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9
th
July 2014

The Objectives behind the Opening of Insurance Sector

1) I would like to take up for discussion, three important issues.
Have the main objectives behind the opening of the insurance sector to
private players been achieved? If not, what are the reasons behind the non-
fulfillment of these objectives?
Sec.40B of the Insurance Act, 1938 and Rule 17D of the Insurance Rules,
1939, place ceilings on the Expenses of Management of life insurance
companies. Similarly, Sec.40A of the Insurance Act, 1938, prescribes a
ceiling on the commission payable to the agent. Is it necessary to impose
such ceilings?
There is a strong demand for raising the limit on Foreign Direct Investment
(FDI) in the insurance sector from 26% to 49%. What are the reasons behind
this demand and is it necessary to raise this limit?
The first of the three issues has been taken up in this article and the other two
will be discussed in the next article.

Objectives behind the opening of Insurance sector
2) The main objectives behind the opening of insurance sector to private players
were,
To accelerate rate of growth of premium income and
Improve insurance penetration.
Let us see whether these objectives have been achieved. TABLE-1 on the
following page gives the first year premium incomes of LIC and Private Insurers
during the last 10 years. First year premium means the total of (Single
Premiums, Non-Single First Premiums and First Year Renewal Premiums) in
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respect of (Linked and Non-Linked) Assurance and Annuity premiums under
both Individual and Group policies.
TABLE-1
L I C Private Insurance Companies

Total First
Year Premium
(Rs.crores)

Percentage
Increase
Market
Share
as %
Total First
Year Premium
(Rs.crores)

Percentage
Increase
Market
Share as
%

2004 05

20,653

5,565


2005 06

28,516

38.1%

73.5%

10.270

84.5%

26.5%

2006 07

56,224

97.2%

74.3%

19,426

89.2%

25.7%

2007 08

59,997

06.7%

64.0%

33,716

73.6%

36.0%

2008 09

53,179

(11.4)%

60.9%

34,152

01.3%

39.1%

2009 10

71,522

34.5%

65.1%

38,372

12.4%

34.9%

2010 11

87,012

21.7%

68.8%

39,369

02.6%

31.2%

2011 12

81,862

(05.9)%

71.8%

32,080

(18.5)%

28.2%

2012 13

76,612

(6.4)%

67.4%

37,050

15.5%

32.6%

2013 - 14

90,124

17.6%

75.3%

29,517

(20.3)%

24.7%

3) The average annual rates of growth between 2004 05 and 2013 14 are,
17.8% in the case of LIC and 20.4% in the case of Private Insurers. However, if
we take the period 2005 06 to 2013 14, the average annual rates of growth
are respectively, 15.5% and 14.1%.

4) TABLE-2 on the following page gives the Total Premium Income of both
LIC and the Private Insurance companies. The new premium income (i.e. the
first year premium income) may occasionally show some ups and downs,
depending on the economic climate in the country. But, the total premium
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income (new premium + renewal premium) should always display an upward
trend.
TABLE-2
L I C Private Insurance Companies

Total Premium
Income
(Rs.crores)

Percentage
Increase
Total Premium
Income
(Rs.crores)

Percentage
Increase

2004 05

75,127

7,728


2005 06

90,792

20.9%

15,084

95.2%

2006 07

127,823

40.8%

28,253

87.3%

2007 08

149,790

17.2%

51,561

82.5%

2008 09

157,288

5.0%

64,497

25.1%

2009 10

186,077

18.3%

79,370

23.1%

2010 11

203,473

9.3%

88,165

11.1%

2011 12

202,889

(0.3)%

88,182

0.0%

2012 13

208,804

2.9%

78,399

(11.1)%

2013 14

Not Available

Not Available


5) So, the rate of growth of not only the new premium income, but also the total
premium income of the life insurance industry appears to be gradually drifting
towards the Negative Zone. What was the position before the constitution of the
IRDA and opening of the insurance sector to private insurance companies?
TABLE-3 on the following page gives the premium income in the case of LIC of
India during the decade 1990 1991 to 1999 2000. Under first year premium,
only individual assurances have been taken into account, since I do not have
with me the breakup of annuity, pension and group premiums into first year and
renewal. The total premium, however, includes premium income under
annuities, pensions and group policies.
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Premium Income of LIC of India
TABLE-3

