IS LIC OF INDIA LOSING ITS MARKET SHARE AFTER LIBERALIZATION?

1 2

Mr. Bidyadhar Padhi, Asst Professor, Silicon Institute of Technology, Bhubaneswar. Dr Mayadhar Satpathy, Senior Reader, Finance, Institute of Management and Information Technology, Cuttack.

ABSTRACT The Government of India liberalized the insurance sector in March 2000 with the passage of the Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign ownership. After liberalization of insurance sector private insurers are making waves. They have beaten all the forecasts. The type of growth rate they have achieved for themselves has no parallel on the globe. In the year 2000-01, when the insurance industry was opened up to the players, the life insurance premium was Rs34898.48 crore. The premium income for the life insurance segment has grown 303% between 2000-01 and 2005-06. This paper will highlight the market share of LIC of India after the liberalization period. It uses a panel dataset of most of the life insurance companies working in India over the period 200110, to evaluate the growth and market share. KEY WORDS IRDA, Liberalization, LIC, Market Share INTRODUCTION Insurance is the best form of fortification against risk that has been formulated by man. Since its emergence, insurance has become unavoidable to every aspect of human life from health disorders to building properties, from household articles to multimillion-dollar projects insurance is considered to be a social device to meet uncertain losses, when the need arises. In general, it is clear that an insurance organization bears the responsibility of offering world-class services to the ultimate users, which needs innovative marketing practices. Insurance in India started without any regulations in the nineteenth century. It was a typical story of a colonial era: a few British insurance companies dominating the market serving mostly large urban centers. After the independence, the Life Insurance Company was nationalized in 1956, and then the general insurance business was nationalized in 1972. The Life Insurance market in India is an underdeveloped market that was only tapped by the state owned LIC of India (the only public sector life insurer) till the entry of private insurers. The penetration of life insurance products was 19 percent of the total 400 million of the insurable population. The state owned LIC sold insurance as a tax instrument, - 215 -

not as a product giving protection. Most customers were under- insured with no flexibility or transparency in the products. With the entry of the private insurers the rules of the game have changed. The Government of India liberalized the insurance sector in March 2000 with the passage of the Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign ownership. The bill was passed to protect the interest of the policyholders from private and foreign players. Under the current guidelines, there is a 26 percent equity cap for foreign partners in an insurance company. There is a proposal to increase this limit to 49 percent. OBJECTIVES OF THE STUDY The objectives of the study are: 1. 2. To study the growth of life insurance in India after liberalization of insurance industry at national level To make a comparative study of the growth and performance of LIC of India and other private life insurers

HYPOTHESIS The following hypotheses are proposed to be treated through the study of this article 1. 2. 3. After liberalization of insurance industry, the numbers and amount of insurance have increased significantly LIC of India is losing its market share after liberalization Still LIC of India is the market leader in the insurance industry and it has dominated Indian Insurance Industry

GROWTH OF LIFE INSURANCE BUSINESS BEFORE AND AFTER LIBERALIZATION The insurance market was opened in August 2000 and the initial batch of new registrations was granted for the first time on 23rd October, 2000. Many of the new companies had not started doing business by the end of March 2001. The number of policies and the amount of premium collected by the private insurers was very little. Table-1 shows the performance of only public sector life insurance company LIC of India before the liberalization i.e. during 1996 to 2000. The corresponding graphs regarding the number of policies and the amount of sum assured during this period have been shown in Figure 1 and 2. - 216 -

TABLE 1 INSURANCE BUSINESS OF LIC OF INDIA BEFORE LIBERALIZATION

Year No.of policies (in lakhs)
708.8 776.7 849.2 916.4 1,013.00

Annual growth rate in No of policies (%)

9.58 9.33 7.91 10.54

Sum assured (Rs.cr)

2,94,336 3,43,018 3,98,959 4,57,435 5,24,589

Annual growth rate in Sum assured (%)

-

1996 1997 1998 1999 2000

16.54 16.31 14.66 14.68

Source: Annual Reports LIC of India FIGURE-1 GROWTH OF NUMBER OF POLICIES AND SUM ASSURED OF LIC OF INDIA BEFORE LIBERALIZATION
30 25 20 15 10 5 0 1996 1997 1998 1999 2000 S um A s s ured No. Of P olic ies

From the above table and graph it is observed that both the sum assured and number of policies issued by LIC of India was increasing steadily in 1996. The annual growth rate of number of policies was around 10% where as the annual growth rate of sum assured was around 16% during the pre-liberalization period. The performance of the life insurance sector was now measured in post liberalization period from 2001 to 2010 after entry of private sector insurance companies in the market in Table -2. - 217 -

TABLE-2 TREND OF LIFE INSURANCE BUSINESS IN INDIA IN THE POST REFORM ERA
Year Total No. of Policies 19683000 22526838 25370675 28626916 26211198 35462117 46151566 50874157 50924000 53225000 359055467 Annual Growth Percentage --14.45 12.62 12.83 -8.44 35.29 30.14 10.23 0.10 4.52 Amount of Premium collected in Rs Lakhs 1220,106.33 5009445.94 5574755.09 6628792.81 8285479.80 10587576.15 15607586 20135141 22178548 26545037 121772468.1 Annual Growth Percentage ---310.57 11.28 18.91 24.99 27.78 47.41 29.01 10.15 19.69

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total

Source: Annual Report of Insurance Regulatory Development Authority (IRDA)

FIGURE-2 NUMBER OF POLICIES IN POST REFORMS ERA

No. of P olic ies

60000000 50000000 40000000 30000000 20000000 10000000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 No. of P olic ies

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FIGURE - 3 TOTAL PREMIUM COLLECTED IN POST REFORMS ERA

T otal P remium C ollec ted

30,000,000.00 25,000,000.00 20,000,000.00 15,000,000.00 Total P remium C ollec ted 10,000,000.00 5,000,000.00 0.00 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

The above table and graph shows that after the liberalization of insurance industry, both the number of policies and annual premium collected have increased significantly. The total number of insurance policies sold increased from 19683000 in 2001 to 22526838 in 2002.This clearly indicates an increase of the total numbers of policies by 14.45%. The increase has continued annually till 2004 and in 2004 the total numbers of policies sold by both the Life Insurance Corporation and other private insurers has reached 28626916. Surprisingly in 2005 the total numbers of polices sold has reduced by 8.44%. But again the increasing trend of numbers of policies sold continued from 2006 to 2010. In 2010 the total numbers of policies sold both by the public and private sector insurance companies have reached to 53225000. Within the ten years of liberalization there has been a growth in the numbers of policies sold by 170%, which shows that the annual average growth in issue of numbers of policies is 17%. It is quite satisfactory achievement and may be attributed to the impact of liberalization policy The premium collected is also correlated with the numbers of policies issued. The total insurance premium collected by the public and private insurance companies has also increased significantly within the ten years starting from 2001 to 2010. In 2001 the total insurance premium collected by the insurance industry was 1220,106.33 as against the collection of premium of Rs 5009445.94 in 2002. In this year the growth in premium collection was 310% as compared to 2001. However, thereafter, the total premium collected has increased steadily at a moderate rate every year till 2010.I t shows that after liberalization the private insurance companies have contributed a lot to the insurance industry. The growth - 219 -

in the year 2003 and 2004 was 11.18% and 18.91% respectively. In 2005 even though the total numbers of policies sold shows a decreasing trend the total insurance premiums amount has increased by 25% over the previous year and reached Rs 8285479.80 lakhs. It shows that the relationship between the numbers of policies issued and the premium collected is not positively correlated in that particular year 2005. The increase in the total premium collected were 27.78% in 2006, 47.41% in 2007, 29% in 2008, 10% in 2009 and 19.69% in 2010. If we compare the total premium collected in 2001and 2010, the growth rate is 95%. It shows that the annual average growth rate in premium collected at 9.5% every year from 2001 to 2010. COMPARATIVE STUDY BETWEEN LIC AND OTHER PRIVATE INSUERERS IN THE POST REFORM ERA Table-3 indicates the comparative performance of LIC of India and the private insurance players as regards the number of Policies sold and the Premium collected in the post reforms era i.e. after liberalization. The corresponding graphs have been indicated in Figure 4 and Figure 5. TABLE 3 COMPARISION OF LIFE INSURANCE BUSINESS BETWEEN LIC OF INDIA AND OTHER PRIVATE INSUERER IN INDIA IN THE POST REFORM ERA
Year No. of Policies by LICI Growth Rate No. of Policies by private Insurers Growth Rate Amount of Premium by LICI(lakh Rs) Growt h Rate Amt of Premium by Pvt Insurers (lakh Rs) Growth Rate

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total

19673000 22394291 24545580 26968069 23978123 31590707 38229292 37612599 35913000 38863000

13.83 9.61 9.87 -11.09 31.75 21.01 -1.61 -4.52 8.21

10000 132547 825094 1658847 2233075 3871410 7922274 13261558 15011000 14362000

1225.47 522.49 101.05 34.62 73.37 104.64 67.40 13.19 -4.32

1219394.26 4982190.94 5462848.94 6316760.18 7512728.98 9079222.36 12782284 14978999 15728804 18607731

308.58 9.65 15.63 18.93 20.85 40.79 17.19 5.01 18.30

712.07 27254.81 111906.15 312032.63 772750.82 1508353.79 2825301 5156142 6449744 7937306

3727.55 310.59 178.83 147.65 95.19 87.31 82.50 25.09 23.06

Source: Annual Report of Insurance Regulatory Development Authority (IRDA)

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FIGURE-4 COMPARATIVE STUDY OF NUMBER OF LIFE POLICIES FLOATED BY LIC OF INDIA AND PVT SECTOR INSURANCE COMPANIES
45000000 40000000 35000000 30000000 25000000 No. of polic ies by L IC 20000000 15000000 10000000 5000000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 No. of polic ies by P vt Ins uerers

FIGURE-5 COMPARATIVE STUDY OF NUMBER OF LIFE POLICIES FLOATED BY LIC OF INDIA AND PVT SECTOR INSURANCE COMPANIES

20000000 18000000 16000000 14000000 12000000 10000000 8000000 6000000 4000000 2000000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 P remium c ollec ted by L IC P remium c ollec ted by P vt ins uerer

From Table 2 and Figure 2 and Figure 3 it is clear that the insurance industry has grown significantly after the liberalization both in terms of the total numbers of policies and - 221 -

total premium collected by the insurance industry. Table 3 shows the total numbers of policies and total amount of premium collected differently by Life Insurance Corporation of India and other private insurers. In 2001 out of the total numbers of policies issued by the insurance industry, LIC has sold 19673000 numbers of policies where as the private insurers were able to sold only 10,000 numbers of policies. This was so happened because the private insurers were new to the insurance market and they have just started their business in 2001. In 2002 the total numbers of policies sold by the private insurers has increased significantly and reached 132547. The total numbers of policies issued by the private insurance companies have been in an increasing trend from the year 2001 to 2010. It shows that the private companies are emphasizing to increase the numbers of policies every year. In 2010 the total members of policies issued by the private insurance companies has reached to 14362000. If we compare this figure with 2001, it shows that there is a growth of 143420%. The total numbers of policies issued by LIC has also increased from 2001 to 2010 except 2005 and 2009. The total numbers of policies sold by LIC in 2001 was 19673000 and it reached the figure 38863000. The growth from 2001 to 2010 was 97.54%. It shows that every year the numbers of policies sold by LIC has been increasing showing an annual average growth rate of 10%. The growth in issue of numbers of policies by private insurance players is much more than LIC of India. In collection of premium the private insurers have also changed all possible predictions. Every year the total premium collected by the private companies has been increasing constantly at a accelerated rate. In 2001 the total premium collected by the private insurance companies was only Rs 712.07 lakhs, which was reached Rs 7937306 lakhs in 2010. This shows that the private insurance companies have done a commendable job to increase their numbers of insurance policies as well as the total premium collection. The premium collected by LIC of India has also increased throughout the study period from 2001 to 2010 but not at the rate at which the private players galloped. But looking at the figures of total premium collected by LIC of India it has reached Rs18607731 lakhs in 2010 which was 70% of the total premium collected by the insurance industries in that year. The rest 30% of the total premium collection in 2010 was collected by the all the private insurances companies together. It shows that LIC of India has still dominated the insurance industry with the highest market share and is undoubtedly the market leader. - 222 -

FIGURE-6 COMPARATIVE STUDY OF GROWTH RATE OF NUMBER OF POLICIES FLOATED BY LIC OF INDIA AND PVT SECTOR INSURANCE COMPANIES
1400.00 1200.00 1000.00 800.00 600.00 400.00 200.00 0.00 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -200.00 P V T s ector G rowth L IC growth

The above graph shows the comparative growth rate of the number of policies floated by LIC of India and the private sector insurance companies from 2001 to 2010. From the above graph it is clear that the growth rate of number of new policies by the private sector insurance companies is much higher than LIC of India. In 2002 the growth looks exceptionally high which is quite normal since in 2001 the number of policies done by the private sector companies is the lowest and it is the beginning of the reforms. That year is an abnormal year and should not be considered for comparison. Even though the growth rate registered by the private sector insurance companies is higher than the LIC of India the growth annual number of policies undertaken by LIC of India is steady over the years.

