Issues _ Challenges in Insurance by mrjamiu



Today Insurance sector is one of the arenas, which has a tremendous potential
to survive and grow.

The objective of the study,
    To conduct a SWOT Analysis of the insurance industry.

      Understand the issues and challenges faced by the Insurance sector.
Executive summary

      Liberalization, globalization, economic slowdown, falling interest rates,
uncertainties of the international situation and heightened customer
expectations are posing challenges before the insurance industry. In the coming
few years, the industry will have to tackle a variety of challenges. They include
the following-bringing about a vast improvement in the quality of service;
broadening the range of products; capturing a large enough chunk of the
market; making their operations cost-effective; competing on the basis of their
inherent strength; designing products to suit the Indian market; reaching the
break-even point in as short a period as possible; and improving geographical
and market reach. One of the challenges is going to be balancing the growth in
business on the one hand and risk management on the other.

      Insurance business has emerged as one of the prominent areas of
financial services during recent times particularly in developing economies
where it could not grow much to globalization.         The pace of growth of
insurance sector has accelerated to the process of opening up of such economies
to outside world under WTO regime. Insurance performs remarkable functions
by insuring the insurable public and property located at different places
Insurance business is one of the fast emerging financial services, predominantly
in the developing nation like ours, in terms of the population it serves. In view
of its great significance in economic operations it has comprehensively
networked itself in almost all parts of the society today.
                                        Insurance: Issues & Challenges


                     Table of Content

    Sr.No               Topic                  Page No.

    1.      Introduction
    2.      Meaning & Definition
    3.      Background & Growth
    4.      Nationalization of Insurance
    5.      Factors Leading to
    6.      Progress Since Nationalization
    7.      Benefits of Globalization
    8.      Challenges of Insurance Sector
    9.      Issues of Insurance Sector
    10.     Issues Relating to Regulation
    11.     SWOT
    12.     Case Study ( MAX NEW
            YORK Life Insurance)
    13.     Conclusion
    14.     Recommendation
    15.     Bibliography

                                                   Insurance: Issues & Challenges



     Insurance is a tool by which fatalities of a small number are compensated
out of funds (premium payment) collected from plenteous. Insurance companies
pay back for financial losses arising out of occurrence of insured events, e.g. in
personal accident policy death due to accident, in fire policy the insured events
are fire and other allied perils like riot and strike, explosion, etc. Hence,
insurance is safeguard against uncertainties. It provides financial recompense
for losses suffered due to incident of unanticipated events, insured within policy
of insurance. Moreover, through a number of Acts of Parliament, specific types
of insurances are legally enforced in our country, e.g. third party insurance
under Motor Vehicles Act, public liability insurance for handlers of hazardous
substances under Environment Protection Act, etc.
Insurance, essentially, is an arrangement where the losses experienced by a few
are extended over several who are exposed to similar risks. Insurance is a
protection against financial loss arising on the happening of an unexpected
event. Insurance companies collect premium to provide security for the
purpose. As loss is paid out of the premium collected from the insuring public
and the insurance companies act as trustees to the amount so collected.
Insurance companies have standard proposal forms, which are to be filed up

                                                   Insurance: Issues & Challenges
giving the details of insurance required and presented to insurance company.
Depending upon the answers given in proposal form insurance companies
assess the risk and quote the premium. On payment of premium and acceptance
thereof by insurance company the insurance is affected. Nonetheless, there is no
insurance cover if premium is not paid.


     It is a commonly acknowledged phenomenon that there are countless risks
in every sphere of life. For property, there are fire risks; for shipment of goods,
there are perils of sea; for human life there are risks of death or disability; and
so on. The chances of occurrences of the events causing losses are quite
uncertain because these majors may not take place. Therefore, with this view in
mind, people facing common risks come together and make their small/
contributions to the common fund. While it may not be possible to tell in
advance, which person will suffer the losses, it is possible to work out how
many persons on an average out of the group, may suffer losses. When risk
occurs, the loss is made good out of the common fund. In this way, each and.
everyone shares the, risk. In fact, they share the loss by payment of premium,
which is calculated on the likelihood of loss. In olden time, the contribution by
the persons was made at the time of loss. The following examples make clear
the above-stated notion of insurance.

                                                   Insurance: Issues & Challenges
Example I
     In a town, there are 2000, persons who are all aged 60 and are healthy. It is
expected that of these 20 persons may die during the year. If the economic
value of the loss suffered by the family of each dying person were taken to be
Rs. 50,000, the total loss would work out to Rs. 10,00,000. If each person of the
group contributes Rs. 500 a year, the common fund would be Rs. 10,00,000.
This would be enough to pay Rs. 50,000 to the family of each of the' 20 dying
persons. Thus, the risks in cases of 20 persons are shared by 2000 persons.
Example 2
     In a village, there are 250 houses, each valued at Rs. 2,00,000. Every year
one house gets burnt, resulting into a total loss of 2,00,000. If all the 250
owners come together and contribute Rs. 800 each, the common fund would be
Rs. 2,00,000. This is enough to pay Rs. 2,00,000 to the owner whose house got
burnt. Thus, the risk of one owner is spread over 250 house-owners of the


Insurance companies bear risk in return for a fee called premium. Thus,
insurance companies are risk bearers. They accept or underwrite the risk in
return for an insurance premium. Accordingly, the term insurance may be
defined as a co-operative mechanism to spread the loss caused by a particular
risk over a number of persons who are exposed to it and who agree to ensure
themselves against that risk. Risk is, in fact, an uncertainty of a financial loss.
Risk must not be confused with loss itself that is the unintentional decline in or
disappearance of value arising from a contingency. The function of insurance

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includes providing certainty, protection, risk sharing, prevention of loss and
capital formation. Wherever there is uncertainty with respect to a probable loss
there is risk. The insurance is also defined as a social apparatus to accumulate
funds to meet the uncertain losses arising through a certain hazard to a person
insured for such hazard.
     Insurance has been defined to be that in which a sum of money as a
premium is paid by the insured in consideration of the insurer's bearing the risk
of paying a large sum upon a given contingency. The insurance, thus, is a
contract whereby:
   (a) certain sum, termed as premium, is charged in consideration,
   (b) against the said consideration, a large amount is guaranteed to be paid by
      the insurer who received the premium,
   (c) the compensation will be made in a certain definite sum, i.e., the loss or
the policy amount whichever may be, and
   (d) the payment is made only upon a contingency.

More specifically, Insurance may be defined as a contract wherein one
party (the    insurer) agrees to pay to the other party (the insured) or his
beneficiary, a certain sum upon a given contingency (the risk) against
which insurance is required.

                                                   Insurance: Issues & Challenges

The Growth and Development of the Indian Insurance Industry
      THERE has always been some form of insurance in India, though of an
informal nature. The formal insurance business as we know it today in both the
life as well as the non-life insurance sector was introduced in India by the
British in the beginning of the 19th century. Over a period of time, the business
spread, though not adequately. Since it also suffered from some malpractices,
the life insurance business was nationalized in 1956 and the general insurance
business in 1973. Despite several achievements to its credit after nation-
alization, in course of time, the industry was beleaguered by certain
shortcomings, which led the government to liberalize it again. The legislative
framework and important milestones in the two sectors are briefly described

Life Insurance
      In 1818, a British firm called the Oriental Life Insurance Company was
formed in Calcutta. This was followed by the establishment of the Bombay Life
Assurance Company in 1823 in Bombay, the Madras Equitable Life Insurance
Society in 1829 and the Oriental Government Security Life Assurance
Company in 1874.
      It is a telling comment on the British view of Indians that prior to 1871;
Indian lives were treated as sub-standard and attracted an extra premium of 15
to20 percent. The Bombay Mutual Life Assurance Society, an Indian insurer
formed in 1871, was the first one to charge normal rates for Indian lives.
      There were no specific regulations for the life insurance business until
1912, when it came to be formally regulated under the provisions of the Indian
Life Assurance Companies Act, 1912. In 1928, the Indian Insurance Companies

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Act was enacted, inter alias, to enable the government to collect statistical
information about both the life and the non-life insurance business, including
the provident insurance societies. All the earlier legislations were consolidated
and amended by the Insurance Act, 1938 with comprehensive provisions for the
detailed and effective control over the insurers (both life and non-life) so as to
protect the interest of the insuring public.

       For administering this legislation, the newly established insurance wing
in the Government of India was made administratively responsible for deciding
policy matters. The actuarial and operational matters were looked after first by
the Actuary to the Government of India, then by the Superintendent of
insurance, an finally by the Controller of Insurance. The amended Act of 1950
made far-reaching changes, such as the requirement of equity capital for
companies in the life insurance business, ceilings on share holdings in such
companies, stricter controls on investments, submission of periodical returns
relating to investments and such other information as the Controller may call
for. This amended Act even carried provisions for the appointment of
administrators for mismanaged companies and ceilings on expenses of
management and agency commissions. The Act was further substantially
amended in 1999 (effective since April 2000), and today remains the main
instrument of regulation of the insurance business in India.

Factors Leading to Nationalization

      By 1956, as many as 154 Indian insurers, 16 non Indian insurers and 75
provident societies (in all, 245 entities) had entered the life insurance business
in India. However, the geographical spread and the number of lives covered

                                                  Insurance: Issues & Challenges

were rather small. In fact, insurance companies, by and large, were governed by
short-term considerations and consequently, the business was confined mainly
to cities and the more affluent segments of society .Offering insurance policies
to people with small incomes, to suit their income and financial position had not
even been attempted.,
      During this period a number of malpractices occurred in the industry
causing loss to the unsuspecting public. There were also some instances of
mismanagement and misutilization of the funds collected. An objectionable and
harmful development was that the business houses which promoted these
companies were, in fact, diverting large funds for their other concerns, with no
consideration for prudence of doing so. Often, such large diversions of funds
led to a situation where the insurance companies were not in a position to
honour their commitment to their own customers. Winding up of companies
was also not totally unknown. This process gathered momentum especially after
the First World War, and between 1914 and 1920, many insurance companies
were closed down causing large losses for the small investors. The Industry was
not playing the role expected of insurance in a modem state and efforts at
improving the standard by further legislation we felt were unlikely to be more
successful than in the past. The concept of trusteeship which should be the
corner stone of life insurance seemed entirely lacking. Indeed, most
management had no appreciation of the clear and vital distinction that exists
between trust moneys and those which belong to joint stock companies.
      In the light of these developments, the demand for stricter government
control of the industry gathered momentum and called for nationalization of the
insurance business-which almost became a foregone conclusion. Again, quoting
Dr. CD. Deshmukh, 'Misuse of power, position and privilege that we have
reasons to believe occurs under existing 'conditions is one of the most

                                                    Insurance: Issues & Challenges

compelling reasons that have influenced us in deciding to nationalize life
      Although that was the immediate cause of nationalization, Dr. CD.
Deshmukh argued that the principal point about nationalization was that the
state did not have to make out a case that the private sector had failed.
Nationalization is justified on many other grounds of ideology, philosophy and
the objective of a welfare state. It was necessary in order that the interest of the
insuring public and the industry could be safeguarded, the country's economy
promoted and more funds provided for economic development. These were the
considerations which persuaded the Government of India to opt for
nationalization of this industry.

Nationalization of Life Insurance

      When the Congress party at its Avadi session of 1955, formally included
in its manifesto the concept of the socialist pattern of society, it also urged the
nationalization of the life assurance business. In January 1956, the All India
Congress Committee formally resolved that the life insurance business should
be nationalized. This demand was presed more vigorously in the context of the
Dalmia affair. Accordingly, as a first step, on January 19,1956, the management
of the life insurance business of 245 Indian and foreign insurers and provident
societies, then operating in India was taken over by the central government
through he Life Insurance (Emergency Provisions) Ordinance, l956. The
Ordinance was replaced by an Act of Parliament known as the Life Insurance
(Emergency) Provisions Act, 1956.The Bill to provide for nationalization of the
life insurance business was introduced in the Lok Sabha in February,1956, and
the same became an Act on July 1, 1956.

