Document Detail

Title: Indian Insurance Industry Since 2000 – A Remarkable Journey
Reference No.: Bombay House Auditorium, Mumbai
Date: 10/08/2007
Indian Insurance Industry Since 2000 – A Remarkable Journey
Indian Insurance Industry Since 2000 – A Remarkable Journey1
C.S. Rao2
I am happy to see that the committee managing the Shroff Memorial Trust has a great fascination for insurance. I am not surprised that they evince interest in the way the sector has been shaping over the years. Mr. Shroff was the chairman of New India for nearly a quarter century and took it to the commanding heights that was the envy of many an insurance company not only in India but also in the advanced countries. I find that many distinguished insurers have spoken about insurance from this platform and they represent quite a cross section and they made major contribution to the development of insurance in India. From the author of the insurance reforms in the early 1990s to the CEO of the private life insurance company – all had shared their thoughts with you on this important topic. I am glad that today I have the opportunity to place before you the fascinating journey of the insurance sector in the post-reforms period.
Fiscal Reforms
There is no denying that a thriving insurance industry is critical for every modern economy. It is, therefore, not surprising that when the government initiated the reforms process in the early 90s, it decided that dismantling the physical barriers for growth that emerged in the “License-Permit Raj” though desirable and necessary would not alone promote growth unless accompanied by fiscal reforms and a thorough revamping of the financial sector. While in the early period of reforms the government removed many of the licensing requirements thus giving freedom to the industry to decide on when, where and how much to invest, a process of fiscal consolidation and reforms in the tax structure was initiated to make the Indian industry compete effectively with the external markets. The tax reforms had to be carefully timed so that industry which was insulated from outside competition for a long period had enough time and resources to withstand competition from multinationals. The reforms in the financial sector are an integral part of the whole reforms process and unless there is major break through in this area, a sustained growth of the economy is not feasible. 
Financial Sector Reforms
The main engines of growth in any economy are (i) a thriving banking industry providing timely and adequate credit (ii) a buoyant stock market where capital is easily accessed and (iii) a dynamic insurance industry that covers risks giving the entrepreneur the ability to experiment and take risks without which there cannot be just rewards. 
The reforms in the Banking sector were primarily aimed at giving the freedom to the Banks to determine the interest rates based on the risk profile of the customer. The freeing of the interest rates coupled with other structural reforms were expected to build a strong and resilient banking system. As a result of the reforms initiated in the 90s  the banking system acquired strength, vibrancy and efficiency and the Indian Banks are now able to effectively compete with their global counterparts. There has been a notable improvement in the financial health of the banks in terms of capital adequacy, profitability and asset quality. As regards stock market, the controller of capital issues was replaced by SEBI, an independent regulator and we have been witnessing for the last few years increased confidence in the market by the domestic as well as international investors. The flow of funds into the stock market is the greatest testimony to the confidence the individuals and corporates repose in the Indian stock market.
Insurance Reforms
It may be recalled that while the reforms in various sectors of the economy were either welcomed or considered essential to overcome a crisis, there was considerable debate on the need for reforms in insurance industry. There were many who maintained that since insurance contracts between insurers and the insured involve special fiduciary obligations, it is better if those obligations are guaranteed by the State ownership of insurance companies. It was argued that insurance industry was nationalized on the grounds that (i) the State would be in a better position to apply the massive resources generated through insurance for nation building activities; (ii) the insurance companies were urban centric and the vast majority of the population that live in the rural areas were denied the benefit of insurance and the State would have the means and the motivation to reach out to this section of the population and (iii) the governance standards in some of the companies were low and that there was a threat of insolvency. The votaries of status quo argued that these considerations were still valid and there was no need for effecting any changes.
Those who favoured change pointed out that there was a wide gap in terms of market potential and its exploitation by the nationalized industry, the consumer did not benefit in the absence of competition in terms of wider choice and competitive pricing and that the reach of the nationalized companies was limited, the range of products offered restricted and the service to the consumers inadequate. It was felt in 1990s that the scale of economic activity attained in the mid-eighties and the momentum generated through the reforms process in other sectors of the economy cannot be sustained by state controlled insurance industry and that insurance penetration and enlargement of the market can be accomplished only when a large number of companies compete with each other. It was also realized that the objectives of nationalization of the industry could largely be accomplished through appropriate regulatory measures and a state monopoly was no longer necessary.
