CHAPTER I I I

REVIEW OF LITERATURE

The available literature on the effects of liberalisation on the life

insurance sector comprises government reports; reports of other
agencies; books; research articles; research papers and dissertations.

The review of literature addresses to the following five major issues:

3.1 Genesis of liberalisation and introduction of competition in

the life insurance sector.
3.2 Weaknesses of the life insurance sector on the onset of
liberalisation.
3.3 Benefits of liberalisation and the role of foreign insurers.
3.4 Effects of liberalisation on life insurance sector of India.
3.5 Performance of Life Insurance Corporation of India under
liberalized conditions.
3.6 Issues that emerge from the review of literature.

3.1 GENESIS OF LIBERALISATION AND NTRODUCTION OF

COMPETITION I N THE LIFE INSIRANCE SECTOR

Competition is not new to the life insurance industry as in the pre-

nationalization period the Indian life insurance sector was
characterized by competitive environment. There was opposition to
the nationalisation and subsequent monopoly of the Government by
establishing The Life Insurance Corporation of India.

To quote from Sezhiyzn E. in 'Role of Life Insurance in

National Economy' (1985), "At the time of discussion of LIC Bill 1956
itself a strong section of opinion in Select Committee and in the
Parliament advocated establishment of five independent corporations
competing with each other, but the Government preferred to have a
single corporation "to start with" and the Finance Minister and the

36
Prime Minister did not rule out a split up if subsequent experience
made it expedient. Later Estimates Committee of the Parliament
( 1 9 6 1 ) and the Committee on Public Undertakings ( 1 9 6 5 ) were
unhappy about the monopolistic and monolithic structure of the
Corporation and suggested setting up of a number of corporations".^

The Administrative Reforms Committee ( 1 9 6 8 ) , which

considered the issue of breaking up of LIC into autonomous
corporations, expressed preference for a single corporation with
delegation of more powers to branch offices. The report stated that
the Corporation has taken a definite shape and it is better to make
improvements in the Corporation in stead of splitting it with the
expectation of increase in efficiency.

The Morarl<a Committee ( 1 9 6 9 ) favoured retention of the

unitary structure but recommended decentralization of powers.
The Government accepted these recommendations and LIC continued
as a monopoly.

Dr. B.S.R. Rao [ 1 9 7 6 ] , in his book titled 'Functioning of LIC-

An Appraisal', opines "there appears to be considerable force behind
the argument for splitting up the Corporation. The setting up of five
autonomous corporations cannot be considered as going back on
nationalisation because the nature of competition prevailing in the
pre-nationalisation period is very much different from the type of
healthy competitive spirit that would develop if several independent
corporations are set up."^ Establishment of autonomous corporations
would promote healthy competition among them with regard to
procurement of new business, competitive premium rates, attractive
bonus payments and effective after sales service.

Era Sezhiyan Committee ( 1 9 8 0 ) recommended splitting of

LIC into five independent non-competing corporations. The

37
committee was convinced that "the present unitary structure had
been a major factor inhibiting the progress".^

The Finance Minister R. Venkatraman, in the budget speech

( 1 9 8 1 ) announced the Government's intention to split LIC into five
independent units. The Finance l^inister said, "We have decided to
undertake a major reorganization of LIC of India in order to
strengthen its ability to meet challenges in future. The Corporation
has an impressive record of extending insurance service to the
community. In the process, it has grown considerably in size. It has,
therefore, become desirable to restructure the Corporation into more
manageable units in the interest of operational efficiency and also to
allow an element of healthy competition."* Due to vociferous
opposition in the Parliament, the Bill for this purpose was referred in
December 1983 to Joint Select Committee of the House. The Joint
Select Committee stated, "in light of historical background, the
stage has come when this idea of setting up manageable units has to
be implemented and given practical shape".^

On the constitution of 10*'' Lol< Sabha (1991), the

Government of India declared it was not proceeding with the Bill.

Thus in spite of recommendations from various segments for the

introduction of competition, LIC continued with its monopoly in the
life insurance sector. The phased globalization of Indian economy,
started in nineties, began having its impact on the monolithic
structure of the LIC. In furtherance of the initiatives in the area of
financial sector reforms covering banking system and financial
markets, it was considered desirable to introduce reforms in the
insurance sector also. The Government of India appointed a
committee on Reforms in the Insurance Sector (Malhotra
Committee) in April, 1993, under the chairmanship of Shri R. N.
Malhotra. This may be called a first step towards liberalisation of the

38
life insurance sector. Malhotra Committee Report submitted in 1994
starts witli the liistorical perspective of the insurance sector. It goes
through nationalization of life insurance and establishment of Life
Insurance Corporation of India. Further it has a review of the
performance of LIC of India and finally the recommendation for
liberalisation of the insurance sector. The Committee in its report
clearly wanted monopoly of public sector to go with the opening of
insurance sector for private players. The objective being "—
introduction of competition should result in better customer services,
and help improve the variety and price of insurance products."^

3.2 WEAKNESSES OF THE LIFE INSURANCE SECTOR ON THE

ONSET OF LIBERALISATION

In spite of the growth of the insurance business under nationalization

in terms of premium, policies, new products, coverage of weaker
sections, and investment in social sectors there were many
weaknesses or deficiencies. The weaknesses and deficiencies that
emerged from the review of literature are described as follows:

3.2.1 Low Insurance Penetration

In spite of attractive growth in domestic premium collection the life

insurance penetration, defined as insurance premium as a percentage
of GDP remained low. On the onset of liberalisation in the year 2000,
it was 1.77% compared to 5.96% for Asia and 4.88% for the world.
Low insurance penetration indicates that the spread of life insurance
has been poor and the large section of insurable population is still out
of insurance coverage.

