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7/29/2019 The Role of Insurance in Savings Mobilisation a Case for _1
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The role of Insurance in savings mobilisation a case for Indian Economy
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The role of insurance in savings mobilisationa case for
Indian economy.
BY
Prof. Sanjay D Paramar (M.A.,GSET)
Prof. Jagdish A Parmar (M.A., GSET)
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ACKNOWLEDGEMENT
First of all we would like to thank all mighty God. We would like to thank ourfamily members as well as our colleagues who have inspired us to write down this book.
We have immense pleasure to dedicate this book to
1. Dr. D.G.Ganvit
2. Dr. Manoj R Patel
3. Prof. Gaurang Desai
who have provided their precious blessing for the publication of book.
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About authors :-
Mr.Sanjaykumar Durgabhai Paramar
He obtained Post Graduate (M.A.) degree in Economics
from SardarPatel University Vallabh vidhyanagar Anand in 2007-08. He obtained a Gold Medal in Agriculture Economics. He
has qualified GSET Examination in Oct., 2011, from M.S.
University Baroda. Now he has been working in Faculty of
business Administration, Dharmsinh Desai University, Nadiad as
an Assistant Professor.
Mr.Jagdishbhai Ambalal Parmar
He obtained Post Graduate (M.A.) degree in Economics with
Gold Medal from Sardar Patel University Vallabh vidhyanagar
Anand in 2007-08. He has qualified GSET Examination in Dec.,
2008, from M.S. University Baroda. He worked as an Assistant
Professor in Tolani college of Arts and Science from 2011 to 2013.
At present he has been working in Govt. Arts and commerce
college as an Assistant Professor [GSET Class -2] at Vansda
(Gujarat).
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List of tables
Table No. Title Page
No.1 Appraisal of Insurance Market 40
2 Registered insurers in India 42
3 New policies issued -life insurance 44
4 New policies issued -non life insurance 45
5 Premium underwritten (within India) by non life
Insurers-segment wise.
49
6 Premium underwritten by life Insurers 56
List of charts and Figures.
Fig No. Title Page No.
1 Percentage contribution of respective segments of
private life insurers.
48
2 Percentage contribution of respective segment ofLIC
48
3 Percentage contribution of respective segment of Life
Insurers
48
4 Trends in life insurance business-Unit linked
Insurance Plans.
58
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Executive summary
The insurance sector in India was hitherto the monopoly of the State. Though the performance of
the public sector insurance companies - LIC and GIC was quite satisfactory, the Indian insurance
business, both life and non-life, left much to be desired as compared to international standards.
There was low penetration and general lack of efficiency. The per capita premiums were very
low when compared to the standards of both industrialised countries and other emerging markets.
With the entry of private players into the insurance business, it is expected that competition
would increase and overall functioning of the insurance sector would improve. The liberalisationprocess initiated in the insurance sector is expected to bring about better integration of the
financial markets and promote financial development of the country. Insurance, apart from acting
as an important financial instrument for risk cover, is also a major instrument for mobilisation of
long-term savings.
The savings part of insurance, if channelized efficiently into long-term investments, could play a
greater role in funding infrastructure projects with long gestation periods. With increasing
urbanisation and longer life expectancy, the demand for insurance is expected to increase
substantially in the years to come. In the liberalised scenario, the Indian insurance regulator,
Insurance Regulatory Development Authority will have to play a crucial role towards meeting the
special needs and challenges of the Indian insurance market. The regulator, besides ensuring
long-term solvency of insurers, should also promote competition among them. The development
of the Indian insurance market into a healthy and vibrant one is expected to further aid in the
economic and financial development of the country by acting as a mobiliser of savings and as a
factor of production, besides playing the usual role of providing social security.
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Table of Contents
Chapter Particulars Page
no.1 Introduction 1
1.1 Insurance and Savings 4
1.2 Insurance penetration in India as compared to global 6
standards
1.3 role of insurance in Financial Saving and GDP 8
1.4 Insurance regulation in India 8
2 Literature review 112.1 Domestic savings 11
2.2 Life Insurance and other savings 12
2.3 Flow of funds for Infrastructure 16
2.4 Insurance sector in India 20
2.5 Theoretical aspects of Insurance 25
3 Methodology
3.1 Data analysis and inferences 36
3.2 Research limitations 36
4 Findings 37
4.1 Contribution to Indian economy 40
4.2 Savings and capital formation50 53
4.3 Insurance companies performance 54
4.4 Innovations in products 57
4.5 Reforms in Insurance Industry 61
4.6 ULIPS (Unit linked Insurance Plans5 Conclusions and Recommendations 63
6 Bibliography 66
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Chapter 1. Introduction
INTRODUCTION TO INSURANCE
Human have always sought security. This quest for security was and important motivation
force in the earliest formation of families, clans, tribes, and other groups. Indeed, groups have
been the primary source both emotional and physical security since the beginning of
humankind. They ensured a less volatile source of life necessities then that which isolated
humans & families could provide & help their less fortunate members in the time of crisis.
Humans today continue their quest to achieve security & reduce uncertainty. We still rely on
groups for financial stability. The group may be our employer, the government, or an insurance
company, but concept is the same. In some ways however, we today are more vulnerable than
our ancestors. The physical & economical securities formerly provided by the tribe or extended
family diminished with industrialization. Our income dependent, wealth acquiring lifestyle
renders us and our families more vulnerable to environmental & societal changes over which
we have no control. Humans are exposed to many serious perils, such as property loss from fire
or windstorm, and personnel losses from incapacity & death. All though individual cannot
predict or completely prevent such occurrences, they can provide for their financial effects.
Encyclopedia of finance & banking defines insurance as the elimination of or protection
against risk amenable to actual calculation, voidance or reduction of losses occurring through
misfortunes such as death, fire, accident, tornado, shipwreck, etc. Insurance is a contact
between an insurer and the insured where by the insurer identifies the insured against loss due
to specific risks such as from fire, storm and death. Insurance contracts require an agreement,
considerations, capacity, legality, compliance with the statute of frauds, and delivery.
Maslow's Need Hierarchy Theory.
Making the person feel "SAFE" other expression of the need for safety occur when individuals
are confronted with real emergencies E.g., accidents, war, crime, natural disasters like waves,
floods, earthquakes etc. Once Physiological needs are met, another set of motives safety or
security needs, become motivates. The primary motivating force here is to ensure a reasonable
degree of continuity, order, structure and predictability in once environment. Maslow
suggested that the safety needs are most readily observed in infants and young children because
of their relative helplessness and dependence on adults. Security needs in the organizational
context co-relate to such factors as job security, salary increases, safe working conditions,
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unionization and lobbying for protective registration. Risk and uncertainty are part of life great
adventures accident illness, thefts, natural disaster they are all built into the working of the
universe, waiting to happen. Insurance then is man's answer to the vagaries of life. If you
cannot beat the manmade and natural calamities, wealth, at least be prepared for them and
aftermath.
Insurance is contact between two parties one is insurer (insurance company) and the insured
(the person or the entity seeking the coverage). Where the insurer agrees to pay the insured for
the financial loses arising out of any unforeseen events in return for a regular payment of the
premium. These unforeseen events are determined as "risk" and that is why insurance is called
is the risk cover. Hence the insurance is essential the means to financially compensate for loses
that life throws at people -corporate and otherwise.
Insurance is an integral part of most enterprises, risk management program. Insurance does not
prevent losses, it substitutes a small certain loss (premium) for a possible or contingent large
loss. The insured is indemnified for the amount of loss, for the insured amount, or for the face
of his policy, in return for payment of periodic premiums. The principal kinds of insurance are
the following.
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1. Life - Term, ordinary, endowment, limited payment, group industrial and annuities,
with a variety of combinations of the first four basic forms.
2. Fire & Marine - Fire, ocean marine, motor vehicle, inland navigation and
transportation, tornado and windstorm, sprinkler leakage, earthquake, riot and civil,
commotion, explosion, rain, hale, flood, aircraft, etc.
