Life Insurance Industry in India
Since inception the Indian life insurance industry has its own origin and history. It has passed through many hurdles and hindrances in order to attain the present status. However, the income earning capacity of an individual citizen of a nation and the eagerness and awareness of the general public are the two key determinants of the growth of any insurance industry. In the Indian context, the insurance habits among the general public during the independence decade was rare and in the following decades, it has slowly increased. There was a remarkable improvement in the Indian insurance industry soon after the economic reform era (1991). After 1991 the Indian life insurance industry has geared up in all respects, as well as it is being forced to face a lot of healthy competition from many national as well as international private insurance players.
In this paper we have analyzed the performance of LIC over a time period of 1980 to 2009, attempt has been made to analyse the overall performance of Life Insurance Industry of India between pre- and post economic reform era. To measure the current status, volume of competitions and challenges faced by the Life Insurance Corporation of India and to measure the effectiveness of investment strategy of LIC over the period 1980 to 2009. Data were analysed by using Regression, Trend Analysis and Anova. The study reveals that there is a tremendous growth in the performance of Indian Life Insurance industry and LIC due to the policy of LPG. Insurance industry also improved a lot due to the emergence of Private sector and opening up for foreign players. Further there is also a huge change in the investment pattern of LIC. There is a increasing trend toward the investment in Stock market by LIC from 60% to 93% from 1980 to 2009 due to the effective regulation of SEBI and increasing transparency of stock market.
Life insurance is a contract for the payment of a sum of money to a person assured on happening of the event ensured against. Usually the contracts provide for the payment of the amount on a date of maturity or at a specified date at periodic intervals or at unfortunate death, if it occurs earlier.
Life insurance is universally acknowledged to be an institution, which eliminates 'risk', substituting certainty for uncertainty and comes to the timely aid of the family in the unfortunate event of death of breadwinner. Life insurance is civilisation's partial solution to the problems that caused by death. In short, life insurance is concerned with two hazards that stand across the life-path of every person: 1.That of dying prematurely is leaving a dependent family to fend for itself. 2. That of living till old age without visible means of support.
The nationalization of insurance business in the country resulted in the establishment of Life Insurance Corporation of India (LIC) in 1956 as a wholly- owned corporation of the government of India. India's life insurance market has grown rapidly over the past six years, with new business premiums growing at over 40% per year. The premium income of India's life insurance market is set to double by 2012 on better penetration and higher incomes. Insurance penetration in India is currently about 4% of its GDP, much lower than the developed market level of 6-9%. In several segments of the population, the penetration is lower than potential. For example, in urban areas, the penetration of life insurance in the mass market is about 65%, and it's considerably less in the low-income unbanked segment. In rural areas, life insurance penetration in the banked segment is estimated to be about 40%, while it is marginal at best in the unbanked segment. The total premium could go up to $80-100 billion by 2012 from the present $40 billion as higher per capita income increases per capita insurance intensity. The average household premium will rise to Rs 3,000-4,100 from the current Rs 1,300 as will penetration by the existing and new players. India's ratio of life insurance premium to its GDP is around 4 per cent against 6-9 per cent in the developed world. It could rise to 5.1-6.2 by 2012 in tandem with the country's demographic profile.
India has 17 life insurers and the state owned Life Insurance Corp. of India dominates the industry with over 70 percent market share, though private players have been growing aggressively. Considering the world's largest population and an annual growth rate of nearly 7 per cent, India offers great opportunities for insurers. US based online insurance company ebix.com plans to enter the Indian market following deregulation of its insurance sector.
In a diverse country such as India it is imperative that a universal insurance infrastructure be created to maximize efficiency in the insurance industry. Online insurer ebix.com can offers the Indian market a business-to-consumer internet portal where consumers have more choice while purchasing insurance and an internet-based agency management system that will help agents work more efficiently with multiple carriers. Foreign holding in Indian insurance companies is limited to 26 per cent. The market is moving beyond single-premium policies and unit linked insurance products which are easier to sell. The agency model is the dominant sales channel accounting for more than 85 per cent of fresh premiums but overall inactivity and attrition is much higher at 50-55 per cent than the global average of 25 per cent. GIVE
II. Review of Literature
In the present section an attempt has been made to examine the review of literature related to the study.
