GAINS AND ISSUES OF INDIAN INSURANCE SECTOR AFTER LIBERALIZATION BY Sriram Taranikanti, Executive Director INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY 7 th September,

2 FRAMEWORK OF PRESENTATION  Evolution of Indian Insurance Market  Regulatory Architecture  India Insurance Industry Status  Gains of liberalization  Issues in liberalization  Regulatory Measures 2

EVOLUTION OF INDIAN INSURANCE MARKET

NEED FOR REGULATORY INTERVENTION Nationalised Market Regulated Market Free Market Regulated Market Insurance Act, 1938 LIC Act, 1956 GIBNA, 1972 IRDA Act, No Regulations - Plagued by fraud - Urban centric -Planned Economy --Optimum utilization of resources -contribution to development of market -untapped market potential high -absence of consumer choice -poor customer service -Level playing field -Consumer Protection -Public Private Partnership

EVOLUTION OF INSURANCE IN INDIA  Life Insurance Companies Act of 1912  Provident Fund Act of 1912  Insurance Act of 1938 and amendments  Nationalization of Life Insurance  Life Insurance Act of 1956  Social Controls on General Insurance  General Insurance Business Nationalization Act of 1972

ECONOMIC REFORMS PROCESS Insurance Reforms Financial Sector Reforms Economic Reforms  Reform process initiated in 1991  Abolition of Licensing, Permits & Quotas in Industrial Sector  Financial Sector Reforms  Banking Sector Reforms  Freeing of interest rates by the Central Bank  Rationalization of priority sector lendings & lowering of directed credit  Capital Market Sector Reforms  Abolition of Controller of Capital Issues and Establishment of Securities and Exchange Board of India in 1992  Issuance of regulations for mutual funds, portfolio managers, registrars, merchant bankers, depository and participants, etc  Insurance Sector Reforms

INSURANCE SECTOR REFORMS  Committee on Reforms in Insurance sector – 1994  Setting-up of Interim Insurance Regulatory Authority – May 1996  IRDA Act Passed – December 1999  Statutory Authority (IRDA) established – 19 th April 2000  First set of Regulations notified – 19 th July, 2000  First set of Certificate of Registration (Licenses) granted – 23 rd October 2000  31 number of Regulations issued by IRDA

REGULATORY ARCHITECTURE 8 8

COMPOSITION OF AUTHORITY IRDA Act states that the Authority shall consist of the following members – Chairperson – not more than five whole-time members – not more than four part-time members Presently the Authority has a complement of following members – Chairman – Three full-time members (Life, Non life, Finance & Investment) – Four part-time members Organised in 14 departments 208 positions of which 150 are filled

INDIA INSURANCE INDUSTRY 10

Road travelled No. of Insurers652 No. of Offices5,42918,206 No. of Policies (in millions) No. of Employees (in millions) No. of Agents (in millions) Total Annual Premium (in US$ billions) Paid-up Capital (in US$ mns) ,551.6 FDI (in US$ mns) 0.01,529.8 Investment (in US$ billions) Insurance Penetration (% of GDP) Insurance Density (Per Capita Premium)US$ 11.5US$ 59

FOREIGN DIRECT INVESTMENT As on (in US$ mns) FDIIndian PromoterTotal Life Insurers Private LIC -20 Total (Life industry) Non life Insurers Private Public sector -110 Total (Non-life industry) ECGC -180 AIC -40 GIC -86 Grand Total Insurance Industry

13 LIFE INSURANCE

1st YEAR PREMIUM - LIC & PVT. SECTOR (LIFE INSURERS) in US$ million Life Cos PVT 54 6,544 (54.7%) MKT Share1%29% LIC 3,918 16,303 (13.8%) MKT Share99%71% Total 3,972 22,847 (17.2%) 14 Figures in bracket represent CAGR

15 TOTAL PREMIUM – LIFE INSURERS Details PVTLICPVTLIC FYP 543,9186,54416,303 Renewal 06,04710,12524,258 Total 549,96416,66840,561 in US $ millions