- 223 -

FIGURE-7 COMPARATIVE STUDY OF GROWTH RATE OF PREMIUM COLLECTION BY LIC OF INDIA AND PVT SECTOR INSURANCE COMPANIES FROM 2001 TO 2010
4500 4000 3500 3000 2500 2000 1500 1000 500 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 G roth of P V T s ec tor P remium G rowth of LIC premium

Just similar to Figure 6 in the above graph it is clear that the premium collection annual growth is more in private sector than LIC of India. The annual growth of LIC of India is steady over the years. After the liberalization an exceptionally high growth of annual premium was seen in 2002. This is because in 2000 the insurance sector was liberalized and it is the beginning. So this figure should not be considered for comparison. The lowest annual growth in premium collection by LIC of India was registered in 2009 but after that year it shows an increasing trend. But it is clear that the growth of annual premium collection by the private sector has been reducing constantly from 2002 to 2010. The growth in private sector annual premium was highest in 2003 and it was 310%, but it was reduced to 83% by the year 2010. CONCLUSION From the above analysis we can conclude that the insurance industries have grown rapidly after the liberalization. Every year both the private insurance companies and LIC of India have been increasing the numbers of policies sold and the total amount of premium collected. Both the total numbers of policies sold and the total amount of premium collected by the insurance industries have increased significantly. But the growth rate of Private - 224 -

insurance companies is more than that of LIC of India in terms of number of Policies and total Premiums collected. After the Insurance sector reforms, most of the private insurance companies entered the Indian market as joint ventures with recognized foreign players across the globe. The increased consumer awareness and competition has brought more products and improved the customer service. As a result the market shares of LIC of India have reduced significantly. But while comparing the market shares of Public sector Insurance company LICI with the private sector insurance companies it is found that LICI still holds 70% market share and remains as the market leader in the insurance Industry. Insurance industry in India is one of the flourishing sectors. The concentration of insurance markets in many developed countries of the world has made the Indian insurance market more magnetic in terms of international insurance players. But this should not be considered as an impossible proposition on the part of private insurance companies that with the tremendous potential for the insurance sector they cannot penetrate the untapped market or they cannot surpass their counterpart in public sector. REFERENCES 1. 2. 3. 4. 5. Annual report of IRDA (www.irda.gov.in) Annual report of LIC of India (www.licindia.in) Bhattacharya, Anbil, (2005), Challenges before Life Insurance Industry, Life Insurance Today, 1 (8): 3-6, 2005 Chaudhary Sonika & Kiran Priti, (2011), Life Insurance Industry in India - Current Scenario, IJMBS Vol. 1, Issue 3, September 2011 Dr. J. Paul Sundar Kirubakaran, (2012), Density and Penetration of Insurance sector in India - An Exploratory Study, IJMBA, 2012; Vol 2 (3): July 2012 (023 - 029), International Standard Serial Number 2230 8393 Kumar Vineet and Kumari Poonam, (2012), A Comparative study on Public vs. Private Sector in Life Insurance in India, VSRD International Journal of Business and Management Research, Vol. 2 No. 10 October 2012 Tiwari Anshuja & Yadav Babita, (2012), Analytical Study on Indian Life Insurance Industry in Post Liberalization, International Journal of Social Science Tomorrow Vol. 1 No. 2, April, 2012

6.

7.

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WHITHER INSURANCE INDUSTRY IN INDIA?

1

P.Deepanvitha, MBA-IV semester Student, Alluri Institute of Management Sciences, Warangal, A.P. can be reached at email: pakala.deepanvitha@gmail.com.
2

N.Abhinaya, MBA-IV semester Student, Alluri Institute of Management Sciences, Warangal, A.P.
3

Mohd.Manzoor Ilahi, MBA-IV semester Student, Alluri Institute of Management Sciences, Warangal, A.P.

ABSTRACT Insurance is a pooling of resources with a mutual understanding of a group of people in systematic way to protect from the natural calamities, uncertainties and risk. Insurance industry not new in Indian economy as it has started a in ancestors period during the thirteen century Koutilya was written the concept in Arthashastra, but organised insurance has been started in 1850 Triton insurance company in Calcutta by British government. After that insurance acts are amendments as growing of the industry but still today it industry not reaches to maturity, the present paper focusing on journey of the industry, present status and future prospects, the analysis the factors influencing and its role in Indian economy. KEY WORDS Insurance, Growth, Economy INTRODUCTION Insurance has a long history in India life insurance in its current form was introduced in 1818.When oriented life insurance company began its operation in India general insurance was however a comparatively late entrant in 1850.When triton insurance company setup its base in Kolkata history of insurance in India can be broadly bifurcated into three as Pre nationalization, Nationalization and Post nationalization. Life insurance was the first to be nationalized in 1956.Conolidating the operation of various insurance companies formed life insurance corporation of India. General insurance followed suit and was nationalized in 1973.General Insurance Corporation of India was setup as the controlling broadly with new India united India national and oriented as its subsidiaries. The process of opening up the insurance sector was initiated against the back ground of economic reform process which commenced from 1991.For this purpose Malhotra committee was formed during this year who submitted their report in 1994 and insurance regulatory development act was passed in 1999. - 226 -

CONCEPT OF INSURANCE A pool is created through contribution made by persons selections to protect themselves from common risk premium is collected by insurance companies which also act as trustee to the pool. Insurance provides financial protection against a loss arising out of happening of an uncertain event a person can avail this protection by paying premium to insurance companies. Insurance is a contract between two parties whereby one party agrees to undertake the risk of another in exchange for consideration known as premium and promises to pay a fixed sum of means to the other party on happening of an uncertain event or after the expiry of a certain period in case of life insurance or to indemnify the other party on happing of an uncertain event in cases of general insurance. TYPES OF INSURANCE 1) LIFE INSURANCE :- ( long term) insurance guaranteeing specific sum of money to a designated beneficiary upon the death of the insured, or the insured if he or she lives beyond a certain age. HEALTH INSURANCE: - insurance against expenses incurred through illness of the insured. GENERAL INSURANCE: - general insurance is normally meant for a short term period of twelve months or less. Recently longer term insurance agreements have made on entry into the general business of general insurance but their term does not exceed five tears. General insurance can be classified into follows Fire insurance, Marine insurance and Miscellaneous

2) 3)

INDIAN INSURANCE INDUSTRY India insurance is a flourishing industry, with several national and international players competing and growing at rapid rates. Thanks to reform sector and easing of policy regulations, the Indian insurance sector been allowed to flourish and as Indian become more familiar with different products this growth can only increase with the period from 20102015 projected to be the golden age for the insurance industry. Indian insurance companies offer a comprehensive range of insurance plans, a range that is growing as the economy matures and the wealth of the middle classes increases. The most common types include: term life policies, endowment policies, joint life policies, whole life policies, loan cover term assurance policies, unit linked insurance plans, group insurance policies, pension plans and annuities. General insurance plans are also available to cover motor insurance, home insurance, travel insurance and health insurance. - 227 -

INDIAN INSURANCE IN THE GLOBAL SCENARIO Indian Insurance in the global scenario has been changing a remarkable growth in the life insurance business, India has been placing its position 10th among the world countries, during 2011-12, the life insurance premium in India declined by 8.5 per cent and during the same period, the global life insurance premium declined by 2.7 per cent. The share of Indian life insurance sector in global life insurance market stood at 2.30 per cent during 2011, as against 2.54 per cent in 2010. The non-life insurance sector witnessed a significant growth of 13.5 per cent during 2011-12. Its performance is far better when compared to global nonlife premium, which expanded by a meager 1.8 per cent during the same period. The share of Indian non-life insurance premium in global non-life insurance premium increased slightly from 0.57 per cent in 2010-11 to 0.62 per cent in the year 2011-12. India stood at 19th rank in global non-life premium income. INSURANCE PENETRATION AND DENSITY IN INDIA The performance of the industry measure of insurance penetration and density reflects the level of development of insurance sector in a country. Since opening up of Indian insurance sector for private participation, India has reported increase in insurance density for every subsequent year and for the first time reported a fall in the year 2011. Even though, insurance penetration, which surged consistently till 2009, slipped in the consecutive second year on account of slower rate of growth in the life insurance premium as compared to the rate of growth of the Indian economy. TABLE 1 INSURANCE PENETRATION AND DENSITY IN INDIA
Life Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Density (USD) 9.1 11.7 12.9 15.7 18.3 33.2 40.4 41.2 47.7 55.7 49.0 Penetratio n% 2.15 2.59 2.26 2.53 2.53 4.10 4.00 4.00 4.60 4.40 3.40 Non life Density (USD) 2.4 3.0 3.5 4.0 4.4 5.2 6.2 6.2 6.7 8.7 10.0 Penetratio n% 0.56 0.67 0.62 0.64 0.61 0.60 0.60 0.60 0.60 0.71 0.70 industry Density (USD) 11.5 14.2 16.4 19.7 22.7 38.4 46.6 47.4 54.3 64.4 59.0 Penetratio n% 2.71 3.26 2.88 3.17 3.14 4.80 4.70 4.60 5.20 5.10 4.10

Source: Swiss Re, Various Issues. - 228 -

1. 2.

Insurance density is measured as ratio of premium (in US Dollar) to total population. Insurance penetration is measured as ratio of premium (in US Dollars) to GDP (in US Dollars) 3. The data of Insurance penetration is available with rounding off to one digit after decimal from 2006.

The insurance density of life insurance sector had gone up from USD 9.1 in 2001 to USD 49.0 in 2011 while reaching the peak at USD 55.7 in 2010. Similarly, life insurance penetration surged from 2.15 per cent in 2001 to 4.60 per cent in 2009, before slipping to 4.40 per cent in 2010 and further slipping to 3.40 per cent in 2011.Over the last 10 years, the penetration of non-life insurance sector in the country remained steady within the narrow range of 0.56-0.71 per cent. However, its density has gone up from USD 2.4 in 2001 to USD 10.0 in 2011. INSURANCE MARKET PLAYERS After open up of Indian economy IRDA was setup in 2000 to promote the insurance in private players there are fifty-two insurance companies operating in India; of which twenty four are in the life insurance business and twenty-seven are in general insurance business. In addition, GIC is the sole national reinsure. Of the fifty two companies presently in operations, eight are in the public sector - two are specialized insurers, namely ECGC and AIC, one in life insurance namely LIC, four in general insurance and one in reinsurance. The remaining forty four companies are in the private sector. TABLE-2 INDIAN INSURANCE MARKET (No of Companies)

HEALTH INSURANCE COMPANIES There is a huge potentiality in health insurance in India, which unable to cover with public sector companies, the Indian Insurance Regulatory Authority (IRDA) granted license to three insurance companies to operate as stand-alone health insurance companies exclusively in the Health insurance segment. These insurance companies are authorized to underwrite business in health, personal accident and travel insurance segments. - 229 -

GROWTH PERFORMANCE OF THE INDUSTRY The performance of insurance sector in India has been suppressed due to monopoly power of public sector last five decades, but potentiality of insurance market in India unable cover by the public sector then after setting up IRDA as apex regulatory body sector is open up for private and foreign players, the following table gives an evidence of growth of the insurance business from 2001 to 2012 shown in table 3, the compounded growth rate of new policies issues in life insurance has been increased by cumulatively nearly 100 percent by private and public sector from 2004-05 to 2006-07, but it was gradually decreased due to global financial crisis many foreign players were facing the norms of capital adequacy and shown a negative impact. TABLE-3 NEW ISSUE POLICIES LIFE INSURERS
YEAR 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 PRIVATE SECTOR 2233075 3871410 7922274 13261558 15010710 143.62 111.14 84.42 73.36% 104% 67.39% 13.18% -4.32% -22.6% -24.04% GROWTH LIC 23978123 31590707 38229292 37612599 35912667 388.63 370.38 357.51 31.74 20.80 -1.61 -4.51 8.21% -4.69 -3.47 GROWTH %

GROWTH PERFORMANCE OF THE INDUSTRY The performance of insurance sector in India in non life insurance has shown a positive growth, the compounded growth rate of new policies issues in life insurance has been increased by cumulatively nearly 100 percent by private and public sector from 200405 to 2006-07, but it was gradually decreased due to global financial crisis many foreign players were facing the norms of capital adequacy and shown a negative impact. - 230 -

TABLE-4 GROWTHRATE OF NEW POLICIES ISSUED NON LIFE INSURERS

YEAR 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 PRIVATE SECTOR 5144755 8946916 12692053 18703219 21922906 240.84 287.65 329.20 73.90% 41.85% 47.36% 17.21% 9.85% 19.43% 14.44% GROWTH RATE PUBLIC SECTOR 44634047 43945284 33972092 38547040 45137181 434.04 505.76 528.14 -1.5% -22.69% 13.46% 17.09% -3.76% 16.52% 4.42% GROWTH RATE

CONCLUSION The journey of insurance sector have long history in India but still it unable to reach all corners in India, one aspect can be Indian government not open up insurance sector till 2000, the awareness of insurance concept still it is an imagination realising investor return only at the end of life are time of maturity, concept of pooling of funds for their mutual benefit to face the risk and uncertainty in life. The penetration of insurance has rapidly increasing a competition among the public, private and foreign players. But due to financial crisis in USA and Europe has shown impact on Indian insurance and financial sector. REFERENCES 1. 2 3. IRDA annual Reports RBI reports SEBI, statistics on Indian economy

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A COMPARATIVE STUDY OF LIC AND PRIVATE LIFE INSURERS IN INDIA

1 2

P.S.Subha Prada, Research Scholar, University of Hyderabad. A.P.

Dr. K. Ramulu, Asst. Professor in Finance & Accounting,School of Management Studies, University of Hyderabad. A.P. He can be reached at email: drkrsms@hotmail.com

ABSTRACT The liberalization of financial sector following the economic reforms in 1991 had a significant impact on the direction and magnitude of the Indian services sector. The sector which was not so active has transformed itself over the past two decades into one that is contributing more than 50% to the GDP. Along with many other sectors Insurance was also opened up for private participation and this changed the Indian insurance scenario. Today, as a result, there are better insurance products leading to greater choice, increased insurance penetration, increased premium collection and better claim settlement among other things. This paper analyses the performance of the Indian Life Insurance Industry from its liberalization in the year 2000, in terms of new premium collection, total premium collection and new policies issued. KEY WORDS Insurance Penetration, Claim Settlement, New Premium Collection, New Policies. THE SERVICES SECTOR The Indian economy grew at 6.5% in 2011-12, the lowest in the last decade, due to an unfavourable macroeconomic environment and global slowdown prevalent across the world. When the industrial and agricultural sectors were growing at a rate lesser than the previous years, the contribution of the Services Sector to the GDP has been increasing over the years. The contribution of the services sector stood at 68.8% to GDP in 2011-12. Among the service sector components, the largest component remains the finance, insurance, real estate and business. Its contribution to the Indian economy has been increasing steadily. In this backdrop, the paper analyzes the growth of the Indian life insurance sector looking at its prospects and contribution to the GDP in the last decade. - 232 -

Table 1 Contribution of finance, insurance, real estate and business to the economy
Year 2007-08 2008-09 2009-10 2010-11 2011-12 Percentage contribution 16.1 16.9 17.1 17.4 17.9

