Insurance sector – new developments

Author: | Published: 12 Jul 2001
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The Indian insurance industry is going through fundamental changes. What was until now an area falling within the exclusive domain of the public sector in India is now open to private enterprise. Since late last year, 12 licences have been issued – eight in life and four in non-life insurance. Of these, 11 licenses have been issued to companies with 26% foreign equity each. These include Standard Life, Prudential Life, New York Life, Sun Life, Old Mutual, Cardiff, ING, AIG, Royal Insurance and Tokio General Insurance.

For 150 years, the Indian insurance industry proffered life and general insurance through both Indian and foreign players. The complexion of the life insurance business in India changed 45 years ago when the life insurance business was nationalized. With this came into being the Life Insurance Corporation of India (LIC). In 1971, nationalization was extended to the general insurance business. The result was the creation of General Insurance Company (GIC) as a holding company of four subsidiaries.

Whilst it is true that both LIC and GIC have been doing a commendable job in spreading insurance, they have not been able to escape the malaise that invariably dogs monopolistic state undertakings. As a result, the main objectives of the insurance industry as far as the spread of consumer coverage, quality and cost effectiveness are concerned have languished. India still has a low insurance penetration of 1.84% and ranks 51st in the world in insurance cover. The comparable figures for insurance penetration in developing countries range from about 7% to 15%.

Winds of change

The winds of globalization that swept the Indian economy in 1991 led to the setting up of a committee headed by Mr Malhotra, an ex-governor of the Reserve Bank of India, with the brief to suggest reforms. The Malhotra Committee in its report in 1994 recommended privatization. The recommendations were accepted and an interim Insurance Regulatory Authority formed in 1995. The Insurance Regulatory and Development Authority Act 1999 (the Act) has now opened up the multi-million dollar domestic insurance sector to private and foreign players.

Insurance Regulatory and Development Authority Act 1999

Recognizing that a strong and effective regulator will have a crucial role in the emerging competitive environment, the Act established an authority called the Insurance Regulatory and Development Authority (the Authority) with wide powers to:

"protect the interests of holders of insurance policies, to promote and ensure orderly growth of the insurance industry and for matters connected or incidental thereto".

The guidelines on solvency norms, entry criteria, rural exposure and advertising code notified by the Authority clearly seek to further its objectives and also address domestic concerns that new insurers must be strong and well-regulated; that insurance premia should not seep out of the country; and that foreign participation in the sector should be limited. The highlights of the notified guidelines are:

  • The minimum equity share capital for life and general insurance is pegged at Rs1 billion and that for reinsurance at Rs2 billion (approximately equivalent to $22 million and $44 million respectively).
  • Foreign equity capped at 26% in life, general and reinsurance companies. Any direct equity holding in the Indian promoter company by a foreign company or its subsidiary or nominees, or by non resident Indians, overseas corporate bodies and multinational agencies to be considered for calculating the 26% limit in the proportion of the paid-up equity share capital held by such entities to the total issued equity capital of the Indian promoter company.
  • Investments by foreign institutional investors (FIIs) and Indian mutual funds (MFs) in the Indian promoter company not to be taken into account for computing the cap of 26% foreign equity if the FIIs' and MFs' investments are within the approved limits specified by the Securities and Exchange Board of India.
  • The minimum rural sector exposure for life insurance and general insurance fixed at 5% and 2% respectively in the first fiscal year. Such exposure to go up to 15% by the fifth year for life insurance and up to 5% after two years for general insurance.
  • For the social sector, the insurers required to cover at least 5,000 lives in the first year, 7,000 in the second, 10,000 in the third, 15,000 in the fourth and 20,000 in the fifth.
  • Packing of premium funds abroad banned and investment of funds by insurance companies to be regulated.
  • Insurance brokers to be regulated in the areas of registration, experience, training, qualification, solvency requirements and professional indemnity.
  • Parameters against which the applications for grant of licence to be considered include past performance of promoters, directors, nature of products, infrastructure of the company, and level of actuarials and professional expertise.
  • Applicants whose applications for grant of licence are rejected are required to wait for a minimum of two years for a fresh proposal. Moreover, the fresh proposal is required to be with a new set of promoters and for a different class of business than originally proposed.
  • Insurance companies required to start business within 12 months of grant of registration. This period is extendable up to 24 months on specific request.

Foreign equity and control of insurance joint venture

Equity and control are interrelated issues. Control of a company can be exercised at two levels – the board of directors and the shareholders. Under the Indian Companies Act 1956, certain resolutions, called special resolutions, have necessarily to be passed by a majority of 75% voting shares. Thus, with a 26% cap on its stake, a foreign insurance company will only be in a position to block special resolutions; it will not be able to control the day-to-day functioning of the joint venture company. However, such control can be established contractually. It is open to the parties to have suitable clauses in the joint venture agreement that protect minority interest and provide for the minority's consent in certain predetermined matters.

Opportunities for future growth

A look at the numbers reveals all. In India, out of an insurable population of 300 million, only 20% have insurance and that too covers only 25% of their needs and financial capacity. The low level of penetration of life insurance in India is highlighted by a comparison of per capita life premium in India with that in other developed nations.