The Report of Malhotra Committee ( 1 9 9 4 ) mentioned that

while the coverage of insurable population did go up from 10% in
1971 to 22% 1992, there was still vast untapped potential.

39
 Rangachary N. ( 1 9 9 9 ) in the speech 'The Indian insurance
industry', stated the word insurance and the need for insurance are
not understood in India by many as in west, only 18% of the
population is insured, rather under insured. The vast potential can be
realized only by tie-ups, collaborations and joint ventures in the
insurance sector.

Rao C. S. ( 2 0 0 5 ) in the address 'Effects of Liberalisation on

Indian insurance Market: An Overview', highlighted the fact that the
nationalized companies did contribute to spread of insurance in rural
and semi urban areas but there was a huge gap between the
potential available and its exploitation. 'Xb - | 3 0 D D

3.2.2 Low Insurance Density

Insurance density, defined as per capita insurance was also low. The
life insurance density on the onset of liberalisation in the year 2000,
at 7.6 USD was much lower than 138.8 USD for Asia and 239.9 USD
for the world. It is surprising to know that the density in the country
is lower than several developing countries of the world with per
capita income lower than India.

3.2.3 Relatively Poor Quality of Insurance Services

Sezhiyan E. (1985) mentioned in a speech that the

operations of the Corporation have expanded enormously and there
has been a serious deterioration in the service to the policyholders
and in financial controls.

The Malhotra Committee Report ( 1 9 9 4 ) , mentions "the

vast marketing and services network of LIC was inadequately
responsive to customer needs; insurance awareness was low among
the general public; marketing of life insurance with reference to
customer needs left much to be desired; the agents and development

40
officers were perceived to be very helpful and knowledgeable at the
initial stage of selling a policy but the enthusiasnn wore off later on
after the policy was bought, term insurance plans were not being
encouraged and unit linked assurance was not available, insurance
covers were costly and returns were significantly low compared to
other savings instruments"/

Rangachary N. ( 1 9 9 9 ) in the lecture titled The Indian

Insurance Industry' Stated that insurance is a service-oriented
industry and exists for the welfare and the need of customers. It
exists for and stands by the customer. The concern for the customer
has to be reflected in the performance of the industry. That does not
seem to be totally fulfilled in the Indian setting where the customer
may not get a cover which he needs or even if he is extended
coverage, the small print could be utilized to contest the claims that
arise for payment. One seems to specialize in interpretations and
quibbling. One seems to be giving more adherences to formalities
and procedures than the end product; one seems to see that the
customer regrets taking an insurance cover". The lecture further
mentioned that let us bring back to the practice, the economic term
Customer is the king and quoted the words of the Father of Nation
uttered at Johannesburg "a customer is the most important visitor on
our premises. He is not dependent on us we are dependent on
him "^ (Mahatma Gandhi in Johannesburg, South Africa, 1890).

Rao C. S. ( 2 0 0 5 ) in his address highlighted that in absence of

competition the consumer did not benefit in terms of wider choice,
lower price, and adequate level of service.

3.2.4 Availability of Insurance Products

In the pre liberalisation period the Indian life insurance scenario was
characterized by limited choice with reference to the availability of
insurance products.

41
 Malhotra Committee Report ( 1 9 9 4 ) Stated "availability of
life insurance products was limited, term plans were not being
encouraged and unit linked assurance was not available".®

Rangachary N. ( 1 9 9 9 ) stated that in India at present

insurance sector is insulated from competition and customers.
Competition decides what products and services customers would
need. In absence of competition it is the insurance business which
decides what risk they would cover and operate on the principle take
it or leave it. Insurance products are not available to all, although the
need may be genuine.

Lenin J. ( 2 0 1 1 ) , in 'A Comprehensive Study on Life Insurer's

Services in India', stated that insurance is one of the major financial
services where customer is the epicenter of all marketing activities.
In pre liberalisation period LIC of India had monopoly and the
customer had to be satisfied with whatever the Corporation provided.

3.3 BENEFITS OF LIBERALISATION AND THE ROLE OF

FOREIGN INSURERS

There are various benefits of liberalisation and the resultant

competition. Commenting on the benefits of liberalisation, The
Malhotra Committee ( 1 9 9 4 ) raises the issue as to why the
consumer of insurance service should not be provided a wider choice
so that he can get the benefits of competition in terms of range of
insurance products, lower price of insurance covers and better
customer service and states that introduction of competition should
result in better customer service and help improve the variety and
price of insurance products.

Kono M., et al. ( 1 9 9 7 ) in the special study for the WTO titled
'Opening Markets in Financial Services and the Role of GATS'
concludes that significant benefits are likely to arise from

42
liberalisation of financial service trade. Enhanced connpetition will
improve sectoral efficiency leading to lower costs, better quality and
more choice of financial services. Liberalisation will improve financial
intermediation and investment opportunities through better resource
allocation across sectors, countries and time, and through better
means of managing risks and absorbing shocks. The study has
cautioned that a number challenges must be met if countries are to
reap the full benefits of liberalisation. It further mentions that there is
no universally applicable liberalisation strategy. Every country will
have to decide its own policy.

