching potential customers. This paper discu ss the distribution channel from the prospective of the sociocultural Ethos of t he market and channels fit into it, along with where the various companies face challenges and bottlenecks. Whenever any debate arises about the intermediaries and distribution channels, the discussion veers to: technology and its impact on distribution. However, die authors believes that the basic existential problems being faced by the channels in this market need to be looked in to first, and t hen the queans of enablers-technology, tools, training, learning to be taken up. Insurance has to be sold the world ever, and the Asian market is to no exceptio n. The Touch point with the ultimate customer is the distributors or the produce rs, and the role played by them in insurance market is critical. 48

Strategic Analysis of Indian Life Insurance Industry It is the distributor who makes the difference in terms of the quality of advice for choice of product, servicing of policy post sale and settlement of claims. In the Asian markets, with their distinct cultural and social ethos, these condi tions will play a major role in shaping the distribution channels and their effe ctiveness. In todays scenario, insurance companies must move from selling insuran ce to marketing an essential financial product. The distributors have to become trusted financial advisors for the clients and trusted business associates for t he insurance companies. This calls for leveraging multiple distribution channels in a cost effective and customer friendly manner. For example, in the developed markets, producers form the major channels of distribution, while the web as a complementary channel is catching up slowly. According to a Forrester survey, 88 % of the life insurance executives responding identified agents as the primary c hannel of distribution. The distinction of channels in the developed markets is: personal distribution systems include all channels like agencies of different m odels and brokerages, banc assurance, and work site marketing. Direct response d istribution systems are the method whereby the client purchases the insurance di rectly. This segment, which utilizes various media such as the internet, telemar keting, direct mail, call centers, etc., is just beginning to grow. Distribution Scenario in the Indian Market: In todays Indian life insurance market, the chall enge to insurers and intermediaries is two pronged: Building faith about the com pany in the mind of the client. Intermediaries being able to build personal cred ibility with the clients. Traditionally, tied agents have been the primary channels for insurance distribu tion in the Indian market; the public sector insurance companies have their 49

Strategic Analysis of Indian Life Insurance Industry branches in almost all parts of the country and have attracted local people to b ecome their agents. The agents are from various segments in society and collecti vely cover the entire spectrum of society. A person who has lived in the localit y for many years sells the products of the insurance company with a local branch nearby. This ensures the last mile touch point being closer to the customer. Of course, the profile of the people who acted as agents suggests they may not hav e been sufficiently knowledgeable about the different products offered, and may not have sold the best possible product to the client. Nonetheless, the customer trusted the agent and company. This arrangement worked adequately in the absenc e of completion. In todays scenario agents continue as the prime channel for insu rance distribution in India, as is the case in most market, supported by call ce nters to a small extent. almost all the new players follow this model primarily because the regulation for other channels are yet to be put in place. However, t here is great excitement in the industry over the impending brokers regulations, and companies are planning possible channels in their enthusiasm to increase volumes. The beliefs that all these channels will grow and seamlessly integrate to bring in business seem a fallacy. What have emerged are a much more difficult and evolving market scene with exiting players, more new players comi ng in, and global practices and ideas being tested. But none of this has changed the fundamental character of the market, which we believe will take more time t han expected. Summary: The current state of insurance distribution in India is still in flux. On one ha nd, insurer are awaiting regulations to be approved assurance to be truly Launch ed on the other hand they are trying the corporate models of intermediaries. In addition, the traditional models in the markets. for brokerages and banc 50

Strategic Analysis of Indian Life Insurance Industry There is no right and wrong in all this. The success of marketing insurance depe nds on understanding the social and cultural needs of the target population, and matching the market segment with the suitable intermediary segment. In addition , a major segment of the Indian population has low disposable income, meaning th at every penny won will be obtained after a lot of persuasion and the expected v alue for money is high. All intermediaries cannot sell all lines of business pro fitability in all market. There should be clear demarcation in the marketing str ategies of the company from this perspective. Client should also receive price d ifferentials for using different channels. This not a new concept, as the public sector property $ casually companies are giving discounts in lieu of agency com mission. The channel composition should not be homogeneous but should reflect th e larger society. For example: Agents from different economic, social strata, an d different age and gender. Brokers stretching from corporate to NGO ARE to milk co-operative. These intermediaries need to be empowered with the right learning , training and development tools and technology enablers. Coupled with the right product mix, this will help the insurers to survive and flourish in this compet itive market. VALUE CHAIN ANALYSIS: Competitive advantage of insurance companies: The LIFE insurance industry has witnessed limited competition till now. But with the entry of private sector insurance companies the scene will change and compe tition among various insurance companies will become the name of the game. Insur ance companies have to face and deal with competition not only in terms of inves tments performance but also customer service. 51

Strategic Analysis of Indian Life Insurance Industry Hence an aggressive competitive strategy is the need of the day for the insuranc e companies in order to gain a competitive niche, survive and proliferate in the insurance industry. To be successful in ones area of business in the presence of competitive forces the following model may adopt to fulfill the purpose. Value chain the competitive advantages of a firm: Michael porter, an authority on compe titive strategy and competitive advantage, argues that competitive advantage gro ws fundamentally out of the value; a firm is able to create for its buyer that e xceeds the cost of creating it. According to him, competitive advantage stems fro m many discrete activities can contribute to a firms relative cost position and c reates a basis for differentiation. A systematic way is necessary for analyzing the source of competitive advantages. The concept developed by Michel porter is v alue chain which represents graphically the activities of the firm and their inte rlink ages. The value chain reflects the history of the firm, its strategy for t he future, approach to which it belongs. The value chain may be similar across f irm in the same industry, but different among competitors. Differences among com petitors are key source of competitive advantages. Value chain-the valuable ingr edients: Value chain of a firm as proposed in general has five generic categorie s of primary activities for a firm involved in competition in any industry. Thes e categories can be represented in the diagram. Firm infrastructure Human Resour ce Management Technology Development Procurements In Bound Logistic Operations O ut bound logistic Marketing and sales Services MARGINS 52

Strategic Analysis of Indian Life Insurance Industry Risk Management in Life Insurance Sources of risk: Designing any strategy to manage future risks of any organizati on need the understanding of the risk and their Origin and direction linked to o ur environment, which is quite dynamic. The world changes so fast that neither i nformation systems nor management practices are able to capture the potential tr end and the direction of the change. This leads to uncertainty and inability to initiate proactive measures. The major changes that have been noticed are: chang es in demographic structure mortality, life style, killer diseases (like AIDS an d SARS) impacting the demographic composition; impact on financial services of r apid globalization, Information explosion and unanticipated volatility in financ ial markets. These changes have made the Law of Averages, which has been traditi onally used by Life Insurance Corporation (LIC) to discount the impact of risks, has become nearly redundant and therefore, there is a search for a new model me thodology and Management strategies to face the challenges of various types of r isks that are being confronted by life insurance companies. As we proceed to dis cuss strategy, let us examine the import types of risks. Types of risks: It is v irtually impossible to provide a list of risks in life insurance operation basic ally due to the fact that risks are associated with multidimensional changes ass ociated with the factors mentioned above. However, the major focuses of risks of insurance business are related to macro-economic factors, pricing, claims, cred it, spreads, and investment risks which can be classified in two ways: one from the actuarial point of view and the other from the financial market point of vie w. 53

Strategic Analysis of Indian Life Insurance Industry Actuarial view of risks is basically classified as: 1. Asset Liability Risks: Ar ising from mismatch between assets and liability of a life insurance company due to fluctuation in interest rates, inflation causing changes in value of assets and liabilities. 2. Asset Risks: Arising from default of borrowers causing or de cline in market value of investment assets. 3. Pricing Risks: Arising from uncer tainty in mortality, claims, leakages, management expenses and income from premi um, investment and real estate. 4. Miscellaneous Risks: Arising from changes in regulatory regime and requirements, taxation, malpractices at operational level and inefficiency in management practices, lack of accountability and fiduciary r esponsibility. 5. Financial view of risks: The actuarial concept of risks as men tioned above can however be broaden and decomposed into six generic types from t he financial sector economists view these risks are: 1) Actuarial Risks: Associat ed with issuance of insurance policies and related liabilities. These risks aris e due to higher cost of raising funds, higher underwriting losses than projected etc. 2) Systematic or Mack risks: Associated with asset liability mismatch, ari sing out of changes in interest rate, inflation etc. 54

