Insurance Report

Indian insurance industry:
The task ahead
Foreword
The Insurance industry in India has gone through a gradual change. Over the past decade, there has been increase in premiums, players and outreach. The number of insurers has also increased making it mandatory for the regulatory authorities to put in place a revised regulatory framework. The Insurance industry, like many other industries has also become competitive with number of insurers attracting investors with numerous product innovations. A combination of these factors along with strong economic growth in the last few years has positioned India as a regional insurance hub and now India aspires to be an international financial center. The pace of growth of this industry is fast. But in an endeavor to expand beyond the current growth levels there needs to be a persistent effort to sustain what has already been achieved. To this end, CII and Ernst & Young, over the past six months of research and analysis have authored the report, Indian Insurance Industry: The task ahead. The report is an attempt, to discuss the various nuances in the insurance industry in India with a focus on new emerging product formats in niche sectors such as health insurance, micro insurance, etc. The report also highlights the reach of insurance products in the light of changing regulatory norms. The report has had the opportunity to incorporate inputs from various members of the National Committee on Insurance of CII.
Chandrajit Banerjee Director General, CII
Ashvin Parekh Partner & National Industry Leader Financial Services Ernst & Young Pvt Ltd
Indian insurance industry: The task ahead
Executive summary
Insurance is the subject matter of solicitation. Please read the offer document before investing. The growing demand for insurance around the world is having a positive effect on the insurance industry in all economies. For India, increasing GDP, coupled with the growth in demand, has opened many doors for the countrys insurance industry. Both the life and general insurance sectors in India, which were nationalized in the 1950s and 1960s, respectively, were liberalized in 2000. Since then, the Indian insurance sector has seen rapid growth. The total premium of the insurance industry has grown at a CAGR of 28.1% during FY03-07. In terms of total premiums, the Indian insurance sector is ranked as the fifth-largest insurance market in Asia as of FY07. Post reforms, the number of players have increased from four in life insurance and eight in general insurance in 2000 to 21 and 20 (including one reinsurer), respectively, in 2008. The life insurance sector grew at an impressive CAGR of 29.3% during FY0307. This growth has been primarily due to rising awareness of insurance, increasing life expectancy rates, changing demographics, greater product innovation, etc. A large number of private sector players have entered this market as customers and demand highly customized products and prompt service. The percentage share of the private sector is expected to increase each year. The growing life insurance market emphasizes the shift from the current solvency regime of 150% to risk-based capital. Every company is expected to provide the quality of underwriting it can quantify for itself in view of its risk-taking ability. The stress is on valuing assets as well as liabilities. Companies are moving towards making arrangements to implement Solvency II norms, but this
is expected to become mandatory not before 2012. During FY03-07, the general insurance sector grew at a CAGR of 21.3%. Auto and health insurance are the two most promising sectors and are expected to garner a large share of the total premium in the future. A stringent regulatory environment, with a rigid tariff regime, has been responsible for a relatively slower growth in the general insurance sector. As on date, all segments, except motor third party, has been detariffed. The growth in premiums in the general insurance industry has slowed down post detariffication and pricing deregulation, which started in FY07. This is likely to affect the customer service offered by insurance companies, the underwriting charged, the criteria for fixing the premium, etc. Detariffication requires the generation of customer awareness for institutional and retail customers. Health insurance is considered the next big opportunity for the insurance sector. In FY06, it covered only 1% of the population of the country and accounted for 1.2% of the total healthcare expenditure (3.5% in FY07). Although the premium on health insurance products has increased from INR6.7 billion in FY02 to INR40 billion in FY07, there is still a huge untapped market. The growth in healthcare has been supported by standalone health insurance companies, such as Star Health and Allied Insurance and Apollo DKV Insurance, as well as new players entering the healthcare market with improved healthcare infrastructure. Several companies are also tying up with Health Maintenance Organizations (HMOs), NGOs and communities to increase their reach to rural markets. The Insurance Regulatory and Development Authority (IRDA) has recommended to the government
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that it should bring down the capital requirements for standalone health insurance companies to INR500 million from INR1,000 million to encourage the entry of more health insurance companies into the market. Since more than two-thirds of Indias population lives in rural areas, microinsurance is seen as the most suitable aid to reach the poor and socially disadvantaged sections of society. In FY08, of the total insurance premium of INR1,000 billion, only INR1.25 billion came from microinsurance. To increase its reach, emphasis is being laid on better product design, reduction of distribution costs, improved premium payment mechanism and relationship building. By providing regulatory incentives, IRDA is also encouraging companies to add micro-insurance products in their portfolio. Among other microinsurance products, micro health insurance, agriculture insurance and livestock
insurance are the products that are in most demand. Reforms have helped to achieve rapid growth in critical areas and sustain them over a period of time through channelized strategies. The government is emphasizing on some areas such as product development, distribution and asset management, among others. The regulator has played a key role in the development of the insurance market in India in the last eight years by providing a conducive and supportive regulatory environment. The Indian insurance market is at par with some such markets in the developed markets in the world. Since the Indian insurance market is still at its growth stage, there are a number of measures that need to be taken by the regulator. The role of the regulator has and will remain the key to the growth of the industry.
Table of contents
Section 1............................................................................................................. 6 Present state of the industry.................................................................................. 6 America ............................................................................................................... 7 Europe ................................................................................................................. 8 The Asia-Pacific region .......................................................................................... 9 India .................................................................................................................. 10 Current state of the life insurance sector............................................................ 14 Products offered ................................................................................................. 14 Premium growth ................................................................................................. 15 Recent developments .......................................................................................... 18 Current state of general insurance ..................................................................... 19 Products offered ................................................................................................. 19 Premium growth ................................................................................................. 20 Recent developments .......................................................................................... 21 Health insurance: concept and current state ...................................................... 23 Various health insurance products available in India .............................................. 23 Recent developments .......................................................................................... 24 Microinsurance: concept and current state ......................................................... 26 Supply and demand side developments ................................................................ 26 Regulations by IRDA on microinsurance................................................................ 29 Recent developments .......................................................................................... 30 Key trends and issues ........................................................................................ 31 Penetrating the insurance market through new distribution channels ..................... 31 Pressing need to raise FDI in insurance from 26% to 49% ....................................... 34 Break-even for insurers expected to slip further .................................................... 34 Money laundering: a matter of concern for the regulator ....................................... 36 Section 2........................................................................................................... 38 Life insurance sector: risk-based capital ............................................................. 38 Solvency norms: a global perspective ................................................................... 38 Solvency norms in India....................................................................................... 40 General insurance: gradual detariffication .......................................................... 42 Phases of detariffication...................................................................................... 42 Impact of detariffication ...................................................................................... 43 The road ahead................................................................................................... 46 Health insurance: holds huge potential ............................................................... 48 Key challenges in health insurance ....................................................................... 48 Recommendations for future direction ................................................................. 51 Opportunities ..................................................................................................... 53 Microinsurance: deepening the markets ............................................................. 55 Popular microinsurance products ....................................................................... 55 Difficulties in providing microinsurance............................................................... 57 Recommendations for future development ......................................................... 58 Section 3........................................................................................................... 60 Regulatory framework and need for a conducive environment ............................ 60
Section 1
Insurance awareness has led people to save in policyholders and pensioners funds in financial markets, which thereby not only protect them, but also lead to overall development of the country. Countries with a robust insurance sector, higher capital base and more diverse products deem to have generated longterm funds for investment in their debt and capital markets. Further, it has been observed that these countries have also released resources for investment, particularly for the infrastructure sector. With a relatively young and welleducated population of 1.1billion people, the insurance market in India appears more than favorable and can generate sufficient long-term funds for the development. The domestic insurance industry has been growing at a CAGR of 28.1% during FY03-07 with the entry of many new players both domestic and foreign, formulation of new regulations and the introduction of newer products. The emergence of segments such as health insurance and micro insurance has opened new growth avenues for specialized services. But still there are gaps such as concerns over product, distribution and penetration (Indias penetration was only 0.6% of GDP in FY07, as compared to 2.7% in Australia and 3.8% in South Korea during the same period), which need to be addressed. Hence, there is an unfinished agenda on the reforms and industry compliance front, particularly in terms of exploring alternative ways to manage and oversee both risk and capital management issues in the insurance industry in India. Accordingly, in order to achieve exponential growth in various segments of insurance, the need to view the present state and future course of action has becomes imperative. This will play a crucial role in setting the right expectations, learning from the experience of other countries as well as delineating strategies, thereby
6 Indian insurance industry: The task ahead
positioning India as a regional insurance hub and an international financial center.
Present state of the industry Global overview The global insurance industry is facing increasing competition, which has put significant pressure on companies to become more efficient, enhance their technology-related processes and alter their business models. Globally, most insurance companies are trying to enhance the efficiency of their underwriting process, cut their overheads and reduce claims leakage since returns from investment are shrinking. Net operating gains in the insurance sector are expected to increase globally in 2008. With high competition in the insurance industry, companies will need to strengthen their product lines, investment strategies and corporate infrastructure. The following have been identified as challenges that may affect the global insurance industry in 2008. 1. Climate change: Climatic changes due to global warming have increased windstorms, floods and heat waves. These result in an increase in mortality and health problems, the spread of environment-related litigation and political risk linked to conflicts for control of resources. Climate changes can affect an insurance companys pricing structure, solvency and corporate viability. Demographic change: The proportion of the population over the age of 60 years is expected to rise from 20% in 2005 to 33% in 2050 worldwide, increasing the demand for financial products to meet post-retirement needs. Moreover, estimates suggest that around 10,000 people will become eligible for social security
2.
benefits every day over the next two decades, with 70 million baby boomers crossing the retirement threshold over the next 10 years. Hence, insurance companies are stepping in as social welfare providers. 3. Emerging markets: Most companies grow organically to meet their strategic objective of being global players, but insurers face a challenge in developing cultural knowledge (for product design and sales) and effective distribution channels. Russia, China and India are among the countries where local insurers have been more successful than in other countries. Regulatory intervention: The shift from rule-based to principal-based regulations has increased regulatory scrutiny, the complexity of rules and sophisticated underlying methods of insurance business. Regulatory changes include the International Financial Reporting Standard, Sarbanes-Oxley, the proposed adoption of Solvency II norms in the UK, principal-based reserves in the US, among others. These regulations are driven by political factors and can result in a change in underwriting practices and the selection criteria. Distribution channels: Technological advancements are edging out traditional agentbased distribution models. Today, insurance companies are reaching their clients directly, either through phone or via the internet. However, insurance brokers and intermediaries are still preferred channels for selling commercial lines and complex products. Therefore, insurance companies need to look for innovative distribution channels.
6.
Legal risks: Significant and unexpected changes in the legal environment can result in serious implications for the insurance business. These changes can be either through government legislations or case law decisions.
To remain competitive, insurance companies are concentrating on upgrading their products, developing new ways to manage and oversee risk and capital management, and formulate new regulations that may revolutionize the industry in the next decade. The following section illustrates the insurance scenario of the three most important geographic regions of the world.
4.
America The insurance market in the US is currently in its best phase, since US property/casualty insurers are expected to record net profits for the third consecutive year. The industrys profitability is related to a favorable insurance pricing environment that began in 2002. A favorable claims experience and comparatively benign catastrophe situations have considerably improved accident and healthcare operational earnings. Operating earnings also benefited from the improved mortality experience in the traditional life and reinsurance lines. However, sales of fixed income annuities have been affected by difficult market conditions associated with uncertainty over the regulatory environment. New business margins for some insurers fell, partly due to the effect of rising interest yields, which resulted in a higher discounting of future profits. However, insurers with innovative product offerings within variable annuities have showed a stronger performance.
5.
Some challenges Insurance companies face increasing complexity in the highly regulated and reporting environment of the US. Lawsuits, regulations and quasi-regulatory issues are still a concern for insurers/distributors as they increase uncertainty in the industry. Some key regulatory issues include international supervision, US regulation of primary insurers, the implementation of Sarbanes-Oxley processes, and the extension of the Terrorism Risk Insurance Act (TRIA).
Most insurers now sell their
products via unaffiliated distributors, including banks, broker/dealers, insurance brokers and independent marketing organizations. To maintain their market position and sales without resorting to aggressive pricing, life insurers need to manage distribution relationships and compensation incentives. Hence, product distribution continues to remain a challenge.
Lastly, the biggest challenges
Fiscal and regulatory changes in some Central European countries have created difficult conditions for insurers. In Germany, investment bond volumes have been affected by the flattening yield curve. In Belgium, sales were generally lower after the introduction of a 1.1% insurance tax levy on life insurance premiums at the beginning of 2006. In Spain, there has been an overall decline in the sale of savings products, which were adversely affected by the tax changes announced for 2007. The Netherlands has also been affected by competitive pricing and regulatory and fiscal changes. For example, new legislation adversely affected the sickness benefits market. Interest rate changes, however, had a positive impact on guarantee provisions and related hedges, which helped to increase the operating earnings of several insurers in this area. The Eastern European region has proved to be more promising. There has been significant growth in pensions in Eastern Europe, partly due to continuing regulatory reforms in several countries, including Poland, the Czech Republic and Hungary. A change to the tax regime in Hungary in 2006 led to a fall in the sales of the top insurers in the region. Several of the top insurers have continued to build the size of their businesses within the CEE region during 2006, reflecting growth expectations. Big insurance players in the UK are strongly capitalized and are under pressure from investors to deliver further growth. As the existing markets are generally mature, companies have become more willing to explore acquisitions, particularly in the emerging high-growth European and Asian markets. Overall, further consolidation seems likely, especially on a cross-border basis, as the industry still has the scope for global consolidation.
currently facing the insurance industry are in the health coverage sector, where increasing costs and a rapidly aging US population make it extremely difficult for insurers to forecast future costs and appropriately price their products. Europe This region encompasses relatively mature insurance markets, including Germany and the UK, as well as the emerging markets of the Central Eastern European (CEE) region. Many of the top insurers have seen a strong performance in the UK market in the life and pension sectors, which are expected to continue as high-growth markets. The rise in the equity markets has also increased the sale of bonds and investments.
Super specialization is the hallmark of the US and UK markets. There are insurers and re-insurers who specialize in a particular product and are regarded as the best in their respective segments. A recent initiative has been to offer incentives to customers for demonstrating a healthy lifestyle. The first of its kind in the UK, Prudentials private medical insurer, PruHealth, has tied up with Sainsburys to offer rewards to people for buying healthy food products. Under this scheme, a policyholder can collect what are known as vitality points for buying fresh fruit and vegetables, which will be used at the end of the year to offset his/her future premiums. An interesting innovation in the field of motor insurance has been in the form of telematics motor policies. For instance, Norwich Union launched a Pay As You Drive (PAYD) scheme in November 2006, under which premiums are calculated, based on how, when and where the car is used. This is done through GPS technology and a telematics box fitted into the policyholders car.
players such as AIG, Allianz and ING, among others. This is particularly so in India, where LICs market share reduced by 13% in three years from 95.3% in FY04 to 81.9% in FY07. Japan has the largest insurance market in the Asia-Pacific region. However, it is slowly losing its competitiveness to Asias two fastest growing markets China and India. With the speed at which China is liberalizing, it remains the most preferred investment destination in this region. The insurance markets in Southeast Asia, as those in Singapore and Thailand, have great potential to be among Asias insurance powerhouses. According to Swiss Re, the agricultural insurance sector in Asia is at a very nascent stage with a very low penetration rate. However, growing government participation and the level of commitment shown by private insurers is spurring the development of this sector. Due to a rise in shipping activities, marine insurance in Asia is gaining momentum. Singapore, Hong Kong and Taiwan are currently the main marine insurance markets in Asia, with China in the race as well. For the purpose of distribution, the use of insurance brokers is becoming more prevalent in Asia due to the lower costs involved. With the increase in the number of insurance companies and the rising demand for insurance products, more insurance brokers are expected to enter this market. Indian general and life insurance premiums have been very low as compared to other developing countries, including China and Taiwan. In addition, the insurance penetration rate is low in India, primarily due to low premiums and higher GDP. Per capita insurance premiums are also low, mainly due to a large population. The following table shows insurance premiums in various countries in 2007.
The Asia-Pacific region Rapid economic expansion and the rising affluence of the middle classes in most countries in the Asia-Pacific region have driven the development of this regions insurance industry. The relaxation of regulatory controls in Asia has led insurers worldwide to increase their reach into Asian countries that were once considered impenetrable to outsiders. Continuing liberalization has made the Asia-Pacific region more attractive as an investment destination. Many Asian countries have removed, or are in the process of removing, the limits on foreign equity participation in the insurance sector. The domestic insurers in the region are facing increasing competition from global
Table 1: Insurance premiums in various countries in 2007