Skipper H. Jr, ( 1 9 9 7 ) in the paper 'Foreign Insurers in

Emerging Markets: Issues and Concerns' focused on issues and
concerns associated with the role of foreign insurers in emerging
markets and put forward arguments in favour of foreign insurer
participation. Foreign insurance companies can enhance the efficiency
of local insurance markets by providing superior customer services,
introducing new products and transferring technological and
managerial know-how. Due to their greater financial strength and risk
diversification capabilities, foreign insurers also often have superior
claims paying ability, which can help to enhance the financial
condition of individuals, households and corporations in emerging
markets. Not only is foreign participation important in promoting
financial stability, it is also imperative to facilitating the trade and
commerce of developing economies. The availability of a reliable
insurance sector has long been recognised as one of the prerequisites
in attracting foreign direct investment. Globally active industrial and
service companies expect their insurers to follow them and provide
worldwide support. Further, the participation of foreign insurers could
improve the efficiency of capital allocation in emerging economies.
Underwriting and investment decisions made by foreign insurers
based on their international experience and best-practice
considerations could send useful signals to markets for efficient

43
resource allocations. The availability of these signals, particularly in
markets where credit allocations are not completely based on
economic considerations, is important in improving capital
productivity.

These positive considerations have underpinned the liberalisation

drive in emerging markets but the pace of market opening is far from
expectations as there are still concerns over the potential pitfalls of
greater foreign participation. This study concludes that opening
insurance market to appropriate foreign insurers is likely to aid
economic development, enhance overall social welfare, and carry
some unresolvable negative possibilities. Countries that maintain
unjustifiable market access barriers and that fail to extend national
treatment to foreign owned insurers are likely to do their citizens,
business and national economies a disservice.

Ranade A. and Ahuja R. ( 1 9 9 9 ) in the paper 'Life Insurance

in India Emerging Issues' identified the emerging strategic issues in
light of liberalisation and private sector entry in to insurance sector.
They justified the need for private insurers on the basis of increase in
efficiency, penetration, density and greater mobilisation of long term
savings.

Rangachary N. ( 1 9 9 9 ) mentioned, opening of insurance

sector to competition and the entry foreign players will improve the
service standards, generate funds for long term investments
(particularly infrastructure sector, which requires investments of $ 50
billion annually), utilize vast potential of life and general insurance
and create more employment opportunities. With competition comes
the urge to innovate and with competition also comes the urge to
move forward. Both these urges combine themselves to takes
services to higher levels resulting in the consumer getting service at
reasonably competitive price. The paper has given elaborate

44
description about tine lil<ely improvements of addition of players in
the insurance sector. "International experience with liberalisation of
insurance sector indicates a tremendous possibility of spurt in
business. Liberalisation has invariably resulted in higher premium
income as a percentage of GDP and thereby expanding market".*" In
addition to this, the new players will lead to increased pension
coverage, increased consumer focus, increased employment,
improved intermediation services, best global management practices
and technology, long term capital investment and long term savings
for the economy.

With regards to the impact on the existing players Rangachary

mentioned that they will become more efficient in terms of
operational costs. It will make them more efficient from customer's
perspective, in terms of products and customer service. Competition
is necessary to encourage the LIC to make the changes, which are
necessary for the market of the new millennium.

Weng D. (2000) in the dissertation titled 'China's Life

Insurance Industry: Opportunities and Challenges for Foreign
Companies', mentioned that foreign insurers entering China since
the opening up of the insurance sector have contributed to the
development of the industry by introducing new products, marketing
systems, operating techniques and management skills.

Baur, Esther et al. ( 2 0 0 1 ) in the paper The Economic

Importance of Insurance in Central and Eastern Europe and the
Impact of Globalisation and E-Business', outline in detail the pros and
cons of foreign insurers in the emerging markets. It gives an
elaborate presentation on the benefits and challenges of market
access liberalisation. On the positive side, it highlights various
benefits of liberalisation of insurance sector such as mobilisation of
domestic savings, improvement in financial stability, improvement in

45
customer service, improvement in the efficiency of insurance marl<et
etc. and on negative side; it mentions national autonomy as a major
concern. There are worries that selective marketing by foreign
insurers could result in the neglect of some customer groups. Foreign
insurers, which are generally more focused on high-value clients,
could fail to provide insurance covers to certain customer sectors,
particularly to lower-income groups.

There are concerns that increased market penetration by foreign

insurers would eventually result in rising fund outflows over the
longer term in the form of profit repatriation and overseas
reinsurance. This, however, has to be balanced by other
considerations. The immediate impact on the capital account will be
favourable, as foreign insurers have to capitalise their new operations
as well as invest in offices and equipment. Furthermore, the long-
term outflow arising from profit repatriation and reinsurance abroad
could be more than offset by other inflows. Foreign direct investment
would benefit from the increased sophistication of the domestic
insurance market. The improved competitiveness of domestic
exports, in view of the trade facilitating effect of insurance, could also
result in more capital inflows. Taking into consideration these factors,
it is fair to conclude that the net impact on the capital account is
likely to be positive.