HISTORY OF INSURANCE IN INDIA Manus Manusmrithi, Kautilyas Arthasastra mention about pooling of assets that would be distributed among the needy during natural calamities like floods, famine etc. This could have been the forerunner to the present day insurance. Marine trade loans and carriers contracts could have been the earliest forms of insurance in ancient times. The origin of life insurance in India can be traced to establishment of the Oriental Life Insurance company in Calcutta in 1818. The company could not however sustain for long. Several other companies, of both domestic and foreign origin, emerged in life insurance business. The market was dominated by foreign players which did good business compared to the Indian companies. The increased competition among the large number of players led to adoption of unfair trade practices by the operators which could not be curbed even after the governments Indian Life Insurance Companies Act, 1912; Indian Insurance Companies Act, 1928; Insurance Amendment Act, 1938; Insurance Amendment Act 1950. It was in this backdrop that the Government of India decided to nationalize insurance business. Life Insurance Corporation came into existence in 1956 following the nationalization of Life Insurance in the same year. It was the monopoly in life insurance in India as Insurance sector in India was a closed sector with few public sector companies catering to the needs in both life and non life insurance segments. The insurance sector was a closed one. However, to complement the financial reforms, facilitate liberalization of financial services, accelerate the growth of the insurance sector and to pave way for reforms in the sector, the government constituted R.N. Malhotra Committee in 1993. Following the recommendations of the committee the insurance sector was liberalized in August 2000, after the establishment of insurance regulator Insurance Regulatory and Development Authority (April 2000). The sector was opened to private - 233 -

players and Foreign insurers were allowed to enter into the Indian market through Joint Ventures with an FDI of upto 26%. The FDI limit was later increased to upto 49% in October 2012. Another significant reason for liberalizing the insurance sector was the abysmally low rates of insurance penetration, which is the ratio of insurance premium to GDP and insurance density, which is the ratio of premium to the total population, in comparison with the developed economies. The competition among the players, the innovative products, new marketing strategies brought in a considerable rise in the penetration rates. Where a penetration of 2.71% was recorded in 2001, it reached a high of 5.2% in 2009, an increase of about 91.88%. However, it has declined in 2010 and 2011 to reach 4.1% owing to global economic concerns. The insurance density also increased commendably from a nominal $11.5 in 2001 to $64.4 in 2010, a growth of about 460% over nine years. This also has declined in 2011 to $59. Table 2 Insurance Penetration and Density in India
Life Density (USD) 9.1 11.7 12.9 15.7 18.3 33.2 40.4 41.2 47.7 55.7 49 Penetratio n (%) 2.15 2.59 2.26 2.53 2.53 4.1 4 4 4.6 4.4 3.4 Non Life Density (USD) 2.4 3 3.5 4 4.4 5.2 6.2 6.2 6.7 8.7 10 Penetratio n (%) 0.56 0.67 0.62 0.64 0.61 0.6 0.6 0.6 0.6 0.71 0.7 Industry Density (USD) 11.5 14.7 16.4 19.7 22.7 38.4 46.6 47.4 54.3 64.4 59 Penetrati on (%) 2.71 3.26 2.88 3.17 3.14 4.8 4.7 4.6 5.2 5.1 4.1

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source : IRDA Annual Report 2011-12 - 234 -

Chart 1 Life Insurance Density and Penetration

Chart 2 Non-Life Insurance Density and Penetration

- 235 -

OBJECTIVES 1. To analyze the life insurance sector in terms of new and total premium collection and new policies issued post liberalization. 2. To compare the performance public and private life insurance companies post liberalization. HYPOTHESES 1. H1 - There is significant difference in the growth rate of new business premium between the public and private life insurers. 2. H2 : There is significant difference in the growth rate of total premium between the public and private life insurers. 3. H3 : There is significant difference in the growth of new policies issued by public and private life insurers. METHODOLOGY The paper is analytical in nature and tries to analyze if there is any significant difference in growth of premium collection and new policies issued among the public and private insurance companies using the non parametric Mann Whitney U test at 5% level of significance. The test is used as the samples are independent and the sample size is small. U= N1*N2 + N1(N1+1) - R12 where N1= number of samples from first population N2= number of samples from second population R1= sum of ranks of samples from first population THE GROWTH OF THE INDIAN INSURANCE SECTOR The opening of the sector contributed not only in terms on increased number of players in the market and growth of the sector, but also offered a plethora of choices to the customers/ investors. Presently, there are fifty-two insurance companies operating in India; of which twenty four are in the life insurance business and twenty-seven are in non-life insurance business. In addition, General Insurance Corporation (GIC) is the sole national reinsurer. - 236 -

Registered Insurers in India

Life Insurers

Non Life Insurers

LIC

Private (23) Public (6)

Private (21)

Reinsurance (1) Public

Table 3 Registered Life Insurers in India

S.N o 1 2 3 4 5 6 7 8 9 10

Insurer Life Insurance Corporation of India HDFC Standard Max New York ICICI Prudential Kotak Mahindra Old Mutual Birla Sun Life TATA AIG SBI Life ING Vysya Bajaj Allianz

Foreign Partner Standard Life Assurance, UK New York Life, USA Prudential Plc, UK Old Mutual, South Africa Sun Life, Canada American International Assurance Co., USA BNP Paribas Assurance SA, France ING Insurance International B.V, Netherlands Allianz, Germany
- 237 -

Year of operations 1956-57 2000-01 2000-01 2000-01 2001-02 2000-01 2001-02 2001-02 2001-02 2001-02

11 12 13 14 15 16 17 18 19 20 21 22 23 24

Metlife Reliance Aviva Sahara Shriram Bharti AXA Future Generali IDBI Federal Canara HSBC Aegon Religare DLF Pramerica Star Union Dai-ichi IndiaFirst EdelWeiss Tokio

Metlife International Holdings Ltd., USA Aviva International Holdings Ltd., UK Sanlam, South Africa AXA Holdings, France Generali, Italy Ageas, Europe OBC HSBC, UK Aegon ,Netherlands Prudential of America, USA Dai-ichi Mutual Life Insurance,Japan Legal & General Middle East Limited, UK Tokio Marine, Japan

2001-02 2002-03 2002-03 2004-05 2005-06 2006-07 2007-08 2007-08 2008-09 2008-08 2008-09 2008-09 2009-10 2011-12

Source: IRDA Annual Report 2011-12 PREMIUM COLLECTION IN LIFE INSURANCE Though the market was dominated by LIC, private insurers were still able to get a foot hold as there was market expansion and not sharing alone. TOTAL PREMIUM COLLECTION Premium is the financial cost of obtaining an insurance cover paid either as a lump sum or in installments during the life of the policy. Though the total premium collected in 2000- 01 was only Rs.6.45 crore, it increased considerably thereafter. The total premium collection in 2003-04 was Rs.66,653.76 crore, as against Rs. 272.55 crore in 2001-02, which - 238 -

rose to Rs.2,65,450.37 crore in 2009-10, with a massive growth of 298% over the six-year period. It moved upward in 2010-11 as well. However, both LIC as well as the private insurers reported a drop in their premium collection in 2011-12 on account of economic concerns. The life insurance industry recorded a premium income of 2, 87,072 crore during 2011-12 as against Rs. 2,91,638.64 crore showing a decline in growth of 1.57 %. Table 4 Total Premium (in crore)

Year LIC 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 34892.02 49821.91 54628.49 63533.43 75127.29 90792.22 127822.84 149789.99 157288.04 186077.31 203473.40 202889.28 Private 6.45 272.55 1119.06 3120.33 7727.51 15083.54 28253.00 51561.42 64497.43 79369.94 88165.24 84182.83 Total Premium 34898.47 50094.46 55747.55 66653.75 82854.8 105875.76 156075.84 201351.41 221785.47 265447.25 291638.64 287072.11

Source: IRDA Annual Report 2011-12

- 239 -

Chart 3 Total Premium Collection

FIRST YEAR PREMIUM New premium refers to the first year premium collected premium The private insurers, immediately after liberalization began with a modest premium collection of Rs. 6.45 crore in 2000-01. It continued to grow swiftly year after year till 2010-11. In the year 2011-12, however both LIC as well as the private sector reported a drop of 9.85% in the first year premium collection due to economic concerns.

- 240 -

Table 5 First Year Premium

Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

LIC 9700.98 19588.77 15976.76 17347.62 20653.06 28515.87 56223.56 59996.57 53179.08 71521.90 87012.35 81862.25

Private 6.45 268.51 965.69 2440.71 5564.57 10269.67 19425.65 33715.95 34152.00 38372.01 39385.84 32079.92

Total 9707.43 19857.28 16942.45 19788.32 26217.64 38785.54 75649.21 93712.52 87331.08 109893.91 126398.18 113942.17

Source: IRDA Annual Report 2011-12

- 241 -

Chart 4 New Premium Collection

NEW POLICIES ISSUED During 2011-12, LIC issued 358 lakh policies (80.90 per cent of total policies issued) and the private life insurers issued 84 lakh policies (19.10 per cent) out of life insurers issued 442 lakh new policies, while LIC suffered a decline of 3.47 per cent (4.70 per cent decline in 2010-11) in the number of new policies issued against the previous year, the private sector insurers continued the previous years experience of significant decline and reported a dip of 24.04 per cent (22.61 per cent decline in 2010-11) in the number of new policies issued. Overall, the industry witnessed 8.22 per cent drop in the number of new policies issued.

- 242 -

Table 6 Number of New Policies Issued (in lakhs)

Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

LIC 245.46 269.68 239.78 315.91 382.29 376.13 359.13 388.63 370.38

Private 8.25 16.59 22.33 38.71 79.22 132.62 150.11 143.62 111.14

Total 253.71 286.27 262.11 354.62 461.51 508.75 509.24 532.25 481.52

Source: IRDA Annual Report 2011-12 Chart 5 New Policies Issued

- 243 -

DATA ANALYSIS AND INTERPRETATION Table 7 Mann Whitney U Test Results

Particulars Calculated U values 34 Results Alternate Hypothesis, H1, accepted for new premium Alternate Hypothesis , H2, accepted for total premium Alternate Hypothesis , H3 accepted for new policies issued

New Premium

Total Premium

21

New Policies Issued

The Mann Whitney U test is statistically significant when obtained U is less than or equal to critical value. 1. Since the calculated U value for new premium , 34, is less than the critical value 37 for N1=12 and N2=12, the alternate hypothesis, H1, that there is significant difference in the growth rate of new business premium between the public and private life insurers is accepted. Since the calculated U value for total premium, 21, is less than the critical value 37 for N1=12 and N2=12, the alternate hypothesis, H2, that there is significant difference in the growth rate of total premium between the public and private life insurers is accepted. Since the calculated U value for new policies issued,0, is less than the critical value 17 for N1=9 and N2=9, the alternate hypothesis, H3, that there is significant difference in the growth of new policies issued by public and private life insurers is accepted.

2.

3.

Thus it can be concluded that there is significant difference in growth rate of new premium collection, total premium collection and new policies issued between LIC and private life insurers. CONCLUSION The liberalization of the insurance sector has brought with it many players and innovations. The sector has seen a good increase in insurance density and insurance penetration following the opening up of the sector. The study suggests that the growth rate - 244 -

between LIC and private insurers, in total premium collection, new premium collection and new policies is significant. However, the data suggests that the growth rate is higher in private sector given that it takes about seven to eight years for an insurance company to break even. In comparison with the half century old LIC, the numbers might fade but the private sector looks promising. The liberalization of the sector has made its mark in that the insurance density and insurance penetration has improved significantly over the last decade. The innovation in marketing the insurance products has allowed it to expand its reach commendably. REFERENCES 1. 2. Annual report of IRDA, 2011-12. Debabrata Das, Jasojit Debnath, Performance of Insurance Companies in India : A Comparison of public and private Insurers ,The IUP Journal of Risk and Insurance, Vol IX, No.1, 2012. Selva Kumar M , Vimal Priyan J, A Comparative Study of Public and Private Life Insurance Companies in India , Indian Journal of Commerce, Vol 65, No 1, JanuaryMarch 2012. Selva Kumar M , Vimal Priyan J, Indian Life Insurance Industry : Prospect for Private Sector, The Journal of Insurance Institute of India, No.XXXVI, Jan Jun 2010.

3.

4.

- 245 -

MYOPIA IN LIFE INSURANCE BUSINESS IN INDIA A STUDY ON LAPSATION

Suresh Chandra.Ch, Ph.D Research Scholar(UGC-NET JRF), Department of Commerce & Business Management, Kakatiya University, Warangal. Can be reached at email: suresh.scholar@gmail.com

ABSTRACT Life insurance business in India has started growing at a rapid speed after the liberalization. The favorable policies and supporting financial environment has created the growth of the sector, but due to extreme expectations and short sighted ness on sales and growth has created the companies to reach to the stage of myopia. The result of myopia in life insurance companies in India has resulted to see the pitfalls in many directions right from declining sales of the policies to lapsing of policies. The lapsation has created hurdles and gave a tough challenge to the life insurance business organizations. The present paper will focus on some of the factors contributed to myopia in life insurance business in India with special emphasis on lapsation of the policies. The study further provides the survey results on policyholders with reference to lapsation. KEY WORDS Insurane density, IRDA, Lapse rate, Traditional policies, ULIP. INTRODUCTION Life insurance business in India has changed the dimensions of Indian economy. The beginning of the life insurance business in India was happened in the era of Britishers. The Oriental Life Insurance company in the year 1818 was regarded as the fist life insurance company emerged in India. The favourable policy to Britishers and the restricted environment has witnessed slow growth to the life insurance sector. Though the Indian Insurance Act,1938 contributed for the sector growth, but overall the life insurance industry in India has not been successful till the year 1956. The emergence of Life Insurance Corporation(LIC) of India through LIC Act,1956 has showed tremendous improvement. Ever since, the life insurance industry has dominated by the monopoly status as the LIC remained as only life insurance company in India. The liberalization policies by the government in early 1990s gave the boosting for the life insurance business. The enactment of IRDA Act,1999 has resulted in the formation of regulatory body in the form of Insurance Regulatory Development Authority(IRDA) and the IRDA has opened the entry gates for the life insurance business. - 246 -

The growth has opened an array of opportunities for global firms to either set-up their division in India or to enter into joint ventures with the private insurance companies in India. The industry has witnessed many alterations especially after 1999 when the Indian government allowed the privatization of the sector to promote insurance for attracting FDIs upto 26%. Since then the Indian insurance industry is regarded as a booming market amongst the international insurance firms. The entry of private life insurance companies in the market brought the market as competitive one and the life insurance companies in order to capture the market were started to increase its operations with variety of new policies and attractive packages to its insurance marketers. Growing competition made the marketers to offer variety of policies and the result of forced selling of policies without caring for matching of life insurance products to the requirements of the policy holders played a vital role in lapsation of policies in the first year of policy life. Further the rapid growth in the Unit Linked Insurance Plans(ULIPs) has encouraged private life insurance companies to depend heavily on market based policies. Further, lack of knowledge by the policy holders has also given a chance for the companies to tap the market with heavy selling of ULIP policies. This was happened due to the fact that beneficiaries are unaware about the insurance products and their comparative merits and limitations. In view of this scenario, the present paper will aim to the analyze the factor contributing for myopia in life insurance business. OBJECTIVES OF THE STUDY The paper will focus thoroughly on the following objectives. 1. 2. 3. To study the factors contributing to the myopia in life business in India. To examine the lapsation scenario in life insurance business with special reference to select companies. To present the perceptions of policyholders on myopia with special reference to lapsation.