Rao, R.T.S. (2000) in this article had explained the phenomenal growth experienced by life insurance industries recently, in line with the country's improving economic fundamentals. By comparing the growth, penetration, density and other insurance variables, he had shown that India is still an underdeveloped insurance market, it has a huge catch-up potential. According to him even though there is strong potential for expansion of insurance into rural areas, growth has so far remained slow. Considering that the bulk of the Indian population still resides in rural areas, it is imperative that the insurance industry's development should not miss this vast sector of the population.
Goyal, K. (2004), in this article has reviewed that private insurance companies had reason to celebrate with the lifting of the sectoral cap in the insurance sector to 49 per cent in the Union Budget 2004-05, as against 26 per cent earlier. However, to offset the excitement, there was also an imposition of service tax of 10 per cent on the risk premium for life insurance, which has the industry with mixed feelings. The FDI hike has been a much-awaited plea of these companies, who believed that they could plough in more money into the business if their foreign partners were permitted an increased holding.
Jain, A.K. (2004), revealed that “Waves of liberalization have done wonders to proper the insurance occupation to the status of a career with a bright future. The average mindset, particularly of younger generation in India was very amenable to the changes in insurance as an avenue where exhilarating opportunities are opened up in changed environment”.
Krishnamurthy, S. (2005) in this article had reviewed that Insurance companies have a pivotal role in offering insurance products which meet the requirements of the people and, at the same time, are affordable. Some of the challenges faced by the insurance sector pertain to the demand conditions, competition in the sector, product innovations, delivery and distribution systems, use of technology, and regulation. With the liberalization and entry of private companies in insurance, the Indian insurance sector has started showing signs of significant change.
Ray, Subhashish and Pathak, Ajay. (2006) opined that ever since the privatization of the insurance sector in India in 2000, the industries has been witnessing the birth of numerous private players, mostly joint ventures between foreign insurance giants and Indian diversified conglomerates and each one is trying to make an inroad into the huge untapped market.
Sinha, Ram Pratap. (2007) opined that the deregulation of general insurance industry in India is having far-reaching consequences in terms of market size, structure and operational practices. As compared to the international standards the penetration level of general insurance companies in India is quite low and, therefore, has tremendous potential for growth. His analysis revealed that the public sector insurers dominate the private sector insurers in terms of mean technical efficiency in constant returns to scale, while the private sector insurers have a slightly higher mean technical efficiency than the public sector insurers in variable returns to scale.
Goswami, P. (2007) in this article had reviewed that the insurance industry in India was opened up to private sector participation in the year 2000. Prior to this, Life Insurance Corporation (LIC) of India was the sole player in the life insurance industry in India. In six years since the entry of private players in the insurance market, LIC has lost 29% market share to the private players, although both, market size and the insurance premium being collected, are on the rise. In 2005, life insurance accounted for 79% of the total insurance market in India. It was found that the responsiveness dimension of service quality provides maximum customer satisfaction in the life insurance industry in India.
Sabera. (2007) indicated that in March 2000, when the Government of India liberalized the insurance sector, lifted the entry restrictions for private insurance players, allowing the foreign players to enter into the market and start their operations in India. The entry of private players helps in spreading and keeping the operation in the Indian insurance sector which in turn results in restructuring and revitalizing of public sector companies“.
III. Research Methodology
The research article is based upon descriptive as well as exploratory research. Secondary sources of data collection have been adopted for the study. The relevant and required data are collected from the text books, national and international articles, RBI Bulletin (various issues) as well as annual reports of LIC. The Statistical tools used in this research article are Correlation, Regression, ANOVA, the method of least squares and linear trend. The method of least square has been used for analysing the overall performance of Life Insurance Industry of India between pre- and post economic reform era and to measure the current status, volume of competitions and challenges faced by the Life Insurance Corporation of India. For processing the data and estimating the results, Excel, SPSS-16 packages have been used.
The following are the objectives of the present study
* To analyze the overall performance of Life Insurance Industry of India between pre- and post economic reform era
* To measure the current status, volume of competitions and challenges faced by the Life Insurance Corporation of India
* To measure the change in the effectiveness of the investment strategy of LIC over the period 1980 to 2009.