Perhaps more disturbing to policy-makers in emerging markets is the

prospect of over-reliance on foreign insurers. There are worries that a
sudden withdrawal of foreign insurers in times of conflicts could
cripple local trade and commerce. Although this could easily be
overcome by appropriate diversification strategies, this argument has
resurfaced from time to time to justify more stringent regulations
over foreign participation. As a result, the political concerns over
national independence may sometimes prompt governments to

46
restrict foreign participation regardless of its potential econonnic
benefits.

Nonetheless, the overall benefits more than offset any negative

considerations if liberalisation is pursued against the backdrop of a
solid set of prudent supervision, consumer protection and competition
regulations as well as disclosure of information by the companies.
The opening up of insurance markets should bring long-term benefits
to emerging markets.

The opening up of the insurance sector in emerging markets to

foreign competition has long been a contentious issue. Numerous
arguments, including the unfavourable balance-of-payment effect and
the need to protect infant industries, have been advocated to justify
measures to control foreign inroads in the market. It is often the case
of striking a fine balance between the stability of the insurance
market on the one hand and ensuring efficiency and good value for
consumers on the other hand.

Matto A. et al. ( 2 0 0 1 ) in a policy research paper for the

World Bank, 'Measuring Services Trade Liberalisation and its Impact
on Economic Growth: An Illustration', mentions "in the countries with
fully open telecom and financial services; the sector grows up to 1.5
percentage points faster than other countries".^^

Dobson W. (2002) in a paper titled 'Further Financial

Liberalisation in the Doha Round' explains the benefits of financial
reforms (withdrawal of government intervention through privatization
and allowing inter sectoral activities for the financial institutions) such
as faster growth of the economy and reduced cost, efficient services,
customer friendly institutions to the users of the financial services.

47
 Rajan R. and Sen R. (2002) in a discussion paper,
'Liberalisation of International Trade in Financial Services in South
East Asia: Indonesia, Malaysia, Philippines, and Thailand', outline the
analytical rationale in favour of liberalisation of trade in service with
particular reference to financial services as a theoretical and empirical
case. The paper offers an overview of the state of deregulation and
the schedule of liberalisation for banking and insurance services in
Indonesia, Malaysia, Thailand and Philippines. An attempt is made to
synthesize the individual country experiences and extract common
themes from them. The paper highlights the benefits of liberalisation.
It also mentions that liberalisation of trade in services could involve
fairly painful and temporary adjustment costs that need to be
properly managed. Deregulation with a weak regulatory and
supervisory environment can cause severe uncertainty in that sector
and the overall economy.

Banga R. ( 2 0 0 5 ) in a working paper. Trade and Foreign

Direct Investment in Services: A Review', stated that in the last two
decades services have emerged as the largest and the fastest
growing sector in the world. The impact of liberalisation of trade in
services differs across the developing countries there are certain
arguments put forward in favour of liberalisation "the role of services
as producer of inputs is very important. Since services constitute a
number of intermediate inputs, like banking and insurance, to the
industry, it is important for developing economies to have efficiency
in these inputs so as to be able to compete in international as well as
domestic markets. The efficiency in producer services can be reached
by liberalisation of these services. This would also in a way imply
efficiency in export-oriented production (BhagwatI 1989)".^^
Domestic consumers' gain from lower prices and higher efficiency of
the consumer services provided to them. However, in spite of various
arguments in favour of liberalisation, developing countries have
shown lot of concern about liberalising their services sectors. "Many

48
services, such as, banking and insurance, are considered to be a part
of the infrastructure of developing countries. Policy makers in
developing countries argue that they must have control over their
infrastructure. Since they do not have comparative advantage
necessary to succeed in international competition, liberalisation of
trade in services might mean that they lose control over their basic
infrastructure".^^

Singh A. T. ( 2 0 0 7 ) in a case study on India for UNCTAD

mentions the following immediately apparent benefits of
liberalisation:

Real life insurance: Traditionally, life insurance products have been

sold in India more as an investment device or a tax planning measure
rather than as a protection against risk. With the entry of private
players, whole life products are introduced as a protection against
risk.
Product range: The basket of products available to the customer
has expanded in the deregulated environment that encourages the
introduction of the product.
Compreliensive risl< coverage: Deregulation has enabled people in
India to cover a larger variety of risks. Earlier people had no option
but to buy prepackaged life insurance products that lacked flexibility.
Customization, however, has been one of the key advantages of
privatization. Riders have added value to the life insurance needs of
the customers.
Customization: In the earlier days, customers could only buy limited
prepackaged products pushed by agents chasing quick sales. Today
customers have access to more and better products that suit their
specific needs and a new breed of insurance advisors has taken birth.
These agent advisors build long term relationships with their clients
and help them better understand the value of life insurance and sell

49
customized solutions in a needs-based manner. This higiner quality of
sales interaction is been one of the key benefits of privatization.
Market awareness: The money that private life insurance
companies have spent on establishing their brands has helped create
awareness about life insurance. Today, life insurance brands compete
with other financial services and manufacturing brands for marketing
space.