                                                    Insurance: Issues & Challenges

      In fact, prior to this Dr. CD. Deshmukh had thought of the idea of
nationalization for some time,and even asked one of his officers, H.M. Patel, to
do some preliminary exploration in this regard. The detailed plan that was pre-
pared included the action to be taken by officers to takeover various life
insurance units as soon as an Ordinance for nationalization was issued. This
Ordinance had also been kept ready for the President of India's signature and
when the insurance business was actually nationalized on September I, 1956, it
caught many people by surprise, and was, perhaps, one of the best kept secrets
of the government. During the Parliamentary debate Dr. CD. Deshmukh, who
later became known as the architect of nationalizatison, also said 'I imagine that
if the history of the first decade after India attained independence is correctly
written ,my name may be mentioned as that of the Finance Minister of India
who nationalized the life insurance business, when everything else is forgotten.’

Progress since Nationalization

The following is a brief account of the several developments that took place
after the life insurance business was nationalized. The positive as well as the
negative points are highlighted so as to serve as a backdrop to the current dis-
cussion on the subject, especially the one relating to reforms in this sector.
      The task before the LIC immediately after nationalization was
formidable, since even as it dealt with a multitude of problems, it was called
upon to build an imposing edifice on the foundations recently laid. The task had
to be completed very carefully and after the Mundhra scandal(another well
known scandal where Haridas Mundra sold fictitious shares worth12.5 million
in 6 of his companies to the LIC.), the Parliament was also watching its
performance with great vigil. The LIC had to chalk up policies on different

                                                   Insurance: Issues & Challenges

fronts simultaneously. As was to be expected, the first five years of its existence
were devoted to integration and consolidation work. Of these, the first few
years were devoted to the framing of rules and regulations, setting up other
administrative procedures and streamlining the accounting procedures.
Concurrently, there was a vast expansion of its network during this period. In
addition to the structural reorganization and decentralization, human resource
development was an important item in working out a new strategy, in which
training was organized on a large scale.
      In the period immediately after nationalization, unfortunately, new
business was actually adversely affected and saw some fall in terms of the
number of policies and the sum assured. This arose mainly on account of the
fact that the process of restructuring the divisional and branch offices had not
been completed and there were inadequate technical and experienced staff.
Some of the branch offices did not even have the full complement of personnel
assigned for them. The agents had not yet become accustomed to the new set
up, the procedures and methods of the corporation. In addition to this, there had
also been a substantial reduction in premium rates in 1954.
      A particularly difficult year was 1957, during which the money position
in the economy was tight, investors were shy and the common man was
affected because of a steady rise in the cost of living. Agriculture was also
affected by famine conditions. In these adverse circumstances, LIC’s
performance during that period should be considered as reasonably good.

       After this initial difficult period, LIC, over the years, made
commendable progress. At the time of nationalization, the total new business of
the 245 erstwhile insurance companies was around two billion rupees of sum
assured. From a 'new' business of Rs 3.2808 billion sum assured under

                                                  Insurance: Issues & Challenges

0.932million policies procured in India during the period of 16months between
September I, 1956 to December 31, 1957,
LIC progressed to a business of Rs 1,927.8496 billion sum assured under
22,491,304 policies on individual lives, in 2001-2002. The first year premium
received during 2001-2002 reached Rs 99.6554 billion from Rs 130.6 million in
the 16-month period ending December 31, 1957.
      Similarly it has grown from a level of Rs 137.5 million sum assured
under 5.4 million policies to Rs 8,110.17 billion under 12.5876 million policies
as on March 31, 2002.The total premium, written, which represents LIC's
annual mobilization of funds and which was Rs 820 million in 1957, now
exceeds Rs 424.3344 billion. Group insurance business written in India, which
was 50 million rupees sum assured and Rs 2.1 million annuity per annum at the
time of nationalization, has, as on March 31, 2002, grown to 93,836 schemes in
force, on 24.719 million lives which carry an insurance cover of Rs 1,005.9764
billion. In addition, there are 6109 superannuation schemes in force on 0.980
million lives with annuities payable amounting to Rs 12.7194 billion per
      The number of new lives covered during 2001-2002 under the 40
approved occupations pertaining to the Social Security Group Insurance
Scheme was 663,351 and the total till date was as large as 5,009,741.
      The total income of LIC during 2002 was a substantial Rs 727.6991
billion, in which income from investments was as large as Rs 226.9542 billion.
The life insurance business has thus seen a rising curve of growth. Its growth
rate in 2001-2002 was the best in the decade in all respects, such as policy
growth rate, sum assured, premium growth rate, and investment income. The
total life fund increased from Rs 871.760 billion in 1997, to Rs 2,270.0898
billion, as on March 31, 2002, which translates into a healthy 22.03 per cent

                                                   Insurance: Issues & Challenges

growth rate. It thus more than doubled during this period.
      The 'valuation surplus' and consequently, the bonus to policyholders (95
per cent of the surplus) and the central government's share (being 5 per cent of
valuation surplus in terms of Section 28 of the Life Insurance Corporation Act,
1956), have been steadily increasing over the years. The 31st valuation of the
corporation's business as on March 31, 2001, excluding foreign business,
showed a surplus of Rs 75.8529 billion. For the year 2000-2001, the central
government's share of the valuation surplus amounted to Rs 3.8066 billion.

      In recent years, LIC has also acquired a significant presence in the rural
sector. For instance, 1,200 out of its 2,048 branches are situated in mofussil
areas. The rural new business in 2001-2002 amounted to sum assured of Rs
254.6194 billion under 3,701,444 policies, representing 16.94 per cent of total
business in terms of policies and 13.65 per cent in terms of sum assured. These
figures are in terms of the definition of the rural! social sector, as approved by
the IRDA.
      The Rural Group Life Insurance Scheme (RGLIS) was introduced with
effect from 15 August 1995. This scheme is for the rural masses and is
administered through the Intermediate Level Panchayats (ILP). Any person
living in the jurisdiction of the ILPs can become a member of such schemes.
Under the subsidized scheme, where 50 per cent of the premium is shared by
the central and state governments in equal proportions, only one person
belonging to the family living below the poverty line is eligible to join. During
1999-2000, as many as 103,619 new lives were covered.
      In its effort to include more people under the umbrella of life insurance,
LIC has endeavoured to provide insurance coverage to a larger number of

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individuals who have no previous insurance on their lives. During 2001-2002,
16.230 million individuals were insured for the first time for a sum assured of
Rs 1,198.5973 billion as against 14.430 million individuals for a sum assured of
Rs 843.2079 billion in the previous year. The ratio of first insurance to the total
business completed for the year comes to 74.29 per cent in respect of policies
and 64.23 per cent in terms of sum assured.
      Through its vast network of 2,048 branches, a 100 divisions and seven
zonal offices spread over the country; its marketing force of 19,074
development officers and 792,645 full-time and part-time agents (of which
744,003 were active agents); LIC has reached various corners of the country
and provides sales and service of life insurance to the Indian public at their
doorsteps. LIC has also been able to reach illiterate people, those living in
interior rural areas, and even people in the marginal income group or below the
poverty line. Side by side, as seen above, group insurance activities have been
expanded through an increasing number of pensions and group superannuation
units. They not only cover the organized sector under various group schemes
but also, through some group insurance schemes, cover the unorganized sector.
Although, LIC's reach should be considered in the background of the poverty
level, literacy problems, lack of insurance awareness, prevailing social customs
and problems of communication to the deep rural areas, the fact remains that a
lot of ground is yet to be covered.

                                                  Insurance: Issues & Challenges

At this stage, it is worth noting that although LIC has virtually a monopoly over
the life insurance business, there are some other very small players viz. Postal
Life Insurance, Army Group Insurance Fund and Naval and Air Force Life
Insurance Funds. Some of the state governments also have insurance schemes
for their employees. A few pension funds are also in operation though reliable
data about these small businesses are not easily available. Additionally, 18 new
players have entered the market since October 2000, but naturally, they have
yet to gather substantial enough business.

                                                    Insurance: Issues & Challenges

Benefits of Globalization

      In this age of global integration, no country can operate in isolation
because in every economic, social and political activity, there is considerable
interdependence between countries. A greater integration of the market with the
rest of the world is accelerated by the breakdown of geographical barriers to the
movement of capital across countries. Each country, therefore, operating in the
international market, has to follow international norms and behaviour.
      Essentially, globalization brings benefits to all participating countries.
The host country becomes a recipient of large foreign investments and foreign
investors secure access to new and developing markets. Several benefits then
flow in either direction in terms of expanding markets, improved products and
services, new marketing and production technologies, and newer concepts of
      So far, our participation in the global market in virtually all sectors of the
financial services sector has been only at the margin and our insurance
institutions in particular have been relatively insulated from world markets.
Now, due to the advantages of opening up that could accrue to India, business
has to operate beyond the national boundaries.
      In the main, globalization will secure for India larger inflows of foreign

                                               Insurance: Issues & Challenges

capital needed to sustain our GDP growth. In addition, new entrants with a
professional approach and state-of-the-art technology will revolutionize the
market by bringing about tremendous improvement in service. Moreover,
global competitors will help in building expertize with their best global


                                             Insurance: Issues & Challenges

Major Challenges in the Insurance Sector

     The process of opening up is forcing a radical change in the
structure of the nationalized insurance industry. This change is
becoming even more pronounced with the entry of foreign companies
into the Indian market in the form of joint ventures with Indian private
sector partners. Consequent to this, the integration of the Indian
insurance industry more closely with the world economy has also
become inevitable. It has become clear that insurance companies can
no longer operate within given national boundaries. Companies from
developing countries must, therefore, align their work culture and their
policies and procedures with those of the participating companies from
developed countries.
     In the past, whenever there was talk of restructuring or reforms in
the public sector companies, the changes actually effected were mostly
of a cosmetic nature. The situation now compels significant changes in
areas such as their role and their ownership pattern. The depth of
restructuring now goes much beyond minor changes in inconsequential areas

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and is forced on them by competition.
    The private sector companies, on the other hand, had to adopt a different
approach right from the beginning, because with their large investments, they
have entered the market for conducting a profitable business. They are trying to
evolve structures which will be most suitable for carrying on business in India.
Of course, in their case, there is no question of change on the lines of the public
sector, but in the sense of moving away from or improving upon the practices
established by the nationalized sector. It also involves the question of
redesigning strategies and policies appropriate for an open regime.
. Apparently, changes will not be and cannot be limited to only some areas, but
will be comprehensive, covering an aspects, because they are so interrelated.
Many of these aspects are common to both the sectors. Thus, in respect of all
companies, significant changes will be necessary in respect of their
organizational set-up, procedures, marketing, fixation of premium rates,
procedures for claims settlement, accounting practices, consortia arrangements,
use of sophisticated technologies, automation/information technology (IT) and
submission to regulation of business. In most cases, the starting point was
marketing strategy which needs consequential changes in all other areas. Some
of these changes will occur on account of government policies or at the
government level, while others

will be at the initiative of the industry itself. The experience in the banking
sector should serve as a guide to them, as also to the policy makers.
     We first describe the changes that are called for at the industry level,
comprising private and public units and then cover public sector-specific areas.

                                                   Insurance: Issues & Challenges

Still, a large part of our description would naturally keep on referring to the
public sector because for the last so many years, that was the only insurance
industry in India.

      During the long monopoly regime, the government attempted only minor,
almost superficial changes in procedures, without going to the root of the
problem, perhaps because of its reluctance to touch any vested interest. What
deregulation requires is comprehensive changes in the very character and basic
policies for the industry.
      Change spreads across a vast canvas and would, in the main, cover the
following areas: (a) mindset; (b) adequacy of capital; (c) personnel; (d) market-
related policies; (e) cost consciousness; (f) competitive strength; (g) technology
in use; (h) accounting practices; (i) scale of operations; and (j) global
integration. These have to aim at creating an efficient, vibrant and viable
insurance industry after assessing its strength and weaknesses. How to effect
them efficiently and quickly is an important challenge for the existing and new

      The most difficult part of change is the change of attitude. No effective
change can be imposed or mandated by an outside party or from above, like the
international institutions (in relation to a national government) or the govern-
ment (in the case of the public sector). It has to spring from within and can be
effectively introduced only when there is willingness on the part of the
concerned parties to do so. If it is based on internal commitment, its depth,
reach and quality will be far better.