3. Causality and Surety - Automobile liability, liability other than automobile workers
compensation fidelity and surety, burglary and theft, automobile property damage,
accident in health, steam boiler, machinery, plate glass, etc.
All mutual & legal reserve life insurance companies provides for a participation in dividendsby all policyholders. In this way, the cost of insurance to the insured is reduced.
Life Insurance Business of Private Companies
The insurance market was opened to the private sector in August 2000 and the initial batch of
new registrations was granted on 23rd October, 2000. During 2000-01, there were 6 registered
private life insurance companies viz., (i) Birla Sun-Life Insurance Company Ltd. (BSLIC), (ii)
HDFC Standard Life Insurance Company Ltd. (HSLIC), (iii) ICICI Prudential Life Insurance
Company Ltd. (IPLIC), (iv) Max New York Life Insurance Company Ltd. (MNYLIC), (v) SBI
Life Insurance Company Ltd. (SLIC) and (vi) TATA AIG Life Insurance Company Ltd.
(TALIC). Out of these, only 4 companies
viz., BSLIC, HSLIC, IPLIC and MNYLIC have started doing business by the end of March
2001.
1.1 Insurance and savings.
The investments of an insurance company are intended to build up reserves and not to bookshort-term profits. These reserves provide a cushion for long-term contingencies, which can be
directed towards investment in socially desirable sectors like infrastructure. The provisions of
Section 27 A of the Insurance Act, 1938 as amended from time to time have prescribed the
investment patterns for life insurance. The Malhotra Committee (1994) had recommended that
the mandated investment of funds of LIC should be reduced from the then existing level of 75
per cent to 50 per cent. Consequent to the liberalisation of the insurance sector, and as per the
notification of IRDA (Investment) Regulations, 2000 dated August 14, 2000, the life insurance
companies have to invest a minimum of 50 per cent of their total assets in government and
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other approved securities. They are also required to invest a minimum of 15 per cent in
infrastructure and social sectors, leaving the balance 35 per cent free for investment in the
capital market. The investment pattern of LIC for the period 1980-81 to 2000-01 shows that
major share of its investments were in Central and State Government securities followed by
loans to State and Central government and their Corporations and Boards.
The role of Insurance in savings mobilisation a case for Indian Economy
Business and Investment of Non-Life Insurance in India
The general insurance companies mainly specialise in insurance business like fire, marine,
aviation, theft, crop, accident, health (medi-claim) etc. General insurance policies, unlike life
insurance policies are short duration contracts. Also, general insurance policies, in comparison
to life insurance policies do not mobilise savings, but they collect funds from the premiums
paid. The number of offices of GIC has more than trebled from 1272 in 1980-81 to 4177 in
2000-01 (Table 4). However, after 1992-93, this growth was either negligible or negative. As
regards the growth in the number of policies and net claims payable of GIC and its subsidiaries,
no steady pattern is observed. However, the volume of business in terms of number of policies
and net claims payable has improved substantially over the years.
The rural business of GIC and its subsidiaries form only 5.2 per cent of total domestic general
insurance premium in 1998-99 (latest available). The non-life business transacted in the rural
areas mainly relates to insurance of livestock. Major portion of this business transacted relates
to livestock cover under the Integrated Rural Development Programme (IRDP) with bank
credit linkages, where insurance is mandatory. Other rural businesses covered include
agricultural pumpsets, Janata Gramin Personal Accident, commercial poultry farms and other
businesses including pisciculture and sericulture.
Non-Life Insurance Business of Private Companies
During 2000-01, there were 4 registered private non-life insurance companies viz., (i)
IFFCOTokio General Insurance Company Ltd., (ITGIC), (ii) Reliance General Insurance
Company Ltd. (RGIC), (iii) Royal Sundaram Alliance Insurance Company Ltd. (RSAIC), (iv)
TATA AIG General Insurance Company Ltd. (TAGIC). The business of these companies
during 2000-01 was very low.
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Investments of General Insurance Companies
The provisions of Section 27 B of the Insurance Act 1938 as amended from time to time hasprescribed the investment patterns for non-life insurance. The Malhotra Committee (1994) had
recommended that the mandated investment of funds of the general insurance companies
should be reduced from the then existing level of 70 per cent to 35 per cent. In April 1995, the
Government relaxed the investment policies of GIC and its subsidiaries and they were allowed
to invest upto 55 per cent of the annual accretion of their funds in market oriented schemes as
against 30 per cent earlier. Consequent to the liberalisation of the insurance sector, and as per
the notification of IRDA (Investment) Regulations, 2000 dated August 14, 2000, the
investments of non-life insurance companies cannot be less than 30 per cent in government and
other approved securities. They are also required to invest a minimum of 10 per cent in
infrastructure and social sectors and a minimum of 5 per cent in the area of housing and fire
fighting. Of the balance 55 per cent, 30 per cent will be governed by prudential norms, while
25 per cent can be invested in unapproved securities including investment in equities.
The investment pattern of GIC and its subsidiaries for the period 1980-81 to 2000-01 shows
that the important avenues for its investments were in market investment followed by Central
Government securities (Table 6). Market investments of GIC and its subsidiaries increased
from 33.7 per cent in 1980-81 to 44.0 per cent in 2000-01. Whereas the investments in Central
Government securities decreased marginally from 21.3 per cent in 1980-81 to 21.0 per cent in
2000-01. The investment pattern of GIC is thus different from that of LIC, whose major
investments are in Central and State Government securities.
1.2 Insurance Penetration in India as Compared to Global Standards
Insurance density, measured in terms of premium per capita, was much lower in emerging
markets in 2000 as compared with the industrialised countries of the world. Similarly,
insurance premium as percentage of GDP i.e., insurance penetration, was lower in the
emerging markets as compared to the industrialised countries in 2000. However, South Africa
and South Korea, which figure among the emerging markets are exceptions and are among the
forerunners in insurance penetration. Of the total world insurance business in terms of
insurance premiums, nine-tenths were contributed by industrialised countries, whereas, the
emerging markets accounted for 10 per cent of total world business in insurance. However, the
growth rate of premium in 2000 in the emerging markets was higher as compared with the
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industrialised countries, indicating the growing importance of the insurance sector in the
former. India's insurance penetration was only 2.3 per cent, as against the world average of 7.8
per cent in 2000
Opening up of the insurance sector has been a key component of economic reforms put in place
in South and East Asian economies in the 1980s and 1990s. The major insurance markets in
South and East Asia are generally open indicating the impact of the reform measures. Since
liberalisation of the Korean and Taiwanese insurance markets in 1987, these markets grew at a
much faster pace than before, suggesting that liberalisation of the insurance sector facilitated
growth of insurance in these countries.
In India, the share of life insurance premium as a percentage of GDP, i.e., insurance
penetration, has increased steadily from 0.6 per cent in 1980-81 to 1.6 per cent in 200001.
However, this is much lower as compared to that of the industrialised countries. The life funds
as percentage of GDP increased from 4.6 per cent in 1980-81 to 8.9 per cent in 2000-01
reflecting an impressive performance of LIC in terms of generating premium and investment
income in excess of its expenditures and claims. The life insurance density, i.e., life insurance
premiums per capita has steadily increased from Rs. 13.1 in 1980-81 to Rs. 334.8 in 2000-01.
However, this is much lower in comparison with world standards. This again reveals the vast
scope for life insurance penetration in India. The life fund per capita which was Rs. 97.4 in
1980-81 has increased more than eighteen fold to Rs. 1819.5 in 2000-01 reflecting the
attractiveness of life insurance business.
In India, the share of gross and net insurance premiums for non-life insurance as a percentage
of GDP, i.e., non-life insurance penetration, have increased from 0.4 per cent and 0.3 per cent,
respectively in 1980-81 to 0.5 per cent and 0.5 per cent in 2000-01. However, this compares
quite unfavourably with that of the industrialised countries and other emerging markets in
general. The non-life gross and net premiums per capita (non-life insurance density) have both
steadily increased from Rs. 7.4 in 1980-81 to Rs. 105.7 in 2000-01 and from Rs. 7.1 to Rs.