General insurance premiums in 2007 Country Premiums, (USD million) 34,016 198 31,677 6,717 2,513 3,515 500 920 3,661 36,388 279 9,348 3,121 563 Penetration, (% of GDP) 2.7 0.3 1 0.6 0.6 2 0.4 0.7 2.5 3.8 0.9 2.5 1.3 0.8 Density, (USD per capita) 1,167 1.4 23.8 6 11 134 3.2 10.7 826.4 755.9 13.8 406.4 47.8 6.5 Life insurance premiums in 2007 Premiums, (USD million) 34,060 350 54,568 33,366 3,821 5,541 404 1,204 16,784 56,878 186 44,317 5,494 726 Penetration, (% of GDP) 3.9 0.5 1.7 4.1 0.9 3.1 0.3 0.9 11.3 5.9 0.6 11.7 2.3 1 Density, (USD per capita) 1,655 2.5 41 29.7 16.8 211.2 2.6 14 3,788.7 1,181.5 9.2 1,926.8 84.2 8.4
Australia Bangladesh China India Indonesia Malaysia Pakistan Philippines Singapore South Korea Sri Lanka Taiwan Thailand Vietnam
Source: Business Monitor International
India Indias insurance industry recently underwent major structural changes. Both the life and general insurance sectors, which were nationalized in the 1950s and 1960s, respectively, saw an across-the-board liberalization process in 2000. Since then, the Indian insurance sector has enjoyed rapid growth. In terms of total premiums, the Indian insurance sector is the fifth-largest insurance market in Asia as of FY07. The life insurance sector is slated to grow at 30% in FY08, as compared to 95% in the last fiscal. The total income from life premiums is expected to exceed INR 2,000 billion (USD 50 billion) by the end of FY08, as against INR 1,500 billion (USD 40 billion) in the previous fiscal. The general insurance segment, on the other hand, is expected to grow at 15% to INR 290 billion by the end of FY08 from INR 256 billion during the corresponding period last year.
The current foreign shareholding limit in India is fixed at 26% in the life and general insurance sectors. There have been negotiations to increase this limit to 49%, as foreign partners want to be more proactive in running their businesses using differentiated strategies. Indian regulators will however take some time to take a decision on increasing the FDI limit as this will reduce the stake of local promoters. The Government introduced reforms in the insurance sector in 1990s, primarily to encourage more domestic investments to increase insurance coverage and create an efficient and competitive insurance industry. The Governments monopoly came to an end in 1991 when restrictions on the entry of private and foreign companies were lifted. The following table summarizes some of the significant milestones in the introduction of insurance reforms in India.
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Table 2: Milestones in insurance reforms in India Framing of a code of conduct by the General Insurance Council to ensure fair conduct and ethical business practices
1957
1991
Beginning of economic liberalization Malhotra Committee set up to complement the reforms initiated in the financial sector Detarrification of aviation, liability, personal accidents and health and Marine cargo products Insurance Regulatory and Development Authority (IRDA) bill passed in Parliament IRDA incorporated as the statutory body to regulate and register private sector insurance companies.
1993
1994
1999
2000
General Insurance Corporation (GIC) and its four subsidiaries, i.e., National Insurance Company Ltd, Oriental Insurance Company Ltd, New India Assurance Company Ltd and United India Assurance Company Ltd made Indias national reinsurer
2005
De-tarrification of marine hull
2007
Detarrification of all general insurance products except of the auto third-party liability segment
The effect of insurance reforms has been positive on the insurance industry. There has been positive growth in all the segments, with investments flowing in the right direction. Reforms have helped to achieve rapid growth in critical areas and sustain them over a period of time through channelized strategies.
Post reforms, the number of players have increased from four in life insurance and eight in general insurance in 2000 to 21 life players and 20 general insurance players, including one reinsurer, in 2008. The bifurcation of players across industry segments over the years is provided below:
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Table 3: Growth in the number of insurers during 2000-2008

2000 Life insurers Public Private General insurers Public* Private** Reinsurer 4 3 1 4 6 1 5 8 1 6 8 1 6 8 1 6 8 1 6 9 1 6 10 1 6 13 1 1 3 1 10 1 12 1 12 1 13 1 13 1 15 1 15 1 20 2001 2002 2003 2004 2005 2006 2007 2008
Source: ICICI Securities December 2007, IRDA * Includes two monoline insurers, Agriculture Insurance Corporation and Export Credit Guarantee Corporation ** Includes monoline insurers, Star Health and Allied Insurance and Apollo DKV
The strong growth in recent years has increased penetration levels substantially, but India is still scarcely penetrated as compared to other economies and global standards. The premium income in the country as a percentage of its GDP increased from 3.3% in FY03 to 4.7% in FY07. This remarkable increase has been a result of the growing contribution of the life insurance sector as compared to the general insurance sector. The contribution of life insurance premiums to the GDP has increased from 2.7% to 4.1% during the same period. However, the contribution of the general insurance
sector has remained almost constant. The growth of the insurance sector in the last five years has made it one of the promising sectors in the economy. The following graph depicts premium income as a percentage of GDP (life and general): On observing the premium per capita of life and general insurance, and the total premiums, it is clear that with the growth of the population at a CAGR of 1.4% during FY0307, premiums per capita have also increased substantially.
Figure 1: Insurance premiums as a % of GDP (life and general)

6.0 5.0 In percentage 4.0 3.0 2.0 1.0 0.0 0.6 FY03 0.7 FY04 2.7 3 0.7 FY05 0.8 FY06 0.7 FY07 3.3 3.7 3.5 4.8 4.2 4.1 4.7 4.1
Non-life insurance premium contribution as a % of GDP Life insurance premium contribution as a % of GDP Total insurance premium contribution as a % of GDP Source: IRDA, CMIE
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The graph below depicts premium per capita (total, life and general):
Figure 2: Premium income per capita (total, life and general) 3,500 3,000 2,500 INR 2,000 1,500 1,000 500 0 638 528 110 FY03 952 776 628 148 FY04 785 167 FY05 1,004 1,479 1,197 1,716
194 FY06
237 FY07
Non-Life Insurance premium per capita Life Insurance premium per capita Total Insurance premium per capita Source: IRDA, CMIE
Growing consumer class, rising insurance awareness, and increased investments and infrastructure spending have built a strong platform for premium expansion in India. The total premium in the insurance industry has grown at a CAGR of 28.1% during FY03-07. The life insurance sector grew at a CAGR of 29.3%, as compared to the general insurance sector, which grew at a CAGR of 21.3%. The impressive growth in the life insurance sector has been primarily due to greater product innovation, e.g., unit-linked insurance policies. A stringent regulatory environment, along with a rigid tariff regime, contributed to a relatively slow growth in the general insurance sector. The graph
below depicts the total premiums in the insurance industry (life and general): The opening up of the insurance sector for private participation/global players during the 1990s has generated stiff competition among the players, with each player offering better quality products. This offers consumers the choice to buy a product that best fits his or her requirements. However, customers are not well aware of how to choose a suitable product to match their requirements. This is especially true of the life insurance sector. The Indian insurance industry needs to promote financial literacy and look to the educational needs of its consumers, to help society eliminate economic/financial illiteracy and enhance the well-being of Indian citizens.
Figure 3: Total premiums of the insurance industry (life and general) 2,000 INR billion 1,500 1,000 500 0 FY03 FY04 FY05 Life Insurance FY06 Total FY07 672.9 818.8 1,004.3 1,263.1 1,810.4
Non-Life Insurance Source: IRDA
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Current state of the life insurance sector

The life insurance industry has witnessed a phenomenal increase in demand over the last few years. The main reason for this change is the growing awareness about the importance of life insurance, increasing life expectancy rates, changing demographics, etc. a large number of private sector players have entered this market as customers now demand highly customized products and prompt service. The life insurance industry in India was nationalized under the Life Insurance Corporation Act of 1956. Until 1999, when the Insurance Regulatory and Development Authority Act was passed, LIC was the only life insurance provider. Since liberalization, a total of 20 life companies have been formed, with the majority of them being joint ventures with foreign companies. insurance companies, especially the new private sector ones, ULIPs account for approximately 90% of their total portfolio. ULIPs primarily cater to high income and/or investment-savvy clients. These products are generally more flexible but have a higher risk associated with them. Capital requirement is lower, as compared to other policies, because most of the investment risk is borne by the policyholders.
Pure risk cover products These products are the simplest form of insurance. They include term and term with return of premium variants. In the last few years, their popularity has increased as consumers purchase them with housing loans. However, their contribution to the sector as a whole is still small as people focus on savings and investment-type policies.
Products offered Life insurance products are offered either for individuals or groups.
Individual products
Participating products In participating policies, insurers are required to share any surplus generated with the policyholders. This includes Money Back, Endowment, Whole Life variants, etc. These policies are the most dominant product range in the middle income segment as they are a source of savings for customers, give assured returns, and cater to non-investmentsavvy consumers. However, these products are pooled investments and are often not adequately transparent with consumers. Unit-linked (ULIP) These policies are becoming increasingly popular as they provide a combination of contingency coverage and marketlinked investment returns. For most
Riders These are extra coverage policies that policyholders purchase to supplement their principal policies. They include accidental death and dismemberment, health and illness, pure term, and waiver of premium variants. Due to high costs and lack of trained agents, riders are not very common in India. However, these products are highly profitable.
Group products
Group protection These are yearly group term contracts, single premium, deposit-linked, loan/ mortgage cover variants. Group products are primarily sold to employer-employee groups. In most cases, affinity group segments buy them. These products are highly price-sensitive and have a long gestation period for sales.
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Group funds These include super-annuation, gratuity funds, leave encashment variants, etc. These products are also highly pricesensitive and have a long gestation period for sales. As the investment track record and servicing standards of a company are the key to its sales, specialized sales teams are required for such funds. These products have low profitability and high capital requirements to maintain solvency.
child, women, health, retirement, whole life, endowment, etc. Due to its inadequate penetration (only 10% of the working population is covered), the pension sector has tremendous potential for insurance companies to be more innovative.
Innovative products The growth in the number of insurance companies has reiterated the need for companies to differentiate themselves to increase their market share. Product innovation is one of the best tools for companies to increase their presence in the market by offering products that suit their customers best. The most significant product innovation to take place in the life insurance segment is the launch of ULIPs, which have become extremely popular due to their insurance-cum-investment profile. Higher returns amid a sustained bull run in equity markets have also contributed to their popularity. Both traditional and unit-linked products are positioned for various customer segments such as
Premium growth From FY03 to FY07, premiums in the life insurance segment have increased at a CAGR of 29.3%. A growing consumer class, rising insurance awareness, increased investments and enlarged infrastructure spending have enabled the expansion of life premiums. The following graph depicts the gross premium of the life insurance sector and the growing share of private players.
Some of the key trends evident from Figure 4: The growth in the private sector has gained significant visibility in the life insurance segment over the years. The number of private sector companies offering life insurance products has increased from 3 in FY00 to 21 in FY08. Interestingly, there is only one public company in the insurance sector offering life
Figure 4: Gross premiums of the life insurance sector and its growth rate
1,800 1,600 1,400
INR billion
47.4
50 40
1,000 800 600 400 200 0 FY03 Private sector FY04 LIC 11.3 18.9
25.0
27.8
30 20 10 0
FY05 Growth rate
FY06
FY07
Source: IRDA
In percentage
1,200
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insurance products Life Insurance Corporation (LIC) of India. LIC has been losing market share to the private sector since the onset of sector liberalization. On comparing the total premiums of the private and public sectors, the contribution of the private sector has increased from 2% in FY03 to approximately 18% in FY07. The share of the public sector, which was 82% in FY07, is on a gradual decline.
When we look at the first year premium contribution by the private and public sectors, LIC still holds a monopoly. However, the share of premiums from private companies has increased from a mere 6% in FY03 to approximately 36% in FY08. LIC is losing market share to the private sector as private players are offering a larger variety of products. Additionally, these companies are pursuing aggressive marketing and distribution growth strategies, thereby increasing their consumer reach. Besides LIC, postal life insurance started in 1884 as a welfare
measure for the employees of the Posts & Telegraphs Department under the Government of India to the Secretary of State. Due to the popularity of its schemes, its benefits were extended to various departments across the Central Government as well as state governments. Currently, postal life insurance is open to all employees in the Central Government as well as state governments, nationalized banks, public sector undertakings, financial institutions, governmentaided educational institutions and local bodies such as municipalities and zila parisads. In 1995, the benefits of postal life insurance were also extended to the rural populace of the country under the banner of Rural Postal Life Insurance.
Private players are not only outgrowing LIC in terms of the number of policies sold, but are earning higher premiums per policy as well. The number of policies sold by life insurance companies increased at a CAGR of 14.9% from FY03 to FY08. The following graph depicts number of policies sold in life insurance sector over the years.
Figure 5: Number of policies sold in the life insurance sector (rst year premiums)
60 50 40 28.6 30 20 10 0 FY03 Private sector Source: IRDA FY04 LIC FY05 Total FY06 FY07 FY08 25.4 26.3 35.5 46.2 50.9
16
INR million
When comparing various players on the number of policies sold, LIC undoubtedly tops the rank. Among private players, Bajaj Allianz and ICICI Prudential are the frontrunners. There are some new players such as Sahara Life, Shriram life, Reliance Life, Future Generali and Bharti Axa Life.
The number of policies sold by LIC is the highest because it is the oldest player in the industry. However, on reviewing the first year premiums in FY07, the growth of LIC was recorded at 118%, as compared to SBI life and Met Life, which registered a growth of 210% and 141%, respectively. The following table shows the first year premiums collected by various players.
Table 4: First year premiums collected by life insurance players (INR million)
FY03 Bajaj Allianz ING Vysya AMP Sanmar Reliance Life SBI Life Tata AIG HDFC Standard ICICI Prudential Birla Sunlife Aviva Kotak Mahindra Max New York Met Life Sahara Life Shriram Life Bharti Axa Life Future Generali IDBI Fortis Life LIC
Source: IRDA
FY04 634 177 63 0 719 522 1,797 726 279 0 2,025 1,802 2,093 7,509 4,499 771 1,241 1,315 234 0 0 0 0 0 162,404
FY05 8,600 2,816 912 0 4,829 3,002 4,862 15,841 6,213 1,923 3,748 2,247 560 17 0 0 0 0 197,859
FY06 27,156 2,841 0 1,934 8,285 4,635 10,289 26,375 6,781 4,075 3,975 4,433 1,426 218 103 0 0 0 256,452
FY07 42,698 4,674 0 9,305 25,661 6,424 16,242 52,546 8,827 7,240 6,149 9,203 3,441 432 1,798 78 0 0 559,347
FY08 64,917 7,047 0 27,528 47,929 9,678 26,796 83,059 19,650 10,591 11,066 15,942 8,268 1,222 3,099 1,131 25 119 591,822
1,293 3,641 1,296 135 352 673 77 0 0 0 0 0 159,768
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Recent developments The life segment is a major attraction for private players as the growth rate continues to be impressive. The pace of growth in life insurance has raised the expectation levels for more activity in the form of joint ventures between multinational insurance companies and their Indian counterparts. IRDA has issued primary licenses to three new joint ventures in life insurance Aegon Religare, Canara Bank-HSBC-OBC and DLF Primerica. The entity formed through the joint venture between telecom service provider Bharti and AXA of France has also entered as a non-traditional player in the life insurance segment.
IRDA is also expecting more applications for licenses over the next one/two years due to the rising inclination of banks to delve into insurance offerings. The ventures between Andhra BankLegal, General-Bank of Baroda and Bank of India-Daichi-Union Bank of India are also likely to enter the insurance space in the near future. Innovative products, aggressive marketing and effective distribution have enabled fledgling private insurance companies to sign up Indian customers at a faster than expected pace. Indians, who had always seen life insurance as a tax-saving device, are now actively seeking new product options in the private sector.
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Current state of general insurance
Post liberalization, the general insurance sector has witnessed robust growth, largely attributable to the growing affluence of the Indian middle class and the expansion of Indian corporations.
Products offered Various products offered under the general insurance ambit are briefly introduced below:
Fire Fire insurance business in India is governed by the All India Fire Tariff, which lays down the terms of coverage, premium rates and conditions of the fire policy. Due to the fixed pricing policy, the insurance market in India over the last few years has had a low loss ratio of 45%. As of now, the fire insurance segment is dominated by four public sector companies, namely New India Assurance, National Insurance, United India Insurance and Oriental Insurance.
Automobile Auto insurance provides defense against loss due to theft or traffic accidents. In the last 45 years, the number of passenger cars has increased substantially. This trend is likely to continue due to strong growth in the auto segment resulting from an increase in consumer income levels. Auto insurance consists of two categories in India: third-party liability and auto own damage. Auto insurance has been a loss making business because of low pricing and very high-claim payouts. But recently, the prices have increased by 70150%, which would help to minimize losses. The auto own damage category, which accounted for 70% of the business in FY07, has been detariffed since January 2007.
Engineering Engineering insurance is one of the most profitable insurance segments. It helps to cover risks associated with construction, testing, machinery, plant and equipment. Other than the four public sector players, ICICI Lombard and Bajaj Allianz are the two private players who have made good progress in this segment.
Health As the health insurance sector is becoming unprofitable for public sector units due to low premium structures, new private players are considering it as the next target segment. Health insurance is expected to become the second-largest general insurance class of business with a contribution of 26% in the total premium income by FY10. This increase is likely to be due to ageing population, technological advancement in medical sciences and rising demand for better healthcare.
Marine The two components of marine insurance, hull and cargo coverage, accounted equally in the overall marine business in FY07. The cargo business underwent pricing deregulation in 1994, whereas the hull segment got deregulated in April 2005. The public sector companies hold a clear monopoly in this sector, as not many private players have taken interest in marine insurance.
Others This includes liability and aviation insurance, which together accounted for 6% of the total premiums in FY07. These two segments experienced slow growth rates of 17% and 2%, respectively, against the sectors aggregate growth rate of 22% in FY07. With the growing services sector, the demand for liability insurance is expected to increase.
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Innovative products Introduced in the 1980s, the mediclaim policy is one of the sectors most noteworthy products. Over the years, the product has undergone a lot of modifications and still remains among the most popular products in the general insurance space. Over the years, GIC introduced a wide array of products even in non-traditional segments. Apart from mediclaim insurance, products such as overseas mediclaim insurance, terrorism cover and several rural insurance packages such as Janata Personal accident insurance, insurance for plantations, cattle, pump sets are a few of the more popular ones. Innovations also happened for corporate customers in the form of customerspecific special contingency policies. The entry of new players has improved service levels considerably in the sector. However, it has still not made a significant impact in terms of new product development.
at a CAGR of 19.5% over the period of four years between FY03 and FY08. The growth in the premiums slowed down post detarrification and pricing deregulation. However, it is expected to resume in the next 34 years, as prices stabilize, distribution processes improve and the cross-selling of products increases. This relaxation would also make it difficult for policymakers to compare various products giving insurers more pricing power. Figure 6 shows gross premiums between FY03 and FY08.
Premium growth The gross premium underwritten from the general insurance sector increased
Some of the key trends emerging from the above graph A very interesting trend is visible in the gross premiums from the general insurance sector over the last few years. The percentage share of the private sector continues to increase each year. In the last five years, their share has increased nearly four times. Private sector companies are closing the market share gap and emerging as serious competitors to public sector insurers. These private sector insurers attract higher-caliber employees because
Figure 6: Gross premiums of general insurance sector