The champions of change finally prevailed and the Insurance Regulatory and Development Authority Act was notified in April 2000. It took a long time and a great deal of perseverance on the part of the government to bring about reforms in insurance sector.
Entry of Private Insurers
While the long debates in the 90s; and the twists and turns that surrounded the opening up of the sector for private participation had at times thrown up serious concerns about the implementation of insurance reforms in this country, once the legislation was put through, the actual process of inducting private players into the market had gone off smoothly. I do not think there is any other sector in this country where the transition from state monopoly to free market has been as hassle free as that of the insurance sector.
The transition was smooth partly due to the continuity provided by the office of the interim Regulator through those turbulent 4 years (1996 to 1999) between the creation of the office and the passing of the IRDA Bill by the Parliament. This office was able to appreciate the concerns of the Government, the Parliament and the private investors and harmonise these various view points while framing the Regulations. They also had time to study the various models obtaining in the world for regulation of the industry and identify what suited the needs of our country.
Supervision and regulation of insurance is a relatively new experience in India. It is the job of the Regulator to ensure that the insurers have, at any point of time, sufficient resources to meet the liabilities and that all customers are treated in an equitable manner. When the state enterprises controlled the entire industry, the safety of the policyholders’ funds was ensured through state guarantee while the fair dealings with the customers was achieved through parliamentary oversight of the state enterprises. The opening of the sector for private participation naturally raised issues about ensuring solvency of the companies and fair treatment to the insured. The Regulations framed by the Authority deal with both the issues in a comprehensive way. The former is addressed by stipulating a high level of capital requirement for entry into the field and rigorous enforcement of the solvency requirements, while the latter is covered by the regulations put in place for protection of policyholder interests.
The Authority was keen that only companies with a sound financial background enter insurance industry and, therefore, stipulated a high solvency margin in addition to high entry capital requirements. The high initial capital requirements and the 26% cap on Foreign Direct Investment had, in no way, deterred the Indian enterprises and the major foreign insurance companies from collaborating to form the Indian Insurance companies. The industry has so far witnessed the entry of 15 new private companies in the life segment and 8 in the non-life segment. In addition, two insurers have been granted license to operate exclusively in the health sector. Of the private insurers who commenced operations in the country other than one insurer each in life and non life segment, all others have set up businesses in collaboration with a foreign partner. In case of one life insurer, where both the foreign and the Indian partner quit from the Indian insurance company in the year 2005, the entire equity stake has been picked up by an Indian entity. Thus, as on date, 21 insurance companies in the private sector are operating in the country in collaboration with established foreign insurance companies from across the globe.
The insurance sector was opened up for private participation on the ground that inspite of enormous contributions made by the public sector to expand the coverage and spread awareness about insurance, the interests of the consumers would be better served if there is competition among the insurers. It was also recognized that the country has a vast potential waiting to be tapped and this can be done only when we have a large number of companies spreading their wings across the country and offering a variety of products catering to the demands of different sections of the population. It was also felt that competition would generate a healthy attitude towards redressal of consumer grievances and improve the quality of service. We have now seven years of experience of public and private sector operating together and it is, perhaps, time to see whether the expectations are fulfilled. 
Growth of Premium
A remarkable feature of the post liberalization landscape is the unprecedented growth in the premium. The growth is significant in life insurance. The first year premium collected by the insurers in the year 2006-07 was Rs.75,400 crs compared to Rs.6560 crs in the year 1999-2000, the year prior to the opening up of the sector for private participation. This represents a compound annual growth rate of nearly 42% and an average annual growth rate of 131%. If we take a corresponding period of 7 years prior to the liberation the first year premium increased from Rs.2375 crs in 1992-93 to Rs.6560 crs in 1999-2000, a compound Annual growth rate of 16%. A significant feature of this impressive growth in the post reform period is the contribution made by the LIC to the growth. The compound annual growth rate in the case of LIC was 36% in the post reform period while it was only 16% in the period prior to reforms. What has prompted the LIC to significantly increase its performance level? Obviously competition has spurred the organization to gear itself up and exploit its vast workforce spread across the country to garner more premium. 