Life premium per capita US$ in 1994









Clearly, there is considerable scope to raise per capita life premiums in the country if the market is effectively tapped. Several informal estimates have been made to assess the existing insurance market in India in terms of premium income. A recent study suggests that out of an amorphous middle class of 300 million, 50 million have the capacity to pay a premium of $300 per year, 100 million have the capacity to pay $200 per year and 150 million have the capacity to pay $100 per year. On the basis of these estimates, the total annual insurance premium could be $50 billion.

Secondly, life premium as a percentage of GDP in India is a meagre 1.3% as compared with 10.10% in Japan. India has traditionally been a highly savings-oriented country – often described as being on a par with thrifty Japan. The low level of life premiums as a percentage of GDP is a clear indicator that the culture of savings that is inherent in the Indian way of life has not been sufficiently harnessed. Needless to add, if the insurance market is properly tapped, it might be possible to raise life premium as a percentage of GDP from the existing level of 1.3% to 10% - on a par with Japan. This would bring an eight-fold increase in the existing volume of life premium.

A study by Swiss Re published under its Sigma Report also forecasts major structural changes that would reshape the competitive landscape of the Asian insurance markets. The report predicts:

"Firstly, more intense competition will emerge in more countries, driven not only by the WTO liberalization process but also by recapitalization requirements. Secondly, moves towards fiscal consolidation will accelerate against the backdrop of fiercer foreign competition, mounting government pressure, fragmented character of some South East Asian markets and the continuing weakness of many insurers' balance sheets".

Misgivings - How real?

The liberalization of the Indian insurance sector has been the subject of much debate. A number of concerns have been expressed. These include issues relating to retention of premia in India, flight of capital and displacement of existing players. A dispassionate and objective examination, however, suggests that these concerns are either unwarranted or exaggerated.

The argument that foreign companies will repatriate premium income through reinsurance seems misplaced. Even now a significant part of the premium is distributed to reinsurers and much of the high insurance risks are reinsured overseas. One recent example is the calamity that struck the state of Gujarat in which total claims stood at Rs120 billion. Only Rs29 billion was settled locally with overseas reinsurers settling the balance. Moreover, every regulator prescribes that the premium earned is retained in the country and the liabilities under the contract are matched with assets in the same country. In fact, the opening up of the sector is expected to increase the retention of premia in India and thus reduce outflow of the valuable foreign exchange.

The apprehension that there would be a flight of capital is not borne out by the experience of other countries. If anything, there has been a strong inflow of foreign capital in the first five years for introducing new products and maintaining the requisite capital adequacy ratio.

The fear that private and foreign companies will swamp the market also does not appear to hold much water. In Taiwan, for example, foreign companies took only a 3% share even seven years after the opening up of the insurance sector. In Korea, their share was 1% after twenty years. In China, a large and complex market like India, private insurers have not made much headway. In fact, in South Korea the opening up of the sector saw the big six domestic players, who initially controlled the entire market, increase their business from 3 to 37 trillion won by 1997. Closer to home, India has the experience of the banking sector where, despite the presence of several foreign banks, their share in overall business is less than 10%.

Challenges for foreign players

Admittedly, when estimating the potential of the Indian insurance market, it is tempting to look at macro-economic variables such as the ratio of premium to GDP, which is indeed comparatively low in India. For example, India's life insurance premium as a percentage of GDP is 1.3% against 5.2% in the US, 6.5% in the UK or 8% in South Korea. Given India's large population, the number of potential buyers of insurance is certainly attractive. However, too broad an approach can be misleading because it ignores the difficulties of approaching this population. New entrants in other mass industries such as consumer products or retail banking have discovered this to their cost. Much of the demand may not be accessible because of poor distribution, large distances or high costs relative to returns.

While it is true that the existing nationalized insurers are hampered by their large scale of operations, public sector bureaucracies and cumbersome procedures, not all is wrong with them. Both LIC and GIC are firmly entrenched in organizational networks, financial strength and brand equity. While private entrants expect to score in the areas of customer service, speed and flexibility, it must be remembered that the benefits to private players would be slim if they focus only on affluent, urban customers, as foreign banks in India did until recently. Although high-end niches offer better returns and seem a logical entry strategy, a very exclusive approach is unlikely to provide meaningful numbers in the long run and insurance, even more than banking, is a volumes game. Therefore, private insurers would be best served only by widening their customer base.


Healthy competition is the most effective propeller of progress. It is expected that the opening up of the insurance sector and entry of several major international players are bound to expand the market. The experience of other countries bears this out. The foreign partners are expected to bring world-class experience and expertise, professional approach and stronger customer orientation along with funds. As the insurance business generates funds for long-term investments, it would go a long way in providing funds for the infrastructure sector (the Rakesh Mohan Committee Report states that India needs investment of about $215 billion in the next five years to reach an infrastructure level comparable to Malaysia, let alone the west). Competition would also develop a better understanding of consumer requirements, leading to more customized products for the Indian market. This should also strengthen the tertiary sector by opening new avenues for actuaries, accountants, stockbrokers and others. In brief, the opening up of the insurance sector in India augurs well not only for the consumers but the economy of India as a whole.

Insurance Sector

Rajinder Narain & Co
F14 Connaught Place
New Delhi-110 001
Tel: 91 11 331 3232
Fax: 91 11 332 8319

Maulseri House
Kapashera Estate
New Delhi-110 037
Tel: 91 11 331 3232
Fax: 91 11 332 8319