Strategic Analysis of Indian Life Insurance Industry 3) Credit Risks: Associated with default of borrowers of funds. 4) Liquidity Ris ks: Associated with funding crisis arising out of unforeseen demand for funds to meet obligations. 5) Legal Risks: associated with financial contracts, frauds, violation of regulation etc. Measuring Risk: Risk management however, calls for risk identification and risk measures. A numb er of methods have been in use to measure the risks in an insurance company, tho ugh there is no single best measure yet like VaR (Value at Risk), which is widel y used for banking industry. Most widely used measures in life insurance compani es are: Actual and Expected Experience Monitoring Risk Based Capital (RBC)/Ratio s/ Target Scenario Analysis Stress Testing Cash Flow Testing (CFT) Cash Flow Mat ching (CFM) Duration and Convexity Analysis Performance Attribution/Exchanges by Source In A/E ratio analysis actual experience to budget plan and pricing is mo nitored to see to what extent liability Assumptions are met. In RBC analysis the ratio of RBC to adjusted statutory surplus is used as the standard for Surplus a dequacy related to risk. In scenario analysis liabilities and assets of a portfol io is examined under different Macro-economic assumption, while stress testing i s conducted by using scenario to find out extraordinary losses arising out of a particular widely used to examine the whether asset in matching the liabilities of a portfolio. Under CFT analysis, basic 55

Strategic Analysis of Indian Life Insurance Industry asset/liability analyses are undertaken to verify that sufficient reserves are m aintained particularly for generated income controls (GICs) and annuity products , while under CFM liabilities are matched with cash flows. There are many other measures to monitor the portfolio risks and normally a company simultaneously us es a set of measures. While in convexity analysis the price sensitivity of durat ion to a change in the interest rate is monitored, in duration analysis price se nsitivity of portfolio or security is examined in return to change in interest r ates. Performance attribution test is conducted to find out the risk factors Cau sing losses by comparing the actual performance with pre-designed performance. R isk management practices Like Risk management methods there are a variety of tec hniques used by the life insurance companies to manage risks. According to Babbe l and Santomero of Wharton School, it appears that a common practice has Evolved such that four elements have become key steps to implementing broad based risk m anagement system. Standards and Reports setting up underwriting risk classificati on and review standards and standardization of financial reporting system. Under writing Authority and Limit - To exercise internal control on managers. Investme nt guidelines and strategies to exercise control over desired asset liability mi smatch. Incentive Scheme to relate compensation to risk and earnings. Since ther e is no uniform technique to manage the entire gamut of risks inline insurance c ompany there are several methods and developed practices to manage actuarial ris ks, through pricing system, solvency margin etc. However, recent developments in dicate that static assumptions regarding loss distribution failed to manage risks arising out of interest rate volatility. Another risk factor is the incentives to agents and marketing staff, which encourages them to sell more new policies, replace old polices, and all these increase the overall risks for the company. I n the areas of systematic risks, top 56

Strategic Analysis of Indian Life Insurance Industry on the list of risk management technique is the Asset Liability Management (ALM) because it not only covers interest rate volatility but also non-interest risks arising out of embed options in the policy. Further, ALM is used to manage prod uct specific risks as well as companywide risks. A survey of global consulting f irm, Milliman USA, of Risk Management Practices of US Life Insurance companies s hows that more than 75 per cent of the companies indicated that they use the fol lowing Risk Management practices: Risk Insurance: Diversification of Assets Dive rsification of Liabilities Selective underwriting Continual Process Improvement Hedging via Capital Market Stochastic Pricing Risk Adjusted Pricing Targets. Ris k limits set the maximum exposure to risk factors and risk tolerance of the Mana gement. Reinsurance allows risk transfer to another party through a reinsurance agreement. Diversification of assets minimizes the impact of unsystematic risks on the portfolio while diversification of liabilities is achieved by offering di verse products. Hedging in capital markets is aimed at reducing the adverse impa ct of interest rate fluctuation achieved through derivatives, futures, forward t rading, options and swaps. It may be mentioned here that insurance supervision, to strengthen the risk management practices, focuses more and more on the capita l of an insurance company against the benchmark of assured risks in addition to the statutory solvency margin. In the US, the risk based capital laws now in eff ect in all states require commissioners to take specified actions when a firms ri sk based capital ratio, defined as the ratio of actual ratio to risk based capit al, falls below a certain threshold (Cumming, Philips and Smith 1997). Even in E urope, the solvency project is centered on the risk based capital model: In a ca pital based solvency system, risk bearing business will be linked to more risk c apital. 57

Strategic Analysis of Indian Life Insurance Industry Risk management scenario in India: So far in India, very scanty attention has be en given to risk management in life insurance companies. Neither is any systemat ic and structured risk management practice followed in insurance companies nor h ave any specific guidelines on risk standards, techniques and risk management be en developed. Of course IRDA guidelines on Investment Management and Asset, Liab ilities and Solvency margin of insurers indirectly deal with Risk Management. Th e risk management prevailing in Indian companies is of a very rudimentary type. Indian financial markets, particularly during the post-liberalized era have witn essed significant understanding. Global intervention, changes in interest rate e tc. have increased the risk exposure. It is therefore necessary to create awaren ess about the necessity of risk management as well as to develop expertise in th is discipline. However, risk management practices can be successfully implemente d through institutionalization of the risk management culture and creating a nec essity for adopting it. Management may also consider introducing certain incenti ves and disincentives incentives for maximizing policyholders return through risk management and disincentives for non-implementation of risk management which ad versely affect asset value and policyholders benefits. Risk management has its co st also and they include the cost of professional training, technology, time and shortterm losses due to rigid implementation of risk policies. However manageme nts should be willing to bear this cost in their own long term interest. In view of the poor state of the risk management practices in India, the following step s are urgently required. Risk standards: A uniform practice of risk management n eeds to be introduced through the life insurance industry. This calls for introd uction of Insurance Industry Risk Standard (IIRS) incorporating the entire gamut of risk management and risk oversight. Risk Management must include the fiducia ry responsibility of board and managers, risk management objectives, responsibil ities of various entities, checks and balances, 58

Strategic Analysis of Indian Life Insurance Industry independent risk oversights. For these, there is need for adequate education and training, which also may preferably be uniform industry wide. Oversight: Indepe ndent review of risk management practices and risk measurements are required at frequent interval by the primary fiduciary and manager fiduciary. This review sh ould include analyzing policy compliance, due diligence, monitoring investment g uidelines, investment strategies, risk limits, and evaluation of investment mode ls. If required, revision redesigning of models, strategies, risk limits may be done within the overall guidelines and parameters of the regulator. Institutiona lizing Risk Management: Separating Risk Monitoring (RM) from operational functio ns can institutionalize risk management practices. Monitoring should be entruste d to the entity not involved in operational matters. Though implementation will be reviewed by the primary fiduciary like board, top management, yet there is a necessity for independent monitoring through designated person. Many organizatio ns appoint a Chief Risk Officer (CRO) who is a reasonably senior level executive reporting to the chief executive of the organization. However, for better coord ination and monitoring a risk management committee (RMC) can be set up which wou ld be assisted by the CRO. RMC would be a high power committee report directly t o the board on quarterly basis. RMC would monitor implementation of Risk Standar d, Risk Limit, ALM, measures, analyze investment strategy in relation to portfol io objectives and predetermine risk limits. Risk Governance : The risk managemen t system to protect assets from depletion may be made stronger through implement ation of risk governance. Risk governance can be established either through risk control or through risk reward. In either of these models, there is a necessity for improving risk knowledge, risk information and 59

Strategic Analysis of Indian Life Insurance Industry competitive risk Practices. Genuine risk reporting and starting of risk informat ion will strengthen risk governance. However, the goal of risk governance can be achieved if the top management and board are truly interested and sincere. Risk management should not be thought and the regulatory requirement, but an integra l part of strategy and way of corporate life. 60