                                                   Insurance: Issues & Challenges

The most important change that is required is in the mindset of the players vis-
a.-vis the customer. Experience has already shown that quality of service is the
influencing factor in the market and in fact, only those units will survive which
offer to the customer what he wants, and to his satisfaction. For the old,
established, public sector entities, it is a question of revolutionizing the very
approach to the business. For the new players also, it means an attitudinal
change, because they have to depart

from the systems, procedures and attitudes of the public sector so that the
customer will be better served.
       In the restrictive mould adopted by India for almost 50 years, all the
important sectors of the economy were more or less working in a sellers'
market. That 'take it or leave it' attitude has now to give way to being more con-
cerned with the customer and the service offered to him. Even the new units,
which had no opportunity to operate in the insurance market in this country, can
make room for themselves in the market mainly by paying greater attention to
this aspect.
       Insurance is a business in which the financial stakes of both the
consumer and the seller are high and have to be based on mutual trust. The
relationship does not end with the conclusion of the transaction, but has to be
durable and of a long-term nature.

Adequacy of Capital
      Capital adequacy is a matter of special attention in view of the nature of

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the insurance business, where in case a contingency arises, the insurer should be
in a position to meet its long-term contractual obligations and pay up the dues
or claims. In that sense, insurance is a capital-intensive business and must be
backed by an adequate capital base on the part of the owners and the companies
should not be running their business purely on other people's money. So mini-
mum start-up amounts and long-running capital adequacy norms are absolutely
essential. In consideration of this, the Malhotra Committee suggested and
subsequently the IRDA stipulated, a minimum capital base of Rs.l billion for
any entity wanting to enter the Insurance business.
      In order to spread their operations further, and to be able to face
competition, the public sector insurance industry also needed an infusion of
additional capital for improving the existing very low capital base. With that in
mind, the Malhotra Committee suggested that LIC's capital base be increased
from a mere Rs 50 million to 2 billion. This is yet to be done. In the same
manner, the Insurance Act requires every reinsurer to have a capital base of Rs
2 billion. After the LIC is able to comply with the new stipulation, another Rs 2
billion will be added to the capital base of the nationalized insurance sector.
      After initial resistance on the ground that the size of capital prescribed
was too high and the business of insurance did not require it, all the new
entrants have not only complied with the requirement, but have actually
contributed larger figures-some even double the amount prescribed. Although
the legal stipulation now is for a capital of Rs 1 billion, which can be
considered quite

      adequate for ,setting up a new company, the new players find that as their
business grows, they actually need much larger capital infusions in order to

                                                   Insurance: Issues & Challenges

satisfy solvency margin requirements.
      The Insurance Institute of India (March 2001), mentions that the
minimum capital base stipulated as the starting point: will not be appropriate
for measuring capital adequacy of an established insurer. Hence, the current
trend is to relate the amount of paid-up share capital to the risks inherent ,in an
insurer's operations and the insurer hould be adequately capitalized to deliver on
his promises. The risk factors will include the lines of business underwritten,
rate of expansion and quality of investments. The relevant concepts are referred
to as Minimum Continuing Capital and Surplus Requirements (MCCSR.) in
Canada and Risk-based capitalization (RBC) in the USA. The position that will
obtain in India is not yet clear.
        Normally, the capital market should enable the raising of finance if the
performance of the units seeking funds from the capital market is considered
satisfactory by the market-but there are difficulties in tapping this source. On
the one hand, the capital of domestic insurers will need to be augmented before
they approach the capital market; and on the other, it will be increasingly
difficult to maintain the required level of retum-on-capital to attract additional
capital, because under competition, the profit margins will be under pressure.
      India has a strong savings culture with the rate of savings staying around
22 per cent of the GDP, Insurance could be a good investment avenue if it is
made attractive enough, Exploiting this opportunity is going to be particularly
essential for the public sector since it is not only expected to reduce its
dependence on the government, but is expected to contribute to the government
treasury by stepping up its savings.
      As seen above, there is now a greater appreciation of and insistence on
adequacy of capital of insurers. However, insurance demands vision,
entrepreneurship and dynamism, which is not a function of just massive capital

                                                   Insurance: Issues & Challenges

Quality of Personnel-Recruitment and Training

        The insurance industry in India is serviced by a big complement of
experienced staff. Thus, LIC has a large force of 792,645 agents, supervised by
19,074 development officers, spread across the country. Similarly, the general
insurance industry's sales force consists of more than 500,000 agents (not many
of whom are active and hence it is difficult to pinpoint their exact number) and
12,047 development officers. .


        The total strength of employees in the insurance public sector is just
around 200,000. However, the general perception is that even this number is
excessive in relation to the requirement and thus impinges on the performance
of the nationalized industry. The new players have started off. with an
advantage in this regard in that they do not have to carry the load of an unduly
large workforce and are managing with a smaller number.
        Human resources constitute the most vital segment of any organization
and great care is needed in recruitment training, deployment, and
developmental aspects like growth and career opportunities, retention of talent
and weeding out deadwood. The insurance business demands personnel of high
quality, with a different range of skills and an emphasis on greater
professionalism. Of course, although there was some dissatisfaction about the
quality of service from the existing entities, the industry does have some
personnel with fairly good technical skills and professional talent.
        However, the crucial stage is the recruitment process and high standards
and qualifications have to be set at the stage of induction of new staff. Insurers

                                                     Insurance: Issues & Challenges

have to attract, retain and develop people who are open to change, are creative,
value teamwork, and have passion for service and delivering value in their
output. In fact, experience in the insurance business by itself now perhaps
counts for less than the qualities mentioned above. Many recruits, therefore,
especially at the middle and senior levels in the new companies are from other
services and often without any background in insurance.
       At the same time, in a sense, the new players, just because they are
recruiting afresh, do not necessarily derive any special advantage in
recruitment, because their recruits especially for middle level and senior
positions are also drawn from the same stock as that from which the present
industry sourced them. They do bring with them the legacy of their public
sector culture. A further difficulty is that the otherwise properly qualified
potential candidates do not rank the insurance industry very high on such issues
as pay (not really a constraint any more) and prestige and are not, therefore,
attracted easily to it. So the industry has to take special pains to find the right
type of people to work with them and then train them further to suit their needs
and culture.

        The ultimate cost of not recruiting persons with proper qualifications, or
of not systematically training their own personnel to match expected standards,
could be very heavy at a time of rapidly increasing competition and consumer
      Looking to the surplus staff already with the public sector, the urgent
need is to improve the quality of the existing personnel, rather than new
recruitment. The public sector must immediately identify whether and on what
scale, at least in respect of certain jobs, it is saddled with underqualified

                                                  Insurance: Issues & Challenges

      staff unable to respond to the demand on them, and accordingly must
undertake a heavy exercise of training, retraining and redeployment.
      Since training helps the companies upgrade the attitude and skills of their
workforce for maintaining standards and quality, it is an inseparable component
of any growing business. Insurance is a business where even the lowest
operating and sales levels need to be up-to-date on their products. They have to
master the nuances of the products, particularly because they are offering a
large range of similar products and have to help the customer to make an intel-
ligent choice.                             .
      The industry has taken steps to empower its staff in terms of job
knowledge as well as customer service by organizing relevant training for them.
Already, large sums are being spent on this activity in the insurance sector, but
Its focus needs to be reoriented to make it more relevant to the needs of the
industry. The future demands a different range of skills than what was needed
and available until now. Of particular relevance would be training in actuarial
Science, management, marketing and technical subjects. For all these reasons,
training facilities need to be substantially expanded and upgraded.
       All the companies are not outsourcing training. Many have set up their
own training facilities for intensive coaching. In order to meet the demand on a
large enough scale, there 18 a need to build a cadre of professional trainers
within the organizations as well as to tap the market for expertize and other
facilities. However, total dependence on in-house training arrangements may
not suffice and hence some outsourcing becomes essential. To combine quantity
and quality, companies have their own training modules added on to the IRDA-
stipulated minimum 100 hours of training. They are mostly company-specific
programmes. Their agents are being trained more as financial advisors.

                                                   Insurance: Issues & Challenges

      Insurance training in India is at present organized through: (a) the
National Insurance Academy, Pune, which caters to the requirements of senior
level executives of both LIC and general insurance companies; (b) the
Insurance Institute of India and its College of Insurance; (c) LIC's Management
Development Centre, its seven Zonal Training Centres and 27 Sales Training
Centres and around a 100 Divisional Training Centres; and (d) training centres
of each general insurance company. The Corporate Training Centre of
individual companies focus on intensive training of direct recruit officers and
specialist and functional training programmes, while their Regional Training
Centres impart induction training. In a few cases, the LIC arranges for the
training of agents through some approved branch offices.
      Many countries, -in recognition of the importance of training, require all
insurers to spend a prescribed percentage of their income or gross salary cost on
training of human resources.

The insurance iTIdustry in India has a system under which each company
provides a budgetary allocation of around 1 per cent of the net premium income
every year. However, there is no compulsion in this regard and there is no
guarantee that the sums provided are actually spent. The UK has adopted a
system of Continuous Professional Development which requires a professional
to update himself with developments in techniques with the help of programmes
such as seminars. The Indian industry too will have to think of such
      In view of the constraint of time and in the absence of any formal training
courses available in the country, it is difficult for newcomers to build up a large

                                                    Insurance: Issues & Challenges

and qualified cadre by creating and augmenting their own in-house facilities.
Therefore, in addition to training organized through special training
establishments set up by the industry itself, there is a need for introducing
formal university education with specialized courses for insurance or insurance-
related matters. Unfortunately, in the country at present, there is no university
which offers any insurance-specific course at any level, leading towards a
diploma or a degree.
       Some of the management institutes have recently started offering courses
on a limited scale in this area. This puts severe limitations on the availability of
candidates with a basic knowledge of insurance. Therefore, their training has to
start off with these basic inputs. The introduction of formal courses will widen
employment opportunities, not just in Indian companies, but also with foreign
insurers wanting to operate in this country.
upgradation of Organizational and Technical Skills
     The insurance business requires organizational and insurance-related
technical skills. Organizational skills refer to the functions of marketing,
distribution systems, customer service, and expense management. These
functions are, of course, common to all businesses. However, they have not
received the attention they deserved in the public sector operating under
monopolistic conditions. Since the new players are ahead of others in this
regard, the existing insurers must devote special efforts for the same.
     Insurance skills refer to the functions of underwriting, claims processing/
adjudication, fraud control, funds management and reinsurance. Being a service
provider, insurance companies must pay attention to product innovation,
appropriate pricing, and speedy settlement of claims. However, because of its
public sector character, the insurance industry in India never felt the urge to
improve itself in these areas. These aspects now deserve closer attention if it

                                                     Insurance: Issues & Challenges

wants to maintain its strong position in the market.

      The public sector insurers are now making modest efforts to inculcate
these skills at different levels; but an additional channel could be the joint
ventures with established and reputed foreign partners, because these qualities
cannot be taught in the conventional sense, but have to be absorbed on the job
itself. This exposure in a real-life situation can be very effective:

Training of Specialists
      Since the insurance industry has to identify and train people across
different professions, the emphasis has now to shift from training only in
insurance subjects, to several other disciplines relevant for introducing
professionalism in the industry. The disciplines likely to be covered are indi-
cated below.
      The insurance sector needs a greater involvement of other professionally
qualified experts as well, either as employees or as consultants. This' includes
doctors, veterinarians, engineers, environmental specialists, accountants, and
financial experts. Their expertise is very relevant for drawing up plans for new
products, for scrutinizing some claims, for settlement of certain disputes and for
some policy decisions. Similarly, insurers draw up policy contracts, which are
necessarily quite complex. They need to be drafted carefully and demand
special skills, and, therefore, legal matters is another area in which training will
have to be arranged. Simultaneously, some insurance-related training for these
experts is also in order because the professionals will need to be given exposure
to the working and problems of the insurance industry to enable them to

                                                  Insurance: Issues & Challenges

respond to special problems arising therein.

       As technologies advance, the process of loss measurement and
assessment becomes more complicated, requiring a greater degree and variety
of expertize which will have to be specifically built up through tailor-made
       Actuarial science is the very basis of insurance and it is unthinkable to
carry on the insurance business without deploying actuarial and forecasting
techniques on an increasing scale- Actuaries are particularly required for
purposes such as estimating the long-term implications of changing mortality'
rates, trends in investment earnings and expenses incurred, for interpreting the
effects of changing market conditions, for product development, and most
importantly, for calculating the surplus that results from operations and
determining the solvency margin.