Inspite of this impressive growth by the public sector insurer, the private sector companies have managed to gain a market share of 26% by the year 2006-07. That they have been able to make such a significant inroad into the market dominated by the LIC is a great testimony to the leadership of the captains of private industry. The happy feature, however, is that their market share had not been gained at the expense of LIC but has come out of the enlarged insurance market. The credit for the enlargement of the market should legitimately go to the private sector which had identified new markets that were hitherto unexplored by the LIC. That the LIC had later followed the lead of the private sector speaks volumes about the contribution made by the liberalization process to the enlargement of the market.
The significant increase in the insurance market in these 7 years has reinforced the arguments of the pro-reform group that there is a vast market waiting to be exploited and that a single, state driven entity will not, by itself, be able to cater to the requirements of that market. It also established in no uncertain terms that so far as life insurance market is concerned, the growth of the private sector need not be at the expense of the public sector. The public and the private sector can together experience high growth rates for a long time to come.
In the case of general insurance industry, the premium growths have been significant though not as impressive as in the case of life insurance. The premium had grown from Rs.9450 crs in 1999-2000 to Rs.25,000 crs in 2006-07. The growth in the premium is expected to be muted as there have been no significant increases in the tariff except in the case of a modest increase in motor premium in the year 2002-03. The growth in the premium has, therefore, come through increased volumes, specially under motor and health. The private sector has acquired a market share of 35% in 2006-07 and a major portion of this it has come at the expense of the public sector. The portfolio mix also indicates that the private sector had succeeded in acquiring a share in the more profitable segments. It should be mentioned to the credit of private insurers that there has been an attempt to bring in product innovation specially in the areas of liability covers and crop insurance. 
The Authority is convinced that significant changes in non-life insurance can be ushered in only when the tariffs are removed and the companies are permitted to tailor the products to meet specific requirements of the customers. 
Removal of Tariffs
There has been a persistent demand for freeing the general insurance market from the rigidities inherent in a regime where tariffs are prescribed by an outside agency. It has been argued that the insurers should be able to determine what risks they are prepared to underwrite and the rate at which they would underwrite the risk. It was also pointed out that the present system of having tariffs in some risks and free rates in others is leading to distortions in pricing as the insurers are willing to underwrite risks not covered by tariff at throwaway prices in order to gain access to lucrative fire and engineering covers which were covered by tariff.
The Authority recognized that the consumer would normally stand to gain when there is a free market. We are also convinced that de-tariffing is an essential pre-requisite for the healthy growth of the market. It has to be, however, recognized that absence of data and lack of experience in underwriting could upset the market with adverse consequences for the insurer as well as the insured if tariffs are withdrawn abruptly.
The Authority had in September, 2005 announced a roadmap where it laid stress on an orderly transition from the tariff market to free market.   It was announced that insurers can determine their rates from 1st January, 2007 for all risks that they undertake. In a market free of tariffs, any responsible insurer should have in place internal capabilities to do underwriting, have rating support and develop policy terms and conditions which maintain a fine balance between the interests of the insurer and the insured. We feel that the function of underwriting and rating of insurance business should be independent of the business development function and that sound underwriting principles are not sacrificed for gaining access to business. How to achieve these multiple objectives was a matter of concern for the Authority. Just as actuaries are in short supply, so are people who have specialized in underwriting. They have to be recruited and properly trained. The road map provided sufficient time to the insurers to identify the right kind of people and place them in appropriate positions to undertake this work when the tariff regime was to be replaced by free tariffs on 1st January, 2007.
While the proposed detariffing was hailed as a significant step in the march towards providing flexibility and freedom to the consumer, there were many who expressed concerns about a possible collapse of the market as a result of acute price competition among insurers leading to a significant fall in the premiums that could threaten the financial viability of the insurers. Some predicted that it would remain only as a Road Map which would not be implemented.