First Year
Premium Income
(Rs.crores)

Percentage
Increase
Total Premium
Income
(Rs.crores)

Percentage
Increase

1990 91

1,199

5,601


1991 92

1,411

17.7%

6,960

24.3%

1992 93

1,620

14.8%

7,987

14.8%

1993 94

1,904

17.5%

9,736

21.9%

1994 95

2,073

8.9%

11,528

18.4%

1995 96

2,339

12.8%

14,182

23.0%

1996 97

2,821

20.6%

16,353

15.3%

1997 98

3,314

17.5%

19,355

18.4%

1998 99

4,181

26.2%

22,976

18.7%

1999 00

5,378

28.6%

27,849

21.2%


Average
Annual
Growth Rate

18.1%
Average
Annual
Growth Rate

19.5%

6) One thing may be noticed. In TABLE-3, there are no negative growth rates
as under TABLEs 1 and 2. The lapse rates were also quite low, comparable to
that of any life insurance company in the world. After the opening of the
insurance sector, its average annual rate of growth of total premium income has
registered a significant fall, from 19.5% to 13.6% and the lapse rate too has
increased. Is it because LIC is not able to stand up to competition? If so, the
private insurance companies should have been registering a very high growth
rate. It is not however so. After the ULIP fiasco of 2008, the average annual rate
of growth of total premium income of these companies has fallen to 5% and the
lapse rates of private insurers are much higher than that of LIC.
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7) The government opened the insurance sector in order to accelerate the rate of
growth of premium income as well as insurance penetration in the country. But,
there is only deceleration in premium growth and stagnancy in insurance
penetration. What would have been the position had the insurance sector not
been opened? The average annual rate of growth of total premium income of
LIC was 19.5% during the Nineties. Assuming that the same average rate of
growth would have been maintained, the total premium income in 2013 14
would have been, Rs.27849 x (1.195)
14
crores = Rs.337,256 crores. Same as the
combined total premium income of LIC and the Private Insurers put together in
2013 - 14.

8) So, what has been achieved by the opening of insurance sector in 2000 01?
Addition of 23 life insurance companies
Deployment of about Rs.40,000 crores as capital, in an industry that needs
no capital, to achieve an annual premium income of less than Rs.80,000
crores (of which about Rs.30,000 crores is first year premium income).
The private insurers want to bring in more capital. What for? It will always
remain a mystery.
Steep increase in Lapse rates
The only positive aspect Employment opportunity provided for thousands
of persons in the new insurance companies and the IRDA.

9) What were the achievements of LIC during the same period (2000-01 to
2013-14)?
Did not deploy any capital
Generated a Solvency Reserve of Rs.60,000 crores, purely from internal
resources (by March 2014, it would have crossed Rs.75,000 crores)
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Achieved a sixteen fold increase in first year premium income and an eight
fold increase in total premium income.

