For 43 long years the government-owned Life Insurance Corporation of India (LIC) held a monopoly. It is only at the dawn of the twenty-first century that the sector was finally deregulated. Reforms were initiated with the passage of the Insurance Regulatory and Development Authority Bill in Parliament in December 1999. The IRDA since its incorporation as a statutory body in April 2000 has regulated the opening up of the insurance sector, which has seen in total 23 life and 24 non-life private companies are operating in India. ?? In India, the decision to liberalize was not easily implemented since there was resistance to privatization.
After all, this would mean: ?? 1. Ending the government monopoly on mobilizing large-scale funds; ?? 2. LIC, a successful life insurance company, would face the heat; ?? 3. The foreign insurance companies would come marching in. That was not all. There were other concerns too. Would new market entrants hire away all the best employees of LIC? Would the world-renowned foreign insurers that would enter the market lure current and future Indian policyholders? How would the citizens of India benefit from liberalization? What would be the impact on India’s capital markets? ??
These and many other questions were debated for several years until 1999. The first private insurance companies began operations in 2001. The outcome of Liberalization ?? Opening up the sector has transformed the landscape. The Indian regulator has done a commendable job in liberalizing the market and putting in place rules of the game to effectively monitor the entry and progress of the new entrants. ?? Domestic liberalization and introducing the monopoly providers to competition has been a part of this story. The positive change brought by deregulation is inestimable.
Even so, some benefits are immediately apparent: ?? 1. Real life insurance: Historically, life insurance has been sold in India as an investment tool. Attracted by the prospect of reasonable returns and tax savings, people put away some money into life insurance.
Protection against risk – which represents the true value of life insurance – did not quite enter the frame. Until the entry of private life insurance companies. For instance, Max New York Life introduced the Whole Life product in the Indian marketplace in the belief that a good life insurance product offers the right balance between protection and savings. ?? 2. Product range: The basket of products available to the customer has grown in the deregulated environment that permits the introduction of the product. ??
3. Comprehensive risk coverage: Deregulation has enabled people in India to cover a larger variety of risks. Earlier people had no option but to buy prepackaged life insurance products, which lacked flexibility. Customization, however, has been one of the key advantages of privatization. Riders have added value to the customer’s life insurance needs.
Max New York Life was the first company to offer base products and riders. ?? 4. Customization: In earlier days, customers could only buy limited prepackaged products pushed by agents chasing quick sales. Today customers have access to more and better products that suit their specific needs and a new breed of insurance advisors has taken birth. These agent advisors build enduring relationships with their clients and help them better understand the value of life insurance and sell customized solutions in a needs-based manner. This higher quality of sales interaction has been among the key benefits of privatization.
?? 5. Market awareness: The money that private life insurance companies have spent on establishing their brands has helped create awareness about life insurance. Today life insurance brands compete with other financial services and manufacturing brands for marketing space. ?? Rapid progress ?? In most other markets that opened their economies, new entrants in life insurance have taken 10 to 12 years to secure a market share of 10 per cent. In India, however, the progress of private life insurers has been considerably more dynamic.
In less than five years since deregulation, private life insurance companies have secured 25 per cent of the market share from LIC. Further the private sector insurers have achieved year-on-year growth of more than 60 per cent. In the number of new policies too the market shares achieved by the new players is quite impressive. ?? In the short period following liberalization, the new private sector insurers have together introduced more that 200 state-of-the-art products giving the customers a very wide choice indeed. It is this new dynamism that has caused insurance penetration to grow to 2.
2 per cent during the years following liberalization. ?? Indeed, life insurance is a very large financial service, a valuable medium of long-term savings and growing at 24 per cent CAGR. ?? In addition to the benefits to customers of finding products to meet their needs, the insurance sector has also created sizeable job opportunities. Professionalization of insurance selling and new marketing concepts introduced by foreign players has meant that many more people are taking to insurance. There are today in India a million insurance agents and another 200,000 employees. ??
The introduction of competition from foreign insurers has also served to wake up the large State-owned company, the Life Insurance Company of India or LIC. LIC has shaken off slumber, upgraded its systems, embraced actuarial prudence, and introduced more modern products and withdrawn products that had inherent guarantees in them. ?? Foreign participation has created benefits not only for the new entrants, but also for the players already in the market. While the initial concerns were focused on how domestic insurers would lose their 100 per cent of the pie, the market has actually become more like a seven-layer cake.