16 Life Insurers Private Sector ,668 Public Sector 3,2556,9789,96440,561 Grand Total 3,2556,98010,01957,229 Av. growth16.5%17.2% AV GROWTH OF TOTAL PREM – PRE & POST LIBERALIZATION in US$ millions

LIFE INSURANCE - TRENDS 17  Growth of Life Insurance industry has been exceptional as compared to other segments of the financial sector in India for ( )  Life Insurance penetration has increased from 1.77% in 2000 to 4.40% in 2010 and density from USD 7.60 in 2000 to USD in 2010  The equity capital in life insurance industry stands at US$ 4.98 bns  Life insurance industry is a significant investor in capital market  Insurance Industry continues to mop retail household savings, which in turn contribute to Capital Market

18 GENERAL INSURANCE

General Insurers PVT Sector 94 4,846 (43.3%) Mkt Share4 %41.5% PSU 2,383 6,825 (10%) Mkt Share96 %48.5% Total 2,477 11,671 (15.1%) GROSS WRITTEN PREMIUM – GENERAL INSURERS Note: Figures in brackets represents CAGR in US$ millions 19

20 General Insurers Private Sector -1944,846 Public Sector 1,4691,9602,3836,825 Grand Total 1,4691,9612,47711,671 Av. Growth5.9%15.1% AV GROWTH OF TOTAL PREM – PRE & POST LIBERALIZATION in US$ millions

GENERAL INSURANCE - TRENDS  Sustained Underwriting Losses – comfort of cross subsidy between business segments no more available  Unsustainable dependence on Investment Incomes  High fixed Cost – a matter of concern due to high and increasing expenses & commissions  Strain on Profitability Position  Deficit in 3 rd Party Motor Pool. Creation of declined risk pool.

GAINS AND ISSUES OF LIBERALIZATION

Year GDP at Market Prices Rate of GDS ^^ Total Insurance Premium (Life) Penetration of Life Insurance Proportion of Life Insurance in Savings Million USD% (%) ^^ Handbook of Statistics on Indian Economy, RBI. Source for data on Insurance Premium , , & : Tapan Sinha paper. the exchange rate for has been assumed as 2.5 exchange rate for the remaining years: Handbook of Statistics on Indian Economy, RBI TRENDS IN LIFE INSURANCE

Year GDP at Market Prices Gross Direct Premium (NL) Penetration of Non Life Insurance Million USD * ^^ Handbook of Statistics on Indian Economy, RBI. Source for data on Insurance Premium , , & : Tapan Sinha paper. the exchange rate for has been assumed as 2.5 exchange rate for the remaining years: Handbook of Statistics on Indian Economy, RBI * is the premium figure of TREND IN NON-LIFE INSURANCE

GAINS OF LIBERALIZATION  Flow of Foreign Direct Investment in India  Growth of insurance business  Competition for benefit of consumer  Multiple distribution channels for wider reach  Variety of new innovative products to meet customer needs  Significant improvements in policyholder servicing  Wider rural reach and financial inclusion  Increasing use of technology to increase efficiency and productivity  Significant flow of funds to infrastructure sector  Imparting of new management skills and capabilities

ISSUES IN LIBERALIZATION  Market misconduct and mi-selling adversely affecting image of the industry  Margins under pressure due to excessive competition amongst market players  Loss making motor third party premium rates  ULIPs/ Non Standard Product Issues  Challenges in distribution of insurance products in a cost-effective manner  Clamour for profitable geographies  Availability of reliable and accurate data  Capacity building and need for skill upgradation  Supervisory challenges in Regulation  Challenges in group wide supervision

REGULATORY MEASURES

Increasing the Insurance awareness among the customers Financial Literacy measures New guidelines for better product design Close supervision on underwriting design Bancassurance Regulations Fraud Analytics/Establishment of Insurance Information Bureau (IIB) Automation of regulatory processes Rural and Social Sector Regulations Supervision of Financial Conglomerates Exposure to supervisory staff and periodic meetings with insures/ stakeholders Off-site and on-site supervision

THANK YOU 31