Strategic Analysis of Indian Life Insurance Industry PEST ANALYSIS POLITICAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY: Within India political ambitions and rise of communalism, fissiparous tendencies are on the rise and may well continue for quite some time to time. Therefore, i t expected that the insurance companies might consider offering political risk c overage also. The only area where Indian insurers consider giving cover is with regard to customs duty change under certain conditions. Certain type of politica l risk at the international level has serious implications for exporters. The te rm political risk has a wider connotation than commonly understood or assumed. It covers events arising not just from politics, but risks in the course of interna tional transactions. In this connection, it may be noted that export credit insu rance has evolved out of uncertainties relating to international trade, particul arly due to problems arising out of foreign legal jurisdiction, political change s and currency exchange difficulties faced by many developing countries. Prohibi tion for Investment: The funds of policyholders are prohibited from being direct ly / indirectly invested outside India as per section 27 C. Manner and condition s of investment: Subject to the above provisions contained in Section 27 -/ 27A / 27 B, the IRDA may, In the interest of the policyholders, specify the time, manner and other conditions of investment by insurer. Give specific directions a pplicable to all insurers for the time, manner and other conditions subject to w hich the policyholders funds should be invested in the infrastructure and social sectors. 61

Strategic Analysis of Indian Life Insurance Industry After taking into account the nature of business and to protect the interest of the policyholders, issue directions to insurers relating to time, manner and oth er conditions of the investments provided the latter are given a reasonable oppo rtunity of being heard. Insurance business in rural / social sector: All insurers are required to undert ake such percentage of their insurance business, including insurance for crops, in the rural social sector as specified by the IRDA. They should discharge their obligations to providing life insurance policies to persons residing in the rur al sector, workers in the unorganized sector or to economically vulnerable class es of society and other categories of persons as specified by the IRDA. Capital requirement: The paid up equity of an insurance company applying for registratio n to carry on life insurance business should be Rs 100 Crores. Renewal of regist ration: An insurer, who has been granted a certificate of registration, should h ave the registration renewed annually with each year ending on March 31 after th e commencement of the IRDA Act. The application for renewal should be accompanie d by a fee as determined by IRDA regulations, not exceeding one forth of one per cent of the total gross premium income in India in the preceding year or Rs 5 Cr ores or whichever is less, but not less than Rs 50000 for each class of business as per Section 3-A. Requirements as to Capital: The minimum paid up equity capi tal, excluding required deposits with the RBI and any preliminary expenses in th e formation of the country, requirement of an insurer would be Rs 100 crore to c arry on life insurance business and Rs 200 crore to exclusively do reinsurance b usiness as per Section 6. 62

Strategic Analysis of Indian Life Insurance Industry

Investment of funds outside India: Insurers outside India as per Section 27-C ca nnot invest the funds of policyholders. Insurance business in Rural Sector: Afte r the commencement of the IRDA Act, 1999, every insurer would have to undertake such percentage of life insurance business in the rural sector as may be specifi ed by the IRDA in this behalf. It is mandatory for the new companies to meet the obligations relating to the rural and unorganized sector as per section 32-B. P ower to investigation or inspection: The IRDA may, at any time, order in writing a person as investigating authority to investigate the affairs of any insurer a nd report to it. Government has power to change the tax policy against life insu rance industry. Health insurance rebate, Pension saving rebate, Mede clai um rebate, P.P.F., E.P.F., NSC all are tax exempted saving, All life insurance p olicy are tax exempted saving , Agricultural income is tax exempted, House rent allowances, Post office saving, Expenses on dreaded diseases are tax exempted. R ecently there is issue to increase FDI level from 26% to 49%. Role of the government: As insurance is an important service sector, hence it is highly regulated by government. Since 1956 insurance sector was highly regulate d by government of India. On March 16, 1999, the Indian cabinet approved on Insu rance Regulatory Authority Bills that was designed to liberalize the insurance s ector. 63

Strategic Analysis of Indian Life Insurance Industry Two governments in India have fallen over the issue of liberalization of the ins urance sector (which was nationalized in 1971). But the government of A.B. Vajpa yee as gone ahead to announce the liberalization of this sector announcement was made in November 1998. Governments objectives for liberalization of insurance: T he main objective of opening of insurance sector to the private insurers is as u nder: 1. 2. To provide better coverage to the Indian citizens. To augment the fl ow of long-term financial resources to finance the growth of infrastructure. Imp ortant government guidelines for private players for entering into Indian life i nsurance market: 1. Private companies with a minimum paid-up capital of Rs. 1bn should be allowed to enter the industry. 2. No company should deal in both life and general insurance through a single entity. 3. Foreign companies may be allow ed to enter the industry in collaboration with the domestic companies. 4. Postal life insurance should be allowed to operate in the rural market. 5. Only one st ate level life insurance company should be allowed to operate in each state. 6. Foreign investors can invest up to 26% of the equity of their joint venture with Indian firms. Government will prevail on grounds that the Rs. 4.5 billion India needs for infrastructure development in the five years from 1997-98, cannot mat erialize if the insurance sector is not opened up. 64

Strategic Analysis of Indian Life Insurance Industry BODIES THAT REGULATE THE SECTOR: For better regulation purpose of the insurance sector the government has established following bodies; 1. IRA: Insurance Regula tory Authority. 2. IRDA: Insurance Regulatory and Development Authority. 3. TAC: Tariff Advisory Committee. 1. IRA: Insurance Regulatory Authority: The IRA, und er the chairmanship of Rangachary, was set-up in January 1996. the IRA Bill has to be passed by parliament to make the IRA a statutory body. Comprehensive legis lation aimed at reviewing the insurance Act of 1938 and repealing the life insur ance corporation Act of 1956 have to be passed. The IRA is also preparing an int ernal rating system to screen all applications, as entry will be in phases. The joint venture status of life insurance companies (with majority holding of the d omestic partner) is likely to be approved by the parliament. Consensus also seem s to be emerging on the minimum of Rs. 1 bn capital stipulations for new insuran ce companies. The IRA has stipulated a minimum rural presence for all companies. The exhaustive guidelines have been issued for the appointment of intermediarie s (brokers, agents, surveyors and actuaries). Feature of IRA: 1. The Bill allowe d for up to 26% foreign equity participation in the insurance sector. 2. The cur rent India monopoly companies were required to bring down their equity holding t o 26% within a period of 10 years. 65

Strategic Analysis of Indian Life Insurance Industry Government pronouncement: 1. IRA will be sole Authority, which will be responsib le for awarding of, licenses i.e. little or no government or political interfere nce in licensing process. 2. No restriction on the number of licenses. 3. No com posite license for life insurance business. 4. Licensing to be only on national basis (no city by city approach) 5. IRA allowed for up to 26% foreign equity par ticipation in the life insurance sector. 6. The current Indian monopolies compan ies are required to bring down their equity holding to 26% within a period of 10 years. IRA proposals: 1. 2. 3. 4. 5. New player should start their business wit hin 15-18 months. Trafficking of licenses not to be permitted. IRA to seek busin ess plan with 5-year protection for all applicants. A system of direct brokers t o be introduced. IRA to vet top management appointments. 2. IRDA: Insurance Regulatory and Development Authority:The Insurance Regulatory and Development Authority, constituted under the IRDA Act, 1999, provide for th e establishment of an authority to protect the interest policyholders, to regula te, promote and ensure orderly growth of the life insurance industry. Business R equirement:A company will not be issued a license unless the IRDA is satisfied w ith the sound financial condition, the general character of management, the volu me of business, the capital structure, earning prospects for the insurers and th at the interests of the general public will be served if registration is granted to the insurer. 66