300 250 200 INR billion 150 100 9.0 50 0 FY03 Private Source: IRDA FY04 Public FY05 FY06 Private sector share FY07 FY08 14.0 20.0 27.0 35.0 40.0 45 40 35 In percentage 30 25 20 15 10 5 0
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they can offer them higher salaries. As a result, private sector players have been quietly turning away business derived from compulsory auto third-party liability, which public sector players are unable to do. Hence, private companies have gained significant market share by increasing their focus on the more profitable fire, engineering and, lately, health businesses. In addition, post liberalization, the local industrial and financial enterprises have collaborated with multinational insurance companies to foray into the general insurance sector. With the government permitting 26% as FDI investment, the share of private companies is likely to increase.
Out of the total general insurance premiums in FY07, automobile insurance accounted for 59%, (auto third party of 10% and auto own damage of 19%). Health and personal accidents contributed approximately 13% to the total general insurance premiums. These two sectors are highly promising, and are expected to increase their share manifold in the coming years. The graph below depicts general insurance premium income composition for FY07.
The premiums in the general insurance sector have increased at a CAGR of 19.5% from FY03 to FY08. The nine private players in the general insurance sector (except HDFC-Chubb, which had negative growth due to a disagreement with its foreign partners) have shown consistent growth in the premiums. Out of all the players, ICICI Lombard has witnessed aggressive growth primarily by making the retail segment its target focus segment. Also, another player Future Generali has just entered the market. As this sector has immense growth potential, more players, including monoline players (a company specializing in a single type of financial business such as credit cards, home mortgages, or a sole class of insurance), are likely to emerge in the near future. The table below collates the premiums collected by various players in the general insurance segment.
Recent developments The general insurance industry has witnessed the entry of many nontraditional players. IRDA is set to issue a license to the Rajan Raheja
Figure 7: General insurance premium income composition FY07

All others, 7% Personal accidents, 2% Health, 11% Fire, 9% Marine, 4% Marine cargo, 2% Marine hull, 2% Engineering, 3%
Auto TP, 10% Auto, 29% Auto OD, 19% Source: Genera Insurance Council
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Table 5: Premium collected by various players (INR million)

FY03 Royal Sundaram Tata-AIG Reliance General IFFCO-Tokio ICICI-lombard Bajaj Allianz HDFC ERGO General Cholamandalam Future Generali New India National United India Oriental Grand Total Special Institution ECGC Star Health & Allied Insurance Apollo DKV AIC
Source: IRDA
FY04 2,580 3,530 1,610 2,960 5,070 4,760 1,120 970 NA 40,460 34,170 30,380 28,320 155,930
FY05 3,310 4,690 1,620 5,070 8,850 8,530 1,780 1,700 NA 42,070 38,250 29,520 30,380 175,770
FY06 4,594 6,124 1,623 8,961 15,920 12,846 2,058 2,222 NA 47,915 35,237 31,548 35,271 204,318
FY07 6,000 7,416 9,122 11,503 30,035 18,046 1,902 3,146 NA 50,242 38,109 35,100 39,405 250,025
FY08 6,952 8,134 19,464 12,358 33,447 24,043 2,166 5,637 106 52,741 40,308 37,389 38,556 281,307
1,520 1,850 1,660 1,730 1,740 2,350 40 60 NA 32,170 23,680 24,940 23,730 115,470
2,440 NA NA NA
445,120 NA NA NA
5,180 NA NA NA
5,780 NA NA NA
6,180 225 NA 5,647
6,694 1,730 30 8,287
Group (RRG) for setting up a general insurance joint venture with Australias QBE Insurance Group.
Public sector companies have a clear monopoly in marine insurance. Personal/retail lines are expected to pick up momentum as a result of increasing income levels and changing life styles. High economic activity is expected to lead to higher growth in commercial lines of business. Increasing distribution channels for insurance products. Increasing focus on IT services in areas of policy management, claims settlement and CRM to control costs and improved speed to market.
Players in the private and public sector largely offer similar products in the general insurance segment. In terms of service differentiation, private players outscore their pubic sector counterparts. This change is likely to be witnessed gradually post detariffication. SBI is slated to enter the general insurance industry through a joint venture with the Insurance Australia Group (IAG). SBIs entry into general insurance is expected to increase competition among existing players. Private players are seen shying away from Motor TP due to low pricing and very high claim payouts.
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Health insurance: concept and current state

Health insurance is a form of insurance that pays for medical expenses. It includes insurance covering disability or long-term nursing or custodial care needs. Before the development of medical expense insurance, patients were expected to pay all other healthcare costs, under what is known as the feefor-service business model. During the middle-to-late 20th century, traditional disability insurance evolved into modern health insurance programs. Today, most comprehensive private health insurance programs cover the cost of routine, preventive and emergency health care procedures, as well as the prescription of drugs to a considerable extent. Various health insurance products available in India The existing health insurance schemes available in India can be broadly categorized as:
awareness coupled with an increase in health hazards and diseases has pushed the demand for healthcare products. The premium on health insurance products has grown from INR6.7 billion in FY02 to INR40 billion in FY07. This is expected to increase to INR300 billion by FY15. In the last 20 years, healthcare consumption increased at 8%, as compared to the overall consumption growth of only 4.7%. With the rise in Indian incomes, the consumption of various products and services is expected to increase; however the proportion of their consumption is likely to vary. Five product categories, namely food, transportation, housing and utilities, healthcare and personal products/ services, are expected to account for more than 80% of the total cumulative spending in the next 20 years. The urban sector is expected to witness higher growth as they have higher disposable incomes. However, rural India is also likely to come up the growth curve with the onset of microfinance and pension funds.
Voluntary health insurance schemes or private-for-profit schemes Mandatory health insurance schemes or government-run schemes (namely ESIS, CGHS) Insurance offered by NGOs/ community-based health insurance Employer-based schemes
Health insurance may be provided through a government-sponsored social insurance program, or from private insurance companies. It may be purchased by individual customers as well as on a group basis, e.g., by a firm to cover its employees. In each case, the covered groups or individuals pay premiums or taxes to help protect themselves from high or unexpected healthcare expenses. In FY06, health insurance covered only 1% of the population of the country and accounted for 1.2% of the total healthcare expenditure (average of other Asian countries is 4%). Overall
Figure 8: Healthcare nancing scenario

Collective nance Private health insurance Community nancing National health systems Government hospitals and PHC
Social health insurance: SEWA etc.
Managed care: HMO Private practitioners Private hospitals Individual nance Private provisions
Designated private practitioner or preferred provider Private practitioners in government facility, user fees, co-payments Government provision
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The growth in healthcare will be supported by standalone health insurance companies and new players entering the healthcare market. Improved healthcare infrastructure across the country has motivated a larger section of population to avail better healthcare services through various healthcare insurance policies. Currently, there are two standalone health insurance companies in India Star Health and Allied Insurance and the recently launched Apollo DKV Insurance. Seeing the growing potential in the health insurance sector in India, a large number of international private insurance companies are setting their footprint in the country, despite a 26% FDI regulation. In addition, domestic life insurance players are augmenting their product portfolios with innovative standalone health insurance products to cater to the growing health insurance segment. The following graph depicts the market share of leading players in health insurance as of November 2007. Currently, state-owned health insurance companies constitute nearly 70% of the market while private companies account for the rest. However, private companies are growing fast and aim to occupy a larger share in the health insurance market in the near future.
Recent developments In FY08, British United Provident Association (BUPA), Britains largest private health insurer is set to enter India in the health insurance domain.
Max New York Life Insurance has forayed into the health insurance sector and has launched three distinct groups of health solutions. LIC plans to launch its first pure health product and hopes to take advantage of its existing agents to cross-sell this product. This plan combines a health insurance cover for the entire family husband, wife and children, hospital cash benefit and major surgical benefit along with a unit-linked insurance plan component. Future Generali Insurance Co. Ltd was granted a Certificate of Registration in 200708 and is in the process of commencing operations. Birla Sun Life Insurance Ltd is planning to launch a health policy in the second quarter of the current financial year. Aviva Life Insurance plans to enter the health insurance sector.
Figure 9: Market share of the top players as of November 2007

30 In percentage 25 20 15 10 5 0 Oriental New India National IFFCO-Tokio ICICI-lombard Bajaj Allianz United India Royal Sundaram Others 3 14 10 5 4 3 23 24 14
Source: IRDA
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ICICI Lombard General Insurance is planning to bring out off-theshelf health insurance products. The company also launched Health Advantage Plus, the first health insurance product for the outpatient department (OPD) in December 2007. The government is expected to raise budgetary support to INR 1,360 billion for the health sector during the Eleventh Five Year Plan (200712). The government has also announced plans for subsidized health insurance for the countrys poorest citizens in the unorganized sector. The Central Government has engaged civic institutions, NGOs and private sector players to reach out to the poor segment.
IRDA
expects two or three more players to enter the health sector in the next 34 years. The new business margin for health insurance is very good at 4050% (versus an average of 20% on traditional insurance products and ULIPs). Moreover, insurers are planning to offer health insurance as standalone policies.
Going forward, the formulation of adequate guidelines for health insurance can help boost the insurance industry as a whole. With health spends inflating faster than the headline inflation, there would be a greater need for health protection, which would largely benefit insurance companies.
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Microinsurance: concept and current state