The actuary plays an essential role in life insurance business, particularly in
product development, determination of premium rates, study of mortality
experience and construction of mortality tables, laying down underwriting
standards, valuation of liabilities and distribution of surplus. The actuary can
also be useful in investment management.

These actuarial tasks cannot be achieved merely by prescribing and insisting on
adherence to certain accounting practices. They have to be completed only by
qualified actuaries.

                                                  Insurance: Issues & Challenges

Market-related policies
     Marketing, which was very low key in the nationalized life sector and
virtually did not exist in the nationalized non-life insurance companies, will be
the most crucial function in the new conditions. Hence a host of changes are
called for. Marketing functions encompass expanding existing markets or
tapping new markets and the industry needs to undertake measures which will
be conducive to both these objectives. The main thrust would be on bringing the
customer to the centre-stage, improvement of service and designing new
products, There has to also be a shift from the idea of just creating sheer
volumes to rendering better quality of service and making the unit profitable.
       Most of our present policies, procedures, and practices pertaining to
writing of policies, sales and claims settlement are borrowed from the West, but
in the days ahead, the Indian industry will be compelled to develop its own
models, innovative practices and flexibility in decision making. Suitable
changes can be contemplated in the following areas-marketing practices; brand
building, customer segmentation; product design/packaging; fixation premium
rates; claims settlement; accounting practices; consortia arrangements; adoption
of new technologies; automation; and the use of IT.

Cost Consciousness
      At the stage of entry into the market, the insurance companies may not
be ready with totally new products and services. Naturally, initial competition
will be more in the form of prices charged, as all companies, public and private,
fight for gaining or retaining a share of the market already developed. The
companies must, therefore, adopt appropriate cost control measures, Cost
leadership implies tight control systems, minimization of overhead costs, and
pursuit of economies of scale. The two important areas where costs can be

                                                   Insurance: Issues & Challenges

reduced or controlled would be administration and claims.

      Controlling administration and establishment costs is the most difficult
and yet an essential task that any organization must undertake. These costs can
be kept within limits by exercising care in the initial recruitment and subsequent
deployment of staff as also the emoluments made to them. In the case of the
public sector, which is known to be over-staffed, costs can be brought down by
down-sizing, accompanied by better utilization of the workforce-both extremely
difficult in the public sector mould-but there are no options for doing so.
      Cost reduction cannot be attempted solely by the traditional ‘across the
board’ cost-cutting methods. Efforts have to be made on several fronts
simultaneously. Thus, on the operational side, it would pay if non-value-added
activities are curtailed to avoid waste of effort and excess cost in the business.
Re-engineering to simplify work-flows and automating manual tasks are the
other two cost reduction strategies that need to be pursued.
     Claims costs can be controlled through two methods: claims minimization
and fraud control. In the first category, the aim would be to minimize the
number of claims lodged with the insurer, of course, not by declining to accept
them, but by persuading the customer to take adequate precautionary measures,
Claims minimization can be best explained by referring to health insurance. The
company can analyze its claims data to determine those medical service
providers who provide low-cost treatment. It can then provide financial
incentives to its customers to make use of their services. Or alternatively, the
company can either negotiate lower rates with high-cost service providers, or
discourage its customers from using their services. With the discouraging

                                                     Insurance: Issues & Challenges

experience of the government companies in the health insurance, cost control
needs to be attended to with even greater vigil by the new entrants.
      Deepak Satawalekar, Managing Director and CEO of HDFC Standard
Life Insurance (2001), stressed the importance of cost control when he averred,
'Our focus is on good investment performance and keeping a tight control on
costs so as to generate good long-term maturity valuefor the customers'.
     Claims minimization can also occur if the importance risk management is
impressed on the customer. In the long run, with the adoption of proper
preventive measures the number of claims and their amounts can be reasonably
controlled, which is really in the interest of the insurer because it reduces its
liability in claims should such an occasion arise.
       There are certain fraud-prone areas in every business, and even more so
in insurance, where the element of subjective judgement is more present. These
relate primarily to: fraudulently obtaining cover after the loss; exaggeration of
the loss; attendant falsification of documentation; submitting

       false claims and the like. The LIC too is not free from such malpractices.
In the past few years, for instance, the incidence of early death claims, (death
of policyholders within two years from the commencement of the policies), has
been on the rise and is causing concern for LIC. It is as high as around 27 per
cent of the total death claims. Looking to the high rate of deaths due to
accidents and heart disease, there is room for suspicion of fraudulent claims.
      With a critically balanced profitability, fraud control is extremely critical
for any insurer. Controlling these pove difficult because of various factors, viz.
difficulty in obtaining evidence of fraud, difficulty in convincing the authorities
about a fraud, and most importantly, some amount of connivance or even

                                                    Insurance: Issues & Challenges

collusion on the part of the supervisors.
        It is really difficult to eliminate fraud; but modern technology can help in
detecting and minimizing the risk of fraud to some extent. This will become
possible by building up a database for monitoring and checking possible frauds.
Most claims follow a certain pattern and technology can be used for identifying
those that deviate from the pattern and decide whether they are fraudulently
        The techniques used to deal with frauds by insurers abroad include
background searches and cross-checks. For example, it is possible for an insurer
to check if an individual filing a work-related disability claim has ever filed a
similar claim in the past. It is possible that an individual with a history of such
claims is faking the disability. Such types of practices where reliability can be
ensured, need to be developed for the Indian market.
      Of course, claims in such categories must be analyzed over a fairly long
period to accurately detect fraud. For instance, in a health insurance claim, a
claim for a particular surgery simply cannot be filed twice. Once such measures
are in place, they can substantially reduce costs and enable companies to lower
their prices which would give them a competitive edge.
      From a statistical angle, high volumes in this business assume
importance, since they help spread risks wider, allowing a lowering of rates and
raising of profits. With a wider base, the probabilities become more predictable,
and with system-wide risks balanced out, there is a possibility of improving
profits. Thus, increasing the volume of business is an important measure of
bringing down per unit costs.
      The Indian market insists on advance payment of premiums. It is at times
suggested that this system of premium collection should be changed in order to
increase market access. However, there is really no case for issuance of policies

                                                     Insurance: Issues & Challenges

on credit for unlimited periods, i.e., for issuance of contracts

      without receipt of due consideration. Advance payment helps insurers to
honour their claims promptly and avoid the uncertainties of the recovery of
outstanding premiums. It also helps in the enhancement of investment returns.
Hence there is every reason to continue the present practice. The collection of
premium on time is of the utmost importance because no insurer can assume
risk unless the premium is received in advance.
      There is a gross imbalance between fixed management expenses and the
cost of procuring business. The statute prescribes a permissible limit of cost to
the insurance companies at approximately 19.5 per cent of their Gross Direct
Premium. This includes the cost of intermediaries. All the existing insurers are
working at costs slightly exceeding this limit, but they will be compelled to
work within the stipulated cost limits within a given timeframe. Although the
existing players will find it difficult to bring down their fixed costs primarily
through rationalization of manpower, there is no escape from it. This issue is
becoming complicated because even as the costs need to be brought down, there
will be an increase in costs as an increase in the commission levels is inevitable
when the industry tries to attract the right kind of people in a bid to build up a
professional agency force. This is bound to put additional pressure on the
already high-cost ratio.   .      .

Maintaining/Acquiring a Competitive Edge
      In order to be able to acquire and maintain a competitive edge in the
market, it is important to follow the concept of competitive market intelligence

                                                   Insurance: Issues & Challenges

and to anticipate the pattern of operations and the game-plan the new entrants
are likely to follow. In particular, it is necessary to find out what new products
and policies others are likely to offer and then suitably design their own
strategies. The basic prerequisite for the government companies (which
virtually never faced any competition) would be to cover their flanks by
examining where private entrants will hit and then be prepared for it when
competition actually materializes.
      The new players have not entered an entirely virgin area but in an area
dominated by a well-entrenched set-up in the public sector. The challenge for
them is, therefore, to offer, in addition to the established products, something
new and innovative.
      Making their operations cost effective through leaner establishments,
more efficient procedures, and greater and more focused use of technology are
going to be chief factors for the nationalized companies in acquiring a
competitive strength. Computerization is going to be of particular relevance in
this context.

      In the context of global competition, it is sometimes argued that the
labour-intensive nature of a service like insurance, particularly in respect of
distribution, should give India, with its abundance of low-cost labour resources,
a competitive edge. However, with the present productivity of this asset, the
above premise is questionable. The provision of insurance services requires
high technical skill and competence in such areas as risk assessment, risk
control,loss assessment, and actuarial science, which can only be acquired by
investing in professional education and proper training. Since obviously, such a

                                                     Insurance: Issues & Challenges

professional cadre will demand and secure a high level of compensation, it will
no longer remain particularly cheaper in relation to the wage levels in other
countries. All the same, the industry cannot shy away from professionalizing its
staff since it has to be less concerned with absolute figures of wages, and more
with lowering of the per unit cost of production.
                 . .
Technological Upgradation
      Technology has led to dramatic changes in India financial landscape and
this wave has also had an impact on the insurance industry though the level of
technology currently in use is still quite low. Therefore, it can no longer afford
to postpone upgrading its technologies to the levels prevalent in other countries.
The trend towards its greater use is just emerging though there are still
problems to be overcome, mainly the mind set of the potential users. Fortu-
nately, resort to automation by even one entity exerts a wholesome pressure on
others to adopt the same, thereby raising the general level of technology in the
      The insurance industry stands to benefit immensely from technological
advance which has an impact on how business is managed and transacted. The
main benefit would obviously be in terms of increased efficiency levels, higher
customer satisfaction, leaner establishments, cost-effective operations, handling
of tremendous volumes of work, cost-effective channels of distribution and on
the whole, a modem work culture, which is the need of the hour. Technology is
critical not only in day-to-day management of the business, but also in areas
such as product development, cost control and marketing.
      The    three     most   important   segments    of    technology     relate     to
computerization, automation and information technology. Computerization in
particular, is very important because of the large data which the insurers must

                                                   Insurance: Issues & Challenges

generate and handle for product development and pricing, apart from the need
for prompt and effective customer service.

      For designing new products and services, a tremendous database
comprising demographic data, income level and distribution, regional
disparities and peculiarities, products, customer profile, demand pattern, incli-
nations, and preferences needs to be built up. Demographic data related to age
and sex composition, health, birth and death longevity, incidence of disease,
etc., has to be carefully documented, stored, retrieved and processed speedily
which is just not possible without high powered computers. Computerization
does not mean just collection and storing of data, but interpretation and
meaningful organization of it to present it        in the form of information.
Computer    networking facilitates the       exchange of business      information
between companies, and access to each other's database and communication via
electronic mail systems. This also provides access to information at the
international level. These functions call for a more effective use of communica-
tion technology.
     Sophisticated computer programmes will also assist underwriters, agents,
brokers and financial planners. Thus, whereas today, for writing insurance, the
customer has to be approached personally, in future the interface with him
could be through computers rather than face-to-face. The agent, who, through
automation can be in constant communication with his company's files, will
have an obvious competitive edge in the marketplace.
     In addition to front-line computerization, there is also some behind the
scene automation to take care of-functions such as dispensing of forms, folding
and stacking of papers, franking, and reconciliation. These also increase the

                                                  Insurance: Issues & Challenges

overall efficiency of the system.
         Computers with expert systems could be used increasingly for such
tasks as insurance underwriting and claims adjusting , medical reports, and
investment performance. Expert systems is a kind of software that collects
together a large amount of data on a given subject and organizes it in a way
that enables a computer to analyze problems and suggest decisions by a process
of elimination, using programmed criteria
      The IT capabilities of a service sector like insurance need tremendous
strengthening because it relies heavily on it. Information technology
encompasses computers, telecommunication, multimedia, relational database
management systems (RDBMS) and image technology. Some of the important
applications of IT are data processing, and Management Information Systems
      Customer Activated Terminal (CAT) also called a Kiosk, is an interactive
multimedia display unit-free standing or housed in a small enclosure-in which
the customer gets the benefit of one-stop shopping at a convenient location
while being able to draw upon the full range of services.
      Another benefit of IT is that it not only helps in better customer service,
but also provides better control mechanisms.