100.8, respectively during the same period. However, this is much lower in comparison with
world standards. This reveals the vast scope for non-life insurance penetration in India.
1.3 Role of Insurance in Financial Saving and GDP
Insurance is an important financial saving instrument of the households. The saving component
of life insurance competes with the savings of the households in other financial instruments
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such as bank deposits, mutual funds and equities. The total life insurance in India comprises
three components viz., life insurance, postal and state insurance. The life insurance business is
almost in the hands of the LIC. Its share ranged between 85 per cent and 95 per cent of the total
insurance fund during 1980-81 through 2000-01. The share of insurance, which constitutes a
significant part of gross financial savings of the household sector, has gone up from 7.6 per
cent in1980-81 to 12.8 per cent in 2000-01. During the period 199192 to 2000-01, this share
has remained above 10 per cent, barring the three years from 1992-93 to 1994-95. The average
share of insurance in gross financial savings which was 7.6 per cent in the 1980s increased to
10.3 per cent in the 1990s. The share of insurance in GDP has shown a consistently rising trend
and more than doubled from 0.7 per cent in 1980-81 to 1.6 per cent in 2000-01.
The average share of insurance as a percentage of GDP increased from 0.8 per cent in the
1980s to 1.2 per cent in the 1990s.
The share of insurance in real GDP i.e., insurance as a percentage of real GDP during the
period 1981-82 to 2000-01 was below 1 per cent. The insurance sector has been only a
marginal contributor to the country's GDP. This is despite the country's vast population and
immense potential for growth of insurance. One of the reasons attributable to this could be the
lack of effective competition due to the monopoly position enjoyed by the public sector.
Opening up of the insurance sector may augur well for the growth in income from this sector.
1.4 Insurance Regulation in India
Insurance regulation in India started with the passage of the Life Insurance Companies Act,
1912 and the Provident Fund Act, 1912. The first comprehensive legislation was introduced
with the Insurance Act, 1938 which provided strict State control over insurance business in the
country under the supervision of the Controller of Insurance. Subsequently, the Insurance Act,
1950 was enacted to check malpractices in the insurance business and also to exercise more
control over the operations of the insurance companies. With the nationalisation of the life
insurance industry in 1956 and the general insurance industry in 1972, the role of the
Controller of Insurance diminished over a period of time. On account of the monopoly status of
the public sector units viz., LIC and GIC in the area of insurance, prior to liberalisation of this
sector, regulation was perceived to be of less interest due to the inbuilt procedures in place. The
phased globalisation of the Indian economy that started in the early 1990s began to have its
impact on the monopolistic structure of the Indian insurance industry. Further, the liberalisation
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of insurance markets was among the objectives of the Uruguay round negotiations conducted
under the auspices of General Agreement on Trade and Tariff (GATT). These negotiations
included trade in services and insurance in the context of financial services (UNCTAD Report,
January 1993). In 1993, the Government appointed a Committee headed by Shri R.N. Malhotra
to examine the reforms required in the insurance sector. The Committee in its report submitted
in 1994 recommended inter alia the opening up of the insurance sector to players other than
State- Owned ones. These recommendations were accepted by the Government and the
Insurance Regulatory and Development Authority (IRDA) Act, 1999, consequent amendments
to the Insurance Act, 1938, Life Insurance Corporation Act, 1956 and the General Insurance
Business Act, 1972 were passed in the year 2000, paving the way for opening up of theinsurance sector.
The important functions of the IRDA as per the IRDA Act 1999, include the following:
i) Licensing and regulating the insurance sector by acting as an independent and
regulatory body.
ii) Specifying requisite qualifications, code of conduct and practical training for insurance
intermediaries and agents.
iii)Protecting the interests of the policyholders in matters concerning assigning of policy,
settlement of insurance claim etc.
iv) Regulating investment of funds by insurance companies.
v) Calling for information from, undertaking inspection of, conducting enquiries and
investigations including audit of the insurers and other organisations connected with the
insurance business.
vi) Regulating maintenance of margin of solvency of the insurer.
vii) Adjudication of disputes between insurers and intermediaries or insurance
intermediaries.
viii) Supervising the functioning of the Tariff Advisory Committee.
ix) Promoting efficiency in the conduct of insurance business.
Efforts are underway to bring about internationalisation of regulations in the insurance sector
on the lines of the banking sector so as to take care of development and health of the insurance
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sector. This concern had resulted into the establishment of International Association of
Insurance Supervisors (IAIS), head quartered at Basle in Switzerland. More than 100 regulators
of insurance industries worldwide are members of this Association and India is also one
amongst them. The underlying objective of this organisation is to bring about a degree of
standardisation in regulatory procedures adopted by different countries. The Advisory Group
on Insurance Regulation (Chairman: Shri R. Ramakrishnan) appointed by the Standing
Committee on International Financial Standards and Codes (Chairman: Dr. Y.V. Reddy), stated
that Indian insurance regulations are, by and large, in consonance with international standards.
Customer Protection:
Insurance Industry has Ombudsmen in 12 cities. Each Ombudsman is empowered to redress
customer grievances in respect of insurance contracts on personal lines where the insured
amount is less than Rs. 20 lakhs, in accordance with the Ombudsman Scheme. Addresses can
be obtained from the offices of LIC and other insurers.
Chapter 2. Literature review
2.1 Types of Domestic Savings
There are basically three types of private domestic saving, each with their own different
determinants, namely: voluntary saving; involuntary saving and forced saving. Voluntary
saving relates to the voluntary abstinence from consumption by private individuals out of
personal disposable income and by companies out of profits. Involuntary saving is saving
brought about through involuntary reductions in consumption. All forms of taxation and
schemes for compulsory lending to governments (including national insurance contributions)
are forms of involuntary saving. Forced saving is saving that comes about as a result of rising
prices and the reduction in real consumption that inflation involves if consumers cannot (or donot) defend themselves. Rising prices may reduce real consumption for a number of reasons.
Firstly, people may suffer money illusion. Secondly, they may want to keep constant the real
value of their money balance holdings, so they accumulate more money and spend less as
prices rise (the real balance effect). Thirdly, inflation may redistribute income to those with a
higher propensity to save, such as profit earners. Inflation initiated by monetary expansion will
certainly redistribute income to the government as the issuer of money. This is the notion of the
inflation tax. As Keynes once said '[inflation is] a form of taxation that the public finds hard to
evade and even the weakest government can enforce when it can enforce nothing else' (Keynes,
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1923). It is believed, however, that in certain circumstances there is a case for mild demand
inflation initiated by government as a stimulus to investment. The empirical evidence across
countries (Thirlwall 1974a, 1974b; Sarel, 1996; Bruno and Easterly, 1998) suggests a positive
relation between inflation and growth up to 6-8 percent inflation, and only when inflation
exceeds 10 percent do the consequences for growth become seriously detrimental.
Voluntary saving depends on the capacity to save and the willingness to save. The capacity to
save depends on three main determinants: the level of per capita income; the growth of income,
and the distribution of income. The willingness to save depends, in turn, on: the rate of interest;
the existence of financial institutions; the range and availability of financial assets, and the rate
of inflation. One of the most important innovations that Keynes made in his General Theory of
Employment, Interest and Money (1936) was to link, for the first time, consumption (and
therefore saving) to the level of income through the concept of the consumption (or savings)
function. More explicitly, there is the suggestion that the consumption or savings function is
non-proportional; that is, that the rich (people or countries) consume proportionately less, and
save proportionately more, of their income than the poor. One way of expressing this idea is to
start with the savings function: S/P = -a1 + b1 (Y/P) (3) where S/P is the level of savings per
head of population (P), and Y/P is per capita income. The negative constant term means that
the marginal propensity to save is above the average, so raising the average as Y/P rises. To
convert this function so that the savings ratio is the dependent variable, multiply both sides of
the equation by P and divide by Y. This gives :S/Y = b1 - a1 (Y/P)-1 (4) where the savings
ratio is a non-linear function of per capita income i.e. as Y/P rises, S/Y rises but at a decreasing
rate to the asymptote b1. This is broadly the pattern observed across countries (Hussein and
Thirlwall, 1999). The savings ratio is lower in poor countries than in rich countries, but does
not rise linearly as income increases. It increases at a diminishing rate and then levels off (at
approximately 25 percent of national income).