Microinsurance refers to the protection of assets and lives against insurable risks of the target population. One of the key target areas for the regulators and the government is to bring financial inclusion for the poor, rural and socially disadvantaged sections of society. Rural households are highly vulnerable to various risks, including illness, accidental death and disability, loss of property due to theft or fire, agricultural losses and disasters of both natural and manmade varieties. This is where microinsurance plays a very important role as it protects those with low-incomes families against specific perils in exchange of regular payments proportionate to the likelihood and cost of risks involved. Therefore, making insurance services available to them becomes a key strategy to ensure that sustainable social protection is offered to these households. If the rural segment is brought into the insurance net, the volume of consumer demand is likely to be high, but the premium per policy for the supplier would be low. Hence, companies venturing into microinsurance should take this as a long-term corporate strategy. Requisite investments in terms of capital, structure, manpower and customer education can create a large future market that has the potential to pay back in sizable premium volumes. Players such as Aviva, Bharati Axa, Bajaj Allianz, ICICI Prudential, Kotak Life and Tata AIG are rushing to capture this new segment. Realizing the potential of the rural market, these companies are commissioning surveys on consumer needs, setting up business units and deploying dedicated teams to cater to the new requirements. In 200708, out of the total insurance premium of INR1,000 billion, only INR1.25 billion came from microinsurance. According to the United Nations Development Program, with Indias rural population of 800 million, the microinsurance sector has the potential to generate premium income of INR80 billion (or USD2 billion), split roughly 25:75 between the life and general insurance sectors. Supply and demand side developments Supply of microinsurance Recently, the International Labour Organization (ILO) (2004a) prepared a list of products of all insurance companies, public as well as private, for the disadvantaged groups in India. Some of the observations made on the basis of the list are presented below:
Out of 80 listed insurance products, 45 (55%) cover only a single risk. The other products, covering a package of risks, mostly focus on 2 (20%) or 3 (18%) risks. The available products cover a wide range of risks. However, a broad majority of insurance products cover life (40 products or 52%) or accident-related risks. The health coverage remains very limited (12 products). Most life insurance products (23 out of 42) are addressed to individuals. However, some products may be bought both by individuals and groups. Most life insurance products (55%) have been designed to cover an extended contract duration ranging from 3 to 20 years. Out of 42 life insurance products, 23 are pure risk products. The other 19 products propose various types of maturity benefits. Out of the 12 currently available health insurance products, 7 have been designed and are restricted to groups.
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Out of the total 12 health products, 7 products propose the reimbursement of hospitalization expenses while the other 5 have chosen to narrow down the coverage to some specific critical illnesses. Most of the health insurance products specifically exclude deliveries and other pregnancyrelated illnesses. Most of these products also mention HIV/AIDS among their exclusion clauses. Most products, whether life or nonlife, require a single payment of premium, i.e., a one-time payment upon subscription. Private insurance companies have three times more products than public companies. As per the IRDA statistics, public insurance companies still play a predominant role in the present coverage of the rural and social sectors. This is primarily a result of the number of years these incumbent public insurers have been operating in the market.
As regards the beneficiaries, the 43 schemes for which the information is available cover 5.2 million people. Most insurance schemes (66%) are linked with microfinance services provided by specialized institutions (17 schemes) or non-specialized organizations (17 schemes). Nearly 22% of the schemes are implemented by communitybased organizations, and 12% by healthcare providers. Life and health are the two most popular risks for which insurance is demanded: 59% of schemes provide life insurance and 57% of them provide health insurance. In SEWAs experience, health insurance tops the list of risks for which the poor need insurance. There are 25 out of 37 schemes that have received some external funds to initiate their schemes. In addition, there are 20 out of 32 schemes that have received external technical assistance in the form of advisory services, technical services, training or even referral services for their schemes. In a majority of the schemes, special staff has been recruited to manage insurance activities. The other schemes have been relying on their regular staff to undertake the additional responsibilities linked to managing these schemes. Most schemes (74%) operate in four states in South India: Andhra Pradesh (27%), Tamil Nadu (23%), Karnataka (17%) and Kerala (8%), while the two western states (Maharashtra 12% and Gujarat 6%) account for 18% of the schemes. Around 56% of these schemes deal with one single risk.
Demand for microinsurance On the demand side too, the ILO (2004b) has prepared an inventory of microinsurance schemes operational in India. Based on this list, some of the observations are made below:
The inventory lists 51 schemes that are operational in India. Most schemes are still at a very nascent stage, having begun their operations only during the last few years. Of the 39 schemes for which this information is available, around 24 schemes came up during the last 4 years, and about 7 schemes have been operating for more than a decade.
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Most schemes require single yearly premium at the time of subscription. Of the 43 schemes, 6 use a monthly payment for their contribution, while 2 others have linked the contributions to some other activities developed with their members such as disbursement of loan. Around 27 schemes 27 rely on voluntary contribution, while 10 schemes impose compulsory contributions, and 7 have adopted a mix of voluntary and compulsory contributions (based on the type of service provided).
of product manufacturing, sales, servicing and claims assessment. The insurers are wholly responsible for all insurance-related costs and losses, but they also retain all profits. Example: SEWA in India
Some microinsurance delivery models Partnerships between MFIs (or other intermediaries) and insurers: In the partneragent model, insurers and MFIs collaborate to capitalize on each others comparative advantages. Insurers utilize MFIs efficient delivery mechanism to provide sales and basic services to clients. MFIs benefit from being able to provide insurance to their clients with no risk and limited administrative burden. FINCA Uganda has entered such a partnership with the American International Group (AIG) to provide insurance to its clients. Example: FINCA Uganda partners with the American International Group
Health care service providers offer a health care financing package and absorb the insurance risk: Under the provider model, the service provider and the insurer are the same. Like the communitybased model, this model is also used mainly in health services, where hospitals or doctors offer policies to individuals or groups. Example: Gonoshatsasthya Kendra in Bangladesh Community-based programs where communities pool funds and manage a relationship with a health care provider: In the community-based insurance model, policyholders are themselves the owners and managers of the insurance program. This model is used mainly in health insurance. The members themselves design, develop, service and sell the products, as well as negotiate with external health care providers. Example: UMASIDA in Tanzania
Regulations by IRDA on microinsurance
Since 2002, IRDA has mandated that life insurers must provide coverage in rural areas by setting sales obligations.
Full service provision where regulated insurers provide specific products to the lowincome market: The full-service insurance model is similar to the model followed by formal sector insurers, where the provider is singly responsible for all aspects
IRDA has notified amendments to obligations of insurers to Rural or Social Sectors Regulations, 2002. The amendments also provide for the alignment of obligations with IRDA (Microinsurance) Regulations, 2005.
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Table 6: Rural sector requirements

Year Percentage of total policies in the rural sector 7% 9% 12% 14% 16% Number of lives insured in the social sector 5,000 7,000 10,000 15,000 20,000
loss on account of exemption to the products may not be huge, especially in comparison to the benefits derived by those targeted.
1st 2nd 3rd 4th 5th
Source : Indian Life Insurane, ENAM
As per the amendments, rural obligations for a life insurer after the sixth year stand at 18% of the total policies written in the seventh year, 19% in the eighth and ninth year and 20% in the tenth financial year. For general insurers, rural obligations stand at 5%, 6%, 7% and 7% for the seventh, eighth, ninth and tenth year, respectively. All insurers will have to cover 25,000 lives in below the poverty line families in the seventh year, and this increases to touch 55,000 lives in the tenth financial year.
IRDA is considering allowing multiple partnerships between life and general insurance firms to sell composite products and share distribution for microinsurance. Besides, IRDA will also consider allowing banks multiple partnerships with life and general insurance firms to sell their products. This initiative will help to increase the distribution network and strengthen the insurance outreach in the rural segment. Insurance agents, brokers or corporate agents are authorized to solicit and procure the insurance business, including the microinsurance business. However, it has been proposed under the provisions and regulations of the Insurance Act, 1938 to introduce the concepts of microinsurance product and microinsurance agent.
Highlights In 2005, IRDA introduced a policy further strengthening the previous one. This policy allows non-government organizations (NGOs) and self-help groups to act as insurance agents to distribute in rural areas as a means of lowering distribution costs.
Microinsurance products may get exemption from service tax. This proposal is under the consideration of the Ministry of Finance to reduce the cost of premiums. Since the targeted population is from the low-income group, the liability of 12% service tax is burdensome. Even if a company absorbs the burden of service tax along with the distribution costs, the premium becomes smaller. The revenue
The rural and social sector obligations and microinsurance regulations from IRDA are important steps in the direction of ensuring financial inclusion and social protection for the poor. While several insurance companies are operating in India and certain regulations are already in place, there is still a need for innovation in products and distribution channels for ensuring deeper penetration for microinsurance. Traditional insurance regulations were designed for institutions serving the middle-income and upper-income segments. Consequently, these regulations can restrict the provision of insurance to low-income markets. Regulatory improvements can result in more effective outreach and demand for microinsurance products.
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Recent developments
Life Insurance Corporation of India has targeted sales of 4 million microinsurance policies during 200809, as against sales of 0.8 million microinsurance policies in 2007-08. The national life-insurers microinsurance policy, Jeevan Madhur, was launched in 2006 and provides the option of a minimum premium payment of INR25 per week. SBI life has launched its new group microinsurance scheme Grameen Shakti as a pilot project in Orissa. It offers survival benefits to group members as well as protection to the families of group members. The premium for a five-year term is INR301 per annum and the sum assured is INR25,000. SBI plans to extend this scheme to other regions in the country as well.
Max New York Life Insurance has entered into a referral tie-up with the Confederation of NGOs for Rural India (CNRI) and has introduced a microfinance product called Max Vijay. The life insurance company is investing INR 4.50 billion in this initiative, which is open to people in the 1050 years age group. CNRI has over 6,000 non-government organizations as members.
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Key trends and issues
Penetrating the insurance market through new distribution channels The competitive landscape of the Indian insurance industry coupled with the introduction of new products has given way to an increasing customer base and the emergence of new distribution channels. Distribution accounts for the largest element in insurers costs and impacts their profitability. Besides, it also influences product design and directly impacts the market image of distributors. The insurance market in India has a good range of distribution channels, but direct sales agents dominate and account for a majority of all Indian life and general insurance premiums. Traditionally, captive agents wrote the bulk of an insurance companys business. Public sector insurance companies had their branches in almost all parts of the country and attracted local people to become their agents. These agents were from various segments in society and collectively covered the entire spectrum of society. But post liberalization, people have started buying insurance products from independent producers and institutional channels such as banks, broker-dealers and wire houses. The widening and strengthening of distribution channels has helped the insurance industry to become more competitive and healthy. Today, a lot of insurance policies are bought online. The development of information technology and the emergence of online and offline
insurance education and training has initiated a marked change in the range and quality of insurance services. Direct sales agents dominate various insurance distribution channels, as the case is in the rest of Asia. But the share of other low-cost channels such as bancassurance, brokers and direct distribution is likely to rise due to the removal of tariffs. The distribution channels in the insurance industry are discussed in the following sections: Agents Agents constitute an integral part of the distribution channels that reach out to corporate clients as they prefer to deal directly with insurers to obtain discounts.
About 7075% of the Indian general insurance premiums come through direct sales agents who are largely employed by public sector insurance companies. The life insurance industry has more than two million tied agents (in-house sales force), of which LIC accounts for about one million.
Since private sector players have entered the market at a relatively later stage, the number of agents in their network has been limited. As distribution through agents requires a long gestation period as well as investment, private players prefer to select other distribution options. The growing distribution network of private players has been illustrated below:
Table 7: Distribution network of private insurers

Number of agents FY05 ICICI Prudential Bajaj Allianz HDFC Standard Kotak Mahindra Reliance Life Birla Sun Life 57,000 47,000 23,671 9,000 7,664 9,468 FY06 72,000 85,000 33,000 12,523 20,231 17,986 FY07 234,000 170,000 74,000 20,000 106,000 50,000
Source: Indian Life Insurance market, Deutche Bank November 07 Indian insurance industry: The task ahead 31
Bancassurance The opening up of the insurance industry to private sector participation in December 1999 led to the initiation of bancassurance as a distribution network. Post liberalization, the industry witnessed the entry of 20 new players with 12 in the life insurance sector and 8 in the general insurance sector. Since bank branches have a physical presence, selling insurance products through branch personnel produces a higher degree of trust in the policyholder, as compared to that for an insurance agent whose credibility may not be as effective. Since October 2002, the opening up of new distribution channels has increased the role of banks in bancassurance. This increase was particularly witnessed in the retail segment where banks were acting as corporate agents. ICICI Lombard reported that bancassurance accounted for more than 60% of its retail sales in FY07. In the last five years, bancassurance has been the force behind the success of the private sector life insurance. The share of bancassurance as a distribution channel for the private sector has increased from 11% in FY04 to over 20% on FY07. The following table shows the growing number of branches of various banks: Though competition in the distribution of insurance products is intense, the
regulations of IRDA allow one bank to tie up only with one life insurance company and not the other way round. This regulation of one life insurer to one bank has allowed banks and insurers to build more lasting relationships. New life insurers find it more difficult to establish new bancassurance tie-ups as larger banks with a more prominent geographical footprint have already formed relationships with existing insurers. Hence, even though bancassurance costs are less than that in the allying agencies, its market share is unlikely to witness any further increase. Bancassurance has also seen a significant rise in other Asian markets. Although the concept of bancassurance looks simple enough, it is far from that in real life practice. Legislative differences, consumer behavior, impact of history and culture, product complexity, employee work culture and many other factors have contributed to significant differences in results across countries. For example, in France and Spain, 60% to 80% of the life insurance products in their respective markets are sold through bank branches, as compared to 10% in the UK and the US. Though competition in the distribution of insurance products is intense, the regulations of IRDA allow one bank to tie up only with one life insurance company and not the other way round. This regulation of one life insurer to one
Table 8: Banking distribution (number of branches)

2003 State Bank of India SBI affiliates Nationalized banks Private Sector banks Others Total Branches
Source: Indian Banks Association, RBI
2004 9,088 4,634 9,107 4,675 33,416 5,595 101 52,894
2005 9,185 4,736 33,937 6,128 77 54,063
2006 9,241 4,798 34,185 6,516 51 54,791
2007 9,390 4,806 36,927 NA NA NA
33,123 5,504 43 52,392
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bank has allowed banks and insurers to build more lasting relationships. New life insurers find it more difficult to establish new bancassurance tie-ups as larger banks with a more prominent geographical footprint have already formed relationships with existing insurers. Hence, even though bancassurance costs are less than that in the allying agencies, its market share is unlikely to witness any further increase. Bancassurance has also seen a significant rise in other Asian markets. Although the concept of bancassurance looks simple enough, it is far from that in real life practice. Legislative differences, consumer behavior, impact of history and culture, product complexity, employee work culture and many other factors have contributed to significant differences in results across countries. For example, in France and Spain, 60% to 80% of the life insurance products in their respective markets are sold through bank branches, as compared to 10% in the UK and the US.
Direct distribution Direct channels such as telephone and internet are yet to make a place for themselves in the market. Detariffication in general insurance is encouraging insurers to migrate to lower cost channels to enhance profitability. Brokers Brokers licenses were first issued in 2003. Given the short operational history, the industry is still at a nascent stage. As on 31 January 2008, there were 227 direct brokers, 33 composite brokers and 6 re-insurance brokers. Corporate agents This is an emerging distribution channel as many non-banking finance companies (NBFCs) or para-banking corporations have very large distribution networks that are well suited to sell insurance products. This distribution method is more suited for simple products with a small premium size. Tying up with local corporate agencies (e.g. NGOs) in remote areas helps insurers to lower their distribution costs. The following graph shows the share of corporate agents and brokers in the total distribution network:
Figure 10: Share of corporate agents and brokers in the total distribution network
12 10 8 In percentage 6 4 2 0 FY04 Corporate agency Brokers FY05 FY06 7.8 8.9 0.3 0.8 1.2
6.8
Source: Indian Life Insurance market, Deutche Bank - November 07
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In the coming years, contribution from corporate brokers is likely to increase as many corporate agents are now becoming brokers. Others: referrals and direct This is the most cost-effective mode of distribution. Channel distribution strategies such as referrals can be used only with experience and the insurance industry in India is still at a very nascent stage. Other direct channels, e.g., the internet have very limited penetration. The share of this distribution channel has decreased from about 22% in FY04 to approximately 14% in FY07 and is not likely to increase in the coming years. Pressing need to raise FDI in insurance from 26% to 49% There is a pressing demand for a more liberal regime for foreign direct investment (FDI) in the sector. The importance of FDI has been well delineated in India in different forums and at all levels over the last decade. The insurance industry is highly capital intensive since the gestation period is long. It requires capital infusion at regular intervals, especially in an insurance market with high growth potential, e.g., India. The establishment cost too is high on account of the vast geographic spread in India. Many local players in this industry do not have sufficient funds to make such huge investments in this business. Forming a joint venture (JV) with a foreign insurer seems another viable option for the local players to get easy access to capital. The foreign partner can participate either by itself or through its subsidiary companies or nominees. However, the ability of a foreign JV partner to infuse more capital is restricted by the 26% limit on the foreign investments in insurance. This is a big deterrent to growth in the industry. Smaller players find it even more difficult to expand as their businesses require more capital.
An increase in FDI could also result in consolidation in the industry as weaker players (looking for more capital to grow their business) would be potential targets for foreign insurers with investible capital. It would be a win-win situation for both. On one hand, the weak player would get access to the much required capital besides the technical know-how whereas on the other hand, the foreign player would get a strong foothold in a rapidly growing insurance market. The United Progressive Alliance (UPA) government has suggested increasing the FDI limit in insurance to 49%. However, the matter is still under discussion, which has perhaps become one of the most controversial economic reform measures. The government proposal to increase the FDI limit to 49% is a welcome move. Maturing progressively, the insurance sector in India appears to be one of the most sought-after sectors among foreign investors. Numerous opportunities are available in this sector for both domestic as well as international players. Insurers from many countries have shown keen interest in the insurance sector in India. Thus, to facilitate the growth in the insurance sector in India, FDI limit should be raised up to 49%. Break-even for insurers expected to slip further Rapid growth has pushed break-even a bit further for domestic insurance players. Globally, life insurance companies generally take 68 years to break-even. High set-up as well as customer acquisition costs in the initial years, coupled with conservative regulatory reserve requirements tend to prolong the time to break-even. From an Indian perspective, the industry is still nascent and fast expanding. The industry was thrown open for private participation in 2001, but it is expected that there would still be at least 12
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years before insurance companies start reporting profits. During FY07, barring SBI Life (reported marginal profits) and Bajaj Allianz (due to the proliferation of actuarial funded products, which were recently banned by IRDA), none of the other insurance players reported profits. The below table shows the accounting losses of various players: Table 9: Accounting losses of various players
Accounting losses (INR million) FY05 ICICI Prudential HDFC Standard Life MNYL Reliance Life SBI Life
Source: SSKI Research
FY06 (2,117) (897) (994) (540) (115) (1,877) (1,287) (603) (984) 20
FY07 (6,489) (1,256) (600) (3,151) 37
Every new policy underwritten entails a loss in the initial years and starts making profits subsequently, resulting in accounting losses at the preliminary stage. The break-even is generally achieved when the renewal premium increases in tandem with the new business premium. But in the wake of the aggressive growth phase that the Indian life insurance industry is witnessing, the volume of new business premium is far higher than that of renewal premium, and hence the trend of accounting losses is likely to continue. Companies also have plans of investing heavily in setting up expansive distribution to be ready for the next phase of growth. Moreover, accounting rules do not allow companies to amortize costs. Therefore, the more a company grows and incurs expenses, the longer the gestation period.
In the wake of this, IRDA is also expected to extend the 10-year deadline for divesting a portion of promoters holding in private insurance companies. This is because IPO happens to be the preferred route for promoters to divest their shares, but the 10-year deadline may come into conflict with SEBIs IPO guidelines, which require at least three consecutive years of profitability for a company to go public. Currently, most life insurers are in their sixth or seventh year of operation, and are expected to take around two more years to report profits. Therefore, they are unlikely to meet the SEBIs eligibility criteria for an IPO within ten years of their operations.
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Money laundering: a matter of concern for the regulator Legislative framework in India: The Prevention of Money Laundering Act, 2002 In response to the political declaration adopted by the Special Session of the UN General Assembly held in June 1998, the money laundering law, The Prevention of Money Laundering Act, 2002 (PML Act), was passed and it came into force from 1 July 2005. The major stipulations under the PML Act require:
to hide their dubious intentions. In this regard, Indian insurance companies have to deal with issues emerging from geographically dispersed distribution networks and contact points through the agency sales force. Apart from establishing comprehensive KYC norms, they would also have to put in place processes to know the agents. IRDAs initiatives to prevent money laundering in insurance IRDA has made consistent efforts to help insurance companies put in place an appropriate anti-money laundering mechanism. Based on the PML Act, IRDA has introduced anti-money laundering (AML) guidelines to help insurers set up a money laundering prevention framework. The highlights of these guidelines are mentioned below:
Appointment of a compliance officer Carrying out the (know your customer (KYC) process to establish the identity and addresses of customers Putting in place a framework for detecting and preventing tainted money from entering into the system Reporting suspicious transactions to the AML authority
Every insurer has to put in place an AML policy, which should address the following:
Internal policies, controls and procedures for prevention and detection of instances of money laundering Appointment of a Principal Compliance Officer Recruitment and training Internal control and audit of the AML framework Establish processes for carrying out the KYC norms, including: Identify customers who need to procure relevant documents stating their identity and address Conduct detailed due diligence for customers with annual premium of greater than INR1 lakh Careful surveillance of cash transactions Conduct KYC at payout stage as well
Money laundering in insurance Mutual funds and banking products have traditionally been more susceptible to money laundering. Insurance has not been a favorite sector for money launderers because of its typical way of functioning whereby only a premium is charged upfront for the promise of a huge contingent payment later. But in the wake of innovations such as single premium policies and unit-linked plans, the insurance sector has become far more prone to money laundering than it was earlier. Companies characterized by large customer bases and their dependence on third parties for sourcing their businesses are soft targets for money launderers as it makes it relatively easier for them
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Create a risk matrix (high, medium and low risk) for various classes of customers and classify products on the basis of their perceived propensity of enabling money laundering through such products Defining suspicious transactions will probably be the most difficult aspect since there are currently no precedents available for insurance, particularly in the Indian context. While the existing guidelines illustrate a few typologies of suspicious transactions, many more types of transactions are likely to emerge as suspicious over a period of time Reporting of cash transactions and suspicious transactions as per
prescribed formats and timelines to the Financial Intelligence Unit (FIUIND)