The Importance of Government policies
     The government's approach to this question is of critical importance,
because its policy will decide the ease with which technology can be imported.
Since the compatibility of technologies and systems imported will govern the
spread of technology, it would be better if the users are given the freedom to
decide which technology should be imported and from where, within given

                                                     Insurance: Issues & Challenges

   Since no private company in India desiring to enter the insurance business
has had the opportunity to participate in the insurance sector, it is not likely to
be thoroughly acquainted with technology used in this sector. In order,
therefore, not to remain behind in the race, technological know-how is being
acquired from foreign insurers with whom they have collaborated. For those
who have no joint venture arrangements, the latest technology would still have
to be imported, possibly through technology tie-ups. Whether. this should be in
the form of a joint venture or whether. lt should just be bought is a decision
that will vary from unit to unit.
      The adoption and spread of technology are also dependent on the
infrastructure provided which is almost entirely controlled by the government.
Without     adequate   good    quality   infrastructure   (primarily    power     and
telecommunications) the efforts of the industry would be hampered. In fact,
these are problems that already acutely plagued the entire economy, posing
serious difficulties for the trade and industry. There is no good reason why
infrastructure supply should remain a prerogative only of the government.
Therefore, in the true spirit of liberalization and deregulation, it is incumbent on
the government to open up infrastructure also to the private sector so that not
only will the availability improve, but its quality as well.
       It is difficult to predict a specific time frame for technological changes in
insurance, which earlier, as public sector entities, had not been under very
heavy pressure to change. Even otherwise, the initial adoption of such a
technology anywhere in the world is always slow and gains momentum only
after it reaches a certain critical mass. However, at this juncture in India, there
is just no time to waste and action on this front must commence as early as

                                                  Insurance: Issues & Challenges

Implications of Technology for Insurance
      The introduction of technology inputs in the working of the insurance
industry has certain implications for it. For instance, the mere installation of
hardware or just automating manual work is not what is implied by the
increased use of technology. The adoption of new technology demands radical
changes in the work culture itself and means organizational restructuring and

      and a review of the existing systems and procedures (in other words,
business process re-engineering). Such sophistication will produce certain other
consequences such as on employment for recruitment, replacement, training and
retraining at
various levels.
      Recruitment at various levels will, hereafter, strictly be from amongst
technically qualified persons, and in some cases even under-qualified or non-
qualified people may be replaced. Those who are otherwise promising could be
moulded for the jobs by training, and those who have some technical skills
could be upgraded through the process of re training. All the same, it could
certainly mean unemployment for some. Yet, in the long-term, it will open up
new opportunities thereby augmenting employment.
      Technological advance in other sectors can also produce an indirect
benefit for insurance. For instance, the strengthening of materials used in
construction and the extension of life resulting from medical advances may
mean lower losses for insurers in the long run.
      On the darker side, computerization also implies a certain risk in terms of
security and integrity of data. The confidentiality of information, prevention of

                                                   Insurance: Issues & Challenges

data corruption and prevention of fraud are matters of concern and need to kept
in mind while deciding upon the area in which it is to be put to use.
      Computers support competent people to perform their functions more
effectively and efficiently. Initial efforts, therefore, will have to be to improve
the skill level so as to assimilate these technologies. For achieving this, the
industry will have to arrange computer-related training on a large scale.
Fortunately, all the public sector insurance outfits have already undertaken such
programmes on a fairly large scale.However,with the increased and effective
use of information technology, the personalized touch in insurance services will
diminish because technology, cannot replace the personal touch in providing
professional service. This is of particular relevance in a country like India
where the consumer would feel more comfortable in a face-to-face interaction.

      The necessity of transparency in the accounts of insurance companies
cannot be overstated. The regulations laid down by the IRDA insist on sound
accounting standards and disclosure practices, so that the true financial position
of the insurance companies is reflected in the accounts, The likely reliance of
the insurers on financial institutions and the capital market for raising funds in
the future will further enforce such transparency and discipline in operations,
thereby putting the

      customer in a better position to choose between one insurer and another.
      Fortunately, the accounts in the public sector insurance industry in India
are considered to be much more transparent than in many other countries and
hence there should not be any difficulty in meeting the transparency and
disclosure standards.

                                                   Insurance: Issues & Challenges

Scale of Operations
Being a game of big numbers, the insurance business requires a very large
capital base and substantial financial resources. Its profitability is heavily
influenced by its size and in advanced countries, efforts are often made to
create as large units as possible. In this context, the United Nations Conference
on Trade and Development (UNCTAD) observed two trends, not necessarily
contradictory to each other, in different parts of the world. On the one hand,
monopolistic and oligopolistic market structures are being broken up in view of
their unwieldy size. On the other, a view is gaining ground that fragmented
markets, in which a multitude of small companies operate, often under
conditions of cut-throat competition, cannot provide the high quality and
reliable services required by a modem economy. A higher degree of
concentration may, therefore increase their efficiency, It may thus be in the
interest of the customers to have fewer but stronger companies, not least
because the latter would have a better longer term financial viability,
      Of course, it is not easy for companies to reach a large enough size on
their own and in the routine course, in view of the economic barriers to organic
growth. Therefore, besides the usual method of revising the capital structure
upwards, in the developed countries, acquisitions and mergers are also
considered seriously and many organizations are beginning to gear up their
internal machinery to manage them. As a result, in many countries,
consolidation has almost become a way of life in the industry.
.    Other factors inducing mergers and acquisitions include the following-a
desire to capture an increased market share; acquire improved width and depth
of product range; expand distribution channels; increase cross-selling
Opportunities, and diversify from product lines and geographical markets with

                                                   Insurance: Issues & Challenges

limited growth potential; achieve spread of development risk; obtain access to
new markets; reach economies of scale; and achieve reduced expense ratio.
Alliances can take different forms. Some experts believe that alliances related
to distribution rather than to products or technology will prove most valuable in
the long run.

Global Integration

     Dramatic changes are taking place in international markets owing to the
internationalization of activities, the appearance of new risks, new types of
covers to match with new risk situations, and unconventional ideas on customer
service. In differing ways, depending upon their history, culture, and structure
of their economy, countries are contending with increasing globalization of the
world economy.
     India's participation in the global market so far has been only at the
margin and its financial institutions have been relatively insulated from the
international markets. Their greater integration with the rest of the world as a
logical step has already started and is accelerated by the breakdown of
geographical barriers to the movement of capital across countries. The industry
is sure to      benefit immensely from this interaction and exposure. Such
integration will call for some changes in the structure and policies of the Indian
companies especially because of the need for compliance with international
standards and practices.1t also has to prepare itself to face competition in the
global arena by making its operations efficient and cost effective.

                                                  Insurance: Issues & Challenges

      Of course, at the same time, as a result of this interdependence, there are
some attendant risks also, since any adverse developments in any major
financial market can be transmitted to the linked markets very quickly. The
sensitive stock markets in the world have experienced this often in recent times.
The September 11, attacks on targets in the USA also caused many ripple
effects which spread to virtually all the markets in world, including the
insurance business.
      Therefore, while welcoming global integration, one has also to be aware
of the danger to the stability of the system, for which preventive measures will
be needed.


                                                 Insurance: Issues & Challenges


I. Increased Pension Coverage
    A few years back FICCI conducted a study on Pension as a social security
scheme. It concluded that the lack of comprehensive social security system in
the country, coupled with willingness to save, means that India, demand for
pension products would be very large. However, unfortunate the present
penetration of pension coverage is poor. By March 1988, the Life Insurance
Corporation of India's (LIC) pension premium was only Rs. 100 crore. The
study further concluded that making pension products into attractive saving
instruments would require only simple innovations which is already common in
some other markets.
    The fact is that in the Indian context, building of retirement benefits in a
structured manner remained confined to only the employed sector, and the

                                                    Insurance: Issues & Challenges

social security benefit in a small measure is available only to the destitute above
65 years of age. Currently, pension benefits are available to employees in
organised sectors like the government and private. At present, there is no
pension benefit for self-employed and Agricultural workers in the unorganised
     In India at present about 89% of population, that is, the informal sector
workers have been kept out of the pension schemes so far. The Social Security
measures till now are state controlled by and large in this country and Insurance
has very less role to play bearing a few schemes.
     THE BRITISH GOVERNMENT, states that the State takes care of its
citizen from cradle to the grave. They have the National Health Scheme which
underwrites the health of the members of the public and they have also got
pension scheme which takes care of the widows, orphans and the old.
     In India, there is no such system of social security exists. India has the
highest number of people above 60 years of age among the 14 countries in the
World. The main reason being the coverage of pension plan in India covers
only 8% of the working population.
     The Insurance Regulatory and Development Authority (IRDA) has

     recommended a new, voluntary pension regime for everyone, including the
unorganised sector, according to the Dave Committee implementation report.
The report submitted now by IRDA to the Finance Ministry, suggests wide-
ranging reforms for this sector. The report, however, does not mandate any
minimum annual contribution or the spacing of contribution across time. In
short, an individual will be able to access the collection points at any time and
will have complete freedom to transfer a part or the full asset from one scheme

                                                   Insurance: Issues & Challenges

to another with the same or different provider company. .
     The Scheme's basic purpose is to bring this class under the purview of
pensions. There are four areas under the present system:

   (a) Contribution collection;
   (b) Record-keeping;
   (c) Assets Management; and
   (d) Annuity Payment.

   There has been a pressing need for a funded retirement plan defined
contribution to be implemented in India. It will address the long pending need
for a strong pension system for the country. The private sector players in the
insurance sector are now in the process of studying the potential of the pension
market. The scope of pension funds if enlarged by the Government, will
definitely provide a real competition in the Insurance Sector.

Present Position
     The Insurance Regulatory Development Authority in its pension report has
projected an exponential growth in the post-reforms pension sector with the
aggregate market size estimated to touch Rs. 4,06,500 crore in year 2025. The
market, currently, stands at Rs. 56,100 crore. The IRDA had said that the
aggregate pension market would grow to Rs. 1,16,600 crore in 2005, Rs.
1,56,900 crore (2010), Rs. 2,15,400 crore (2015) and Rs. 2,98,600 crore (2020).
The pension market includes the Employees' Provident Fund (EPF), Employees'
Pension Scheme (EPS), Government Provident Fund (GPF), Public Provident
Fund (PPF) and the Voluntary Contributions through the future schemes in the
individual and

                                                   Insurance: Issues & Challenges

     group pension categories. The regulator also suggested setting up a single
integrated domestic pension system by October 2001. While suggesting
stripping of regulatory powers of the existing Employees' Provident Fund
Office, it recommended that IRDA monitor this sector as well.
     The report had also not laid any restrictions on the number of players and
said that foreign equity should be allowed in the sector. It had also suggested
that minimum returns must be linked in the bank rate initially and payouts
should be exclusive preserve of Life Insurance Companies.

2. Convergence of Insurance and Banking Industry
     It was the evolution of banks entering into the Insurance Sector and Selling
Products across the counter that saw an increasing reach into the rural areas.
Many new players were hesitant of such possibilities, stating that the rural India
reflected huge numbers in terms of lives to be insured, business volumes would
be negligible. It was not until some insurers decided to tap Micro-Insurance
possibilities. and came out with special products for the rural masses, that
insurance penetration to rural India actually took. .
     Bancassurance is equally a major factor and plus point for spreading
insurance to rural areas. Even state or public sector entities, which till then had
depended solely on the tied agents, capitalised on the branch network of public
sector banks. Insurance spread across the country as banks offered to cross sell
products. The concept of Universal Banking is now taking a shape in Indian
Financial Sector and the very scope of Insurance business will be widened. For
example, SBI Life Insurance Company Ltd. and other Banks with their Joint
Venturers have started making a dent into rural business. This was not much
possible earlier and is the result of entry of private players into the Insurance

                                                   Insurance: Issues & Challenges

     Thus, the State owned Insurance Sector could not earlier make much use
of bank branch network in the country for insurance business, which has now
become possible. This contemporary issue of participation of banks in
marketing/selling of insurance products in the country is of much significance.
The Insurance business had the less number of insured due to the above reasons
which is going to be increased now manifold and that too with qualitative
products and services" Many of the banks are now entering into MOU with
Insurance Companies to sell their insurance products through network of their
bank branches.

