"Issues _ Challenges in Insurance"
OBJECTIVE 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 s Table of Content Sr.No Topic Page No. 1. Introduction 2. Meaning & Definition 3. Background & Growth 4. Nationalization of Insurance Sector 5. Factors Leading to Nationalization 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 4 Insurance: Issues & Challenges INTRODUCTION TO INSURANCE INTRODUCTION 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 5 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. MEANING OF INSURANCE 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. 6 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 village. DEFINITION OF INSURANCE 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 7 Insurance: Issues & Challenges 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. 8 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 below. 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 9 Insurance: Issues & Challenges 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 10 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 11 Insurance: Issues & Challenges compelling reasons that have influenced us in deciding to nationalize life insurance'. 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. 12 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 13 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 14 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 annum. 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 15 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 16 Insurance: Issues & Challenges 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. 17 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. 18 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 management. 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 19 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 practices. CHALLENGES 20 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 21 Insurance: Issues & Challenges 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. 22 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. POLICIES AT THE INDUSTRY LEVEL 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 players. CHANGE IN THE MINDSET 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. 23 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 24 Insurance: Issues & Challenges 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 25 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 26 Insurance: Issues & Challenges only. 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 27 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 expectations. 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 28 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. 29 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 programmes. 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 30 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 31 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 32 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 courses. 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. 33 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 34 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 35 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 36 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 made. 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 37 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 38 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 39 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 industry. 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 40 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 41 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 (MIS). 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 42 Insurance: Issues & Challenges parameters. 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 possible, 43 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 streamlining, 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 44 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. ACCOUNTING PRACTICES: 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. 45 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 46 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. 47 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. ISSUES 48 Insurance: Issues & Challenges CONTEMPORARY ISSUES IN INSURANCE 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 49 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 sector. 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 recently 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 50 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 51 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 52 Insurance: Issues & Challenges Sector. 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. Bancassurance. 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 years. 3. Alternate Channels of Distribution 53 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. 54 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 55 Insurance: Issues & Challenges section 193 and 194A of the Income Tax Act. Currently, the Gratuity and Super-a 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 policies. 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 56 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 57 Insurance: Issues & Challenges Cost of Life Cover Policy Company Age of Premium Total slim Assured (Rs.) at maturity (P.A.) (Rs.) 1. Endowment Policy (20 LIC 27 4852 2,75,000 yrs.) TATA-AIG 27 7144 3,16,663 HDFC-Standard 27 4805 N.A. Life ICICI Prudential 27 4450 2,41,171 Life Max New York 27 N.A. N.A. Life 2. Endowment Policy (30 LlC. 39 3702 3,51,000 yrs.) TATA AIG 39 4973 5,25,243 HDFC Standard 39 3586 N.A. Life ICICI Prudential 39 3079 3,74,531 Life Max New York 39 N.A. N.A. Life 58 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 lower. 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 . 59 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 country. 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 participation. 60 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 61 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. 62 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 63 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 64 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, 65 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 66 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. 67 Insurance: Issues & Challenges SWOT 68 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. Strengths 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 talent. 69 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 improvement. Even in a difficult field like reinsurance, the general insurance sector under government control has acquired a good standing in the international market. 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 action. Weaknesses 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 70 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. 71 Insurance: Issues & Challenges Opportunities and Threats of the Industry Opportunities 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 available. 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 72 Insurance: Issues & Challenges territory. If they do not move fast enough, a valuable opportunity will have been lost. Threats 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 73 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. 74 Insurance: Issues & Challenges CASE-STUDY 75 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. 76 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. 77 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 78 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 79 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- screen, 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 80 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 processing. 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 settlement. The workflow-enabled claims processing system provides a holistic view of 81 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 82 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. Conclusion In addition to processing clients' requests and claims, a workflow system also 83 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. 84 Insurance: Issues & Challenges CONCLUSION 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. 85 Insurance: Issues & Challenges RECOMMENDATION 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 recommendation: 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 86 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. BIBLIOGRAPHY BOOKS: 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 87 Insurance: Issues & Challenges Insurance Chronicle- The ICFAI University Press (September, 2004) WEBLIOGRAPHY WEBSITES: www.irdaindia.com www.google.com 88