2.2 Life Insurance vs. Other Savings
Life insurance in India made its debut well over 100 years ago. In a country, which is one of
the most populated in the world, the prominence of insurance is not as widely understood, as it
ought to be.
Protection:
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Savings through life insurance guarantee full protection against risk of death of the saver. Also,
in case of demise, life insurance assures payment of the entire amount assured (with bonuses
wherever applicable) whereas in other savings schemes, only the amount saved (with interest)
is payable.
Aid to Thrift:
Life insurance encourages 'thrift'. It allows long-term savings since payments can be made
effortlessly because of the 'easy instalment' facility built into the scheme. (Premium payment
for insurance is monthly, quarterly, half yearly or yearly). For example: The Salary Saving
Scheme popularly known as SSS provides a convenient method of paying premium each month
by deduction from one's salary.
In this case the employer directly pays the deducted premium to LIC. The Salary Saving
Scheme is ideal for any institution or establishment subject to specified terms and conditions.
Liquidity:
In case of insurance, it is easy to acquire loans on the sole security of any policy that has
acquired loan value. Besides, a life insurance policy is also generally accepted as security, even
for a commercial loan.
Tax Relief:
Life Insurance is the best way to enjoy tax deductions on income tax and wealth tax. This is
available for amounts paid by way of premium for life insurance subject to income tax rates in
force. Assessees can also avail of provisions in the law for tax relief. In such cases the assured
in effect pays a lower premium for insurance than otherwise.
Money When You Need It:
A policy that has a suitable insurance plan or a combination of different plans can be
effectively used to meet certain monetary needs that may arise from time-to-time. Children's
education, start-in-life or marriage provision or even periodical needs for cash over a stretch of
time can be less stressful with the help of these policies.
Alternatively, policy money can be made available at the time of one's retirement from service
and used for any specific purpose, such as, purchase of a house or for other investments. Also,
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loans are granted to policyholders for house building or for purchase of flats (subject to certain
conditions).
Private Players, Foreign Equity and Profitability
The Union Government had opened up the insurance sector for private participation in 1999,
also allowing the private companies to have foreign equity up to 26 per cent. Following the
opening up of the insurance sector, 12 private sector companies have entered the life insurance
business. Apart from the HDFC, which has foreign equity of 18.6%, all the other private
companies have foreign equity of 26 per cent. In general insurance 8 private companies have
entered, 6 of which have foreign equity of 26 per cent. Among the private players in generalinsurance, Reliance and Cholamandalam does not have any foreign equity.
Competition in the Insurance Sector
Even after the liberalization of the insurance sector, the public sector insurance companies have
continued to dominate the insurance market, enjoying a bigger per cent of the market share. In
fact, the LIC, which is the only public sector life insurer, enjoys a lion's share percentage of the
market share in Life insurance.
Given the huge market share enjoyed by the public sector companies, the argument, which is
often made by advocates of greater liberalization, that the entry of private players would bring
down the cost of insurance due to enhanced competition, does not seem to be convincing. The
price making capacity of the market leaders in the public sector is likely to remain intact for the
time being. The foreign insurance companies do have the reputation of charging less premium
compared to the risks involved and promising abnormally high returns, in order to grab greater
market share. Such competition, however, although capable of bringing down the 'cost' of
insurance for a while, has often led to gigantic frauds and bankruptcies.
Moreover, as is the case in other markets, the initial flurry of entries into the Indian insurance
market would invariably be followed by a phase of mergers and acquisitions that would lead to
cartelisation, precluding the possibility of competition driving down the costs in the medium
run. In the long run, other forms of non-price competition like aggressive advertisement wars
are likely to lead to increasing costs, eventually harming the interests of the consumers. These
phenomena in the insurance market have been observed in several advanced countries. If the
public sector companies start imitating the strategies of the foreign insurance companies in
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order to defend their market shares, it would be at the cost of undermining their important
social objectives, which they have been fulfilling so impeccably till date.
Implications for Resource Mobilization
A major role played by the insurance sector is to mobilize national savings and channelize
them into investments in different sectors of the economy.
However, no significant change seems to have occurred as far as mobilizing savings by the
insurance sector is concerned, following the liberalization of the insurance sector in 1999. Data
from the RBI show that the trend of the savings in life insurance by the households to GDP
ratio, while showing a clear upward trend through the 1990s signifying increasing business for
the insurance sector, does not show any structural
break after 1999.
It can be inferred therefore that the foreign capital which flowed in after the opening up of the
insurance sector has not been accompanied by any technological innovation in the insurance
business, which would have created greater dynamism in savings mobilization. Ratio of
Savings in Life Insurance by Household to GDP
Ratio of Savings in Life Insurance to GDP Ratio of Savings in Life Insurance to
GDP
Far from expanding the market for the insurance sector, the business activities of the private
companies are limited in urban areas, where a fairly good market network of the public sector
insurance companies already exists. The glaring evidence for this is the composition of agents
operating in the insurance sector. According to the IRDA Annual Report the number of
insurance agents in urban and rural India was in 100:76 ratio in the public sector companies, in
2001-02. For the private insurance companies this ratio was
100:1.4. Due to their urban-biased operational activity, the private insurance companies can
neither increase the insurance base of the economy significantly, nor lead to substantial
employment generation. Given this scenario, further increase in foreign participation is only
going to lead to Intensified competition for the urban insurance markets, rather than leading to
a growth in overall savings.
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It was also argued that competition will expand market and the foreign insurers will bring
better products. This has simply not happened. The size of the market has remained by and
large the same and from this market the private companies are picking up the creamy sections
in the metros seriously eroding the ability of public sector to cross subsidize its products in the
rural areas.
2.3 Flow of funds for infrastructure
Life insurance is all about mobilizing the savings for long term investment in social and
infrastructure sectors. The opening up of insurance market would enable huge flow of funds
into infrastructure but the record of private companies on this is dismal. More than fifty percent
of the policies they sell are unit-linked insurance where the decision on investment of savings
element in insurance is taken by the policyholders. A bigger percentage of policies sold by
almost all the life insurance companies are unit-linked policies . Under these schemes, nearly
50 percent of the funds are invested in equities thus limiting the fund availability for
infrastructural investments.
Raising the FDI cap also does not seem justifiable as far as channelizing savings into
investments are concerned. The life insurance sector invested a total of Rs. 31335.89 crores inthe infrastructure sector in 2002-03. Out of this the contribution of the LIC was Rs. 30998.16
crores, which was 98.92 per cent of the total investment in infrastructure by the entire life
insurance sector. The figures provided by the IRDA Reports further suggest that the share of
the public sector life and non-life insurance companies in investment in infrastructure is greater
than their market share. Despite the FDI cap being set at 26%, the investment from the
insurance sector to the infrastructure sector was predominantly from the public sector
companies.
Therefore, the argument that raising the FDI cap in the insurance sector would help in
mobilizing resources for infrastructure, does not hold. On the other hand, greater foreign
control is more likely to lead to a decline in the share of investment of the private insurance
companies into the infrastructure sector, given the record of the foreign insurance companies in
siphoning resources for speculative financial ventures. It is also worth mentioning that the only
insurance company involved in insuring Indian exports is the Export Credit Guarantee
Corporation of India, which provides insurance cover to export credit. The ECGC has been in
existence since 1957. It is functioning under the United India Insurance Co. No private player
with foreign partnership has ventured into this area. Moreover, the LIC and other public sector
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units are the only ones to undertake overseas operations, as reported by the Annual Reports of
the IRDA. Foreign participation has also not helped in marketing Indian insurance products
abroad.