Records retention for 10 years Mandatory for intermediaries to carry out KYC and observe the insurers AML program. Any non-compliance by intermediaries will result in action against them Framework for training employees and intermediaries on AML-related matters. Internal audit to deploy modules to test the efficacy of the AML framework and give suitable recommendations
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Section 2
Life insurance sector: risk-based capital

Solvency norms: a global perspective Need for solvency norms The solvency of an insurance company corresponds to its ability to pay claims. An insurer is insolvent if its assets are not adequate (over indebtedness) or cannot be disposed off in time (illiquidity) to pay the claims arising. The solvency of an insurance company or its financial strength depends mainly on whether sufficient technical reserves have been set up for the obligations entered into and whether the company has adequate capital as security. It can be described by the following formula: Solvency = Ability to pay the claims of policyholders = (Policyholders assets Policyholders liabilities) The solvency margin takes care of the unanticipated problems. An insurance company with the requisite solvency margin is not likely to fail. It helps in rectifying problems and taking precautionary measures. Since insurance is a risky business and there can be no absolute guarantee against unforeseen circumstances such as floods, earthquakes, etc., all insurance companies are liable to pay claims to policyholders. But if a claim arises and the liability is large, there is a possibility that the insurance company in question may become insolvent. This would create an awkward situation for the insurance company, regulator as well as the government. The solvency margin is thus aimed at preventing such a crisis. prudential norms in insurance, which is analogous to capital adequacy norms in banking. To satisfy the solvency margins, insurers have to build up an adequate solvency margin reserve as their business grows. The figure below shows some of the important milestones in the origin of solvency norms: Transition to Solvency II norms The European Commissions Solvency II Directive on insurance supervision, scheduled for implementation from October 2012, will introduce a new solvency regime with an integrated risk
Figure 11: Origin of solvency II norms Solvency II Timeline 1970s First life and non-life directives
1990s Agreed that it was time to assess the EUs solvency regime for the insurance industry
1999 European Financial Services Action Plan Solvency I
May 2001 - Autumn 2003 Phase one of Solvency II November 2002 European Commission Discussion Paper
Audumn 2006 - mid 2007 Phase two of solvency II From August 2004 Waves of `Calls for Advice From May 2005 Preparation of the directive From October 2005 Quantitative impact studies
Origin of solvency norms Till the 1970s, when the term solvency margin came into vogue, life insurance companies in Europe were only required to maintain a higher value of assets than their liabilities after the distribution of surplus, if any. It was stipulated that the value of assets should exceed the value of liabilities by a certain margin. This margin was known as the solvency margin. Solvency margin is part of the
Mid 2007 - 2010 Solvency II Directive adoption process Denition of implementation measures Denition of guidance
By October 2012 Implementation date for Solvency II
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approach that reflects the risks being taken by insurers much better than the current Solvency I regime. Solvency II touches on many areas of the business from the setting of technical provisions to internal controls, capital tiers, governance arrangements, financial reporting and calculating capital requirements. The three pillar structure for Solvency II is the insurance industrys equivalent of bank regulations under Basel II. It addresses risks from the perspective of quantitative requirements, supervisory process, market transparency and disclosures. Pillar I defines the process and formulas for calculating Solvency Capital Requirements (SCR), Minimum Capital Requirements (MCR) and investment rules. Pillar II highlights general regulatory principles, including the power that a governance system exerts in helping companies evaluate emerging risks and resolve issues in the supervisory review process. The resulting financial disclosure, formalized written policy and solvency is the focus of Pillar III. The below figure depicts this three pillar structure: Solvency II: Challenges and implications Regardless of its outcome in the near term, the convergence of
accounting, risk and actuarial information will challenge traditional actuarial models currently in use and result in more sophisticated financial management methodologies and more efficient deployment of capital. Companies that excel in this area will be rewarded.
Although the implementation date for Solvency II, which was recently moved back to 2012, is quite distant as of now, insurers and supervisors are far from ready. Even with a two-year extension, companies need to act now, rather than wait on the sidelines for further guidance because the systems, processes and data will need significant improvement. Nevertheless, Solvency II will create a capital environment, which will directly address the costs/benefits of taking risks. The goal is to link required capital more closely to risks incurred, with a greater focus on insurance companies risk profiles. The Solvency II directive issued on 10 July 2007 states that the responsibility for an insurers financial soundness will be pushed back firmly to its management, where it belongs.
Figure 12: Three-pillar structure
Risk
Risk qualications Pillar one Quantitative capital requirements Solvency Capital Requirement (SCR) Minimum Capital Requirement (MCR)
Risk governances Pillar two Supervisory activities Internal control and risk management Supervisory review process
Risks transparency Pillar three Supervisory reporting and public disclosure Transparency
Disclosure
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Challenges Conversion to an economic capital type standard such as Solvency II will be a huge challenge, with far reaching implications for the industry. One of them would be an accelerated pace of consolidation. The changes made under the proposed Solvency II directive are likely to benefit large insurance groups while niche providers, who are in single lines of business, may suffer from the emphasis on diversification. Large diversified groups are expected to enjoy large supervisory diversification credits. For globally diversified groups, diversification credit could be 4050% capital saving. This would give these groups a significant pricing advantage in the market while exerting pressure on less diversified businesses.
Solvency norms in India Origin and current state In 1994, the Union Ministry of Finance constituted an expert group to formulate solvency margin requirements for Indian insurance companies. The regulator studied the insurance regulations of many countries before framing the current regulations. As per the IRDA (Assets, Liabilities, and Solvency Margin of Insurers) Rules 2000, both life and general insurance companies need to maintain solvency margins. Indias solvency regulation is a mix and match of the UK and Canadian norms. The regulation follows the UK model while the regulators administrative fiat to maintain a 50% extra margin is taken from Canada. This 50% extra capital cushion is to make sure that a breach is never reached by insurers or has a very low probability. It also ensures that a fraudulent insurer is caught much earlier. According to IRDA (Assets, Liabilities and Solvency Margin of Insurers) Regulations, 2000, all insurance companies are required to maintain the solvency ratio of 150% at all times. It also mandates all insurers to file the Statement of Solvency Margin (General Insurers) as on March 31 every year. But post relaxation of controls on the tariffs for the general insurance industry, there is a need to monitor the solvency position of all insurers at shorter intervals. Accordingly, it has now been decided by the regulator that all insurance companies shall file their solvency position as at the end of each quarter. It is expected that the stipulation would enable insurance companies to lay down their business plans and be in a position to meet their capital requirements in a timely manner. Challenges/issues in the present solvency norms in India Solvency is a part of prudential norms and as risks increase across markets, the solvency margin also needs to go up tangentially. In order to satisfy
The major challenges in the implementation of Solvency II, which are being anticipated by industry players, pertain to obtaining adequate data. Collecting the data required for risk assessment can be a difficult task since insurers largely rely on the analysis of historic data to predict future outcomes, but the amount of data available on extreme events is limited and such outcomes are difficult to predict with accuracy. Another aspect of the data challenge relates to the timely production of meaningful information on exposure to risks. Risk exposures are particularly complicated for insurers and a large volume of data needs to be reported and managed in alternative ways. Considerable cost for the implementation of solvency II norms is another area of concern. A trend parallel to the implementation of Basel II in banking where costs continue to mount in regard to data and systems infrastructure may be anticipated for solvency II.
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the solvency margin requirements, companies have to systematically build up reserves by transferring a part of the surplus to a special reserve called Solvency Margin Reserve. However, transferring the surplus will result in a reduction in bonus rates declared and make insurance unattractive vis--vis other financial instruments. Therefore, only a part of the amount needed to meet solvency margin requirements can come from the surplus held back. The balance requirement has to be met by other sources for capital, which include:

insist on the submission of a business improvement plan if the ratio is less than 200%. Similarly in the life insurance sector, there is a view that the time has come to revise IRDAs solvency norms on the following grounds:
Factors used in solvency calculations have to capture risks in the products more clearly Maintaining the statutory reserve and solvency requirements have to be viewed in an integrated way Factors should give credit to a companys size and risk management policies Clear regulatory margins should be established in solvency for non-quantifiable risks in the business (examples are effects of potential mis-selling, policy contract wordings, management quality, systems risks, data issues, operational, business risks and others)
Share capital Free reserves in the shareholders fund Difference between the market value and book value of assets
This coupled with the constraints on capital raising (FDI restrictions in private insurers and mandatory majority government shareholding in public insurers) poses significant challenges for insurers to maintain 150% solvency margins in a rapidly growing industry scenario. Proposal to implement Solvency II guidelines in India There are discussions going on in the industry regarding the implementation of Solvency II norms. Solvency II is an updated version of Solvency I, which is currently in force in India. Solvency II norms link the level of required capital with the risks inherent in the underlying business. It examines assets in greater detail. Under the current solvency regime, insurers are expected to maintain a 150% margin over their insured liabilities. The new guidelines make the solvency margins dynamic. Various factors have resulted in a debate on the implementation of Solvency II norms in the insurance industry in India both for the life and general insurance sectors. The solvency margin of 150% is considered less in general insurance business, which is more comparable to trading and is exposed to the owners financial misconduct. Many regulators
The initial years during the evolution of the insurance industry in India required companies to maintain sufficient capital to remain solvent and prove their business worth. However, having done phenomenally well on the business front, a review of solvency norms should be attempted. The solvency ratio of 150% can be broken down into more sophisticated measures of insurance risks. The International Association of Insurance Supervisors (IAIS) has proposed the implementation of Solvency II guidelines in India. However, the regulator has made it clear that it is no hurry to implement these guidelines. As the first step to Solvency II, insurers are now expected to file their audited reports on solvency compliance on a quarterly basis. The migration may still be short of a complete transition to Solvency II. The absence of a proper management information system among Indian insurers is a major stumbling block for migration to new solvency guidelines.
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General insurance: gradual detariffication

The insurance industry in India has witnessed significant developments in the recent past, one of the most important being the initiation of detariffing of some general insurance products. Globally, detariffication has brought about fundamental changes in the industry and India is going to be no exception. Phases of detariffication Detariffication in the general insurance industry took place in two phases as depicted in the following figure: Figure 13: Two-phased detarifcation process as set up by the regulator
Phase one
Phase two
Till January 2007, Insurance companies could only change the premium rates subject to oor rates determined by the IRDA. Phases of No changes were allowed to pricing product features. deregulation Controls on premium rates were totally removed beginning in November 2007 for auto and January 2008 for re and engineering, but pricing mechanisms were to be lled with the IRDA.
IRDA allowed complete freedom in product design and pricing starting from January 2008 (brought forward from April 2008).
Source: IRDA
During phase one, IRDA allowed all insurance companies to change their premium rates by removing the ceiling, but at the same time it prescribed a minimum floor price beyond which a company could not reduce the price of a product. This was done to avoid any price war and to ensure healthy competition in the industry. IRDA ensured that the product design remained intact. This was followed by phase two, wherein IRDA allowed complete autonomy in the product design and removed the floor price in January 2008. This phase is likely to instill intense competition in the market as floor rates have been removed and companies are allowed to customize insurance policies.
The regulator has been pursuing a policy of detariffication since 1994 when insurance tariffs on personal accident and bankers indemnity were dismantled. It has been revealed that some progress was made in Marine Hull Insurance in April 2005 as it got detariffed, whereas auto third party, auto own damage, engineering and fire insurance were still price tariffed. As of January 2007, all classes of business except auto third party liability have been detariffed. The following exhibit shows the detarrification roadmap for the general insurance industry.
Figure 14: Detarrication roadmap (1994-2007)

