Chapter 3

Life Insurance Market

Non-Life Insurance Market

In December 2000, the GIC subsidiaries were restructured as independent insurance companies. At the same time, GIC was converted into a national re-insurer. In July 2002, Parliament passed a bill, delinking the four subsidiaries from GIC. Presently there are 12 general insurance companies with 4 public sector companies and 8 private insurers. Although the public sector companies still dominate the general insurance business, the private players are slowly gaining a foothold. According to estimates, private insurance companies have a 10 percentage share of the market, up from 4 percentage in 2001. In the first half of 2002, the private companies booked premiums worth Rs 6.34 billion. Most of the new entrants reported losses in the first year of their operation in 2001.

Insurance companies not only provide risk cover to infrastructure projects, they also contribute long-term funds. In fact, insurance companies are an ideal source of long term debt and equity for infrastructure projects. With long term liability, they get a good asset- liability match by investing their funds in such projects. IRDA regulations require insurance companies to invest not less than 15 percentage of their funds in infrastructure and social sectors. International Insurance companies also invest their funds in such projects. Insurance costs constitute roughly around 1.2- 2 percentage of the total project costs. Under the existing norms, insurance premium payments are treated as part of the fixed costs. Consequently they are treated as pass-through costs for tariff calculations.

Premium rates of most general insurance policies come under the purview of the government appointed Tariff Advisory Committee. For Projects costing up to Rs.1 Billion, the Tariff Advisory Committee sets the premium rates, for Projects between Rs.1 billion and Rs.15 billion, the rates are set in keeping with the committee’s guidelines; and projects above Rs.15 billon are subjected to re-insurance pricing. It is the last segment that has a number of additional products and competitive pricing. Insurance, like project finance, is extended by a consortium. Normally one insurer takes the lead, shouldering about 40-50 per cent of the risk and receiving a proportionate percentage of the premium. The other companies share the remaining risk and premium. The policies are renewed usually on an annual basis through the invitation of bids. Of late, with IPP projects fizzling out, the insurance companies are turning once again to old hands such as NTPC, NHPC and BSES for business.

Re-insurance business

Insurance companies retain only a part of the risk (less than 10 per cent) assumed by them, which can be safely borne from their own funds. The balance risk is re-insured with other insurers. In effect, therefore, re-insurance is insurer’s insurance. It forms the backbone of the insurance business. It helps to provide a better spread of risk in the international market, allows primary insurers to accept risks beyond their capacity settle accumulated losses arising iron catastrophic events and still maintain their financial stability. While GICs subsidiaries look after general insurance, GIC itself has been the major reinsurer. Currently, all insurance companies have to Bide 20 per cent of their reinsurance business to GIC. The aim is to ensure that GIC’s role as the national reinsurer remains unhindered. However, GIC reinsures the amount further with International companies such as Swiss (Switzerland), Manicure (Germany), and Royale (UK. Reinsurance premiums have seen an exorbitant increase in recent years, following the rise in threat perceptions globally.

Life Insurance Market

The Life Insurance market in India Is an underdeveloped market that was only tapped by the state owned LIC l the entry of private insurers. The penetration of life insurance products was 19 percentages of the total 400 million of the insurable population. The state owned LIC sold Insurance as a tax instrument, not as a product giving protection. Most customers were under- insured with no flexibility or transparency in the products. With the entry of the private insurers the rules of the game have changed. The 12 private insurers in the life insurance market have already grabbed nearly 9 percentage of the market in terms of premium income. The new business premiums of the 12 private players have tripled to Rest 1000 core in 2002- 03 over last year. Meanwhile, state owned LIC’s new premium business has fallen. Innovative products, smart marketing and aggressive distribution are the triple combination that has enabled 1ledgling private insurance companies to sign up Indian customers faster than anyone ever expected. Indians, who have always seen like insurance as a tax saving device, are now suddenly turning to the private sector and snapping up the new innovative products on offer.

The growing popularity of the private insurers shows in other ways. They are coining money in new niches that they have introduced. The state owned companies still dominate Segments like endowments and money back politics. Duty in the annuity or pension products business, the private insurers have already wrested over 33 percentage of the is And in the popular unit-linked insurance schemes they have a virtual monopoly, with over 90 percentage of the customers. The private insurers also seem to be scoring big in other ways-they are persuading people to take out bigger policies. For instance, the average size of a life insurance policy before privatization was around Rs.50000. That has risen to about Rs.80000. But the private insurers are ahead in this game and the average size of their policies is around Rs.1.1 lakh to Rs.1.2 lakh- way bigger than the industry average. Buoyed by their quicker than expected success, nearly all private insurers are fast- forwarding the second phase of their expansion plans. No doubt the aggressive stance of private insurers is already paying rich dividends. But a rejuvenated LIC is also trying to fight back to woo new customers.


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