The study is based on the hypothesis that
* There is no significance difference in the performance of Life Insurance Industry between pre- and post economic reform era
* There is no significance Change in the pattern of the investment strategy of LIC over the period 1980 to 2009.
Status and Position of Indian Life Insurance Industry in the pre LPG era
In India, life insurance in its modern form came from England in the year 1818. The first life insurance was Oriental life insurance Company started by Europeans in Calcutta. All the insurance industries established during that period of time were brought up with the purpose of looking after the needs of European community and Indian natives were not being insured by these companies. Later on with the efforts of eminent people like Babu Muttylal Seal, the foreign life insurance companies started insuring Indian lives. But still Indian lives were being treated as sub-standard lives and heavy extra premiums were being charged on them. However in the year 1870, Bombay Mutual Life Assurance Society heralded the birth of first Indian life insurance company and covered Indian lives at normal rates. Starting as Indian enterprise with highly patriotic motives, insurance companies came into existence to carry the message of insurance and social security through insurance to various sectors of the society. Bharat Insurance Company (1896) was another one of such companies inspired by nationalism. The Swadeshi movement during 1905-1907 gave rise to more insurance companies. The United India in Madras, National Indian and National Insurance in Calcutta and the Co-operative Assurance at Lahore were established in 1906. In 1907, the Hindustan Co-operative Insurance Company took its birth in one of the rooms of the Jorasanko, house of the great poet Rabindra Nath Tagore, in Calcutta. The Indian Mercantile, General Assurance and Swadeshi Life (later Bombay Life) were some of the companies that established during the same period. Prior to 1912, India had no legislation to regulate insurance business. However in the year 1912, the Life Insurance Companies Act, and the Provident Fund Act were passed. The Life Insurance Companies Act, 1912 made it necessary that the premium rate tables and periodical valuations of companies should be certified by an actuary, but in actuall the Act discriminated between foreign and Indian companies on many accounts, putting the Indian companies at a disadvantage.
The first two decades of the twentieth century saw lot of growth in insurance industries. From 44 companies with total business-in-force of Rs.22.44 crore, it rose to 176 companies with total business-in-force of Rs.298 crore in 1938. During the mushrooming of insurance companies many financially unsound concerns were also floated which failed miserably. The Insurance Act 1938 was the first legislation governing not only life insurance but also non-life insurance to provide strict state control over insurance business. The demand for nationalization of life insurance industry was made repeatedly in the past but it gathered momentum in 1944 when a bill to amend the Life Insurance Act 1938 was introduced in the Legislative Assembly. However, it was much later on the 19th of January, 1956, that life insurance in India was nationalized. About 154 Indian insurance companies, 16 non-Indian companies and 75 provident were operating in India at the time of nationalization. Nationalization was accomplished in two stages; initially the management of the companies was taken over by means of an Ordinance, and later, the ownership too by means of a comprehensive bill. The Parliament of India passed the Life Insurance Corporation Act on the 19th of June 1956, and the Life Insurance Corporation of India was created on 1st September, 1956, with the objective of spreading life insurance much more widely and in particular to the rural areas with a view to reach all insurable persons in the country, providing them adequate financial cover at a reasonable cost.
In the year 1956, LIC had 5 zonal offices, 33 divisional offices and 212 branch offices, apart from its corporate office. Since life insurance contracts are long term contracts and during the currency of the policy it requires a variety of services needs felt in the later years to expand the operations and place a branch office at each district headquarter. Re-organization of LIC took place and large numbers of new branch offices were opened. As a result of the re-organization servicing functions were transferred to the branches, and branches were made accounting units. It worked wonders with the performance of the corporation. It may be seen from the fact that about 200.00 crores of New Business in 1957 the corporation crossed 1000.00 crores only in the year 1969-70, and it took another 10 years for LIC to cross 2000.00 crores mark of new business. But with the re-organization happening in the early eighties, by 1985-86 LIC had already crossed 7000.00 crores Sum Assured on new policies.