List of Private Companies in Life Insurance
India's savings patterns are shifting, with far-reaching implications for the economy and
financial system. The downward plunge of the Indian stock market has hurt the fortunes of
thousands of investors, big and small. It will also have broader implications for India's financial
system and the future of savings and investment patterns. Over the past few years, cautious
investors had started to diversify away from bank deposits and cash, moving into equities,mutual funds and insurance products. But the market turmoil is driving them back to the safety
of bank deposits, reducing the amount of capital available to other instruments and possibly
retarding the growth of the financial-services industry as a whole.
India's high savings rate has been a crucial driver of its economic boom, providing productive
capital and helping to fuel a virtuous cycle of higher growth, higher income and higher savings.
Since the 1990s, the gross domestic savings rate has risen steadily from an average of 23% to
an estimated high of 35% in the 2006/07 fiscal year (April-March). The latter rate comparesvery favorably not only with developed economies (the US and the UK have savings rates of
around 14%), but also with other emerging economieswith a few exceptions such as
Malaysia (38%) and Chile (35%). Yet India's household sector (including some small
businesses) continues to account for the lion's sharesome 70%of savings. The last five
years have seen a surge in corporate savings as companies became more competitive and
increased their profitability. That has been accompanied by a rise in public-sector savings on
the back of increased fiscal prudence. However, the current economic situation is putting
pressure on both corporate profitability and the public finances, ensuring that savings in these
two sectors are unlikely to grow as rapidly as in the past. Household savings will therefore
remain crucial to sustaining a strong savings rate.
Savings trends
As real GDP growth climbed and the economy opened up, many worried that increasingly
prosperous Indians would spend more and save less, breaking the cultural habits of decades.
Those fears turned out to be unfounded; prosperity has only increased the savings rate. One
reason for this is the woeful inadequacy of India's social-security system. Only around 10% of
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India's working population is covered by a retirement-benefit scheme. With increased urban
migration, the joint family system (where several generations live together) is declining,
reducing traditional old-age support from families. Health-insurance coverage is very low.
Lastly, many Indians remain averse to taking loans. Personal savings remain vital to meet long-
term needs such as home buying, children's education, retirement and healthcare.
All this suggests that India's large fund of household savings, which stood at Rs9.85trn
(US$192bn) in 2006/07, will remain available to fuel domestic growth. Yet much of Indians'
physical savings is still locked up in unproductive physical assetssuch as houses, durables
and jewellerythat households are only slowly converting into financial assets. As a result,
India's government is keen to find new ways to encourage that shift while increasing savings.
The government would like to channel household savings into the country's debt, equity and
infrastructure-finance markets. This would not only deepen and stabilise the financial markets
but also reduce the government's future social-security burden.
The government already plays an important role in changing investor preferences. Indian
investors are highly tax sensitive; a small tax change can move billions of rupees from one
avenue into another. Such tax changes, coupled with solid economic growth and the emergence
of new investment channels as a result of private participation in the insurance and mutual-fund
industries, are slowly changing the composition of household savings.
There have been some particularly interesting changes within the roughly 50% of the
household savings pool that goes into financial assets. Bank deposit growth declined markedly
in the decade to 2005, after the government began offering tax benefits that gave post office
deposits and other small savings instruments much higher tax-adjusted returns than banks
deposits. However, bank deposit growth then accelerated significantly, and deposits climbed
back up from 36% of household financial assets in 2005/06 to 55% in 2007/08. One reason wasthat banks faced much greater demand for credit and stepped up their deposit-mobilization
efforts, while raising deposit rates. Also, the government extended the tax benefits already
available on post office deposits to bank deposits with maturities of over five years.
Along with the rise in bank deposits, the funds raised through the capital markets and by
mutual funds have simultaneously increased substantially. However, this share of savings
changes quickly, responding to the volatility, risk and returns of the markets themselves. Here,
too, tax benefits have played an important role. The government has made all dividends
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including those from mutual funds tax-free in the hands of investors. Investments in equity and
in equity-oriented mutual funds are exempt from long-term capital gains; the latter are also
exempt from dividend distribution tax.
Private participation
Financial-sector liberalization has been an important driver of these changes. The government
permitted private participation in the mutual-fund industry in 1993, unleashing substantial
growth and structural change. By end-March 2008, total assets under management stood at
Rs5trn, up from Rs3trn a year earlier, and private-sector players held more than 80%. In the
insurance industry, private participation was approved in 2000, leading to a rise in penetrationand market size. By March 2008 the private insurers had taken a combined market share of
36% and 40% of the life and non-life insurance markets, respectively, and the share of life
insurance in household financial assets had climbed to 18%.
The increased availability of these options has contributed to a decline in the share of other
contractual savings, such as provident and pension funds. However, as the government's
pension reforms gain momentum and the insurance industry continues to increase coverage and
penetration, those types of savings will likely increase.
Outlook
In the medium term, these trends are likely to continue. The number of Indians in the working-
age group of 15-64 years is forecast to rise from 63% of the population in 2006 to 68% in
2026. Public-sector employment, with its social-security guarantees, is declining; private-sector
employment, with its higher salaries but lower job security, is increasing rapidly. That can only
boost demand for new financial products and the need for Indian investors to remain in charge
of their own savingspresenting opportunities for both the government and financial-services
providers to channel those savings productively
2.4 Insurance Sector in India
Insurance sector in India is one of the booming sectors of the economy and is growing at the
rate of 15-20 per cent annum. Together with banking services, it contributes to about 7 per cent
to the country's GDP. Insurance is a federal subject in India and Insurance industry in India is
governed by Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and General
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Insurance Business (Nationalisation) Act, 1972, Insurance Regulatory and Development
Authority (IRDA) Act, 1999 and other related Acts.
The origin of life insurance in India can be traced back to 1818 with the establishment of the
Oriental Life Insurance Company in Calcutta. It was conceived as a means to provide for
English Widows. In those days a higher premium was charged for Indian lives than the non-
Indian lives as Indian lives were considered riskier for coverage. The Bombay Mutual Life
Insurance Society that started its business in 1870 was the first company to
charge same premium for both Indian and non-Indian lives. In 1912, insurance regulation
formally began with the passing of Life Insurance Companies Act and the Provident Fund Act.
By 1938, there were 176 insurance companies in India. But a number of frauds during 1920s
and 1930s tainted the image of insurance industry in India. In 1938, the first comprehensive
legislation regarding insurance was introduced with the passing of Insurance Act of 1938 that
provided strict State Control over insurance business. Insurance sector in India grew at a faster
pace after independence. In 1956, Government of India brought together 245 Indian and
foreign insurers and provident societies under one nationalised monopoly corporation andformed Life Insurance Corporation (LIC) by an Act of Parliament, viz. LIC Act, 1956, with a
capital contribution of Rs.5 crore.
The (non-life) insurance business/general insurance remained with the private sector till 1972.
There were 107 private companies involved in the business of general operations and their
operations were restricted to organised trade and industry in large cities. The General Insurance
Business (Nationalisation) Act, 1972 nationalised the general insurance business in India with
effect from January 1, 1973. The 107 private insurance companies were amalgamated and
grouped into four companies: National Insurance Company, New India Assurance Company,
Oriental Insurance Company and United India Insurance Company. These were subsidiaries of
the General Insurance Company
(GIC).
In 1993, the first step towards insurance sector reforms was initiated with the formation of
Malhotra Committee, headed by former Finance Secretary and RBI Governor R.N. Malhotra.
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The committee was formed to evaluate the Indian insurance industry and recommend its future
direction with the objective of complementing the reforms initiated in the financial sector.
