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Insurance Sector in India - A Conceptual Study

 

Dr. A. Vinaygamoorthy

Associate Professor, Department of Commerce, Periyar University, Salem - 636 011

 

and

 

Mr. C. Sankar

Ph.D., Research Scholar, Department of Commerce, Periyar University, Salem - 636 011

 

Abstract

 

            Market research and finalizing on segmentation, targeting and positioning the strategy would focus on the marketing mix namely, Product, Price, Place and Promotion. While determining the implementation methodology, the four characteristics viz. Intangibility, Inseparability, Perish ability and Variability gives rise to certain unique requirements that deserve careful attention while formulating the marketing strategy for insurance. After implementation, the insurers should concentrate on the effective control that would enhance their business. In India Insurance is sold and not bought. The agents / Advisors by using various strategies sell the product by convincing the customers. Service sector is the lifeline for the social economic growth of a country. It is today the largest and fastest growing sector globally contributing more to the global output and employing more people than any other sector. The real reason for the growth of the service sector is due to the increase in urbanization, privatization and more demand for intermediate and final consumer services. Availability of quality services is vital for the well being of the economy.  In developing economies, the insurance sector still holds a lot of potential which can be tapped. Majority of the people in the developing countries remains unaware of the functions and benefits of insurance and it is for this reason that the insurance sector is still to grow. Tangible or intangible – an individual can insure anything! Be it a house, car, factory, or the voice of a singer, leg of a footballer, and the hand of an author etc. It is possible to insure all these as they have the possibility of becoming non functional by any disaster or an accident. On a product basis, investment-linked insurance products continued to perform worse than traditional products with guaranteed returns. Meanwhile, premiums in most emerging market countries, particularly in Asia, continued to grow, albeit at a slower pace. As major investors, life insurers profited from the recovery of stock and credit markets. Profitability and risk capital also improved as capital markets rebounded, but have not yet returned to their pre-financial crisis levels.

 

Introduction

         

The Insurance sector plays a vital role in the economic development of our nation. It acts as a mobilize of savings, financial intermediary, promoter of investment activities, stabilizer of financial markets and a risk manager. Service sector is the lifeline for the social economic growth of a country. It is today the largest and fastest growing sector globally contributing more to the global output and employing more people than any other sector. The real reason for the growth of the service sector is due to the increase in urbanization, privatization and more demand for intermediate and final consumer services. Availability of quality services is vital for the well being of the economy.

 

In advanced economies the growth in the primary and secondary sectors are directly dependent on the growth of services like banking, insurance, trade, commerce, entertainment etc. Hence, in this paper an attempt has been made to discuss the Challenges facing Insurance Industry , World Insurance Scenario, and Insurance markets Present which is one of the leading service sector in our country.

 

Clearing basics

 

Before we begin the analysis of Indian insurance industry, let us clear some basics on insurance.

 

v    In the words of a layman, insurance means managing risk. For instance, in life insurance segment, the insurance company tries to manage mortality (death) rates among the wide array of clients.

v    The insurance company works in a manner by collecting premiums from policy holders, investing the money (usually in low risk investments), and then reimbursing this same money once the person passes away or the policy matures. The greater the probability for a person to have a shorter life span than the average mark, the higher premium that person has to pay. The case is the same for all other types of insurance, including automobile, health and property.

v    Ownership of insurance companies is of two types:

 

Ψ      Shareholder ownership

Ψ      Policyholder ownership

 

Concept of Insurance

 

Insured, are you? The functions of Insurance will give you an idea on how to go ahead with the approach of insurance and what type of insurance to choose. In a layman's words, insurance means, ‘a guard against pecuniary loss arising on the happening of an unforeseen event’. In developing economies, the insurance sector still holds a lot of potential which can be tapped. Majority of the people in the developing countries remains unaware of the functions and benefits of insurance and it is for this reason that the insurance sector is still to grow. Tangible or intangible – an individual can insure anything! Be it a house, car, factory, or the voice of a singer, leg of a footballer, and the hand of an author.....etc. It is possible to insure all these as they have the possibility of becoming non functional by any disaster or an accident.

 

Basic functions of Insurance

 

1.Primary Functions

2.Secondary Functions

3.Other Functions

 

Primary functions of insurance:

v  Providing protection – The elementary purpose of insurance is to allow security against future risk, accidents and uncertainty. Insurance cannot arrest the risk from taking place, but can for sure allow for the losses arising with the risk. Insurance is in reality a protective cover against economic loss, by apportioning the risk with others.

v  Collective risk bearing – Insurance is an instrument to share the financial loss. It is a medium through which few losses are divided among larger number of people. All the insured add the premiums towards a fund and out of which the persons facing a specific risk is paid.

v  Evaluating risk – Insurance fixes the likely volume of risk by assessing diverse factors that give rise to risk. Risk is the basis for ascertaining the premium rate as well.

v  Provide Certainty – Insurance is a device, which assists in changing uncertainty to certainty.