Finally, the paper will provide meaningful findings and suggestions on the basis of analysis. METHODOLOGY OF THE STUDY The present paper is based on the research work carried on Lapsation of policies in Insurance Sector A study of select life insurance companies in A.P.. The primary data is collected from the policy holders and marketing intermediaries of select life insurance companies. The secondary data is collected from annual reports of IRDA and 3 select life insurance companies (LIC, ICICI Prudential and Bajaj Allianz companies). Further, various journal articles, published articles in books, magazines and news papers and internet sources were used for the collection of data. A sample size of 300 is used which is selected on the basis on determination of sample size for unknown population size. - 247 -

ANALYSIS The detailed analysis on the research objectives is given below. A) FACTORS CONTRIBUTING TO THE MYOPIA IN LIFE INSURANCE BUSINESS

Myopia is a Greek letter which means nearsighted or shortsightedness is generally applied to present the condition of the eye where the light that comes in does not directly focus on the retina but in front of it and it may cause wrong perception about a particular object. The concept of myopia with reference to marketing is introduced by Theodore Levitt in a published book on Marketing myopia. The concept conceives that businesses will do better in the end if they concentrate on meeting customers needs rather on selling products. Myopia in life insurance business refers to the lack of understanding about the long term business successes and focusing on the short term gains by the life insurance companies. The life insurance business in India especially after liberalization has remarked tremendous growth. The growth opportunities in life insurance business made the companies to focus on the policies which have maximum momentum. The rise in the demand for ULIPs has made the private sector life insurance companies to completely concentrate on the market based ULIP policies. Especially, the following factors contributed for the myopia in life insurance business. They include: i. LACK OF INSURANCE AWARENESS &EDUCATION: Though the majority of the policies are sold to the educated Indians so far, but the lack of awareness about the insurance policies is the major problem faced in India. Especially a life insurance product requires careful understanding of various pros and cons which definitely require the need for the proper educator. So far, the life insurance service providers in India are using the services of agents and various marketing intermediaries. The major concern for these people (agents & marketing intermediaries) is to motivate the prospective customers to take the policies. But, the basic awareness and education is not been initiated by the companies. In very few cases, the IRDA which is a regulatory body is making effort to provide customer awareness through its promotion. But majority of the actions taken by the companies and as well as IRDA are restricted to print media. The awareness campaigns were not been implemented so far to the customers to gain knowledge about the various life insurance products that are available in the market. The following data shows the field survey results on policy holders sentience about policy chosen by them. - 248 -

Table No.1 CLASSIFICATION ON THE BASIS OF POLICY HOLDERS EDUCATION AND SENTIENCE ON POLICIES
Sentience about the Policy chosen by them Having sentience about the Policy 8(24.25%) 10(16.7%) 59 (62%) 45(62.5%) 32(80%) 154 Not having sentience about the policy 25(75.75%) 50(83.3%) 36(38%) 27(37.5%) 8(20%) 146 Total 33 60 95 72 40 300

Educational Qualification of the policyholders Illiterate High School Graduate Post Graduate Professional Total

Source: Field Survey From the survey results, it was found that 75.75% of illiterate policy holders opined that they do not have sentience about the policy chosen by them. 83.3% of the policy holders who belongs to High School have opined that they do not have sentience about the policy chosen by them. 62% of the policy holders from graduate category opined that they have sentience about the policy. 62.5% of the policy holders from post graduate category and 80% of the policy holders from professional category have opined that they have awareness over the sentience about the policy chosen by them. Chi-square test is performed in order to analyze the association between educational qualification of the policy holders and the type of policy chosen by them. From the test result, it was found that the calculated value of 2 (61.30) is less than the tabular value (9.49) at 5% level of significance and 4 degrees of freedom, hence it is concluded that there is a significant association between educational qualification of the policy holders and sentience about the policy chosen by them. - 249 -

B)

POLICY HOLDERS LEVEL OF DEPENDENCE ON POLICY MATTERS Table No. 2 Policy holders level of dependence on policy matters
Completely on agent 201 (67%) 248 (82.66%) 65 (21.6%) 29 (9.6%) 25 (8.3%) On agent & to some extent on branch 58 (19.33%) 31 (10.3%) 159 (53%) 45 (15%) 32 (10.6%) On agent & branch office only 22 (7%) 11 (3.6%) 61 (20.3%) 65 (21.6%) 29 (9.6%) Mostly individua l decision 19 (6.6%) 10 (2.66%) 15 (5%) 159 (53.6%) 214 (70.3%)

S.No.

Particulars

Total

Policy selection Completing the formalities before taking policy Payment of premium Services when the policy is in continuation Policy claims

300

300

300

300

300

Source: Field Survey Table No. 2 shows the policy holders level of dependence on policy matters. Fro policy selection, majority of the respondents, i.e., 67% of the policy holders have preferred to depend completely on agent for taking life insurance policy. For completing the formalities before taking the policy, majority of the policy holders, i.e, 82.66% of them are depending completely on agent for completing the formalities. For payment of premium, majority of the respondents, i.e., 53% of them are depending on agent and some extent on branch to pay the premium. For services when the policy is in continuation, majority of the respondents, i.e., 44% of them are depending mostly branch office and to some extent on agent. For policy claims, majority of the respondents, i.e., 40.3% of them are completely depending on branch office services. Hence, from the survey it is to point out that for policy selection, completing the formalities before taking the policy majority of the respondents are depending completely on agent and for payment of premium and services when the policy is in continuation majority of them are depending on both agent and branch and for policy claims majority of the respondents completely depending on branch office. - 250 -

Iii. POOR PRODUCT DEVELOPMENT Every product development successfully passes several distinctive stages right from idea screening, idea generation to till concept testing and commercializing the product successfully in the market. Especially life insurance service products are the policies which are generally gives long term benefit and the customers while selecting the these products makes a long term estimation about their needs and forthcoming issues. But, the recent statistics of major life insurance companies clearly showing that the withdrawn life insurance policies are keep increasing. The following table shows the details of information on select life insurance companies. Table No.3 LIST OF TOP 4 COMPANIES WHOSE POLICIES ARE WITHDRAWN
List of companies policies with drawn from market LIC 20004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 3 2 4 3 8 3 1 ICICI Prudential 12 1 26 6 5 15 1 Bajaj Allianz 6 1 10 2 8 14 1 SBI Life 1 3 9 6 2 9 1

Period

Source: IRDA reports on life insurance products of life insurance companies The above table clearly shows the list of policies which are withdrawn from offering in the market. For LIC, 2008-09 have shown highest number of policies lapsed. For ICICI Prudential, 2006-07 have shown majority of the policies lapsed. For Bajaj Allianz, 2009-10 have witnessed majority of the polices get lapsed and for SBI Life insurance company, majority of the policies were lossed in 2006-07 and 2009-10 period. Overall, it is to understand that all the companies have shown number of polices withdrawn from the market. This is also suggesting that lack of proper life insurance product development may also effect in achieving the rising number in withdrawn policies. - 251 -

B)

LAPSATION SCENARIO IN SELECT LIFE INSURANCE COMPANIES

The following table shows the detailed analysis on the survey results on 4 select life insurance companies, namely LIC, ICICI Prudential, Bajaj Allianz and SBI Life insurance companies. i. a) LAPSE RATE FOR LINKED & NON-LINKED POLICIES The lapse rates for the non-linked products and linked products over the last three years were as follows: Table No. 4 LAPSE RATE FOR NON-LINKED &LINKED POLICIES
Duration elapsed in years 0-1 year 1-2 years 2-3 years 3-4 years 4-5 years Non-linked 2004-05 22.31% 12.12% 4.51% 3.50% 3.26% 2005-06 18.95% 12.96% 5.94% 4.74% 3.97% 2006-07 6.10% 2.50% 2.18% 5.55% 4.42% 2004-05 24.19% 9.43% 8.73% 2.23% 6.07% Linked 2005-06 41.06% 17.62% 6.10% 2.50% 2.18% 2006-07 13.43% 18.10% 8.78% 3.94% 2.08%

Source: Lapsation committee report of IRDA, 2008. The above statistics given by IRDA clearly shows the lapsed rate in non-linked and linked policies for the period 2004-05 to 2006-07 period. From the data, it is clearly observed that for non-linked policies, the lapsed rate is high for the initial period of 0-1 year. For the period 2004-05, the lapsed rate is 22.31% for the period of 0-1 year. It has gradually decreased to 6.10% for the financial year 2006-07 periods. For the period of 1-2 years, the lapsed rate is high for the year 2005-06 periods. For the remaining years, i.e., 2-3 years to 4-5 years, the lapse rate is low compared to the initial period of 0-1 year period. For the linked policies also, the lapse rate is high for the initial period of 0-1 year. For 2004-05 Period, the lapse rate is situated at 24.19% and it has increased to 41.06% and decreased to 13.43% for the period of 2006-07 period. The lapse rate for linked policies has shown high for the initial period of 0-1 year and 1-2 years and it has declined to 2.08% for the end of 4-5 years duration. Overall, from the statistical figures, it is to conclude that, the lapse rate found high in the initial period of 0-1 year and 1-2 years and decreased rapidly as the years progressed. - 252 -

ii.

POLICY WISE LAPSATION SCENARIO The following table shows about the policy wise lapsation scenario of select life insurance policies which are in operation under various life insurance companies operating in India. Table No.5 Policy wise lapse rate
Policy Type Term Policy 28.27% UnitLinked 18.09% WPWhole Life 8.51% WPEndowment 7.08% NPEndowment 4.55% NPWhole Life 3.80% Pension Policy 2.54%

Lapse rate

Source: Committee report of IRDA on Lapsation, 2008. From the above table, it is evident that for the term life insurance plan, the lapse rate is very high with 28.27%. For market based ULIP plans, the lapse rate is situated at 18.09% and For the traditional plans including Whole life (including Whole premium and Net premium) the lapse rate is situated at 8.51% and 3.80% respectively. For Endowment types the lapse rate is situated at 7.08% and 4.55% respectively. And fro the pension, policies, the lapse rate is situated at 2.54%. Overall, from the statistics, it is clearly observed that for Term policy and Unit linked the lapse rate shown very high compared to traditional form of life insurance policies. iii. LAPSE RATE IN THE UNIT LINKED PRODUCTS VERSUS TRADITIONAL PRODUCTS Table No.6 LAPSATION RATE IN ULIP AND TRADITIONAL PRODUCTS

Type of policy Traditional Unit Linked

2002-03 5.58% 8.43%

2003-04 7.70% 11.37%

2004-05 7.69% 17.80%

2005-06 7.48% 26.09%

2006-07 6.59% 14.34%

Source: Committee report of IRDA on Lapsation, 2008. As per the above table, the industry lapse rate with respect to number remained within 4% to 6% whereas the linked products showed increasing lapse rates since - 253 -

2004-05. With respect number of policies lapsed in unit linked products, there is a sharp increase in lapse rate from 17.8% to 26% in 2005-06 but decreased to 14.34% in 2006-07. The lapse rates with respect to number of policies under Unit linked products are observed to be considerably higher than those under conventional products as evident from the above figures. Excepting term assurance products the following results using three years combined data (2004-05 to 2006-07) reiterate the higher lapse rate in unit linked products than traditional products. iv) COMPARATIVE STUDY ON LAPSE RATIO OF SELECT LIFE INSURERS The following table shows the statistics with reference to the lapse ratio in select life insurance companies for the period 2006-07 to 2010-11. Table No.7 Comparative study on lapse ratios of select life insurance companies

Lapse ratio ( in percentages) for select life insurers Period 2006-07 2007-08 2008-09 2009-10 2010-11 Average lapse ratio for 5 years LIC 4 6 4 4 5 4.6 ICICI Prudential 26 40 53 81 46 49.2 Bajaj Allianz 17 19 14 17 11 15.6 SBI 19 16 9 7 7 11.6

Source : IRDA Annual report from 2006-07 to 2010-11 The statistics on comparative study on lapse ratio for LIC as well as 3 other private life insurance companies have clearly showing that the lapse ratio for the LIC is steady as it recorded 4% in 2006-07 and reached to 5% for the period 2010-11. For ICICI Prudential, the lapse ratio is highly inconsistent as it has recorded 26% in 2006-07 and reached to 46% for the period ended in 2010-11 period. Further, Bajaj Allianz Life have shown declining rate of lapse ratio in the chosen 5 years period. It has reached to 11% for the period 2010-11 period. For SBI, the lapse ratio is decreasing from 19% in 2006-07 period to 7% in 2010-11 period. Hence, from the statistics, it is to conclude that for majority of the life insurers the - 254 -

lapse ratio is steady except to ICICI Prudential life insurers. And the average lapse ratio is low for LIC with 4.6% compared to ICICI Prudential which has shown 49.2% recorded as highest in the select life insurance companies. Fro Bajaj Allianz, the average lapse ratio has recorded as 15.6% and for SBI, the average lapse ratio for 5 years is 11.6%. C) i. PERCPETIONS OF POLICYHOLDERS POLICYHOLDERS OPINION ON MIS SELLING AS A REASON FOR LAPSATION The following table shows the filed survey results on the opinion of policy holders with reference to mis selling as a reason for lapsation. Table No. 8 POLICY HOLDERS OPINION ON MIS SELLING AS A REASON FOR LAPSATION
Policy holders opinion on mis selling as a reason for lapsation Misselling is evident for lapsation (yes) 90(75%) 42 (70%) 51 (85%) 45 (75%) 228 (76%) Misselling is not evident for lapsation (No) 30 (25%) 18 (30%) 09 (15%) 15 (25%) 72 (24%)

Type of policyholder LIC ICICI Pru Bajaj Allianz SBI Life Total

Source: Field Survey From the above table it was found that majority of the LIC policy holders, i.e., 75% have opined yes with reference to mis selling as a reason for lapsation. 70% of the ICICI Pru policy holders , 85% of them Bajaj Allianz policy holders, 75% of the SBI Life policy holders have opined yes which means that a total 76% of the policy holders of all life insurance companies have opined yes with reference to the opinion on mis selling is one of the reasons for lapsation. ii. CLASSIFICATION OF POLICY HOLDERS ON THE BASIS MARKETING INTERMEDIARIES INFLUENCE ON LAPSATION The following table shows the classification of policy holders on the opinion on agents influence on lapsation. - 255 -

Table No. 9 Marketing intermediaries influence on lapsation

Classification of policyholders LIC ICICI Pru Bajaj Allianz SBI Life Total Influence of marketing intermediaries is evident on lapsation 94 (78.33%) 48 (80%) 42 (70%) 39 (65%) 223 (74.33%) Influence of marketing intermediaries is not evident on lapsation 26 (21.67%) 12 (20%) 18 (30%) 21 (35%) 77 (25.67%)