10) What could be the reason for non-achievement of Governments objectives
behind the opening of insurance sector to private players? I have given below my
personal views on this issue.
a) IRDA stands for Insurance Regulatory & Development Authority. However,
it appears that it is under the impression that D stands, not for Development,
but for Discipline. Dozens of show cause notices have been issued to the
CEOs and Appointed Actuaries of Companies. It is even stated that, the
number of such notices issued during the last 3 or 4 years may be higher than
the number of such notices issued by the then insurance regulators during the
last century.
b) Restrictions are being imposed at regular intervals. The Product
Regulations issued in February 2013 imposed so many inexplicable and
illogical restrictions that, many of the life insurance plans that were quite
popular for over a century, not only in India but in other countries as well,
suddenly got invalidated. This disrupted the business activities of every
life insurance company. The pleas from the industry and professionals to
reconsider these restrictions were imperiously brushed aside. I have written
two articles on this topic in my Blog JayaVijaya.
c) What the Regulator was planning could have been achieved easily by adding
a few rider benefits, without disrupting the normal business activity.
d) Another Regulation on Reinsurance strikes at the very root of the basic
principles on which reinsurance is based and makes a mockery of
international practices in this regard.
e) Applications for approval of new products are bounced back to the
companies, with dozens of queries.
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f) In this atmosphere, bringing out of new products and development of
business has virtually become a nightmare.
g) Marketing of life insurance is not an easy task. In fact, it is an art. A healthy
and congenial atmosphere is a pre-requisite for the development of life
insurance industry. What is being witnessed today is just the opposite.
h) The Body that regulates banks is known as Reserve Bank of India. The Body
that regulates stock exchanges and mutual funds is known as Stock Exchange
Board of India. In Sri Lanka, the Body that regulates insurance companies is
known as Insurance Board of Sri Lanka. Why should the corresponding body
in India be called an AUTHORITY? Call it as Insurance Board of India. The
unseemly fervour for disciplining everyone and everything may then cool
down and the life insurance industry may strike again the path of growth.
i) The Government should remember that, languishing of this industry is
tantamount to denial of security of life insurance cover to millions of
people and it cannot shirk its responsibility in this regard.

Recruitment and Training of Agents
11) The measures taken by the IRDA have affected the private insurers and the
LIC equally. The Corporation is however still able to keep its head above the
water, thanks to the experience of its agency force. A dedicated and competent
agency force is the foundation on which a life insurance company has to be built.
Since the IRDA was entrusted with both Regulation and Development of
insurance industry, it should have ensured that every company not only recruited
sufficient number of agents, but also gave them proper training. But, it appears
that, apart from prescribing an examination system for recruitment of agents, it
did not take any step in this regard.

12) Sri Lanka opened its insurance sector in the late eighties and three
companies, CEYLINCO, CTC Eagle and UNION Assurance, were given license
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immediately. During the first year of operations, CTC Eagle concentrated on
recruiting agents and giving very good training to both agents and office staff. It
naturally paid rich dividends later. In India, the IRDA was constituted about five
years before the opening of the insurance sector (about 10 years after the
opening of the insurance sector in Sri Lanka). As soon as it was constituted, its
officials visited many countries to study the insurance regulations and the
functioning of the insurance industry in those countries. They did not however,
visit the next door neighbor, Sri Lanka. If they had, the importance of training
would have been understood.

13) How to recruit an agent? Is there any way to ensure that the person
recruited has the necessary skills to function as an agent? What should be the
qualification of an agent? Should he be a graduate or will just a matriculate do?
Should a qualifying test be held before confirming himher? What are the
training needs and what should be the profile of the trainer? These are some of
the questions being discussed perennially in every marketing conference,
without ever arriving at any satisfactory conclusion. At the end of it all, one is
left with the uncomfortable feeling that, something fundamental is being missed.
It is the agents capacity to SELL. The following delightful excerpt (source
unknown) brings home this point, very forcefully indeed.

***************************** --- *******************************
14) DUZ HE SELL?
A newly hired travelling salesman wrote his first report to the home office. It
stunned the brass because it was obvious the new man was almost illiterate.

Dear Bos,
I seen this outfit which ant never bot a dime worth of nothing fro us and sole
them a couple hunerd thousand dollars of guds. I am now going to Chicawgo.
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Before the illiterate could be given the old heaveho by the sales manager, this
letter came from Chicago.
I cum hear and sole them a half a millyon.
Fearful if he did, and fearful if he did not fire the illiterate, the sales manager
dumped the problem on the lap of the president.
The following morning the ivory tower members were amazed to see the two
letters posted on the Bulletin Board and, this memo from the president above.
We ben spending two much time trying to spel instead of trying to sel
Lets watch those sails. I want everybody shud reed them leters
from Gooch, who is on the rode doing a great job for us,
and you shud go out and do like he duz.
***************************** --- *******************************
15) I saw the above excerpt (from an unknown source) in 1984, just by chance,
in a piece of discarded typed paper. The fact that the capacity to sell is the most
important qualification for a salesman cannot be brought out more forcefully. If
the person who has this capacity is also well educated, he can blossom into a
super salesman. Training will sharpen his skills further.