Key Recommendations of Malhotra Committee
Structure
Government stake in the insurance Companies to be brought down to 50%.
Government should take over the holdings of GIC and its subsidiaries so that these
subsidiaries can act as independent corporations.
All the insurance companies should be given greater freedom to operate.
Competition
Private Companies with a minimum paid up capital of Rs.1billion should be allowed to
enter the industry.
No Company should deal in both Life and General Insurance through a single Entity.
Foreign companies may be allowed to enter the industry in collaboration with the
domestic companies.
Postal Life Insurance should be allowed to operate in the rural market.
Only one State Level Life Insurance Company should be allowed to operate in each
state.
Regulatory Body
The Insurance Act should be changed.
An Insurance Regulatory body should be set up.
Controller of Insurance should be made independent.
Investments
Mandatory Investments of LIC Life Fund in government securities to be reduced from
75% to 50%.
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GIC and its subsidiaries are not to hold more than 5% in any company. Customer
Service
LIC should pay interest on delays in payments beyond 30 days
Insurance companies must be encouraged to set up unit linked pension plans.
Computerisation of operations and updating of technology to be carried out in the
insurance industry.
Malhotra Committee also proposed setting up an independent regulatory body - The InsuranceRegulatory and Development Authority (IRDA) to provide greater autonomy to insurance
companies in order to improve their performance and enable them to act as independent
companies with economic motives.
Insurance sector in India was liberalized 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. 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. The opening up of the insurance sector
has led to rapid growth of the sector. Presently, there are 16 life insurance companies and 15
non-life insurance companies in the market. The potential for growth of insurance industry in
India is immense as nearly 80 per cent of Indian population is without life insurance cover
while health insurance and non-life insurance continues to be well below international
standards.
The role of Insurance in savings mobilisation a case for Indian Economy
Insurance : The Indian Experience
As a part of the financial sector reforms, the insurance sector has been liberalised recently.
With this, the stage has been set for major changes in the insurance market in India with regard
to innovations in product, pricing and distribution. This will also necessitate effective
regulation to meet the new challenges this sector is likely to encounter in the liberalised
environment. In this context, the paper attempts to make an overview of the insurance system
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in India. The paper also attempts to evaluate the insurance penetration achieved in the country
as compared to world standards and traces future scope for this sector as a facilitator for
economic and financial development of the country.
The economic reforms initiated in the country since mid-1991, have been aimed at increasing
efficiency by expanding the role of the private sector along with inflow of investment and
technology, while allowing a greater role of market forces. Insurance being one of the key
components of the financial sector, reforms in the financial sector would encompass insurance
sector reforms also. In the liberalised environment, with increased sophistication and
innovation, insurance is seen as a key segment of the financial market. Insurance is therefore an
area, which holds immense potential, especially for an emerging economy like India. A
Committee on Reforms of the Insurance Sector (Chairman: R.N. Malhotra) was appointed by
the Government of India in April 1993 to examine the regulation and structure of the insurance
industry. Based on the Report submitted by the Committee in January 1994, concrete steps
have been taken by the Government in 1999, after much deliberation, towards liberalisation of
the insurance sector. The paper traces the evolution of the insurance market in India. Section I
of the paper deals with the theoretical aspects of insurance. Section II traces the historical
perspectives of insurance in India. Sections III and IV deal with the business and investments
of life and non-life insurance in India, respectively. In Section V, an assessment of insurance
penetration in India is made in comparison with world standards. Section VI discusses the role
of insurance in financial savings of the household sector. Section VII covers regulation of
insurance in India and Section VIII gives concluding observations.
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2.5 Theoretical Aspects of Insurance
From the definitional angle, the term insurance can be best understood by referring to the two
important schools of thought on the subject viz., (i) transfer school and (ii) pooling school.
According to the transfer school, "Insurance is a device for the reduction of uncertainty of one
party, called the insured, through the transfer of particular risks to another party, called the
insurer, who offers a restoration, at least in part, of economic losses suffered by the insured"
(Pfeffer Irving, 1956). On the other hand, according to the
'pooling' school, ".............. the essence of insurance lies in the elimination of the uncertain
risk of loss for the individual through the combination of a large number of similarly exposed
individuals" (Manes Alfred, 1935). Thus, in the case of an individual, insurance is a transfer
mechanism through which he passes on risk to the insurer. Whereas, for the insurer, insurance
is a pooling mechanism by which he reduces risk in the context of his business. Insurance
markets are generally characterised by asymmetric or imperfect information. In such markets,
there is uncertainty about the actual behaviour of the insured. The insured possesses better
information about himself or his risk type than the insurer. The high-risk insurees have
incentives to hide their true state and present themselves as low risk types. The difficult
problem faced by the insurance companies is the exact evaluation of risk and to adjust the
premium accordingly at the time of signing of the insurance contract. In other words, the
insurer will have to fix up the price and the amount of insurance the customer can buy at that
price. Higher premium will attract a pool of more risky insurance applicants and will lead to
the problem of 'adverse selection', while the applicants with small risks will drop out. Higher
insured values may lead to 'moral hazard' problems, as it will create an incentive for the insuree
to take increased risks than he would otherwise take. The problem of moral hazard, though
unimportant in the case of life insurance (as no one would try to take his own life in normal
circumstances), can be severe in the area of non-life insurance. It is therefore necessary for the
insurance companies to strike a correct balance between the premium and the extent of risk
covered.
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The role of Insurance in savings mobilisation a case for Indian EconomyAn
Historical Perspective
One of the main features of the pre-nationalised insurance sector was the utilisation of the
insurance sector as a backup or extension by the well known industrial houses of India. There
are mainly two forms of insurance in India viz., life and non-life. Life insurance provides
protection to a household against the risk of premature death of its income-earning member.
Non-life insurance can be grouped under three heads viz., fire, marine and miscellaneous
insurance. Life Insurance Corporation of India carries on life insurance business and the
General Insurance Corporation and its four subsidiaries deal with non-life insurance. After
liberalisation of the insurance sector in 1999, private players have entered both life and non-
life business in India. The Insurance Regulatory and Development Authority (IRDA) was
constituted in April 2000 as an autonomous body to regulate and develop the business of
insurance and re-insurance in the country in terms of the Insurance Regulatory and
Development Authority Act, 1999.
Life Insurance
The life insurance business was first introduced in India by a British firm in 1818. Initially,
higher premiums were charged for insuring Indian lives as against non-Indian lives. The
Bombay Mutual Life Assurance Society, an Indian insurer, set up in 1871 was the first to
charge same premium for both Indians and non-Indians. The decades of 1920s and 1930s
witnessed rapid growth of life insurance in India. In order to regulate the life insurance
business, the Indian Life Assurance Companies Act, 1912 was enacted. The enactment of the
Insurance Act, 1938 introduced effective State control over the insurance business in the
country. After independence, Indian companies came into their own. In 1956, the LifeInsurance Corporation of India was formed when the Government of India brought together the
insurance business of 2451 Indian and foreign insurers and provident societies, under one
nationalised monopoly corporation called Life Insurance Corporation (LIC). Since
nationalisation, LIC developed a vast network of branches and expanded its business. LIC also
extends pension cover to the insured apart from life cover. Acting on the recommendations of
the Committee on Reforms in the Insurance Sector (1994), private players were allowed into
the Life insurance business in 2000.
During 2000-01, there were 6 registered private companies engaged in the business of life
insurance.