Source: Filed Survey The above table shows the opinion of the policy holders with reference to influence of marketing intermediaries on lapsation. 78.3% of the LIC policy holders opined that that agents influence is evident on lapsation. 80% of the ICICI Prudential policy holders, 70% of the Bajaj Allianz policy holders, 65% of the SBI Life policy holders have opined that influence of agent is evident on lapsation. iii. PERCEPTIONS OF POLICY HOLDERS ON INFLUENCE OF LACK OF FUND PERFORMANCE RESULTING IN LAPSATION The following table shows the opinion of the policy holders with reference to the lack of performance of policy resulting in lapsation. Table No 10 PERCEPTIONS WITH REFERENCE TO LACK OF POLICY PERFORMANCE RESULTING IN LAPSATION
Perceptions with reference to lack of policy performance resulting in lapsation Yes (influence of policy performance is evident in resulting of lapsation) 102 (85%) 45 (75%) 39 (65%) 43 (71.66%) 229 (76.33%) Influence of policy performance is not evident in resulting of lapsation) 18 15 (25%) 21 (35%) 17 (28.34%) 71 (23.64%) Total

Classification of policyholders

LIC ICICI Pru Bajaj Allianz SBI Life Total

120 (100%) 60 (100%) 60 (100%) 60 (100%) 300 (100%)

Source: Field Survey - 256 -

The above table shows the perceptions of policy holders on the Lack of performance of policy resulting in lapsation. 85% of the LIC policy holders have opined yes which suggest that they are strongly supporting to the statement that influence of lack of policy performance resulting gin lapsation. iv. POLICY HOLDERS PERCEPTION ON MEASURES TO OVERCOME LAPSATION The following table shows the responses of policy holders with reference to the measures to overcome from the problem of lapsation. Table No. 11 POLICY HOLDERS PERCEPTION ON MEASURES TO OVERCOME LAPSATION
Perceptions of policyholders on measures to overcome from lapsation Type of policyholders Getting awareness about policy 48 32 28 29 137 (45.66%) Choosing the policy based on financial capability 39 16 14 15 84 (28%) Selection of proper market intermediaries 22 05 11 10 48(16%) Creating strong communication channel for dues 11 07 07 06 31 (10.33%)

LIC ICICI Prudential Bajaj Allianz SBI Life Total

Source: Field survey From table No 11, the survey result on the perceptions of policy holders with reference to measures to overcome from the problem of lapsation is obtained. From the policy holders of 4 select life insurance companies, it was found that 45.66% of the policy holders have opined that getting awareness about the policy is the measures to overcome from the problem of lapsation. 28% of the policy holders have given that choosing the policies based on financial capability is the measure to overcome from the problem of lapsation. 16% of the policy holders felt that selection of proper market intermediaries help to reduce the problem of lapsation and 10.3% of the policy holders found that creating strong communication channel from the companies - 257 -

about policy dues is the measure to overcome from the problem of lapsation. Hence from the results it is to conclude that majority of the policy holders have opined that getting awareness about policy is the measure to overcome from the problem of lapsation. v. POLICYHOLDERS OPINION ON AWARENESS ON INSURANCE EDUCATION AS A MEASURE FOR DIMINUTION OF LAPSE RATE The following table shows the opinion of sample respondents with reference to the awareness on insurance education helping for reducing lapse rate. Table No.12 POLICY HOLDERS OPINION ON INSURANCE EDUCATION AS A MEASURE FOR DIMINUTION OF LAPSATION
Opinion on insurance education as a measure for diminution of lapsation Insurance education helps in reducing lapse rate 91 (75.83%) 41 (68.33%) 43 (71.66%) 48 (80%) 223 (74.33%) Insurance education did not helps in reducing lapse rate 29 (24.17%) 19 (31.67%) 17 (29.34%) 12 (20%) 77 (25.66%) 120 (100%) 60 (100%) 60 (100%) 60 (100%) 300 (100%)

Classification of policyholders LIC ICICI Pru Bajaj Allianz SBI Life Total

Total

Source: Field Survey The above table shows the opinion of sample respondents with reference to the insurance education as a measure for reducing lapse rate in life insurance policies. From the field survey, it was found that 75.83% of the LIC policy holders have opined that insurance education helps in reducing lapse rate. 68.33% of the ICICI Prudential policy holders, 71.665 of the Bajaj Allianz policy holders, 80% of the SBI Life policy holders have opined that insurance education will helps in reducing policy lapsation. Hence, from the survey, it was found that majority of the policy holders, i.e., 223 out of 300, i.e., 74.33% of them have opined that insurance education have an impact on reducing lapse rate of life insurance policies. FINDINGS & SUGGESTIONS Life insurance sector undoubtedly contributed for the growth of the economy. The emergence of various life insurance companies resulted in the introduction of various types of policies. But, due to lack of understanding about long term benefits and needs, the life - 258 -

insurance companies in India primarily focused on hedging on profits. Lack of awareness and education on life insurance policies remained primary concern which resulted in myopia by the policy holders. And also, the dependence of policy holders completely on agent and branch remained high. It suggests that the policy holders are highly depended on the advice by the agents for taking policies. Rising of withdrawn policies by the top 4 life insurance companies clearly suggested that lack of proper planning in product (policy) development may also result in myopia by the companies. The lapse rate clearly suggesting that in Term and Unit linked plans, the lapse rate is high. And also, the companies dependence on Unit linked plans has resulted in high lapse rate. The lapse rate especially in the private sector is high which shows that the companies while aiming to sell its policies has heavily concentrated on ULIP which also resulted in the problem of lapsation. The survey results clearly showing that misselling and role of marketing intermediaries role is high which resulted in lapsation. Lack of fund performance is also another factor which resulted in lapsation. Majority of the policy holders opined that getting awareness about the policy is the best measure to overcome from the lapsation. Overall, the study clearly revealing that the life insurance companies especially concentrated on unit linked plans in the post liberalized era to increase their sales. Further, lack of proper awareness campaigns, poor product development have resulted in myopia in life insurance business. Overall, the myopia factor clearly showed its impact on lack of sales and rising lapsation. Hence, it is to suggest that the product development should be made clearly studying the actual needs and capabilities of the policy holders. Further, strengthening the awareness and proper training to marketing intermediaries will result in best selection by the policy holders. REFERENCES 1. 2. 3. 4. 5. 6. 7. Baughman, J. (1974). Problems and performance of the role of the chief executive. Graduate School of Business Administration, Harvard University. David Mercer, Marketing Myopia, Marketing Harsh Walia, Lapsation of an insurance policy and its implications, The Insurance times, vol.XXII, No.12, December, 2002. IRDAs Annual Reports from 2000-01 to 2010-11. IRDAS Statistical Hand Book Jogendra kumar, Lapsation of a life insurance policy, Bimaquest, volume no. IX, Issue II, July, 2009, Pg. 38-44. Kotler, Philip; Singh, Ravi (1981). Marketing Warfare in the 1980s. Journal of Business Strategy 1 (3): 3041. - 259 -

8. 9. 10. 11.

Levitt, T. (1960). Marketing Myopia. Harvard Business Review. LICs Annual Reports from 2004-05 to 2010-11. M. Srinivas, Cause of lapsation of life insurance polices in LIC of India, Review of Business Research, Published on May1, 2008. N.V. Subramanyan, Lapsation of life insurance policies a critical study, the Journal of Insurance Institute of India, Universal Insurance building, New Delhi, vol. No.XXX, July-December, 2004. Steiner, G. (1979). Strategic Planning: What Every Manager Must Know. New York: The Free Press. www.iciciprulife.com www.licindia.com www.sbilife.co.in www.wikipedia.org www.bajajallianz.co.in www.irdaindia.gov.in

12. 13. 14. 15. 16. 17. 18.

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MEASURING PERFORMANCE AND EFFICIENCY GROWTH OF THE SELECTED INDIAN LIFE INSURANCE COMPANIES: A TOTAL FACTOR PRODUCTIVITY APPROACH
1

Shri Tapas Ku. Parida, Research Scholar (Economics)School of Economics, University of Hyderabad, Central University, Hyderabad 500046, E-mail: tapasmfc@gmail.com, Cell: 91 (0) 9397194068, 9867625115.
2

Dr. Debashis Acharya, Associate Professor, School of Economics, University of Hyderabad, Central University, Hyderabad 500046, E-mail: dass@uohyd.ernet.in, Cell: 91 (0) 9492061648, Phone (O): 040 - 23133124.

ABSTRACT Historically, Life Insurance Corporation of India (LIC) dominated the Indian Life Insurance market. However, the situation has changed drastically, with the development of the IRDA Act in 1999, which allow private players to enter into the Indian life insurance market. At the end of the year 2010-11, there are 48 insurance companies operating in India (life insurers 23, non-life insurers 24 and a reinsurer). On the basis of total premium income, the market share of LIC declined marginally from 85.75% in 2005-06 to 69.78% in 2010-11. Accordingly, the market share of private insurers has gone up from 14.25% in 2005-06 to 30.22% in 2010-11. The present paper attempts to compare the performance and efficiency in terms of total factor productivity (TFP) growth of 13 Indian life insurance companies (12 private sector and 1 public sector) in respect of Catch-up efficiency and Frontiershift efficiency for the FYs ranging from 2005-06 to 2010-11 using Data Envelopment Analysis (DEA). For this purpose, Net Premium Income and Number of products launched during the year has been taken as the output indicators and operating expenses along with Commission expenses has been taken as the inputs. KEY WORDS Catch-up Efficiency, DEA, Frontier shift, Life insurance, Malmquist TFP Growth. INTRODUCTION Life Insurance has become an increasingly important part of the financial sector over the years, providing a range of financial services for consumers and becoming a major source of investment in the capital market. First, by pooling risks and smoothing incomes, it helps avoid excessive and costly bankruptcies and facilitates lending to businesses. Second, the availability of insurance enables individuals and entrepreneurs to undertake activities - 261 -

with higher risk and higher return than they would otherwise consider, thus promoting higher productivity and growth. Third, due to the long term nature of their liabilities, with predictable premiums, life insurers also serve another important function, acting as providers of capital to infrastructure and other longterm investments. Finally, insurance has a big role to play in providing support to the poorer sections of the society. In the absence of risk pooling mechanisms, setbacks in incomes can permanently damage a poor familys prospects. Insurance can help prevent these setbacks and provide support to the society. The Indian insurance market opened up to the private players in August 2000 and cap for foreign investment was fixed at 26%, which is now a policy issue both for the government and regulator to increase the cap limit for attracting more foreign funds into the country. During 2001 to 2012, the Indian insurance market showed a robust growth in all most all parameters like total premium collection, no of new policies etc. In 2011-12, the total insurance business in India constitutes around 12% of the Gross Domestic Savings (GDS) of the country and life fund represents around 34% of the financial savings of the household sector. Due to this robust growth, Indias insurance penetration has been increased to 4.1% (life: 3.4% and non-life: 0.7%) in 2011 from 2.7% (life: 2.2% and non-life: 0.5%) in 2001. Another important indicator of growth in insurance in the country is, insurance density, which also grew by four fold to $11.5 (life: $49.0 and non-life: $10.0) in 2011 from $59.0 (life: $9.1 and non-life: $2.4) in 2001. In the last decade, the insurance in force is also rose nearly 12-fold and health nearly 25-fold. This progress has been aided by the dramatic shift in the availability of products, for example: better term, ULIPs, whole life and maximum NAV guarantee etc. Presently, the industry evolved from a monopoly to a truly competitive market, as there are nearly 52 companies (life 24, non-life 27 and reinsurer 1) are operating in this industry from 5 incumbents (1 life, 4 non-life) in 2001. LIFE INSURANCE SECTOR IN INDIA Life insurance has become a critical part of any economy, providing a range of financial services for consumers and becoming a major source of investment in the capital market. This provides individuals and the economy with several important financial solutions. First, life insurance products encourage long-term saving and reinvestment of substantial sum in public and private sector projects. By leveraging their role as financial intermediaries, life insurers have become a key source of long-term finance, encouraging development of capital markets (Beck and Webb; 2003). Secondly, in the phase of growing urbanization, population mobility, and formalization of economic relationships between individuals, families, and - 262 -

communities, life insurance has taken on increasing importance as a way for individuals and families to manage risk. The insurance laws in India were developed in the footsteps of English Insurance Laws. The period between 1928 and 1956 held a significant aspect in the development of insurance laws in India. The enactment of the Insurance Act, 1938 provided stability to the growing insurance business and the earlier legislations were consolidated and amended to protect the interest of the insuring public. The next significant piece of legislation that came into effect was the introduction of the Life Insurance Act on 01 September, 1956. The nationalization of the life insurance business in India saw the emergence of countrys only public-sector life insurance company Life Insurance Corporation of India (LICI), which was formed as a result of the takeover of 170 companies and 75 provident fund societies. The Government of India appointed a high-powered committee entitled Malhotra Committee in 1993 under the chairmanship of R.N.Malhotra, former Finance Secretary and Governor of Reserve Bank of India. The Committee submitted its report in January 1994 that emphasized upon the private-sector participation in the life insurance business thereby lifting the entry barriers of private players and allowing foreign players to enter the market with some limitations on foreign direct investment. The government accepted the recommendation of Malhotra Committee report in principle. This opened the floodgates of opportunities for the private players in India to diversify themselves into the insurance business either through joint ventures or as a standalone player. In April 2000, the commercial banks have been permitted to undertake insurance business subject to maintenance of an arms length relationship by the banks with their insurance subsidiaries. As on 30 September, 2012, there were 24 registered life insurance companies that were operating in India with 1 publicsector player and 23 private insurers, with more proposals being on the pipeline. In 2011, the global direct premium fell by 0.8% (life -2.7% and non-life 1.9%) compared to a growth of 2.7% (life 3.2% and non-life 2.1%) in 2010 (Swiss Re; Sigma 3/2012). The growth varied from regions to region, as advanced markets, premium volume slipped by 1.1% the same grew in the emerging markets at 1.3%. The growth also varied by lines of business. In the Western Europe, life premiums dropped steeply by 9.8%. The North America witnessed a positive growth of 2.3% in its life premium. In the emerging markets, though life premium dropped by 5.1% partly due to new distribution regulations in China, non-life insurance reported a smart growth of 9.1%. In the world, life insurance premiums accounted for 57% of the total. This share is higher in advanced economies (58%) than in emerging markets (52%) mainly due to the low share of life insurance in the Middle East and Central & Eastern Europe.