In most other economies that opened their markets, new entrants in

life insurance sector have taken 10 to 12 years to secure a market
share of 10 per cent. However, In India, the progress of private life
insurers has been considerably more dynamic. In less than five years
since deregulation, private life insurance companies have secured 25
per cent of the market share from LIC. Further the private sector
insurers have achieved year-on-year growth of more than 60 per
cent. In the number of new policies sold too, the market share
achieved by the new players is quite impressive. In addition to the
benefits to customers of finding products to meet their needs, the
insurance sector has also created sizable job opportunities.
Professionalism of insurance selling and new marketing concepts
introduced by foreign players has meant that many more people are
taking to insurance sector for employment. There are today in India a
million insurance agents and another 200,000 employees. Foreign
capital will allow the people of this country to enjoy higher rates of
economic growth, employment and a higher standard of living. The
country will ultimately benefit immensely from removing all caps on
foreign investment. Limits on foreign investment or product
competition in markets like insurance only inhibit the successful
restructuring of these markets.

Market opening in India has raised the level of awareness among the
public about the need for insurance, created new job opportunities,
increased education on financial planning, brought new products and

50
encouraged innovation In the sector. In India as in other countries,
the increased awareness of the benefits of insurance has created a
greater demand that new foreign players have helped to fulfill. The
pie does not get smaller for insurers already operating in a market, it
gets bigger, and it expands with new players.

UNCTAD ( 2 0 0 7 ) the report states "as one of the key pillars of

the financial services sector, the insurance sector Is a central element
of the trade and development matrix. As both an infrastructural and
commercial service, a well-functioning insurance sector plays a
crucial role in economic development not just at a macro economic
level but also in terms of the activities of individuals and
businesses"." Given the importance of the insurance sector, its
potential for growth, rapidly emerging trends within the sector
including the trend towards liberalization of insurance services, it is
essential to clearly understand the challenges and opportunities that
arise from both the development of the insurance sector as well as its
liberalization for developing countries. While insurance service
liberalization and globalisation can be beneficial, they have different
impacts on developed and developing countries. Experiences of
various countries indicate that liberalization of insurance services
needs to be accompanied by a strategic and clearly defined national
policy on the financial services sector in general and the insurance
sector in particular. It is essential to develop efficient and effective
regulatory and supervisory frameworks, in line with international
initiatives. This recognition that liberalization alone might be
insufficient may be one of the reasons for the hesitation of some
countries in the context of the liberalization of insurance services.

Other areas that pose a challenge for developing countries include

the potential impact of the operations of insurance companies on the
activities of policyholders and the economy as a whole. The need to
overcome supply-side constraints, the need to raise public awareness

51
about the benefits of insurance coverage and the need to build
human capacity are the biggest challenges. The role of regional
cooperation and that of government as a facilitator, regulator and
provider of insurance services also require due consideration. The
challenge would ultimately lie in reconciling efficiency and social
considerations, particularly for lower-income and marginal sections of
the population. It mentions the benefits of foreign insurance
companies such as enhanced financial strength, transfer of
technological and managerial skills, global market credibility and the
negative aspects such as anti competitive practices, selective
marketing to high value customers, potential employment losses.

Ansari Z. A. ( 2 0 1 1 ) in 'Analysis of Impact of Reforms on

Insurance Industry of Saudi Arabia' on the basis of the study on
Saudi Arabia for a period 2005 to 2009 finds that reforms since 2004,
Saudi insurance is growing fast registering remarkably high growth
rate in premium. The number of insurers has increased and the
regulatory system is so developed to take the Saudi industry to
international standards.

Lee C. and Chang C. ( 2 0 1 2 ) in an article explore the effects

on the development of life insurance sector of a broader range of
financial liberalisation policies. Using a panel data for 50 countries
including India over 1996-2005, the study concludes that financial
reforms alone do not exert a significant impact on life insurance
development.

3.4 EFFECTS OF LIBERALISATION ON LIFE INSURANCE

SECTOR OF I N D I A

Manoj Kumar ( 2 0 0 2 ) highlights the importance of insurance

sector as a mobiliser of savings and generator of funds for long term
investment in infrastructure. Quoting the experience of Malaysia,
Indonesia, Thailand, China and Philippines, it states that there is

52
room for more not only for existing companies but also for any
number of competitors. It further states opening up of the sector will
certainly mean new products, better packaging and improved
customer service.

Stichele M. V. (2003) mentioned that a gradual and

considered approach to the deregulation of financial services is
needed to make financial liberalisation beneficial to a country. The
presence of foreign insurance companies carries with it some risks of
financial instability.

Vijayakumar A. ( 2 0 0 4 ) in his article argued that opening up

of the insurance sector in India, fostered competition, innovation and
product variation. He adds further in this context that one has to
consider aspects such as demand for pension plan, the role of
information technology, the role of regulator, and the role of post
office net work In sale of insurance.

Krishnamurthy S. (2005) is of the opinion that with

liberalisation and the entry of private players' Indian life insurance
sector is showing significant changes. It has shown extremely
satisfactory results in terms of premium income and new policies
sold, but a huge potential still remains untapped. The opening up has
seen improved efforts on educating the customer regarding insurance
needs.