 

Secondary functions of insurance:

 

v  Preventing losses – Insurance warns individuals and businessmen to embrace appropriate device to prevent unfortunate aftermaths of risk by observing safety instructions; installation of automatic sparkler or alarm systems, etc.

v  Covering larger risks with small capital – Insurance assuages the businessmen from security investments. This is done by paying small amount of premium against larger risks and dubiety.

v  Helps in the development of larger industries – Insurance provides an opportunity to develop to those larger industries which have more risks in their setting up.

 

Other functions of insurance:

 

v  Is a savings and investment tool – Insurance is the best savings and investment option, restricting unnecessary expenses by the insured. Also to take the benefit of income tax exemptions, people take up insurance as a good investment option.

v  Medium of earning foreign exchange – Being an international business, any country can earn foreign exchange by way of issue of marine insurance policies and a different other ways.

v  Risk Free trade – Insurance boosts exports insurance, making foreign trade risk free with the help of different types of policies under marine insurance cover.

 

Insurance provides indemnity, or reimbursement, in the event of an unanticipated loss or disaster. There are different types of insurance policies under the sun cover almost anything that one might think of. There are loads of companies who are providing such customized insurance policies.

 

Challenges facing Insurance Industry

 

Ψ  Threat of New Entrants: The insurance industry has been budding with new entrants every other day. Therefore the companies should carve out niche areas such that the threat of new entrants might not be a hindrance. There is also a chance that the big players might squeeze the small new entrants.

Ψ  Power of Suppliers: Those who are supplying the capital are not that big a threat. For instance, if someone as a very talented insurance underwriter is presently working for a small insurance company, there exists a chance that any big player willing to enter the insurance industry might entice that person off.

Ψ  Power of Buyers: No individual is a big threat to the insurance industry and big corporate houses have a lot more negotiating capability with the insurance companies. Big corporate clients like airlines and pharmaceutical companies pay millions of dollars every year in premiums.

Ψ  Availability of Substitutes: There exist a lot of substitutes in the insurance industry. Majorly, the large insurance companies provide similar kinds of services – be it auto, home, commercial, health or life insurance.

 

Growth of Indian Life Insurance Sector

 

The life insurance sector of India has added up to 4.1% of the GDP in 2009, a considerable growth was recorded since the time the sector was opened for the private companies. The contribution in FDI by the life insurance segment was recorded at US $ 1.3 billion, even though the government is likely to increase the FDI cap limit from 26% to 49%, a bill of which is pending at the Rajya Sabha. The year 2009-10 also saw private sector insurance company, Aviva Life Insurance establishing nine unit-linked plans, in line with the recent IRDA guidelines featuring enhanced and higher internal rate of return (IRRs).

 

As per the data provided by the IRDA, the businesses of the life insurance companies had a growth of 22% at US$ 12 billion in April-November 2009-10, in comparison to the US$ 9.8 billion during the same period last year. Such a huge sale of single premium policies led the industry to record a raise of 53.25% in November 2009 alone. With the registration of IndiaFirst Life Insurance Company Limited, a joint stake life insurance company encouraged by Bank of Baroda and Andhra Bank of India and Legal & General Middle East Limited, UK, the total number of of life insurers registration with the Insurance Regulatory Development Authority (IRDA) has increased to 23. According to industry body, Life Insurance Council, The life insurance industry had earlier been anticipated to grow by 15% in the year 2009 - 10 and surpass the US$ 54.1 billion mark in total premium income by March-end. This growth in premium income includes new business as well as renewals, driven by increasing awareness on the value of getting insured. The US$ 41-billion Indian insurance industry made a grand return with better performances in the April-November 2009 period. Life insurance in India recorded the first year premium (inclusive of Single Premium) segment accounting to US$ 24 billion.

 

World Insurance Scenario

 

As per World Insurance Report published by reinsurance major Swiss Re, the global insurance premium for the calendar year 2009 was USD 4066 billion, which is 1.1 per cent (inflation adjusted) lower than USD 4220 billion reported during the previous calendar year 2008.