     Public Sector banks in India can emerge as leading players in the
distribution of Insurance products across all parts of the country. With their net
work of 60000 branches two-thirds of which are in rural areas and their 117
million customer accounts, insurance companies would be well advised to use
them as a channel for their products,
     Bancassurance in India has a great future. Funds generated through the
Bancassurance model will play a pivotal role in mobilising savings particularly
in rural areas and short and long-term funds mobilised could, in turn, be used
for developmental activities. PSU banks, will however, have to gear themselves
adequately to undertake this task as it would entail adequate training in well
designed products. With the emergence of Private banks, PSU banks have
realized that customers' expectations have risen dramatically in the past few

3. Alternate Channels of Distribution

                                                   Insurance: Issues & Challenges

     Nowadays there is a thinking in the Insurance Sector about alternative
channels of distribution like Internet and Bancassurance. Many insurers are
willing to take advantage of these changes. As far as the Internet is concerned,
most people are using the net for information, to see whether the number quoted
by the agent are accurate. For the purchase they turn to the agent as there is no
price difference for the buyer. It is a fact now that all companies are looking at
the Internet and banks. But Life Insurance is a personal decision. In banks, staff
is changed occasionally and when you visit the bank branch again, the earlier
person is not there and the new person has no idea why one has purchased the
policy in the first instance.
     Multiple distribution channels help insurers reach out to different sectors
of society, with Trade Unions or post offices being focal points of sale. Many
companies in the private sector have now tied up with the trade unions of
railways, and have provided them with customized products to suit the needs of
the employees.
     Thus, new channels of distribution and marketing have seen the emergence
of customization of Insurance covers tailored out to meet the various needs of
specific groups. Even nowadays sugar co-operatives have also become a high
selling point of products

     especially among the farmers and farm labourers. The distribution
channels have, therefore, to playa vital role in increasing the quantum of
Insurance business. It is one of the important factor of internal environment for
any Insurance Company as more and innovative channels of distributions will
always have an edge over others.

                                                       Insurance: Issues & Challenges

Intermediaries and Distribution Channels
       In the light of one of the important contemporary issues of Insurance
Sector, the modern set-up of Intermediaries and distribution channel now
comprises the following.

    (i) Direct Response: includes telephone, off the page, mail and TV.,etc.
    (ii) High Street: includes bank branches, finance houses, kiosks, retail
.                   stores, etc.
    (iii) Electronic: includes Internet, interactive TV., etc.
    (iv) Agency: includes Issues, conduct, quality, demand for exclusivity,
                cost, etc.
    (v) Financial Advisors: includes among others, independent financial
                             advisors, stock and securities brokers.

       Prior to entry of private players in the insurance sector, there were no
alternative channels of distribution. It is the result of information technology
which provided new channels of distribution and liberalisation provided new
intermediaries to Insurance.

4. Uniform Tax Concessions
       There are certain sections of the Income Tax Act, 1961 which provide
some concessions to Life Insurance Corporation of India, viz. Sections 80
CC(I), 88, 193, 194A and Section 36(V) of the Income Tax Rules, which are
not available to recently joined private sector Insurance Companies. At present,
tax rebate is granted on repayment of Loans taken from LIC, for the purchase
and construction of residential houses under Section 88 of the Income Tax Act.
L I.C. interest earnings are also exempted from withholding of tax under

                                                  Insurance: Issues & Challenges

     section 193 and 194A of the Income Tax Act. Currently, the Gratuity and

     nnuation policies purchased from LIC are eligible for deduction under
Section 36(V) of the Income Tax Rules. At present investment upto Rs. 10,000
P.A. in LIC's pension Product gets a rebate of 20% under section 80CC(1) of
the Income Tax Act.
     The Private Life Insurers have also demanded a "Level Playing Field"
with the Life Insurance Corporation of India on the above tax concessions.
.Thus, there are three areas which require changes in the Income Tax Act, 1961
and these are:
(a) Tax rebate on re-payment of loans.
(b) Exemption from withholding tax on interest earned.
(c) Deduction of employer's contribution to gratuity and super annuation
     Many companies in the Private Sector such as Prudential ICICI Life,
HDFC Standard Life, SBI Life, Om Kotak Life, Tata AIR, Birla Sun Life, Bajaj
Allianz Life, Ing-Vysya Life have already started Life Insurance business in a
big way. These companies are awaiting the necessary changes in the Income
Tax Act and Rules that grants certain benefits to LI.C. They are now referring
to the Budget statement of Finance Minister for ensuring "Level Playing field
for Private Companies."
     Tax concessions on uniform basis in the Insurance Sector has become a
very important issue. Unless it is settled and made uniform, the private sector
companies cannot compete for a longer period with the Life Insurance
Corporation of India. This issue therefore, requires urgent action on the part of
the Government of India so that the insured may take the maximum benefit of

                                                   Insurance: Issues & Challenges

various Insurance Products being offered by the Insurers.

5. Cost and Competitiveness
     Life Insurance Corporation's monopoly has been broken with new players
entering the Life Insurance Sector. Almost for three decades the LIC. was the
unchallenged master. But now it is facing a challenge from Private Sector
players who may cut on the business of LIC. For the customers who now want
to have life covers for which there are many providers. All the new players
offer endowment schemes and money back schemes which are based on the
model of LIC, at different premiums.
     Different Companies follow a different system of calculating the bonus.
There are other special deals offered by several companies. For example, some
companies offer a

     special premium in cases of accidental deaths. Some others also offer a
waiver of premium if a person is unemployed. There is a different set of
documentation which is followed by these companies. The claim settlement
period also differs with all these different rules of their administration cost of
life covers also differs. A comparative Table showing cost of Life Cover to
various Insurers is given here below

                                                    Insurance: Issues & Challenges

                          Cost    of    Life
Policy                    Company              Age of       Premium Total slim
                                               Assured (Rs.)           at maturity
                                               (P.A.)                  (Rs.)
1. Endowment Policy (20
                          LIC                  27           4852       2,75,000
                          TATA-AIG             27           7144       3,16,663
                                               27           4805       N.A.
                          ICICI   Prudential
                                               27           4450       2,41,171
                          Max New York
                                               27           N.A.       N.A.
2. Endowment Policy (30
                          LlC.                 39           3702       3,51,000
                          TATA AIG             39           4973       5,25,243
                          HDFC      Standard
                                               39           3586       N.A.
                          ICICI   Prudential
                                               39           3079       3,74,531
                          Max New York
                                               39           N.A.       N.A.

                                                   Insurance: Issues & Challenges

     From the above table, it is clear that there are different cost for different
Insurance Providers, which has a bearing on their profitability. The cost factor
is equally important for creating competition in between the various insurers.
More people would be looking to the insurer who provides Insurance at less
premium. This cost and competition factor will ultimately affect the quantum of
business of different Insurers besides increasing the total Insurance business in
the country. The rate of premium, service and incentives also have a

     bearing on the non-life business in the country. Therefore, various
components of cost of Public Sector Insurance providers and those of the
Private Sector would be different, making it one of the major issues, which have
to bekept in view always. This provides an insight into the opportunities which
will now be available to the new Insurers vis-a-vis the old one.

6. Exposure Norms for Public and Private Sector
     The Insurance Regulatory Development Authority came up with the stiff
exposure norms for the private sector companies .It stipulates that investments
by any insurance company could not exceed 10% of            the total subscribed
share capital, free reserves, debentures and bonds of the investee company or 10
per cent of the controlled funds in the case of life insurers, whichever was
     The IRDA's revised investment regulations also said that for the public
sector insurance companies, the investment exposure can not at any point
exceed 20 per cent of the subscribed share capital, debentures and bonds of the
investee company or 5 per cent of controlled funds of the life insurer .

                                                    Insurance: Issues & Challenges

     Within the above exposure limit, the Authority has said that the investment
in equity instruments including preference shares, investment in equity
convertible part of debentures should not exceed 50 per cent of the overall
exposure ceiling.
     The regulators has also barred life insurance companies from entering into
reinsurance treaty arrangements with its promoter company or any other
associate or group companies without prior approval. The regulations direct
companies to draw up an independent programme of reinsurance of their own.
It also said that the efforts of each company while making the reinsurance
programme should be to maximise retention of premium earned within the

7. Entry of Financial Institutions into the Insurance Business
     In view of the interest evinced by some of the All-India Financial
Institutions (FIs), falling within the regularity and supervisory domain of RBI,
in entering the Insurance

     business, the guidelines for entry of the financial institutions into insurance
business have since been formulated. The FIs desirous of entering into
insurance business, and meeting the following criteria may make an application
to the IRDA along with the necessary particulars duly certified by their
statutory auditors.
A. Insurance Business without Risk Participation
    1. FI having net owned fund of Rs. 2 crore would be permitted to undertake
Insurance Business agent of Insurance Companies of fee basis, without any risk

                                                      Insurance: Issues & Challenges

  B. Insurance Business with Risk Participation
       2. The FIs which satisfy the eligibility criteria given below, will be
  permitted to set-up a joint venture company for undertaking insurance business
  with risk participation, subject to safeguards.
  The maximum equity contribution that the FI can hold in the joint venture
  company will normally be 50 per cent of the paid-up capital of the Insurance
  company. On a selective basis, the Reserve Bank of India may permit a higher
  equity contribution by a promoter FI initially, pending divestment of equity
  within the prescribed period. The eligibility criteria for joint venture participant
  will be as under, as per the latest available audited balance sheet.
    (i) The owned fund of the FI should not be less than Rs. 500 crore. The owned
  fund for the purpose should be computed as per the definition of 'net owned
  fund' under section 45-1A of the RBI Act,. 1934,
  (ii) The CRAR of the PI should be not less than 15%;
  (iii) The level of net non-performing assets should be not more than 55 of the
  total outstanding loans and advances;
  (iv) The FI should have earned net profit for the last three continuous years;
  (v) The track record of the performance of the subsidiaries, if any, of the
  concerned PI should be satisfactory; and
  (vi) Regulatory compliance with the RBI guidelines for raising of resources by
  the Fls should be demonstrated.
3. In case where a foreign partner contributes 26 per cent of the equity with the
  approval of Insurance Regulatory Development Authority /Foreign Investment
  Promotion Board, more

  than one FI may be allowed to participate in the equity of the insurance joint

                                                        Insurance: Issues & Challenges

  venture. Since such participants will also assume insurance risk, only those FIs
  which satisfy the criteria given in paragraph 2 above, would be eligible.
4. No FI would be allowed to conduct insurance business with risk participation,
  departmentally. A subsidiary or a company in the same group of the FI or of
  another FI engaged in non-banking or banking business, will not normally be
  allowed to join the insurance company on risk participation basis.
5. FIs, falling within the regulatory and supervisory domain of RBI, which are not
  eligible as joint venture participant, as per the foregoing criteria, can make
  investments upto 10 per cent of the owned fund of the FI or Rs. 50 crore,
  whichever is lower, in the insurance company. Such participation shall be
  treated as an investment and should be without any contingent liability for the
  FI. The eligibility criteria for these FIs will be as under:
  (i) The CRAR of the FI should not be less than 15 per cent;
  (ii) The level of net NPA should be not more than 5 per cent of total
  outstanding loans and advances; and
  (iii) The FI should have earned net profit for the last three continuous years.
  6. All FIs entering into insurance business as agents or investors or on risk
  participation basis will be required to obtain prior approval of the Reserve
  Bank. The Reserve Bank will give permission to the FIs on a case to case basis
  keeping in view all relevant factors. It should be ensured that risks involved in
  Insurance Business do not get transferred to the FI and that is business does not
  get contaminated by any risk which may arise from insurance business.