Sinha Tapen ( 2 0 0 5 ) states that the insurance Industry in

India has come a long way since the time when it was tightly
regulated and concentrated in the hands of few public sector insurers.
Following the IRDA Act 1999, India abandoned the public sector
monopoly of insurance industry in favour of market driven
competition. The shift has brought about major changes in the
industry. The inauguration of a new era of insurance development
has seen the entry of international insurers, the proliferation of

53
innovative products, distribution channels and rising of supervisory
standards. These developnnents were instrumental in propelling
business growth in real terms. There are good reasons to expect that
the growth momentum can be sustained. In particular, there is huge
untapped potential in various segments of the market. It has a word
of caution that the insurance industry's development should not miss
the vast sector of rural population. The report concludes with a
statement that India is among the most promising emerging
insurance markets in the world and has the potential to become one
of the biggest markets in Asia. The sound economic fundamentals,
rising household wealth and a further improvement in the regulatory
framework are stated as the factors which will contribute to further
growth of the insurance sector. While analyzing evolution of
insurance in India the report stated that India is fast becoming a
global economic power. With relatively young population, India will
become an attractive insurance market over the next few decades.
The analysis includes predictions for the insurance sector for 2025.

Max NCAER, Financial Protection Survey ( 2 0 0 7 ) , on the

basis of 63016 households surveyed across the country highlights
that as much as 78% of Indians are aware of life insurance as a tool
to cover risk of life and 24% own life insurance. The repot further
stated that the insurers have failed to provide insurance cover to at
least those who could conveniently afford it.

McKinsey & Company ( 2 0 0 7 ) in its report titled 'Indian Life

Insurance Sector 2012: Fortune Favours the Bold', stated that the
impressive growth of the sector has been driven by liberalisation that
enabled the entry of new players with significant growth aspirations
and capital commitments. These players have contributed to the
development of the sector by enhancing product awareness,
promoting consumer education and creating more organized
distribution channels.

54
 Rao C. S. ( 2 0 0 7 ) in his speecli 'Indian Insurance Industry
Since 2000-A Remarkable Journey' mentioned dynamic insurance
industry as one of the main engines of growth. LIC of India is the
major contributor to the unprecedented growth of premium in the
post liberalisation period. There is an increase in insurance density
and penetration as well as average size of policy in the post
liberalisation period. The public and private sector can experience
high growth rates over a long period of time to come. The speech
also covers important areas such as product development, training of
agents, insurance education and research, rural and social focus and
micro insurance. The speech further states that the country has
enormously benefited from the reforms process.

C I I and Ernst and Young ( 2 0 0 8 ) Report titled 'Indian

Insurance Industry: The Task ahead', stated that the effect of
insurance reforms has been positive on insurance industry. There has
been positive growth in all the segments. Reforms have helped to
achieve rapid growth.

White Paper by American Council of Life Insurers ( 2 0 0 9 ) ,

states that the Indian insurance sector has grown tremendously since
it was opened to private investors, including foreign companies in
1999. Private players have made vitally important contributions to
overall competitiveness of the industry. The sector has blossomed
since then. However, the life insurance industry is still in its early
stages of evolution as indicated by relatively lower insurance density
and penetration.

Micro insurance has emerged in the post liberalisation period as an

important financial arrangement to protect low income people from
specific risks.

Kutty S. ( 2 0 1 0 ) in an article 'Indian Life Insurance: The

Millennial Decade', mentioned that the liberalisation and the opening

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of the industry to competition has provided a powerful stimulus to
business growth. The key drivers of growth have been high growth
rate of the economy coupled with high savings rate. There is a
marked rise in the proportion of insurance funds in the household
financial savings. Much of the growth can be linked to the rapid
expansion of reach and the spread of life insurance services. The
expansion and reach has not been confined to just metros as can be
seen from the regional distribution of life insurance offices.

Majumdar N. ( 2 0 1 0 ) stated in an article 'Increasing Life

Insurance Penetration in the Next Decade' that the life insurance
penetration has increased from 1.2% when the sector was opened to
4 . 1 % and one can say without hesitation that insurance mindedness
has increased due to opening up of the sector.

Mukherjee P., ( 2 0 1 0 ) The Finance Minister in his speech at

the inauguration of new building of Insurance Institute of India in
Bandra Kuria Complex in Mumbai stated that the opening of
insurance sector has resulted in the development of new insurance
products, reduced premium and improved customer service. He
further mentioned generation of awareness about the benefits of
insurance as an important challenge.

Krishnamurthy R., ( 2 0 1 1 ) in an article 'Life Insurance in

India: Strategic Shifts in Dynamic Industry', stated that as a global
sweet spot, India attracts the attention of every major insurer. The
country started in the 20*^ place in the global insurance league table
when the market was opened to private players in the year 2000, it
has moved up to 11'^'^ place in 2010.
The large young population, combined with low rate of insurance
penetration and high rate of personal savings point to the potential
for Indian life insurance market.

56
 Kshetrimayum S. D., ( 2 0 1 1 ) in the doctoral thesis 'A Study
of Impact of Liberalisation on Indian Life Insurance Industry', on the
basis of secondary data for the period 2001 to 2010 describes the
post liberalisation scenario in the life insurance sector in India. The
thesis has empirical analysis of the market structure of life insurance
in post liberalisation period and concludes that the concentration of
life insurance market can be qualified as very high. The thesis further
deals with the impact of liberalisation on efficiency and states that
the Data Envelope Analysis provides evidence of improvement in the
firm level as well as industry level efficiency during the period of
study. With respect to innovation in the industry it refers to the
increase in the number of life insurance products available in the
market and the new distribution channels introduced in the post
liberalisation period.