 

The share of life insurance business was 57 per cent in total premium collection. While life insurance business collected USD 2331 billion as premium, the same for non-life business was USD 1735 billion. During 2009, the premium in life insurance business fell by 2 per cent on account of double digit decline in premium collection in USA and UK. However, compared to 2008, when life insurance premium fell by 5.8 per cent, this is an improvement on account of the improved sentiment in the calendar year 2009. On a product basis, investment-linked insurance products continued to perform worse than traditional products with guaranteed returns. Meanwhile, premiums in most emerging market countries, particularly in Asia, continued to grow, albeit at a slower pace. As major investors, life insurers profited from the recovery of stock and credit markets. Profitability and risk capital also improved as capital markets rebounded, but have not yet returned to their pre-financial crisis levels.

 

Indian insurance sector

 

Since opening up, the number of participants in the industry has gone up from six  nsurers (including Life Insurance Corporation of India, four public sector general insurers and General Insurance Corporation as the national reinsurer) in the year 2000 to 48 insurers operating in the life, non-life and reinsurance segments (including specialised insurers, viz., Export Credit Guarantee Corporation and Agriculture Insurance Company). Three of the non-life insurance companies, viz., Star Health and Alliance Insurance Company, Apollo Munich Health Insurance Company and Max Bupa Health Insurance Company function as standalone health insurance companies. Of the twenty two insurance companies which have set up operations in the life segment post opening up of the sector, twenty are in joint venture with foreign partners. Of the seventeen insurers (including health insurers) who have commenced operations in the non-life segment, sixteen are in collaboration with the foreign partners. The three standalone health insurance companies have been set up in collaboration with foreign joint venture partners. Thus, as on date, thirty six insurance companies in the private sector are operating in the country in collaboration with established foreign insurance companies across the globe.

 

The first year premium, which is a measure of new business secured, underwritten by the life insurers during 2009-10 was `1,09,894 crore as compared to `87,331 crore in 2008-09 registering a growth of 25.84 per cent against negative growth rate of 6.81 per cent during 2008-09. In terms of linked and non-linked business during the year 2009-10, 54.53 per cent of the first year premium was underwritten in the linked segment while 45.47 per cent of the business was in non-linked segment (51.13 and 48.87 per cent respectively in 2008-09). The total premium underwritten by the life insurance sector in 2009-10 was `2,65,450 crore as against `2,21,785 crore in 2008-09 exhibiting a growth of 19.69 per cent (10.15 per cent in 2008-09).

 

The non-life insurers (excluding specialised institutions like ECGC and AIC and the standalone health insurance companies) underwrote premium of `35,816 crore in 2009-10, as against `31,428 crore in 2008-09 registering a growth of 13.44 per cent. The three health insurance companies underwrote premium of `1,072 crore in 2009-10, twice of their collective premium of `535 crore in 2008-09.

 

 

 

TABLE -1

 

Registered Insurers in India

(As on 30th September, 2010)

 

Type of business          Public Sector                    Private Sector             Total

Life Insurance                     1                                      22                                23

General Insurance               6*                                    18**                            24

Reinsurance                         1                                      0                                 1

Total                                   8                                      40                                 48

* Includes specialized insurance companies - ECGC and AIC

** Includes three Standalone Health Insurance Companies – Star Health & Allied  Insurance Co., Apollo Munich Health Insurance Co. and Max Bupa Health Insurance Co. Includes L&T General Insurance Company Ltd., which was   granted registration in 2010-11.

 

TABLE -2

 

Number of Life Insurance Offices*

(as on 31st March)

Insurer

2010   

2009

2008

2007

2006

Private

8768

8785

6391

3072

1645

LIC

3250

3030   

2522

2301   

2220

Total

12018

11815

8913

5373

3865

* Offices opened after seeking approval of the Authority

 

The first year premium, which is a measure of new business secured, underwritten by the life insurers during 2009-10 was `1,09,894 crore as compared to `87,331 crore in 2008-09 registering a growth of 25.84 per cent against negative growth rate of 6.81 per cent during 2008-09. In terms of linked and non-linked business during the year 2009-10, 54.53 per cent of the first year premium was underwritten in the linked segment while 45.47 per cent of the business was in non-linked segment (51.13 and 48.87 per cent respectively in 2008-09). The total premium underwritten by the life insurance sector in 2009-10 was `2,65,450 crore as against `2,21,785 crore in 2008-09 exhibiting a growth of 19.69 per cent (10.15 per cent in 2008-09).

 

The non-life insurers (excluding specialized institutions like ECGC and AIC and the standalone health insurance companies) underwrote premium of `35,816 crore in 2009-10, as against `31,428 crore in 2008-09 registering a growth of 13.44 per cent. The three health insurance companies underwrote premium of `1,072 crore in 2009-10, twice of their collective premium of `535 crore in 2008-09.