Aviation Liability PA & health Marine cargo Marine hull Fire Engineerign Auto OD* Auto TP* 1994 Detariffed Tariffed Aviation Liability PA & health Marine cargo Marine hull Fire Engineering Auto OD* Auto TP* April 2005 Aviation Liability PA & health Marine cargo Marine hull Fire Engineering Auto OD* Auto TP* January 2007*
* Auto own damage (OD) and auto third party (TP) Source: IRDA
Impact of detariffication To speculate market behavior is a formidable task, particularly when a regulated market moves to being a self regulated one. Detariffication is already having a dramatic impact on the various facets of the Indian general insurance industry. The following sections discuss the impact of detariffication on various dimensions of the general insurance industry in India.
substantial dip in premium rates in fire and engineering, nearly 4550% after detariffication. Besides driving the premiums down, detariffication has impacted the strategy of various insurance players. The prime focus in the detariffed regime is the clash of interest between public and private sector companies. Public sector companies are offering a steep discount of approximately 48% in the highly profitable segments such as fire and engineering insurance. As a result, losses registered by a general insurance company on account of health insurance cannot be further set aside against the premium charged on account of fire insurance (as was done earlier). Hence, public sector players have shown a pickup in growth momentum in recent months, while private sector players are demonstrating a reverse trend. The reduction in premium rates has removed the possibility of cross subsidization of policies. As a result, the
Market growth Growth in gross premium underwritten by general insurers in the public as well as private sectors has come down drastically as depicted by the available figures for the first nine months of FY08. The graph below shows the gross premium underwritten growth rate over the last six years.
General insurers are likely to see competition driving down the premium for industrial, engineering, fire and household categories. There has been a
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Figure 15: Growth rate of gross premium underwritten during FY03-08

160 130 In percentage 100 70 40 10 -20 -12 FY03 FY04 28 5 7 9 57 53 60 27 2 FY08* 135 106
FY05
FY06
FY07
Pre detarifcation Private * pro-rata basis for the full year Source: IRDA Public
Post detarifcation
premium for the health insurance sector has gone up by 1520%. For example, the health-insurance premium (on an insured value of INR1 lakh) charged by public sector general insurance companies for a person aged between 46 and 55 years prior to January 2007 was INR2,039. But it has now risen to INR3,161. Again, under similar conditions, the premium for a person aged between 66 and 70 years, which was INR2,958 has risen to INR 5,916. Some insurance companies, which have already got a go-ahead from IRDA, have started offering discounts ranging from 1520% in motor owned damages as well. Other group portfolios such as health and marine would expect a reverse trend in pricing, which so far enjoyed subsidized premium on account of the tariffed property premium. This resetting of the premiums is expected to rein in the growth of general insurers. The impact of detariffication in India is also expected to exhibit a phased pattern as it happened in other countries such as Taiwan, Hong Kong, Korea,
Turkey and Japan, which went through detariffication. In the initial stage, the premium went down as insurance companies kept on reducing the amount of premium charged in the short term due to price wars. Gradually, based on their experience, insurers could forecast the risks associated with different policies/customers, considering the amount of claims that arose. Thus, they start increasing the premium commensurate with the risks associated with an insurance policy.
Customer service The new ball game of detariffing has ultimately benefited customers/clients since nearly every insurer in the industry is set to woo customers. The market has become buyer-driven and customer-focused since the fixed rate doctrine has been replaced by a more flexible arrangement enabling customization of services for customers. The industry has witnessed the emergence of new customer-oriented techniques and
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the use of client-driven terms such as customer delight, customer centricity, customer relationship management. The attitude of insurers toward customers has changed. They are now involving clients in devising the cover and working of premiums.
Criteria for fixing premiums The free market regime will encourage the scientific rating and adoption of better riskmanagement practices. It is expected to eliminate crosssubsidization resulting in independent pricing for each line of business. Insurers would base the premium on the basis of the customers risk profile. This would increase the significance of risk management and claims control in the insurance business.
been unable to demonstrate real value to clients. First of all, the tariff market did not enable brokers to demonstrate their value in shopping around for the best deal. Clients have, therefore, understandably questioned the value of an expert intermediary when the product that they are purchasing is basically a commodity. While detariffication is changing these dynamics of the broking community, it is likely to take significant time and resources to ensure that clients understand all the benefits that brokers can bring to them.
Distribution Detariffication will have the following two medium term implications on distribution:
Underwriting In order to be profitable and competitive, there would also be an increased focus on the underwriting discipline to avoid underwriting losses. It would be a great challenge for insurers to develop innovative service practices and offer value-added services as a part of its existing offerings. Innovations in product design (to be opened after 31 March 2008) will further boost the profitability of insurers.
Role of brokers Big brokers such as Aon and Marsh are already present in the market. Few bigger broking firms may enter the market. With detariffing, a brokers role is expected to increase significantly in the market. Broker commissions may see an upward movement. The fact that 70% of all Indian premium income has hitherto emanated from tariffed products means that brokers have so far
Gradual demise of the marketing agent Public sector insurers (PSIs) will need to readjust their business models to deal with the underwriting challenges posed by a detariffed market. In order to maintain competitiveness, it is likely that their huge sales forces will need to be reduced. Voluntary retirement schemes (VRS) have already been set up by the PSIs to cater for the loss of sales jobs that detariffication is expected to cause. In the short run, however, local private insurers do not appear to be prepared to wait for brokers to gain a foothold in the market. Furthermore, the take-up of the VRS offered by the PSIs is reported to have been disappointing. Some private insurers have adopted direct distribution strategies. ICICI-Lombard is utilizing the extensive retail bank branch network of its Indian partner to sell products via the Bancassurance channel, and Tata AIG has recently employed 1,500 direct marketing agents of its own. This situation may prove difficult for organizations reliant on the broker
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channel because if these direct strategies prove successful, the extent to which the private companies are prepared to support the cause of brokers may reduce substantially. Brokers will have to demonstrate value to clients While the value of brokers lies to a great extent in their skills in structuring a customized solution for their client, it will take sometime until this value proposition filters down to end customers. On the whole, the market will take some time to allow brokers to establish a name.
spread, which would enable them to launch more products across various regions and procure higher levels of renewal business. However, for this, they need to institutionalize their underwriting and marketing skills so that they can reduce costs more quickly, understand customer imperatives and have more weapons in their armory besides price reduction.
The road ahead The early signs post detariffication are encouraging but the industry has many challenges ahead. Price reduction as a strategy to increase market share will not deliver results in the long run. Instead, insurers should focus on risk-based rates wherein the prices seem to be making a move toward real values in alignment with the actual risks being covered. Insurance companies should not reduce prices to such a level that although they increase the number of customers in the short run, they are not able to charge more from these customers over the long haul, especially if they have no claims to report. Industry Claims arising out of natural calamities have proved to be quite a costly affair to reinsurers. Till now, there is no market initiative as to how insurers should deal with such risks and how they should price them. Thus, it is important for the industry to take initiative in this regard.
On the other hand, private insurers enjoy the underwriting strength of their foreign partners and have a very aggressive sales team. However, they need to work hard to expand their operations to effectively compete with their counterparts in the public sector.
Regulator Clarity on inclusion/exclusion From the wording point of view, it is necessary for insurance companys to clearly explain what is included or excluded in the insurance policy. This holds true for both institutional as well as retail customers.
Control mechanism on quantitative data/techniques There is a need for supervision on collection of data, method of arriving at a particular rate or product structure. Players need to comply with industry regulations while formulating the product structure. The pricing of products is done by each insurance company separately after calculating their risk appetite and collecting quantitative evidence to meet the claims. The industry is apprehensive to have risk pools such as earthquake insurance, flood insurance, etc., which are generic products, not allowing each company to come up with their own innovative approach.
Public sector insurers have certain advantages such as higher market share and better geographical
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Customer education It has become imperative that one is not only aware of the need for insurance, but also has adequate knowledge to handle all the related issues. Financial literacy among customers, including insurance education requires a high level of bilateral academics, continuous professional education of provider constituents and awareness empowerment education. Information can be disseminated in many ways, for instance, at the workplace, schools, media, and through community organizations. High-performance learning organizations among insurers leverage the right blend of technologies to deliver high-impact learning experiences at the lowest possible cost. But in the Indian scenario, it is a bigger challenge, as we have a fast growing population coupled with a high rate of illiteracy.
From the service providers perspective, highly engaged, skilled and productive workforce, with the right skills and strong financial knowledge would contribute to the long-term success of this industry. Thus, players need to shift their focus from a top line-driven approach to a bottom line-driven one. However, it is too early to conclude on the success of detariffication. Companies should grow profitably as growth without profit would make their business unviable. Reduction in the rate of premium should not be the sole criteria in procuring business and earning profits. If so, underwriters may reduce the premium without any rationale just to get more business or retain their existing customers. This trend might eliminate them from the business. The settling down of the premium normally take three to eight years or even more, depending upon certain factors, such as the entry of new players, lack of regulations, potential for insurance services, etc. However, the general insurance sector in India is expected to take shorter time of two to three years for premium rates to settle primarily because of its unique attributes. Unlike it was expected, the industry has not observed any intense price wars. High growth potential (because of large untapped insurance market) coupled with regulatory control have helped in preventing intense price wars among insurers. At the same time, insurers do not have sufficient capital available at their disposal due to lower FDI limits, thus resulting in their inability to afford price wars.
There is a strong emphasis laid by the government to ensure professional training for agents. Courses, including the Certified Financial Planner (CFP) conducted by the Financial Planning Standard Board (FPSB), LOMAs Fellow Life Management Institute (FLMI) Program as well as certified courses from the Life Insurance Market Research Association (LIMRA) and the International General Agents and Managers Association, have laid down the first step towards better insurance knowledge.
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Health insurance: holds huge potential

In the light of escalating healthcare costs, coupled with demand for healthcare services and the lack of easy access for people from the low-income group to quality healthcare, health insurance is emerging as an alternative mechanism for financing healthcare. One of the reasons for low penetration of health insurance in India is the lack of regulations in the health sector, resulting in exposure of the beneficiary to various wrong practices present in the system. To avoid such controversy, the IRDA has set up a separate department for health insurance. The authority is planning to bring out separate regulations/guidelines for health insurance. To increase the penetration of health insurance in the country, IRDA has also recommended the government to bring down capital requirements for standalone health insurance companies to INR500 million from INR1,000 million. The major lines of health insurance include medical expense, disability income protection and long-term care. All these products are included in the current regulatory definition of the health insurance business. The health financing scenario in India has raised a number of issues such as increase in healthcare costs, high financial burden on the poor strata that erodes their incomes, need for long-term and nursing care for senior citizens because of increasing nuclear family system, increasing burden of new diseases and health risks. These issues are observed not only in India, but in most developing nations, which are characterized by poverty, high population and low incomes.
Key challenges in health insurance While health insurance is a huge potential market, there are certain challenges that cannot be ignored. The problem lies not just in strengthening the reach in rural India, but also in providing quality service in urban areas.
Disease burden and insurance Currently, life expectancy at birth, infant and under-five mortality levels are worse than those of Bangladesh and Sri Lanka. Although India accounts for 16.5% of the global population, the country contributes to a fifth of the worlds share of diseases: a third of the diarrhea diseases, TB, respiratory and other infections and parasitic infestations, and prenatal conditions; a quarter of maternal conditions, a fifth of nutritional deficiencies, diabetes, CVDs, and the second-largest number of HIV/ AIDS cases after South Africa. Hence with this kind of disease burden, the need for health insurance would increase. Moreover, the claims are likely to increase manifold in the coming years. Expenditure on health in India The total expenditure on health, as a percentage of GDP, in FY07 was very less (only 5%), which is considerably lower than that of developed nations (and even Brazil), but is comparable to Russia and China. The table below depicts total expenditure on health, as a percentage of GDP, in FY07.
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Figure 16: Total expenditure on health as a percentage of GDP in FY07