The Authority is happy that it was able to adhere to its schedule and remove tariffs from 1st January 2007. The insurance market had not collapsed as predicted by some and the financial year ended with a 25% increase in the premium. The first quarter of current year which bore the full brunt of detariffing has also witnessed a modest growth in overall premium collected. I am happy that the insurers have demonstrated to the world that they have enough maturity to handle not only relaxations in price controls but are also ready for the next milestone in the Road Map – namely modifications to terms & conditions of contract. 
The CEOs of the general insurance companies and the General Insurance Council have made tremendous efforts at making the Road Map for detariffing a reality. They deserve all praise for the contribution made by them to take the reforms process forward. I have no doubt that the Indian industry has the skills and the will to further the reforms process. I am confident that we will be able to give flexibility to the insurers to devise their own terms and conditions and this transition would be as smooth as the transition to free pricing.
The Authority feels that detariffication would result in expansion of the general insurance market and a substantial increase in the premiums, though in the short run there may be a reduction in premiums under Fire, Engineering and Own Damage within the motor premium. This fall in premiums should not worry us and it should be looked at as the correction that is long overdue. The Fire and Engineering premiums have, for a long period, subsidized other segments in an insurer’s portfolio. There is no reason why one class of consumers should subsidize others unless it serves a larger social purpose. We do not see any purpose to perpetuate this regime and expect the insurers to do proper underwriting.   We feel that there is a huge retail market which remains to be tapped and the freeing of tariffs would give a fillip to the exploration of this market by the insurers.
Insurance Penetration
The opening of the sector has, as earlier pointed out, led to unprecedented increase in coverage, specially in the life segment and it has impacted the level of insurance penetration which has witnessed a surge in the last two years. While insurance penetration was 1.93% in 1999 it rose to 4.8% in the year 2006. It has thus more than doubled in 7 years. While the increase is impressive in the case of life, where it increased from 1.39% to 4.1% , it remained stagnant at nearly 0.6% in the case of non-life. The increased economic activity coupled with recent reforms in general insurance market, would certainly help expand the market in the years to come.
Insurance Density
In the area of insurance density, significant contribution has been made by the private sector. We had the problem of not only absence of risk protection through insurance but also a considerable amount of under insurance. During the pre-liberalisation era, the nationalized companies were unable to target niche markets and were content to sell a large number of low ticket items spread over the whole country.   The private sector has, on the contrary, started looking at the requirements of various segments of the population, and introduced need based selling through excellent counseling. It is not uncommon to see the CEOs of insurance companies personally making presentations to the heads of industrial and service sector companies and advising them on what products are best suited to their employees. The product development has also benefited through these interactions as the insurance chiefs could profitably use their feedback to evolve new products. Through this process they were able to minimize at least to some extent, the problem of under insurance. We see a significant increase in the size of the policies. While the average size of the policy before opening up was around Rs.50,000/- it has now gone up to Rs.1 lakh in the case of L.I.C. In the case of private insurers, the average size is Rs.2.50 lakhs. The insurance density which was $10 in the year 1999 has gone upto $33.2 in 2006. 
Product Development
The opening up has augured well for the consumer who has now access to a wide range of new products. Particularly, unit linked products have attracted the attention of the insured. While this is a product for the discerning public, there seems to be appetite for this product from all sections. Availability of riders, particularly health riders, has been a positive development. In the non-life segment crop insurance based on rainfall and temperature, experiments in health insurance, Directors and Officers liability covers have made their entry and have come to stay. The removal of tariffs will give a further boost to development of tailor made products in the years to come.  