Even with a reduced market share, the actual number of policyholders has greatly increased. ? Leveraging globalization ?? Recognition of the benefits of foreign participation to the Indian economy and consumers is at the heart of the Indian Finance Ministry and IRDA’s support for a proposal now before the Indian Parliament to increase the foreign investment limit in the insurance sector from 26 per cent to 49 per cent. This increase will allow insurance companies to absorb new capital, which will facilitate industry expansion, the deployment of technical competencies, and the inflow of the latest products and services.
The restrictive era in foreign investment policy was consistent with a high level of trade protection and wave of economic nationalism that perceived foreign investment to mean a loss of sovereignty and foreign acquisitions. India has put that era firmly behind it. The mindset now must change. Foreign direct investment (FDI) brings to the recipient country not only capital and foreign exchange, but also managerial ability, technical knowledge, administrative organization, and innovations in products and production techniques, all of which are scarce commodities.
These benefits are not immediately apparent in the economy because it takes time to develop. However, there is enough empirical evidence to prove that with FDI the economy is better able to provide higher productivity and bigger job pools. ?? Given the imperative of attracting FDI for increasing India’s GDP growth rate, we need to lower barriers and, in cases where we believe the barriers must stay, have watertight arguments in favor of retaining those barriers. Any such barrier cannot be justified in the case of insurance.
Insurance deregulation has also meant that the Indian customer gets access to global expertise in a specialist industry. Besides, there needs to be some harmonization in FDI laws governing financial services. Currently there is no sectoral cap on mutual funds, while there is a 74 per cent cap on FDI in private banks. Why then should there be a 26 per cent cap on insurance? Moreover, life insurance is a special industry. It can’t be financed by debt; it requires shareholder capital. ?? Life insurance is a long gestation business and requires significant amounts of capital.
A significant portion of the capital deployed is put aside for maintaining the required solvency margin. Some recent estimates reveal that to build a company the size and reach of the Life Insurance Corporation of India would require anything between Rs. 15,000 to Rs. 20,000 crore. The total capital deployed by the dozen life insurance companies is around Rs. 3,300 crore. The potential for growth is enormous and Indian capital markets are not deep enough to support this exponential growth. FDI can effectively bridge that cap. ??
Foreign capital will allow the people of this country to enjoy higher rates of economic growth, employment and a higher standard of living. The country will ultimately benefit immensely from removing all caps foreign investment. Limits on foreign investment or product competition in markets like insurance only inhibit the successful restructuring of these markets. ?? Issues Need to be Addressed There are other issues that need to be addressed: ?? 1. Simplification of life insurance laws: Many of the existing laws are overlapping and contradictory and there are gaps that need to plugged. ?? 2.
Traditional life insurance products need to be encouraged: In an underinsured country like India, where life insurance awareness is low, traditional products where life insurers manage risks should hold precedence over market-linked products. The current excessive tilt towards unit-linked insurance plans needs to be redressed. ?? 3. Self-regulation would be good for the industry’s all-round well-being: The industry should show maturity and develop a robust self-regulatory framework that minimizes the need for top–down mandates. Agreement on noncompetitive, non-threatening agendas among life insurers should be possible.
?? 4. Fully leveraged reinsurance: In the initial stages of its development and growth, the Indian life insurance industry needs to fully leverage all resources possible and financial reinsurance should be allowed. ?? Multiple benefits ?? India has traditionally been a savings-oriented country and insurance plays a critical role in the development of the Indian economy. As one of the three pillars of financial systems, insurance serves a distinctive role in managing risk, providing for financial security, and mobilizing capital for investment. ??
The role of insurance in the economy is vital as it is able to mobilize premium payments into ready capital. As such, it is a key sector for development and a key area for attention for trade liberalization/negotiations. In the Doha round, countries have an opportunity to capture the benefits of liberalizing insurance and other financial services sectors. Perhaps the same questions, which preceded the insurance sector opening in India, are being asked in other world capitals. The questions are important and valid. The evidence for liberalization and the benefits to your citizens are tangible and positive.