Annual Business: Sum Assured Policies First year premium
336.3 crores 8,00,000 14 crores
75606 crores 14857000 4171 crores
Business in force: Sum Assured Policies Renewal premium
1477 crores 5686000 74 crores
459201 crores 91726000 16136crores
Group Business in force: Sum Assured No. of Lives
5.29 crores -
69558 crores 21671000
Source: Secondary Data - Annual Reports of LIC.
Progress of Indian Life Insurance Industry in the Post LPG Era
Insurance sector reforms:
In 1993, Malhotra Committee headed by former Finance Secretary and RBI Governor R.N. Malhotra was formed to evaluate the Indian insurance industry and recommend its future direction. The Malhotra committee was set up with the objective of complementing the reforms initiated in the financial sector. The reforms were aimed at "creating a more efficient and competitive financial system suitable for the requirements of the economy keeping in mind the structural changes currently underway and recognizing that insurance is an important part of the overall financial system where it was necessary to address the need for similar reforms…"
In 1994, the committee submitted the report and some of the key recommendations included:
* 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.
* Private Companies with a minimum paid up capital of Rs.1bn 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.
3) Regulatory Body
* The Insurance Act should be changed.
* An Insurance Regulatory body should be set up.
* Controller of Insurance (Currently a part from the Finance Ministry) should be made independent.
* Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%.
* GIC and its subsidiaries are not to hold more than 5% in any company (There current holdings to be brought down to this level over a period of time).
5) 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 The committee emphasized that in order to improve the customer services and increase the coverage of the insurance industry should be opened up to competition.
But at the same time, the committee felt the need to exercise caution as any failure on the part of new players could ruin the public confidence in the industry. Hence, it was decided to allow competition in a limited way by stipulating the minimum capital requirement of Rs.100 crores. The committee felt the need to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives. For this purpose, it had proposed setting up an independent regulatory body.
MAJOR POLICY CHANGES
Insurance sector has been opened up for competition from Indian private insurance companies with the enactment of Insurance Regulatory and Development Authority Act, 1999 (IRDA Act). As per the provisions of IRDA Act, 1999, Insurance Regulatory and Development Authority (IRDA) was established on 19th April 2000 to protect the interests of holder of insurance policy and to regulate, promote and ensure orderly growth of the insurance industry. IRDA Act 1999 paved the way for the entry of private players into the insurance market which was hitherto the exclusive privilege of public sector insurance companies/ corporations. Under the new dispensation Indian insurance companies in private sector were permitted to operate in India with the following conditions:
* Company is formed and registered under the Companies Act, 1956;
* The aggregate holdings of equity shares by a foreign company, either by itself or through its subsidiary companies or its nominees, do not exceed 26%, paid up equity capital of such Indian insurance company;
* The company's sole purpose is to carry on life insurance business or general insurance business or reinsurance business.
* The minimum paid up equity capital for life or general insurance business is Rs.100 crores.
* The minimum paid up equity capital for carrying on reinsurance business has been prescribed as Rs.200 crores.
The Authority has notified 27 Regulations on various issues which include Registration of Insurers, Regulation on insurance agents, Solvency Margin, Re-insurance, Obligation of Insurers to Rural and Social sector, Investment and Accounting Procedure, Protection of policy holders' interest etc. Applications were invited by the Authority with effect from 15th August, 2000 for issue of the Certificate of Registration to both life and non-life insurers. IRDA has so far granted registration to 12 private life insurance companies and 9 general insurance companies. If the existing public sector insurance companies are included, there are currently 13 insurance companies in the life side and 13 companies operating in general insurance business.
Today LIC functions with 2048 fully computerized branch offices, 100 divisional offices, 7 zonal offices and the corporate office. LIC's Wide Area Network covers 100 divisional offices and it connects all the branches through a Metro Area Network. LIC has tied up with some Banks and Service providers to offer an on-line premium collection facility in selected cities. LIC's ECS and ATM premium payment facility is an addition to customer convenience. Apart from on-line Kiosks and IVRS, Info Centers have been commissioned at Mumbai, Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, New Delhi, Pune and many other cities. With a vision of providing easy access to its policyholders, the LIC has launched its SATELLITE SAMPARK offices. These satellite offices are smaller, leaner and closer to the customer. The digitalized records of the satellite offices will facilitate the customer anywhere servicing and many other conveniences in the future. LIC continues to be the dominant life insurer even in the liberalized scenario of Indian insurance industries and is moving fast on a new growth trajectory surpassing its own past records. LIC has issued over one crore policies during the current year.
