Insurance IndustryIt is due to globalization, deregulation and also terrorist attacks; that the insurance industry is undergoing a massive change and the metamorphosis has been noteworthy in the last few decades.
Clearing basics:
Before we begin the analysis of Indian insurance industry, let us clear some basics on insurance.
In the words of a layman, insurance means managing risk. For instance, in life insurance segment, the insurance company tries to manage mortality (death) rates among the wide array of clients.
The insurance company works in a manner by collecting premiums from policy holders, investing the money (usually in low risk investments), and then reimbursing this same money once the person passes away or the policy matures. The greater the probability for a person to have a shorter life span than the average mark, the higher premium that person has to pay. The case is the same for all other types of insurance, including automobile, health and property.
Ownership of insurance companies is of two types:
Shareholder ownership
Policyholder ownership
Types of Insurance
Life Insurance - Insurance guaranteeing a specific sum of money to a designated beneficiary upon the death of the insured, or to the insured if he or she lives beyond a certain age.
Health Insurance - Insurance against expenses incurred through illness of the insured.
Liability Insurance - This insures property such as automobiles, property and professional/business mishaps.
Challenges facing Insurance Industry
Threat of New Entrants: The insurance industry has been budding with new entrants every other day. Therefore the companies should carve out niche areas such that the threat of new entrants might not be a hindrance. There is also a chance that the big players might squeeze the small new entrants.
Power of Suppliers: Those who are supplying the capital are not that big a threat. For instance, if someone as a very talented insurance underwriter is presently working for a small insurance company, there exists a chance that any big player willing to enter the insurance industry might entice that person off.
Power of Buyers: No individual is a big threat to the insurance industry and big corporate houses have a lot more negotiating capability with the insurance companies. Big corporate clients like airlines and pharmaceutical companies pay millions of dollars every year in premiums.
Availability of Substitutes: There exist a lot of substitutes in the insurance industry. Majorly, the large insurance companies provide similar kinds of services – be it auto, home, commercial, health or life insurance.
How to choose an insurance company?
There are many factors to probe into when an investor chose an insurance company.
The consumers as well as the investors should only focus on the insurer's financial strength and capability to meet ongoing responsibilities to its policyholders.
The fundamentals of the insurance company should be strong and should not indicate a poor investment opportunity as this might also deter growth.
Life Insurance in India :
India Life Insurance industry came into being with the establishment of Life Insurance Corporation (LIC)in India in 1956. Till the time Insurance Regulatory and Development Authority(IRDA) Act was implemented in the year 1999, private companies were controlled by the LIC of India. Since 1999 onwards the market was opened for operations of private companies also in the insurance sector.
Growth Of Indian Life Insurance Sector
The life insurance sector of India has added up to 4.1% of the GDP in 2009, a considerable growth was recorded since the time the sector was opened for the private companies. The contribution in FDI by the life insurance segment was recorded at US $ 1.3 billion, even though the government is likely to increase the FDI cap limit from 26% to 49%, a bill of which is pending at the Rajya Sabha.
The year 2009-10 also saw private sector insurance company, Aviva Life Insurance establishing nine unit-linked plans, in line with the recent IRDA guidelines featuring enhanced and higher internal rate of return (IRRs).
As per the data provided by the IRDA, the businesses of the life insurance companies had a growth of 22% at US$ 12 billion in April-November 2009-10, in comparison to the US$ 9.8 billion during the same period last year. Such a huge sale of single premium policies led the industry to record a raise of 53.25% in November 2009 alone.
With the registration of IndiaFirst Life Insurance Company Limited, a joint stake life insurance company encouraged by Bank of Baroda and Andhra Bank of India and Legal & General Middle East Limited, UK, the total number of of life insurers registration with the Insurance Regulatory Development Authority (IRDA) has increased to 23.
According to industry body, Life Insurance Council, The life insurance industry had earlier been anticipated to grow by 15% in the year 2009 - 10 and surpass the US$ 54.1 billion mark in total premium income by March-end. This growth in premium income includes new business as well as renewals, driven by increasing awareness on the value of getting insured.
The US$ 41-billion Indian insurance industry made a grand return with better performances in the April-November 2009 period. Life insurance in India recorded the first year premium (inclusive of Single Premium) segment accounting to US$ 24 billion.
FDI Policy in Indian Life Insurance Industry
The FDI limit in the insurance sector has been capped at 26% for the foreign marketeers but the government is thinking to increase it to 49% and a bill of this offer is pending at the Rajya Sabha. The LIC is still the major company in the life insurance sector but with such an emergence of the private companies, providing a range of moneymaking policies and investment chances for people from all walks of life the situation is fast changing. The Unit Linked Investment Plans (ULIP) offering life cover as well as scope for savings and investment deserves extra acknowledgement in this issue. Furthermore, with minimum lock-in period of three years such plans are subjected to avoid miss usage of important tax benefits