Agents Training
The expanding market demands a large agency force. The insurers have, therefore, been recruiting agency force on a continuous basis. Presently there are more than 20 lakh individual agents and nearly 5000 Corporate Agents.  In order to introduce an element of professionalism in the insurance intermediaries elaborate training and testing arrangements were introduced by the Authority. The demand for tied agency force has led to a situation where the resources of the institutes providing training have been stretched. The inspections by   the Authority of these institutes have revealed a number of areas        where improvements were called for.   It was noticed that some of the institutes did not have the infrastructure to conduct classes and the faculty was drawn on an ad hoc basis and the courses conducted in a short span as a result of which many of the agents did not receive adequate training. It was also noticed that the licensed training institutes allowed franchisees to conduct training on their behalf which was irregular. The insurers, in their anxiety to recruit agents, did not pay any attention to the type of training imparted. The Authority had, during 2004, streamlined the system of training and impressed upon the insurers the need for greater attention being paid to the training of their agency force. The revised guidelines were issued after extensive consultations with the stakeholders and it is hoped that this effort would result in improving the quality of the agency force. The Authority is keen that the agency force should be properly equipped as the insurance products are no longer simple and the agent should be able to assess the requirements and advise on the appropriate policy.
It would not be out of place to mention here the importance of the field force being adequately trained. Being the person on the spot as a representative of the insurer, it is essential that the agent recognizes and understands the need of the prospect. Having identified the need, it is his duty to ensure a need-based selling. In the absence of a need-based selling, the contracts are not likely to last long and the policyholder looks for the earliest opportunity to quit. The large attrition rate in the contracts bears silent testimony to this fact. In this regard, another important factor that comes to my mind is the unhealthy and illegal practice of paying rebates to solicit business. Sec. 41 of the Insurance Act, 1938 strictly prohibits rebating for procuring business. Apart from the statutory imposition, the practice also is generally responsible for the poor retention ratios. Although the retention ratios of insurance companies have been progressively showing improvement, a great deal needs to be done in this area. A well-trained agent, fulfilling his role as the primary underwriter, can contribute a great deal in the accomplishment of this task.
Corporate Agents
The opening of the sector is accompanied by entry of new set of intermediaries in the insurance market. The institution of corporate agents was a new experiment started by the Authority to facilitate sale of insurance policies through existing institutions which are in contact with a large section of the population in the discharge of their normal activities. The Corporate Agent model is expected to bring down costs of procurement of business substantially to the insurance company while benefiting the corporate with fee based income which improves its revenue stream. The insured himself, should feel comfortable with this model as he would be dealing with an Institution that is familiar to him. In parts of Europe the Bancassurance model has worked well and the experience of the three parties to the transaction, namely, the Bank, the insurance company and the customer has been positive. You would notice in India too the insurers are keen to have working arrangements with Banks so that they have access to their databank which is a valuable resource for the insurer to build his customer base. I am confident that in the years to come Bancassurance would be a critical intermediary in the spread of insurance in the country.
The introduction of brokers in the Indian insurance industry in the liberalized scenario is another significant development. Brokers act as representatives of the policyholders although they are paid by the insurers. As a result, they are expected to bring better service to the clients in several areas like:
·        Monitoring the insurance market, the credibility of the players and the quality of services they render
·        Analyzing the various products available in the market and assist the clients in choosing the products that suit their requirement
·        Helping the client in the completion of the proposals, conclusion of the contract and render subsequent service, if any
·        Assisting the client in the settlement of claims.
Although the agent is also expected to render most of these services, for several reasons this has not been achieved in the Indian context. Being better equipped with higher level of training and with no obligations to the insurers, the brokers are expected to deliver these services to the client in a more objective fashion.
The general insurance market is largely driven by brokers. They package the client’s requirements and negotiate with the insurers on the rates and terms and conditions of the contract. The relevance of the broker was limited in the Indian context till recently as the insurers had no flexibility in determining the rates or the terms. Both were laid down by the Tariff Advisory Committee and any deviation would invite penalties. 
In spite of the constraints inherent in a tariff regime, we have witnessed a significant growth in the number of applicants for grant of broker~s license. The brokers were obviously testing the market in preparation for the detariffing that should normally take place when the market is freed from monopoly. The first phase of removal of price control began on 1st January 2007 and if things go well the insurers would be given the freedom to quote their own terms and conditions from 1st April, 2008. The brokers will then play a major role in the insurance industry. We in the Authority are anxious to see that this new channel of intermediation develops on healthy lines and provides quality service to the insured. If the broker has to add value, he should have highly qualified professionals who can render sound advice. It is not uncommon to see some of broking houses in the west bigger than many insurance companies. We hope that the Indian insurance brokers emulate their western counterparts and augment their pool of professionals.