General Insurance
The first general insurance company viz., Triton Insurance Company Ltd. was established in
Calcutta in 1850. Its shareholders were mainly British. The first Indian company for General
Insurance business was the Indian Mercantile Insurance Company Ltd., set up in 1907 in
Mumbai. The general insurance business in India was nationalised with effect from January
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1973 by the General Insurance Act, 1972. As a result, 107 insurers (including both Indian and
foreign companies) were amalgamated and grouped into four companies viz., the National
Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance
Company Ltd. and the United India Insurance Company Ltd. General Insurance Corporation
(GIC) was incorporated as a company in November 1972 and it commenced business on
January 1, 1973. GIC has been acting as the Indian reinsurer2 since then. GIC has also been
accepting overseas reinsurance business. For regulation of product pricing of general
insurance, a Tariff Advisory Committee (TAC) started functioning since 1968 headed by the
Controller of Insurance. After the nationalisation of GIC in 1972, the management of TAC was
delegated to GIC. Acting on the recommendations of the Committee on Reforms in the
Insurance Sector (1994), private players were allowed into the non-Life insurance businessalso in 2000. During 2000-01, there were 4 registered private companies engaged in the
business of non-life insurance.
Business and Investments of Life Insurance Companies
Since nationalisation of the life insurance business in India in 1956 and non-life business in
1972, rapid strides have been made in the development of the insurance sector. The Life
Insurance Corporation has introduced different types of policies to suit different income groups
and age groups over the years. These insurance policies include term, whole life, endowment,
annuity, individual, group and pension plans. This has afforded reasonable variety of
investment schemes to the investors. The number of offices of LIC increased from 889 in
1981-82 to 2048 in 2000-01 (Table 1). The number of policies grew from 3.7 per cent in 1981-
82 to 12.0 percent in 2000-01. This growth, which peaked at 12.8 per cent in 1990-91, could
not be maintained in the subsequent years. The growth in the sum assured which was 14.7 in
1981-82, peaked to a high of27.4 per cent in 198990, but eventually declined to 20.3 per cent
in 2000-01.The rural new business of LIC as a percentage of its overall new business has
grown well during the 1980s and 1990s. The penetration in the rural areas was more
pronounced in the 1990s than in the 1980s
The share of rural to total new business in terms of number of policies has increased from 32.8
per cent in 1981-82 to 55.5 percent in 2000-01. In terms of sum assured, this share increased
from 26.6 per cent in 1981-82 to 47.8 per cent in 2000-01. The Committee on Reforms in the
Insurance Sector (Malhotra Committee) had recommended that it should be made mandatory
for insurance companies to transact a minimum business in rural areas and they should not be
allowed to avoid small policies. With improving rural infrastructure, rising incomes and
greater awareness among the rural people regarding the importance of life cover, further
growth in rural insurance business can be achieved.
Life Insurance Business of Private Companies
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The insurance market was opened to the private sector in August 2000 and the initial batch of
new registrations was granted on 23rd October, 2000. During 2000-01, there were 6 registered
private life insurance companies viz., (i) Birla Sun-Life Insurance
Company Ltd. (BSLIC), (ii) HDFC Standard Life Insurance Company Ltd. (HSLIC), (iii)
ICICI Prudential Life Insurance Company Ltd. (IPLIC), (iv) Max New York Life Insurance
Company Ltd. (MNYLIC), (v) SBI Life Insurance Company Ltd. (SLIC) and (vi) TATA AIG
Life Insurance Company Ltd. (TALIC). Out of these, only 4 companies
viz., BSLIC, HSLIC, IPLIC and MNYLIC have started doing business by the end of March
2001.
The investments of an insurance company are intended to build up reserves and not to book
short-term profits. These reserves provide a cushion for long-term contingencies, which can be
directed towards investment in socially desirable sectors like infrastructure. The provisions of
Section 27 A of the Insurance Act, 1938 as amended from time to time have prescribed the
investment patterns for life insurance. The Malhotra Committee (1994) had recommended that
the mandated investment of funds of LIC should be reduced from the then existing level of 75
per cent to 50 per cent. Consequent to the liberalisation of the insurance sector, and as per the
notification of IRDA (Investment) Regulations, 2000 dated August 14, 2000, the life insurance
companies have to invest a minimum of 50 per cent of their total assets in government and
other approved securities. They are also required to invest a minimum of 15 per cent in
infrastructure and social sectors, leaving the balance 35 per cent free for investment in the
capital market. The investment pattern of LIC for the period 1980-81 to 2000-01 shows that
major share of its investments were in Central and State Government securities followed by
loans to State and Central government and their Corporations and Boards.
Business and Investment of Non-Life Insurance in India
The general insurance companies mainly specialise in insurance business like fire, marine,aviation, theft, crop, accident, health (medi-claim) etc. General insurance policies, unlike life
insurance policies are short duration contracts. Also, general insurance policies, in comparison
to life insurance policies do not mobilise savings, but they collect funds from the premiums
paid. The number of offices of GIC has more than trebled from 1272 in 1980-81 to 4177 in
2000-01 (Table 4). However, after 1992-93, this growth was either negligible or negative. As
regards the growth in the number of policies and net claims payable of GIC and its
subsidiaries, no steady pattern is observed. However, the volume of business in terms of
number of policies and net claims payable has improved substantially over the years.
The rural business of GIC and its subsidiaries form only 5.2 per cent of total domestic general
insurance premium in 1998-99 (latest available). The non-life business transacted in the rural
areas mainly relates to insurance of livestock. Major portion of this business transacted relates
to livestock cover under the Integrated Rural Development Programme
(IRDP) with bank credit linkages, where insurance is mandatory. Other rural businesses
covered include agricultural pumpsets, Janata Gramin Personal Accident, commercial poultry
farms and other businesses including pisciculture and sericulture.
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Non-Life Insurance Business of Private Companies
During 2000-01, there were 4 registered private non-life insurance companies viz., (i)
IFFCOTokio General Insurance Company Ltd., (ITGIC), (ii) Reliance General Insurance
Company Ltd. (RGIC), (iii) Royal Sundaram Alliance Insurance Company Ltd. (RSAIC), (iv)
TATA AIG General Insurance Company Ltd. (TAGIC). The business of these companies
during 2000-01 was very low.
Investments of General Insurance Companies
The provisions of Section 27 B of the Insurance Act 1938 as amended from time to time has
prescribed the investment patterns for non-life insurance. The Malhotra Committee (1994) hadrecommended that the mandated investment of funds of the general insurance companies
should be reduced from the then existing level of 70 per cent to 35 per cent. In April 1995, the
Government relaxed the investment policies of GIC and its subsidiaries and they were allowed
to invest upto 55 per cent of the annual accretion of their funds in market oriented schemes as
against 30 per cent earlier. Consequent to the liberalisation of the insurance sector, and as per
the notification of IRDA (Investment) Regulations, 2000 dated August 14, 2000, the
investments of non-life insurance companies cannot be less than 30 per cent in government and
other approved securities. They are also required to invest a minimum of 10 per cent in
infrastructure and social sectors and a minimum of 5 per cent in the area of housing and fire
fighting. Of the balance 55 per cent, 30 per cent will be governed by prudential norms, while
25 per cent can be invested in unapproved securities including investment in equities.
The investment pattern of GIC and its subsidiaries for the period 1980-81 to 2000-01 shows
that the important avenues for its investments were in market investment followed by Central
Government securities (Table 6). Market investments of GIC and its subsidiaries increased
from 33.7 per cent in 1980-81 to 44.0 per cent in 2000-01.
Whereas the investments in Central Government securities decreased marginally from 21.3 per
cent in 1980-81 to 21.0 per cent in 2000-01. The investment pattern of GIC is thus different
from that of LIC, whose major investments are in Central and State Government securities.