16 14 Percentage of GDP 12 10 8 6 4 2 0 Brazil Source: WHO USA France Russia UK India China 7.9 5.2 8.2 11.2 15.2
5.0
4.7
The general government expenditure on health, as a percentage of total health expenditure, is one of the lowest. It is slightly higher than China, but considerably lower than the developed nations. The appended graph shows the government expenditure on health as a percentage of the total health expenditure in FY07.
Even though the volume of funds keeps on increasing, we have still not been able to keep pace with the expanding population. As most of the health facilities are available through the public sector, the need to raise government expenditure on health has become critical.
Figure 17: Government expenditure on health as a percentage of total expenditure on health in FY07
25 21.8 20 16.6 In percentage 15 10.1 10 6.7 5 3.5 1.0 0 Brazil Source: WHO USA France Russia UK India China 16.2
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High loss ratio The health insurance industry in India is characterized by an increasing loss ratio on account of high healthcare costs. In 2003, the health insurance sector witnessed a loss ratio of about 78%, which deteriorated to 98% in 200405. In FY07, it was approximately 110120%. (During FY07, total premium collected under health insurance policies was approximately INR40 billion against the overall claims of over INR43 billion)
guidelines, life insurers have also been allowed to sell standalone health insurance products. Post this announcement, a host of life insurers, including LIC, Reliance and Birla have forayed into the health insurance market, thereby intensifying competition for existing non-life insurers.
Product characteristics In India, a majority of health insurance products work on an indemnity basis (reimbursements are done to patients only after they have paid their healthcare bills out of their own pockets). Since many people cannot afford such large payments, even if they are subsequently reimbursed, they do not choose to purchase medical insurance. In addition, this reimbursement process can take up to six months. This may result in low acceptance of health insurance products among the public. In addition, health insurance companies need to focus on providing distinct and innovative products for an ever increasing list of diseases, keeping in mind the age bracket of the target customers.
Poor medical infrastructure and low medical penetration India lacks in proper medical facilities and medical professionals to cater to the huge population base, resulting in the vast geographical spread of population remaining out of reach for regular medical facilities. This, coupled with poor awareness levels about health insurance products, even among the educated elite, has resulted in low penetration level in the general public. One of the key challenges lies in taking these products to rural areas, where medical infrastructure is poor, which is forcing rural people to come to urban areas for costly, and often, unaffordable medical care. Further, distribution channels, especially direct agents, face a lot of difficulties in selling. For companies, it is a big task to motivate their agents to sell health products, since the commission paid to them is lesser for a health portfolio compared to other products.
Lack of proper healthcare data Insurance companies in India lack sufficient quantity of statistically valid data requisite to assess health risks accurately. This kind of sycho-demographic and sociodemographic data is required by insurance companies to understand the risk profile of individuals. In the West, records are maintained right from the time a child is born, which is not the case in India. In the absence of such record maintenance, insurance companies find it difficult to assess the eligibility of an individual for health insurance. Also, health insurance
Intensifying competition Till recently, only non-life insurance companies were allowed to sell health insurance products in India. But in 2007, as per IRDA
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companies have a difficulty in fixing an appropriate premium for various kinds of diseases. Hence, the lack of information available is one of the major problems, which prevents the spread of health insurance. IRDA is, however, trying to address this particular problem by compiling whatever data is available at different places. It has constituted a working group and created more sub-groups to look at currently available data and analyze it.
involving the creation of a centralized data warehouse besides the enforcement of standardized billing, claims forms and proposal forms will remove a lot of roadblocks for decision makers. Introduction of rating and credentialing of providers to encourage standardization of services from various providers Promote data maintenance and pooling The creation of standards for diseases and treatment procedures to develop a common understanding and database as well as the introduction of cost containment measures will prove effective in setting processes. Further, the development of an information bank on insurance, diseases and treatment, which involves the creation of a centralized data warehouse besides the enforcement of standardized billing, claims forms and proposal forms would facilitate the smooth functioning of companies.
Recommendations for future direction Policy-related reform initiatives With health insurance now taken as a standalone segment in the insurance industry, it is important to take a decision for appointing a separate regulator for healthcare and its financing needs. Creation of standards for diseases and treatment procedures to develop a common understanding and database as well as to introduce cost containment measures would help in setting processes. Regulators need to make policies to allow the financing agencies and insurance companies to dictate the performance of health facilities and the constituents to ensure best services.
Shift from cost-based reimbursement system to predetermined rate-based system International trends indicate that major payers for healthcare services have pressurized providers and insurers to cut costs and improve the quality of their services in the recent past, thereby revolutionizing the financing and delivery of healthcare services. The health insurance market in India is poised to shift from indemnity insurance to managed care, from cost-based reimbursement to prospective payment, and from independent physicians and hospitals to more integrated and coordinated healthcare systems. In a regime of pure indemnity insurance, which currently exists
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Review and revise the mediclaim scheme both in terms of coverage and the premium charged to ensure a greater awareness and better performance of the scheme. The continuous analysis of mediclaim schemes should be made a mandate as this will provide insights into the future course of action. This will also ensure proper data collation. The creation of an information bank on insurance, diseases and the treatment
in India, providers, i.e., doctors as well as hospitals have an incentive to provide more care than might be medically appropriate. This results in unnecessary increase in costs. For this reason, patients may also be less willing to question the expertise of the provider. Managed care is the appropriate healthcare service that covers individuals by making arrangements with selected providers. A transition from the present system of indemnity insurance to managed care would bring in the following benefits: Higher quality: The incentives of providers are aligned with those of patients. This basically means that correct treatment would be provided for the ailment. Hence, there would be less unnecessary surgery and hospitalization, more mammograms and other preventive health investigations. Controlled costs: By triggering competition among providers, including physicians and hospitals, insurance companies can force providers to cut costs in order to provide services at a lower price. Organization of care: Patients are more likely to get what they need when financial barriers do not pose any hurdle. Better preventive care: There are lesser costs involved in caring for healthier members; hence there is an incentive to keep people healthy.
affluent families live in areas with better sanitation and enjoy better nutrition. However, it has been observed that even when the lowincome groups visit health facilities frequently often more frequently than the high-income groups their health outcomes remain dismal. Hence, the quality of the medical system plays a large role in health outcomes. Earlier, the quality of healthcare was measured through the presence or absence of a primary health care center. But, there was little or no relationship between the existence of a healthcare center and health outcomes. Post this, structural measures of quality began to be included where quality was defined by physical infrastructure, stock of medical supplies, total number of assigned personnel, availability of refrigeration units and electricity. It has been observed that healthcare demand has been witnessing an uptrend in tandem with structural quality more people visited health clinics when there was significant improvement in structural quality. There was a major flaw in the above two approaches none of the indicators measured process quality, particularly the quality of medial personnel. Structural measures such as drug availability are largely determined by the degree of subsidization and cost of transportation, making structural quality a predictable feature of the owner as well as the location. On the other hand, process quality is likely to vary more within these parameters. Both medicine and consultation are considered equally important for a patients health. Households can mitigate problems with drug supply through purchases from other
Mechanism to measure the quality of health care provided Many studies have attributed households in producing good health outcomes. For example, children are healthier when mothers are more educated, rich households are better able to insure against health shocks and
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markets, whereas they cannot do this with medical care. If structural quality is well correlated with process quality, the overall service quality can be measured.
MCO provides medical care to the individual when the need arises. This is how it functions as a health insurer. Third-party administrators (TPAs) IRDA has paved the way for insurance intermediaries such as TPAs, which are going to play a pivotal role in setting up managed care systems. Currently, TPA licenses are issued to render health services. TPAs have been set up with the objective of ensuring better services to policyholders and mitigating some of the negative consequences of private health insurance. This is expected to result in cashless hospitalization services. In contrast to the earlier scenario where the insured are reimbursed all hospitalization expenses, TPA would tie-up with the hospitals and all the hospitalization services would be on cashless basis in the present scenario. TPAs perform activities ranging from keeping all the records of medical insurance policies, issuing identity cards to all the policyholders (which they have to show to the hospital authorities before availing any hospitalization services), issuing an authorization letter to the hospital for the treatment wherein the TPA will pay for the treatment, making payments to the hospital, sending necessary documents for claims, etc. TPA services are likely to extend further in the near future.
Broadening the role of intermediaries in health insurance sector In most insurance transactions, there is an intermediary, usually an insurance agent or broker between the buyer and the insurer. The role of the intermediary is to scan the market, match buyers with insurers who have the skill, capacity, risk appetite and financial strength to underwrite the risk, and then help the client select from competing offers. Price is important, but is only one of the several criteria that buyers consider in choosing insurer(s) that provide their coverage. In addition, factors such as the breadth of coverage, risk management services, the insurers reputation for claims settlement and financial strength are also extremely critical.
Medical care organizations (MCOs) MCOs such as health maintenance organizations have become popular in recent decades because of their ability to lower consumers healthcare costs while increasing providers throughput. These organizations function as healthcare intermediaries or as a platform in the two-sided market for medical care, with the two sides being healthcare providers looking for patients and patients looking for healthcare providers. An individual pays the MCO in advance for medical care that he/ she may require in the future. The
Opportunities There are immense opportunities for the health insurance sector in India to expand in the coming years. The need for health insurance is felt by all sections
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of the society across geographies. As the insurance industry is maturing, it will pave way for newer opportunities.
Support from the government The government has also extended its support in contributing to the growth of the healthcare industry. As per the 2005 statistics, there are 142,655 sub-centres, 23,109 PHCs and 3,222 community health centres (CHC); most of them are below the desired level. To upgrade these hospitals, the government has allocated INR99,470 million for the flexible pool under the National Rural Health Mission for FY08.
MNCs entering the Indian market The increase in healthcare costs in India has induced large insurance companies to buy hospitals to grow their market. Apollo Hospitals has made a joint venture (JV) with German company Deutsche Krankenversicherung (DKV) to tap the emerging health insurance market in India. The Apollo-DKV will begin operations in FY08, with Apollo hospitals holding 20%, its associates 54% and DKV 26%. The JV is expected to reduce conflicts between an insurer and the hospital and also lower the cost of settling claims to maximize their revenue growth.
Subsidized premiums To enable people below the poverty line to pay premiums, the government has subsidized the premium amount to encourage people to take insurance. New India Assurance has introduced a universal health scheme in the form of subsidized premiums for the people below the poverty line.
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Microinsurance: deepening the markets

Microinsurance in India today is where microfinance was a few decades ago, and therefore, a vast untapped potential exists in this segment. The table below shows the estimated market size for microinsurance in India as in FY07. Table 10: Estimated market size for microinsurance in India INR million Low end Life General Total 15,393 46,912 62,305 High end 20,141 64,127 84,268 USD million Low end 385 1,173 1,558 High end 504 1,603 2,107
Source: United Nation Development Program
The target market for microinsurance is largely self-employed or those working in the unorganized sector or informal economy with irregular and unpredictable cash flows. Popular microinsurance products Micro Health Insurance The low public investment in health (health insurance covered about 1% of the population and accounted for a mere 1.2% of the total expenditure on health in FY07 in India) and the absence of any form of national social insurance has heightened insecurities, resulting in higher demand for health insurance in the rural market. These non-profit programmes aim to provide quality healthcare at low premiums on a community-level scale. The idea behind this scheme is that creative planning will enable the poor to benefit from the same protections against risks as the rich. Countries such as Europe, Japan, Thailand, Philippines, Rwanda, Uganda, etc., have managed to gain support from the government
in the form of direct subsidies of the premiums, a legal framework as well as technical support to promote health insurance, among other incentives. Micro health insurance schemes in India have not only achieved good enrolment levels among their target populations, indicating the existence of demand, but from a policymakers perspective, these schemes have also improved access to health services for the poor. To capture this untapped market, many private companies have entered into this era of micro health insurance by introducing new schemes and initiating tie ups with Health Maintenance Organizations (HMOs), NGOs and communities.
Some of these include:
NGOs such as Accord/Ashwini, Karuna Trust, Healing Fields Foundation are working toward micro health insurance. Self-Employed Womens Association (SEWA) provides health, life and assets insurance to women working
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in the informal sector and their families.
The General Insurance Corporation offers Personal Accident Policy, Jan Arogya Policy, Raj Rajeshwari Policy, Mediclaim Policy, Overseas Mediclaim Policy, Cancer Insurance Policy, Bhavishya Arogya Policy and Dreaded Disease Policy, specifically targeting the poor population groups. The Voluntary Health Services (VHS) offers sliding premium with free care to the poorest. Agriculture insurance Agriculture is the biggest source of livelihood for a majority of households in India. There is a very high degree of risk involved in agriculture as most farmers do not have assured sources of irrigation and their activities are prone to weather risks such as inadequate rainfall. The traditional yield-based crop insurance, which currently covers less than 20% of the farming community, suffers due to poor service and financial sustainability. Though other fields are being explored, index-based weather insurance is now emerging as a promising alternative. In this method, insurance premiums are actuarially priced and promise timely claims payments to farmers as the claim payout is determined on a particular weather index, which is measured on a daily basis. In 2003, BASIX (a livelihood promotion institution set up in 1996) in collaboration with Commodity Risk Management Group of the World Bank and ICICI Lombard launched the first index-based weather insurance in Mababubnagar district covering 230 farmers. In the subsequent
years, this number increased to 2,000. Today, there are more companies offering weather insurance in India, including the government-owned Agriculture Insurance Company.
Livestock insurance After agriculture, livestock is the most common source of income for rural households. Very often it provides a supplementary source of income for rural households, helping them to cover for loss of income from other sources. Traditionally, livestock insurance has always been seen as an unattractive portfolio for insurance companies due to its poor financial performance because of the behavioral risks associated with both customers and service providers. Since most of the lending in microfinance is not necessarily targeted at a single economic activity, most MFIs, NGOs, SHGs and other insurers have not entered this segment. MFIs have started encouraging their customers to take livestock insurance on a voluntary basis. BASIX has cumulatively insured over 40,000 livestock so far. In the last two years, BASIX has also started providing preventive vet care services on a fee basis under its Business Development Services (BDS) program. It currently has close to 50,000 customers availing these services. BASIX expects that the BDS services will effectively mitigate risks, and thereby, reduce the mortality of livestock owned by its customers. This would eventually translate into reduction of premium rates for livestock insurance, resulting in an increase in the number of enrollments for livestock insurance.
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Difficulties in providing microinsurance Before understanding the difficulties in providing microinsurance, the evolution of the industry in Figure 18 highlights the stages, which the industry has gone through to reach the present level.
Figure 18: Evolutionary phases of Health Insurance

Insurability/infrastructure Managed care Full reimbursement Hospital cash* Fully untapped
Integrated state and private offering Increasingly mature market and sophisticated buyers
Regulatory burden, little incentive
Critical illness*
Current capacity of Indian market
Life only Risk not insurable No opportunity
Stay away Insurers involvement Administration Underwriting, product development Active claims management
* Low to very low penetration due to Absence of product expertise and variety Lack of consumer awareness
Existing microinsurance schemes that provide more than simple credit life insurance find it difficult to sustain. Suppliers, whether governments, savings and credit societies, private-sector insurers, or other financial institutions such as MFIs, face the following difficulties:
claim volatility and lack of reliable data characteristic of low-income, informal markets. Often, actuarial expertise resides with one type of institution (i.e., formal insurers), while distribution networks to poor customers lie with another (i.e., MFIs or NGOs).
Technical specialization. Insurance requires specialized actuarial capacity, which uses mathematics to place a monetary value on future risks. The actuarial analysis for microinsurance is complicated by
Marketing and sales. Most poor people do not understand insurance or are even biased against it. Many are skeptical about paying premiums for possible future benefits, when the insured event
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may not occur. Creating awareness about the value of insurance is time consuming and costly. In addition, the wording of insurance contracts is often too complicated for the poor, many of whom are illiterate.
are yet to be utilized in a manner where their true potential can be harnessed to increase the insurance penetration levels. Moreover, poor network connectivity in many areas, electricity shortages, non-banking habits of the microinsurance policyholders and prospects, and negative perceptions about insurance have been some of the other obstacles. To expand the reach of distribution, nongovernmental organizations (NGOs) should also consider a broking model as against an agent model, which is widely adopted currently.
Distribution channels Microinsurance requires a distribution system that can both efficiently handle small financial transactions in convenient locations and engender trust. Existing distribution systems of this kind are hard to find, creating a new system to collect premiums and pay claims is expensive and often ineffective.
Recommendations for future development The rise in demand for microinsurance products can be ensured by further strengthening the market outreach. This can be done through the following ways:
Focus more on risk than premiums Insurance companies should focus more on the risk cover than the lower premium for microinsurance. Till recently, microinsurance was driven by government-led social security schemes. But now the time has come for independent growth.
Better product design The demand for microinsurance products is currently low due to poor product design. The insurers should design different, unbundled microinsurance products to cater to the needs of the rural areas.
Aim at relationship building, mutual trust and after sales service Microinsurers must reward and encourage sales without pushing insurance onto unwilling prospects, and should act in the best interests of the poor. Compensation and incentives that reward client retention are likely to be more appropriate for microinsurance than incentives strongly linked to sales. The microinsurance culture should strongly emphasize relationship building, mutual trust and after sales service, while ensuring that the organization minimizes delays and rejections.
Reducing distribution cost The microinsurance products may be distributed by individual insurance agents, corporate insurance agents, insurance brokers or microinsurance agents. The distribution costs of the microinsurance business are high and agents find it a daunting task to service existing microinsurance clients. It is both a time-consuming and costly proposition for them. Semiformal institutions, including savings and credit cooperatives, NGOs and self-help groups have immense potential in carrying the message of insurance. These means to solicit the insurance business
Improve premium payment mechanism For microinsurance to succeed, the premium payment mechanism
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needs to find a balance between being efficient and being sensitive to the needs and capacities of clients. Efficient arrangements mean prompt and full payment without affecting the safety of the premium transfer mechanism or sacrificing customer service advantages. Higher transaction costs for frequent small premium payments can drive up premium rates. Cost-effective fraud controls are vital in microinsurance. Certainly, premium collection is the most daunting aspect of efficient microinsurance provision. Building staff capacity, finding the right business module and leastcost delivery channels, as well as strengthening managerial acumen are vital to the microinsurance business.
organized small microinsurance institutions. Though capital requirement is necessary, they discourage established insurers from offering services to lowincome households whose policy sizes are minimally priced.
Adequate agents requirement The requirements for agents are either too low (anybody without prior formation can act as agent), or too restrictive. The definition of the role of the insurer, i.e., of a sole business line affects microinsurance providers. A financial institution that wants to offer insurance services is not allowed to operate as an agent. It can do so only with separate staff (and counters), which makes it expensive and unattractive.
Encourage microinsurance among microfinance institutions Microfinance activity in the country is resulting in the spread of microinsurance among its members/clients. For MFIs, integrating insurance with their credit and savings activities makes logical sense as it helps them to reap scale economies in financial management, provides them with a captive market, and enables them to use their existing network and distribution channels to sell insurance. Besides, linking microinsurance with micro-credit makes it cheaper for borrowers to have both these financial services.
Encouraging customer awareness and knowledge Regulations on policy details can also restrict access to lowincome markets. The client group, which is often illiterate and not familiar with these procedures, can barely understand long and detailed insurance contracts using legal language. To solve this, simple contracts and innovative, poor-oriented public information campaigns are important for microinsurance.
Reinsurance issue Reinsurance is a serious constraint for microinsurers. Most microinsurers, who are informally organized or do not have a license from the regulator to conduct the insurance business, have no access to reinsurance.
Changes in capital requirements The current minimum capital requirements are too high, compared to the small amounts of the policies, and for locally
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Section III
Regulatory framework and need for a conducive environment