Insurance Education and Research
One of the spin-offs of liberalization of the insurance sector has been rise in demand for insurance education, training and research. The Insurance Institute of India’s role appears to have been confined to professional examinations conducted by it. The course is a recognized qualification for professional competence in the area of insurance. What was perhaps ignored is the need to innovate by way of introduction of new subjects in tune with the demand and expectations of an evolving market after a thorough review of the existing course curriculum. Examples of such subjects include Health Insurance, Unit Linked Insurance, Microinsurance, tapping of alternate channels of distribution, ALM (Asset Liability Management) related issues and re-visiting the insurance regulations in the context of the evolving economic environment. The market realities dictate that these areas are dealt with in greater detail. The various stakeholders need to be receptive to the changing ground realities to be in a position to meet the challenges.
Similarly research in insurance remains a neglected area and there is need for a concerted effort to develop and define areas of focus for research in tune with the requirements of the industry. Without a research focus no institute can expect to make tangible gains in the near future in terms of value addition and meeting the expectations of its members and the industry at large. Experiences of the other economies and particularly the emerging economies are particularly relevant in this context.
Rural and Social Focus
During the debate on opening of the insurance sector, concern was expressed in some sections that the competition generated with the entry of private insurers would result in all the insurers including the public sector insurers to chase the niche markets in the relatively well off regions and their activities would, therefore, be mostly urban centric and they would ignore the rural markets and the weaker sections of the society. 
It was indicated that when the state has monopoly of the sector the public sector companies were being used as instruments of state for implementing welfare schemes benefiting the rural masses and the vulnerable sections. These companies were able to carry out the mandate given by the government even if it meant that they had to suffer some losses, because the tariff allowed them enough margin in other segments to cover these losses. This situation would alter with entry of private players and removal of tariffs. The cushion enjoyed by the PSUs would disappear and they have to compete with private sector for business and they would then be unable to take on any additional load imposed by the government by way of obligations to the poor.  It was then argued by many academicians that all business relating to rural areas and weaker sections need not be loss making and all insurers should have the obligation to serve the rural areas and weaker sections. The Insurance Act was, therefore, amended authorizing the Regulator to lay down certain obligations on the insurers towards rural areas and weaker sections.
The Authority notified the regulations on obligations of insurers towards the rural and social sectors in the year 2000. The definition of rural area is in accordance with the one provided by the Census of India. It is mandatory for all insurers to comply with the rural and social sector obligations which are linked to the year of commencement of operations of the respective company.
In respect of the public sector insurers (four non life insurers and LIC), the Regulations provide that the quantum of insurance business to be done in the rural and social sectors shall not be less than what was recorded by them for the accounting year ended 31st March, 2002. The Authority monitors the performance of the insurers in fulfilling their obligations to these sectors. The insurance companies have over the last seven years set up systems to explore and exploit the potential of the rural markets. The obligation has not been viewed merely as a statutory requirement.   The insurers recognized the potential of the rural markets; particularly in the context of these markets having exhibited the ability to procure goods and services with the growing income levels. There is also awareness about the need for insurance particularly life and health. The new players are making an effort to tap these markets in a commercial way. This fact is duly reflected in the premium underwritten in the rural sectors / lives covered in the social sectors by some of the insurers which is in excess of the stipulated obligations.
Micro Insurance Regulations
The Authority was all the time conscious that proper implementations by the insurers of the social and rural obligations would depend on the development of products suited to the requirements of the target population and the commitment on the part of the intermediary to bring the product and the consumer together. It was aware that the newly established insurers will take a long time to build up network of intermediaries to reach the target population. In the absence of an appropriate product and a willing and dedicated intermediary the observance of obligations could degenerate into adherence to the letter of the law and not its spirit. To avoid such a situation the Authority came out with micro insurance regulations defining the micro insurance product and giving the insurer access to various channels for fulfilling the obligations in the spirit in which they were mandated. 
