The Government of India liberalised the insurance
sector in March 2000 with the passage of the Insurance Regulatory
and Development Authority (IRDA) Bill, lifting all entry restrictions
for private players and allowing foreign players to enter the market
with some limits on direct foreign ownership. Under the current
guidelines, there is a 26 percent equity cap for foreign partners
in an insurance company. There is a proposal to increase this limit
to 49 percent.
The opening up of the sector is likely to lead to
greater spread and deepening of insurance in India and this may
also include restructuring and revitalizing of the public sector
companies. In the private sector 12 life insurance and 8 general
insurance companies have been registered. A host of private Insurance
companies operating in both life and non-life segments have started
selling their insurance policies since 2001.
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, Parliamant 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 percent share
of the market, up from 4 percent 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
With a large capital outlay and long gestation periods,
infrastructure projects are fraught with a multitude of risks throughout
the development, construction and operation stages. These include
risks associated with project implementaion, including geological
risks, maintenance, commercial and political risks. Without covering
these risks the financial institutions are not willing to commit
funds to the sector, especially because the financing of most private
projects is on a limited or non- recourse basis.
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 percent 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 percent
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 Commitee.
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 billion 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.
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 from catastrophic events and still maintain their
While GIC's subsidiaries look after general insurance,
GIC itself has been the major reinsurer. Currently, all insurance
companies have to give 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 Swissre (Switzerland), Munichre
(Germany), and Royale (UK). Reinsurance premiums have seen an exorbitant
increase in recent years, following the rise in threat perceptions
Life Insurance Market
The Life Insurance market in India is an underdeveloped
market that was only tapped by the state owned LIC till the entry
of private insurers. The penetration of life insurance products
was 19 percent 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 percent of the market in terms of
premium income. The new business premiums of the 12 private players
has tripled to Rs 1000 crore in 2002- 03 over last year. Meanwhile,
state owned LIC's new premium business has fallen.
Innovative products, smart marketing and aggressive
distribution. That's the triple whammy combination that has enabled
fledgling private insurance companies to sign up Indian customers
faster than anyone ever expected. Indians, who have always seen
life insurance as a tax saving device, are now suddenly turning
to the private sector and snapping up the new innovative products
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 policies. But in the annuity or pension
products business, the private insurers have already wrested over
33 percent of the market. And in the popular unit-linked insurance
schemes they have a virtual monopoly, with over 90 percent of the
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
privatisation was around Rs 50,000. That has risen to about Rs 80,000.
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.
Bajaj Life Insurance Company posts phenomenal growth in its First
Complete Fiscal 2002- 2003 (Source- Company Press Release)