- 263 -

LIC

Total Premium: Life Insurers 203473 202889 9.35 88165 11.08 291639 9.87 -0.29 84183 -4.52 287072 -1.57

% growth Private Sector % growth Total % growth

Source: IRDA

Real Growth 2011*(%) Regions/Countries Life Non-Life Advanced countries -2.3 0.5 Emerging markets -5.1 9.1 Asia 0.5 7 India** -8.5 13.5 World -2.7 1.9

Total -1.1 1.3 2.2 -5.5 -0.8

Source: IRDA, * calender year ** Financial year 2011-12

The share of Indian life insurance sector in global life insurance market stood at 2.30% in 2011, as against 2.54% in 2010. However, in non-life segment, Indias share in global non-life insurance premium increased slightly from 0.57% in 2010 to 0.62% in the 2011. India stood at 19th rank in global non-life premium income. MOTIVATION AND OBJECTIVE OF THE STUDY In the last decade, the insurance industry has shown a remarkable transformation in terms of premium collection, branch expansion, product innovation and also in distribution channels. The changes may go unnoticed from month to month, or even year to year, but if one takes a step back and compares the industry landscape of 2001 to that of 2012, the difference is more than striking. Due to this robustness in growth and increasing competition, this motivates me to study the performance of the 13 insurance companies (public and private), which are operated in the sample period. In Indian context, there are a very few studies available so far, to study the efficiency and performance of the life insurance companies in India. OBJECTIVE OF THE STUDY To find the relative efficiency of the selected insurance companies in the sample period and to find out the performance of these companies over a period of time. DATA AND METHODOLOGY

SAMPLE SIZE

The present paper attempts to compare the performance and efficiency in terms of total factor productivity (TFP) growth of 13 Indian life insurance companies (12 private sector and 1 public sector) in respect of Catch-up efficiency and Frontier-shift efficiency for the FYs ranging from 2005-06 to 2010-11 using Data Envelopment Analysis (DEA). For this purpose, Net Premium Income and Number of products launched during the year has been taken as the output indicators and operating expenses along with Commission expenses has been taken as the inputs. - 264 -

DATA SOURCES

The data relating to inputs and outputs of the 13 life insurers (both public & private) have been taken from the data published by the Insurance Regulatory & Development Authority (IRDA) Annual Reports. The period of analysis is for a 6 year period from 200506 to 2010-11. Nominal data in respect of premium, operating expenses and commission expenses have been deflated by appropriate price deflator.

METHODOLOGY

Catch-up effect, Frontier-shift effect & Malmquist Total Factor Productivity Index Methodological Issues In the present study we are concerned about the productivity change and efficiency of 13 life insurance companies during the period from 2005-06 to 2010-11. The performance of a Decision Making Unit (DMU) between two time-periods is typically described in terms of productivity change or efficiency. Productivity change of a DMU can be defined as the product of Catch-up and Frontier-shift terms. Measurement of catch-up (or recovery) term, on the other hand, relates to the degree to which a DMU improves or worsens its efficiency. Again, measurement of Frontier-shift (or innovation) term reflects the change in the efficient frontiers between the two time-periods. In fact, both can serve as good indicators for evaluating the performance of a DMU. EMPIRICAL RESULTS In this paper, we attempt to estimate the change in total factor productivity (TFP) of 13 life insurance companies for a six year period ranging from 2005-06 to 2010-11 using the Malmquist Total Factor Productivity Index. We have selected 13 life insurers who had their operations in all the six years. In order to measure Malmquist Productivity Index and the Catch-up & Frontier-shift efficiency measures, specification of outputs and inputs is essential. We have used the Data Envelopment Analysis Solver-Pro (Malmquist-Radial) Program, popularly known as DEA-Solver Software Pro-5.0 version to measure the Malmquist Productivity (TFP) growth index as well the Catch-up & Frontier-shift of the 13 life insurers. In the following, we will discuss the company-wise Catch-up and Frontier-shift efficiency scores of the individual life insurers and also will see the changes in Malmquist Total Factor Productivity scores for the period against all 13 life insurers. a) CATCH-UP & FRONTIER-SHIFT EFFICIENCY SCORES OF LIFE INSURERS

The following two table presents the company-wise relative Catch-up and Frontiershift efficiency scores of the individual life insurers. - 265 -

Catch up Efficiency Scores

INSURER WISE CATCH-UP EFFICIENCY SCORES FOR THE PERIOD FROM 2003-04 TO 2009-10 & AVERAGE CATCHUP SCORE FOR THE AFORESAID PERIOD Catch-up Catch-up Catch-up Catch-up Catch-up Catch-up Company Name Average Catch-up Efficiency scores Efficiency Efficiency Efficiency Efficiency Efficiency (Insurers) Efficiency Scores 2005-06 Scores 2006-07 Scores 2007-08 Scores 2008-09 Scores 2009-10 Scores 2010-11 LICI 1 1 1 1 1 1 1 Birla Sun Life 1.208989 1.510222 0.865037 0.803596 0.783653 1.041428 1.035487 ICICI Pru 1 1 1 1 1 1 1 ING Vysya 1.397723 1.49902 0.586853 1.424489 1.043255 0.847736 1.133179 HDFC Standard Life 0.839495 1.480027 1.065559 0.959523 0.92652 0.920781 1.031984 Max New York Life 0.808581 2.600204 0.461664 1.524486 0.776242 0.912578 1.180626 Shriram 1 1 1 1 1 1 1 BAJAJ Allianz Life 1.008385 0.86481 0.875944 1.023108 1.290273 0.908895 0.995236 SBI Life 1 1 1 1 1 1 1 Kotak Mahindra 1.653352 0.723628 1.381925 0.75555 1.076235 1.229786 1.136746 TATA-AIG Life 0.397824 1.107037 1.19125 1.496877 1.007778 0.923168 1.020656 Met Life 0.32334 1.052881 1.876762 0.5527 1.929408 0.874822 1.101652 AVIVA Life 0.677968 0.630067 2.521111 1 1 0.799715 1.10481 Source: Calculated

Based on the relative catch-up efficiency scores over the six year period, we find that the lone public life insurer Life Insurance Corporation of India (LICI) along with the private life insurers such as ICICI Prudential Life Insurance, Shriram Life and SBI Life demonstrated a score of 1 on a consistent basis indicating no change in relative efficiency of these life insurers across the term-period. Among the private insurers, Max Newy Work Life Insurance, Kotak Mahindra and ING Vysya with mean relative catch-up efficiency scores of 1.180, 1.136 and 1.133 respectively were found to be highly efficient over the said period.

FRONTIER SHIFT EFFICIENCY SCORES Based on relative Frontier-shift efficiency scores, we find that only the public life insurer LICI represented a consistent progress in frontier-technology with a score above 1 throughout the 6-year period ranging from 2005-06 to 2010-11. No private life insurers could represent the same across the 6-year time-period. The private life insurers attained frontier-efficiency scores above 1 only in patches but not on a consistent basis over the years. Among the private life insurers, Shriram Life enjoyed the highest mean relative frontierefficiency score of 1.27 followed by Birla Sun Life - 266 -

Insurance with a score of 1.22 across the study period. Nevertheless, all the life insurers enjoyed mean frontier-efficiency scores above 1 over the said period thereby indicating a significant progress in frontier technology.

INSURER WISE FRONTIER-SHIFT EFFICIENCY SCORES FOR THE PERIOD FROM 2003-04 TO 2009-10 & AVERAGE FRONTIER-SHIFT EFFICIENCY SCORE FOR THE AFORESAID PERIOD Frontiershift Frontiershift Frontiershift Frontiershift Frontiershift Frontiershift Average Company Name Efficiency scores Efficiency Efficiency Efficiency Efficiency Efficiency Frontiershift (Insurers) 2005-06 scores 2006-07 scores 2007-08 scores 2008-09 scores 2009-10 scores 2010-11 Efficiency scores LICI 1.011418 1.29147 1.311898 1.028436 1.070453 1.017882 1.121926 Birla Sun Life 0.928654 0.967004 2.257067 0.809267 0.923678 1.436088 1.220293 ICICI Pru 0.898955 0.79038 1.823539 0.844505 1.206977 1.277434 1.140298 ING Vysya 0.592517 0.669783 2.259363 0.834294 1.001562 1.343336 1.116809 HDFC Standard Life 0.781362 0.99408 1.137044 0.994349 1.127497 1.656212 1.115091 Max New York Life 0.859071 0.722495 2.163243 0.815936 0.938696 1.450292 1.158289 Shriram 0.847301 0.863459 1.846526 1.031687 0.900565 2.176772 1.277718 BAJAJ Allianz Life 0.666781 0.693931 2.008335 0.680051 0.830858 1.820332 1.116715 SBI Life 1.258067 0.733186 1.030251 0.982659 0.705385 1.70449 1.069006 Kotak Mahindra 0.590795 0.843579 1.458615 0.800466 0.910523 1.923968 1.087991 TATA-AIG Life 0.755035 0.973815 1.486129 0.815919 0.945718 1.680695 1.109552 Met Life 0.946586 0.771371 1.175829 0.764866 0.588477 2.057813 1.050824 AVIVA Life 0.504618 0.81696 1.77101 0.706341 0.870879 1.479749 1.024926 Source: Calculated

MALMQUIST INDEX SUMMARY The change in Malmquist total factor productivity Index can be decomposed into changes in Catch-up efficiency and Frontier-shift efficiency scores. In other words, Malmquist total factor productivity index can be represented as a product of catch-up and frontier-shift effects, which is expressed as follows: Malmquist Index = (Catch-up) X (Frontier-shift)

The Malmquist Total Factor Productivity (TFP) represents the productivity of the production point (X t+1, Yt+1) relative to the production point (Xt, Yt). The table below shows the year-wise and insurer wise relative Malmquist total factor productivity index scores for the observed years from 2005-06 to 2010-11. - 267 -

MALMQUIST INDEX (MI) SCORES OF INDIVIDUAL FIRMS OVER THE YEARS (2003-04 TO 2009-10) Ranking (Based MI scores MI scores MI scores MI scores MI scores MI scores Average Company Name (Insurers) on 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 MI scores TFP Change) LICI 1.011418 1.29147 1.311898 1.028436 1.070453 1.017882 1.121926 9 Birla Sun Life ICICI Pru ING Vysya HDFC Standard Life Max New York Life Shriram BAJAJ Allianz Life SBI Life Kotak Mahindra TATA-AIG Life Met Life AVIVA Life Source: Calculated 1.122733 0.898955 0.828175 0.65595 0.694628 0.847301 0.672372 1.258067 0.976792 0.300371 0.306069 0.342115 1.460391 0.79038 1.004018 1.471265 1.878634 0.863459 0.600119 0.733186 0.610437 1.078049 0.812162 0.51474 1.952445 1.823539 1.325914 1.211587 0.998692 1.846526 1.759189 1.030251 2.015696 1.770351 2.206751 4.464913 0.650324 0.844505 1.188443 0.954101 1.243883 1.031687 0.695765 0.982659 0.604792 1.221331 0.422741 0.706341 0.723843 1.206977 1.044884 1.044649 0.728655 0.900565 1.072034 0.705385 0.979936 0.953074 1.135412 0.870879 1.495581 1.277434 1.138795 1.525008 1.323504 2.176772 1.654491 1.70449 2.366069 1.551564 1.80022 1.183377 1.23422 1.140298 1.088371 1.14376 1.144666 1.277718 1.075662 1.069006 1.258954 1.14579 1.113893 1.347061 1.1662558 4 8 11 7 5 2 12 13 3 6 10 1

CONCLUDING OBSERVATIONS In this paper, 13 life insurance companies have been compared in respect of catch-up efficiency scores, frontier-shift efficiency scores and Malmquist Total Factor Productivity growth index for a six year period ranging from 2005-06 to 2010-11. Life Insurance Corporation of India (LICI) exhibited a relative catch-up efficiency of 1 indicating no significant changes in performance over the years. In comparison, the private life insurers such as Max New York Life Insurance, Kotak Mahindra Life and ING Vysya exhibited a mean relative catch-up efficiency score of more than 1 over the said period. Further, a comparison of the relative frontier-shift efficiency scores of the life insurers for the six year period from 2005-06 to 2010-11 reflected that the public-sector life insurer is marginally ahead of its private sector counterparts with respect to efficiency in frontier technology over the years. Moreover, LICI exhibited a consistent relative Total Factor Productivity change index score of more than 1 over the six year time period thereby indicating a relative progress in total factor productivity growth from period t to period t+1. Among the private life insurers, AVIVA Life Insurance Company along with Shriram Life and Kotak Mahindra Life Insurance Company limited recorded the highest Total Factor Productivity growth scores respectively. However, all the private life insurers exhibited a mean positive total factor productivity growth during the said period. - 268 -

REFERENCES 1. 2. Banker, R. A. Charnes and W.W. Cooper (1984), Some Models for Estimating Technical and Scale Efficiency, Management Science , Vol. 30, pp 1078-1092. Beck T. and Webb I. (2003), Economic, Demographic, and Institutional Determinants of Life Insurance Consumption across Countries, The World Bank Economic Review, Vol. 17, No. 1, pp 51-88. Berger, A.N. and Humphrey, D.B. (1992), Measurement and Efficiency Issues in Commercial Banking, National Bureau of Economic Research, Studies in Income and Wealth, Vol. 56, PP 245-279, Chicago University Press. Caves, D.W., L.R. Christensen and E. Diewert (1982), The Economic Theory of Index Numbers of The Measurement of Input , Output and Productivity, Econometrica, Vol. 50, No 6, pp 1393-1414. Charnes, A., W.W. Cooper and E. Rhoades (1978), Measuring The Efficiency of Decision Making Units, European Journal of Operational Research, Vol. 2, No 6, pp 429-444. Coelli, T., D.S.P. Rao, and G. Battese (1998), An Introduction to Efficiency and Productivity Analysis, Boston Academic Publishers. Cooper, W.W., Seiford L.M. & Tone, K (2007), Data Envelopment Analysis: A comprehensive text with Models, Applications, References and DEA Solver Software, 2nd ed. Springer publications. Cummins, D., G. Turchetti, and M. Weiss, (1995), Productivity and Technical Efficiency in the Italian Insurance Industry, Working paper, Wharton Financial Institutions Center, University of Pennsylvania, U.S. Cummins, J. D. and M. A. Weiss, (1993), Measuring Cost Efficiency in the Property Liability Insurance Industry, Journal of Banking and Finance, Vol. 17, pp 463-481. Cummins, J.D. and H. Zi, (1998), Comparison of frontier efficiency Methods: An Application to the U.S. life insurance industry, Journal of Productivity Analysis. Diewert, W.E. (1992), The Measurement Productivity, Bulletin of Economic Research, Vol. 44, pp 163-98. Doherty N.A. (1981), The Measurement of Output and Economies of Scale in Property Liability Insurance, Journal of Risk and Insurance, Vol 48, pp 391-402. Farrell M.J. (1957), The Measurement of Productive Efficiency, Journal of The Royal Statistical Society, Series A, General, 120 (3), pp 253-281. - 269 -

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Frsund,F.R.(1997), The Malmquist Productivity Index, TFP and Scale, 5th European Workshop on Peoductivity and Efficiency Analysis, Copenhagen, Denmark. Gamarra Lucinda Trigo (2007), Single versus Multi-Channel Distribution Strategsies in the German Life Insurance Market: A Cost and Profit Efficiency Analysis, Working Paper No-81, University of Rostock, Institute of Economics, Rostock, Germany. Gardner, L., and M.F. Grace, (1993), X-efficiency in the U.S. life insurance industry, Journal of Banking and Finance, Vol. 17, pp 497-510. Grace, M.F. and S.G. Timme (1992), An examination of cost economies in the United States life insurance industry, Journal of Risk and Insurance, Vol 59, pp 72-103. Hancock, D (1985), The Financial Firm: Production with Monetary and Non-monetary Goods, Journal of Political Economy, Vol. 93, pp 859-880. Ray, S.C. (2004), Data Envelopment Analysis: Theory and Techniques for Economics and Operations Research, Cambridge University Press. Tone, K. (2002), A strange case of the cost and allocative efficiencies in DEA, Journal of the Operational Research Society, Vol. 53, pp 1225-1231. Weiss, M. A. (1990), Productivity Growth and Regulation of P/L Insurance:198084,Jounal of Productivity Analysis Vol. 2, pp 15-38. Yuengert, A.M., (1993), The measurement of efficiency in life insurance: Estimates of a Mixed Normal Gamma Error Model, Journal of Banking and Finance, Vol. 17, pp 483-496. Zofio, J.L. and C.A.K. Lovell (1997), Yet another Malmquist Productivity Index Decomposition, Sixth European Workshop on Efficiency and Productivity Analysis, Copenhagen, Denmark.