The regulations are aimed at facilitating the insurers’ efforts to bring down the costs of transactions, thereby achieving the objective of offering reduced premium rates to the targeted policyholders. Micro insurance aims at meeting the insurance needs of the rural and targeted section of the population to cover the risks of loss of life, their main income earning assets their habitats and to cover them for their health needs. Availability of composite insurance products is therefore one of the requirements/pre-requisites of the rural and targeted market segments. The regulations provide the framework by allowing one class of insurer (say life) to tie up with another class of insurer (say non life) for offering their respective products. The micro insurance regulations also aim at developing self sustainable standalone institutional micro insurance delivery channels.
The Authority has been highlighting the need for promoting the concept of Micro Insurance at various forums. All insurance companies have been advised to furnish details of the initiatives taken to promote micro insurance as a viable business opportunity, with particular reference to understanding the constraints faced by them. Efforts have been initiated to promote the concept of insurance along with Micro Finance. The Authority has expressed its willingness to work in close association with Reserve Bank of India to further the concept of Micro Insurance. With a view to synergise the efforts of all state governments that are promoting the poverty alleviation programmes, the Authority has been requesting the state governments to publicize the concept of micro insurance through their various agencies.
We, in the Authority, are happy that the concept of micro insurance regulation has caught the imagination of the International Association of Insurance Supervisors and they constituted a group to look into various issues involved in propagating micro insurance and what regulations would promote and sustain that activity. The IRDA has played a key role placing micro insurance on the agenda of the IAIS. I have no doubt that in the years to come, we could dispense with obligations to cover the rural areas as the insurers, in order to promote their own business interests, would tap the rural market without regulatory intervention. We cannot ignore the Indian reality of 70% of the population living in rural areas. The rural scene itself has changed with advances in agriculture and horticulture and development of industrial clusters away from the cities. There is a vast untapped potential waiting to be tapped by the insurers. The proposals received in the Authority for Branch expansion from the insurers give me the impression that they have already scented the opportunity. 
The welfare of the weaker sections and providing reasonable cover to them at affordable rates will be a challenge. The low income people live in risky environments and are lot more exposed to risks. We are aware how the trickle down effect had not worked and there are islands of poverty amidst plenty. Inclusive growth is what governments and financial institutions have been propagating as a concept for the last few years. There cannot be a better opportunity than the present for the insurers to adopt the concept and take it forward on their march towards achieving greater insurance penetration. The micro finance agencies have sprung up to take care of those who are left behind by the banking sector. A repetition of that can be avoided if the insurers make micro insurance an integral part of their overall strategy for development of the insurance sector in India.
Concerns and expectations
The Insurance industry has, in the last 7 years, grown enormously. Global players are interested in the market and are anxious to come to India. There is a vast untapped potential with a major portion of the savings parked in Banking sector. Part of those savings can easily migrate to insurance. While the Authority is happy about the positive developments in the sector, there are still some concerns in certain areas.
At the cost of repetition, I would emphasize that we would like to see greater sense of responsibility and involvement by the insurers in training the work force so that they do a professional job in selling insurance. Insurance products are becoming increasingly complicated and unless the agent is fully conversant with the features of the products he would not be doing justice to his job. In their anxiety to augment the sales force, sufficient attention is not paid by the insurers in the selection and training of the agents.   The attrition and migration rate of the agents themselves are matters of concern. 
The Authority has been concerned about the policyholders making an un-informed decision in respect of the unit linked life insurance products. The concerns arise on account of various issues relating to the risks they bear; ambiguity in respect of nomenclature of charges; the charges levied; periodicity of charges; and disclosures on performance. Considering the several features differentiating the linked products from the traditional products, and taking into account the need for protection of interests of the policyholders and the need to keep intact the basic nature of the insurance contracts; the various aspects of unit linked business were examined in detail and guidelines framed governing the features of the Unit Linked Insurance business in general and the products to be offered thereunder by the companies, in particular. 