Strategic Analysis of Indian Life Insurance Industry Foreign insurance companies have been allowed to have a maximum 26% share holdin g. No life insurance company can be registered under the Act unless they have a paid up capital of Rs. 100 crores. Every life insurer shall deposit with the res erve bank of India one percent of the total gross premium written in India in an y financial year, not exceeding Rs. 10 crores. This amount would not be suscepti ble to any assignment or charge nor would it be available for the discharge of a ny liabilities other than liabilities arising out of policies issued, so long as any such liabilities remain undercharged. Investment of Assets:Every insurer is required to invest, and keep invested, assets equivalent to not less than the n et liabilities as follows: (a) 25 % in government securities, (b) a least 25% of the said sum in government securities or other approved securities and (c) the balance in any approved investment rated as very stron or more by reputed rating a gencies, which include various debt instruments on which dividend on its ordinar y shared for the five years immediately preceding or for at least five out of th e six or seven years immediately preceding have been paid and which have priorit y in payment over ordinary shares of the company in winding up. The IRDA may in the interest of the policyholders directions relation the time, manner and other conditions and investments of assets to be held by an insurer. The IRDA may also direct the insurer to realize the investment, if it sees the investments to be unsuitable or undesirable. The Act prohibits an insurer from directly or indirec tly investing policyholder funds outside India. Further, every insurer has to al ways maintain an excess of the value of his assets over the amount of his liabil ities of not less than Rs. 50 crores in the case of an insurer carrying of life insurance business. If at any time an insurer does not maintain the required sol vency margin, he is required to submit a financial plan, as per directions issue d by the IRDA, indicating a plan of action to correct the deficiency within thre e months. 67

Strategic Analysis of Indian Life Insurance Industry In order to ensure that the company does not risk the money of the policyholders, the Act provides that an insurer who does not comply with the aforesaid provisi ons may be deemed to be insolvent and may be would up by the court. Insurers are required to get an actuary to investigate the financial conditions of the life insurance business including a valuation of liabilities every year in order to e nsure continual compliance. In order to maintain transparency in its dealings, i nsurers would have to keep separate account relating to funds of shareholders an d policyholders. Consequences of non-compliance: A company failing to comply wit h the act shall be liable for panel action. Further, IRDA is empowered to invest igate into the affairs of the company. Failure to comply with the directions may lead to cancellation of the license for the company. Also, if the IRDA has reas on to believe that a company is doing business in a manner likely to be prejudic ial to the interest of policyholders, it is required to report to the central go vernment. The central government may base on the report, appoint an administrato r to manage the affairs of the company. This would act as a further assurance to the consumers, as their interests would at all times be a priority and that in the event that the company acts in the manner prejudicial to their interests, th an an administrator would be appointed to serve their needs. The court may also wind up the company if it fails to deposit or keep deposits as per the requireme nts of the act or if the continuance of the company is prejudicial to the intere st of the policyholders or public interest. But an insurance company cannot be w ound up voluntarily or on the grounds that by reasons o its liabilities it canno t continue its business, except for the purpose of affecting an amalgamation or a 68

Strategic Analysis of Indian Life Insurance Industry reconstruction of the company. Therefore, a company after issuing a policy canno t escape liability by seeking voluntary winding up. The four amendments, made in the life insurance Bill by the Lok Sabha, are as under: 1. 2. The Insurance Reg ulatory and Development Authority should give priority to health insurance. Poli cyholders fund will be invested in the social sector and infrastructure. The perc ent may be specified by the IRDA and such regulations will apply to all insurers operating in the country. 3. Insurers will be expected to undertake a certain p ercent of business in rural areas, and cover workers in the unorganized and info rmal sectors and economically backward classes. 4. In the event of insurers fail ing to fulfill the social sector obligations, a fine of Rs. 25 lakh would be imp osed the first time. Subsequent failures would result in cancellation of license s. 3.TARIFF ADVISORY COMMITTEE: The tariff advisory committee established under the Act is empowered to control and regulate the rates, terms, and etc. that may be offered by insurers in respect of any risk or of any category of risks. It i s provided that in fixing, amending or modifying such rates etc. the committee s hall try to ensure as far as possible that there is no unfair discrimination bet ween risk of essentially the same hazard and also that consideration is given to past and prospective loss experience. Every insurer is required to make payment to the TAC of the prescribed annual fees. TAX POLICY AND INSURANCE SECTOR: Anot her factor, which affects the insurance sector, is the tax policy. The tax refor ms in India are such that it encourages the citizens to invest in the insurance sector. 69

Strategic Analysis of Indian Life Insurance Industry The tax policy of the government is particular relevant for life insurance which is a long-term contract and inculcates among the policyholders the habit of sav ing. Taxation of returns on investment influences, investment decisions and high rates of taxation will discourage the desire to save. Already in India there ar e complaints that the rates of return on life policies are not what they could b e. Therefore tax incentives play a vital role in determining the attractiveness of such policies. Such tax breaks are available in many countries and have helpe d in the development of their life sector. In western countries the gain from th e proceeds of a life insurance policy is paid free of tax. Provided the policy s atisfies certain qualifying conditions. Non-qualifying policies get basic rate t ax relief, though higher rate taxpayers may still have to pay tax on the gain, a lthough at a reduced rate. The insurance companies can use such tax concessions rate. The insurance companies can use such tax concessions to design products fo r different categories of taxpayers. The other factors, which affect the insuran ce sector, are the employment law, and government stability. These are the facto rs, which affect the insurance industry. INVESTMENT DECISIONS MANDATED BY GOVERN MENT: Insurers are required to fulfill certain social commitments as well. As ma ny of the social welfare measures companies are not just regulated, but have bee n mandated to hand over a portion of their funds to the state for investment in infrastructure and for social development through government bonds and securitie s. In India, the pattern was, accordingly, prescribed in great detail by the gov ernment. This was not in the form of guidelines, but as a legal obligation under the insurance Act, 1938. 70

Strategic Analysis of Indian Life Insurance Industry Pattern of investment specified for life insurance: Type of investment (1) Government Securities (2) Government securities or approv ed securities (3) Approved investments Percentage 25% other Not less than 50% (a) Infrastructure and social Not less than 15% sector (b) Other govern by expos ure norms Not exceeding 35% 71

Strategic Analysis of Indian Life Insurance Industry ECONOMICAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY Interest rate at bank and interest rate of P.F variation very much affect to lif e insurance industry, because people always attract by higher return. Therefore, they do not prefer lower return policy. Unemployment also affects insurance ind ustry, because the unemployment people will not have earning, so saving also aff ect to life insurance sector Life insurance industry will directly affected by E arthquake, Monsoon, and Natural calamity. Because of these events turns into lot s of death, so the life insurance companies have to pay claim against policy. In fant mortality rate and maternity mortality rate are also affecting to life insu rance. Typical Indian want luxurious product against low income, so that they pr efer installment or annuity (EMI), so that they may not have extra saving to inv est in life insurance. Adequacy of capital: Capital adequacy is a matter of attention in view of the nature of the life insu rance business, where in the case a contingency arises, the insurers should be i n a position to meet its long-term contractual obligations and pay up the dues o r claims. In that sense, life insurance is a capital-intensive business and must be backed by an adequate capital base on the part of the owners and the compani es should not be running their business purely on other peoples money. So minimum start up amounts and long running capital adequacy norms are absolutely essenti al, in consideration of this, the Malhotra committee suggested and subsequently the IRDA stipulated a minimum capital base of Rs 1 bn for any entity wanting to enter the life insurance business. Increased Economical Activity: Although economic activity has slowed down since 1996, sooner or later there wil l be an upswing. The increase in the growth rate in various sectors accompanied by the growth in trade in the context of fulfilling of commitments to the WTO wi ll signal a growth in the demand for insurance covers of new types. For example, aviation insurance cover will be on an increasing scale in view of the need for more frequent 72