 

Performance in the first quarter of 2010-11

 

The life insurers underwrote new business of `25,522 crore during the first quarter in the current financial year, 2010-11 as against `14,456 crore in the corresponding first quarter in 2009-10, recording growth of 76.55 per cent. Of the new business premium underwritten, LIC accounted for `18,740 crore (73.43 per cent market share) and the private insurers accounted for `6,782 crore (26.57 per cent market share). The market share of these insurers were 62.45 per cent and 37.55 per cent respectively in the corresponding period of 2009-10.The non-life insurers underwrote a premium of `10,755 crore during the first quarter of the current financial year recording a growth of 21.83 per cent over `8,827 crore underwritten in the same period in 2009-10. The private sector non-life insurers underwrote a premium of `4,361 crore in April-June, 2010 as against `3,586 crore in April-June, 2009, reporting a growth of 21.61 per cent. The public sector non-life insurers underwrote a premium of `6,391 crore which was higher by 21.88 per cent (`5,244 crore in the first quarter of 2009-10). The market share of the public and private insurers stood at 59.44 and 40.56 per cent at the end of the quarter (59.36 and 40.64 at the end of June 2009).

 

ECGC underwrote credit insurance of `208 crore as against `190 crore in the previous year, a growth of 9.66 per cent. AIC underwrote agricultural insurance of `149 crore as against `132 crore in the previous year, i.e., a growth of 12.84 per cent. The health insurers (Star Health, Apollo Munich and Max Bupa) underwrote premium of `364 crore as against `246 crore in the previous year, reporting growth of 48.23 per cent.

 

Indian Insurance Companies

 

With the rapid growth of the Indian Insurance industry, in particularly serving a Middle Class that is growing on both size and wealth every year, it is hardly surprising that Indian insurance companies are growing, and playing an increasingly important role in the nation's financial services industry. This increasing market is creating considerable competition among Indian insurance companies in an industry that 20 years ago was relatively small. To date, India's Insurance Regulatory and Development Authority (IRDA), has granted registration to 12 private life insurance companies and nine general insurance companies. Counting the existing public sector insurance companies, there are currently 13 Indian insurance companies in the life side and 13 Indian insurance companies operating in general insurance. General Insurance Corporation has been approved as the Indian reinsurer for underwriting only reinsurance business.

 

Information Technology  

 

Insurers are the earlier adopters of technology. Because of the Information revolution, customers are free to choose from a wide range of new and innovative products. The Insurance companies are utilizing the Information technology applications for better customer service, cost reduction, new product design and development and many more. New technology gives the policyholders / insured better, wider and faster access to products and services. The impact of Information Technology in Insurance business is being felt at an accelerating pace. In the initial years IT was used more to execute back office functions like maintenance of accounts, reconciling broker accounts, client processing etc. With the advent of "database concepts", these functions are better integrated in an administrative efficiency. The real evolution is however emerged out of Internet boom. The Internet has provided brand new distribution channels to the Insurers. The technology has enabled the Insurer to innovate new products, provide better customer service and deeper and wider insurance coverage to them. At present, Insurance companies are giving customers a distinct claim id to track claims on-line, entertaining on-line enrollment, eligibility review, financial reporting, and billing and electronic fund transfer to its benefit clan customers.

 

Product Innovations

 

Insurers are continuously innovating new products based on forward-looking models. They have developed new products addressing the new challenges in society and products to address the hazards from new environmental issues. Companies will need to constantly innovate in terms of product development to meet ever-changing consumer needs. Understanding the customer better will enable Insurance companies to design appropriate products, determine price correctly and to increase profitability. Since a single policy cannot meet all the Insurance objectives, one should have a portfolio of policies covering all the needs. Product development is made possible by integrating actuarial, rating, claims and illustration systems. At present, the Life Insurers are concentrating on the pension schemes and the Non-Life Insurers on many innovative schemes of various realms and thereby enriching their market share. Moreover, with increased commoditization of insurance products, brand building is going to play a vital role.

 

Distribution Network

 

While companies have been successful in product innovation, most of them are still grapping with right mix of Distribution Channels for capturing maximum market share to build brand equity, building strong and effective customer relationships and cost effective customer service. While the traditional channel of tied up advisors or agents would be the chief distribution channel, insurer should innovate and find new methods of delivering the products to customers. Corporate agency, brokerage, Banc assurance, e-insurance, cooperative societies and panchayats are some of the channels, which can be tapped by the insurers to reach the appropriate market segments. Now days, the urban masses are tapped with the new techniques provided by Information Technology through Internet. Rural masses are attracted by the consultative approach adopted by the Insurers. Moreover, they attract the customers through telephone and mobile also.