Shinde G, Patil D., and Bhalerao K., ( 2 0 1 1 ) in a paper

'Journey of Insurance Sector in India Since its Inception', mentioned
that the opening of the insurance sector has led to rapid growth.
India is an important emerging insurance market in the world. Life
insurance will grow very rapidly in the next decade. The major drivers
include sound economic fundamentals, a rising middle income class,
rising risk awareness, and improving regulatory framework.

Ghosh A. ( 2 0 1 2 ) , in a research paper 'Does the Insurance

Reform Promote the Development of Life Insurance Sector in India?
An Empirical Analysis', On the basis an empirical study of relationship
between reforms in the life insurance sector in India and the growth
of life insurance business in the post reforms period concluded that
insurance sector reforms improved overall development of life
insurance in recent years.

Tiwari A. and Yadav B. ( 2 0 1 2 ) in an article 'Analytical Study

On Indian Life Insurance Industry Post Liberalisation', on the basis of

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analysis secondary data of the life insurance sector for a period 2001
to 2010 about total premium, numbers of policies, total income
conclude that the private insurers are giving tough fight to LIC of
India.

Jain Y. ( 2 0 1 3 ) in an article 'Economic Reforms and World

Economic Crisis: Changing Indian Life Insurance Market Place', stated
that in the post liberalisation period the life insurance industry
experienced a marvelous growth but this growth has declined in the
post world economic crisis (2008). The challenges for life insurance
industry are product innovation, distribution, customer service and
investments.

Padhi B. ( 2 0 1 3 ) in an article 'Role and Performance of Private

Insurance Companies in India in the Post Liberalisation Era' observes
that the overall performance of all the private insurance companies is
found to be very satisfactory.

Yamawathi K. T. H., ( 2 0 1 3 ) in an article 'Performance

Evaluation of Indian Life Insurance Industry in Post liberalisation'
states the achievements of life insurance sector post liberalisation are
laudable. However, sustained growth will require efficient and
effective service to policy holders. In spite of increase in the life
insurance business, there is large uninsured population.

Gupta P. and Aggarwal V. ( 2 0 1 4 ) in their working paper for

the Centre for WTO Studies, 'An Analysis of Insurance Sector
Penetration Perspective in India' conclude that the increased
penetration with the opening up of the sector gives a clear indication
that the private and foreign players have an ability to enhance the
size, and participation in the insurance market world wide.

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3.5 PERFORMANCE OF LIFE INSURANCE CORPORATION OF
I N D I A UNDER LIBERALIZED CONDITIONS

Ranade A. and Ahuja R. ( 1 9 9 9 ) in the research paper state

that the LIC is a strong incumbent, and is in position to tal<e
advantage of its wide reach and more than 40 years of experience.
However, unless it specifically addresses the strategic issues such as
changing demography, and the demand for pensions, demand for
wider variety of products including delinking of savings and
insurance, LIC may find it difficult to adapt to the liberalised scenario.

Krishnamurthy S. ( 2 0 0 5 ) in a research paper 'Insurance

Sector: Challenges of Competition and Future Scenario' mentioned
that the LIC of India continues to remain strong in rural areas and
the lower middle class segments while in metros and major urban
centers, the private insurers have made their presence felt.

Singh A. T. ( 2 0 0 7 ) stated that the introduction of competition

from foreign insurers has served to wake up the large state-owned
company, the Life Insurance Corporation of India. The LIC has
shaken off slumber, upgraded its systems, embraced actuarial
prudence, and introduced more modern products and withdrawn
products that had inherent guarantees in them.
Foreign participation has created benefits not only for the new
entrants, but also for the players already in the market.

Chandarana H. M. ( 2 0 0 8 ) in the Ph. D. thesis 'Performance

Evaluation of Life Insurance Corporation of India' has evaluated the
performance of LIC of India during the period 1996-97 to 2005-06.
The thesis describes the structure of LIC, its investment pattern in
pre and post liberalisation period, distribution channels and the
operational highlights. The thesis based on the secondary data
presents the evaluation of financial performance with reference to
total income, total outgo, life insurance fund, total assets.

59
Performance of various plans of LIC is analysed in terms of business.
It also includes analysis of overseas operations of LIC of India. The
analyses establish that there was significant difference in the growth
of total income and total outgo during the period of study. There was
no significant difference in the ratio of total outgo to total income and
the growth of life insurance fund.

Mitra D. and Ghosh A. ( 2 0 0 9 ) in a paper 'Rural Life

Insurance in Post Reform Era: Growth and Opportunities' give details
about the rural life insurance in post reform era. The paper focuses
on the role of LIC of India and private insurers in rural and social
insurance and discusses the obligations of IRDA on rural and social
insurance. The paper further refers to micro insurance, rural agents
and the role of government in spreading rural insurance.

Hussain S. ( 2 0 1 0 ) in another study on LIC of India 'Growth of

LIC of India During Post Privatization Period' for the period 2004 to
2009 on expansion of offices, premium collection, expenses, number
of policies sold concludes that LIC of India needs to control its
operating costs and popularize its schemes among general public.