The table below compares the regulatory framework of major countries on various parameters.
Table 11: Comparison of regulatory framework US Regulatory authority National Association of Insurance Commission UK Financial Services Authority Singapore The Monetary Authority of Singapore Insurance Supervision Department By the state budget By the Central Bank only and insurance industry (co-financing) Separated Separated Composite By the state budget and insurance industry (co-financing) Separated By the Central Government Germany Ministry of finance India Insurance Regulatory and Development Authority (IRDA)
Supervisory authority Financing
Separation of life and general insurance business
Separated: Health insurance will be separate from general insurance as a standalone segment. Separate regulations with respect to capital requirement, solvency norms will be formulated No provision
Cross-sectoral Activities
Limits on shareholding in non-insurance companies Legal form of company limited by shares and public limited company
Provisions on shareholding in non-insurance companies Legal form of company limited by shares and public limited company
No provision
Limits on shareholding in non-insurance companies Legal form of company limited by shares and public limited company
Licensing requirements
Legal form of company limited by shares and public limited company
Any organization should be incorporated under the Companies Act, 1956 and possess the certificate of the memorandum of association and articles of association to be able to apply for an insurance license
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US Business plan Managerial requirements Shareholder information Required Fit and proper requirement Approval of shareholders and identification 1) Require that insurance companies possess a certain minimum capital as a condition for authorization
UK Required Fit and proper requirement Approval of shareholders and identification 1) Require that insurance companies possess a certain minimum capital as a condition for authorization
Singapore For the first five years Fit and proper requirement No provision
Germany Required Fit and proper requirement Approval of shareholders and identification 1) Require that insurance companies possess a certain minimum capital as a condition for authorization
India Not required Fit and proper requirement Information is required: Due diligence is conducted 1) Applicant should have INR1 billion or more paid up equity share capital, in case the application for grant of certificate is for the life insurance or general insurance business 2) Applicant should have INR2 billion or more paid up equity share capital, in case the application for grant of certificate is for the reinsurance business
Financial requirements
1) Require that insurance companies possess a certain minimum capital as a condition for authorization
Specific requirements for branches and subsidiaries
17 states have no mechanism for licensing the initial entry of a non-US insurance company as a branch, unless that company is already licensed in another US-state
The system of the single authorization (European passport) permits any insurance company, to offer in the other EU members
Application of the market need test
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US Reporting To submit a financial report at least once a year (annual report) usually holding the annual accounts (balance sheet, profit and loss accounts, additional notes), an annual statement of the solvency margin, and statements concerning premium income due, losses, reserves, assets, etc. No restrictions
UK To submit a financial report at least once a year (annual report) usually holding the annual accounts (balance sheet, profit and loss accounts, additional notes), an annual statement of the solvency margin, and statements concerning premium income due, losses, reserves, assets, etc. No restrictions
Singapore To submit a financial report at least once a year (annual report) usually holding the annual accounts (balance sheet, profit and loss accounts, additional notes), an annual statement of the solvency margin, and statements concerning premium income due, losses, reserves, assets, etc. No restrictions
Germany To submit a financial report at least once a year (annual report) usually holding the annual accounts (balance sheet, profit and loss accounts, additional notes), an annual statement of the solvency margin, and statements concerning premium income due, losses, reserves, assets, etc. The general policy conditions for compulsory insurance and supplementary health insurance may be submitted Detariffication
India To submit a financial report at least once a year (annual report) usually holding the annual accounts (balance sheet, profit and loss accounts, additional notes), an annual statement of the solvency margin, and statements concerning premium income due, losses, reserves, assets, etc. No restrictions
General policy
Premium rates On-site inspection
Detariffication 1) Once every five years 2) On site inspection of foreign branches allowed
Detariffication
Detariffication
Detariffication 1)Once every year
1) Once every year 1) Once every year 1) Once every year 2) On site inspection of foreign branches is not allowed The method of assessing solvency rests on the principle of a solvency margin 2) On site inspection of foreign branches allowed The method of assessing solvency rests on the principle of a solvency margin 2) On site inspection of foreign branches allowed The method of assessing solvency rests on the principle of a solvency margin
Solvency supervision
In the US, another method employing risk based capital (RBC), is used
The method of assessing solvency rests on the principle of a solvency margin, which is 150%. IRDA plans to implement Solvency II norms or RBC in the next 34 years
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US Technical provisions
UK
Singapore
Germany
India No provisions
Life: mathematical Life: mathematical Life: mathematical Life: mathematical reserves reserves reserves reserves Non life: unearned premiums, claims outstanding and claims incurred but not reported (IBNR) Non life: equalization reserve Non life: unearned Non life: premium reserves, equalization reserve unexpired risks reserve and claims reserves A set of maximum limits associated with the solvency assessment purpose No currency matching No restrictions Quantitative restrictions
Investmentsceilings and floors
Prudent person management approach
Prudent person management approach
Exposure and prudential norms for various instruments No currency matching No restrictions
Currency matching Foreign investments
100% No restrictions
80% No restrictions
80% Upper limits between 5% and 20% depending on the foreign assets concerned Life: Lower of historical cost or market value Non life: Valued at historical cost
Investment valuation
Valued at market price
Lower of historical cost or market value
Independent by the Actuaries
Reinsurance arrangements Actuaries
Approval required Independent of insurance company
Approval required
Approval required
Approval required Evidence of competence and reputability is required Compulsory motor third party liability and Accident insurance
Approval required Independent of insurance company
Only life insurance Only life insurance companies companies, an age requirement (atleast 30) has to be met Compulsory motor third party liability insurance Brokers also have to establish financial guarantees in order to practise Compulsory motor third party liability and Accident insurance
Compulsory insurance
Compulsory motor third party liability insurance Brokers need to be licensed and agents need to be registered
Compulsory motor third party liability insurance Brokers need to be licensed and agents need to be registered
Insurance distribution
No regulations Regulation exists for brokers and agents both, brokers also have to establish financial guarantees in order to practise
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US Taxation Tax exemption for benefits paid
UK Tax exemption for benefits paid
Singapore Tax incentives for the purchase of life insurance products such as the deductibility of premiums contracted by private individuals from taxable income within a certain limit are granted
Germany Tax incentives for the purchase of life insurance products such as the deductibility of premiums contracted by private individuals from taxable income within a certain limit are granted
India Tax exemption for benefits paid
Policyholder protection funds
Insolvency guarantee funds for property and casualty insurance and life insurance and guarantee funds for motor vehicle insurance The insurance company may file for bankruptcy
Insolvency guarantee funds for property and casualty insurance and life insurance and guarantee funds for motor vehicle insurance The insurance company may file for bankruptcy Report the existence of preferential status for policyholders in the liquidation procedure Only the supervisory authority may file a petition in bankruptcy The insurance company may file for bankruptcy
Liquidation
The government regulation can either promote or hinder insurance provisions. A conducive regulatory framework is essential for achieving sustainability and at the same time needed for the expanding insurance services (for instance, large-scale, cost-covering and long-term provision) to all income segments of the society. Regulations have proven vital from the stage of having a new player in the industry. It is necessary to gauge the financial strength, track record and reputation of promoters, particularly with regard to compliance with regulations and the strength of internal control systems. IRDA has also been keen to see the industry develop in terms of product innovation and the use of alternative distribution channels.
Applicants with a strong record in these areas, or in specialist and niche fields, and those with experience in the health insurance business have received favorable consideration. In addition to strict scrutiny at the point of entry, regulators also provide for constant monitoring of the performance of the companies as a check against lax management practices, which may result in loss to policyholders. Regulators protect policyholders against excessive insolvency risk by requiring insurers to meet certain financial standards and act prudently in managing their affairs. The statutes require insurers to meet minimum capital and surplus standards and financial reporting requirements and authorize regulators to take other actions to protect policyholders interest.
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In the near future, the insurance industry is expected to grow both in stature and strength. Insurers shall be less financially vulnerable to the vagaries of the market because of the adoption of a prudential regulatory regime, which has set very high solvency requirements and capital adequacy norms. Domestic institutions both insurers and intermediaries are expected to catch up with their international counterparts with respect to efficiency, innovation and customer services. Productivity levels are expected to be as per international best practices. The level of market penetration is also expected to improve substantially. Most regulations become obsolete almost as soon as they are formulated. With evolving industry dynamics, it is essential to step up regulations to keep pace with the exponential growth in the
industry. Regulators in emerging markets should be in tandem with product innovations, alternative distribution channels, electronically-linked payment systems, e-commerce, investment avenues and alternative risk transfers etc. It has become imperative not only to formulate or update regulations, but also for the industry to adhere to these regulatory compliance policies and procedures. A more sophisticated approach to risk management, financial reporting and corporate governance will be necessary for insurance companies to meet these requirements. This would ensure sustenance in growth, which augurs well for the insurance industry in India over the long term.
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Bibliography
Insurance Regulatory and Development Authority (IRDA) Life Insurance Council General Insurance Council World Health Organization Centre for Monitoring Indian Economy Business Monitor International, accessed 14 March 2008 Health Insurance Reforms: An Unfinished Agenda, Ernst & Young, 2007 Detariffing in Indian General Insurance Industry Trends and Way Ahead, Ernst & Young, 2007 Indian General Insurance Industry, Ernst & Young, 2007 Regulation and Supervision of Microinsurance, GTZ and Federal Ministry for Economic Cooperation and Development, 2004 Life Insurance Industry 2008 Outlook, Ernst & Young, 2007 Freny Patel, Bancassurance, at last, 15 August 2002, via Dow Jones Factiva, 2002 Business Standard Ltd Indian Life Insurance Industry, Cygnus, August 2007, via Thomson Research Indian Non-Life Insurance Industry, ICICI Securities, 6 December 2007, via Thomson Research Indian Life Insurance market, Deutche Bank, November 2007, via Thomson Research
India, a huge insurance market, Rediff news, 01 February 2008, 2008 PTI Indian Health Insurance, Cygnus, September 2007, via Thomson Research Indian Life Insurance Industry, ICICI Securities, 6 December 2007, via Thomson Research Indian Non-Life Insurance Industry, Cygnus, September 2007, via Thomson Research Strategic Business Risk, Ernst & Young, 2008 2008 US Life Insurance Industry Outlook, Credit Suisse, 23 January 2008, via Thomson Research Issues in health insurance, Express Healthcare Management, Issue 16-31 April 2001 Regulation: Solvency II - Seven steps to solvency success, The Review, 18 December 2007, via Dow Jones Factiva Solvency II: Interpreting the key principles, Ernst & Young, 2008 One in four of Europes insurers could face major strategic decisions under solvency II, Standard & Poors, 12 March 2008 Solvency II: Readiness & beyond, Ernst & Young, 2006
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Our offices in India
Ahmedabad Shivalik Ishan Building 2nd Floor Beside Reliance Petrol Pump Ambavadi Ahmedabad - 380 015 Tel: + 91 79 66083800 Fax: + 91 79 66083900 Bengaluru UB City, Canberra Block 12th & 13th Floor No.24, Vittal Mallya Road Bengaluru 560 001 Tel: + 91 80 4027 5000 Fax: + 91 80 2210 6000 Chennai TPL House, 2nd Floor No 3, Cenotaph Road Teynampet Chennai 600 018 Tel: + 91 44 2431 1440 Fax: + 91 44 2431 1450 Gurgaon Golf View Corporate Tower - B Near DLF Golf Course Sector 42 Gurgaon - 122 002 Tel: + 91-124 464 4000 Fax: + 91-124 464 4050 Hyderabad 205, 2nd Floor Ashoka Bhoopal Chambers Sardar Patel Road Secunderabad 500 003 Tel: + 91 40 2789 8850 Fax: + 91 40 2789 8851
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About CII
The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the growth of industry in India, partnering industry and government alike through advisory and consultative processes. CII is a non-government, not-for-profit, industry led and industry managed organisation, playing a proactive role in Indias development process. Founded over 113 years ago, it is Indias premier business association, with a direct membership of over 7500 organisations from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 83,000 companies from around 380 national and regional sectoral associations. CII catalyses change by working closely with government on policy issues, enhancing efficiency, competitiveness and expanding business opportunities for industry through a range of specialised services and global linkages. It also provides a platform for sectoral consensus building and networking. Major emphasis is laid on projecting a positive image of business, assisting industry to identify and execute corporate citizenship programmes. Partnerships with over 120 NGOs across the country carry forward our initiatives in integrated and inclusive development, which include health, education, livelihood, diversity management, skill development and water, to name a few. Complementing this vision, CIIs theme India@75: The Emerging Agenda, reflects its aspirational role to facilitate the acceleration in Indias transformation into an economically vital, technologically innovative, socially and ethically vibrant global leader by year 2022. With 64 offices in India, 8 overseas in Australia, Austria, China, France, Japan, Singapore, UK, USA and institutional partnerships with 271 counterpart organisations in 100 countries, CII serves as a reference point for Indian industry and the international business community.
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CII offices
Headquarters The Mantosh Sondhi Centre 23, Institutional Area, Lodhi Road. New Delhi 110003 Tel: + 91 11 24629994-7 Fax: + 91 11 24626149 Email: ciico@ciionline.org
Regional Offices Eastern Region 6, Netaji Subhas Road Kolkata 700001 Tel: + 91 33 22307727/28/1434 Fax: + 91 33 2301721 Email: ciier@ciionline.org Nothern Region
Corporate Offices New Delhi India Habitat Centre, Core 4A, 4th floor, Lodi Road New Delhi 110003 Tel: + 91 11 24682230-35 Fax: + 91 11 24682229 Email: ciico@ciionline.org Gurgaon Plot No 249-F, Udyog Vihar, Phase IV Sector 18, Gurgaon 122015 Haryana Tel: + 91 124 4014060-67 Fax: + 91 124 4014080 Email: ciico@ciionline.org
Block No.3, Dakshin Marg, Sector 31-A Chandigarh 160030 Tel: + 91 172 2602365/2605868/2607228 Fax: + 91 172 2606259 Email: ciinr@ciionline.org Southern Region 98/1, Velacherry Main Road Chennai 600042 Tel: + 91 44 42444555 Fax: + 91 44 42444510 Email: cii.south@ciionline.org Western Region 105, Kakad Chambers, 1st Floor 132, Dr Annie Besant Road Worli, Mumbai 400018 Tel: + 91 22 24931790/0565/0287 Fax: + 91 22 24939463/24945831
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Note
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Note
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Ernst & Young Pvt. Ltd. Assurance | Tax | Transactions | Advisory

About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 130,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve potential.
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Ernst & Young refers to the global organization on member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Ernst & Young Private Limited is one of the Indian client serving member firm of Ernst & Young Global Limited. Ernst & Young Pvt Ltd. is a company registered under the Companies Act, 1956 having its registered office at Block C, 3rd Floor, 22 Camac Street, Kolkata- 700016
2008 Ernst & Young Pvt. Ltd. All Rights Reserved.
Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young Pvt. Ltd. accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material. 0063.Insurance in India 08/09. Artwork by Jayanta Ghosh

Insurance Report

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Insurance Report

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Indian insurance industry:

The task ahead

Chandrajit Banerjee Director General, CII

Indian insurance industry: The task ahead

Indian insurance industry: The task ahead

Indian insurance industry: The task ahead

Indian insurance industry: The task ahead

positioning India as a regional insurance hub and an international financial center.

Indian insurance industry: The task ahead

Indian insurance industry: The task ahead

Table 1: Insurance premiums in various countries in 2007

Source: Business Monitor International

Indian insurance industry: The task ahead

De-tarrification of marine hull

Indian insurance industry: The task ahead

Table 3: Growth in the number of insurers during 2000-2008

Figure 1: Insurance premiums as a % of GDP (life and general)

Indian insurance industry: The task ahead

Non-Life Insurance Source: IRDA

Indian insurance industry: The task ahead

Current state of the life insurance sector

Indian insurance industry: The task ahead

FY05 Growth rate

Indian insurance industry: The task ahead

Indian insurance industry: The task ahead

1,293 3,641 1,296 135 352 673 77 0 0 0 0 0 159,768

Indian insurance industry: The task ahead

Indian insurance industry: The task ahead

Current state of general insurance

Indian insurance industry: The task ahead

Figure 6: Gross premiums of general insurance sector

Indian insurance industry: The task ahead

Figure 7: General insurance premium income composition FY07

Indian insurance industry: The task ahead

Table 5: Premium collected by various players (INR million)

6,180 225 NA 5,647

6,694 1,730 30 8,287

Indian insurance industry: The task ahead

Health insurance: concept and current state

Figure 8: Healthcare nancing scenario

Social health insurance: SEWA etc.

Indian insurance industry: The task ahead

Figure 9: Market share of the top players as of November 2007

Indian insurance industry: The task ahead

Indian insurance industry: The task ahead

Microinsurance: concept and current state

Indian insurance industry: The task ahead

Indian insurance industry: The task ahead

Regulations by IRDA on microinsurance

Indian insurance industry: The task ahead

Table 6: Rural sector requirements

1st 2nd 3rd 4th 5th

Source : Indian Life Insurane, ENAM

Indian insurance industry: The task ahead

Indian insurance industry: The task ahead

Key trends and issues

Table 7: Distribution network of private insurers

Table 8: Banking distribution (number of branches)

2004 9,088 4,634 9,107 4,675 33,416 5,595 101 52,894

2005 9,185 4,736 33,937 6,128 77 54,063

2006 9,241 4,798 34,185 6,516 51 54,791

2007 9,390 4,806 36,927 NA NA NA

33,123 5,504 43 52,392