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COMPETENCE OF MICROFINANCE INSTITUTIONS A CASE STUDY OF WARANGAL

1

Prof G. Sithamber Swamy, Professor, Dept of Business Management, Alluri Institute of Management Sciences Warangal.
2

V. Srilatha, Student of MBA II year AIMS Warangal. Can be reached at lathaveldandi@gmail.com

ABSTRACT Micro Finance is the provision of financial services to micro entrepreneurs and small business people. The main aim of micro finance is reduce the poverty and increase the confidence of small scale entrepreneurs. The main use of micro finance is encouraging women entrepreneurship. In India micro finance is most popular with the help of this we can improve the self-help group. In rural areas mainly giving loans to people can do the work in efficient way. Involving the women in financial services can utilize money in better manner and also increase the value of money. In spite of the impressive figures micro finance in India is still presently too small to create a massive impact in poverty alleviation, but if pursued with skill and opportunity development of poor, it holds the promise to alter the socio economic face of the Indias poor. The main objectives of micro finance are loans offered without collateral and high frequency of repayment, loans are generally taken for income generation purpose. The present paper is an attempt to know the efficiency of microfinance institutions in Warangal district. KEY WORDS Microfinance, poverty alleviation, self-help groups. INTRODUCTION Microfinance is the provision of financial services such as loans, savings, insurance, and training to people living in poverty. It is one of the great success stories in the developing world in the last 30 years and is widely recognized as a just and sustainable solution in alleviating global poverty. Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services. Microfinance is not just about giving micro credit to the poor rather it is an economic development tool whose objective is to assist poor to work their way out of poverty. It covers a wide range of services like credit, savings, insurance, remittance and also non-financial services like training, counseling etc. - 271 -

A BRIEF HISTORY OF MICROFINANCE IN INDIA The post-nationalization period in the banking sector, circa 1969, witnessed a substantial amount of resources being earmarked towards meeting the credit needs of the poor. There were several objectives for the bank nationalization strategy including expanding the outreach of financial services to neglected sectors (Singh, 2005). As a result of this strategy, the banking network underwent an expansion phase without comparables in the world. Credit came to be recognized as a remedy for many of the ills of the poverty. There spawned several pro-poor financial services, support by both the State and Central governments, which included credit packages and programs customized to the perceived needs of the poor. While the objectives were laudable and substantial progress was achieved, credit flow to the poor, and especially to poor women, remained low. This led to initiatives that were institution driven that attempted to converge the existing strengths of rural banking infrastructure and leverage this to better serve the poor. The pioneering efforts at this were made by National Bank for Agriculture and Rural Development (NABARD), which was given the tasks of framing appropriate policy for rural credit, provision of technical assistance backed liquidity support to banks, supervision of rural credit institutions and other development initiatives. In the early 1980s, the GOI launched the Integrated Rural Development Program (IRDP), a large poverty alleviation credit program, which provided government subsidized credit through banks to the poor. It was aimed that the poor would be able to use the inexpensive credit to finance themselves over the poverty line. Also during this time, NABARD conducted a series of research studies independently and in association with MYRADA, a leading non-governmental organization (NGO) from Southern India, which showed that despite having a wide network of rural bank branches servicing the rural poor, a very large number of the poorest of the poor continued to remain outside the fold of the formal banking system. These studies also showed that the existing banking policies, systems and procedures, and deposit and loan products were perhaps not well suited to meet the most immediate needs of the poor. It also appeared that what the poor really needed was better access to these services and products, rather than cheap subsidized credit. Against this background, a need was felt for alternative policies, systems and procedures, savings and loan products, other complementary services, and new delivery mechanisms, which would fulfill the requirements of the poorest, especially of the women members of such households. The emphasis therefore was on improving the access of the poor to microfinance rather than just micro-credit. To answer the need for microfinance from the poor, the past 25 years has seen a variety of microfinance programs promoted by the government and NGOs. Some of these - 272 -

programs have failed and the learning experience from them has been used to develop more effective ways of providing financial services. These programs vary from regional rural banks with a social mandate to MFIs. In 1999, the GoI merged various credit programs together, refined them and launched a new programme called Swaranjayanti Gram Swarazagar Yojana (SGSY). The mandate of SGSY is to continue to provide subsidized credit to the poor through the banking sector to generate self-employment through a selfhelp group approach and the program has grown to an enormous size. MFIs have also become popular throughout India as one form of financial intermediary to the poor. MFIs exist in many forms including co-operatives, Grameen-like initiatives and private sector MFIs. Thrift co-operatives have formed organically and have also been promoted by regional state organizations like the Cooperative Development Foundation (CDF) in Andhra Pradesh. The Grameen-like initiatives following a business model like the Grameen Bank. Private sector MFIs include NGOs that act as financial services providers for the poor and Include other support services but are not technically a bank as they do not take deposits. Recently, microfinance has garnered significant worldwide attention as being a successful tool in poverty reduction. In 2005, the GoI introduced significant measures in the annual budget affecting MFIs. Specifically, it mentioned that MFIs would be eligible for external commercial borrowings which would allow MFIs and private banks to do business thereby increasing the capacity of MFIs. Also, the budget talked about plans to introduce a microfinance act that would provide some regulations on the sector. It is clear from the previous that the objectives of the bank sector nationalization strategy have resulted into several offshoots, some of which have succeeded and some have failed. Today, Self-Help Groups and MFIs are the two dominant form of microfinance in India. This report focuses on the aspects of the SHG as an effective means to provide financial services to the poor. IMPORTANCE OF MICROFINANCE The micro finance gives the loan to poor people , without any security. encourage the people who are in below poverty line. Salient features of Microfinance: Borrowers are from the low income group Loans are of small amount micro loans Short duration loans - 273 -

Loans are offered without any security High frequency of repayment Loans are generally taken for income generation purpose.

SELF HELP GROUP Aself-helpsupportgroupisfullyorganizedandmanagedbyitsmembers,whoare commonly volunteers and have personal experience in the subject of the groups focus. These groups may also be referred to as fellowships, peer support groups, lay organizations, mutual help groups, or mutual aid self-help groups. VISION AND MISSION OF SHG The disadvantaged communities shall be empowered to overcome all social, economic, cultural and psychological barriers through self-managed organizations. They will attain higher productivity with improved skills and asset base and utilize resources to full potential and gainful access to services. Our missions is to enable the disadvantaged communities perceive possibilities for change and bring about desired change by exercising informed choices through collective action CHANNELS OF MICRO FINANCE In India microfinance operates through two channels: 1. SHG Bank Linkage Programme (SBLP) 2. Micro Finance Institutions (MFIs)

Status of Micro Finance in India 2011-2012 According to NABARD 2012, National Bank for Agriculture and Rural Development Examining the progress of the Self-Help Group bank linkage program in India This report provides an overview of the state of microfinance in India during 2011-12, focusing on the self-help group (SHG) bank linkage program (SBLP). It analyzes data on the extent of savings harnessed and credit availed by SHGs across agencies and geographies. The report also highlights the facilitating role played by NABARD in refining SBLP. The report predicts that the third decade of the SBLP will witness a maturing of program with livelihoods support, product innovations, reforms in leveraging technology to improve efficiency, and extension of outreach to more geographical regions. Findings include: Over 103 million rural households now have access to regular savings through 7.96 million SHGs linked to banks; - 274 -

SHG savings balance with banks has declined by 6.7% compared to the previous year, although number of SHGs saving linked has grown by 6.7%; Number of SHGs having loans outstanding with banks has declined partly due to continued decline in the number of SHGs being extended fresh loans by banks; Quantum of fresh loans issued to SHGs by banks rose by 13.7% during the year.

STRUCTURE OF SHG A SHG is a group of about 10 to 20 people, usually women, from a similar class and region, who come together to form savings and credit organization. They pooled financial resources to make small interest bearing loans to their members. This process creates an ethic that focuses on savings first. The setting of terms and conditions and accounting of the loan are done in the group by designated members. SHG FEDERATION As mentioned previously, SHGs have also federated into larger organizations. In Figure 1, a graphic illustration is shown of a SHG Federation. Typically, about 15 to 50 SHGs make up a Cluster / VO with either one or two representatives from each SHG. Depending on geography, several clusters or VOs come together to form an apex body or an SHG Federation. In Andhra Pradesh, the Village Organizations, SHG Clusters and SHG Federations are registered under the Mutually Aided Co-operative Society (MACS) Act 1995. SHG BANK LINKAGE A most notable milestone in the SHG movement was when NABARD launched the pilot phase of the SHG Bank Linkage programme in February 1992. This was the first instance of mature SHGs that were directly financed by a commercial bank. The informal thrift and credit groups of poor were recognised as bankable clients. Soon after, the RBI advised commercial banks to consider lending to SHGs as part of their rural credit operations thus creating SHG Bank Linkage. The linking of SHGs with the financial sector was good for both sides. The banks were able to tap into a large market, namely the low-income households, transactions costs were low and repayment rates were high. The SHGs were able to scale up their operations with more financing and they had access to more credit products. During 2003, APMAS conducted a study on SHG bank linkage in Andhra Pradesh covering a sample of 400 bank linked SHGs. The study clearly indicated that the repayment rates were high and that the bank linkage made difference in the lives of the SHG members. However, the study also pointed out certain issues that require attention. These include - 275 -

adequacy of loan size, timeliness of credit and also the need for branch manager or the promoter undertaking a rating before the SHG is bank linked. The following were the major findings of the study: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Average Savings per SHG Rs. 23,000, average loan size Rs. 31,000. 50% of SHGs practice equal distribution of bank loan. Only 50% SHGs felt that the loan size was adequate and 54% studied SHGs were first time linked. 69% of SHGs got RLF, some got from multiple sources. It takes more than four months for an SHG to get a bank loan. No post linkage follow up by banker and others. 66% of bank linked SHGs are A grade as per CRI Only 22% of bank linked groups are appraised by banker, etc. Idle fund of bank linked SHGs average Rs. 5,300 Leaders dominate and have 30% loan on them. 12% SHG default to banks repayment problem. 10% SHGs reported that they were forced to take loan. High percentage of SHGs participate in Government Programs. Bankers attitude is still an issue.

THE STATE OF SHGS IN INDIA Before evaluating their impact and determine support solutions, it is important to examine the current state of SHGs in India today. And, it is certainly a mixed picture. FINANCIAL MANAGEMENT OF SHG The financial management of SHGs has been found to be ranging from weak to average. Specifically, internal controls at SHGs and SHG Federations are lacking. Internal controls represents the systems and processes that manage the day to day transaction flow and ensure that roles and responsibilities are defined and executed to safeguard assets. Field studies have indicated that these systems and processes have been ill-defined and poorly executed by members. In addition to internal controls, how SHGs are managing their cash flows is especially important. Since SHGs are accessing external borrowings through SHG Bank Linkage and then lends these funds to its members, there has been cases of poor cash flow management to repay debts not just externally but also internally. The risk of overleveraging SHGs is high. - 276 -

GOVERNANCE OF SHG Since SHGs are an informal organization and a SHG Federation is a composition of informal groups, there is poor governance and the capacity of the members to enact good governance is weak. The members of SHGs do not have much experience with establishing formalized monitoring and review functions or complying with legal regulations. With the growing size of the loans being made to SHGs, a strong governance system is needed to ensure that there is accountability. HUMAN RESOURCES OF SHG While the achievements of the women members to form common interest groups to help themselves is remarkable, there is a long way to go to build the capacities of the staff of SHGs. The role of NGOs to provide support is essential to many SHGs success stories. The support needed ranges from bookkeeping and accounting, organizational structure, governance and other areas. IMPACT OF SHGS With the structure and model of SHGs and SHG Bank Linkage firmly established, the nature of the impacts of SHGs can be more closely examined and evaluated. The latest published estimates from NABARD state that, to date of March 31, 2005, 1.6 million SHGs have benefited from approximately Rs 69 billion in financing (NABARD, 2005). There is no doubt that there has been greater outreach of financial services to the poor through SHGs. Of course the outreach has been good in South India. However, there outreach has been limited in the rest of the country. In addition to the financial analysis of SHGs, the non-financial areas such as social security and gender dynamics are also effected by the SHG Movement. Indeed, poverty reduction is much less an issue of numbers but rather ideas and concepts. The following is an analysis of the non-financial impact of SHGs. SOCIAL HARMONY Broadly defined, social harmony encompasses the equality and integrity of relationships between different social groups. To frame the following analysis, SHGs typically consists of the following social groups: 1. 2. 3. 4. 5. Schedule Caste (SC) Scheduled Tribe (ST) Minorities (MN) Backward Caste (BC) Other Caste (OC) - 277 -

The compositions of SHGs are sometimes exclusively one particular social group or a mix. The impact of SHGs on social harmony has also been mixed. While it has been observed that in groups with mixed membership had group leaders that came from a variety of the social groups. In the vast majority of instances, groups leaders were almost exclusively from the dominant social groups category. This demonstrates a lack of equality and unity across caste divisions. Given the relatively young history of SHGs, it is to be expected that their impact on bridging centuries old divisions would be slow. LIVELIHOODS Livelihoods, meaning a persons economic activity, is an area that is vitally important to SHGs. The loans that SHG members receive are intended to improve their livelihoods so that they can receive greater and steadier cash flows. In rural areas, livelihoods range from agriculture farming, animal husbandry, dairy and various other goods and services activities. Experience has shown that SHGs have had improved livelihoods to the extent of providing the leveraging needed to start an enterprise. However, the interventions to introduce new livelihoods or refine existing ones that could yield better economic results were done by external agencies. SUPPORTING THE SHG MOVEMENT The impact of the SHG movement on various aspects of civil society has been varied. As mentioned, the development of SHGs has varied from state to state but, regardless of the phase of evolution, SHGs require external help to continue to grow and have greater outreach and impact to civil society. It is clear from research that some of the obstacles to evolution are beyond the control of the SHGs. The following is a pointed analysis of where government, NGOs, Banks and others, including the private sector, can work together to help answer the needs to SHGs in a measured and effective manner in hopes of not overloading them leading to failure. BENEFITS OF MICROFINANCE Customarily, one had to apply for a loan in order to start a business, but that proved to be an obstacle to people with poor credit. However, microfinance institutions now offer basic financial services like savings, insurance and loans to unprivileged people. Microfinance institutions provide such services to the less fortunate; it can be a commercial bank, credit union, credit cooperative, or a financial non-government organization. 1. PROVIDE ACCESS TO FUNDING Typically, the less privileged acquire financial services such as loans through an informal relationship, which might prove to be costly and unreliable. In addition, most banks do not view the unprivileged as viable clients due to employment history or unstable credit and lack of financial security. Microfinance institutions often dismiss such requirements by providing small loans at flexible rates. - 278 -

2.