Strategic Analysis of Indian Life Insurance Industry air travel for men and for transporting materials. This would necessitate substa ntial property, liability and personal insurance. As far as cover against busine ss interruption is concerned, the pace of business and of change today is so fas t that even the most careful assessment of exposure time, and the most liberal c overage cannot protect the insured adequate in the event of a loss be on the inc rease and insurance companies cannot afford to ignore the vast potential in this business. Interest Rates: During the last years the government has rationalized interest r ate creates better business opportunities for the life insurance sector because the substitute products are graded lower by the customers. On the other hand the value of the holdings of the insurance companies will increase. Rationalized of the interest rates is still expected, and it is an opportunity for the company. Low interested rates mean low investment return for reinsures causing negative impact on their overall net profitability as pricing is to a certain extent sens itive to interest rate fluctuations. The negative impact therefore, lead to high er pricing level for reinsures in order to sustain their profitability. But, in reinsurance market, which is characterized by over capitalization a resulting in tense competition. The opportunity for such rate increases practically remains v ery slim and even non-existent. As a result, reinsures are under tremendous pres sure to cut their operational cost to safeguard profitability. Furthermore, low interest rates discourage and even prevent any outflow of capital from reinsuran ce business to capital markets, causing current over capitalization in reinsuran ce market to continue. A positive outcome is that low inflation rates, if sustai ned for a considerable period, usually bring some relief to reinsures from the r esulting lower than forecast claims payment. Also, this can lead stability to re insures administrative cost. 73

Strategic Analysis of Indian Life Insurance Industry As interest rates fall, bond value rise, and insurers feel richer. On the liabil ity side, reserves are not explicitly discounted so lower interest rates do not increase reserves, lower inflation means lower expected future claims payments w hich lowers required reserves. This in turn increase surplus, again allowing ins urers to feel richer. Therefore, low interest rates and low inflation result in higher assets, lower liabilities, hence greater surplus and greater risk capacit y resulting in less demand for, and greater surplus of reinsurance. Low interest rates and low inflation reduce the ability of reinsures to off set technical lo sses by using financial products and should, as a consequences, force market com petition downloads. However, this will also serve to weaken the balance sheets o f insurers and create an increase in the demand for balance sheet protections. L astly, these conditions move risk from the liability side of the balance sheet t o the asset side while actually generating new needs for cover. Inflation rate: Inflation can also be one of the causes to change the scenario o f the insurance sector. High inflation for instance, would tend to reduce the in surance business, particularly life, because the real value of the money paid ba ck to the policyholder on maturity of the policy would go down and would, theref ore, lose its attraction for the investor. At the most, the insuring public may prefer pure risk plans (terms insurance), which have a low premium outlay. The r esponse to an inflationary situation will depend on what benefit the insured is looking for. In a situation of high inflation, clients would prefer policies whe re the savings portion is periodically returned while the risk portion is mainta in for the duration of the contract. Those who prefer risk protection are likely to opt for long term policies, which may also be preferred because they are lik ely to be low premium policies. A flexible system, under which the sum insured, is increased from time to time so that the real value of the cover is maintained , and could give a boost to the market under conditions of high inflation. Fortu nately, the rate of inflation in India 74

Strategic Analysis of Indian Life Insurance Industry has been contained to less than 5 percent for a fairly long time and unless it g oes out of hand, it is not likely to dampen the market. Market related factors: These are the factors, which governs the entire life insurance sector. This incl udes internal as well as the external factors. We have seen the various factors like technological, economical and will see the political and government factors , environmental factors and competitive analysis of insurance sector in the next session. These all factors have changed the trend of life insurance sector, whi ch is shown in the following figure. Stage 1 Closed market, by state. Stage 2 Ba rriers to entry to operate is essential, license can be obtained. Stage 3 Stage 4 Barriers to entry Entry costs are low reduced expertise brought. systems and can be requirements same for all. capital are Entry is controlled are high expertise Scarce resource is Permission from state Scarce resource is expertise Scarce resource is capital Scarce resource is brand From the above figure we can see that now days strength of brand is very importan t aspect for the success in this sector. Of course you should have strong distri bution channel without which growth is not possible. 75

Strategic Analysis of Indian Life Insurance Industry Customer satisfaction: Since the customer is the focus of any service industry, every such industry continuously strives for greater variety and better quality of products, improvement in its delivery system, cost effectiveness, easy access , and quick response to perceived needs in short qualitatively superior service. Indian life insurance companies already have a sizable line up of the products. The difference between them and the foreign operators perhaps lies in the servi ce provided, because there is still not enough concern on the part of the Indian companies, with customer satisfaction, on time renewals, claims settlements, et c. if high standards have been achieved else where, it is not impossible to atta in the same in India too. The concept of sales is now redefined as a long standing relationship. The relationship does not end with the conclusion of the transact ion, but has to be durable and of a long term nature. Hence, improved in perform ance of the company will not be synonymous with only basic cost reduction or lar ger business, but the new measure of performance will be set in terms of service to the customer. One can anticipate greater insistence from pressure groups lik e customer forums to keep customer satisfaction at the top of the list of priori ties of the insurers. 76

Strategic Analysis of Indian Life Insurance Industry SOCIO-CULTURAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY: The basic social factors that affect the life insurance sector are as under: Pop ulation Life style Educational level Level of earning Societal benefits These ar e the major social factors, which affect the life insurance sector. We will disc uss all of them in brief> Population: Growth in the population is a major factor pushing up the demand. It is also goi ng to exert a special influence on the life insurance market in other ways. Apar t from exerting pressure on demand for goods and services, and through that, ill effects of uncontrolled growth of population also could spur the growth of dema nd. For example, overcrowding in public places of entertainment, public support, or too many vehicles on the road can result in hazards like stampedes and pollu tion, which require covers and still are not sold on a large scale today. Thus t he positive as well as the negative aspects of population growth are going to sp ur demand. Life style: The peculiar lifestyle of a country or an age also influences the insurance busi ness. Change therein produces different demands for life insurance. For e.g. All over the world, family size is shrinking and the fact that in decades to come, both presents are more frequently likely to work outside the home will mean that there could be a greater possibility of property loss. Similarly, a larger numb er of vehicles 77

Strategic Analysis of Indian Life Insurance Industry on the roads for people commuting to their jobs or business would mean larger in cidence of accidents. This will increase the demand for life insurance products. Of course, there is also the other possibility that wherever it is possible, so me people will try to spend a part of their time working at home either because they would like to be with their families or because they find it more convenien t. Activities like life insurance and financial services are particularly well s uited for such arrangements. With time becoming scarcer for most people who pack in a full day, there is a higher demand for convenience and service. Companies will respond by trying to shorten the transaction time for the delivery of produ cts and services and creating distribution systems that can reach clients wherev er they are and whenever they want to use them, so as to ensure convenient acces s to service providers. In recent times, there has been a surge in the high end business of the LIC. For instance, as against 90 policies each worth more than R s 10 million in 1999-2000, the number was as high as 900 policies in the next ye ar. Or again, the number of jeevan shri policies jumped from 88,000 to a total o f 2,33,000 policies in the same period. However, consumers behavior cannot be ade quately and accurately predicted. The younger generation is overwhelmingly influ enced by consumerism. If this trend continues or increases with increasing incom e, there will be fewer propensities to save or insure, as a result of which the increasing purchasing poser may not be reflected in the life insurance market. C rumbling social values, the deteriorating law and order situation, the growing i ncidence of crime, extortion, abduction, etc., are posing a new category of risk s which need to be covered through suitably designed policies. Thus these are ho w changing life style of the citizens is affecting the life insurance industry. 78

Strategic Analysis of Indian Life Insurance Industry Level of education: India is one of the developing countries: the level of education is very low her e. The literacy rate is very poor. More than 50% of the population is still uned ucated or more or less not educated. Thus the people are not able to understand the concept of the life insurance. Among the educated people the quality of the education is still a big question mark. Thus the awareness is not created and it has become a big challenge for the industry. Thus one of the factors, which aff ect the life insurance sector, is low level of education. Level of earning: Another factor, which affects the life insurance sector, is the level of earning . In India the rule of 80-20 is working. The 80% of the total population is havi ng the 20% of the wealth and the 20% of the total population is having 80% of to tal wealth. Thus the richer are richer and poorer are poorer. Due to this the li fe insurance sector is affected very much. Societal benefits: In view of the fact that large sections of India have inadequate life insurance cover, an important social responsibility of the government relates to spreading it far and wide. In addition, the government attempts to extent life insurance with certain social obligations in view in both urban and the rural areas throug h such means special schemes for the weaker sections, and by tilting of the life insurance companies investments in favour of social developments. The social cha nges emerging in the country provide opportunities for insurers to sell financia l services products such as family health care programmed, retirement plans disa bility insurance, long-term care for senior citizens and different employee bene fit plans. It is not the total population but the insurable population which is material for the conclusion of potential. Apart from the usual demographic and o ther well known 79