Insurance Penetration in India as Compared to Global Standards
Insurance density, measured in terms of premium per capita, was much lower in emerging
markets in 2000 as compared with the industrialised countries of the world. Similarly,
insurance premium as percentage of GDP i.e., insurance penetration, was lower in the
emerging markets as compared to the industrialised countries in 2000. However, South Africa
and South Korea, which figure among the emerging markets are exceptions and are among the
forerunners in insurance penetration. Of the total world insurance business in terms of
insurance premiums, nine-tenths were contributed by industrialised countries, whereas, the
emerging markets accounted for 10 per cent of total world business in insurance. However, the
growth rate of premium in 2000 in the emerging markets was higher as compared with the
industrialised countries, indicating the growing importance of the insurance sector in the
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former. India's insurance penetration was only 2.3 per cent, as against the world average of 7.8
per cent in 2000
Opening up of the insurance sector has been a key component of economic reforms put in
place in South and East Asian economies in the 1980s and 1990s. The major insurance markets
in South and East Asia are generally open indicating the impact of the reform measures. Since
liberalisation of the Korean and Taiwanese insurance markets in 1987, these markets grew at a
much faster pace than before, suggesting that liberalisation of the insurance sector facilitated
growth of insurance in these countries.
In India, the share of life insurance premium as a percentage of GDP, i.e., insurance
penetration, has increased steadily from 0.6 per cent in 1980-81 to 1.6 per cent in 200001.
However, this is much lower as compared to that of the industrialised countries. The life funds
as percentage of GDP increased from 4.6 per cent in 1980-81 to 8.9 per cent in 2000-01
reflecting an impressive performance of LIC in terms of generating premium and investment
income in excess of its expenditures and claims. The life insurance density, i.e., life insurance
premiums per capita has steadily increased from Rs. 13.1 in 1980-81 to Rs. 334.8 in 2000-01.
However, this is much lower in comparison with world standards. This again reveals the vastscope for life insurance penetration in India. The life fund per capita which was Rs. 97.4 in
1980-81 has increased more than eighteen fold to Rs. 1819.5 in 2000-01 reflecting the
attractiveness of life insurance business.
In India, the share of gross and net insurance premiums for non-life insurance as a percentage
of GDP, i.e., non-life insurance penetration, have increased from 0.4 per cent and 0.3 per cent,
respectively in 1980-81 to 0.5 per cent and 0.5 per cent in 2000-01. However, this compares
quite unfavourably with that of the industrialised countries and other emerging markets in
general. The non-life gross and net premiums per capita (non-life insurance density) have both
steadily increased from Rs. 7.4 in 1980-81 to Rs. 105.7 in 2000-01 and from Rs. 7.1 to Rs.
100.8, respectively during the same period. However, this is much lower in comparison with
world standards. This reveals the vast scope for non-life insurance penetration in India.
Role of Insurance in Financial Saving and GDP
Insurance is an important financial saving instrument of the households. The saving component
of life insurance competes with the savings of the households in other financial instruments
such as bank deposits, mutual funds and equities. The total life insurance in India comprises
three components viz., life insurance, postal and state insurance. The life insurance business is
almost in the hands of the LIC. Its share ranged between 85 per cent and 95 per cent of the
total insurance fund during 1980-81 through 2000-01. The share of insurance, which
constitutes a significant part of gross financial savings of the household sector, has gone up
from 7.6 per cent in 1980-81 to 12.8 per cent in 2000-01. During the period 199192 to 2000-
01, this share has remained above 10 per cent, barring the three years from 1992-93 to 1994-
95. The average share of insurance in gross financial savings which was 7.6 per cent in the
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1980s increased to 10.3 per cent in the 1990s. The share of insurance in GDP has shown a
consistently rising trend and more than doubled from 0.7 per cent in 1980-81 to 1.6 per cent in
2000-01.
The average share of insurance as a percentage of GDP increased from 0.8 per cent in the
1980s to 1.2 per cent in the 1990s. The share of insurance in real GDP i.e., insurance as a
percentage of real GDP during the period 1981-82 to 2000-01 was below 1 per cent. The
insurance sector has been only a marginal contributor to the country's GDP. This is despite the
country's vast population and immense potential for growth of insurance. One of the reasons
attributable to this could be the lack of effective competition due to the monopoly position
enjoyed by the public sector. Opening up of the insurance sector may augur well for the growth
in income from this sector.
Insurance Regulation in India
Insurance regulation in India started with the passage of the Life Insurance Companies Act,
1912 and the Provident Fund Act, 1912. The first comprehensive legislation was introduced
with the Insurance Act, 1938 which provided strict State control over insurance business in the
country under the supervision of the Controller of Insurance. Subsequently, the Insurance Act,
1950 was enacted to check malpractices in the insurance business and also to exercise morecontrol over the operations of the insurance companies. With the nationalisation of the life
insurance industry in 1956 and the general insurance industry in 1972, the role of the
Controller of Insurance diminished over a period of time. On account of the monopoly status
of the public sector units viz., LIC and GIC in the area of insurance, prior to liberalisation of
this sector, regulation was perceived to be of less interest due to the inbuilt procedures in place.
The phased globalisation of the Indian economy that started in the early 1990s began to have
its impact on the monopolistic structure of the Indian insurance industry. Further, the
liberalisation
of insurance markets was among the objectives of the Uruguay round negotiations conducted
under the auspices of General Agreement on Trade and Tariff (GATT). These negotiations
included trade in services and insurance in the context of financial services (UNCTAD Report,
January 1993). In 1993, the Government appointed a Committee headed by Shri R.N. Malhotra
to examine the reforms required in the insurance sector. The Committee in its report submitted
in
1994 recommended inter alia the opening up of the insurance sector to players other than
State- Owned ones. These recommendations were accepted by the Government and the
Insurance Regulatory and Development Authority (IRDA) Act, 1999, consequent amendments
to the Insurance Act, 1938, Life Insurance Corporation Act, 1956 and the General Insurance
Business Act, 1972 were passed in the year 2000, paving the way for opening up of the
insurance sector.
The important functions of the IRDA as per the IRDA Act 1999, include the following:
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i) Licensing and regulating the insurance sector by acting as an independent and
regulatory body.
ii) Specifying requisite qualifications, code of conduct and practical training for insurance
intermediaries and agents.
iii)Protecting the interests of the policyholders in matters concerning assigning of policy,
settlement of insurance claim etc.
iv) Regulating investment of funds by insurance companies.
v) Calling for information from, undertaking inspection of, conducting enquiries and
investigations including audit of the insurers and other organisations connected with theinsurance business.
vi) Regulating maintenance of margin of solvency of the insurer.
vii) Adjudication of disputes between insurers and intermediaries or insurance
intermediaries.
viii) Supervising the functioning of the Tariff Advisory Committee.
ix) Promoting efficiency in the conduct of insurance business.Efforts are underway to bring about internationalisation of regulations in the insurance sector
on the lines of the banking sector so as to take care of development and health of the insurance
sector. This concern had resulted into the establishment of International Association of
Insurance Supervisors (IAIS), head quartered at Basle in Switzerland. More than 100
regulators of insurance industries worldwide are members of this Association and India is also
one amongst them. The underlying objective of this organisation is to bring about a degree of
standardisation in regulatory procedures adopted by different countries. The Advisory Group
on Insurance Regulation (Chairman: Shri R. Ramakrishnan) appointed by the Standing
Committee on International Financial Standards and Codes (Chairman: Dr. Y.V. Reddy),
stated that Indian insurance regulations are, by and large, in consonance with international
standards.
Chapter 3. Research methodology
The research relied entirely on the qualitative data because of its macro nature. Data from
major insurance companies such as Life Insurance Company of India and General Insurance
Company of India was analyzed. The statistics from the annual reports of Insurance Regulatory
Development Authority of India the regulator body for insurance business was studied and
analyzed.
The secondary sources of data were the various websites and insurance manuals. This mainly
provided information about the insurance sector and the company profiles. These helped in
gaining knowledge about the industry. These sources are listed in references.
Other sources of data such as Internet, books, magazines and other relevant publications were
studied.
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3.1 DATA ANALYSIS AND INFERENCE:
Tables, pie charts, bar charts and percentage analysis and other statistical methods were used to
analyze and present data in a more clear way.
3.2 RESEARCH LIMITATIONS:
1. It was not possible to get all the data especially primary data as the subject is very wide.
2. Data on savings was not readily available.
3. There was difficulty in filtering of secondary data because of the macro nature of the
project.