ENCOURAGE SELF-SUFFICIENCY AND ENTREPRENEURSHIP Unprivileged people might have profitable business plans, but they lack sufficient funds to meet the start-up costs. These loans give clients enough capital to get their plans off the ground and then begin turning revenue. They can pay off their loans in time then continue to gain revenue from the business indefinitely.

3.

MANAGE RISK Microfinance can give unprivileged people enough capital stability, which gives them financial security from sudden monetary problems. Also, savings allow for improved nutrition, reduced illness, better living conditions and educational investment.

4.

EMPOWER WOMEN Microcredit also empowers women since they are the major beneficiaries. In the past, women were not able to participate in economic activities. Microfinance institutions now provide women with the capital they require to start business projects. This gives them more confidence and allows them to participate in Economics activities.

GAPS IN MICRO FINANCE 1. LEGAL STRUCTURE AND REGULATION Although the SHG-Bank linkage model is well managed in India by NABARD, currently there is no proper regulatory body for the supervision of MFIs. The presence of institutions with a variety of legal forms makes it difficult for the regulation of all such institutions by a single regulatory body in the current Indian legal structure. Though NBFCs, which cover the major part of the outstanding loan portfolio by the microfinance channel, are regulated by Reserve Bank of India, other MFIs like societies, trusts, Section-25 companies and cooperative societies fall outside the purview of RBIs regulation. The acceptance of the Malegam committee recommendations by the RBI is a big step forward in addressing the above concern but again it will cover only a section of the MFIs i.e. NBFCs. The microfinance bill which was introduced in the year 2007 is still pending. The most recent and the strongest step taken by the government, The Micro Finance Institutions (Development and regulation) Bill, 2011 is a major step in the microfinance sector. The proposed bill clarifies all doubts pertaining to regulation of the MFIs by appointing RBI as the sole regulator for all MFIs. 2. FINANCIAL ILLITERACY One of the major hindrances in the growth of the microfinance sector is the financial illiteracy of the people. This makes it difficult in creating awareness of microfinance - 279 -

and even more difficult to serve them as microfinance clients. Though most of the microfinance institutions claim to have educational trainings and programmes for the benefit of the people, according to some of the experts the first thing these SHG and JLG members are taught is to do their own signature. The worst part is that many MFIs think that this is what financial literacy means. We all know how dangerous it can be when one doesnt know how to read but he/she knows how to accept or approve it (by signing it). 3. INABILITY TO GENERATE SUFFICIENT FUNDS Inability of MFIs to raise sufficient fund remains one of the important concern in the microfinance sector. Though NBFCs are able to raise funds through private equity investments because of the for-profit motive, such MFIs are restricted from taking public deposits. Not-for-profit companies which constitute a major chunk of the MFI sector have to primarily rely on donations and grants from Government and apex institutions like NABARD and SIDBI. In absence of adequate funding from the equity market, the major source of funds for MFIs are the bank loans, which is the reason for high Debt to Equity ratio of most MFIs. MFIs receive debt from banks against their equity and in order to increase their portfolio size they need to increase their debts for which they further need to increase their equity. After the Andhra crisis, it is reported that banks have stopped issuing fresh loans and even though currently few banks have resumed, they want MFIs to increase their equity to get fresh loans. So the only mode for the MFIs to increase their portfolio size is to increase their equity. The problem of inadequate funds is even bigger for small and nascent MFIs as they find it very difficult to get bank loans because of their small portfolio size and so they have to look for other costlier sources of fund. 4. DROPOUTS AND MIGRATION OF GROUP MEMBERS Majority of the microfinance loans are disbursed on group lending concept and a past record of the group plays an important role in getting new loans either through SHGBank linkage or through MFIs. The two major problems with the group concept are dropouts (when one or more members leave the group) and migration (when one or more members move to another group). Most MFIs lend on the basis of the past record of the group i.e. SHG or JLG and also on the individuals repayment performance. In absence of a decent past record, members are deprived of getting bigger loan amounts and additional services. - 280 -

A CASE STUDY OF WARANGAL DISTRICT Table No 1 STATE WISE INFORMATION OF TOTAL SHGS AND MEMBERS

S.No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Districts Vizianagaram Medak Warangal West godavari Mahabubnagar Karimnagar Nalgonda Nizamabad Khammam East godavari Guntur Prakasam Krishna Paravathipuram Utnoor Eturungaram Neloore Adilabad Rangareddy Chittoor Visakhapatnam

Total No. of SHGs 26791 38877 45384 59144 45748 52853 56095 36351 33184 73069 55079 46296 51529 6234 12646 4383 33985 20918 32214 60596 33401
- 281 -

Total No. of Members 322069 445601 544157 600232 595760 625474 612993 392872 331918 743704 561607 464970 561735 77638 152455 47084 362577 241706 352746 630133 384870

22 23 24 25 26 27 28 29

Kadapa Srikakulam Anantapur Bhadrachalam Seethampeta Kurnool Rampachodavar am Paderu TOTAL

32394 33785 49983 14999 6694 39995 4432 8153 1015212

324524 396109 541051 148699 77843 439743 45487 92817 11118574

INTERPRETATION The above Table will indicates that the information regarding Andhra Pradesh State having the 29 districts and each districts SHGs and their members. In each district most of the Womens are benefited with this type of facilities provided. To govern the issues regarding the self help groups and micro finance assistance Warangal District administration has developed a program named as INDIRA KRANTI PATHAM. Table No 2 SELFHELP GROUPS BANK LINKAGES RELEASES
YEARS 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 TOTAL No.of SHGs 13971 14334 17167 25705 26413 19895 20665 16813 154963 Amount Rs.in Crores 40.72 52.6 93.65 196.65 285.16 281.38 317.38 327.68 1595.22

- 282 -

Chart No 1

INTERPRETATION The above Table shows the details regarding in Warangal District the performance of SHGs. The SHGs started in year 2004 in that time no.of SHGs in that year were 13971 and total Amount should be circulated in that time 40.72%. Coming to 2011-12 that Groups have increased by 16813 and total Amount increased by327.68%.the main reason is awareness of people. The utilisation of money is also increased day by day. Mainly SHGs will gives the confidence for women in participating in the financial activities. Table No 3 DISTRICT WISE TRANSACTION DATA UPDATION REPORT
Total SHGs 1315 596 766 798 966 1046 821 1419 935

S.NO 1 2 3 4 5 6 7 8 9

Mandal Atmakur Hasanparthy Khanapur Narsampet Duggoni Chennaraopet Venkatapur Mulug Shayampet

Total Members 14904 7470 8598 9852 11335 13253 8991 15472 11302

- 283 -

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

Lingala ghanpur Ghanapur Nallabelly Nellikudur Maddur Thorrur Palakurthi Jangon Govindaraopet Sangem Kuravi Bachannapeta Nekkonda Geesugonda Parkal Regonda Dharmasagar Kesamudram Zaffergadh Raghunatha palle Narmetta Ghanpur(stn) Cheriyal Mahabubabad Devaruppula

826 744 792 1183 854 1344 1265 798 663 1157 1260 934 909 681 1107 1118 1274 1293 904 1061 871 1594 1221 1180 909
- 284 -

10228 9157 9461 13570 9487 16229 15276 10255 7360 14712 14507 11344 10253 8499 13326 14617 15653 14447 11500 12759 10352 19760 15923 14846 11015

35 36 37 38 39 40 41 42 43 44

Dornakal Mogullapalle Parvathagiri Narsimhulapet Raiparthy Chityal Bhupalpalle Maripeda Wardhannapet Kodakandla Total

1146 799 879 1232 1087 1210 496 1485 1514 932 45384

12800 9298 11054 14251 13847 13839 5603 17828 18426 11498 544157

INTERPRETATION The above Table -3 gives the information regarding in Warangal District how many no.of mandals will have in that each mandal how many no.of SHGs will be there in that each SHGs how many no.of members will there in that information will gives.In Warangal district mainly having the 44 mandals the total SHGs and members will be there like this 45384 and 544157 members will participating and their exchange of information, ideas, will also perform well. Table No 4 YEAR-WISE WARANGAL DISTRICT ANNUAL REPORT
TOTAL TARGETS GRPS 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 38122 39522 28547 27771 17926 33261 8 AMT 3812.2 62992.92 36681.33 32370.05 30,022.50 850841.4 TOTAL ACHIVEMENT GRPS 25705 26413 19895 20665 16474 260289 AMT 19664.5 28516.13 28138.12 31738.34 31753.92 639459.9

YEARS

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INTERPRETATION The above table indicates the details regarding Warangal District performance of SHGs. The SHGs have started the year in 2004 and continuing the 2012-13. Mainly knowing the value of money and utilizing this amount in an efficient manner. Comparing to past information present the achievements Will also increased. in Warangal district mainly middle class families are there in that people will utilized the resources and get the benefits of this schemes. The total targets and achievements will be reach with in time. it is better opportunity for developing the financial growth who are there in below poverty line. Table No 5 INDIRA KRANTHI PATHAM DISTRICT RURAL DEVELOPMENT AGENCY:: WARANGAL-SHG BANK LINKAGE Statement Showing The Details Of Trade & Acheivement Cluster Wise As On Date:As On 16.01.2013
TOTAL TARGET SL.NO BANK PHY 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Andhra Bank Allahabad Bank APGVB Bank of Baroda Central Bank of India Canara Bank Carporation Bank Indian Bank ING Vysya Bank Indian overseas Bank Punjab national Bank State Bank of Hyderabad State Bank of India Syndicate Bank Union Bank of India 2418 382 4793 567 615 565 323 376 103 676 394 3669 5641 170 64 FIN 5,939.96 895.22 9,934.83 1,207.40 1,345.29 1,198.46 829.38 871.10 275.66 1,337.61 921.67 8,759.75 13,300.19 298.50 135.03 PHY 1856 115 3667 442 490 409 277 232 111 581 220 2299 3874 137 64 MONTH END UP TO Jan-13 FIN 4,335.87 227.09 7,073.20 880.79 997.60 872.65 679.45 471.79 245.80 1,054.00 438.38 5,215.50 8,684.33 228.00 135.03 No.of SHGs 2952 53 3967 247 447 234 212 288 37 346 158 1832 1810 258 23 Amount(R s.in lakhs) 6,213.62 106.35 10,469.21 604.18 998.35 535.81 606.40 545.79 51.83 666.55 295.05 3,988.59 3,618.56 467.27 33.50 TOTAL ACHIEVEMENT

Grand Total

20756

47,250.05

14774

31,539.48

12779

29,091.26

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Chart No 2

INTERPRETATION The above Table gives the information regarding how many banks will give services to SHGs. The main intention is circulating the money in an efficient way with the help of banks. In every SHGs will work with bank given services and advices to groups and members. Mainly 15 banks are participated in this SHGs.the target should be 47,250.05 ending of month January will reach 31539.48.in that the achievements in SHGs are 12779 amount (Rs.in lakhs)i.e., 29091.26.percentage of amount should be 61.50.it means perform well in baks on behalf of SHGs giving good motivation to that people. CONCLUSION This paper has outlined several areas of working with SHGs to further their impact on civil society. It should be noted that the sustainability of SHGs to effect such change is directly linked to their financial sustainability. The main aim of Micro Finance Institutions is giving loans to people without any security this is main advantage for womens. There is a need for significant investment in providing institution building support. Research has shown that SHGs financial Management is average or week. Thus, it is vitally important that both government and NGOs work to bear all the costs in mind of interventions to make them sustainable and destined to failure. It is a better opportunity for increasing the financial growth of the human beings and stand their own legs without depends on others. Mainly womens utilized this resources improving the financial growth of the home and giving challenges to men. Government regulations could help manage this risk and increase the emphasis on sustainability of SHGs. There are key areas of SHG financial Management that need to be improved such as internal controls, accounting, organizational efficiency and others. - 287 -

For the SHG members to manage their own Institutions with professional staff and large volumes of transactions will be difficult. SHPIS must provide the need support for the SHG federations to develop in to sustainable institutions of the poor. At last the performance of SHGs will work in an efficient way. The women also participating the financial activities and saving the money controlling the cash outflows in the home. The SHGs main concept is providing the financial support to the women then only the economy will increased. Employment opportunity and it will help full for GDP. The Government will control misusage of resources then it will be help full for poor people. with this resource we reduce their debt and increase their worth. In Warangal District the performance of SHGs will be an efficient manner and effective utilization of resources. Comparing past information the performance was good. the awareness of people will utilized proper manner and the results is also good. REFERENCES 1. 2. 3. 4. 5. 6. 7. APMAS, Optimizing SHGs ,October 2005 http://www.65.19.149.155/bookkeeping/reports/index.aspx Kropp, Dr.Erhard W.&Suran, Dr.B.S., Linking Banks and (Financial) Self Help Groups in india-an Assessment , November 2002. m-bookkeeping NABARD,SHG Bank Linkage Model-Wise cumulative position up to 31 march 2005 www.apmasorg. www.serp.ap.gov.in

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