Strategic Analysis of Indian Life Insurance Industry factors such as age group, income level, sex-wise distribution, and literacy lev el, a realistic assessment of this potential has to be based on several other re levant factors. Many invisible factors like religious faiths and social values t oo need to be considered. As such, there is considerable difficulty in accuratel y estimating the potential and crude estimates can be misleading. The estimate w ill also vary according to the criteria used to measure if. In principal, every individual is a potential candidate for life insurance. In reality, financial st atus limits this potential, not only because of the practical consideration of t he insurable worth of a person to the insurer in financial terms, but more so du e to the prospects capacity to pay life insurance premium after meeting other pre ssing needs. Again, there are many practical factor affecting insurability such a s old age, past and present illness, and physical and mental impairments. In add ition, the cost of reaching out to a very large number of customers, if they are dispersed, becomes important. In that sense, the cost and profitability of expl oiting the potential, which is otherwise attractive, limit the opportunity. The sheer size of the numbers, there fore is not crucial itself. For assessing the p ractical business potential of life insurance, the eligible population needs to be Qualified in relation to other factors including those mentioned above. Thus, i n the opinion of some experts, out of the population in the insurable age group, Only the main workers (i.e., excluding marginal workers) with adequate income m ay be considered as the actual insurable population. The population in the age g roup 15-55 is usually regarded as the insurable population, since this can be co nsidered as the main active age group ( in the sense of working, earning. And supp orting others), and beyond this range life risk may be considered to be not wort h insuring. 80

Strategic Analysis of Indian Life Insurance Industry There is one opinion, which suggests that in our country the age group 15-55 as the base is not totally suitable. Due to various factors including the unemploym ent problem, real earning starts from around the age of 25 for salaried persons. For others, particularly small entrepreneurs, traders and businessman, the star ting age is a little higher. Only in the affluent sector of society life insuran ce can be taken before personal earning starts. Thus, number wise life insurance below the age of 25 is not so significant (although amount wise it need not be so). On the other hand, people over the age of 50 rarely apply for fresh life in surance, mainly because in India the normal retirement age is around 60 years. A lso, a high percentage of the population in the lower income group does not rema in insurable after the age of 50. thus, in our country the practical age range for insurable population actually narrows down to 25 to 50. 81

Strategic Analysis of Indian Life Insurance Industry TECNOLOGICAL FACTORS AFFECTING LIFE INSURANCE INDUSTRY: Internet as an intermediary in the current Indian market customer is not aware a bout the intrinsic value of insurance. He thinks of insurance only in the mount of March as a tax saving measure. The security provide by an insurance cover is rarely thought about. In such a scenario Internet can be an effective medium for educating the consumers about insurance. It serves as a single window for disse minating product, process and procedural information to the consumers. Product d evelopment and target marketing through the Internet: with increase in the numbe r of insurance companies there will be a need for market segmentation and subseq uently product designed for each of them. In such a scenario Internet can be a e ffective channel for pushing product specific information to a particular market segment. Consumer feedback about a particular product as well as suggestions fo r different types or covers can also be generated through the Internet. Retail m arketing is a commonly expected concept and the providers of the retail products and service will try out for larger market and market share. There would be cut through competition and the real benefit would be to the customers in terms of better products, distribution, pricing, post transaction service and technology. Technology will perhaps be the single largest driver of the retail thrust. The entire strategy will evolve around the absolute ability of the organization. The customer will demand for greater convenience of excess to the product/ service and all at low cost of delivery. There fore the use of technology and specifical ly the Internet with realigned strategies would be one of the key factors to suc cess. Constraints of locations, timing and accessibility would not be a hurdle f or either customers or businesses. Maintaining the database The most important f acto that is affecting the insurance industry is the marinating the database of the customers. The insurance industry having a huge list of the customers. 82

Strategic Analysis of Indian Life Insurance Industry In order to maintain it in manual format it is really the work of stupidity. Wit h the change in time the computers has taken the work of this things. Thus with the development of the technology it has becoming possible to maintain such huge database very easily. A person can switch over to the computer and get the deta ils of the customer very easily. Thus maintaining the database has really become easy due to the development in technology. E-business insurance in India: The Internet has played a vital role in transform ing the business of the 21st century. Computers are now being used extensively f or creating a storing data, information with the help of complex and sophisticat ed technological tools in every kind of business. This change having been widely accepted, the advantages are numerous such as fast processing improved. Efficie ncy, cost reduction among several other benefits. However, with every positive c hange, there is an evil attached and technology is no exception. In technical is an evil attached and technology is no exception. In technical terms, increased sophistications of technology brings with it, an increased factor of risk involv ed. The risk can be of various attributes, for example, the risk of data being l ost due to a virus attack, the theft of important and confidential information a nd so on, which ultimately results in losses for the business entity. With this change in the business process, insurers have to devise new methods for assessin g, underwriting and servicing claims for the so-called e-business insurance. Ins urers face challenges to ascertain risks, in order to quantify them because such risks dont have any past data, which makes it all the more difficult for actuari es. Moreover, what financial impact a particular risk can have is very difficult to be determined. For example, if some hackers obtain credit card information o f few customers, its a loss for banks, their credibility, customers and also thei r brand. Will an insurance policy cover all of this is million dollar question h ence; the difficulty is to design a cover first of all, which really answers the needs of customers. But even after designing and pricing such products with dif ficulty, the challenge to underwrite and handle claims for such policies remains existent. 83

Strategic Analysis of Indian Life Insurance Industry Impact on distribution channels: Distribution channels are the most important pa rt of the insurance industry. The scenario is continuously changing in this indu stry. In future the customers are expected to be more technology oriented, bette r informed, more knowledgeable and more demanding. The insurers will have to off er all types of channel to customer and it is the customer who will have the rig ht to choose the channel suiting him/ her. Dual income families with young child ren, singles with long working days and flexi-timers all demand high level of so phistication and ease when it comes to service. Hence the companies have to be v ery careful and cautious in catering to the needs of these customers who provide s a good amount of business to the insurers. Thanks to the technological advance ment and increased de regulation and sophistication, the carriers and producers can now reach the customers in different ways as has been proved in the US marke t and other developed nations the web is extensively used for the access of info rmation but when it comes to the purchase of policy, the offline mode is preferr ed. The private players in India seems to have identified this and have put subs tantial information on there websites regarding policies, quotes and contact inf ormation among other routine stuff. 84

Strategic Analysis of Indian Life Insurance Industry PORTER FIVE-FORCE ANALYSIS One important component of industry and competitive analysis involves delving in to the industrys competitive process to discover what the main sources of competi tive pressure are and how strong each competitive force is. This analytical step is essential because managers cannot devise a successful strategy without indep th understanding of the industrys competitive character. Even though competitive pressures in various industries are never precisely the same, the competitive pr ocess works similarly enough to use a common analytical framework in gauging the nature and intensity of competitive forces. The state of competition in an indu stry is a composite of five competitive forces. 1. The rivalry among competing s ellers in the industry. 2. The potential entry of new competitors. 3. The market attempts of companies in other industries to win customers over to their own su bstitute products. 4. The competitive pressures stemming from supplier-seller co llaboration and bargaining. 5. The competitive pressures stemming from seller-bu yer collaboration and bargaining. 85

Strategic Analysis of Indian Life Insurance Industry Figure shows porters five-forces model of competition. Firms in othe r industry offe ring substitute products Suppliers Of Raw-materials, inputs Rivalry among competing sellers Buyers Firms in othe r industries offering substitute products The five-force model developed by porter in 1980, guides the analysis of an orga nizations, Environment and attractiveness of the life insurance industry. The nat ure and degree of competition in an industry hinge on five forces, which include the threat of substitute, bargaining power of buyers, the bargaining power of s uppliers, the threat of new entrants and degree of rivalry between the existing competitors. 86