                                                    Insurance: Issues & Challenges

Some Issues Relating to Regulations
In August 2000, the IRDA came out with regulations for the investment of
insurance funds. These were revised subsequently from time to time. These
regulations apply equally to all the entities and the private firms are also obliged
to invest their funds in the social and physical infrastructure. There could be
some reservations in the minds of the shareholders of the private companies on
this account because to that extent, there will be limitations on the profitability
of the companies. It is inevitable to ensure a level playing field, that the same
set of rules should to apply to both for private and public entities alike. For the
same reason government companies alone should not be burdened With social
and other similar obligations if the private entities are not going to be under an
obligation to do the same.
      While there cannot be any quarrel with the IRDA regulations, the
practical problems posed cannot be overlooked. For example, they mandate an
investment of not less than 15 per cent of the controlled fund in the
infrastructure and rural! social sectors. Considering the size of the Life Fund of
the LIC, this means an investment of around 300 billion, The difficulty is that in
the current recessionary situation in the country, enough avenues for such
investment are not available even if the LIC is willing to invest. They can, at
best, find worthwhile projects which will absorb barely Rs 40 to 50 billion.
      The difficulty is compounded by the fact that only the bonds issued by

                                                    Insurance: Issues & Challenges

the government or otherwise rated as AA by an independent rating agency
would qualify as approved investment. Most of the infrastructure projects are
implemented by new companies which, obviously cannot have a proven track
record. They would not have AA rating, which means they would not qualify
for investment. In such a situation, these bonds will not be useful as instruments
of investment.
      The IRDA requires a balance to be struck between infrastructure and
social sectors. Its implication is that for social structure alone, the investment
will have to be of the order of Rs 10 billion or thereabouts which is impossible.
      Many infrastructure projects with foreign collaboration are implemented
through private limited companies. But the law restricts investment in private
limited companies,

      which means investments in such infrastructure would not qualify for
being included in the statutory category and hence there may be a hesitation on
the part of the insurance companies to consider such investments. In other
words, a part of the investible funds cannot flow to infrastructure projects even
when projects are available.
      As far as the social sector is concerned also, there is a practical problem in
meeting the legal requirements. The beneficiaries under this category are mostly
individuals to whom, obviously, the insurance companies cannot lend. In these
circumstances, e companies would find it extremely difficult to comply with
requirements even when they are keen, and hence would get branded as
defaulters on this count.
     The IRDA will have to give serious thought to this ground reality and find
a practicable solution. One way out would be for the regulator to allow

                                                     Insurance: Issues & Challenges

insurance companies to lend to rural organizations by way of refinancing and
that should be accepted as an investment in the social sector.
     There are two aspects of quality of investment viz. 'approved investment'
and 'rating of investment'. The former is easily defined and presumably takes
care of the safety element. Rating of investment is also from the point of view
of safety and does give some comfort to the investors. The problem is that the
rating can change from time to time and in case it is downgraded after the
investment is actually made, it is very difficult for the insurer to offload it on
the market. To that extent, the said investment may not strictly conform to the
regulations in the subsequent year.
       A restrictive policy severely constrained the utilization of funds of the
LIC and the four general insurance companies, who had to forego an
opportunity of investing them better paying financial instruments and were
compelled put them in the low-paying government securities which affected
their profitability. The complaint was that such directed investment of funds,
mostly at below market rate of interest, was excessive and yet the companies
Were held responsible for not being able to generate a large enough surplus
through investment operations. Excessive regulation is costly and in the long:
run, the consumer bears the cost of regulation.

     Of course, the assumption here is that the companies themselves are very
keen to exercise much discretion in this regard. At least in the case of
nationalized units, this is not fully substantiated, as can be inferred from the fact
that they preferred to invest even the funds that were free for their discretion,

                                                    Insurance: Issues & Challenges

mostly in government securities only. Though low-paying, that was the safest
strategy for them since no accusing finger could be pointed at them. As long
term players, they hold the securities to maturity and do not need to provide for
market fluctuations. In that sense, not much of a judgement about the
desirability of investing in that instrument is involved.
       It is contended that if overseas investment by Indian insurance and
pension companies/funds were to be allowed, that could provide the benefit of
market diversification. Currently, this choice does not exist and the
policyholders/pensioners have perhaps lost out as a result. There are strong pros
and cons of this argument and an unequivocal verdict is not possible. On the
one hand, it is possible to contend that Indian policyholders investors were
deprived of a share in the growth of the western equity market. It could also be
averred that there is a downside risk as well, because with greater global
integration", risks in one country could easily be passed on to another.
        The past history of movement of Indian currency against major hard
currencies is only in one direction downward. The overall trend of the equity
market in the nineties has been more or less flat while the equity markets in the
UK and the USA gained over two and half times in that period. In such a case,
the argument is that it is possible that certain benefits would have occurred to
the Indian insurers if they had been allowed to invest in equities the UK or the
USA in the nineties.
     At the same time, it cannot be overlooked that the value of Indian
currency has depreciated by about 60 percent against the pound sterling or
dollar. Thus the overseas investment by an Indian institutional investor having a
liability in rupees would have grown six times in about eight years in terms of
Indian rupees. Of course the Government of India has its own logic for not
permitting overseas investment. For instance, just as certain investments would

                                                   Insurance: Issues & Challenges

have brought benefits, any investment in a market like the EastAsian Equity
Market in the boom time would have provided disastrous results.

     It is true that the new money market instruments like currency swap could
have minimized such risks. However, that would still be a matter of chance. It is
possible to argue that viewed purely from the consumers' interest, overseas
investment by institutional investors, though not entirely free of some problems,
should be good in the long run. Yet, because of the risks involved, the
government has to be cautious in allowing such transactions. In any case, it is
difficult to jump to conclusions one way or the other.
     In a sense, regulation of investments makes both the regulator and the
investment manager responsible for the proper management of the investment
portfolio. For this, the regulator has to work closely with the industry. The point
is whether both would be able to act in concert with each other.

       Insurance: Issues & Challenges


                                                     Insurance: Issues & Challenges

Strengths and Weaknesses of the Industry

          The insurance industry, which has been in existence for so long in India,
naturally acquired some strengths-but it also developed some shortcomings.
The Malhotra Committee, apart from eliciting opinions from the persons it
interviewed, also commissioned an agency to make an independent assessment
of the prevailing public opinion about the strengths and weaknesses in the
working of the two organizations (the LIC and the GlC) and drew some
conclusions, the main among which are described below.


          After Nationalization, the Government of India did bring about or at least
attempted some qualitative improvements in the working of the industry. This
was in terms of improved delivery systems, a larger number of products on
offer, geographical spread, reach and presence in remote areas served by a wide
network of intermediaries, systems to manage very large funds collected almost
on a daily basis, substantial funding of infrastructure creation, fulfillment of
social obligations, and recently, better service through a fair amount of
computerization. As a result, over the years, the nationalized industry built up a
sound financial base, and improvements in the areas mentioned above. It is
served by a large and qualified staff, some of it with experienced professional

                                                  Insurance: Issues & Challenges

      There have been some more initiatives from the public sector units to
further improve their work culture, but being of recent origin, they are still to
bear full fruit and so the quality of work still leaves tremendous scope for
      Even in a difficult field like reinsurance, the general insurance sector
under government control has acquired a good standing in the international
      All these strengths have put the public sector units in a position to
successfully compete with other companies if they are freed from unnecessary
government controls and are allowed to take timely, forceful and well-directed


      It was to be expected that an entity with a longstanding monopoly
position would develop certain weaknesses too. Certain weaknesses as noted by
the Malhotra Committee that did surface in the nationalized insurance industry
are briefly discussed here.
      The weak areas of the industry were perceived to be the following: poor
customer service; vast marketing and services network inadequately responsive
to customer needs. The technical knowledge of most agents and development
officers was also inadequate and they did not provide sufficient information

                                                   Insurance: Issues & Challenges

about the scope of available covers. Insurance covers were expensive. The
awareness level of various plans of insurance was quite limited even amongst
the policyholders, particularly in the rural areas. In addition to excessive staff,
there was need for improvement in the workculture, productivity and discipline
among the employees.
Similarly, the spread of rural- and welfare-oriented insurance was very limited.
Technology was also not very well developed.
      Governmental interference affected the functioning of the industry in the
public sector mould. There was excessive government-directed investment of
funds, which resulted in poor investment skills. Insurance executives felt
inhibited in exercising discretion and taking timely and fair decisions because of
apprehensions with regard to external agencies like the Central Vigilance
Commission (CVC) and the Comptroller and Auditor General (C&AG).
However, these checks and balances cannot be done away with in a public
sector, where large public funds are involved. Further, the phenomenon of
corruption has also reared its ugly head, which is exacerbated because of the
lags in computerization which had seriously affected operational efficiency and
customer service. The perception about LIC in particular was that its
management was top heavy and excessively hierarchical, and that its marketing
organization was weak and turnover of agents extremely high. Moreover, the
returns from life insurance were significantly lower compared to other savings
instruments. As a result, the coverage of insurable population was just 22 per
cent, leaving a vast untapped market.

                                                   Insurance: Issues & Challenges

Opportunities and Threats of the Industry


      The variety of constraints put on it by its owner, viz. the government, was
both a reason as well as an alibi for the under-performance of the nationalized
insurance sector. Now that restrictive government policies are being given up
(almost reluctantly) and public sector units are being; empowered to make
independent decisions, they should be more free to decide their own growth
path. It should also be possible for them to prove their potential strength by
exploiting the tremendous opportunities such as the following substantial
potential for growth (with the existing products and set up); exploring untapped
niche areas; and forming limited joint ventures with suitable partners. Easy
access to developments in the more advanced markets provide further
opportunities to upgrade their working. Technological, financial or specific
area-based avenues of absorbing improved systems are also now more easily
     The expectation that private sector entrants would necessarily take time to
secure a foothold in the market was in itself an opportunity. In practice, though,
the new entrants have made inroads faster than expected and are now all set to
expand their presence in the market. It is therefore, upto the public sector
companies to move quickly and at least prevent further incursion into their

                                                    Insurance: Issues & Challenges

territory. If they do not move fast enough, a valuable opportunity will have been

        These opportunities will of course be accompanied by threats in the
competitive market, and may be of the following nature.
        Private entrants are naturally targeting the profitable and more lucrative
segments, by providing better service, new products and flexibility. They are
targeting the bigger corporates and other clients in the well-established metro-
politan centres. These new entrants have succeeded in eating into share of the
existing entities. This share will increase substantially, if not in the immediate
future, but in the long run, if the existing incumbents do not radically alter their
marketing structure and practices.

        No doubt complaints have been voiced that the means followed by at
least some of them have been less than fair. Some of these may well be true, but
such practices can produce only short term gains. Ultimately, the service pro-
vided will decide whether the threat of losing the market share will come true,
and in a competitive market, mere complaining does not help.
        The flight of talent to new entrants is already in evidence, and could be
on the rise for some time to come. Retaining qualified and competent
executives will be a considerable challenge for the existing companies.
        One very serious danger that the government-owned units are likely to
face is that even if at some point of time,the government does decide to

                                                    Insurance: Issues & Challenges

disinvest a portion of its equity, they may not be fully free from government
interference. They could face a peculiar problem that although on paper and in
terms of a legal definition, they would not be public sector units. In effect, their
working could be no different from what it was before their ownership pattern
changed. This could be a genuine threat since they would be competing with
units which are free from such artificial and unnecessary restrictions.
      The new units, equipped with state-of-the-art equipment and innovative
procedures would have an in-built edge over the erstwhile public sector units,
which until recently had no such opportunity and incentive. Due to the possible
negative impact on employment, there was no serious effort at updating
technology or equipment. The resultant inadequate investment in infrastructure
could lead to their lagging behind in the race.
      One of the trickiest problems is going to be to deal with the surplus staff
which they are perforce required to carry, as against the leaner establishments
with which their competitors have started their operations. This threat has to be
carefully and skillfully handled because sooner or later, some downsizing will
have to be resorted to even while protecting the interest of the employees.
      This analysis suggests that the industry has to carefully chart out its
strategy on the basis of an appreciation of the strengths and weaknesses as also
the possible threats and opportunities. It lends further support to the argument
favouring opening up and restructuring of the Insurance sector.

             Insurance: Issues & Challenges


                                                   Insurance: Issues & Challenges

Max New York Life Insurance Limited

Max New York Life Insurance Company Limited (MNYL) is a jointventure
between New York Life, a Fortune 100 company and Max India Limited, one
of India's leading multi-business corporations. Its vision is to become the most
admired life insurance company in India.