 

Modern Marketing Approach

 

Marketing strategies for insurance in the emerging scenario could be understood in terms of the following steps:

 

Having done market research and finalizing on segmentation, targeting and positioning the strategy would focus on the marketing mix namely, Product, Price, Place and Promotion. While determining the implementation methodology, the four characteristics viz. Intangibility, Inseparability, Perish ability and Variability gives rise to certain unique requirements that deserve careful attention while formulating the marketing strategy for insurance. After implementation, the insurers should concentrate on the effective control that would enhance their business. In India Insurance is sold and not bought. The agents / Advisors by using various strategies sell the product by convincing the customers. Moreover, they push Policies with the highest premium to pocket a higher commission. The consultative approach to selling is the modern approach, which helps customers and prospects to buy. A consultant makes calls and sells just like any other sales person. The difference is in their attitude, their approach and their commitment. Here, the customer is seen as a person to be served and not a person to be sold. It helps the purchaser to make an intelligent decision. The four-step process includes:

 

§  Need discovery

§  Selection of the product

§  Need satisfaction presentation, and

§  Serving the sale

 

This approach to selling their products requires understanding of concepts and principles borrowed from the fields of psychology, communications, and sociology and needs a lot of personal commitments and self – discipline from the seller.

 

The commitments referred are

 

  • Finding and understanding the needs of the customers.
  • Partnering with the customers.
  • Helping the customers to achieve his business and other objectives by the purchase of the product or service.
  • Believing that your products / services are a great fit with your customer's needs, and
  • Believing in yourself and your ability to help the customers in solving their problems.

 

Insurance markets Present

 

As per the World Insurance Report published by reinsurance major Swiss Re, the global insurance premium for the calendar year 2009 was USD 4066 billion, which is 1.1 per cent (inflation adjusted) lower than USD 4220 billion reported during the previous calendar year 2008. The share of life insurance business was 57 per cent in total premium collection. While life insurance business collected USD 2331 billion as premium, the same for non-life business was USD 1735 billion. During 2009, the premium in life insurance business fell by 2 per cent on account of double digit decline in premium collection in USA and UK. However,  compared to 2008, when life insurance premium fell by 5.8 per cent, this is an improvement on account of the improved sentiment in the calendar year 2009. During year 2010, it is expected that overall premium growth in the industry will turn positive and profitability and balance sheets will continue to improve. The prospects for life insurance in 2010 are promising as growth resumes in the sector. A further recovery of the financial markets is likely to stimulate the overall growth of unit-linked products and allow insurers to continue strengthening their balance sheets.

 

Conclusion

 

            The total investments of insurance sector in the financial year 2009-10 recorded an increase of 18.61 per cent over the previous year. While life insurers reported 19.63 per cent growth in investments, non-life insurers registered only 4.64 per cent growth. In both life and non-life insurance business, private sector insurers reported larger increase in investments than the public sector insurers because of lower base of private sector companies in the previous year. In order to achieve the competitive edge over others standardize the process and bring about quality improvement and get feed back from the customers regarding the quality of services rendered. This will result in customer satisfaction, customer retention, customer acquisition, employee retention and cost reduction. This paper focuses on the Quality Service, Marketing approach and Growth Of Indian Life Insurance Sector adopted by the modern insurers to withhold their existing customers and attract new ones.

 

References and Notes

 

  1. Atmanand (2003), "Insurance and Disaster Management: the Indian Context," Disaster Prevention and Management, 12 (4), General Review, http:// www.Emeraldinsight. com/Insight/ Last accessed 14th July 2007.
  2. Duncan, E. Elliott (2002), "Customer Service Quality and Financial Performance among Australian Retail Financial Institutions" Journal of Financial Services The examples and perspective in this article or section may not represent a worldwide view of the subject.
    Please [ improve this article] or discuss the issue on the talk page.  Marketing, " 7 (1): 25-41.
  3. Dutta, A. & Sridhar, V. (2002), "Modeling Growth of Cellular Services in India: A System Dynamics System dynamics is an approach to understanding the behaviour of complex systems over time. It deals with internal feedback loops and time delays that affect the behaviour of the entire system.  Approach" Proceedings of the 36th Hawai International Conference on System Sciences (HICSS'03), IEEE Computer Society (body) IEEE Computer Society - The society of the IEEE which publishes the journal "Computer".

    http://computer.org/. .
  4. Groesser, S. & Techn D. (2005), "Modeling the Health Insurance System of Germany: A System Dynamics Approach", System Dynamics Conference Proceedings, 2005.

 

Websites

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