Strategic Analysis of Indian Life Insurance Industry 1. Threat new entrants: The future of life insurance market scenario will be mar ked by the active presence of many international players, beside several Indian players. As far as life insurance industry there would be fewer entries due to m ore specialized firm with lower expenses ratios and better capitalization. Threa t of entry is determine by the entry barriers which act to prevents firms from e ntering the industry. In life insurance industry entry barriers is moderate so t hat it becomes profitable, it attracts new entrants, thereby increasing the numb er of competitors. The Indian market is highly brand oriented, it is difficult t o introduce new brand. The acceptability of new brand is also very low. The capi tal requirement in life insurance is Rs. 100 crores, which attract more companie s to invest in. promoters, can hold paid up equity capital up to 26% in an India n insurance company. In case promoters hold more than 26% of the paid up equity capital, they shall divest the excess shares in the phased manner within a perio d of ten year. Tax exemption structure makes the industry attractive. High level of competition in life insurance industry become giant player came into the mar ket. High profit in life insurance industry act as a magnet to firms outside the industry motivating potential entrants to commit the resources needed to hurdle entry barriers. But again due to potential market, private giants and internati onal player try to enter in to the market in the large scale with their proper h omework with customized and products too. An Indian private are well developed a nd has capacity to face challenges, foreign companies foresee good prospects for new business by alliances and partnership with domestic outfits . Registration: Every insurer is required to obtain a certificate of registration from the cont roller of insurance. The registration is required to be renewed after a period o f three years. 87

Strategic Analysis of Indian Life Insurance Industry Economies of scale: Economies of scale is difficult to find in the initial stage of entry into the market because of experience as evidence by the theory of exp erience curve. Legislation or government action: special permission is required from the government to enter in the insurance sector. With the tariff advisory c ommittee to control the rates, rules and regulation, and with the control of IRD A and the governments attitude to serve to the needs of the people with social ob jectives, the multinationals may face breathing and developmental problems. 2. Bargaining power of buyer: Now a day competition is increasing in the each an d every sector, and as a competition in the market increase the bargaining power of the buyer will get increase. So buyers bargaining power is high. Market is h ighly segmented. Buyers in this industry are very return oriented and it switche s easily. The switching cost of buyer over brand or close substitute products: T he life insurance industry has the uniqueness of providing risk protection, whic h does have any substitute. Thus the switching cost has no place. As far as the substitute products are concerned they are providing the service of saving and t ax benefits but still they lag in the risk coverage factor. If buyers buy insura nce then switching cost become high. High switching cost creates buyers lock in and makes a buyers bargaining power. Buyers have a strong competitive force when they are able to exercise bargaining leverage over premium, service or other ter ms of sale. 3. Bargaining power of Suppliers: Policy designer tend to have less leverage to bargain over premium and other ter ms of sale when the company they are supplying a major customer. Suppliers barga ining power increase if reduced administrative cost and also reduced claim proce dure time. Insurance is tax exempted so that suppliers bargaining power increase s. 88

Strategic Analysis of Indian Life Insurance Industry Suppliers then have a big incentive to protect and enhance their customers compet itiveness via reasonable premium, better service and on going advances in the te chnology of the item supplied. Suppliers ability to integrate forward: the privat e players can integrate forward to increase the volumes of business by providing customized and tailor-made policies whereas existing players whereas lack on th is point. Brand identity: there is certainty among the minds of people in relati on to existence and payment of claims from the existing players whereas the solv ency of private players is not certain. 4. Threat from Substitutes:Life insurance sector can be featured in three factors. They are saving, risk an d tax benefit. SAVING: As far as saving are concerned, Existences of a large num ber are saving through PPF, EPF. Most of customer saving their money in bank, po st deposit. Many customers invest their money in share market, purchase Gold & S ilver also. The substitute products for the industry are as follow: Term deposit s in bank (5.25-8 %) Investment in government securities. (4-5%) Money market in vestment (for corporate) Capital market (around 13% p.a. for developing country like India) There is threat of increasing market potential of NSC, Government de benture etc. If investments in insurance policies are made with the objective of tax benefits then there are other investment avenues, which offer similar benef its. 89

Strategic Analysis of Indian Life Insurance Industry RISK COVERAGE: For risk coverage, there is no close substitute of the products. The risk protection is provided by this sector only. No other instrument provide s assurance against risk. TAX BENEFIT: There are various substitute of this feat ure of life insurance. Some of the substitute which provides tax benefit is: PPF NSE POST OFFICE SECURITIES. INVESTMENT IN THE MUTIAL FUND. OTHER TAX SAVING INS TRUMENT. Thus these are the substitute of the life insurance industry. But the core compe tency of this sector is the risk protection providing capacity, which no other s ector can provide. 5. Rivalry among the exiting player: As a result of privatization competitive conditions will prevail in which entry of companies buyers will exercise control. There is cut- thought competitions am ong rivals in life insurance industry. There are mainly 13 private organizations and one public organization in life insurance competition. The insurance sector is showing high market growth rate, which enables the insurance companies to ac hieve its own market growth through the growth in market place. As per the study conducted by the monitor group, the size of the Indian general insurance market was of the order rs.10000 crores in 2001. The annual growth rate is expected to be 15%. All the insurance companies deal in identical policies, as service leve ls offered are similar. Hence, there is no product differentiation. Post90

Strategic Analysis of Indian Life Insurance Industry privatization, product and service differentiation exist between public companyprivate companies. Ministry of finance controls all the insurance companies that are in the industry at present. Hence, there are less chances of exit. Also, po st privatization there will be less chances of exit, as the ministry of finance and insurance regulatory and development authority1999 will govern the insurance companies. Nationalized players have negligible computerization and use of mana gement information system (MIS). Although they are planning to implement softwar e developed by CMC for fulfilling the MIS requirements across various levels of offices. Private players will make extensive use of MIS as well as will have mor e or less a paperless office. 91

Strategic Analysis of Indian Life Insurance Industry OT ANALYSIS OT- analysis of the industry shows opportunity and threat the industry is likely to face. OT analysis of Indian life insurance industry shows the comparative st rengths and weakness of Indian life insurance industry with rest of the world an d also major opportunities and threats the Indian life insurance industry is fac ing. Opportunities: Todays human life becomes full uncertain, so they prefer prot ection against the risk. Therefore they prefer life insurance. This is the oppor tunity for the life insurance sector. Easy accesses to development in the more a dvance market provide further opportunity to upgrade their working. Technologica l, financial or specific area based avenues of absorbing improved system are als o now more easily available. So, that insurance companies working efficiently an d fast service. Increased economic activities: increase in the economic activity has become the opportunity for the life insurance sector. The activity such as development in the automobile industry, development in the shipping industry. Th e growth in the GDP shows the opportunity for this industry. The growth rate exp ected this year 7-7.5%. So this is also one of the opportunities for the life in surance sector. Uncovered market: The Indian insurance market is the one of the least markets in the world. India has a population 1044.15 million out of which only 77.7 million have a life insurance policy. Almost 300 million people in the country can afford to buy life insurance but of this only 20 % have an insuranc e cover. Thus there lies a big opportunity for the life insurance industry. No d oubt lots of marketing and promotional efforts have to be done for trapping the uncovered portion of the huge market. Indias insurance has long way to catch up w ith the rest of the world. According to the institute of charted financial analy st of India. India is the 23rd largest insurance market in the world. India acco unts for just 0.4% of the global insurance market which is very low. the ratios o f premium to GDP for India stands at only 3% against 5.2% in US ,6.5%in UK. 92