Table-2: Total Life Insurance Premium (Rs. Crore)
Max New York
Two way ANOVA
Source of Variation
Analysis and Interpretation
Table 2 shows total life insurance premium during the year 2001-02 to 2007-08. The proportion of premium collected by LIC out of total premium collected by life insurance industry is declined from 97% in 2001-02 to 74% in 2007-08. It indicates the increasing competition from private sector. ICICI prudential is becoming a stronger and stronger player by keeping over a lot of business of LIC. But still there is a lot of scope of development in the life insurance industry where private sector will be a challenge in the front of LIC. By applying ANOVA at 0.05 level of significance, It is being observed that there is a significance difference in the performance of LIC and other Private Sector insurance companies over a period of 2001-02 to 2007-08
Table 3: Total Life Insurance Premium
Source- compiled from table 2.
Y = A+BX
ΣXY=A ΣX+BΣ X2
ΣuY=A Σu+B Σu2
B= ΣuY/ Σu2
A= 718653.57/7= 102664.79
B= ΣuY/ Σu2= 693649.44/28= 24773.19
102664.79+ 24773.19 (2012-2004)
102664.79+ 24773.19 (8)
Based on the middle year 2005, the trend value for the year 2012 can be calculated using the linear function Y=A+BX, where, A&B are constant. If we substitute the values in the trend line equation, the expected total LIC premium for the year 2012 is Rs. 300,850.35 crores. It shows that the total business is in increasing trend.
Table 4: Investment strategy of LIC
Instrument-wise of which
(2 to 5)
(6 to 7)
Note : 1. Data for 2009 are provisional.
2. Instrument-wise loans for the years 2003 to 2006 exclude policy loans to HPF, Treasury bills and Commercial papers.
Source : Life Insurance Corporation of India.
NA:- Not Available
t-Test: Two-Sample Assuming Equal Variances
Hypothesized Mean Difference
t Critical one-tail
t Critical two-tail
Source of Variation
Analysis and Interpretation
Table 4 shows the Investment strategy of LIC from 1979 to 2009. Total investment of LIC in stock exchange securities were Rs 2733.8 crores in 1979 which further increases to Rs 15871.2 crores in 1991, Rs. 140106 crores in 2001 and Rs. 715710.4 crores in 2009, which is almost 261.8 times as compared to the investment made in stock market by LIC in 1979. However the total investment rose to Rs 4587.7 crores in 1979 to Rs. 762891.7 crores in 2009, which is divided between stock exchange securities ( Rs. 715710.4 crores) and loans (Rs. 47181.4 crores) showing an increase of 166.2 times as compared to the investment made in stock market by LIC in 1979.
By various studies it is being observed under that there is no significance change in the pattern of the investment strategy of LIC over the period 1980 to 2009. In order to validate this t test analysis has been applied on the investment pattern of LIC in the stock exchange securities and loans. Two way ANOVA at 0.05 level of significance has been applied on the investment pattern of LIC among various sectors and years. Both i.e. t test and Anova rejects the null hypothesis showing that there is significance change in the pattern of the investment strategy of LIC over the period 1980 to 2009.
Summary and Conclusion
The data was analyzed using method of least squares. It was found that the total business of LIC is in an increasing trend. The collected and analyzed data prove that the LPG is incorporating a positive influence on LIC of India and its performance. Total investment of LIC rose from Rs 4587.7 crores in 1979 to Rs. 762891.7 crores in 2009. Proportion of premium collected by LIC out of total premium collected by life insurance industry is declined from 97% in 2001-02 to 74% in 2007-08. It indicates the increasing competition from private sector. ICICI prudential is becoming a stronger and stronger player by taking over a lot of business of LIC due to aggressive and flexible product range. But still there is a lot of scope of development in the life insurance industry where private sector will be a challenge in the front of LIC.
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