Dedicated (tied) Agency
16) Selling life insurance is not an easy task and it is more difficult in a highly
competitive environment. The business procured through a dedicated agency
force is like staple diet for an insurance company. Business from other sources
like Bankassurance and Brokers can, at best, be desserts. There may be a few
exceptions. Bankassurance business of SBI Life is an example. But, SBI Life can
rise to great heights if it develops an independent, dedicated agency force.
Forming a team of persons to continuously spot and recruit good agents and
imparting intensive training to agents so recruited is the only way to expand life
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insurance business. This is what the LIC has done over the years and, it has to
intensify its efforts further in this regard.

17) The virtual absence of a dedicated agency system is the weakness of our
general insurance sector. Neither the public sector nor the private sector general
insurance companies have realised the importance of agents and, as a result, the
vast potential of personal insurance in this sector remains untapped. Whichever
company takes the lead in this direction will reap a golden harvest.

Lapsation of Policies
18) A good agent never allows a policy procured by him to lapse. If the lapse
rates are now increasing, it is indicative of weakening of the agency system. The
blame for this can be placed squarely at the door steps of the IRDA. It lacks the
attitude to listen to other stakeholders and is also too conscious of its status. Its
response to increasing lapse rates is to collect more and more statistics regarding
lapses of policies and produce impressive and well bound books containing the
statistics collected. These impressive books remind one of the Status of Chinese
Empire during the second half of the Nineteenth Century, more than 150 years
ago. The European countries, USA and Japan were sending their armies to
China to carve out spheres of influence. There was virtually no resistance and
the only step that was taken by the Chinese Emperor was to print Wall Posters
and paste them across the country, calling upon the Great Chinese People to
throw out the invaders. Compare the position of China then and now. In
collecting lapse statistics and calling upon the companies and agents to bring
down the lapse rates, without ever attempting to take any concrete measures in
this regard, the IRDA reminds one of the Chinese Empire of the Nineteenth
Century.

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19) Lapse rates will always increase in a competitive environment. To decrease
the lapse rates an incentive can be given to agents. If a policy is in force for
more than 15 years then, when the policy comes up for final payment due to
death claim, surrender or maturity, one percent of the final payment can be paid
as Special Commission to the agent who procured the policy, provided the
agency is in force (with the same company) on the date of final payment. The
additional cost in this regard will not at all be significant and this step
will serve as an incentive for the agent to continue to be in touch with the
policyholder and ensure that the policy is not lapsed or surrendered early,
will encourage the agents to sell long term (term of more than 15 years)
policies, which in turn, will lead to higher profitability for the life insurance
companies and
will also help the companies in retention of agents and guard against
poaching by competitors.

20) This suggestion is not something new. A Note in this regard was generated
by the Actuarial Department of LIC of India in (I think) 1991-1992 and
submitted through the Marketing Department for discussion at higher levels, In
the opinion of the Actuarial department, the additional surplus generated due to
Decrease in lapse ratio,
Decrease in agency discontinuation and
Increase in the average policy term
would more than offset the expense in respect of the additional commission that
would become payable to the agents. Unfortunately, no final decision was taken
and the proposal was allowed to lapse. If the IRDA can now examine this issue
and implement it, in the same or modified form, it would go a long way in
developing full time professional agents and bringing down the lapse rates. It
should also talk to all the insurance companies and persuade (and not order)
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them to pay more attention to the training of agents. It should also understand its
limitations and resist the temptation to prepare training materials and force it on
all companies; but allow each company to develop its own training course. The
LIC is already paying a lot of attention to the training of agents. But there is still
much scope for improvement.

It is to be recognised that the money spent on training will give greater
returns than the money spent on advertisement.

21) The other issues, Ceilings on Expenses of Management & Agency
Commission and the Limit on Foreign Direct Investment, will be taken up next.


9
th
July 2014 R.RAMAKRISHNAN
(actuary)