Strategic Analysis of Indian Life Insurance Industry To enter into rural market where customer awareness about insurance is low by ef fective and efficient marketing strategies. To sell insurance products through e lectronic Medias. Natural calamities: natural calamities taking place now days h ave created a concern for life insurance among the public. Because of natural ca lamities like earthquake, flood, and cyclone people have become conscious about benefits and need of insurance. Thus through a calamity it has become a consider ably big opportunity for the industry. Growing population: the growth in the pop ulation (approximately 1.7%) is very high. It is said that one Australia is adde d in our country every year. Thus potential customers for the life insurance ind ustry. It has become an opportunity for the life insurance industry. The lack of comprehensive social security system combined with a willingness to save means that Indian people demand for pension products will be large. Thus, it has becom e an opportunity for the life insurance industry. India has traditionally been a highly savings oriented country. Needless to say, if the insurance market is pr operly tapped, it is possible to raise life insurance premium as a percentage of GDP from its existing level. Thus, it has become an opportunity for the life in surance industry. To use Internet and e-commerce technologies to dramatically cu t the costs and/or to pursue new sales-growth opportunities. With the help of te chnology it has become easy for the companies to reach the customer quickly, eas ily, efficiently and in a better way. Also the companies can cut down the cost o f operation up to considerable level. Thus technology has thrown lots of opportu nity for the company. Liberalized government policy toward insurance sector: the government has liberalized the government policy in the life insurance sector. Now a day role of government has changed. Due to liberalized policy of governmen t the country is benefited in earning foreign inflows: the domestic company can also collaborate with foreign country and can create synergy. Thus there is grea t opportunity for those who can trap it. Exist the option of joint venture& alli ance etc. for companies to create Synergy, value as well as competitive capabili ties for the firms. 93

Strategic Analysis of Indian Life Insurance Industry Threats: Private entrants are naturally targeting the profitable and more lucrat ive segments, by providing better service, new products and flexibility. They ar e targeting the bigger corporate the other clients in the well established metro politan center. These new entrants succeeded in eating share of the existing ent ities. This creates threat among rival firms itself. Decreased in bank rate: the decreased bank rate is the biggest threat for the life insurance sector. Fluctu ation in the bank rate makes big difference for the life insurance industry. It has become threats for the life insurance industry. Interest rate of P.F and ban k saving create threat to insurance sector. All other saving is obviously the th reat for life insurance sector. Increasing intensity of competition among indust ry rivals-may cause squeeze (fall) on profit margins. Consumers education- consum ers are more and more confused because the market players are offering large num ber of product range. As at present the awareness level is not much, it is only because the education level is only 62 %( in which only 10% are well educated). Fraud in insurance sector: the major problem fraud, which affects the life insur ance sector. The flight of talent to new entrants is already in evidence, and co uld be considerable challenges for existing companies. One very serious danger t hat the government on units is likely to face is that even if at some point of t ime, the government does decide to disinvest a portion of its equity; they may n ot be fully free from government interference. They could face a peculiar proble m that although paper and in terms of legal definition they would not be public sector units. In effects, their working could be no different from what it was b efore their ownership pattern change. This could be genuine threats since they w ould be competing with units which are free from such artificial and unnecessary restrictions. The new units, equipped with state of arts equipment and innovati ve procedure would have an in-built edge over the erstwhile public sector units, which until recently had no such opportunity and incentives. Due to possible ne gative impact on the rise for some time to come. Retaining qualified and compete nt executives will be 94

Strategic Analysis of Indian Life Insurance Industry on employment, there were no serious efforts at updating technology and equipmen t. The resultant inadequate investment in infrastructure could lead to their lag ging behind in the race. 95

Strategic Analysis of Indian Life Insurance Industry KEY STRATEGY TO SUCCESS In order to succeed in any of the business it is very necessary to make and foll ow the strategies. Strategies are very important for any of the business. Follow ing are the general strategies, which are recommending to the insurance sector. One approach is to focus upon product quality, which will instill confidence in minds of the customers that they would be offered best product from out of the s everal available products. The other approach, is to focus on the customers need , would involve a heavy investment in developing relationships with policyholder s. Under this approach, one can expect a range of products and services designed to give the customer what he specially desires. The third approach is of greate r market segmentation under which the population should be divided into several homogeneous groups and product, and services would be targeted towards such sele cted markets. The effort would be to tie clients to their company- by customized c ombination of coverage, easy payment plan, risk management advice, and convenien t quick claim handling. Porter Generic Strategies: One of the expert Michel porters has identified three internally consistent gene ric strategies, which can be used singly or in combination: overall cost leaders hip is clearly under stable. In a differentiation strategy, a company seeks to b e unique in its industry along some dimensions that are widely valuable by the c ustomer. May be the lowest cycle time for settling a claim under say, a med clai m policy could be differentiating factor. In a cost focus, a company seeks a cos t advantage in its target segment, while in differentiation focus; a company see ks a differentiation target. 96

Strategic Analysis of Indian Life Insurance Industry Marginal Different Product: Another strategy would be for the companies to design products that will make co mparison-shopping difficult. They could offer a wide variety of covers with marg inal differences and varying prices, whose terms and conditions are difficult to compare for consumers who may not have sufficient experience in purchasing insu rance and who would find it difficult to make a clear choice. If the consumer is offered a unique policy, he will have no alternative coverage with which can be compared. Given the combination policy, which can offer protection against a nu mber of losses, the consumer will find comparison even more difficult. Designing New Strategies: The existing insurance companies cannot be satisfied with concentrating on the c onsolidation of their existing markets, but have to achieve further growth and p enetration. They must, therefore, concentrating on strengthening existing points of service, designing new channel of distribution, direct contact with their ul timate customers, and front line employee empowerment. They also need to refresh their marketing set up. The new comers, on the other hand give priority to tapp ing the market, left unexploited by the public sector companies. Move towards Rural Market: It is one of the most important suggestions; data says that rural market is stil l uncovered by this sector. We believe that the sector should move towards tie r ural market. Insurance penetration can be achieved by tapping the neglected Rura l Markets. There is vast potential for insurance growth in the rural sector. A r ecent survey by foundation for research, training and Education in insurance (FO RTE) suggests that insurance can be sold profitably to rural communities in Indi a. The survey reveals that There is distinct hierarchy of needs in rural areas. Rural people find security in groups. 97

Strategic Analysis of Indian Life Insurance Industry The saving habit is very strong in rural areas. Average saving across the most i mportant socio-economic strata comes to 30-35% of annual income or Rs. 13,500 an nually, which is significant. There is high level of awareness about life insura nce and fairly high-level about 36% already own life insurance. 51% of these who own life insurance would like to buy more. Amongst the savers, a significant pe rcentage does not save through formal financial modes or institutions. Rural buy ers of insurance prefer a half yearly mode of premium payment to coincide with t he time of the harvest. Thus there are very much chances for any of the companie s to work over this scenario. So we believe and suggest all the players to move towards the rural areas. MOTIVATION OF SALES FORCE: A life insurance company sho uld constantly be involved in the process of motivating the sales force in the t urbulent times. The following strategies are recommending; Building relationship is real perk. One should be sure to build in networking times for agents during the program-in addition to entertainment and education. Web should be frequentl y used for creating gift ideas. Hold sales contests in the forth quarter. It is the best times ti motivates agents who wants to qualify for a trip. Consider a c ontrast within the contest for- top-tier producers; additional rewards for additi onal milestones that are met, such as air and guest room upgrades. 98

Strategic Analysis of Indian Life Insurance Industry Use of Internet: The present scenario is such that the products sold with the help of Internet. T he technological advancement is such that force the companies to take such steps . Still the full-fledged use of Internet is not done in our country. As suggesti on earlier the Internet based life insurance will help the companies to reduce t he transaction cost and time. At the time it can improve the quality of service to its customers, which is the mission of the company. Company should concentrat e on the quality of the premium received this will help the companies to reduce its underwriting losses. Appointing of proper and efficient agent as well as eff ective direct marketing could do this. By way of training the excessive staff, w hich is a major problem in the company, the company could reduce management expe nse to a large extent. 99

Strategic Analysis of Indian Life Insurance Industry BIBLIOGRAPHY Planed P.S and Shah R.S; Insurance in India, Response books-2003 Insurance 4th e dition CIB Puplicaion-2002 Magazine Life insurance vol 1 ICFAI PRESS 2002 Life insurance vol 2 ICFAI PRESS 2002 Insu rance industry Emerging Trends ICFAI PRESS 2002 Insurance law and regulation vol 1ICFAI PRESS 2002 Web site: www.irdaindia.org www.equitymaster.com www.licindia.com www.icicipruli fe.com www.incometaxindia.gov.in Newspaper: Economic times Times of India Business standard 100