  The company is counted among the country's leading private life insurance
companies having recorded a sum assured of over Rs. 10,000 cr, through over
230,000 policies. The paid-up capital of the company is Rs. 300 cr, which
makes it amongst the highest capitalized life insurers in India. As one of the
leading private life insurance companies in the country, it has 1,000 employees
spread across the country, with over 4,500 direct agents as the primary channel
of distribution. It is the first life insurance company in India to be awarded the
ISO 9001: 2000 certification.
  The Policy Owner Servicing (POS) department at MNYL is responsible for
servicing a multitude of requests from policy owners. With the number of
policies touching 2,00,000 within three years of commencement of operations
with roughly 80,000 customers, the POS department encountered an increasing
workload and was unable to process customer requests within the expected
time. In addition, the various permutations and combinations of requests
possible by a single customer with multiple policies, added up further
complexity to the service handling process. Some of the customer requests may
be common across the policies, while some others may be specific to the policy.
The frequently handled ones include change of address, change of nominee,
addition of new policy riders, and purchase of paid-up additional coverage.

                                                  Insurance: Issues & Challenges

The Business Challenge

Overloaded POS - Unable to Maintain Customer Response Timelines
The associated limitations with the existing enterprise IT architecture and the
need for interacting with various departments for servicing a typical customer
request have seriously affected the response time at MNYL. The service
processing used to depend on multiple divergent non-integrated systems, which
was hectic and time-consuming. Ensuring compliance with the guidelines
stipulated by the Insurance Regulatory and Development Authority (IRDA),
such as meeting SLA's for service response times became the primary need for
the department to avoid the risk of penalties and loss of reputation. MNYL took
the BPM optimization and identified that a proper workflow has to be created
for the POS department to handle and track multiple-requests. Also, it identified
that a typical workflow has complexities of handling as many as 29 different
work types in the complete service cycle.
For example,

. The signature verification of the policyholder though critical for servicing
requests, could not be enforced. Activities such as letter generation, file and
folder requests, etc. were being manually handled resulting in time lags. Also,
physical file handling and frequent movement across departments was time-
consuming and posed the risk of misplacing important documents besides the
usual wear and-tear. Monitoring user accountability was difficult and
supervisors were dependent on spreadsheets to collate data. Productivity could
not be calculated correctly; and decision-making for optimum resource
deployment was impaired.

                                                     Insurance: Issues & Challenges

Claims Settlement - Hard to Comply with Regulations
The responsibility of claims department at MNYL is to receive and process by
way of settlements valid insurance claims fairly and on a war footing. As the
business was growing, the volume of insurance claims started increasing and
the numbers were almost doubling annually. On the other hand, the department
had the responsibility to control cost involved in processing claims without
affecting the interests of both the shareholders and the policy

owners. The department was facing the challenge of implementing cost-
effective closure strategies based on different claim categories, while adhering
to IRDA guidelines. As per the guidelines, the claims should be processed and
settled within 15 days and 30 days respectively from receipt of all documents.
While ensuring strict compliance to IRDA guidelines, Max Life was required to
induce consistent    turnaround times for investigation, correspondence, and
settlement of claims. In order to reduce the turnaround time for claim
settlement, the department was required to build a higher throughput for cases,
reduce processing errors, and minimize duplication of data entry, while
servicing claimants with professionalism and empathy and preventing
fraudulent claims from being settled. The stand-alone application used by the
department for claims processing was hardly equipped to help the department
realize its goals and objectives of efficiently settling claims within the stipulated
time frames. Thus, they required an integrated system that would create a more
productive and efficient environment for processing and settling claims.

The Solution

                                                   Insurance: Issues & Challenges

Compress the Cycle Times
The challenge before Max New York Life Insurance was to reduce and
maintain the cycle times at lower levels in servicing all types of customer
requests and claims settlement. To accomplish this, they required a system that
would allow close monitoring of the time frames for each activity performed,
given the substantial growth in the number of customers and rapid growth in the
number and complexity of customer requests. They needed the ability to track
and monitor various applications that come under the perspective of turnaround
time management and faster service. This required automation of the workflow
and management of the business process efficiently through a robust system, a
system capable of increasing productivity, customer satisfaction and delivering
measurable business benefits.

  The company considered various vendors offering BPM solutions and
compared each of the available options against the stipulated evaluation criteria.
The selection criteria were designed taking into account various aspects such as
functional, technical, supplier profile

  and cost. The company also had specific criteria for each of the four areas of
concern. After a detailed analysis, it finally decided to use the BPM solution
offered by Newgen. The solution from Newgen comprised its BPM tools,
OmniFlow, OmniDocs and OmniCapture. The workflow solution was
implemented, staEting around May 2003. It was initially deployed at the head
office at Gurgaon, in just two months and the roll out was later extended to the
37 general offices spread across the country. The branch offices were provided

                                                  Insurance: Issues & Challenges
with Web access to OmniFlow.

The Tool Set
The workflow solution, OmniFlow, provides a platform-independent, scalable
solution that enables automation of organizational business processes. The
document management solution, OmniDocs, acts as a platform for creating,
capturing, managing, delivering and archiving large volumes of documents and
content. It also handles scanned document images, electronic documents, e-mail
and electronic data output from other applications. A production grade scanning
and indexing system, OmniCapture converts paper documents into electronic
images, and indexes and uploads them into the document management and
workflow systems.

Solution Design
The solution was designed to handle the complexities of multiple requests with
ease and enable efficient handling of claims processing. The workflow system
was designed to cater to each specific worktype, providing user-friendly
desktop. It was also integrated with the company's core insurance application to
provide documents and relevant information displayed side-by-side on a split-
while maintaining security and data integrity. Since all the communication with
the customer is scanned, it gives, in one shot, an overview of the
correspondence with the customer, the time taken, who responded, what was
the last correspondence, etc. With approximately 70 work steps and several
hundred rules defined for routing, the BPM solution has been

                                                   Insurance: Issues & Challenges
designed to be able to handle the complexities of multiple requests. All the
rules, roles and exceptions, as laid down by MNYL’s processes have been
implemented in the system.

Workflow-enabled Request Processing
Usually, the General Office (GO) will receive a request from a policy owner in
the form of a letter along with some supporting documents. At present these are
sent to the head office on a daily basis via courier. The mailroom sorts these
requests based on the worktype and sends them for scanning. Using
OmniCapture, batches of around 150 new requests are scanned daily and
introduced into the workflow system. The workflow system caters to each
specific work type and initiates transactions by allocating the tasks to the users,
while managing the routing of the work processes within the POS department
and across other departments for underwriting and inter-departmental

Workflow-enabled Claims Processing
The claims are received by the company in the form of a letter, fax or e-mail
from either a nominee, an assignee, the court or the Income Tax Department, in
case of death of the insurer. Non-death claims concerning cases like critical
illness, waiver of premium, etc. are received from the insurer itself. On
registering the claim and capturing the relevant details for processing and
reporting purposes, an initial assessment is done. In some cases, the claims may
be passed on to a third party agency for further investigation, while some other
may be repudiated. The claim amount is assessed and passed through to
  The workflow-enabled claims processing system provides a holistic view of

                                                    Insurance: Issues & Challenges
the policy and client related data, enabling department users to efficiently
process claims while ensuring ease of use. The system also provides users with
a consolidated view of the agent details, policy coverage, and nominee details
and allows them to disburse the settlement amount while maintaining an audit
trail of previous disbursements. In order to ensure strict compliance with IRDA
guidelines, the solution provides inbuilt features to keep track of and remind
users when timelines are being overstepped. The system also alerts at specified
intervals if no action is being taken on a claim.

Measurable Business Benefits

Improved Productivity and Customer Satisfaction
The workflow solution helped MNYL overcome the problems posed by manual
and existing systems besides improving productivity, increasing cost savings,
reducing processing time and a multitude of other benefits. The turnaround time
for client request processing has been reduced by approximately 45%, and as a
result customer satisfaction has increased. The workflow solution has also
helped in reducing processing time of complex requests through exception
handling, routing to supervisor queues etc. It is able to comply with IRDA
regulations due to traceability and automated reminders, escalations, etc.
      The employee satisfaction has increased due to reduced dependency on
the head office for query resolution, reduced data look-up time, reduced file
transit time, easy signature verification, reduced manual handling of documents,
and time savings due to automatic letter generation. The workload for
supervisors in allocating work has reduced due to automatic allocation of
requests. Further, it has become easier to evaluate the user performance and
tracking their response quality. The cost-related benefits were realized in the

                                                 Insurance: Issues & Challenges
form of savings on printouts and photocopies involving approximately 500
pages per day, savings on phone calls from General Offices to Head Office, and
savings on underwriting.

Complying with Regulations while Gaining on Cost and Saving
Many administrative tasks involved in managing each of the claims were
streamlined in the solution. Further, the entire claims process became more
stable and consistent. The solution helped the claims department to ensure
adherence to IRDA regulations through multilevel escalations, alerts and
reminders. Also the new solution ensured better tracking of cases referred to
other departments, while controlling fraud and avoiding costs incurred in legal
disputes by settling claims on time.
 The duplication of data entry was reduced by more than 50% by bringing
relevant data from the core application to the user desktop. Further, sending
scanned documents to the investigators through e-mails saved time and cost for
the company. It also helped in better

 management and tracking of ex gratia cases, claims under legal scrutiny, and
cases sent for investigation to third party agencies. The efficient handling of
claims processing has reduced error rates and speeded up claims settlement, all
of which have enhanced customer satisfaction. In addition, the long-term
benefits such as lowering operational costs and reduced claims payouts were
envisaged for the company.

In addition to processing clients' requests and claims, a workflow system also

                                                    Insurance: Issues & Challenges
provides the facility to centrally process and route specific document types,
such as new business applications, rewrite applications, endorsement
applications, notices of cancellations, inspection report forms and more,
through the company's business processes. The documents are directed to the
appropriate department for further processing or go to a "queue" where system
work is performed. Workflow performs varied system work including setting
timers, collaborative documentation checks, etc. All these in turn help MNYL
improve the quality of customer interaction and service, target offerings and
utilize cross selling opportunities in the insurance business.

                                                  Insurance: Issues & Challenges


      It can thus be seen that insurance in India has had a long and chequered
history. It had its roots in the British regime and continued with the practices
developed then. As any other industry, this industry has its own Strengths,
weaknesses, opportunities and threats. Keeping pace with the changing times is
a major challenge for the industry. On the one hand, the industry grew enor-
mously, but on the other, its spread was limited to certain areas and to certain
sections, with the result that a large mass of people remains bereft of insurance
cover. In the absence of effective control, certain malpractices crept into the
business, which was, therefore, nationalized. But even in the nationalized set-
up, certain shortcomings cropped up which persuaded the government to favour
liberalization and introduction of competition.
      Finally, it is seen that the industry has a massive growth opportunity in
both Indian context as well as worldwide. Hence it is important for the market
players of the insurance industry to outright its issues and to understand and
overcome the challenges that may come in the way and also to spread its wings
through the market.

                                                  Insurance: Issues & Challenges


Since the actual opening of the insurance sector in India was preceded by a
keen and heated debate about the positive and negative aspects of liberalization,
although opening of insurance sector has pushed it into a boom phase with
international players collaborating with Indian Insurers. The Insurance Sector
is facing a new set of issues and challenges. If these issues and challenges are
not dealt with in time it would bring about a catastrophic loss for the Insurance
Sector. These issues and challenges are covered up in this project and in
relation with these issues and challenges, I would like to make the following

      Under the present pension scheme the funds are not enough to provide
    the elderly with complete social security. The IRDA should formulate a
    pension scheme that offers independence and security to the elderly.
      With the banks entering in the business of selling insurance products, the
    insurance company is facing a major threat of loosing its client base to the
    bank hence it is recommended that either the insurance companies market
    their products fiercely or enter a MOU with banks.
      The new channels of distribution of insurance product i.e. through
    internet, television etc. the customers are experiencing lack of personal
    touch, because of which they do not completely understand the product
    itself. So it is recommended that the insurance companies while distributing

                                                    Insurance: Issues & Challenges
    products through these channels make an extra effort to explain each and
    every detail regarding the plan.
       Insurance companies are coming out with various new products because
    of increase in competition, they have a varied cost structure and some of
    them could be expensive for a common man e.g. ULIP, inorder to tap in
    more customers it is recommended that the insurance companies formulate a
    uniform cost structure on the basis of risk covered.


   Insurance in India

                                -P.S. Palande
                                -R.S. Shah
                                -M.L. Lunawat

       Insurance (Fundamentals, Environment and Procedures)

                                -B.S. Bodla
                                -M.C. Garg
                                -K.P. Singh

                                          Insurance: Issues & Challenges
   Insurance Chronicle- The ICFAI University Press (September, 2004)




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