Rajendran R. and Natrajan B. ( 2 0 1 0 ) in their study on of

LIC "The Impact of Liberalisation, Privatisation and Globalisation on
LIC of India", for the period 1957 to 2007 conclude that liberalisation,
privatisation and globalisation are incorporating positive influence on
LIC of India and its performance.

T.S. Vijayan ( 2 0 1 0 ) Chairman LIC of India in conversation

with the Economic Times in 2010, in a reply to a question on how the
Organisation has evolved after liberalisation of insurance sector
stated that with the advent of liberalisation, new concepts like bank
assurance, alternate channels, brokers and ULIPs evolved in wake of
booming economy. With liberalisation of the sector, LIC has evolved
from the status of being the only insurer through securing leadership

60
in face of deregulation to becoming the insurer of choice. Vijayan
further stated that restructuring of delivery channels and revamp of
customer service are some of the steps in the evolution of LIC in post
liberalisation era.

Bedi H. S. and Sigh P. ( 2 0 1 1 ) in 'An Empirical Analysis of Life

Insurance Industry in India' provide an empirical analysis of life
insurance industry in India for the period 2001 to 2008. The study
concludes that liberalisation, privatisation and globalisation have had
positive influence on LIC and its performance. It states that there is
no significant change in the pattern of investments strategy of LIC
over the period 1980 to 2009.

Darzi T. A. ( 2 0 1 1 ) in the Ph. D. dissertation 'Financial

Performance of Insurance Industry in Post Liberalisation Era in India'
stated that the insurance sector in the country is passing through a
period of structural changes under the combined impact of financial
sector reforms in general and insurance sector in particular. The
market has transformed from earlier government monopoly to a
competitive structure. Liberalisation has led to a paradigm shift in the
Indian life insurance sector. Liberalisaton has introduced competition
leading to expansion and growth of insurance. Hence, the larger cake
is being shared by the existing and new players. It suggests that life
insurers should come out with innovative covers and selling
techniques coupled with wider choice of pricing and improved
customer focus for growth and expansion of the Indian insurance
market. The thesis concentrates on performance evaluation of the
non life insurance sector.

3.6 ISSUES THAT EMERGE FROM THE REVIEW OF LITERATURE

Important issues that emerge from the review of literature are as

follows:

61
 1. What could be the effects of liberalisation on the life insurance
sector?
2. With more market oriented approach, what will be the changes
in consumer oriented policies with respect to product design,
distribution channels, complaint redressal, and claim
settlement?
3. Has liberalisation improved access to and awareness about life
insurance?
4. What would be the impact of liberalisation on LIC of India?
5. Has liberalisation changed the investment policy of LIC of
India?
6. Rural insurance.

The above review of literature points to the fact that a comprehensive

analysis of effects of liberalisation on the life insurance sector as a
whole is lacking. Overall analysis is necessary to evaluate the impact
on the life insurance sector and to decide the policies of further
liberalisation.

The review of literature has pointed to certain issues as mentioned

above. Of these, the researcher has focused on the issues of the
effects of liberalisation on the life insurance sector, consumer
orientation, awareness about life insurance, and the impact of
liberalisation on LIC of India.

With this review of literature, we now move to the chapter on

Overview of Life Insurance Sector.

References

1. As quoted by Era Sezhiyan (1985), 'Role of Life Insurance in National Economy',

A. D. Shroff Memorial Trust, Bombay, Pg. 16 & 17.
2. Rao B. S. R. (1976), 'Functioning of LIC: An Appraisal' Institute of Financial
Management and Research, Madras, Pg. 156.

62
3. 'Era Sezhiyan Committee', (1980), as quoted from Tryst with Trust: the LIC
Story', LIC of India, Bombay, Pg. 363.
4. R. Venkatraman (1981), 'Budget speech', February 28, 1981, Pg. 4,
indiabudget.nic.in/bspeech/bsl98182.pdf.
5. Dharmendra, K. (Ed.), (1991), Tryst with Trust: the LIC Story', LIC of India,
Bombay, Pg. 373.
6. 'Committee on Reforms In Insurance Sector', (Malhotra Committee), (1994),
Ministry of Finance, Government of India, New Delhi, Pg. 90.
7. ibid. Pg.lO.
8. Rangachary N., (1999), The Indian Insurance Industry', A. D. Shroff Memorial
Trust, Bombay, Pg. 8.
9. Malhotra Committee, Pg. 10.
10. Rangachary N., (1999), The Indian Insurance Industry', A. D. Shroff Memorial
Trust, Bombay, Pg. 11.
11. Matto A. et al. (2001), 'Measuring Service Trade Liberalisation and its Impact on
Economic Growth: An Illustration', Policy Research Working Paper No. 2655,
World Bank, Pg. 64.
12.Bhagawatl J. (1989), as quoted from Banga R., 'Trade and Foreign Direct
Investment in Services: A Review', Working Paper No. 154, Indian Council for
Research on International Economic Relations, New Delhi, Pg. 34.
13. Banga R., (2005), Trade and Foreign Direct Investment In Services: A Review',
Working Paper No. 154, Indian Council for Research on International Economic
Relations, New Delhi, www.icrier.orgExperience. Pg. 35.
14. UNCTAD (2007), 'Trade and Development Aspects of Insurance Services and
Regulatory Frameworks', United Nations, New York, Geneva. Pg. ill.

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