The guidelines are intended to enhance transparency, provide better understanding of the product design to intending investors/policyholders, enlarge the insurance cover in a consistent manner and mainly to conform to the medium and long term investment characteristics of insurance products. Insurance companies have been advised to strictly comply with the guidelines and also give adequate publicity to the various features of the Unit Linked Life Insurance Products on their websites and the sales literature for the benefit of customers. 
The Authority, while issuing the guidelines had focused on such areas as product design, market conduct, advertisements, disclosures, furnishing of information, rating of unit linked funds etc. The guidelines under the product design stipulate the terminology to be used for unit linked life insurance plans and other vital areas thereby ensuring that the applicants are able to take a proper decision before choosing a unit-linked policy.
As the policyholder is expected to bear the entire risk associated with the premium allocated to investments component, the guidelines laid emphasis on disclosures and advertisement. All life insurers should necessarily and explicitly give comprehensive information, using the same font size, in all the sales brochures, prospectus of insurance products, in all promotional material and in policy documents.An advertisement, in particular, should reflect adequate, accurate, explicit and timely information fairly presented in a simple language about inherent risks involved, the risk factors associated with specific reference to fluctuations in investment returns and the possibility of increase in charges, the fact of premiums and funds being subject to certain charges related to the fund or to the premium paid etc.
In spite of these guidelines, there are complaints that there is mis-selling of the products and that agents promise returns far in excess of what is permitted to be stated and non-disclosure relating to risks that the policyholders have to bear. While it is not possible to police more than two million agents selling these products across the length and breadth of the country, it may be necessary for the Authority to closely examine the commission structure in this product and insist on the agent filing with the insurer as part of the policy document a list of items which he has disclosed to the prospect and the prospect’s attestation that he had fully understood the implication of his investment decision. 
The general insurance industry in the country, is undergoing a major change with the removal of price controls and the prospect of freedom being given to insurers in the choice of terms and conditions. This measure will no doubt give considerable freedom to insurers to tailor products to meet the customer’s needs; there is, however, the possibility of the insurer resorting to unscientific underwriting to show an impressive top line growth. 
Experience in other markets that went through the process of detariffication indicates some level of volatility with stability restored over two to three years. The Authority would like to minimize the adverse factors; and the calibrated approach with controls removed gradually is an attempt in that direction. The stability of the market during this period is a matter of concern. We hope that the Indian insurer is mature enough not to invite instability at a time when the market is witnessing a rapid growth.
One of the outcomes expected with private sector entering the market is the availability of health insurance covers to various sections of the population. It is disappointing that the private insurers simply adopted the mediclaim policy of the PSUs and marketed it primarily to the clients who gave them the more lucrative fire and engineering covers. We, however, see a gradual emergence of standalone health insurance companies. It is also expected that detariffing would prompt the general insurers to look to alternate business opportunities. The one segment that has large untapped potential is the health segment which should grow in the years to come. We hope competition would also drive insurers to come out with innovative covers.
The country has benefited enormously from the reforms process. The average annual growth rate of GDP has been steadily rising and the 8% plus growth rate that is the present norm speaks volumes of how India has been progressing. Besides, inflation has been moderate. The foreign exchange reserves present a very health picture and foreign debt is being paid ahead of schedule. India has become a production base and an export hub for diverse goods from agricultural products to automobile components to high end services. Indian firms are now a part of global product chains. Large international corporations have established R&D centres in India. The capital market has been buoyant and India is considered as a favourite destination by foreign investors. Trade has registered a steady rise and all these factors resulted into greater integration of Indian economy with the world economy.
The reforms in the insurance industry could not have been effected at a more opportune time. The buoyancy in the economy is reflected in the rapid growth of the insurance industry. As we look back at these seven years, one can reasonably be proud of the strides made by the industry. We are witnessing a demographic change in the country and the younger generation which is exposed to the outside world demands products and services which are at par with what are available in the advanced countries. The insurance sector cannot be an exception and the legitimate demands and aspirations of the insured will have to be met and it will have to provide world class products and service them diligently.   I am confident that the Indian insurance industry is geared to meeting this challenge.
1 A.D. Shroff Memorial Lecture on 10th August, 2007 at Bombay House Auditorium, Mumbai
2 Chairman, Insurance Regulatory and Development Authority
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